Notes to Unaudited Consolidated Financial Statements
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Background and Basis of Presentation
The
terms “Sanara MedTech,” “we,” “the
Company,” “SMTI,” “our,” and
“us” as used in this report refer to Sanara MedTech
Inc. and its subsidiaries. The accompanying unaudited consolidated
balance sheet as of March 31, 2020, and unaudited consolidated
statements of operations for the three-months ended March 31,
2020 and 2019, have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by U.S. generally accepted accounting principles
for complete financial statements. In the opinion of management of
the Company, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended March
31, 2020, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2020, or any other
period. These financial statements and notes should be read in
conjunction with the financial statements for each of the two years
ended December 31, 2019, and December 31, 2018, included in the
Company’s Annual Report on Form 10-K.
On
August 28, 2018, the Company consummated definitive agreements that
continued the Company’s operations to market its principal
products, CellerateRX® Surgical Activated Collagen®
Peptides and CellerateRX® Hydrolyzed Collagen wound fillers
(CellerateRX), through a 50% ownership interest in a newly formed
Texas limited liability company, Cellerate, LLC which began
operations on September 1, 2018. The remaining 50% ownership
interest was held by an affiliate of The Catalyst Group, Inc.
(Catalyst), which acquired an exclusive world-wide license to
distribute CellerateRX products. Cellerate, LLC conducts operations
with an exclusive sublicense from the Catalyst affiliate to
distribute CellerateRX products into the wound care and surgical
markets in the United States, Canada and Mexico.
On
March 15, 2019, the Company acquired Catalyst’s 50% interest
in Cellerate, LLC (the Cellerate Acquisition) in exchange for
1,136,815 shares of the Company’s newly created Series F
Convertible Preferred Stock. Each share of Series F Convertible
Preferred Stock was convertible at the option of the holder, at any
time, into 2 shares of common stock, adjusted for the 1-for-100
reverse stock split of the Company’s common stock which
became effective on May 10, 2019. Additionally, each holder of
Series F Convertible Preferred Stock was entitled to vote on all
matters submitted for a vote of the Company’s shareholders
with votes equal to the number of shares of common stock into which
such holder’s Series F shares could then be converted. Based
on the closing price of the Company’s common stock on March
15, 2019 and the conversion ratio of the Series F Preferred Stock,
the fair value of the preferred shares issued to Catalyst was
approximately $12.5 million. Following the closing of this
transaction, Mr. Ronald T. Nixon, Founder and Managing Partner of
Catalyst, was elected to the Company’s Board of Directors
effective March 15, 2019.
The
Cellerate Acquisition was accounted for as a reverse merger and
recapitalization because, immediately following the completion of
the transaction, Catalyst could obtain effective control of the
Company upon exercise of its convertible preferred stock and
promissory note, both of which could occur at Catalyst’s
option. Additionally, Cellerate, LLC’s officers and senior
executive positions continued on as management of the combined
entity after consummation of the Cellerate Acquisition. For
accounting purposes, Cellerate, LLC was deemed to be the accounting
acquirer in the transaction and, consequently, the transaction was
treated as a recapitalization of Sanara MedTech. As part of the reverse merger and
recapitalization, the net liabilities existing in the Company as of
the date of the merger totaling approximately $1,666,537, which
included $508,973 of cash, were converted to equity as part of this
transaction. No step-up in basis or intangible assets or
goodwill was recorded in this transaction.
On May
9, 2019, the Company organized Sanara Pulsar, LLC, a Texas limited
liability company, which is owned 60% by the Company’s wholly
owned subsidiary Cellerate, LLC, and 40% owned by Wound Care
Solutions, Limited, an unaffiliated company registered in the
United Kingdom (WCS). Net profits and losses and distributions are
shared by the members in proportion to their respective membership
interests. The Company consolidates the operations and financial
position of Sanara Pulsar.
Principles of Consolidation
The
unaudited consolidated financial statements include the accounts of
Sanara MedTech Inc. and its wholly owned subsidiaries Wound Care
Innovations, LLC a Nevada limited liability company, and Cellerate,
LLC a Texas limited liability company. The consolidated financial
statements also include the accounts of Sanara Pulsar, LLC, a Texas
limited liability company which is owned 60% by the Company’s
wholly owned subsidiary Cellerate, LLC, and 40% owned by Wound Care
Solutions, Limited, an unaffiliated company registered in the
United Kingdom (WCS).
Revenue Recognition
The Company recognizes revenue in accordance with Accounting
Standards Codification (“ASC”) Topic 606, Revenue
from Contracts with Customers, which was adopted on January 1, 2018
using the modified retrospective method. Revenues are recognized
when control of the promised goods or services is transferred to
the customer in an amount that reflects the consideration the
Company expects to be entitled to receive in exchange for
transferring those goods or services. Revenue is recognized based
on the following five step model:
-
Identification of the contract with a customer
-
Identification of the performance obligations in the
contract
-
Determination of the transaction price
-
Allocation of the transaction price to the performance obligations
in the contract
-
Recognition of revenue when, or as, the Company satisfies a
performance obligation
Details of this five-step process are as follows:
Identification of the contract with a customer
Customer purchase orders are generally considered to be contracts
under ASC 606. Purchase orders typically identify specific terms of
products to be delivered, create the enforceable rights and
obligations of both parties, and result in commercial substance. No
other forms of contract revenue recognition, such as the completed
contract or percentage of completion methods, were utilized by the
Company in either 2019 or 2020.
Performance obligations
The Company’s performance obligation is generally limited to
delivery of the requested items to its customers at the agreed upon
quantities and prices.
Determination and allocation of the transaction price
The Company
has established prices for its products. These prices are
effectively agreed to when customers place purchase orders with the
Company. Rebates and discounts, if any, are recognized in full at
the time of sale as a reduction of net revenue. Allocation of
transaction prices is not necessary where one performance
obligation exists.
Recognition of revenue as performance obligations are
satisfied
Product revenues are recognized when the products are delivered,
and title passes to the customer.
Disaggregation of Revenue
Revenue
streams from product sales and royalties are summarized below for
the three months ended March 31, 2020 and 2019. All revenue was
generated in the United States; therefore, no geographical
disaggregation is necessary.
|
|
|
|
|
|
|
Product
sales revenue
|
$3,474,081
|
$2,478,521
|
Royalty
revenue
|
50,250
|
8,375
|
Total Revenue
|
$3,524,331
|
$2,486,896
|
The Company recognizes royalty revenue from a licensing agreement
between BioStructures, LLC and the Company. The Company records
revenue each calendar quarter as earned per the terms of the
agreement which stipulates the Company will receive quarterly
royalty payments of at least $50,250. Under the terms of the
development and license agreement the Company executed with
BioStructures, LLC in 2011, royalties of 2.0% are recognized on
sales of products containing the Company’s patented
resorbable bone hemostasis. The minimum annual royalty due to the
Company is $201,000 per year throughout the life of the patent
which expires in 2023. These royalties are payable in quarterly
installments of $50,250. To date, royalties related to this
licensing agreement have not exceeded the annual minimum of
$201,000 ($50,250 per quarter).
Contract Assets and Liabilities
The Company does not have any contract assets or contract
liabilities.
Inventories
Inventories
are stated at the lower of cost or net realizable value, with cost
computed on a first-in, first-out basis. Inventories consist of
finished goods and related packaging components. The Company
recorded inventory obsolescence expense of $20,116 for the three
months ended March 31, 2020, compared to $38,837 for the three
months ended March 31, 2019. The allowance for obsolete and
slow-moving inventory had a balance of $58,574 at March 31, 2020,
and $43,650 at December 31, 2019. The Company considered the impact
of COVID-19 on its recorded value of inventory and determined no
adjustment was necessary.
Allowance for Doubtful Accounts
The
Company establishes an allowance for doubtful accounts to ensure
accounts receivable are not overstated due to uncollectible
accounts. The Company recorded bad debt expense of $30,000 during
the three months ended March 31, 2020, and zero during the three
months ended March 31, 2019. The allowance for doubtful accounts at
March 31, 2020 was $79,465 and $60,012 at December 31, 2019. Bad
debt reserves are maintained based on a variety of factors,
including the length of time receivables are past due and a
detailed review of certain individual customer accounts. If
circumstances related to customers change, estimates of the
recoverability of receivables would be further adjusted. The
Company considered the impact of COVID-19 in its analysis of
receivables and determined that allowance for doubtful accounts was
appropriate at March 31, 2020.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. The extent to
which the COVID-19 pandemic may directly or indirectly impact our
business, financial condition, and results of operations is highly
uncertain and subject to change. We considered the potential impact
of the COVID-19 pandemic on our estimates and assumptions and there
was not a material impact to our consolidated financial statements
as of and for the three months ended March 31, 2020; however,
actual results could differ from those estimates and there may be
changes to our estimates in future periods.
Impairment of Long-Lived Assets
Long-lived
assets and certain identifiable intangibles to be held and used by
the Company are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may
not be recoverable. The Company continuously evaluates the
recoverability of its long-lived assets based on estimated future
cash flows and the estimated liquidation value of such long-lived
assets and provides for impairment if such undiscounted cash flows
are insufficient to recover the carrying amount of the long-lived
assets. If impairment exists, an adjustment is made to write the
asset down to its fair value, and a loss is recorded as the
difference between the carrying value and fair value. Fair values
are determined based on quoted market values, undiscounted cash
flows or internal and external appraisals, as applicable. Assets to
be disposed of are carried at the lower of carrying value or
estimated net realizable value. There was no impairment recorded
during the three months ended March 31, 2020 and 2019.
Fair Value Measurements
As
defined in ASC Topic 820, fair value is the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement
date (exit price). The Company utilizes market data or assumptions
that market participants would use in pricing the asset or
liability, including assumptions about risk and the risks inherent
in the inputs to the valuation technique. These inputs can be
readily observable, market corroborated, or generally unobservable.
ASC 820 establishes a fair value hierarchy that prioritizes the
inputs used to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for
identical assets or liabilities (level 1 measurement) and the
lowest priority to unobservable inputs (level 3 measurement). This
fair value measurement framework applies at both initial and
subsequent measurement.
The
three levels of the fair value hierarchy defined by ASC Topic 820
are as follows:
Level 1
– Quoted prices are available in active markets for identical
assets or liabilities as of the reporting date. Active markets are
those in which transactions for the asset or liability occur in
sufficient frequency and volume to provide pricing information on
an ongoing basis. Level 1 primarily consists of financial
instruments such as exchange-traded derivatives, marketable
securities and listed equities.
Level
2 – Pricing inputs are other than quoted prices in active
markets included in Level 1, which are either directly or
indirectly observable as of the reported date. Level 2 includes
those financial instruments that are valued using models or other
valuation
methodologies.
These models are primarily industry-standard models that consider
various assumptions, including quoted forward prices for
commodities, time value, volatility factors, and current market and
contractual prices for the underlying instruments, as well as other
relevant economic measures. Substantially all of these assumptions
are observable in the marketplace throughout the full
term
of the
instrument, can be derived from observable data or are supported by
observable levels at which transactions are executed in the
marketplace. Instruments in this category generally include
non-exchange-traded derivatives such as commodity swaps, interest
rate swaps, options and collars.
Level 3
– Pricing inputs include significant inputs that are
generally less observable from objective sources. These inputs may
be used with internally developed methodologies that result in
management’s best estimate of fair value.
Our
intangible assets have been valued using the fair value accounting
treatment. A description of the methodology used, including the
valuation category, is described in Note 8 – Intangible
Assets.
Income Per Share
The
Company computes income per share in accordance with ASC Topic 260,
“Earnings per Share,” which requires the Company to
present basic and dilutive income per share when the effect is
dilutive. Basic income per share is computed by dividing income
available to common shareholders by the weighted average number of
common shares outstanding. Diluted income per share is computed
similar to basic income per share except that the denominator is
increased to include the number of additional common shares that
would have been outstanding if the potential common shares had been
issued and if the additional common shares were dilutive. All
convertible instruments were excluded from the current and prior
period calculations as their inclusion would have been
anti-dilutive during the three months ended March 31, 2020 and
March 31, 2019.
Recently Issued Accounting Pronouncements
In
February 2016, the FASB issued ASC Topic 842 Leases which is to be
effective for reporting periods beginning after December 15, 2018.
The Company adopted the pronouncement effective January 1, 2019.
In accordance with the transition
guidance of ASC 842, such arrangements are included in our balance
sheet as of January 1, 2019. All other leases are short-term leases
for which out of practical expediency the Company has elected to
not recognize lease assets and lease liabilities. See Note 4
below for more information regarding the Company’s
leases.
On June
20, 2018, the FASB issued Accounting Standards Update (ASU)
2018-07, which simplifies the accounting for share-based payments
granted to nonemployees for goods and services. Under the ASU, most
of the guidance on such payments to nonemployees would be aligned
with the requirements for share-based payments granted to
employees. The Company adopted the pronouncement effective January
1, 2019 and the adoption did not have a material impact on the
Company’s financial position, operations or cash
flows.
NOTE 2 – NOTES PAYABLE
Convertible Notes Payable - Related Parties
As part
of the aforementioned transaction with Catalyst to form Cellerate,
LLC, the Company issued a 30-month convertible promissory note to
Catalyst in the principal amount of $1,500,000, bearing interest at
a 5% annual interest rate, compounded quarterly. Interest was
payable quarterly but could be deferred at the Company’s
election to the maturity of the promissory note. Outstanding
principal and interest were convertible at Catalyst’s option
into shares of the Company’s Common Stock at a conversion
price of $9.00 per share.
On
February 7, 2020, Catalyst converted its promissory note, including
accrued interest of $111,911, into 179,101 shares of the
Company’s common stock. As of March 31, 2020, there were no
promissory notes or accrued interest outstanding.
NOTE 3 – COMMITMENTS AND CONTINGENCIES
LICENSE AGREEMENTS AND ROYALTIES
CellerateRX® Activated Collagen®
The
Company has an exclusive sublicense to distribute CellerateRX®
Activated Collagen® products into the wound care and surgical
markets in the United States, Canada and Mexico. The Company pays
specified royalties to Applied Nutritionals, LLC based on annual
net sales of CellerateRX. The term of the sublicense extends
through August 2028, with automatic one-year renewals through
December 31, 2049, subject to termination at the end of any renewal
term by either party on six months' notice. The Company pays
royalties based on its annual net sales of CellerateRX consisting
of 3% of all collected net sales each year up to $12,000,000, 4% of
all collected net sales each year that exceed $12,000,000 up to
$20,000,000, and 5% of all collected net sales each year that
exceed $20,000,000. Minimum royalties of $400,000 per year are
payable for the first five years of the sublicense
agreement.
BIAKŌS™ Antimicrobial Barrier Film and
Curashield™ No Sting Skin
Protectant
On
October 1, 2019, the Company executed an additional license
agreement with Rochal Industries, LLC (“Rochal”)
whereby the Company acquired an exclusive world-wide license to
market, sell and further develop certain antimicrobial barrier film
and skin protectant products for use in the human health care
market utilizing certain Rochal patents and pending patent
applications (the “ABF License Agreement”). Currently,
the products covered by the ABF License Agreement are
BIAKŌS™ Antimicrobial Barrier Film and
Curashield™ No Sting Skin
Protectant. The Executive Chairman of the Company is also a
director of Rochal, and indirectly a significant shareholder of
Rochal, and through the potential exercise of warrants a majority
shareholder of Rochal. Another Company director is also a director
and significant shareholder of Rochal.
Future
commitments under the terms of the ABF License Agreement
include:
1.
Subject to the
occurrence of specified Company financing conditions in 2020,
Sanara will also pay Rochal $500,000, which at Rochal’s
option may be in cash or the Company’s Common Stock; or a
combination of cash and Sanara Common Stock.
2. The
Company will pay Rochal a royalty of:
a.
4% of net sales of
licensed products in countries in which patents are
registered
b.
2% of net sales of
licensed products in countries without patent
protection.
The
minimum annual royalty due to Rochal will be $50,000 beginning with
the first full calendar year following the year in which first
commercial sales of the products occur (the “First Revenue
Year”). The annual minimum royalty will increase by 10% each
subsequent calendar year up to a maximum amount of
$75,000.
3.
Sanara will pay
additional royalty annually based on specific net profit targets
from sales of the licensed products, subject to a maximum of
$500,000 during any calendar year.
Unless
previously terminated or extended by the parties, the ABF License
Agreement will terminate upon expiration of the last U.S. patent in
October 2033.
The
foregoing summary of the ABF License Agreement does not purport to
be complete and is qualified in its entirety by reference to the
ABF License Agreement. The Company filed a copy of the ABF License
Agreement as an exhibit to its Quarterly Report on Form 10-Q filed
on November 14, 2019.
BIAKŌS™ Antimicrobial Wound Gel and BIAKŌS™
Antimicrobial Skin and Wound Cleanser
On July
7, 2019, the Company executed a license agreement with Rochal
Industries, LLC (“Rochal”) whereby the Company acquired
an exclusive world-wide license to market, sell and further develop
antimicrobial products for the prevention and treatment of microbes
on the human body utilizing certain Rochal patents and pending
patent applications (the “License Agreement”).
Currently, the products covered by the License Agreement are
BIAKŌS™ Antimicrobial Wound Gel, and FDA cleared
BIAKŌS™ Antimicrobial Skin and Wound Cleanser. The
Executive Chairman of the Company is also a director of Rochal, and
indirectly a significant shareholder of Rochal, and through the
potential exercise of warrants a majority shareholder of Rochal.
Another Company director is also a director and significant
shareholder of Rochal.
Future
commitments under the terms of the License Agreement
include:
1.
Subject to the
occurrence of specified Sanara financing conditions by the end of
2022, Sanara will also pay Rochal $750,000, which at Sanara’s
option, may be in cash or Sanara Common Stock; or a combination of
cash and Sanara Common Stock.
2.
The Company will
pay Rochal a royalty of:
a.
4% of net sales of
licensed products in countries in which patents are
registered
b.
2% of net sales of
licensed products in countries without patent
protection.
The
minimum annual royalty due to Rochal will be $100,000 beginning
with calendar year 2020. The annual minimum royalty will increase
by 10% each subsequent calendar year up to a maximum amount of
$150,000.
3.
Sanara will pay
additional royalty annually based on specific net profit targets
from sales of the licensed products, subject to a maximum of
$1,000,000 during any calendar year.
Unless
previously terminated by the parties, the License Agreement will
expire with the related patents in December 2031.
The
foregoing summary of the License Agreement does not purport to be
complete and is qualified in its entirety by reference to the
License Agreement. The Company filed a copy of the License
Agreement as an exhibit to its Quarterly Report on Form 10-Q filed
on August 14, 2019.
Resorbable Bone Hemostat
The
Company acquired a patent in 2009 for a resorbable bone hemostat
and delivery system for orthopedic bone void fillers. This patent is not part of the Company’s
long-term strategic focus. The Company subsequently licensed
the patent to a third party to market a bone void filler product
for which the Company receives a 3% royalty on product sales over
the life of the patent, which expires in 2023 with annual minimum
royalties of $201,000. The Company pays two unrelated third parties
a combined royalty equal to eight percent (8%) of the
Company’s net revenues or minimum royalties generated from
products that utilize the Company's acquired patented bone hemostat
and delivery system. To date,
royalties received by the Company related to this licensing
agreement have not exceeded the annual minimum of $201,000 ($50,250
per quarter). Therefore, the Company’s annual royalty
obligation under the terms of the license agreement has been
$16,080 ($4,020 per quarter).
OTHER COMMITMENTS
At the
time of the formation of Sanara Pulsar, it and WCS entered into a
supply agreement whereby Sanara Pulsar became the exclusive
distributor in the United States of certain wound care products
that utilize intellectual property developed and owned by WCS. In
2019, the Company advanced to WCS $200,000 and recorded the payment
as a reduction of non-controlling interests. All distributions made
by Sanara Pulsar to its members, not including tax distributions,
will be made exclusively to Cellerate, LLC until such time as
Cellerate, LLC has received an amount of distributions equal to
such advances. In the event WCS’s Form K-l from Sanara Pulsar
for the year 2020 does not allocate to WCS net income of at least
$200,000 ("Target Net Income"), then Cellerate. LLC will, within 30
days after such determination, pay WCS the amount of funds
representing the difference between Target Net Income and the
actual amount of net income shown on WCS’s Form K-1 for the
year 2020. For the years 2021 through 2024 Target Net Income will
increase by 10% each year and in the event WCS’s Form K-1 for
any of those years does not allocate to WCS net income in an amount
at least equal to Target Net Income for such year, then Cellerate,
LLC will, within 30 days after such determination, pay WCS the
amount of funds representing the difference between Target Net
Income and the actual amount of net income shown on WCS’s
Form K-1 for the applicable year.
NOTE 4 – LEASES
The
Company periodically enters into operating lease contracts for
office space and equipment. Arrangements are evaluated at inception
to determine whether such arrangements constitute a lease. In
accordance with the transition guidance of ASC 842, such
arrangements are included in our balance sheet as of January 1,
2019.
Right
of use assets, which we refer to as “ROU assets,”
represent the right to use an underlying asset for the lease term,
and lease
liabilities represent the obligation to make lease payments arising
from the lease. Operating lease ROU assets and liabilities were
recognized at the transition date based on the present value of
lease payments over the respective lease term, with the office
space ROU asset adjusted for deferred rent
liability.
The Company has two operating leases: an office space lease with a
remaining lease term of 51 months
and a copier lease with a remaining lease term
of 16 months
as of March 31, 2020. In
accordance with the transition guidance of ASC 842, such
arrangements are included in our balance sheet as of January 1,
2019. All other leases are short-term leases for which out of
practical expediency the Company has elected to not recognize lease
assets and lease liabilities.
In
March 2017, and as amended in March 2018, the Company executed a
new office lease effective April 1, 2019 for office space located
at 1200 Summit Ave., Suite 414, Fort Worth, TX 76102. On July 1,
2019, the Company amended the office lease agreement which became
effective on August 22, 2019 upon completion by the landlord of
certain leasehold improvements. Under the terms of the amended
lease agreement, the Company leased an additional 1,682 rentable
square feet of office space which brought the total square footage
leased to 5,877. The amended lease agreement extends the original
term of the lease for a period of 36 months through June 30, 2024.
The monthly base rental payments under the amended lease agreement
are as follows:
|
|
|
|
|
|
August
22, 2020
|
June
30, 2020
|
$12,243.75
|
July
1, 2020
|
June
30, 2021
|
$12,488.63
|
July
1, 2021
|
June
30, 2022
|
$12,488.63
|
July
1, 2022
|
June
30, 2023
|
$12,733.50
|
July
1, 2023
|
June
30, 2024
|
$12,978.38
|
As the implicit rate in the leases is not determinable, the
discount rate applied to determine the present value of lease
payments is the Company’s incremental borrowing rate of
6.25%. The office space lease agreement contains no renewal terms,
so no lease liability is recorded beyond the termination date. The
copier lease can be automatically renewed but no lease liability is
recorded beyond the initial termination date as exercising this
option is not reasonably certain.
In
accordance with ASC 842, the Company has recorded lease assets of
$556,533 and a related lease liability of $570,582 as of March 31,
2020. Cash paid for amounts included in measurement of operating
lease liabilities as of March 31, 2020 was $37,354 . The present
value of our operating lease liabilities is shown
below.
Maturity of Operating Lease Liabilities
|
|
Remainder
of 2020
|
$113,532
|
2021
|
151,317
|
2022
|
151,333
|
2023
|
154,271
|
2024
|
77,870
|
Thereafter
|
-
|
Total
lease payments
|
648,323
|
Less
imputed interest
|
(77,741)
|
Present
value of lease liabilities
|
$570,582
|
As of
March 31, 2020, our operating leases have a weighted average
remaining lease term of 4.2 years and a weighted average discount
rate of 6.25%.
NOTE 5 – PROPERTY & EQUIPMENT
Property
and equipment are stated at cost, less accumulated depreciation.
Depreciation is recorded using the straight-line method over the
estimated useful lives of the related assets, ranging from three to
ten years. A summary is as follows:
|
|
|
|
|
|
Computers
|
$87,928
|
$87,310
|
Office
equipment
|
22,597
|
22,312
|
Furniture
and fixtures
|
208,601
|
153,995
|
Leasehold
improvements
|
2,030
|
2,030
|
|
321,156
|
265,647
|
Less
accumulated depreciation
|
(75,754)
|
(60,694)
|
|
|
|
Property
and equipment, net
|
$245,402
|
$204,953
|
Depreciation expense related to property and equipment was $15,762
for the three months ended March 31, 2020, and $1,631 for the three
months ended March 31, 2019.
The
Company considered the impact COVID-19 may have had on the carrying
value of its property and equipment and determined that no
impairment loss had occurred. We will continue to assess COVID-19's
impact on our business including any indicators of impairment of
property and equipment.
NOTE 6 – SHAREHOLDERS’ EQUITY
Preferred Stock
On
March 13, 2019, the Company established a new series of preferred
stock consisting of 1,200,000 shares of Series F Convertible
Preferred Stock, par value of $10.00 per share. After
proportionally adjusting to reflect a subsequent 1 for 100 reverse
stock split of the Common Stock, each share of Series F Convertible
Preferred Stock was convertible at the option of the holder, at any
time, into 2 shares of Common Stock. Additionally, each holder of
Series F Convertible Preferred Stock was entitled to vote on all
matters submitted for a vote of the Company’s shareholders
with votes equal to the number of shares of Common Stock into which
such holder’s Series F Preferred shares could then be
converted. The Series F Convertible Preferred Stock ranked senior
to the Company’s Common Stock as to the payment of dividends
(if any) and the distribution of assets. Upon liquidation of the
Company, holders of Series F Convertible Preferred Stock were
entitled to a liquidation preference of $5 per share.
On
February 7, 2020, Catalyst Group converted its entire holdings of
Sanara MedTech Inc.’s 30-month $1,500,000 convertible
promissory note and Series F Convertible Preferred Stock into
shares of Sanara Common Stock. The Company issued an aggregate of
2,452,731 shares of Common Stock in the conversions. After the
conversions, Catalyst controls the voting of a total of 3,416,587
shares of Common Stock, which represents 55.1% of the 6,203,832
shares of Common Stock currently outstanding. As of March 31, 2020, there were no shares of the
Series F Preferred stock issued and outstanding.
Common Stock
On May
10, 2019 the Company effected a 1-for-100 reverse stock split of
the Company’s issued and outstanding shares of Common Stock.
Concurrent with the reverse stock split, the Company changed its
corporate name from Wound Management Technologies, Inc. to Sanara
MedTech Inc.
The
reverse stock split was previously approved by a majority of
shareholders of the Company’s outstanding voting stock on
March 21, 2019. On May 10, 2019, the Company’s Common Stock
began trading on the OTCQB market under the symbol
“WNDMD” and traded under that symbol until June 6,
2019, at which time the Company changed its trading symbol to
“SMTI”. The post-split Common Stock is traded under a
new CUSIP number 79957L100. In connection with the reverse stock
split, the Company also made a corresponding adjustment to the
Company’s authorized capital stock to reduce the authorized
Common Stock to 20,000,000 shares and the authorized preferred
stock to 2,000,000 shares, effective May 10, 2019.
The
reverse stock split did not change a shareholder’s ownership
percentage of the Company's Common Stock, except for the small
effect where the reverse stock split would result in a shareholder
owning a fractional share. No fractional shares were issued as a
result of the reverse split. Shareholders who were otherwise
entitled to receive a fractional share received a cash payment
based on the market price of a share of the common stock on May 13,
2019.
On
October 15, 2019, Company closed a private placement offering of
1,204,820 shares of its common stock at a price of $8.30 per share.
All shares sold by the Company were newly issued shares. The
purchasers in the offering were related party entities to three
members of the Company’s Board of Directors.
On
February 21, 2020, the Company filed a Form S-8 registration
statement which registered an aggregate of 2,000,000 shares of
common stock, par value $0.001 per share (the “Common
Stock”), that may be issued under the Sanara MedTech Inc.
2014 Omnibus Long-Term Incentive Plan. Pursuant to Rule 416 of the
Securities Act of 1933, as amended, this registration statement
also covers such additional and indeterminate number of securities
as may become issuable pursuant to the provisions of the plan
relating to adjustments for changes resulting from a share
dividend, share split or similar change.
Restricted Stock Awards
During
the first quarter of 2020, the Company issued a total of 180,100
shares of restricted common stock to Company employees, directors,
and certain consultants of the Company. The restricted share awards
were issued under the Company’s 2014 Long Term Incentive Plan
and are subject to certain vesting provisions and other terms and
conditions set forth in each recipient’s restricted stock
agreement.
The
fair value of each award is based on the closing price of the
Company’s common stock on the respective grant dates. The
Company recognizes compensation expense for stock awards on a
straight-line basis over the vesting period of the award.
Share-based compensation expense of $304,897 was recognized in
selling, general and administrative expenses during the three
months ended March 31, 2020. No share-based expense was recognized
during the three months ended March 31, 2019.
Below
is a summary of restricted stock activity for the three months
ended March 31, 2020:
|
For the Three Months Ended
|
|
|
|
|
|
|
|
|
Non-vested
at beginning of period
|
-
|
-
|
Granted
|
180,100
|
$11.50
|
Vested
|
(15,497)
|
11.15
|
Forfeited
|
-
|
-
|
Non-vested
at March 31, 2020
|
164,603
|
$11.54
|
At March 31, 2020 there was $1,677,875 of total unrecognized
share-based compensation expense related to unvested share-based
equity awards. Unrecognized share-based compensation expense is
expected to be recognized over a weighted-average period of 2.6
years.
.
Stock Options
On
December 31, 2017, the Company granted a total of 11,500 options to
five employees. The aggregate fair value of the awards was
determined to be $61,322 and was to be expensed over a three-year
vesting period. On April 13, 2018, the Company granted a total of
2,000 options to one employee and one contractor. The aggregate
fair value of the awards was determined to be $8,943 and was to be
expensed over a three-year vesting period. The aggregate fair value
of the awards was determined to be $16,405 and was to be expensed
over a three-year vesting period.
The
Company’s stock option agreements include a provision whereby
all outstanding options vest immediately if the Company consummates
a transaction resulting in a change in control of the Company, as
defined in the stock option agreements. The Cellerate Acquisition
on March 15, 2019 (see Note 1 for more information) represented a
change in control of the Company for purposes of the stock option
agreements. Accordingly, all outstanding stock options fully vested
on March 15, 2019.
A
summary of the status of the stock options at March 31, 2020 and
changes during the three-month period then ended is presented
below:
|
For
the Three Months Ended March 31,
2020
|
|
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining Contract Life
|
Outstanding
at beginning of period
|
11,500
|
$6.00
|
|
Granted
|
-
|
-
|
|
Exercised
|
-
|
-
|
|
Forfeited
|
-
|
-
|
|
Expired
|
-
|
-
|
|
Outstanding at
March 31, 2020
|
11,500
|
$6.00
|
2.8
|
|
|
|
|
Exercisable at
March 31, 2020
|
11,500
|
$6.00
|
2.8
|
NOTE 7 – DEBT AND CREDIT FACILITIES
In
December 2018, Cellerate, LLC executed agreements with Cadence
Bank, N.A. (“Cadence”) which provided Cellerate, LLC
access to a revolving line of credit up to a maximum principal
amount of $1,000,000. The line of credit supports short-term
working capital requirements of Cellerate, LLC. The line of credit
is secured by substantially all of the assets of Cellerate, LLC.
The interest rate per annum under this loan is the “Prime
Rate” as it varies from time to time and designated in the
“Money Rates” section of the Wall Street Journal plus
0.75%.
On June
21, 2019, the Company modified the Cadence revolving line of credit
to increase the maximum principal amount from $1,000,000 to
$2,500,000. Most terms of the modification agreement, including
security and interest rate, were unchanged from the original loan
agreement. Significant changes under the terms of the modification
agreement include extending the maturity date from December 16,
2019 to June 19, 2020, and the addition of a financial covenant
requiring the Company to sell additional equity securities in an
amount of at least $5,000,000 no later than December 31,
2019.
On
October 16, 2019, the Company paid down the entire $2,200,000
balance of the revolving line of credit with cash proceeds received
through a private placement stock offering. The total outstanding
line of credit balance and accrued interest was $0 at March 31,
2020.
NOTE 8 – INTANGIBLE ASSETS
The
carrying values of the Company’s finite-lived intangible
assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent
|
$510,310
|
$(510,310)
|
$-
|
$510,310
|
$(510,310)
|
$-
|
License
|
2,000,000
|
(84,744)
|
1,915,256
|
1,500,000
|
(48,876)
|
1,451,124
|
Software
and Other
|
64,464
|
(46,268)
|
18,196
|
64,464
|
(44,394)
|
20,070
|
Total
|
$2,574,774
|
$(641,322)
|
$1,933,452
|
$2,074,774
|
$(603,580)
|
$1,471,194
|
During
the first quarter of 2020, the Company paid a $500,000 milestone
payment to Rochal Industries, LLC (“Rochal”) upon FDA
clearance of BIAKŌS™ Antimicrobial Wound Gel pursuant to
the terms of the July 8, 2019 license agreement with Rochal. The
milestone payment was recorded as an addition to intangible
assets.
As of
March 31, 2020, the weighted-average amortization period for all
intangible assets is 12.0 years. Amortization expense related to intangible assets
was $37,742 for the three months ended March 31, 2020 and $2,709
for the three months ended March 31, 2019. The estimated
remaining amortization expense as of March 31, 2020 is as
follows:
Remainder
of 2020
|
$123,717
|
2021
|
164,956
|
2022
|
162,541
|
2023
|
157,461
|
2024
|
157,461
|
Thereafter
|
1,167,316
|
Total
|
$1,933,452
|
During the first quarter of 2020, the Company reviewed the carrying
value of intangible assets due to the events and circumstances
surrounding the COVID-19 pandemic. The Company does not
believe the impact of the COVID-19 has created an impairment loss on the Company’s intangible
assets. Accordingly, no there was no impairment loss
recognized on the Company’s intangible assets during
the three months ended
March 31, 2020.
NOTE 9 –RELATED PARTIES
Payables to Related Parties
The
Company had outstanding payables to related parties totaling
$206,849 at March 31, 2020, and $68,668 at December 31,
2019.
Prepaid other - related party
In the
normal course of business, the Company may advance payments to its
suppliers, inclusive of Rochal, a related party. As of March 31,
2020, the Company paid $200,000 to Rochal as a deposit towards the
initial payment of a pending product license agreement. In the
event this license agreement is not executed by the end of the 2020
calendar year, Rochal will be obligated to refund the advance
deposit payments of $200,000 to Sanara. At December 31, 2019, there
were no prepaid balances to related parties.
NOTE 10 – SUBSEQUENT EVENTS
Promissory Note - Paycheck Protection Program
On
April 22, 2020, the Company executed an unsecured promissory note
to Cadence Bank, N.A. (the “Loan”) pursuant to the
Paycheck Protection Program (the “PPP”) under Division
A, Title I of the federal Coronavirus Aid, Relief, and Economic
Security (“CARES”) Act. The Company plans to use the
Loan proceeds for covered payroll costs in accordance with the
relevant terms and conditions of the CARES Act.
The
Loan is in the principal amount of $583,000, bears interest at a
fixed rate of 1.00% per annum and matures on April 22, 2022. The
Loan requires monthly payments of principal and interest in the
amount of $24,546 commencing on November 2, 2020 with a final
payment of $174,115 due on April 22, 2022. The Loan may be prepaid
at any time prior to maturity without penalty. Under the terms of
the PPP, the Company may apply for forgiveness of the amount due on
the Loan equal to the sum of payroll costs, covered rent and
covered utility payments incurred during the 8-week period
commencing on the loan funding date of April 24, 2020.The foregoing
summary is qualified in its entirety by reference to the promissory
note which is attached as Exhibit 10.1 to the Company’s Form
8-K filed on April 29, 2020.
New Product License Agreement
On May
4, 2020, the Company executed a product license agreement (the
“License Agreement”) with Rochal Industries, LLC
(“Rochal”) whereby Sanara acquired an exclusive
world-wide license to market, sell and further develop certain
products for human medical use to enhance skin condition or treat
or relieve skin disorders, excluding uses primarily for beauty,
cosmetic, or toiletry purposes. The Executive Chairman of the
Company is also a director of Rochal, and indirectly a significant
shareholder of Rochal, and through the potential exercise of
warrants a majority shareholder of Rochal. Another Company director
is also a director and significant shareholder of
Rochal.
Key
terms of the License Agreement include:
1.
Sanara will pay to
Rochal $600,000 in cash and $750,000 payable at Sanara’s
option in cash, Sanara Common Stock, or a combination of cash and
Sanara Common Stock.
2.
At the time Rochal
issues a purchase order to its contract manufacturer for the first
good manufacturing practice run of the licensed products Sanara
will pay Rochal $600,000 in cash.
3.
Upon FDA clearance
of the licensed products, Sanara will pay Rochal $500,000 in cash and $1,000,000,
which at Sanara’s option, may be in cash or Sanara Common
Stock, or a combination of cash and Sanara Common
Stock.
4.
Sanara will pay
Rochal a royalty of:
a.
4% of net sales of
licensed products in countries in which patents are
registered
b.
2% of net sales of
licensed products in countries without patent
protection.
c.
The minimum annual
royalty due to Rochal will be $100,000 beginning with the first
full calendar year following the year in which first commercial
sales of the licensed products occur and increase by 10% each
subsequent calendar year up to a maximum amount of
$150,000.
d.
Sanara will pay
additional royalty annually based on specific net profit targets
from sales of the licensed products, subject to a maximum of
$1,000,000 during any calendar year.
5.
The License
Agreement will expire in 2034.
The
foregoing summary of the License Agreement does not purport to be
complete and is qualified in its entirety by reference to the
License Agreement. See Exhibit 10.1 for a full copy of the License
agreement.