Business context and reporting period
The supplied filing is Wound Management Technologies, Inc.’s Form 10-K for the fiscal year ended December 31, 2016, filed April 4, 2017. It is not a Sanara Medtech Inc. filing, and it reports annual results rather than standalone 2016 Q4 results. The company markets wound-care and surgical products, principally CellerateRX activated collagen, and was preparing to commercialize HemaQuell resorbable bone hemostat.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $5.51 million | $3.37 million |
| Gross profit / margin | $4.56 million / approximately 82.9% | $2.48 million / approximately 73.6% |
| Operating loss | $272,133 | $964,981 |
| Net loss | $415,747 | $1.34 million |
| Net loss available to common shareholders | $677,463 | $1.61 million |
| Operating cash flow | +$409,245 | -$1.20 million |
| Cash at year end | $833,480 | $182,337 |
| Working capital | $601,654 | -$300,424 |
Revenue grew 63%, attributed to increased sales and marketing. Cost of goods sold rose 6%, and reported gross margin improved. The 2016 operating loss includes $818,665 of “other administrative expense,” primarily $758,665 of noncash warrant expense and a $60,000 cash consulting fee. The filing says operating income would have been $342,918 without this nonrecurring expense; that is an adjusted figure, not reported operating income.
Current liabilities were $1.39 million, including $414,338 of notes payable. Long-term liabilities included $1.20 million of related-party convertible notes, bearing 10% interest and due in 2018. Accrued interest was $367,411 current and $192,328 on the related-party notes. Current assets were $2.00 million; current ratio was approximately 1.43, versus 0.79 in 2015. Financing cash flow was +$244,927, including $450,000 from Series C preferred stock issuance; investing cash flow was -$3,029. The filing reports no income-tax expense and a full valuation allowance against deferred tax assets.
Changes, outlook, risks and unusual items
- Net loss narrowed substantially, and operating cash flow turned positive. However, cash generation included significant noncash adjustments, notably warrant expense; receivables also increased materially.
- Management forecast 2017 revenue of approximately $8 million, or 45% growth, and expected to retire all amortized short-term debt by the end of Q2 2017. These are forecasts, not results. Management planned investment in staff, products, sales alliances and operating systems ahead of anticipated 2018 sales growth.
- HemaQuell received FDA 510(k) clearance in February 2016 and became available for sale in February 2017. Management cited early surgeon interest and expected a contribution to 2017–2018 revenue, but reported only limited initial use and hospital evaluations.
- Material concentration and supply risks: two customers represented approximately 18% and 14% of 2016 sales, and the company purchased all inventory from one vendor. CellerateRX manufacturing is controlled by an outside supplier; its licensed patent and the company’s exclusive licenses expire in 2018. A minimum annual royalty of $375,000 applies when percentage royalties fall short.
- Significant dilution risk: outstanding warrants increased to 67.25 million, including 60 million warrants issued to a strategic adviser. Only 12 million of that grant were exercisable at year-end; vesting of the remainder depends on specified financing, strategic, distribution or hiring events, or a company acquisition. Series C preferred stock also carries conversion and voting rights.
- Litigation remains unresolved. A lender’s claim concerning a $223,500 note includes disputed interest, fees and other claims; the company asserts usury counterclaims and said the outcome could not be determined. Separate usury litigation involving Fox Lake Animal Hospital and Bohdan Rudawski was consolidated and set for trial in June 2017. The auditor gave an unqualified opinion on the financial statements; management reported effective disclosure controls and internal control over financial reporting.
Most important facts for investors to verify
- Confirm the issuer identity: this filing names Wound Management Technologies, Inc., not Sanara Medtech Inc.; do not attribute these results to Sanara without confirming the corporate relationship and filing.
- Check subsequent filings for actual 2017 revenue, cash flows, HemaQuell adoption, and whether management’s debt-repayment and growth forecasts were achieved.
- Review the composition and recurrence of 2016 operating expenses and cash flow, including the adviser warrant valuation, the increase in receivables, and the status of accrued royalties and interest.
- Assess fully diluted share count and warrant terms, including the potential effect of the 60 million-share adviser warrant and Series C preferred stock.
- Check developments in the Link and consolidated Rudawski/Fox Lake cases, the CellerateRX license renewal or replacement after 2018, and supplier continuity.