Sanara MedTech Inc. (then Wound Management Technologies, Inc.) — FY2018 Form 10-K
Reporting period: Year ended December 31, 2018; filed April 1, 2019. The company focused on wound-care and surgical products, principally CellerateRX hydrolyzed collagen. The filing reports annual results, not standalone fourth-quarter results.
Financial performance and position
- Revenue: Reported revenue was $5.84 million, down 7.4% from $6.30 million in 2017. This comparison is significantly affected by the August 2018 formation of Cellerate, LLC: from September onward, the company used equity-method accounting and did not consolidate Cellerate’s sales. Cellerate reported $3.01 million of revenue for September–December; management cited combined 2018 CellerateRX sales of $8.6 million, up 40% from 2017.
- Profit and margins: Gross profit was $5.33 million versus $5.50 million; reported gross margin was approximately 91.3% versus 87.2%. Operating loss was $502,000, compared with operating income of $120,000. Net loss was $601,000, versus net income of $331,000. Net loss attributable to common shareholders was $732,000, including $131,000 of Series C dividends and inducement dividends.
- Expenses and interest: SG&A increased to $5.74 million from $5.28 million, attributed mainly to sales-force expansion, added infrastructure, product-development spending, and one-time Cellerate formation costs. Interest expense declined to $87,000 from $127,000.
- Cash flow and liquidity: Operating activities provided $277,000, versus using $140,000 in 2017. Investing activities used $8,000; financing activities had no cash flow. Year-end cash was $732,000, down from total current assets of $2.04 million in 2017 to $978,000 in 2018. Current liabilities were $404,000, compared with $2.12 million; the 2017 balance included $1.2 million of related-party notes later converted to stock. Year-end current ratio was about 2.4x.
- Debt and equity: The company had a $1.50 million long-term convertible note issued to Catalyst in connection with Cellerate’s formation, bearing 5% interest and convertible at Catalyst’s option at $0.09 per common share; accrued interest was $26,000. Total liabilities were $1.93 million and shareholders’ equity $1.11 million. Common shares outstanding increased to approximately 236.6 million from 113.4 million, including conversions of related-party debt and Series C preferred stock.
Material changes and transactions
- The prior CellerateRX license expired in August 2018. The company and Catalyst formed Cellerate, LLC, each initially holding 50%; Cellerate obtained a sublicense to distribute CellerateRX in the United States, Canada, and Mexico. The equity-method presentation makes reported year-over-year revenue and expense comparisons less representative of underlying business activity.
- On March 15, 2019, after year-end, the company acquired Catalyst’s remaining 50% interest in Cellerate for 1,136,815 Series F preferred shares, convertible into 227,363,000 common shares. The company said it would consolidate Cellerate from the transaction date; the filing estimated the preferred shares’ fair value at approximately $12.5 million.
- In February 2018, $1.2 million of related-party notes plus $386,000 accrued interest were converted into 22.7 million common shares. Series C preferred shares and accrued dividends were also converted into common stock during 2018.
- The filing describes a planned 1-for-100 reverse stock split, authorized-capital adjustment, and company name change to Sanara MedTech Inc., expected to take effect in late April or early May 2019. These were subsequent events, not completed at the reporting date.
Outlook, risks, and other notable matters
- Management said it was optimistic about continued sales momentum in 2019 and planned to expand CellerateRX distribution and pursue opportunities in biofilm management, placental biologics, wound-therapy adjuncts, debridement, and oxygen delivery. The filing provides no quantified revenue or earnings guidance.
- Management cited Catalyst relationships and cross-selling opportunities, including a planned antimicrobial product focused on biofilm management. Execution and commercial results remain uncertain.
- Key risks include continued dependence on CellerateRX and third-party licensing/manufacturing, the expired CellerateRX patent, strong larger competitors, reimbursement and regulatory changes, customer concentration, and reliance on a single supplier for raw materials used in the principal product. The company also warned that additional financing might be needed and might not be available on acceptable terms.
- The company reported no outstanding legal proceedings and no off-balance-sheet arrangements. The auditor issued an unqualified opinion on the financial statements, but did not attest to internal-control effectiveness. Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end because of the company’s small size and limited segregation of duties.
- Cellerate, LLC had access to a revolving credit line of up to $1.0 million. The filing does not establish that the full amount was drawn.
Important facts for investors to verify
- Reconcile reported 2018 revenue with Cellerate’s separately reported four-month results and management’s $8.6 million combined core-product sales figure; assess comparability with 2017.
- Review the terms, conversion rights, and potential dilution from the $1.5 million Catalyst note and the Series F preferred shares issued for Cellerate.
- Confirm the status and final terms of the reverse split, authorized-share changes, company name change, and Cellerate consolidation.
- Assess cash needs, the availability and usage of Cellerate’s bank credit line, and whether operating cash generation can support planned growth.
- Monitor remediation of the disclosed internal-control material weakness, along with customer concentration, single-supplier dependence, and the CellerateRX sublicense and royalty obligations.