Sanara Medtech Inc. quarterly report, Q1 FY2016

Sanara Medtech Inc. (then Wound Management Technologies, Inc.) — Q1 2016 Form 10-Q

Reporting period: Three months ended March 31, 2016. The filing identifies the registrant as Wound Management Technologies, Inc.; the company markets CellerateRX wound-care products and is developing HemaQuell resorbable bone wax through its subsidiary.

Financial performance

MetricQ1 2016Q1 2015
Revenue$1,095,223$1,013,987
Gross profit$904,580$796,901
Gross margin82.6%78.6%
General and administrative expense$746,401$878,043
Operating income (loss)$138,866($96,031)
Net income (loss)$90,275($133,396)
Net income (loss) available to common stockholders$17,006($196,874)
Net cash used in operating activities($136,219)($179,064)

Revenue increased 8% year over year. Management separately reported Q1 revenue was approximately 55% above the prior quarter’s $707,469. About 95% of Q1 revenue came from CellerateRX and 5% from ROP royalties, including $50,250 of royalty revenue. Cost of goods sold fell 12%, which management attributed to a more favorable mix of surgical sales; gross margin rose approximately 4 percentage points. G&A declined 15%, attributed to lower legal costs and termination of a shipping and marketing agreement. Interest expense increased 29% to $48,625, partly due to warrants converted to interest-bearing notes.

Liquidity, debt and capital

  • At March 31, cash was $283,322, versus $182,337 at year-end; current assets were $1,306,764 and current liabilities were $1,198,175. The balance sheet therefore shows working capital of approximately $109,000, although the filing’s going-concern note says the company has a working-capital deficit.
  • Total liabilities were $2,400,954, compared with assets of $1,525,442; stockholders’ deficit was $875,512. Current notes payable and convertible notes totaled $553,800; long-term related-party convertible notes were $1,200,000. Accrued interest was $316,907.
  • Operating cash use was $136,219. Financing provided $237,906, including $300,000 from Series C preferred stock sales, offset by debt and lease payments. Cash increased by $100,985 during the quarter.
  • Previously accrued royalties of $323,062 were paid in March; $93,750 of current-year royalties remained accrued at quarter-end.
  • Common shares issued rose to 108,377,331 from 107,274,559 at year-end. The company also had 9,736,844 warrants outstanding and Series C preferred stock with conversion and dividend rights.

Outlook, risks and notable items

  • Management cited expanded sales efforts, new accounts and growth in hospital, surgical and wound-care channels. HemaQuell received FDA 510(k) clearance on February 17, 2016; the company expected to finalize the product and manufacturing for first cases by June or July, followed by a market launch. No quantified financial guidance was provided.
  • The going-concern note states that recurring operating losses, accumulated deficit and financing needs raise substantial doubt about the company’s ability to continue as a going concern. Continued operations depend on additional financing and successful future operations.
  • Management concluded disclosure controls were not effective because of deficiencies in controls over valuation of embedded derivatives. No material change in internal control was reported during the quarter.
  • Subsequent to quarter-end, a director consulting agreement provided for a $200,000 payment and $15,000 monthly compensation. A strategic-advisory agreement included a $60,000 fee, transaction and financing fees, and a warrant for 60,000,000 shares at $0.12 per share, creating significant potential dilution.
  • The filing reports no legal proceedings or defaults upon senior securities. Forward-looking statements are subject to risks and actual outcomes may differ.

Important facts for investors to verify

  • Reconcile the balance-sheet current-assets figure: the MD&A gives December 31, 2015 current assets as $1,268,170, while the balance sheet shows $1,158,670. Also clarify the filing’s statement of a working-capital deficit against the March 31 balance-sheet amounts.
  • Confirm Series C preferred shares outstanding: the balance sheet reports 81,360 at March 31, while Note 4 reports 83,503.
  • Assess cash runway, financing requirements, debt and accrued-interest repayment terms, and progress toward sustained positive operating cash flow.
  • Evaluate the potential dilution and compensation costs from preferred-stock conversions, warrants and the post-quarter advisory arrangements, especially the 60-million-share warrant.
  • Monitor remediation of the disclosed derivative-valuation control deficiencies and the commercial launch and adoption of HemaQuell.