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 consolidated subsidiaries. The accompanying unaudited
financial statements 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 of the results of the interim periods presented have
been included. Operating results for the nine-month period ended
September 30, 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 and the related notes
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
for the year ended December 31, 2019.
Reverse Stock Split
Effective
May 10, 2019, the Company effected a reverse stock split of the
issued and outstanding shares of the Company’s common stock
at a ratio of one share for every 100 shares. Unless otherwise
indicated, all share and per share information in this report have
been adjusted to reflect the reverse stock split.
Cellerate Acquisition
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 Convertible Preferred
Stock 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 Convertible Preferred Stock, the fair value
of the preferred shares issued to Catalyst was approximately $12.5
million. Following the closing of the Cellerate Acquisition, 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 conversion of its Series F Convertible Preferred Stock
and promissory note, both of which could occur at Catalyst’s
option. Additionally, 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 Cellerate
Acquisition totaling approximately $1,666,537, which included
$508,973 of cash, were converted to equity. No step-up in
basis or intangible assets or goodwill was recorded in the
Cellerate Acquisition.
On May
9, 2019, the Company organized Sanara Pulsar, LLC, a Texas limited
liability company (“Sanara Pulsar”), 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.
On June
9, 2020, the Company organized United Wound and Skin Solutions, LLC
(“UWSS”), a Delaware limited liability company. UWSS is
a 100% owned subsidiary of the Company.
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, Cellerate, LLC
a Texas limited liability company, and UWSS. The consolidated
financial statements also include the accounts of Sanara Pulsar
which is owned 60% by the Company’s wholly owned subsidiary
Cellerate, LLC, and 40% owned by WCS. All significant intercompany
profits, losses, transactions and balances have been eliminated in
consolidation.
Revenue Recognition
The Company recognizes revenue in accordance with Accounting
Standards Codification (“ASC”) Topic 606, Revenue
from Contracts with Customers (“ASC 606”), which the
Company 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 control of the goods and services passes to the
customer.
Disaggregation of Revenue
Revenue
streams from product sales and royalties are summarized below for
the nine months ended September 30, 2020 and 2019. All revenue was
generated in the United States; therefore, no geographical
disaggregation is necessary.
|
|
|
|
|
|
|
Product
sales revenue
|
$10,647,088
|
$8,304,792
|
Royalty
revenue
|
150,750
|
108,875
|
Total Revenue
|
$10,797,838
|
$8,413,667
|
The Company recognizes royalty revenue from a development and
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, 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 development and 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 $258,585 for the nine
months ended September 30, 2020, compared to $88,438 for the nine
months ended September 30, 2019. The allowance for obsolete and
slow-moving inventory had a balance of $231,342 at September 30,
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 as of September 30,
2020.
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 nine
months ended September 30, 2020, and $60,000 during the nine months
ended September 30, 2019. The allowance for doubtful accounts at
September 30, 2020 was $65,719 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 the allowance for doubtful accounts was
appropriate at September 30, 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 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
determined there was not a material impact on our estimates and
assumptions used in preparing our consolidated financial statements
as of and for the nine months
ended September 30, 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, including certain identifiable intangibles held and to be
used by the Company, are reviewed for impairment whenever events or
changes in circumstances, including the COVID-19 pandemic, indicate
that the carrying amount of such assets 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. No impairment was recorded during the nine months ended
September 30, 2020 and 2019.
Investment in Equity Securities
The
Company’s equity investments consist of non-marketable equity
securities in a privately held company without readily determinable
fair values, and are reported at cost minus impairment, if any,
plus or minus changes resulting from observable price changes in
orderly transactions for the identical or similar investment of the
same issuer. The Company has reviewed
the carrying value of its investment and has determined there was
no impairment or observable price changes as of September 30,
2020.
Fair Value Measurements
As
defined in ASC Topic 820, Fair Value Measurement (“ASC
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 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.
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 shares of common
stock 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 shares of common stock that would
have been outstanding if the potential shares of common stock had
been issued and if the additional shares of common stock were
dilutive. All convertible instruments were excluded from the
current and prior period calculations as their inclusion would have
been anti-dilutive during the nine months ended September 30, 2020
and September 30, 2019.
The
following table summarizes the shares of common stock that were
potentially issuable but were excluded from the computation of
diluted net loss per share for the nine months ended September 30,
2020 and 2019 as such
shares would have had an anti-dilutive effect:
|
|
|
|
|
|
|
|
Stock
options
|
11,500
|
11,500
|
Convertible
debt
|
-
|
175,973
|
Preferred
shares
|
-
|
2,273,630
|
Recently Issued Accounting Pronouncements
In June
2016, the Financial Accounting Standards and Oversight Board
(“FASB”) issued Accounting Standards Update No.
2016-13, Financial Instruments-Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments (“ASU
2016-13”) which requires the measurement and recognition of
expected credit losses for financial assets held at amortized cost.
ASU 2016-13 replaces the existing incurred loss impairment model
with an expected loss methodology, which will result in more timely
recognition of credit losses. ASU 2016-13 is effective for annual
reporting periods, and interim periods within those years,
beginning after December 15, 2019. The adoption of this standard
did not have a material impact on the Company’s consolidated
financial statements.
NOTE 2 – NOTES PAYABLE
Convertible Notes Payable – Related Parties
As part
of the Cellerate Acquisition, 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 on the promissory note was payable
quarterly but could have been 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 $1,500,000 promissory
note, including accrued interest of $111,911, into 179,101 shares
of the Company’s common stock. As of September 30, 2020,
there were no related party promissory notes or accrued interest
outstanding.
Promissory Note – Paycheck Protection Program
On
April 22, 2020, the Company executed an unsecured promissory note
(the “PPP Loan”) to Cadence Bank, N.A.
(“Cadence”) pursuant to the Paycheck Protection Program
(the “PPP”) under Division A, Title I of the federal
Coronavirus Aid, Relief, and Economic Security Act (the
“CARES Act”). The Company used the PPP Loan proceeds
for covered payroll costs and other costs in accordance with the
relevant terms and conditions of the CARES Act.
The PPP
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
PPP Loan requires monthly payments of principal and interest in the
amount of $24,546 commencing on May 2, 2021 with a final payment of
$323,239 due on April 22, 2022. The PPP Loan may be prepaid at any
time prior to maturity without penalty. Under the terms of the PPP
and the CARES Act, the Company has applied for forgiveness of the
full amount due on the PPP Loan. At September 30, 2020, the
outstanding principal amount on the PPP Loan was $583,000 plus
accrued interest of $2,559.
NOTE 3 – COMMITMENTS AND CONTINGENCIES
LICENSE AGREEMENTS AND ROYALTIES
CellerateRX® Activated Collagen®
The
Company has an exclusive, world-wide sublicense to distribute
CellerateRX® Activated Collagen® products into the wound
care and surgical markets. The Company pays specified royalties
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. For the nine-month periods ended September
30, 2020 and 2019, royalties due under the terms of this agreement
totaled $300,000 and $337,549, respectively.
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”), a related party, 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 “BIAKOS
License Agreement”). Currently, the products covered by the
BIAKOS License Agreement are BIAKŌS™ Antimicrobial Wound
Gel, and BIAKŌS™ Antimicrobial Skin and Wound Cleanser.
Both products are FDA cleared. 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 BIAKOS License Agreement
include:
1.
Subject to the
occurrence of specified Company financing conditions by the end of
2022, the Company will also pay Rochal $750,000, which at the
Company’s option, may be paid in cash or the Company’s
common stock, or a combination of cash and the Company’s
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;
and
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.
The Company 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 BIAKOS License Agreement
will expire with the related patents in December 2031.
For the
nine-month periods ended September 30, 2020 and September 30, 2019,
royalty expense recognized under this agreement was $75,000 and
$275, respectively.
CuraShield™ Antimicrobial
Barrier Film and No Sting Skin
Protectant
On
October 1, 2019, the Company executed a license agreement with
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
CuraShield™ Antimicrobial Barrier Film and a no sting skin protectant
product.
Future
commitments under the terms of the ABF License Agreement
include:
1.
Subject to the
occurrence of specified Company financing conditions in 2020, the
Company will also pay Rochal $500,000, which at Rochal’s
option may be paid in cash or the Company’s common stock, or
a combination of cash and the Company’s 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;
and
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 annual minimum royalty
will increase by 10% each subsequent calendar year up to a maximum
amount of $75,000.
3.
The Company will
pay additional royalties 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.
No
commercial sales or royalties have been recognized under this
agreement as of September 30, 2020.
Product License Agreement
On May
4, 2020, the Company executed a product license agreement (the
“Debrider License Agreement”) with Rochal, whereby the
Company acquired an exclusive world-wide license to market, sell
and further develop
an autolytic debrider for human medical use to
enhance skin condition or treat or relieve skin disorders,
excluding uses primarily for beauty, cosmetic, or toiletry
purposes.
Future
commitments under the terms of the Debrider License Agreement
include:
1.
At the time Rochal
issues a purchase order to its contract manufacturer for the first
good manufacturing practice run of the licensed products, the
Company will pay Rochal $600,000 in cash.
2.
Upon FDA clearance
of the licensed products, the Company will pay Rochal $500,000 in cash and $1,000,000
which at the Company’s option may be paid in cash or the
Company’s common stock, or a combination of cash and the
Company’s common stock.
3.
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 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.
4.
The Company 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 or extended by the parties, the Debrider
License Agreement will expire in October 2034.
No
commercial sales or royalties have been recognized under this
agreement as of September 30, 2020.
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. 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 (the “Target
Net Income”), then Cellerate, LLC will, within 30 days after
such determination, pay WCS the amount of funds representing the
difference between the Target Net Income and the actual amount of
net income shown on WCS’s Form K-1 for the year 2020. For
each of the years 2021 through 2024 the Target Net Income will
increase by 10%, 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 the 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 the Target Net
Income and the actual amount of net income shown on WCS’s
Form K-1 for the applicable year. All other 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 all such
advances to WCS.
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 on the consolidated balance sheets 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 on 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 45 months
and a copier lease with a remaining lease term of
10 months, as of September 30,
2020. In accordance with the
transition guidance of ASC 842, such arrangements are
included on the consolidated balance sheets as of January 1, 2019. All other leases are short-term leases, which for
practical expediency, the Company has elected to not recognize as
lease assets and lease liabilities.
In
March 2017, the Company executed a new office lease effective April
1, 2019, for office space located in Fort Worth, Texas. 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 extended 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:
|
|
|
From
|
Through
|
|
August
22, 2019
|
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 Topic 842, the Company has recorded lease
assets of $497,748 and a related lease liability of $511,830 as of
September 30, 2020. Cash paid in 2020 for amounts included in the
measurement of operating lease liabilities as of September 30, 2020
was $112,797. The present value of our operating lease liabilities
is shown below.
Maturity of Operating Lease Liabilities
|
|
Remainder
of 2020
|
$38,090
|
2021
|
151,317
|
2022
|
151,333
|
2023
|
154,271
|
2024
|
77,870
|
Thereafter
|
-
|
Total
lease payments
|
572,881
|
Less
imputed interest
|
(61,051)
|
Present
Value of Lease Liabilities
|
$511,830
|
|
|
Operating
lease liability - current
|
124,263
|
Operating
lease liability – long term
|
387,567
|
As of
September 30, 2020, our operating leases had a weighted average
remaining lease term of 3.7 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. Below is a summary of property and equipment for the
periods presented:
|
|
|
|
|
|
Computers
|
$85,864
|
$87,310
|
Office
equipment
|
22,597
|
22,312
|
Furniture
and fixtures
|
205,871
|
153,995
|
Leasehold
improvements
|
2,030
|
2,030
|
|
316,362
|
265,647
|
Less
accumulated depreciation
|
(107,443)
|
(60,694)
|
|
|
|
Property
and equipment, net
|
$208,919
|
$204,953
|
Depreciation expense related to property and equipment was $50,593
for the nine months ended September 30, 2020, and $16,881 for the
nine months ended September 30, 2019.
The
Company considered the impact the COVID-19 pandemic may have had on
the carrying value of its property and equipment and determined
that no impairment loss had occurred as of September 30, 2020. The Company will
continue to assess the COVID-19 pandemic'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. Each share of
Series F Convertible Preferred Stock is 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
is 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
Convertible Preferred shares could then be converted. The Series F
Convertible Preferred Stock ranks 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 are entitled to a liquidation
preference of $5.00 per share.
On
February 7, 2020, Catalyst converted its entire holdings of Sanara
MedTech Inc.’s 30-month $1,500,000 convertible promissory
note and 1,136,815 shares of Series F Convertible Preferred Stock
into shares of the Company’s common stock. The Company issued
an aggregate of 2,452,731 shares of common stock in the
conversions. After the conversions, Catalyst and its affiliates
control the voting of a total of 3,416,587 shares of the
Company’s common stock, which represents 54.4% of the
6,279,610 shares of common stock outstanding as of September 30, 2020. As of September 30, 2020, there were no shares of
Series F Convertible Preferred Stock 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 shareholders of a
majority 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 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 Registration Statement on
Form S-8 which registered an aggregate of 2,000,000 shares of its
common stock that may be issued under the Sanara MedTech Inc. 2014
Omnibus Long-Term Incentive Plan. The Registration Statement on
Form S-8 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. At the Company’s
Annual Meeting of Shareholders held on July 9, 2020, the Company
approved the Restated 2014 Omnibus Long Term Incentive Plan (the
“LTIP Plan”) in which the Company’s directors,
officers, employees and consultants are eligible to participate. A
total of 229,212 shares had been issued under the LTIP Plan and
1,770,788 were available to issue as of September 30,
2020.
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. During the second quarter of 2020, the Company issued an
additional 1,000 shares of restricted common stock to an officer of
the Company. Restricted shares forfeited during the second quarter
totaled 1,430. During the third quarter of 2020, the Company issued
16,396 shares of restricted common stock to certain employees of
the Company. Restricted shares forfeited during the third quarter
totaled 188. 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 $872,662 was recognized in
selling, general and administrative expenses during the nine months
ended September 30, 2020. No share-based expense was recognized
during the nine months ended September 30, 2019.
At September 30, 2020, there was $1,537,238 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 1.9
years.
Below
is a summary of restricted stock activity for the nine months ended
September 30, 2020:
|
For the
Nine Months Ended
|
|
|
|
|
|
|
|
|
Non-vested
at beginning of period
|
-
|
$-
|
Granted
|
197,496
|
12.88
|
Vested
|
(35,919)
|
11.16
|
Forfeited
|
(1,618)
|
11.15
|
Non-vested
at September 30, 2020
|
159,959
|
$13.28
|
Stock Options
A
summary of the status of the stock options at September 30, 2020
and changes during the nine-month period then ended is presented
below:
|
For the Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of period
|
11,500
|
$6.00
|
|
Granted
|
-
|
-
|
|
Exercised
|
-
|
-
|
|
Forfeited
|
-
|
-
|
|
Expired
|
-
|
-
|
|
Outstanding at
September 30, 2020
|
11,500
|
6.00
|
2.3
|
|
|
|
|
Exercisable at
September 30, 2020
|
11,500
|
$6.00
|
2.3
|
NOTE 7 – DEBT AND CREDIT FACILITIES
In
December 2018, Cellerate, LLC executed agreements with 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
was used to support the short-term working capital requirements of
Cellerate, LLC.
On June
21, 2019, the Company modified the revolving line of credit with
Cadence to increase the maximum principal amount from $1,000,000 to
$2,500,000. On October 16, 2019, the Company paid down the entire
$2,200,000 balance of the revolving line of credit with cash
proceeds received from a private placement of the Company’s
common stock. The Company’s revolving line of credit with
Cadence matured on June 19, 2020.
NOTE 8 – INTANGIBLE ASSETS
The
carrying values of the Company’s finite-lived intangible
assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent
|
$510,310
|
$(510,310)
|
$-
|
$510,310
|
$(510,310)
|
$-
|
Licenses
|
3,350,000
|
(202,268)
|
3,147,732
|
1,500,000
|
(48,876)
|
1,451,124
|
Software
and Other
|
64,464
|
(50,015)
|
14,449
|
64,464
|
(44,394)
|
20,070
|
Total
|
$3,924,774
|
$(762,593)
|
$3,162,181
|
$2,074,774
|
$(603,580)
|
$1,471,194
|
During
the first quarter of 2020, the Company paid a $500,000 milestone
payment to Rochal upon FDA clearance of BIAKŌS™
Antimicrobial Wound Gel pursuant to the terms of the
BIAKŌS™ License Agreement. The milestone payment was
recorded as an addition to intangible assets. During the second
quarter of 2020, the Company entered into the Debrider License
Agreement which required an initial payment of $1,350,000 to Rochal
which consisted of $600,000 in cash and $750,000 in the
Company’s common stock.
As of
September 30, 2020, the weighted-average amortization period for
all intangible assets is 12.8 years. Amortization expense related
to intangible assets was $159,013 for the nine months ended
September 30, 2020 and $55,763 for the nine months ended September
30, 2019. The estimated remaining amortization
expense as of September 30, 2020 is as follows:
Remainder
of 2020
|
$64,515
|
2021
|
258,059
|
2022
|
255,645
|
2023
|
250,564
|
2024
|
250,564
|
Thereafter
|
2,082,834
|
Total
|
$3,162,181
|
The Company has 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
COVID-19 has created an impairment
loss on the Company’s intangible assets as of September 30,
2020. Accordingly, there was no impairment loss recognized on
the Company’s intangible assets during the nine
months ended September 30,
2020.
NOTE 9 – INVESTMENT IN EQUITY SECURITIES
The
Company, through its wholly owned subsidiary UWSS, made a $500,000
long-term investment in July 2020 to purchase certain
non-marketable securities consisting of 7,142,857 Series B-2
Preferred Shares of Direct Dermatology Inc.
(“DirectDerm”), representing 2.9% ownership of
DirectDerm at that time. Through this investment, the Company
received exclusive rights to utilize DirectDerm’s technology
in all acute and post-acute care settings such as skilled nursing
facilities, home health, and wound clinics. The Company does not
have the ability to exercise significant influence over
DirectDerm’s operating and financial activities.
NOTE 10 - RELATED PARTIES
Payables to Related Parties
The
Company had outstanding payables to related parties totaling
$94,807 at September 30, 2020, and $68,668 at December 31,
2019.
Prepaid other - related parties
In the
normal course of business, the Company may advance payments to its
suppliers, inclusive of Rochal, a related party. As of September
30, 2020, the Company prepaid $50,970 to Rochal for a finished
goods inventory order. At December 31, 2019, there were no prepaid
balances to related parties.
Manufacturing and Technical Services Agreements – related
parties
On
September 9, 2020, the Company executed a manufacturing agreement
with Rochal. Under the terms of the manufacturing agreement, Rochal
agreed to manufacture, package, and label products licensed from
Rochal by the Company. The manufacturing agreement includes
customary terms and conditions for the Company’s industry.
The term of the agreement is for a period of five years unless
extended by the mutual consent of the parties. As of September 30,
2020, there were no costs incurred by the Company under this
agreement.
On
September 9, 2020, the Company executed a technical services
agreement with Rochal. Under the terms of the technical services
agreement, Rochal will provide its expertise and services on
technical service projects identified by the Company for wound
care, skin care and surgical site care applications. The technical
services agreement includes customary terms and conditions for the
Company’s industry. The Company may terminate this agreement
at any time. As of September 30, 2020, the Company had incurred
$174,200 of costs under this agreement.
NOTE 11 – SUBSEQUENT EVENTS
On
November 9, 2020, UWSS entered into agreements to purchase shares
of Series A Convertible Preferred Stock (the “Series A
Stock”) of Precision Healing Inc. (“Precision”)
for an aggregate purchase price of $600,000. The Series A Stock is
convertible into 150,000 shares of common stock of Precision and
has a senior liquidity preference relative to the common
shareholders. UWSS also agreed to invest an additional $600,000 in
February 2021 for 150,000 additional shares of Series A Stock. The
additional shares of Series A Stock will convert into shares of
common stock of Precision at a ratio based on the date Precision
delivers a development milestone related to the diagnostic tools,
as follows:
1.
If Precision meets
its development milestone by March 31, 2021, the Series A Stock
will convert into 150,000 shares of common stock of
Precision;
2.
If Precision meets
its development milestone between April 1, 2021 and June 30, 2021,
the Series A Stock will convert into 200,000 shares of common stock
of Precision; or
3.
If Precision meets
its development milestone after July 1, 2021, the Series A Stock
will convert into 300,000 shares of common stock of
Precision.
The
Company estimates that UWSS will own between 11.8% and 16.7% of
Precision’s common stock on an as converted basis after its
$1.2 million total investment based on when the development
milestone is achieved. As part of this transaction, UWSS entered
into an exclusive license agreement whereby UWSS obtained an
exclusive, perpetual right to use certain Precision technology and
diagnostic tools for virtual wound and skin care assessments in the
United States in all professional healthcare settings.