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: September 30, 2017ended March 31, 2021

 

WOUND MANAGEMENT TECHNOLOGIES,SANARA MEDTECH INC.

 

 

 

 

 

 

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“emerging growth company"company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

SANARA MEDTECH INC. AND SUBSIDIARIES

Form 10-Q

 

 

 

 

 

 

 

 

 

Sanara MedTech Inc. (“we”, “our”, the “Company”) is a medical technology company focused on developing and commercializing transformative technologies to improve clinical outcomes and reduce healthcare expenditures in the surgical and chronic wound and skin care markets. The accompanying notes are an integral partCompany’s portfolio of these unaudited consolidated financial statements.

 

Note 1 - SummaryImpact of Significant Accounting Policiesthe COVID-19 Pandemic

 

Basis of Presentation

 

The terms “WMT,” “we,” “the Company,” and “us” as used in this report refer to Wound Management Technologies, Inc. The accompanying unaudited consolidated balance sheet as of September 30, 2017, and unaudited consolidatedfinancial statements of operations for the nine months ended September 30, 2017 and 2016, 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. Certain prior period amounts in the consolidated financial statements and accompanying notes have been reclassified to conform to the current period’s presentation. 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 periodsthree-month period ended September 30, 2017,March 31, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 2017,2021, 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, 2016,2020, and December 31, 2015,2019, included in the Company’s Annual Report on Form 10-K. The accompanying consolidated balance sheet as of December 31, 2016, has been derived from the audited financial statements filed in our Form 10-K and is included for comparison purposes in the accompanying balance sheet. Certain prior year amounts have been reclassified to conform to current year presentation.

 

Principles of Consolidation

 

The accompanying unaudited consolidated financial statements include the accounts of WMTSanara MedTech Inc. and its wholly-owned subsidiaries:wholly owned subsidiaries. The consolidated financial statements also include the accounts of Sanara Pulsar, which is owned 60% by the Company’s wholly owned subsidiary Cellerate, LLC, and 40% owned by Wound Care Innovations, LLC a Nevada limited liabilitySolutions, Limited, an unaffiliated company registered in the United Kingdom (“WCI”); Resorbable Orthopedic Products, LLC, a Texas limited liability company (“Resorbable); and Innovate OR, Inc. “InnovateOR” formerly referred to as BioPharma Management Technologies, Inc., a Texas corporation (“BioPharma”WCS”). All significant intercompany accountsprofits, losses, transactions and transactionsbalances have been eliminated.eliminated in consolidation.

 

Inventories

 

 

Fair Value MeasurementsMeasurement

 

As defined in Accounting Standards CodificationASC Topic 820, Fair Value Measurement (“ASC”ASC 820”) 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. The carrying amounts of cash, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short-term nature of these instruments. The Company does not have any assets or liabilities that are required to be measured and recorded at fair value on a recurring basis.

 

On July 25, 2017, the stock purchase warrants related to the remaining derivative liabilities expiredThe carrying amounts of cash, accounts receivable, accounts payable and on September 30, 2017, the Company had no derivative liabilities related to stock purchase warrants.

 

Income (Loss) Per ShareTaxes

 

The Company computes income (loss) per shareaccounts for stock-based compensation to employees and nonemployees in accordance with Accounting Standards Codification “ASC”Update (“ASU”) 2018-07 Topic No. 260, “Earnings per Share,”718. Stock-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as expense over the stipulated vesting period, if any. The Company estimates the fair value of stock-based payments using the Black-Scholes option-pricing model for common stock options and warrants, and the closing price of the Company’s common stock for common stock issuances.

In December 2019, the Financial Accounting Standards Board issued ASU 2019-12, Simplifications to Accounting for Income Taxes, which requiresremoves certain exceptions to the general principles of Topic 740 and adds guidance to reduce complexity in accounting for income taxes. The ASU is effective for annual and interim periods in fiscal years beginning December 15, 2020. The adoption of this standard did not have a material effect on the Company's consolidated financial statements.

In March 2021, the Company issued 20,834 shares of its common stock to present basic and dilutive income (loss)Rochal Industries, LLC (“Rochal”) for a $750,000 milestone payment required per share when the effect is dilutive. Basic income (loss) per share is computed by dividing income (loss) available to common stockholders byterms of a licensing agreement with Rochal. The payment became due upon the weighted average numberCompany’s public offering of common shares available. Diluted income (loss) per share is computed similarstock in February 2021. The milestone payment was recorded as an addition to basic income (loss) per share except thatintangible assets.

 

 

 

NoteNOTE 4 – Commitments and Contingencies- COMMITMENTS AND CONTINGENCIES

 

 

 

On September 29, 2009,August 27, 2018, the Company entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”exclusive, world-wide sublicense agreement with CGI Cellerate RX, LLC (“CGI Cellerate RX”), by to distribute CellerateRX Surgical and amongHYCOL products into the wound care and surgical markets. Pursuant to the sublicence agreement, the Company RSIACQ, LLC, a wholly-owned subsidiarypays royalties of 3-5% of annual collected net sales of CellerateRX Surgical and HYCOL. As amended on January 26, 2021, the term of the sublicense extends through May 2050, with automatic successive year-to-year renewal terms thereafter so long as the Company’s Net Sales (as defined in the sublicense agreement) each year are equal to or in excess of $1,000,000. If the Company’s Net Sales fall below $1,000,000 for any year after the initial expiration date, CGI Cellerate RX will have the right to terminate the sublicense agreement upon written notice. Minimum royalties of $400,000 per year are payable for the first five years of the sublicense agreement.

On July 7, 2019, the Company (RSI), Resorbable Orthopedic Products, LLC (“Resorbable”)executed a license agreement with Rochal, a related party, whereby the Company acquired an exclusive world-wide license to market, sell and Resorbable’s members,further develop antimicrobial products for the prevention and treatment of microbes on the human body utilizing certain Rochal patents and pending patent applications (the “BIAKŌS License Agreement”). Currently, the products covered by the BIAKŌS License Agreement are BIAKŌS Antimicrobial Wound Gel and BIAKŌS Antimicrobial Skin and Wound Cleanser. Both products are 510(k) approved. The Company’s Executive Chairman is a director of Rochal, and indirectly a significant shareholder of Rochal, and through the potential exercise of warrants, a majority shareholder of Rochal. Another one of the Company’s directors is also a director and significant shareholder of Rochal.

On October 1, 2019, the Company executed a license agreement with Rochal pursuant to which RSIthe Company acquired substantiallyan exclusive world-wide license to market, sell and further develop certain antimicrobial barrier film and skin protectant products for use in the human health care market utilizing certain Rochal patents and pending patent applications (the “ABF License Agreement”). Currently, the products covered by the ABF License Agreement are CuraShield Antimicrobial Barrier Film and a no sting skin protectant product.

At the time of the formation of Sanara Pulsar, it and WCS entered into a supply agreement whereby Sanara Pulsar became the exclusive distributor in the United States of certain wound care products that utilize intellectual property developed and owned by WCS. In 2019, the Company advanced to WCS $200,000 and recorded the payment as a reduction of non-controlling interests. In the event WCS’s Form K-l from Sanara Pulsar for the year 2020 does not allocate to WCS net income of at least $200,000 (the “Target Net Income”), then Cellerate, LLC will, within 30 days after such determination, pay WCS the amount of funds representing the difference between the Target Net Income and the actual amount of net income shown on WCS’s Form K-1 for the year 2020. In March 2021, the Company paid WCS $200,000 for the year 2020. For each of the years 2021 through 2024 the Target Net Income will increase by 10%, and in the event WCS’s Form K-1 for any of those years does not allocate to WCS net income in an amount at least equal to the Target Net Income for such year, then Cellerate, LLC will, within 30 days after such determination, pay WCS the amount of funds representing the difference between the Target Net Income and the actual amount of net income shown on WCS’s Form K-1 for the applicable year. All other distributions made by Sanara Pulsar to its members, not including tax distributions, will be made exclusively to Cellerate, LLC until such time as Cellerate, LLC has received an amount of distributions equal to all such advances to WCS.

Right of Resorbable’suse assets, which we refer to as “ROU assets,” represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities were recognized on the transition date based on the present value of lease payments over the respective lease term, with the office space ROU asset adjusted for deferred rent liability.

 

On October 10, 2017, Wound Management Technologies, Inc. (the “Company”) and Evolution Venture Partners LLC (“EVP”)January 18, 2021, the Company entered into a termination agreementan Equity Exchange Agreement (the “Termination“Exchange Agreement”) terminating,, effective as of September 29, 2017, that certain letter agreement dated April 26, 2016, (the “Agreement”January 14, 2021, with two individuals who each owned 50% of the outstanding equity interests in Woundyne Medical, LLC (“Woundyne”), by and between. Pursuant to the Exchange Agreement, the Company EVP, and Middlebury Securities, LLC (“Middlebury”). Middlebury terminated its charter on or about July 27, 2016, and therefore is not a party to the Termination Agreement. The Agreement had an initial term of one year (with an automatic six-month renewal term) and provided for:

On February 12, 2021, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Cantor Fitzgerald & Co. as representative of several underwriters named therein (collectively, the “Underwriters”), pursuant to which the Company agreed to issue and sell an aggregate of 1,100,000 shares of the Company’s common stock to the Underwriters at a price to the public of $25.00 per share, (“Common Stock”less underwriting discounts and commissions (the “Offering”),. Pursuant to the Underwriting Agreement, the Company granted the Underwriters a 30-day option to purchase up to an additional 165,000 shares of common stock at the public offering price, less underwriting discounts and commissions, which the Underwriters exercised in full. The Offering, including the purchase of the 165,000 additional shares of common stock, closed on February 17, 2021.

The net proceeds to the Company from the Offering were approximately $28.9 million, after (i) giving effect to the Underwriter’s full exercise of its option to purchase additional shares of common stock, and (ii) deducting the underwriting discounts and commissions and offering expenses payable by the Company. Through an exerciseinsured cash sweep service, the net proceeds have been deposited in accounts insured by the Federal Deposit Insurance Corporation.

During the three months ended March 31, 2021, the Company granted and issued 4,744 shares of restricted common stock to one employee under the LTIP Plan. The shares are subject to certain vesting provisions and other terms and conditions set forth in the employee’s restricted stock agreement. The fair value of this award was $216,658 based on the closing price of $0.12 per share.the Company’s common stock on the grant date and is recognized as compensation expense on a straight-line basis over the vesting period of the award.

 

 

 

The total amount offollowing summarizes the consulting fee and warrant expense was $818,665 and is recognized in 2016 as “Other administrative expenses”loss from the equity method investment reflected in the Consolidated Statementconsolidated statements of Operations.operations:

 

 

 

Payables to Related Parties

The Company had outstanding payables to related parties totaling $21,842$86,592 at March 31, 2021, and $93,655, respectively. The payables are unsecured, bear no interest and due on demand.$223,589 at December 31, 2020.  

 

 

On October 11, 2013,September 9, 2020, the Company filedexecuted a Certificatemanufacturing agreement with Rochal. Under the terms of Designations, Number, Voting Power, Preferencesthe manufacturing agreement, Rochal agreed to manufacture, package, 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.label products licensed from Rochal by the Company. The Series C Preferred Stock is entitled to accruing dividends (payable, atmanufacturing agreement includes customary terms and conditions for 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.

 

On November 13, 2013,September 9, 2020, the Company filedexecuted a Certificate of Designations, Number, Voting Power, Preferences and Rights of Series D 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 entitled to any preferencetechnical services agreement with respect to dividend or upon liquidation, and will automatically convert (at a ratio of 1,000-to-1) into sharesRochal. Under the terms of the Company’s common stock, par value $0.001 upon approval oftechnical services agreement, Rochal will provide its expertise and services on technical service projects identified by the Company for wound care, skin care and surgical site care applications. The technical services agreement includes customary terms and conditions for the Company’s stockholders (and filing of) and amendment toindustry. For the Company’s Certificatethree months ended March 31, 2021, the Company incurred $148,521 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 D Preferred Stock issued and outstanding.

 

 

Forward-Looking Statements

 

SomeThis Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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, including, without limitation, statements concerning the impact of the COVID-19 pandemic and our expectations for SG&A expense. Statements, other than statements of historical fact, included in this Quarterly Report on Form 10-Q are forward-looking statements and generally may be identified by words "believe," "intend," "plan," "expect," "anticipate," "estimate," "project," "goal" andsuch as “anticipate,” “believe,” “continue,” “contemplate,” “could,” “estimate,” “expect,” “forecast,” “guidance,” “intend,” “may,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” or other similar expressions identify such a statement was made.words, phrases or expressions. These statements should be viewed with caution and are subject to knownvarious risks and unknown risks, uncertainties, many of which are outside of the Company’s control. The following factors, among others, could cause actual results to differ materially from those in the forward-looking statements:

For a more detailed discussion of these and other factors that may affect our business and that could cause the actual results to differ materially from those contemplated by the statements. Theanticipated in these 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 are not limited to the risks discussedstatements, see “Risk Factors” in this and our other SEC filings. We do not promise 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 such forward-looking statements.

 

Business Overview

We currently market seven products across chronic and surgical wound care applications and have multiple products in our pipeline. We license our products from research and development partners Applied Nutritionals, LLC (“AN”) (through a sublicense with CGI Cellerate RX, LLC (“CGI Cellerate RX”), an affiliate of The Catalyst Group, Inc. (“Catalyst”)) and Rochal Industries, LLC (“Rochal”) and have the right to exclusively distribute certain products under development by Cook Biotech Inc. (“Cook Biotech”). In 2021, we use “WMT,” “the Company,” “we,” “our”intend to begin marketing two biologic products for surgical and “us”wound care applications pursuant to our marketing and distribution agreement with Cook Biotech.

In June 2020, we formed a subsidiary, United Wound and Skin Solutions LLC (“UWSS”), to hold certain investments and operations in this reportwound and skin care virtual consult services. We anticipate that our various service offerings will allow clinicians/physicians utilizing our technologies to refercollect and analyze large amounts of data on patient conditions and outcomes that will improve treatment protocols and ultimately lead to more evidence-based formulary to improve patient outcomes. We intend to launch our initial virtual consult service offerings in 2021. Through a combination of our UWSS services and our Sanara products, we believe we will be able to offer patient care solutions at every step in the continuum of wound and skin care from diagnosis through healing.

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 reduction in demand for our surgical products beginning in the second half of March 2020. Additionally, most states limited access to SNFs to only resident caregivers, which impeded our ability to provide education and product training to the businessesclinicians who use our products in these facilities. These restrictions resulted in an overall decline in sales for the second quarter of Wound Management Technologies, Inc.2020. During the second half of 2020 and the first quarter of 2021, we saw a strong rebound in product sales as restrictions on elective surgeries eased in our primary markets in Texas, Florida, and the southeastern United States.

 

Wound Management Technologies, Inc. (“WMT” orThe duration of 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, mergedpandemic is uncertain; however, management believes that elective surgical procedures will continue to be performed with the Company (whichexception of certain geographic COVID-19 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.

Our revenue is derived primarily from sales of our surgical products to hospitals and other acute care facilities, and sales of our chronic wound care products to customers across the post-acute continuum of care. Our revenue is driven by direct orders shipped by us to our customers, and to a lesser extent, direct sales to customers through delivery at the time was a wholly owned subsidiary of MB Software Corporation), andprocedure by one of our sales representatives. We generally recognize revenue when our product is received by the Company changed its name to MB Software Corporation as part of the merger. In May of 2008, the Company changed its name to Wound Management Technologies, Inc.customer.

 

The Company, through its wholly-owned subsidiary, Wound Care Innovations, LLC (WCI), marketsRevenue streams from product sales and sellsroyalties are summarized below for the patented CellerateRX® Activated Collagen® productsthree months ended March 31, 2021 and March 31, 2020. All revenue was generated in the expanding 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 a wound immediately—other forms of native, intact collagen in commercially available products require time 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 acute and chronic wounds, except third degree burns, and are offered in both gel and powder form. CellerateRX is currently approved for reimbursement under Medicare Part B and no prescription is required.United States. 

 

We believe that these products are unique in composition, applicabilityrecognize royalty revenue from a development and clinical performance, and demonstratelicensing agreement with BioStructures, LLC. We record revenue each calendar quarter as earned per the ability to reduce costs associated with standard wound management. The Company is focused on delivering the CellerateRX® product line to hospitals and surgery centers as well as the diabetic care and long-term care markets.

 

Our primary focus is developing and marketing products for the advanced wound care market, with a focus on surgical products, as pursued through our wholly owned subsidiaries, WCI and ROP, which brings a unique mixCost of products, procedures and expertise to the wound care arena including surgical wounds. CellerateRX’s patented Activated Collagen fragments (CRa® are a fractionGoods Sold

Cost of goods sold consists of the sizeacquisition costs from the manufacturers of our licensed products, raw material costs for certain components sourced directly by us, and all related royalties due as a result of the native collagen moleculessale of our products. Our gross profit represents total revenue less the cost of goods sold, and particles found in other products, which delivers the benefitsgross margin is gross profit expressed as a percentage of collagen to the body immediately.total revenue.

 

 

Wound Management Technologies, Inc. is pleased to report revenuesSelling, general and administrative expenses (“SG&A”) consist primarily 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 expansion of our network of distributorsalaries, 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.

 

We are continuingexpense all SG&A expenses as incurred. We expect our SG&A expenses to focus on growing CellerateRX® revenues by developingincrease in absolute dollars and carrying out our strategic initiatives to:decrease as a percent of revenue as we 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.commercial organization. 

 

The Company hired a seasoned medical industry veteran with experience in both surgical suite salesResearch and general wound care as Director of Strategic Accounts in September of this year,development expenses (“R&D”) include costs related to spearheadenhancements to our efforts to expand our distributor partner networkscurrently available products and to work with strategic partners to facilitate the product’s adoption by major hospital systems across the Country.

Other income (expense) is primarily comprised of gains or losses on equity method investments, interest income, interest expense and HemaQuell™.other non-operating activities.

 

Results of Operations

 

 

As a smaller reporting company, we are not required to provide this information.

 

 

Disclosure Controls and Procedures

 

Changes in Internal Control over Financial Reporting

 

 

 

 

 

None.

 

This item is not applicable.

 

None.

  

 

 

The following documents are filed as part of this Report:

 

 

 

 

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

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