U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: SeptemberJune 30, 20172020
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-11808
WOUND MANAGEMENT TECHNOLOGIES,SANARA MEDTECH INC.
(Exact name of registrant as specified in its charter)
| Texas | | 59-2219994 |
| (State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification Number) |
1200 Summit Ave,
Suite 414,
Fort Worth, Texas 76102
(Address of principal executive offices)
(817) 529-2300
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ (Do not check if a smaller reporting company)
☒ | Smaller reporting company | ☒ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 16, 2017, 112,227,943August 13, 2020, the Company had 6,203,214 shares of the Issuer'sCommon Stock, $.001 par value common stock were issued and 112,223,854 shares wereper share outstanding.
WOUND MANAGEMENT TECHNOLOGIES,SANARA MEDTECH INC. AND SUBSIDIARIES
Form 10-Q
Quarter Ended SeptemberJune 30, 20172020
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Part I – Financial Information
Item 1. Financial Statements
Wound Management Technologies,Sanara MedTech Inc. and Subsidiaries
Consolidated BalanceBalance Sheets September 30, 2017 and December 31, 2016
| | | |
| | | |
| Assets | | |
| Current assets | | |
| Cash | $151,314 | $833,480 |
| Accounts receivable, net of allowance for bad debt of $24,764 and $21,947 | 814,048 | 744,044 |
| Royalty receivable | 50,250 | 50,250 |
| Inventory, net of allowance for obsolescence for $116,772 and $153,023 | 820,908 | 348,457 |
| Prepaid and other assets | 51,662 | 19,782 |
| Total current assets | 1,888,182 | 1,996,013 |
| | | |
| Long-term assets: | | |
| Property, plant and equipment, net of accumulated depreciation of $85,384 and $41,328 | 117,336 | 34,939 |
| Intangible assets, net of accumulated amortization of $408,248 and $369,974 | 102,062 | 140,336 |
| Total long-term assets | 219,398 | 175,275 |
| | | |
| Total assets | $2,107,580 | $2,171,288 |
| | | |
| Liabilities and stockholders' deficit | | |
| | | |
| Current liabilities | | |
| Accounts payable | $160,689 | $238,229 |
| Accounts payable - Related Parties | 21,842 | 93,655 |
| Accrued royalties and dividends | 232,511 | 276,916 |
| Accrued payable | 5,340 | - |
| Accrued commission | 17,492 | - |
| Deferred rent | 14,138 | - |
| Current lease obligation | 344 | 3,766 |
| Accrued interest | 460,956 | 367,411 |
| Derivative liabilities | - | 44 |
| Notes payable | 223,500 | 414,338 |
| Convertible notes payable - Related parties | 1,200,000 | - |
| Total current liabilities | 2,336,812 | 1,394,359 |
| | | |
| Long-term liabilities | | |
| Convertible notes payable - Related parties | - | 1,200,000 |
| Total long-term liabilities | - | 1,200,000 |
| | | |
| Total liabilities | 2,336,812 | 2,594,359 |
| | | |
| Stockholders' deficit | | |
| Series A Preferred Stock, $10 par value, 5,000,000 shares authorized; none issued and outstanding | - | - |
| Series B Convertible Preferred Stock, $10 par value, 7,500 shares authorized; none issued and outstanding | - | - |
| Series C Convertible Preferred Stock, $10 par value, 100,000 shares authorized; 85,561 issued and outstanding as of September 30, 2017 and 85,646 issued and outstanding as of December 31, 2016 | 855,610 | 856,460 |
| Series D Convertible Preferred Stock, $10 par value, 25,000 shares authorized; none issued and outstanding | - | - |
| Series E Convertible Preferred Stock, $10 par value, 5,000 shares authorized; none issued and outstanding | - | - |
| Common Stock: $.001 par value; 250,000,000 shares authorized; 112,227,943 issued and 112,223,854 outstanding as of September 30, 2017 and 109,690,387 issued and 109,686,298 outstanding as of December 31, 2016 | 112,227 | 109,690 |
| Additional paid-in capital | 45,931,183 | 45,822,570 |
| Treasury stock | (12,039) | (12,039) |
| Accumulated deficit | (47,116,213) | (47,199,752) |
| Total stockholders' deficit | (229,232) | (423,071) |
| | | |
| Total liabilities and stockholders' deficit | $2,107,580 | $2,171,288 |
| | | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Wound Management Technologies, Inc. And Subsidiaries
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2017 and 2016
(Unaudited)
| | | |
| | | |
| | | | | |
| | | | | |
| | | | | |
| Revenues | $1,549,016 | $1,409,530 | $4,607,162 | $3,762,681 |
| | | | | |
| Cost of goods sold | 230,049 | 211,639 | 568,071 | 612,514 |
| | | | | |
| Gross profit | 1,318,967 | 1,197,891 | 4,039,091 | 3,150,167 |
| | | | | |
| Operating expenses | | | | |
| Selling, general and administrative expenses | 1,303,344 | 963,738 | 3,799,644 | 2,827,340 |
| Other administrative expenses | - | - | - | 818,665 |
| Depreciation and amortization | 41,400 | 15,282 | 82,329 | 45,601 |
| Bad debt expense | 2,998 | 2,718 | 8,913 | 7,345 |
| Total operating expenses | 1,347,742 | 981,738 | 3,890,886 | 3,698,951 |
| | | | | |
| Operating income / (loss) | (28,775) | 216,153 | 148,205 | (548,784) |
| | | | | |
| Other income / (expense) | | | | |
| Change in fair value of Derivative Liability | 6 | 118 | 44 | 205 |
| Other income | 14 | 1 | 65 | 1 |
| Debt forgiveness | - | 7,648 | 50,646 | 30,592 |
| Interest expense | (19,807) | (42,433) | (115,421) | (132,689) |
| Total other income / (expense) | (19,787) | (34,666) | (64,666) | (101,891) |
| | | | | |
| Net income / (loss) | (48,562) | 181,487 | 83,539 | (650,675) |
| | | | | |
| Series C preferred stock dividends | (42,873) | (75,031) | (100,677) | (213,435) |
| | | | | |
| Net income / (loss) available to common stockholders | $(91,435) | $106,456 | $(17,138) | $(864,110) |
| | | | | |
| Basic loss per share of common stock | $(0.00) | $0.00 | $(0.00) | $(0.01) |
| | | | | |
| Diluted loss per share of common stock | $(0.00) | $0.00 | $(0.00) | $(0.01) |
| | | | | |
| Weighted average number of common shares outstanding basic | 111,161,335 | 108,539,909 | 110,536,584 | 108,397,112 |
| | | | | |
| Weighted average number of common shares outstanding diluted | 111,161,335 | 194,229,681 | 110,536,584 | 108,397,112 |
| | | | | |
| | | |
| | | |
| Assets | | |
| Current assets | | |
| Cash | $3,305,281 | $6,611,928 |
| Accounts receivable, net of allowance for bad debt of $80,029 and $60,012 | 1,368,371 | 1,285,165 |
| Royalty receivable | 49,344 | 50,250 |
| Inventory, net of allowance for obsolescence of $93,944 and $43,650 | 862,692 | 746,519 |
| Prepaid other - related party | 50,970 | - |
| Prepaid and other assets | 472,568 | 161,902 |
| Total current assets | 6,109,226 | 8,855,764 |
| | | |
| | |
| Property, plant and equipment, net of accumulated depreciation of $91,424 and $60,694 | 227,002 | 204,953 |
| Right of use assets – operating leases | 527,371 | 585,251 |
| Intangible assets, net of accumulated amortization of $698,079 and $603,580 | 3,226,696 | 1,471,194 |
| Total long-term assets | 3,981,069 | 2,261,398 |
| | | |
| Total assets | $10,090,295 | $11,117,162 |
| | | |
| Liabilities and Shareholders' Equity | | |
| Current liabilities | | |
| Accounts payable | $139,795 | $337,504 |
| Accounts payable – related party | 752,322 | 68,668 |
| Accrued royalties and expenses | 861,792 | 528,060 |
| Accrued bonus and commissions | 1,519,736 | 1,588,056 |
| Operating lease liability - current | 122,750 | 117,533 |
| Short-term debt | 190,433 | - |
| Accrued interest | 1,101 | - |
| Total current liabilities | 3,587,929 | 2,639,821 |
| | | |
| Long-term liabilities | | |
| Operating lease liability – long term | 419,054 | 481,384 |
| Convertible notes payable – related party | - | 1,500,000 |
| Long-term debt | 392,567 | - |
| Accrued interest - related party | - | 103,557 |
| Other long-term liabilities | 77,092 | - |
| Total long-term liabilities | 888,713 | 2,084,941 |
| | | |
| Total liabilities | 4,476,642 | 4,724,762 |
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| Shareholders' equity | | |
| Series F Convertible Preferred Stock: $10 par value, 1,200,000 shares authorized; none issued and outstanding as of June 30, 2020 and 1,136,815 issued and outstanding as of December 31, 2019 | - | 11,368,150 |
| Common Stock: $0.001 par value, 20,000,000 shares authorized; 6,203,402 issued and outstanding as of June 30, 2020 and 3,571,001 issued and outstanding as of December 31, 2019 | 6,203 | 3,571 |
| Additional paid-in capital | 11,475,511 | (2,081,829) |
| Accumulated deficit | (5,638,523) | (2,675,802) |
| Total Sanara MedTech shareholders' equity | 5,843,191 | 6,614,090 |
| Equity attributable to noncontrolling interest | (229,538) | (221,690) |
| Total shareholders' equity | 5,613,653 | 6,392,400 |
| | | |
| Total liabilities and stockholders' equity | $10,090,295 | $11,117,162 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Wound Management Technologies,Sanara MedTech Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2017 and 2016
(Unaudited)Operations (unaudited)
| | |
| | |
| | | |
| | | |
| Cash flows from operating activities: | | |
| Net income (loss) | $83,539 | $(650,675) |
| Adjustments to reconcile net loss to net cash used in operating activities | | - |
| Depreciation and amortization | 82,330 | 45,601 |
| Gain on forgiveness of debt | (50,646) | (30,592) |
| Bad debt expense | 8,913 | 7,345 |
| Common stock issued for services | 60,250 | 12,876 |
| (Gain) loss on change in fair value of derivative liabilities | (44) | (206) |
| (Gain) loss on issuance of debt for warrants | - | 758,665 |
| Changes in assets and liabilities: | | |
| (Increase) decrease in accounts receivable | (78,917) | (287,601) |
| (Increase) decrease in royalities receivable | - | 150,750 |
| (Increase) decrease in inventory | (472,451) | (167,562) |
| (Increase) decrease in prepaids and other assets | (31,880) | 108,014 |
| Increase (decrease) in accrued royalties and dividends | (44,405) | (100,761) |
| Increase (decrease) in accounts payable | (37,831) | 34,842 |
| Increase (decrease) in accounts payable related parties | (71,813) | 387 |
| Increase (decrease) in accrued liabilities | 36,970 | - |
| Increase (decrease) in accrued interest payable | 104,482 | 108,826 |
| Net cash flows (used in) operating activities | (411,503) | (10,091) |
| | | |
| Cash flows from investing activities: | | |
| Purchase of property and equipment | (126,453) | (3,029) |
| Net cash flows used in investing activities | (126,453) | (3,029) |
| | | |
| Cash flows from financing activities: | | |
| Payments on capital lease obligation | (3,422) | (3,557) |
| Payments on debt | (190,838) | (172,700) |
| Cash proceeds from sale of series C preferred stock | 50,050 | 450,000 |
| Net cash flows provided by (used in) financing activities | (144,210) | 273,743 |
| | | |
| Net increase (decrease) in cash | (682,166) | 260,623 |
| Cash and cash equivalents, beginning of period | 833,480 | 182,337 |
| Cash and cash equivalents, end of period | $151,314 | $442,960 |
| | | |
| Cash paid during the period for: | | |
| Interest | $10,937 | $23,863 |
| | | |
| Supplemental non-cash investing and financing activities: | | |
| Common stock issued for Series C dividends | 137 | 99 |
| Common stock issued for conversion of Series C Preferred Stock | 8,000 | 10,000 |
| Issuance of vested stock | - | 167 |
| | | |
| | | |
| | | | | |
| | | | | |
| Revenues | $2,967,183 | $3,017,489 | $6,491,514 | $5,504,385 |
| | | | | |
| Cost of goods sold | 348,675 | 334,829 | 678,863 | 624,169 |
| | | | | |
| Gross profit | 2,618,508 | 2,682,660 | 5,812,651 | 4,880,216 |
| | | | | |
| Operating expenses | | | | |
| Selling, general and administrative expenses | 3,624,027 | 2,983,248 | 8,530,565 | 5,333,611 |
| Depreciation and amortization | 74,221 | 22,542 | 127,726 | 26,882 |
| Bad debt expense | - | - | 30,000 | - |
| Total operating expenses | 3,698,248 | 3,005,790 | 8,688,291 | 5,360,493 |
| | | | | |
| Operating loss | (1,079,740) | (323,130) | (2,875,640) | (480,277) |
| | | | | |
| Other expense | | | | |
| Other expense | (48,716) | 145 | (85,474) | 145 |
| Interest expense | (1,101) | (29,486) | (9,455) | (34,911) |
| Total other expense | (49,817) | (29,341) | (94,929) | (34,766) |
| | | | | |
| Net loss | (1,129,557) | (352,471) | (2,970,569) | (515,043) |
| | | | | |
| Less: Net loss attributable to noncontrolling interest | (3,793) | (1,054) | (7,848) | (1,054) |
| | | | | |
| Net loss attributable to Sanara MedTech common shareholders | $(1,125,764) | $(351,417) | $(2,962,721) | $(513,989) |
| | | | | |
| Basic loss per share of common stock | $(0.18) | $(0.15) | $(0.54) | $(0.37) |
| | | | | |
| Diluted loss per share of common stock | $(0.18) | $(0.15) | $(0.54) | $(0.37) |
| | | | | |
| Weighted average number of common shares outstanding basic | 6,203,577 | 2,366,288 | 5,477,759 | 1,398,867 |
| | | | | |
| Weighted average number of common shares outstanding diluted | 6,203,577 | 2,366,288 | 5,477,759 | 1,398,867 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Wound Management Technologies,
Sanara MedTech Inc. and Subsidiaries
NotesConsolidated Statements of Changes in Shareholders’ Equity (Deficit)(unaudited)
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | |
| Balance at December 31, 2018 | 1,136,815 | $11,368,150 | - | $- | $(10,919,639) | - | $- | $138,286 | $- | $586,797 |
| Reverse recapitalization | - | - | 2,366,465 | 2,366 | (1,159,929) | (41) | - | - | - | (1,157,563) |
| Net loss | - | - | - | - | | - | - | (162,572) | - | (162,572) |
| Balance at March 31, 2019 | 1,136,815 | $11,368,150 | 2,366,465 | $2,366 | $(12,079,568) | (41) | $- | $(24,286) | $- | $(733,338) |
| Treasury stock retirement | - | - | (41) | - | - | 41 | - | - | - | - |
| Repurchase and cancellation of fractional shares | - | - | (243) | - | (1,061) | - | - | - | - | (1,061) |
| Net loss | - | - | - | - | | - | - | (351,417) | (1,054) | (352,471) |
| Balance at June 30, 2019 | 1,136,815 | $11,368,150 | 2,366,181 | $2,366 | $(12,080,629) | - | $- | $(375,703) | $(1,054) | $(1,086,870) |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | |
| Balance at December 31, 2019 | 1,136,815 | $11,368,150 | 3,571,001 | $3,571 | $(2,081,829) | - | $- | $(2,675,802) | $(221,690) | $6,392,400 |
| Conversion of Preferred Shares to Common | (1,136,815) | (11,368,150) | 2,273,630 | 2,274 | 11,365,876 | - | - | - | - | - |
| Conversion of Promissory Note to Common | - | - | 179,101 | 179 | 1,611,732 | - | - | - | - | 1,611,911 |
| Stock Grants | - | - | 180,100 | 180 | (180) | - | - | - | - | - |
| Share-based compensation | - | - | - | - | 393,740 | - | - | - | - | 393,740 |
| Net loss | - | - | - | - | | - | - | (1,836,957) | (4,055) | (1,841,012) |
| Balance at March 31, 2020 | - | $- | 6,203,832 | $6,204 | $11,289,339 | - | $- | $(4,512,759) | $(225,745) | $6,557,039 |
| Stock Grants | | | (430) | (1) | 1 | - | - | - | - | - |
| Share-based compensation | | | | | 186,171 | - | - | - | - | 186,171 |
| Net income (loss) | - | - | - | - | | - | - | (1,125,764) | (3,793) | (1,129,557) |
| Balance at June 30, 2020 | - | $- | 6,203,402 | $6,203 | $11,475,511 | - | $- | $(5,638,523) | $(229,538) | $5,613,653 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Sanara MedTech Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited) | | |
| | |
| | | |
| | | |
| Cash flows from operating activities: | | |
| Net loss | $(2,970,569) | $(515,043) |
| Adjustments to reconcile net loss to net cash used in operating activities | | |
| Depreciation and amortization | 127,726 | 26,882 |
| Interest expense on convertible debt | 8,354 | 22,585 |
| Interest expense on PPP loan | 1,101 | - |
| Loss on disposal of asset | 2,180 | 13,581 |
| Bad debt expense | 30,000 | - |
| Inventory obsolescence | 75,422 | 85,838 |
| Share-based compensation | 491,069 | - |
| Changes in assets and liabilities: | | |
| (Increase) decrease in accounts receivable | (112,301) | (259,342) |
| (Increase) decrease in inventory | (191,595) | (15,109) |
| (Increase) decrease in prepaid - related parties | (50,970) | (144,587) |
| (Increase) decrease in prepaid and other assets | (252,786) | (758,132) |
| Increase (decrease) in accounts payable | (197,709) | (217,299) |
| Increase (decrease) in accounts payable related parties | (66,346) | 55,243 |
| Increase (decrease) in accrued royalties and expenses | 333,731 | 166,379 |
| Increase (decrease) in accrued liabilities | 40,502 | 299,440 |
| Net cash used in operating activities | (2,732,191) | (1,239,564) |
| | | |
| Cash flows from investing activities: | | |
| Purchase of property and equipment | (57,456) | (25,606) |
| Cash received in reverse acquisition | - | 508,973 |
| Repurchase and cancellation of fractional shares | - | (1,061) |
| Purchase of intangible assets | (1,100,000) | - |
| Net cash flows provided by (used in) investing activities | (1,157,456) | 482,306 |
| | | |
| Cash flows from financing activities: | | |
| Draw on line of credit | - | 1,000,000 |
| Proceeds from PPP Loan | 583,000 | - |
| Net cash provided by financing activities | 583,000 | 1,000,000 |
| | | |
| Net increase (decrease) in cash | (3,306,647) | 242,742 |
| Cash and cash equivalents, beginning of period | 6,611,928 | 176,421 |
| Cash and cash equivalents, end of period | $3,305,281 | $419,163 |
| | | |
| Cash paid during the period for: | | |
| Interest | $- | $7,465 |
| Income taxes | - | - |
| | | |
| Supplemental non-cash investing and financing activities: | | |
| Common stock issued for conversion of Series F Preferred Stock | 11,368,150 | - |
| Common stock issued for conversion of Related Party debt and interest | 1,611,911 | - |
| Common stock issuable in payment of intangible asset | 750,000 | - |
| Common stock issued in reverse capitalization; less cash received of $508,973 | - | 1,666,537 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Sanara MedTech Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
NoteNOTE 1 - Summary of Significant Accounting Policies– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Background and Basis of Presentation
The terms “WMT,“Sanara MedTech,” “Sanara,” “we,” “the Company,” “SMTI,” “our,” and “us” as used in this report refer to Wound Management Technologies,Sanara MedTech Inc. and its subsidiaries. The accompanying unaudited consolidated balance sheet as of SeptemberJune 30, 2017,2020, and unaudited consolidated statements of operations for the nine monthssix-months ended SeptemberJune 30, 20172020 and 2016,2019, 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 WMT,the Company, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine-month periodssix-month period ended SeptemberJune 30, 2017,2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2017,2020, 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, 2016,2019, and December 31, 2015,2018, 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 accompanying consolidated balance sheetremaining 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 December 31, 2016, has been derived from the audited financial statements fileddate 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 our Form 10-Kbasis 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 is included for comparison purposes40% owned by Wound Care Solutions, Limited, an unaffiliated company registered in the accompanying balance sheet. Certain prior year amounts have been reclassifiedUnited Kingdom (“WCS”). Net profits and losses and distributions are shared by the members in proportion to conformtheir 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, a Delaware limited liability company. United Wound and Skin Solutions is a 100% owned subsidiary of the Company. The Company intends to current year presentation.utilize the UWSS entity to invest in future partnerships and technology that offer proprietary, efficacious solutions for wound and skin care.
Principles of Consolidation
The accompanyingunaudited consolidated financial statements include the accounts of WMTSanara MedTech Inc. and its wholly-owned subsidiaries:wholly owned subsidiaries, Wound Care Innovations, LLC, a Nevada limited liability company, (“WCI”); Resorbable Orthopedic Products,Cellerate, LLC, a Texas limited liability company, (“Resorbable); and Innovate OR, Inc. “InnovateOR” formerly referred to as BioPharma Management Technologies, Inc.,United Wound and Skin Solutions, LLC. The consolidated financial statements also include the accounts of Sanara Pulsar, LLC, a Texas corporationlimited liability company which is owned 60% by the Company’s wholly owned subsidiary Cellerate, LLC, and 40% owned by Wound Care Solutions, Limited.
Revenue Recognition
The Company recognizes revenue in accordance with Accounting Standards Codification (“BioPharma”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 six months ended June 30, 2020 and 2019. All intercompany accountsrevenue was generated in the United States; therefore, no geographical disaggregation is necessary.
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| Product sales revenue | $6,391,014 | $5,445,760 |
| Royalty revenue | 100,500 | 58,625 |
| Total Revenue | $6,491,514 | $5,504,385 |
The Company recognizes royalty revenue from a licensing agreement between BioStructures, LLC and transactionsthe 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 been eliminated.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 supplies.components. The Company recorded inventory obsolescence expense of $0$75,422 for the threesix months and $8,347ended June 30, 2020, compared to $85,838 for the ninesix months ended SeptemberJune 30, 2017, compared to $15,631 for the nine months ended September 30, 2016.2019. The allowance for obsolete and slow-moving inventory had a balance of $116,772$93,944 at SeptemberJune 30, 2017,2020, and $153,023$43,650 at December 31, 2016.2019. 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 six months ended June 30, 2020, and $0 during the six months ended June 30, 2019. The allowance for doubtful accounts at June 30, 2020 was $80,029 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 June 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 to our consolidated financial statements as of and for the six months ended June 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 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. No impairment was recorded during the six months ended June 30, 2020 and 2019.
Fair Value Measurements
As defined in Accounting Standards Codification (“ASC”)ASC Topic No. 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 No. 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.
On July 25, 2017, the stock purchase warrants related to the remaining derivative liabilities expired and on September 30, 2017, the Company had no derivative liabilities related to stock purchase warrants.
Our intangible assets have also been valued using the fair value accounting treatment and atreatment. A description of the methodology used, including the valuation category, is described in the Company’s Annual Report on Form 10-K.Note 8 – Intangible Assets.
Income (Loss) Per Share
The Company computes income (loss) per share in accordance with Accounting Standards Codification “ASC”ASC Topic No. 260, “Earnings per Share,” which requires the Company to present basic and dilutive income (loss) per share when the effect is dilutive. Basic income (loss) per share is computed by dividing income (loss) available to common stockholdersshareholders by the weighted average number of common shares available.outstanding. Diluted income (loss) per share is computed similar to basic income (loss) 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 both the three months and ninesix months ended SeptemberJune 30, 20172020 and June 30, 2019.
The following table summarizes the nineshares of common stock that were potentially issuable but were excluded from the computation of diluted net loss per share for the six months ended SeptemberJune 30, 2016. The dilutive effect of the outstanding convertible preferred stock for the three months ended September 30, 2016 was 85,689,7722020 and 2019 as such shares andwould have had an adjustment to net income of $75,032.anti-dilutive effect:
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| Stock options | 11,500 | 11,500 |
| Convertible debt | - | 173,800 |
| Preferred shares | - | 2,273,630 |
Recently Issued Accounting Pronouncements
In May 2014,February 2016, the Financial Accounting Standards Board (FASB)FASB issued Accounting Standards Codification (ASC) 606, Revenue from Contracts with CustomersASC Topic 842 Leases which is to be effective for reporting periods beginning after December 15, 2017.2018. The Company has reviewedadopted 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 which for practical expediency the Company has elected to not recognize as lease assets and believes it willlease 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.
In February 2016, the FASB issued ASC 842 Leases which is to be effective for reporting periods beginning after December 15, 2018. The Company is currently reviewing any impact that it will have on the Company’s financial position, operations or cash flows.
Note 2 - Going Concern
The Company has continuously incurred losses from operations, however, the operating loss in 2016 included a significant nonrecurring expense in the amount of $818,665, primarily a non-cash loss on the issuance of warrants for services valued at $758,665. Without this non-cash expense, operating income was $342,918 for 2016. The Company has a working capital deficit of $448,630 on September 30, 2017, and surplus of $601,654 on December 31, 2016. The Company has adopted a robust operating plan for 2017 that projects existing cash and future cash to be generated from operations will satisfy our foreseeable working capital, debt repayment and capital expenditure requirements for at least the next twelve months. However, minimal funding may be required at certain times during the year due to the timing of significant expenditures such as inventory purchases. The Company obtained $50,050 cash proceeds from the issuance of series C preferred stock during the nine months ended September 30, 2017, and believes it will be able to obtain any such additional funding, if required during the remainder of 2017. We will also monitor our cash flow; assess our business plan; and make expenditure adjustments accordingly. Based upon the Company's current ability to obtain additional financing or equity capital and to achieve profitable operations, it is not appropriate at this time to continue using the going concern basis.
Note 3 – Accounts Payable and Notes Payable
Accounts Payable
During the nine months ended September 30, 2017, the WMTI reached an agreement to settle an outstanding payable with WellDyne Health, LLC, (“WellDyne”), a third party that had provided shipping and consulting services on behalf of the Company effective through September 19, 2015. As part of that settlement, WellDyne forgave $39,709 of the outstanding payable.
Notes Payable
During the nine months ended September 30, 2017, the Company paid a total of $190,838 principal and $10,937 in accrued interest to three non-related party note holders and reached an agreement with them to forgive $10,937 in accrued interest. As a result, all three of these notes were retired. As of September 30, 2017, the balance consists of one note in the amount of $223,500. See Note 9 Subsequent Events for a discussion of the disposition of this note payable.NOTE 2 – NOTES PAYABLE
Convertible Notes Payable - Related Parties
On June 15, 2015,As part of the aforementioned transaction with a Catalyst affiliate to form Cellerate, LLC, the Company entered into term loan agreements with The James W. Stuckert Revocable Trust (“SRT) and The S. Oden Howell Revocable Trust (“HRT”), pursuantissued a 30-month convertible promissory note to which SRT madeCatalyst in the principal amount of $1,500,000, bearing interest at a loan5% annual interest rate, compounded quarterly. Interest was payable quarterly but could be deferred at the Company’s election to the Company in the amount of $600,000 and HRT made a loan to the Company in the amount of $600,000 under Senior Secured Convertible Promissory Notes (the “Notes”). Both SRT and HRT are controlled by affiliatesmaturity of the Company. The Notes each carry an interest rate of 10% per annum, and (subject to various default provisions) all unpaidpromissory note. Outstanding principal and accrued but unpaid interest under the Notes is due and payable on June 15, 2018. The Notes may be prepaid in whole or in part upon ten days’ written notice, and all unpaid principal and accrued interest under the Notes may be converted,were convertible at theCatalyst’s option of SRT and HRT, into shares of the Company’s Series C Convertible Preferred Stockcommon stock at a conversion price of $70.00$9.00 per shareshare.
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 June 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 to Cadence Bank, N.A. (the “PPP 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 is using 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 November 2, 2020 with a final payment of $174,115 due on April 22, 2022. The PPP Loan may be prepaid at any time prior to maturity.”). The Company’s obligations undermaturity without penalty. Under the two notes are secured by all the assetsterms of the PPP, the Company may apply for forgiveness of the amount due on the PPP 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 subsidiaries.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. At June 30, 2020, the total outstanding note balance was $583,000 plus accrued interest of $1,101.
Note 4NOTE 3 – Commitments and ContingenciesCOMMITMENTS AND CONTINGENCIES
Royalty agreements.LICENSE AGREEMENTS AND ROYALTIES
Effective November 28, 2007, WCI enteredCellerateRX® Activated Collagen®
The Company has an exclusive sublicense to distribute CellerateRX® Activated Collagen® products into separate exclusivethe wound care and surgical markets in the United States, Canada and Mexico. 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.
BIAKŌS™ Antimicrobial Wound Gel and BIAKŌS™ Antimicrobial Skin and Wound Cleanser
On July 7, 2019, the Company executed a license agreementsagreement with Applied Nutritionals,Rochal Industries, LLC (“Applied”Rochal”) and its founder George Petito, pursuant to which WCI obtainedwhereby the Company acquired an exclusive world-wide license to makemarket, sell and further develop antimicrobial products incorporating intellectual propertyfor 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 the Company financing conditions by the end of 2022, the Company will also pay Rochal $750,000, which at the Company’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.
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.
The foregoing summary does not purport to CellerateRX products. In considerationbe complete and is qualified in its entirety by reference to the BIAKOS License Agreement which was filed as an exhibit to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 14, 2019.
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 the licenses, WCI agreed to pay to Applied the following royalties, beginning January 3, 2008: (a) an upfront royalty of $100,000use in the aggregate, (b) an aggregatehuman 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.
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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 in cash or the Sanara common stock; or a combination of cash and Sanara common stock.
2.
The Company will pay Rochal a royalty of:
a.
4% of fifteen percent (15%)net sales of grosslicensed products in countries in which patents are registered
b.
2% of net sales occurring duringof 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 license; (c) anproducts 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.
The Company will pay additional upfront royalty annually based on specific net profit targets from sales of $400,000,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 does not purport to be complete and is qualified in its entirety by reference to the aggregate,ABF License Agreement which was paid October, 2009; plus (d)filed as an aggregate royalty of three percent (3%) of gross sales for all sales occurring afterexhibit to the payment ofCompany’s Quarterly Report on Form 10-Q filed with the $400,000 upfront royalty. In addition, WCI must maintain a minimum aggregate annual royalty payment of $375,000 for 2009 and thereafter, if the royalty payments made do not meet or exceed that amount. The total of unpaid royalties as of December 31, 2016, was $276,916, and it was paid in full in January of 2017. As of September 30, 2017, the balance of accrued royalties for the current year is $232,511.SEC on November 14, 2019.
Product License Agreement
On September 29, 2009,May 4, 2020, the Company entered into an Asset Purchase Agreementexecuted a product license agreement (the “Asset Purchase“Debrider License Agreement”), by and among with Rochal whereby the Company RSIACQ, LLC, a wholly-owned subsidiaryacquired 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.
Key terms of the Debrider License Agreement include:
1.
The Company (RSI), paid Rochal $600,000 in cash and will pay $750,000 to Rochal at the Company’s option in cash, Sanara common stock, or a combination of cash and Sanara common stock.
Note: The Company has elected to pay the $750,000 in Sanara common stock which will be issued to Rochal in August 2020. Under the terms of the agreement, the number of shares to be issued is determined by dividing the amount to be paid ($750,000) by the closing sale price of the Sanara’s common stock on the effective date of the agreement. On May 4, 2020, the closing price of Sanara common stock was $12.50 which will result in the issuance of 60,000 shares to Rochal.
2.
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.
3.
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 in cash or Sanara common stock; or a combination of cash and Sanara common stock.
4.
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.
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.
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
5.
The Debrider License Agreement will expire in October 2034.
The foregoing summary does not purport to be complete and is qualified in its entirety by reference to the Debrider License Agreement which was filed as an exhibit to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 12, 2020.
Resorbable Orthopedic Products, LLC (“Resorbable”)Bone Hemostat
The Company acquired a patent in 2009 for a resorbable bone hemostat and Resorbable’s members, pursuant to which, RSI acquired substantially all of Resorbable’s assets, in exchangedelivery system for (i) 500,000 sharesorthopedic bone void fillers. This patent is not part of the Company’s common stock, and (ii)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 soldthat utilize the Company's acquired patented bone hemostat and delivery system. To date, royalties received by the Company or anyrelated to this licensing agreement have not exceeded the annual minimum of its affiliates, which products are developed from or otherwise utilize any$201,000 ($50,250 per quarter). Therefore, the Company’s annual royalty obligation under the terms of the patented technology acquired from Resorbable. The royalty is paid to Barry Constantine Consultants, LLC for distribution tolicense agreement has been $16,080 ($4,020 per quarter).
OTHER COMMITMENTS
At the original patent holders, (including Mr. Barry Constantine) and/or their heirs. The royalty expense was $12,060 for eachtime of the nine-months ended September 30, 2017,formation of Sanara Pulsar, it and September 30, 2016, and $4,020 for each of the three-months ended September 30, 2017 and September 30, 2016. Mr. Constantine resigned effective October 1, 2017, as a contract employee of the Company in which he held the position of Director of R&D.
Evolution Partners LLC Letter Agreement and Termination Agreement
On October 10, 2017, Wound Management Technologies, Inc. (the “Company”) and Evolution Venture Partners LLC (“EVP”)WCS entered into a terminationsupply agreement (the “Termination Agreement”) terminating, effective aswhereby Sanara Pulsar became the exclusive distributor in the United States of September 29, 2017,certain wound care products that certain letter agreement dated April 26, 2016, (the “Agreement”),utilize intellectual property developed and owned by and betweenWCS. In 2019, the Company EVP,advanced to WCS $200,000 and Middlebury Securities,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 ("Target Net Income"), then Cellerate. LLC (“Middlebury”). Middlebury terminated its charterwill, 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 or about July 27, 2016,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 therefore isin the event WCS’s Form K-1 for any of those years does not a partyallocate to the Termination Agreement. The Agreement had an initial term of one year (with an automatic six-month renewal term) and provided for:
· A $60,000 consulting fee payable upon execution of the Agreement, refundable only upon cancellation of the Agreement by EVP during the initial one-year term.
· A success feeWCS net income in an amount at least equal to 5%Target Net Income for such year, then Cellerate, LLC will, within 30 days after such determination, pay WCS the amount of funds representing the transaction valuedifference between Target Net Income and the actual amount of any strategic transaction.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.
· A selling fee equal to 3% of the gross proceeds of any debt financing transaction or 5% of the gross proceeds of any equity financing transaction.NOTE 4 – LEASES
· The issuanceCompany periodically enters into operating lease contracts for office space and equipment. Arrangements are evaluated at inception to EVPdetermine whether such arrangements constitute a lease. In accordance with the transition guidance of a warrant (the “Warrant”)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 purchaselease 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 60,000,000 shares oflease payments over the Company’s common stock, par value $0.001 per share (“Common Stock”), at an exercise price of $0.12 per share.
respective lease term, with the office space ROU asset adjusted for deferred rent liability.
The total amountCompany has two operating leases: an office space lease with a remaining lease term of 48 months and a copier lease with a remaining lease term of 13 months as of June 30, 2020. In accordance with the consulting fee and warrant expense was $818,665 and is recognizedtransition guidance of ASC 842, such arrangements are included in 2016our balance sheet as “Other administrative expenses” in the Consolidated Statement of Operations.
As of the termination date, there were no Financing Transactions or Strategic Transactions (as defined in the Agreement) being considered byJanuary 1, 2019.All other leases are short-term leases which for practical expediency the Company has elected to not recognize as lease assets and no such transactions occurred.Pursuant to the Termination Agreement, EVP has agreed to cancel the Warrant in exchange for the Company’s issuance to EVP of 750,000 shares of Common Stock. There was no incremental increase in the fair value of the modified stock-based compensation award as of the modification date and accordingly, no additional compensation cost was recognized.
Office leaseslease liabilities.
In March of 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 and relocated our corporate offices there76102. On July 1, 2019, the Company amended the office lease agreement which became effective on AprilAugust 22, 2017. The lease is effective May 1, 2017, and ends on2019 upon completion by the last daylandlord of certain leasehold improvements. Under the terms of the fiftieth (50th) full calendar month followingamended lease agreement, the effective date, (JuneCompany 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, 2021). Monthly2024. The monthly base rental payments under the amended lease agreement are as follows: months 1-2, $0; months 3-14, $7,250; months 15-26, $7,401; months 27-38, $7,552; and months 39-50, $7,703. Rent expense
| | |
| | |
| 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 recognized on a straight-line basis overnot determinable, the termdiscount rate applied to determine the present value of lease payments is the Lease and the resulting deferred rentCompany’s incremental borrowing rate of 6.25%. The office space lease agreement contains no renewal terms, so no lease liability is $14,138recorded 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 $527,371 and a related lease liability of $541,804 as of SeptemberJune 30, 2017.2020. Cash paid in 2020 for amounts included in measurement of operating lease liabilities as of June 30, 2020 was $74,709. The present value of our operating lease liabilities is shown below.
Payables to Related PartiesMaturity of Operating Lease Liabilities
| | |
| Remainder of 2020 | $76,178 |
| 2021 | 151,317 |
| 2022 | 151,333 |
| 2023 | 154,271 |
| 2024 | 77,870 |
| Thereafter | - |
| Total lease payments | 610,969 |
| Less imputed interest | (69,165) |
| Present Value of Lease Liabilities | $541,804 |
As of SeptemberJune 30, 2017,2020, our operating leases have a weighted average remaining lease term of 4.0 years and December 31, 2016, the Company had outstanding payables to related parties totaling $21,842 and $93,655, respectively. The payables are unsecured, bear no interest and due on demand.a weighted average discount rate of 6.25%.
Note
NOTE 5 - Stockholders’ Equity– 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 | 205,871 | 153,995 |
| Leasehold improvements | 2,030 | 2,030 |
| | 318,426 | 265,647 |
| Less accumulated depreciation | (91,424) | (60,694) |
| | | |
| Property and equipment, net | $227,002 | $204,953 |
Depreciation expense related to property and equipment was $33,227 for the six months ended June 30,2020, and $7,917 for the six months ended June 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. We 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
There are currently 5,000,000On March 13, 2019, the Company established a new series of preferred stock consisting of 1,200,000 shares of Series A Preferred Stock authorized, with no shares of Series A Preferred Stock currently issued or outstanding.
Effective June 24, 2010, the Company filed a Certificate of Designations, Number, Voting Power, Preferences and Rights of Series BF Convertible Redeemable Preferred Stock (the “Certificate”) with the Texas Secretary of State, designating 7,500 shares of Series B Preferred Stock, par value of $10.00 per share (the “Series B Shares”). The Series B Shares rank seniorshare. After proportionally adjusting to shares of all other common and preferredreflect a subsequent 1-for-100 reverse stock with respect to dividends, distributions, and payments upon dissolution. Eachsplit of the common stock, each share of Series B Shares isF Convertible Preferred Stock was convertible at the option of the holder, at any time, into 2 shares of common stock as provided in the Certificate. There are currently no Series B Shares issued or outstanding.
On October 11, 2013, the Company filed a Certificate of Designations, Number, Voting Power, Preferences and Rights of Series C Convertible Preferred Stock (the “Certificate of Designations”), under which it designated 100,000 shares of Series C Preferred Stock, par value $10.00. The Series C Preferred Stock is entitled to accruing dividends (payable, at the Company’s options, in either cash or stock) of 5% per annum until October 10, 2016, and 3% per annum until October 10, 2018.
The Series C Preferred Stock is senior to the Company’s common stock and any other currently issued series of the Company’s preferred stock upon liquidation, and is entitled to a liquidation preference per share equal to the original issuance price of such shares of Series C Preferred Stock together with the amount of all accrued but unpaid dividends thereon. Each of the Series C Shares is convertible at the option of the holder into 1,000 shares of common stock as provided in the Certificate.stock. Additionally, each holder of Series CF Convertible Preferred Stock shall bewas entitled to vote on all matters submitted for a vote of the holders of Common Stock a number ofCompany’s shareholders with votes equal to the number of full shares of Common Stockcommon stock into which such holder’s Series CF Preferred shares could then be converted. As of September 30, 2017, and December 31, 2016, there were 85,561 and 85,646 shares ofThe Series C Preferred Stock issued and outstanding, respectively.
On November 13, 2013, the Company filed a Certificate of Designations, Number, Voting Power, Preferences and Rights of Series DF Convertible Preferred Stock (the “Certificate of Designations”), under which it designated 25,000 shares of Series D Preferred Stock. Shares of Series D Preferred Stock are not entitledranked senior to any preference with respect to dividend or upon liquidation, and will automatically convert (at a ratio of 1,000-to-1) into shares of the Company’s common stock par value $0.001 upon approvalas to the payment of dividends (if any) and the distribution of assets. Upon liquidation of the Company’s stockholders (and filing of)Company, holders of Series F Convertible Preferred Stock were entitled to a liquidation preference of $5 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 amendment to the Company’s Certificate of Incorporation increasing the number of authorized1,136,185 shares of Common Stock from 100,000,000 to 250,000,000.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 and its affiliates control the voting of a total of 3,416,587 shares of common stock, which represents 55.1% of the 6,203,402 shares of common stock currently outstanding. As of SeptemberJune 30, 2017, and December 31, 2016,2020, there arewere no shares of the Series D Preferred StockF preferred stock issued and outstanding.
On May 30, 2014, the Company filed a Certificate of Designations, Number, Voting Power, Preferences and Rights of Series E Convertible Preferred Stock (The “Certificate of Designations”), under which it designated 5,000 shares of Series E Preferred Stock. Shares of Series E Preferred Stock are not entitled to any preference with respect to dividends or upon liquidation, and will automatically convert (at a ratio of 1,000 shares of Common Stock for every one share of Series E Preferred Stock) into shares of the Company’s common stock, $0.001 par value upon approval of the Company’s stockholders (and filing of) and amendment to the Company’s Certificate of Incorporation increasing the number of authorized shares of Common Stock from 100,000,000 to 250,000,000. As of September 30, 2017, and December 31, 2016, there are no shares of Series E Preferred Stock issued and outstanding.
On March 7, 2017, the Company issued 715 shares of Series C Preferred Stock for cash proceeds of $50,050.
The Series C preferred stock earned dividends of $100,677 and $213,435 for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, no Series C preferred stock dividends have been declared.
Common Stock
On March 9, 2017,May 10, 2019 the Company effected a 1-for-100 reverse stock split of the Company’s issued 150,000and outstanding shares of common stock. Concurrent with the reverse stock split, the Company changed its corporate name from Wound Management Technologies, Inc. to eachSanara MedTech Inc.
The reverse stock split was previously approved by shareholders of a majority of the Company’s four Board Directors, (a totaloutstanding 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 600,000the 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 valued at $42,000).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 March 10, 2017,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 250,000 shares of common stock valued at $18,250shares. The purchasers in the offering were related party entities to a contract consultant upon achievement of specified revenue targets.
On July 31, 2017, the Company issued 937,556 shares of common stock for the conversion of 800 shares of Series C Convertible Preferred Stock and $9,629 of related Series C dividends.
Warrants
During the nine months ended September 30, 2017, 61,326,300three members of the 67,246,300 warrants outstanding at the beginningCompany’s Board of the period were either forfeited or expired, leaving a balance of 5,920,000 outstanding on September 30, 2017. A summary of the status of the warrants granted for the nine months ended September 30, 2017, and changes during the period then ended is presented below:
| | For the Nine Months Ended September 30, 2017 |
| | | Weighted Average Exercise Price |
| Outstanding at beginning of period | 67,246,300 | $0.12 |
| Granted | - | - |
| Exercised | - | - |
| Forfeited | (60,051,300) | - |
| Expired | (1,275,000) | |
| Outstanding at end of period | 5, 920,000 | $0.07 |
| | |
| | |
| | Weighted-Average Remaining Contract Life | Weighted- Average Exercise Price | | Weighted-Average Exercise Price |
$0.06 | 4,500,000 | 1.00 | $0.06 | 4,500,000 | $0.06 |
0.08 | 550,000 | 0.43 | 0.08 | 550,000 | 0.08 |
0.09 | 625,000 | 0.54 | 0.09 | 625,000 | 0.09 |
0.15 | 245,000 | 0. 05 | 0.15 | 245,000 | 0.15 |
$0.06 -.15 | 5,920,000 | .86 | $0.07 | 5,920,000 | $0.07 |
The aggregate intrinsic value of the exercisable warrants as of September 30, 2017, was $45,000.Directors.
On October 10, 2017, Wound Management Technologies, Inc. (the “Company”) and Evolution Venture Partners LLC (“EVP”) entered into a termination agreement (the “Termination Agreement”) terminating, effective as of September 29, 2017, that certain letter agreement dated April 26, 2016, (the “Agreement”), by and betweenFebruary 21, 2020, the Company EVP,filed a Form S-8 registration statement 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. Pursuant to Rule 416 of the Securities Act of 1933, as amended, this registration statement also covers such additional and Middlebury Securities, LLC (“Middlebury”). Middlebury terminated its charter on or about July 27, 2016, and therefore is not a partyindeterminate number of securities as may become issuable pursuant to the Termination Agreement. Pursuantprovisions of the plan relating to adjustments for changes resulting from a share dividend, share split or similar change.
At the Termination Agreement, EVP has agreedCompany’s Annual Meeting of Shareholders held on July 9, 2020, the Company approved the Restated 2014 Omnibus Long Term Incentive Plan as amended (the “Plan”) in which the Company’s directors, officers, employees and consultants are eligible to cancelparticipate. For a warrant forbrief description of the purchasePlan, see the section entitled “Item 2, Approval of 60,000,000the Restated 2014 Omnibus Long Term Incentive Plan” in the Company’s definitive Proxy Statement filed with the Securities and Exchange Commission on June 25, 2020, which section is incorporated by reference herein.
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.
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 $491,069 was recognized in exchangeselling, general and administrative expenses during the six months ended June 30, 2020. No share-based expense was recognized during the six months ended June 30, 2019.
Below is a summary of restricted stock activity for the Company’s issuancesix months ended June 30, 2020:
| | |
| | |
| | | Weighted Average Grant Date Fair Value |
| Non-vested at beginning of period | - | $- |
| Granted | 181,100 | 11.50 |
| Vested | (25,580) | 11.16 |
| Forfeited | (1,430) | 11.15 |
| Non-vested at June 30, 2020 | 154,090 | $11.57 |
At June 30, 2020 there was $1,488,058 of total unrecognized share-based compensation expense related to EVPunvested share-based compensation awards. Unrecognized share-based compensation expense is expected to be recognized over a weighted-average period of 750,000 shares of Common Stock (the “Shares”). As the fair value of the surrendered warrants exceeded the fair value of the Shares, there is no expense associated with this transaction.2.3 years.
Stock Options
During
On December 31, 2017, the nine months ended September 30, 2017, 943,500Company granted a total of 11,500 options to five employees. The aggregate fair value of the 1,093,500awards 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 outstanding at the beginningto one employee and one contractor. The aggregate fair value of the period expired. 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 granted for the nine-month period ended Septemberat June 30, 2017,2020 and changes during the six-month period then ended is presented below:
For the Nine Months Ended September 30, 2017 | |
| | | For the Six Months Ended June 30, 2020 |
| | | | | Weighted Average Remaining |
| | | Weighted Average Exercise Price | | | |
| Outstanding at beginning of period | 1,093,500 | $0.15 | 11,500 | $6.00 | |
| Granted | - | | - | |
| Exercised | - | - | |
| Forfeited | - | - | |
| Expired | (943,500) | $0.15 | - | |
| Outstanding at end of period | 150,000 | | |
| Outstanding at June 30, 2020 | | 11,500 | $6.00 | 2.5 |
| | | |
| Exercisable at June 30, 2020 | | 11,500 | $6.00 | 2.5 |
| | |
| Stock Options Outstanding
| Stock Options Exercisable
|
Exercise Price
| | Weighted-Average
Remaining Contract Life
| Weighted- Average
Exercise Price
| | Weighted-Average
Exercise Price
|
(a) | 150,000
| -
| -
| -
| (a) |
(a)
On January 1, 2015, the company granted three tranches of options, 25,000, 25,000, and 100,000 which vest upon meeting specific performance measures agreed upon. The measures include achieving three specific sales targets per month for 3 consecutive months. The exercise price and expiration date of each tranche will be set upon achieving the targets. As of the date of this filing the performance measures have not been met. As a result, the exercise price is undetermined and these options are excluded from the calculation of weighted average remaining life.
The aggregate intrinsic value of the exercisable options as of September 30, 2017 was $0.
Note 6 – Derivative Liabilities
As of December 31, 2013, the Company did not have a sufficient number of common shares authorized to fulfill the possible exercise of all outstanding warrants and the conversion of all convertible notes payable. As a result, the Company determined that the warrants and the embedded conversion features of the outstanding debt instruments did not qualify for equity classification. Accordingly, the warrants and conversion features were treated as derivative liabilities and were carried at fair value. During the year ended December 31, 2016, all of the outstanding convertible notes that qualified as derivative liabilities were paid in full or converted to common stock. As of September 30, 2017, no warrants remained as derivative liabilities due to their expiration on July 25, 2017.
The following table sets forth the changes in the fair value of derivative liabilities for the nine months ended September 30, 2017:
Balance, December 31, 2016 | $(44)
|
Gain on change in fair value of derivative liabilities | 44
|
Balance, September 30, 2017 | $0
|
The aggregate gain on derivative liabilities for the nine months ended September 30, 2017 was $44.
NoteNOTE 7 – Related Party Transactions
On April 25, 2016, the Company and John Siedhoff, a member of the Company’s Board of Directors, entered into a Consulting Agreement (the “Agreement”), pursuant to which Mr. Siedhoff provides certain consulting services to the Company. The Agreement provided for a payment in the amount of $200,000 to Mr. Siedhoff as compensation for consulting services rendered to the Company prior to April 1, 2016, as well as a consulting fee of $15,000 per month during the term of the Agreement. The Agreement also provides for the reimbursement of reasonable and necessary expenses, and may be terminated by either party upon 30 days’ advance written notice. On March 10, 2017, the Agreement, was amended to: (i) change the name of the consultant under the Agreement from John Siedhoff to Twin Oaks Equity, LLC (an entity controlled by Mr. Siedhoff), and (ii) increase the monthly compensation payable from $15,000 to $20,000, effective as of January 1, 2017. The consulting fee expense was $220,000 for the nine months ended September 30, 2017, (including a bonus of $40,000 in recognition of 2016 results).
Note 8 – Capital Lease ObligationDEBT AND CREDIT FACILITIES
In December 2014,2018, 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 Company entered into a Capital Lease agreement forassets of Cellerate, LLC. The interest rate per annum under this loan is the purchase“Prime Rate” as it varies from time to time and designated in the “Money Rates” section of a phone system. The agreement required a down payment of $2,105 and 36 monthly payments of $375. The Company recorded an asset of $13,512 and a capital lease obligation of $13,512. Aggregate payments under the lease were $3,423 for the nine months ended September 30, 2017. At September 30, 2017, a total lease liability of $344 remained which is due in full in 2017.
Note 9 – Subsequent EventsWall Street Journal plus 0.75%.
On November 1, 2017,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 Ken Link entered intointerest 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 binding settlementfinancial 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 were $0 at June 30, 2020.
The Company’s revolving line of credit with Cadence matured on June 19, 2020. The Company is considering other financing options including a new revolving line of credit with Cadence.
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) | $- |
| Product Licenses | 3,350,000 | (139,627) | 3,210,373 | 1,500,000 | (48,876) | 1,451,124 |
| Software and Other | 64,464 | (48,141) | 16,323 | 64,464 | (44,394) | 20,070 |
| Total | $3,924,774 | $(698,078) | $3,226,696 | $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. During the second quarter of 2020, the Company signed a new product license agreement which will resultrequired an initial payment of $1,350,000 to Rochal which included $600,000 in dismissal with prejudice of all claimscash and counterclaims asserted$750,000 payable at the Company’s option in Cause No. 342-256486-11, in exchange for which the Company will deliver to Ken Link 1,200,000 shares of Wound Management Technologies, Inc.cash, Sanara common stock, in total satisfactionor a combination of all obligations between the parties. As a result of this settlement the Note Payablecash and Sanara common stock. The initial payment was recorded as an addition to Mr. Link in the amount of $223,500 is cancelled.intangible assets.
As of June 30, 2020, the weighted-average amortization period for all intangible assets is12.8 years. Amortization expense related to intangible assets was $94,499 for the six months ended June 30,2020 and $18,965 for the six months ended June 30,2019. The estimated remaining amortization expense as of June 30, 2020 is as follows:
| Remainder of 2020 | $129,030 |
| 2021 | 258,059 |
| 2022 | 255,645 |
| 2023 | 250,564 |
| 2024 | 250,564 |
| Thereafter | 2,082,834 |
| Total | $3,226,696 |
During the second 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 COVID-19 has created an impairment loss on the Company’s intangible assets. Accordingly, there was no impairment loss recognized on the Company’s intangible assets during the six months ended June 30, 2020.
NOTE 9 –RELATED PARTIES
Payables to Related Parties
The Company had outstanding payables to related parties totaling $752,322 at June 30, 2020, and $68,668 at December 31, 2019. The outstanding payable at June 30, 2020 was primarily related to a $750,000 payment due to Rochal under the terms of the product license agreement dated May 4, 2020. The $750,000 amount due to Rochal will be paid in Sanara common stock in August of 2020.
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 June 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.
Item 2. Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 20162019 and with the unaudited consolidated financial statements and related notes thereto presented in this Quarterly Report on Form 10-Q.
Forward-Looking Statements
SomeThis Quarterly Report on Form 10-Q contains forward-looking statements concerning the impact of the COVID-19 pandemic among other matters. These statements contained in this reportmay discuss expectations as to future expectations, contain projections oftrends, plans, events, results of operations or financial condition, or state other "forward-looking" information. Theinformation relating to the Company. Forward-looking statements generally will be accompanied by words "believe," "intend," "plan," "expect," "anticipate," "estimate," "project," "goal" andsuch as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “guidance,” “intend,” “may,” “possible,” “potential,” “predict,” “project” or other similar expressions identify such a statement was made.words, phrases or expressions. These statements should be used with caution and are subject to knownvarious risks and unknown risks, uncertainties, and othermany of which are outside of the Company’s control. The following factors that could cause the actual results to differ materially from those contemplated byin the statements.forward-looking statements: unanticipated changes in the markets for the Company’s business; unanticipated downturns in business relationships with customers or their purchases from us; the potential effects on our businesses from natural disasters; the availability of credit to customers and suppliers; competitive pressures on sales and pricing; unanticipated changes in the cost of inventory and other operating costs; the introduction of competing products; unexpected technical or marketing difficulties; unexpected claims, charges, litigation or dispute resolutions; new laws and governmental regulations; stock market and currency fluctuations; war, civil or political unrest or terrorism; the course of the COVID-19 pandemic and government responses thereto; and unanticipated deterioration of economic and financial conditions in the United States and around the world. The forward-looking information is based on various factors and is derived using numerous assumptions. Factors that might cause or contribute to such a discrepancy include, but areCompany does not limited to the risks discussed in this and our other SEC filings. We do not promiseassume any obligation to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements. Future events and actual results could differ materially from those expressed in, contemplated by, or underlying suchthese forward-looking statements.
The following discussion and analysis of our financial condition is as of SeptemberJune 30, 2017. Our2020. The discussion of our results of operations and cash flows should be read in conjunction with our unaudited financial statements and notes thereto included elsewhere in this report and the audited financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016.2019.
Impact of the COVID-19 Pandemic
Beginning in March 2020, many states issued orders suspending elective surgeries in order to free-up hospital resources to treat COVID-19 patients. This resulted in a substantial reduction in demand for the Company’s surgical products beginning primarily in the second half of March 2020. Additionally, most states limited access to skilled nursing facilities to only resident caregivers, which impeded the Company’s ability to provide education and product training to the clinicians who use our products in these facilities. These restrictions resulted in an overall decline in sales for the second quarter. As the second quarter progressed, the Company saw a strong rebound in product sales as restrictions on elective surgeries eased and the Company expanded the use of its virtual training platform. During the second quarter, the Company generated approximately $2.9 million of product sales revenue including approximately $0.60 million in April, $0.86 million in May, and $1.46 million in June (a record month for the Company).
With many states recently experiencing a spike in COVID-19 cases and consequently reinstating recently relaxed restrictions, the Company may again experience swings in monthly sales if surgeries are postponed and subsequently rescheduled. Based on the Company’s second quarter experience, management continues to believe that the majority of postponed surgeries will ultimately be performed.
As a result of the COVID-19 pandemic, the Company has significantly reduced costs in areas such as payroll, consulting, business travel, and other discretionary spending. The duration of the pandemic is uncertain, however, management believes that elective surgical procedures will continue to be performed with the exception of future geographic hotspots. We will continue to closely monitor the COVID-19 pandemic in order to ensure the safety of our people and our ability to serve our customers and patients.
Business Overview
Unless otherwise indicated, we use “WMT,” “the
The Company” “we,” “our” and “us” in this report to refer to the businesses of Wound Management Technologies, Inc.
Wound Management Technologies, Inc. (“WMT” or the “Company”) was organized on December 14, 2001, as a Texas corporation under the name eAppliance Innovations, Inc. In June of 2002, MB Software Corporation, a public corporation formed under the laws of Colorado, merged with the Company (which at the time was a wholly owned subsidiary of MB Software Corporation),corporation. The Company’s business is developing, marketing, and the Company changed its namedistributing wound and skin care products to MB Software Corporation as part of the merger. In May of 2008, the Company changed its name to Wound Management Technologies, Inc.
The Company, through its wholly-owned subsidiary, Wound Care Innovations, LLC (WCI), marketsphysicians, hospitals, clinics and sells the patented CellerateRX® Activated Collagen®post-acute care settings. Our products are primarily sold in the expandingNorth American advanced wound care market. CellerateRX’s activated collagen, which is approximately 1/100th the size of native collagen, delivers the essential benefits of collagen to aand surgical tissue repair markets. Sanara MedTech products include CellerateRX® Surgical Activated Collagen® Adjuvant (CellerateRX); HYCOL™ Hydrolyzed Collagen (HYCOL); BIAKŌS™ Antimicrobial Skin & Wound Cleanser (BIAKŌS AWC); and PULSAR II™ Advanced Wound Irrigation System (AWI™).
Products
CellerateRX products are primarily purchased by hospitals and ambulatory surgical centers for use by surgeons on surgical wounds. HYCOL products are used in skilled nursing facilities, wound immediately—care clinics and other forms of native, intact collagen in commercially available products require timemedical facilities, and are intended for the body to prepare the collagen for use in the wound healing process. CellerateRX is cleared by the FDA as a medical device for use on all acutemanagement of full and chronicpartial thickness wounds except third degree burns,including pressure ulcers, venous and are offered in both gelarterial leg ulcers and powder form. CellerateRXdiabetic foot ulcers. HYCOL is currently approved for reimbursement under Medicare Part B and no prescription is required.
B. We believe that theseCellerateRX and HYCOL products are unique in composition, applicabilitysuperior to other products in clinical performance, and demonstrate the ability to reduce costs associated with the standards of care for their intended uses.
BIAKŌS AWC is an FDA cleared, patented product that effectively disrupts extracellular polymeric substances to eradicate biofilm microbes. BIAKŌS AWC also provides mechanical removal of debris, dirt, foreign materials, and microorganisms from wounds including stage I-IV pressure ulcers, diabetic foot ulcers, post-surgical wounds, first and second-degree burns as well as grafted and donor sites. BIAKŌS AWC is effective in killing free-floating microbes, immature and mature bacterial biofilms and fungal biofilms. In addition, BIAKŌS AWC safety studies show that it is non-cytotoxic, non-irritating, and non-sensitizing to healthy skin and assists in the normal wound healing process. First sales of BIAKŌS AWC occurred in July 2019
PULSAR II™ Advanced Wound Irrigation System (AWI™) is a portable, no touch, painless, selective hydro-mechanical debridement system that effectively removes bacteria and necrotic tissue from wounds without disrupting healthy tissue.
New Products, Markets and Services
The Company received notification of FDA clearance for BIAKŌS™ Antimicrobial Wound Gel in February 2020 and expects to launch the product in 2020 to complement its BIAKŌS™ AWC. Both products are effective against planktonic microbes as well as immature and mature biofilms. When used together, the cleanser can be used initially to clean a wound and disrupt biofilms (removing 99% in 10 minutes). The gel can then be applied and will remain in the wound for up to 72 hours, eliminating biofilms between normal dressing changes.
Marketing, Sales and Distribution
The Company’s CellerateRX Surgical products are attracting increased business from hospitals and surgery centers due to their recognized benefits including efficacy and economic value. The surgical products are used in specialty areas such as spine, orthopedics, trauma, vascular, general, plastic, podiatry and reconstructive surgeries. The surgical products are sold through a growing network of surgical specialty distributors and Company representatives who are credentialed to demonstrate the products in surgical settings.
The Company’s advanced wound care products are primarily distributed to post-acute care settings, including long-term care facilities, home health, wound care centers, and professional medical offices. We believe our products are unique in composition, superior to other products in clinical performance, and demonstrate the ability to reduce costs associated with standard wound management. Our wound care products are sold by Company representatives supplemented by major medical-surgical distributors, independent distributors, and durable medical equipment (DME) distributors.
The Company currently employees 16 surgical regional sales managers (“RSMs”) and 5 wound care RSMs. The company is focusedconstantly evaluating new markets and opportunities to add to this team as warranted.
Corporate Infrastructure
The Company has significantly invested in corporate infrastructure in 2020 with the hiring of a Chief Commercialization and Regulatory Officer. This position directs the Company’s efforts related to product development, commercialization, procurement, quality and regulatory matters associated with new and existing products. In early 2020, the Company retained a Compliance Officer to oversee the Company's ongoing compliance program focusing on deliveringpolicy development, training and compliance with the CellerateRX® productCompany’s Code of Ethics.
Competition
The wound care market is served by a number of large, multi-product line to hospitals and surgery centerscompanies as well as a number of small companies. Our products compete with primary dressings, advanced wound care products, collagen matrices and other biopharmaceutical products. Manufacturers and distributors of competitive products include Smith & Nephew plc, Acelity L.P. Inc. (acquired by 3M Company in October 2019), Medline Industries, Inc., ACell Inc., and Integra LifeSciences Holdings Corporation. Many of our competitors are significantly larger than we are and have greater financial and personnel resources. We believe our products outperform our competitors’ currently available products by providing greater efficacy, reducing the diabeticcost of patient care, and long-term care markets.replacing numerous products with a single primary dressing.
Resorbable Orthopedic Products, LLC (“ROP”)
Liquidity and Capital Resources
Historically, we have financed our operations primarily from the sale of equity securities. During 2019 and 2020, our principal sources of liquidity have been our cash generated from operations, cash provided through a wholly-owned subsidiarybank line of credit, and a $10,000,000 private placement offering in October 2019. Cash consists of cash on deposit with banks.
As a result of the Company was organized as a Texas limited liability company on August 24, 2009, as part of a transaction to acquire a multi-faceted patent for resorbable bone hemostasis products. ROP is both licensing technology from this patent and also developing products itself. In 2014,COVID-19 pandemic, the Company entered into a commercial license for a bone void filler.has significantly reduced costs in areas such as payroll, consulting, business travel, and other discretionary spending. We will continue to monitor our cash flow and will make additional expenditure adjustments as necessary. The Company began receiving royaltieswill be applying for forgiveness of the loan received under this agreementPaycheck Protection Program. The Company believes the full amount of the loan ($583,000) will be forgiven. If appropriate, we may pursue additional financing including issuing additional stock and incurring additional debt. If we are unable to obtain additional funding for operations at any time in the fourth quarterfuture, we may not be able to continue operations as currently planned which would require us to modify various aspects of 2013. Royalties will continue forour operations.
For the lifesix months ended June 30, 2020, net cash used in operating activities was $2,732,191 compared to $1,239,564 used in operating activities during the first six months of 2019. The higher use of cash in 2020 was due primarily to the Company’s investment in sales force expansion and corporate infrastructure.
For the six months ended June 30, 2020, net cash used in investing activities was $1,157,456 , compared to $482,306 provided by investing activities during the first six months of 2019. The cash used in investing activities during the first six months of 2020 was primarily due to the May 4, 2020 acquisition of the patentdebrider product license agreement from Rochal which expires in 2023.included a $600,000 initial payment. In 2016 ROP received FDA 510(k) clearance for HemaQuell™ Resorbable Bone Hemostat. HemaQuell™ isaddition, a mechanical tamponade for bleeding bone that resorbs within 2-7 days after use. In$500,000 milestone payment was made to Rochal during the first quarter of 2017, ROP launched HemaQuell® Resorbable Bone Hemostat via the Company’s Innovate OR, Inc, subsidiary. Initial sales efforts are focused on orthopedic, cardiovascular, and spine surgeries.
Our primary focus is developing and marketing products for the advanced wound care market, with2020 as a focus on surgical products, as pursued through our wholly owned subsidiaries, WCI and ROP, which brings a unique mix of products, procedures and expertise to the wound care arena including surgical wounds. CellerateRX’s patented Activated Collagen fragments (CRa® are a fraction of the size of the native collagen molecules and particles found in other products, which delivers the benefits of collagen to the body immediately.
Management Letter
Wound Management Technologies, Inc. is pleased to report revenues of $1,549,016 for the third quarter of 2017, an increase of approximately 10% over the $1,409,530 reported during the same period in 2016. Year-to-date revenues of $4,607,162 for the nine months ended September 30, 2017, were up 22% from the $3,762,681 reported during the same period in 2016. This increase of approximately $845,000 is the result of continued expansionFDA clearance of our network of distributor sales partners since the third quarter of 2016. Although third quarter revenues were up from the previous quarter by approximately $100,000, revenues from the Texas Coast were down approximately $65,000 from the previous quarter primarily during a period in which the region was feeling the impact of Hurricane Harvey.
Although we incurred a net loss of $48,562 for the three-months ended September 30, 2017, year-to-date remained profitable with net income of $83,539 for the nine-months ended September 30, 2017. The current quarter loss was primarily due to sales and marketing initiatives including HemaQuell™ prelaunch expenses, and sales advisory services. Additional one-time consulting expenses were incurred related to a new business development opportunity that we decided not to pursue.BIAKŌS™ Antimicrobial Wound Gel.
InFor the first nine-months of this year we completed another three-year Strategic Plan initiativesix months ended June 30, 2020, net cash provided by retiring all amortized notes payable.
We are continuingfinancing activities was $583,000 as compared to focus on growing CellerateRX® revenues by developing and carrying out our strategic initiatives to: grow our sales force; expand our surgical product sales to new customers; and increase sales to existing customers. Our Regional Sales Managers are working closely with our distributor and representative network to increase awareness and sales. We are also increasing our market presence with continuing case studies by key opinion leaders.
$1,000,000 provided for the six months ended June 30, 2019. The Company hired a seasoned medical industry veteran with experiencecash provided in both surgical suite sales and general wound care as Director of Strategic Accounts in September of this year, to spearhead our efforts to expand our distributor partner networks and to work with strategic partners to facilitate2020 were proceeds from the product’s adoption by major hospital systems across the Country.
In closing, Wound Management Technologies continues to be well positioned to execute our strategic growth initiatives with a solid go-to-market plan in place. The Company looks forward to capitalizing on the traction it has built in the market thus far with additional investments in strategic growth, sales, marketing and clinical support for CellerateRX® and HemaQuell™.Paycheck Protection Program loan.
Results of Operations
For the three and nine months ended September 30, 2017, compared with the three and nine months ended September 30, 2016:
Revenues. The Company generated revenuesrevenue of $1,549,016$2,967,183 for the three months ended SeptemberJune 30, 2017,2020, compared to revenuesrevenue of $1,409,530$3,017,489 for the three months ended SeptemberJune 30, 2016,2019, representing a 10% increase2% decrease in revenues.revenue from the prior year. The Company generated revenueslower second quarter revenue was due to the suspension of elective surgeries and restricted access to patient facilities throughout most parts of the United States as a result of the COVID-19 pandemic. For the six months ended June 30, 2020, revenue totaled $6,491,514, compared to revenue of $5,504,385 for the ninesix months ended SeptemberJune 30, 2017,2019, yielding an 18% increase from the prior year. The higher revenue in 2020 was primarily due to strong revenue growth during the first quarter as well as the month of $4,607,162, compared to revenues of $3,762,681 forJune resulting from the nine months ended September 30, 2016, or a 22% increase in revenues. The increase in revenues is the result of an expanded salesforce and the successful implementationexecution of the Company’s strategic planstrategy to introduce our products into hospital operating roomsexpand its sales force and surgery centers. Revenues include $50,250independent distribution network in royalty income for each of the three months ended September 30, 2017both new and 2016, and $150,750 in royalty income for each of the nine months ended September 30, 2017 and 2016 from the development and license agreement the Resorbable Orthopedic Products, LLC subsidiary (ROP) executed with BioStructures, LLC in 2011.existing U.S. markets.
Cost of goods sold. Cost of goods sold for the three months ended SeptemberJune 30, 2017,2020, was $230,049,$348,675, compared to costs of goods sold of $211,639$334,829 for the three months ended SeptemberJune 30, 2016, (a 9% increase).2019. Cost of goods sold for the ninesix months ended SeptemberJune 30, 2017,2020, was $568,071, as$678,863, compared to costs of goods sold of $612,514$624,169 for the ninesix months ended SeptemberJune 30, 2016, (a 7% decrease). Although revenues increased by 22%2019. The increase over the nine-month period, cost of goods sold as a percent of revenues decreased as a result of the increase in the percent of surgicalprior year was primarily due to higher sales which have a greater gross profit margin.volume.
Selling, general and administrative expenses (“SG&A"). SG&A expenses for the three months ended SeptemberJune 30, 2017,2020, were $1,303,344,$3,624,027, as compared to SG&A expenses of $963,738$2,983,248 for the three months ended SeptemberJune 30, 2016, a 35% increase in SG&A expenses.2019. SG&A expenses for the ninesix months ended SeptemberJune 30, 2017,2020, were $3,799,644,$8,530,565, as compared to $5,333,611 for the six months ended June 30, 2019. The higher SG&A expenses of $2,827,340 for the nine months ended September 30, 2016, or a 34% increase in SG&A expenses. SG&A expenses increased2020 were primarily due to increased payroll costs resulting from sales force expansion and operational support, and higher sales commission expense related toas a result of higher product sales. Direct selling costs represented the revenuevast majority of the increase payroll expensesin total SG&A costs as we growincreased the size of our infrastructure and consulting fees relatedfield sales organization from nine in June 2019 to strategic initiatives.twenty-one in June of 2020.
Other administrative expense. Other administrativeThe higher SG&A expenses forare consistent with the nineCompany's strategy of building out a larger sales force and independent distribution network. New sales representatives generally take six to twelve months ended September 30, 2016, consistedto begin generating significant revenue. The Company expects SG&A expenses to decline as a percentage of a onetime non-cash expense of $758,665 for a warrantrevenue in the next two years as revenue generated by new sales representatives begins to purchase sharesoffset the cost of the Company’s stock and a onetime cash expense of $60,000 for professional fees, both incurred in the Second Quarter related to a strategic growth initiative.
sales force expansion.
Interest expense. Interest expense was $19,807$1,101 for the three months ended SeptemberJune 30, 2017,2020, as compared to $42,433$29,486 for the three months ended SeptemberJune 30, 2016.2019. Interest expense was $115,421$9,455 for the ninesix months ended SeptemberJune 30, 2017,2020, as compared to $132,689$34,911 for the ninesix months ended SeptemberJune 30, 2016. This change2019. The lower interest expense was primarily due to amending several notes and recapturing previous expensed interest expense.not using our revolving line of credit in 2020.
Net income/income / loss. WeThe Company had a net loss of $48,562$1,129,557 for the three months ended SeptemberJune 30, 2017,2020, compared to net incomeloss of $181,487$352,471 for the three months ended SeptemberJune 30, 2016. 2019. The current quarter loss was primarily due to sales and marketing initiatives including HemaQuell™ prelaunch expenses, a National Sales Meeting, and sales advisory services. Additional one-time consulting expenses were incurred related to a new business development opportunity that we decided not to pursue. WeCompany had net income of $83,539 for the nine months ended September 30, 2017, compared to a net loss of $650,675$2,970,569 for the ninesix months ended SeptemberJune 30, 2016.2020, compared to net loss of $515,043 for the six months ended June 30, 2019. The 2016net loss was primarily due to a onetime non-cash expense of $758,665 for a warrant to purchase shares ofhigher SG&A costs described above, which were driven by the Company’s stockstrategy to grow top-line revenue through significant investments in sales force expansion and related sales support infrastructure. The Company expects SG&A expenses to decline as a onetime cash expensepercentage of $60,000 for professional fees, both incurredrevenue in the Second Quarter relatednext two years as the revenue generated by its new sales force begins to a strategic growth initiative.
Liquidity and Capital Resources
As a result ofoffset the current status of the Company’s two Convertible notes payable to Related parties totaling $1,200,000, the Company has a working capital deficit of $448,630 as of September 30, 2017, a decrease of $1,050,284 from the 2016 year-end surplus balance of $601,654.
As of September 30, 2017, we had total current assets of $1,888,182, including cash of $151,314 and inventories of $820,908. As of December 31, 2016, our current assets of $1,996,013 included cash of $833,480 and inventories of $348,457.
As of September 30, 2017, we had total current liabilities of $2,336,812 including $223,500 of notes payable. Our current liabilities also include $232,511 of current year royalties payable. As of December 31, 2016, our current liabilities of $1,394,359 included $414,338 of notes payable and prior year accrued royalties payable of $276,916.
As of September 30, 2017, no derivative liabilities remained due to the expiration of the related warrants on July 25, 2017. At December 31, 2016, our derivative liabilities totaled $44 related to 10,000 of the 21,736,844 outstanding stock purchase warrants.
For the nine months ended September 30, 2017, net cash used in operating activities was $411,503 compared to $10,091 used in the first nine months of 2016.
In the nine months ended September 30, 2017, net cash used in investing activities was $126,453 compared to $3,029 used in the first nine months of 2016.
In the nine months ended September 30, 2017, net cash used in financing activities was $144,210. For the nine months ended September 30, 2016, financing activities provided $273,743.sales force expansion expense.
Off-Balance Sheet Arrangements
None.
Recent Accounting Pronouncements
For the period ended September 30, 2017, there were no other changes to our critical accounting policies as identified in our Annual Report on Form 10-K for the year ended December 31, 2016.
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers which is to be effective for reporting periods beginning after December 15, 2017. The Company has reviewed the pronouncement and believes it will not have a material impact on the Company’s financial position, operations or cash flows.
In February 2016, the FASB issued ASC 842 Leases which is to be effective for reporting periods beginning after December 15, 2018. The Company is currently reviewing any impact that it will have on the Company’s financial position, operations or cash flows.
Contractual Commitments
Royalty agreement. Effective November 28, 2007, WCI entered into separate exclusive license agreements with Applied Nutritionals, LLC (“Applied”) and its founder George Petito, pursuant to which WCI obtained the exclusive world-wide license to make products incorporating intellectual property covered by a patent related to CellerateRX products. In consideration for the licenses, WCI agreed to pay to Applied the following royalties, beginning January 3, 2008: (a) an upfront royalty of $100,000 in the aggregate, (b) an aggregate royalty of fifteen percent (15%) of gross sales occurring during the first year of the license; (c) an additional upfront royalty of $400,000, in the aggregate, which was paid October, 2009; plus (d) an aggregate royalty of three percent (3%) of gross sales for all sales occurring after the payment of the $400,000 upfront royalty. In addition, WCI must maintain a minimum aggregate annual royalty payment of $375,000 for 2009 and thereafter, if the royalty payments made do not meet or exceed that amount. The total of unpaid royalties as of December 31, 2016 was $276,916. These prior year royalties were paid in full in March of 2016. As of September 30, 2017, the balance of accrued royalties for the current year is $232,511.
Item 3.
QuantitativeQuantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide this information.
Item 4. ControlsControls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that information is accumulated and communicated to our management, including our principal executive and principal financial officerofficers (whom we refer to in this periodic report as our Certifying Officer), as appropriate to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of our Certifying Officer, the effectiveness of our disclosure controls and procedures as of SeptemberJune 30, 2017,2020, pursuant to Rule 13a-15(b) under the Securities Exchange Act. Based upon that evaluation, our Certifying Officer concluded that, as of SeptemberJune 30, 2017,2020, our disclosure controls and procedures were effective.
Remediation of Previously Reported Material Weakness
As reported in Item 9A on Form 10-K for the year ended December 31, 2019, the Company’s management concluded that our internal control over financial reporting was not effective due to the small size of the Company and limited segregation of duties. Notwithstanding such material weakness, management has concluded that our financial statements for the periods included in this Quarterly Report on Form 10-Q are fairly stated in all material respects in accordance with generally accepted accounting principles for each of the periods presented herein.
The Company has formally documented its system of internal control and implemented additional controls including the hiring of an additional full-time accounting professional in January 2020 which enabled the Company to properly segregate such duties. The Company has concluded that the material weakness previously noted has been remediated as of June 30, 2020.
Changes in Internal Control over Financial Reporting
There
Except as noted above, there were no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We will continue to evaluate the effectiveness of internal controls and procedures on an on-going basis.
Part II — Other Information
Item 1. LegalLegal Proceedings None.
Item 1a. Risk Factors
As a smaller reporting company, we are not required to provideof June 30, 2020, and as of this information.filing date, the Company has no outstanding legal proceedings.
The COVID-19 pandemic in the United States and other parts of the world may negatively impact our business, financial condition and results of operations.
An epidemic of COVID-19 is ongoing in the United States and most of the world. On January 30, 2020, the World Health Organization declared a global emergency, and since that time governments have instituted measures to attempt to contain spread of the virus, including temporary limitations on non-essential business activities and elective surgical procedures in medical facilities.
A majority of our revenue is currently generated from the sale of products in connection with surgical procedures. If extensive limitations are put on these procedures and/or our sales personnel are restricted from entering patient facilities, it could adversely affect our sales and operating results. Additionally, we obtain our products from manufacturers in the United States, and any disruptions in those manufacturing sites or the shipment of the products could impact our sales and operations.
The extent to which these events impact our business will depend on future developments regarding the rate of infection of the virus and the further or lessening of current or new restrictions put in place to contain the pandemic.
Item 2. UnregisteredUnregistered Sales of Equity Securities and Use of Proceeds None.
Item 3. DefaultsDefaults Upon Senior Securities None.
Item 4. MineMine Safety Disclosure This item is not applicable.
Item 5. OtherOther Information None.
The following documents are filed as part of this Report:
| Exhibit No. | | Description |
| | |
| | Certification of Principal Executive Officer in accordance with 18 U.S.C. Section 1350, as adopted by Section 302 of the Sarbanes-Oxley Act of 2002* |
| | | |
| | Certification of Principal Financial Officer in accordance with 18 U.S.C. Section 1350, as adopted by Section 302 of the Sarbanes-Oxley Act of 2002* |
| | | |
| | Certification of Principal Executive Officer in accordance with 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002* |
| | | |
| | Certification of Principal Financial Officer in accordance with 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002* |
| | | |
| 101 | | Interactive Data Files pursuant to Rule 405 of Regulation S-T. |
* Filed herewith
Pursuant to the requirements of the Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | Wound Management Technologies,Sanara MedTech Inc. | |
| | | | |
November 16, 2017August 13, 2020 | By: | /s/ J. Michael CarmenaMcNeil | |
| | | J. Michael Carmena,McNeil | |
| | | Chief Financial Officer | |
| | | |