Business context and reporting period
This is Wound Management Technologies, Inc.’s Form 10-Q for the quarter ended September 30, 2013—not a filing under the name Sanara Medtech Inc. The company markets CellerateRX wound-care products and is developing resorbable orthopedic products.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $472,753 | $360,245 | $1,263,170 | $734,191 |
| Gross profit (margin) | $234,016 (49.5%) | $150,822 (41.9%) | $579,648 (45.9%) | $212,822 (29.0%) |
| Net income (loss) | ($1,687,496) | ($1,397,869) | ($2,662,187) | ($1,140,014) |
| Loss per share | ($0.02) | ($0.02) | ($0.04) | ($0.02) |
Revenue increased 31% in Q3 and 72% year to date, which management attributed to expanded hospital, operating-room and wound-center sales and the CellerateRX Surgical powder launch. Nine-month G&A fell 50% to $1.52 million, and bad-debt expense declined to $12,816 from $864,649. These reductions were partly offset by higher interest expense ($264,616 versus $175,297) and a $941,928 loss from changes in derivative-liability fair value. The prior-year nine-month results included a $3.36 million derivative fair-value gain.
Liquidity, debt and cash flow
- At September 30, cash was $131,221 and current assets were $875,580, versus current liabilities of $6,563,444—a current ratio of approximately 0.13. Stockholders’ deficit was $5,484,310.
- Current liabilities included $2,889,785 of notes payable to related and unrelated parties, $2,153,795 of derivative liabilities and $569,000 of stock subscriptions payable. The subscription funds were repayable if the planned Series C offering did not close.
- Nine-month operating cash use was $1,185,125; financing provided $1,270,485, including the $569,000 subscription advance. Cash increased from $45,861 at year-end 2012 to $131,221.
- The company reported substantial doubt about its ability to continue as a going concern and said additional capital might be required to commercialize products and fund operations.
Material developments, outlook and risks
- Management cited a three-year WellDyne marketing, shipping and services arrangement and an expanded Academy Medical distribution agreement. Academy’s stated purchase quotas were more than $1.1 million in year one and more than $5.8 million by year five; these are contractual quotas, not reported revenue or assured sales.
- After quarter-end, Brookhaven Medical provided a $1 million senior secured convertible loan and agreed to a drawdown facility of up to $2 million, subject to its terms. The notes bear 8% interest, are secured by company and subsidiary assets, and are convertible into Series C preferred stock. A merger was contemplated by a letter of intent, with management anticipating a first-half 2014 closing; completion was subject to conditions and a definitive agreement.
- Management reported that it had paid prior-year accrued royalties during the first half of 2013; accrued current-year royalties were $281,250 at quarter-end. It also reported that the IRS accepted a tax compromise and the final $16,000 was paid in March 2013.
- Disclosure controls were deemed ineffective because of deficiencies in controls over embedded-derivative valuation. A pending Texas lawsuit alleges default on a promissory note; the company disputes the claim and says the outcome cannot be determined.
- The company issued shares for debt conversions, services and incentives, and had 16.9 million warrants outstanding at quarter-end. Its common-share count had risen to 82.5 million issued shares from 68.8 million at year-end 2012, creating dilution risk.
Important facts for investors to verify
- Whether the Brookhaven financing was fully drawn, how it affected debt and liquidity, and whether the proposed merger closed on the anticipated terms and timeline.
- Whether the Series C offering was completed and whether the $569,000 advance was converted or repaid.
- Whether distributor quotas and sales initiatives translated into realized revenue, collections and sustainable gross margins.
- How the company addressed going-concern conditions, derivative-valuation control deficiencies, and potential dilution from convertible securities and warrants.
- The resolution and potential financial effect of the Ken Link litigation.