Business context and reporting period
This Form 10-Q covers the quarter and nine months ended September 30, 2014. The filing identifies the issuer as Wound Management Technologies, Inc. (WMT), not Sanara Medtech Inc. WMT markets CellerateRX advanced wound-care products through Wound Care Innovations and is developing resorbable orthopedic products through Resorbable Orthopedic Products.
Financial results and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $679,122 | $472,753 | $1,905,766 | $1,263,170 |
| Gross profit | $443,951 | $234,016 | $1,232,426 | $579,648 |
| Gross margin | 65.4% | 49.5% | 64.7% | 45.9% |
| Operating loss | $(647,485) | $(331,423) | $(1,812,869) | $(991,743) |
| Net loss | $(671,007) | $(1,687,496) | $(1,992,894) | $(2,662,187) |
| Net loss available to common stockholders | $(735,741) | $(1,687,496) | $(2,167,658) | $(2,662,187) |
- Q3 revenue grew 44%; nine-month revenue grew 51%. Management attributed growth to expanded sales into hospitals, operating rooms and wound centers, the CellerateRX Surgical powder launch, and new accounts. Approximately 96% of Q3 revenue came from CellerateRX and 4% from ROP royalties.
- G&A increased 97% in Q3 and 96% for the nine-month period, reflecting commissions reclassified from cost of goods sold, staffing and stock compensation, marketing and shipping agreements, and higher legal and development costs. Consequently, operating losses widened despite higher gross profit.
- Interest expense declined to $48,968 in Q3 and $254,627 for nine months. No debt-related expense was recorded in 2014, versus $401,755 and $463,900, respectively, in the comparable 2013 periods. A $25,387 Q3 gain on derivative fair value also contrasted with an $859,710 loss in Q3 2013, contributing to the lower reported net loss.
- At September 30, cash was $849,661 and current assets were $1,664,868, against current liabilities of $2,499,801, a working-capital deficit of approximately $834,933. Notes and convertible notes payable totaled $1,592,704; accrued royalties and dividends were $248,518. Stockholders’ deficit was $548,785.
- Nine-month operating cash use was $1,374,247, versus $1,185,125 in 2013; investing cash use was $5,555. Financing provided $2,184,910, principally from $2,252,510 of Series C preferred stock proceeds, partly offset by debt repayments. Ending cash was $849,661.
Material changes, outlook, and risks
- Management cited early-stage sales and marketing efforts, additional investment in CellerateRX, and development of ROP products as growth initiatives. The company announced FDA 510(k) clearance for its resorbable orthopedic hemostat in February 2014. No quantified financial guidance was provided.
- The filing states that current liabilities exceed current assets, the company has a stockholders’ deficit, and it has not established reliable revenue sufficient to fund operations. These conditions raise substantial doubt about its ability to continue as a going concern; additional funding and successful operations are needed.
- Financing included Series C preferred stock carrying accruing dividends and conversion rights, as well as common-stock and preferred-stock issuances for services. These securities may affect future dilution and claims on value.
- Disclosure controls were deemed ineffective as of September 30, 2014, due to deficiencies in controls over valuation of embedded derivatives. Management reported no material quarterly change in internal control over financial reporting.
- A disputed lawsuit brought by Ken Link remained unresolved; after a 2013 mistrial, trial was reset for the week of December 1, 2014. WMT asserted usury counterclaims and said the outcome and financial effect could not be determined.
- WMT reported $248,518 of accrued current-year royalties at quarter-end under the CellerateRX license, which includes a minimum annual royalty requirement. The filing also reports a subsequent October 23 payment of $96,592 in accrued interest to Brookhaven Medical.
Important facts for investors to verify
- Confirm the issuer identity and reporting period: this source is Wound Management Technologies, Inc.’s 2014 Q3 filing, despite the request metadata naming Sanara Medtech Inc.
- Assess funding needs and going-concern risk against the working-capital deficit, continuing operating cash burn, and dependence on external financing.
- Review the Link litigation status and potential exposure, and the royalty obligations and accrued balance.
- Evaluate the potential dilution and seniority of preferred shares, common shares, options and warrants, including Series C conversion and dividend terms.
- Reconcile the Series D preferred share count: the balance sheet reports 16,656 shares outstanding at September 30, while the note narrative reports 15,350.
- Consider the ineffective disclosure controls and derivative valuation deficiencies when relying on reported results and controls.