SANARA MEDTECH INC.
10-Ks and 10-Qs
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UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☑
ANNUAL REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2020
------------------------------------------------------
Commission File Number 001-39678
SANARA MEDTECH INC.
(Exact
name of Registrant as specified in its charter)
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Texas
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59-2219994
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(State or other jurisdiction of
incorporation
or organization)
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(
I.R.S. Employer Identification No.)
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1200
Summit Ave, Suite 414, Fort Worth, Texas 76102
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(Address
of principal executive offices)
(817)
529-2300
(
Registrant’s telephone number, including area
code
)
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Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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Common Stock, $0.001 par value
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SMTI
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The Nasdaq Capital Market
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
☐
Yes
☑
No
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
☐
Yes
☑
No
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
every Interactive Data File required to be submitted 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 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
“accelerated filer,” “large accelerated
filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act.
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Large
accelerated filer
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Accelerated
filer
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Non-accelerated
filer
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Smaller
reporting company
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Emerging
growth company
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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 has filed a report on and
attestation to its management’s assessment of the
effectiveness of its internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b))
by the registered public accounting firm that prepared or issued
its audit report.
☐
Indicate
by check mark whether registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes
☐
No
☑
The
aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant as of June 30, 2020 based
on the $18.00 closing price as of such date was approximately
$22,923,054.
As of
March 30, 2021, 7,617,122
shares of the Issuer’s $0.001
par value common stock were issued and
outstanding.
SANARA MEDTECH INC.
Form 10-K
For the Year Ended December 31, 2020
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Page
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PART
I.
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PART II.
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PART III.
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PART IV.
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89
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91
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Sanara, Sanara MedTech, our logo and our other trademarks or
service marks appearing in this report are the property of Sanara
MedTech Inc. Trade names, trademarks and service marks of other
companies appearing in this report are the property of their
respective owners. Solely for convenience, the trademarks, service
marks and trade names included in this report are without the
®, ™ or other applicable symbols, but such references
are not intended to indicate, in any way, that we will not assert,
to the fullest extent under applicable law, our rights or the
rights of the applicable licensors to these trademarks, service
marks and trade names.
Unless otherwise indicated, “Sanara,” “we,”
“us,” “our,” and “the Company,”
refer to Sanara MedTech Inc. and its consolidated
subsidiaries.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS
This
report contains forward-looking statements within the meaning of
the federal securities laws. Forward-looking statements generally
relate to future events or our future financial or operating
performance. In some cases, you can identify forward-looking
statements because they contain words such as
“anticipates,” “believes,”
“continue,” “contemplates,”
“could,” “estimates,”
“expects,” “intends,” “may,”
“plans,” “potential,”
“predicts,” “projects,”
“should,” “target,” “will” or
“would” or the negative of these words, variations of
these words or other similar terms or expressions that concern our
expectations, strategy, plans, or intentions. Such forward-looking
statements are subject to certain risks, uncertainties and
assumptions relating to factors that could cause actual results to
differ materially from those anticipated in such statements,
including, without limitation, the following:
●
the impact of the
COVID-19 pandemic on our business, financial condition and results
of operations;
●
shortfalls in
forecasted revenue growth;
●
our ability to
implement our comprehensive wound and skin care strategy through
acquisitions and investments and our ability to realize the
anticipated benefits of such acquisitions and
investments;
●
our ability to meet
our future capital requirements;
●
our ability to
retain and recruit key personnel;
●
the intense
competition in the markets in which we operate and our ability to
compete within our markets;
●
the failure of our
products to obtain market acceptance;
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the effect of
security breaches and other disruptions;
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our ability to
maintain effective internal controls over financial
reporting;
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our ability to
comply with the restrictive covenants set forth in the loan
agreement governing our revolving credit facility;
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our ability to
maintain and further grow clinical acceptance and adoption of our
products;
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the impact of
competitors inventing products that are superior to
ours;
●
disruptions of, or
changes in, our distribution model, consumer base or the supply of
our products;
●
our ability to
manage product inventory in an effective and efficient
manner;
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the failure of
third-party assessments to demonstrate desired outcomes in proposed
endpoints;
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our ability to
successfully expand into wound and skin care virtual consult and
other services;
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our ability and the
ability of our research and development partners to protect the
proprietary rights to technologies used in certain of our products
and the impact of any claim that we have infringed on intellectual
property rights of others;
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our dependence on
technologies and products that we license from third
parties;
●
the effects of
current and future laws, rules, regulations and reimbursement
policies relating the labeling, marketing and sale of our products
and our planned expansion into wound and skin care virtual consult
and other services and our ability to comply with the various laws,
rules and regulations applicable to our business; and
●
the effect of
defects, failures or quality issues associated with our
products.
All
forward-looking statements speak only as of the date on which they
are made. For a more detailed discussion of these and other factors
that may affect our business, see the discussion in “Item 1A.
Risk Factors” and “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” in this report. We caution that the foregoing
list of factors is not exclusive, and new factors may emerge, or
changes to the foregoing factors may occur, that could impact our
business. We do not undertake any obligation to update any
forward-looking statement, whether written or oral, relating to the
matters discussed in this report, except to the extent required by
applicable securities laws.
1
PART
I
I
tem 1. BUSINESS
Overview
We are
a medical technology company focused on developing and
commercializing transformative technologies to improve clinical
outcomes and reduce healthcare expenditures in the chronic and
surgical wound and skin care markets. Our portfolio of products and
services will allow us to deliver comprehensive wound and skin care
solutions for patients in all care settings, including acute
(hospitals and long-term acute care hospitals
(“LTACHs”)) and post-acute (wound care clinics,
physician offices, skilled nursing facilities (“SNFs”),
home health, hospice, and retail). Each of our products, services,
and technologies contribute to our overall goal of achieving better
clinical outcomes at a lower overall cost for patients regardless
of where they receive care. We strive to be one of the most
innovative and comprehensive providers of effective wound and skin
care products and technologies and are continually seeking to
expand our offerings for patients requiring wound and skin care
treatments across the entire continuum of care in the United
States.
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 intend to
begin marketing three biologic products for surgical and 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
wound and skin care virtual consult services. We anticipate that
these various service offerings will allow clinicians/physicians
utilizing our technologies to collect 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.
Market Scale
A study
by a physician at the Department of Surgery for the Indiana
University Health Comprehensive Wound Center found that
approximately 8.2 million patients suffer from surgical and chronic
wounds each year in the United States. Furthermore, according to an
article published by the
American
College of Surgeons and Surgical Infection Society
, in the
United States, the annual treatment cost projections for all wounds
is approximately $28 billion with the estimated annual cost of
surgical site infections ranging from $3.5 billion to $10 billion.
The U.S. teledermatology market alone is estimated to grow from $5
billion in 2019 to $45 billion by 2027 according to a research
report by Fortune Business Insights. In addition to our surgical
wound and chronic wound divisions, the Company is planning to
launch virtual consult services through UWSS for both virtual wound
and virtual skin (dermatology) consultations.
Summary of our Product & Service Offerings and Development
Programs
We are
committed to developing and commercializing innovative products
that address the challenges physicians face in diagnosing and
treating wound and skin care ailments. The following table sets
forth our product and service portfolio:
2
Our
surgical wound care products, CellerateRX Surgical Activated
Collagen (Powder and Gel) (collectively, “CellerateRX
Surgical”), are used in a wide range of surgical specialties
to help promote patient healing and reduce the risk of
complications. The product is used in specialties including
cardiothoracic, colorectal, general surgery, hand, head and neck,
high-risk obstetrics and gynecology, Mohs surgery, neurosurgery,
oncology, orthopedic (hip and knee, sports, spine, joint, foot and
ankle, ortho trauma and ortho oncology), plastic/reconstructive,
podiatric, urology, and vascular. Currently, substantially all of
our revenue is derived from the sale of surgical wound care
products. We anticipate that chronic wound care products and UWSS
technology-based services will become meaningful drivers of revenue
in the future.
Our
chronic wound care products, HYCOL Hydrolyzed Collagen (Powder and
Gel) (collectively, “HYCOL”), BIAKŌS Skin and
Wound Cleanser (“BIAKŌS AWC”) and BIAKŌS Skin
and Wound Gel, are used across the post-acute continuum of care,
including home health, hospice, physician offices, podiatrists,
retail, SNFs, and wound care centers. Our chronic wound care
products can be used on stage I-IV pressure ulcers, diabetic foot
ulcers (“DFUs”), venous stasis, arterial, post-surgical
wounds, first- and second-degree burns and donor sites. BIAKŌS
AWC is also available in an irrigation bottle (BIAKŌS
Antimicrobial Skin and Wound Irrigation Solution) that can be used
in conjunction with negative pressure wound therapy installation
and dwell (“NPWTi-d”) and other wound irrigation
needs.
In
addition, we have a robust pipeline of products under development
for both the chronic and surgical wound care and virtual consult
markets. We believe our pipeline efforts will deepen our
comprehensive portfolio of offerings as well as allow us to address
additional clinical applications. Wound care products in our
pipeline include an over-the-counter hand and skin cleanser, an
antimicrobial skin protectant, a debrider product that leverages
the body’s own enzymes and moisture, a new wound bed
preparation device for use with BIAKŌS AWC, next generation
CellerateRX and HYCOL, a novel dressing that delivers oxygen to the
wound bed, and a sterile BIAKŌS product for use in surgical
settings. Additionally, Sanara expects to commercialize three
products with Cook Biotech in the second half of 2021. The first
two, FORTIFY TRG Tissue Repair Graft and FORTIFY FLOWABLE
Extracellular Matrix, are currently 510(k) cleared for use in the
surgical wound care segment, and VIM Amnion Matrix is categorized
by the U.S. Food and Drug Administration (“FDA”) as an
HCT/P, subject to regulation under Section 361 of the Public Health
Service Act (“PHSA”) (for which no premarket approval
or clearance is required).
3
The
UWSS technology-based services we expect to launch in 2021 include:
an electronic medical record (“EMR”) software platform
for both wound and skin conditions (WounDerm, LLC f/k/a Woundyne
Medical, LLC (“WounDerm”)), skin and wound virtual
consult services (DirectDerm Inc. (“DirectDerm”) and
MGroup Integrated Physician Services, P.A. (“MGroup”)),
and diagnostic products and services for chronic wounds (Precision
Healing Inc. (“Precision Healing”)).
As
detailed below, following the anticipated launch of UWSS’s
service offerings, we expect to be able to provide wound treatment
solutions for patients across the entire acute and post-acute
continuum of care:
Strategy
●
Drive additional market penetration as well as geographic expansion
for our products.
We intend to leverage our comprehensive
product and technology-based services portfolio and relationships
with key constituents to deepen our presence in the surgical and
chronic wound and skin care markets. We believe the breadth and
flexibility of the products we offer allow us to address a wide
variety of wound types and sizes and offer significant new
opportunities for sales growth. In addition, we believe that as we
continue to offer new products and technology-based services, our
salesforce’s ability to reach additional customers in new and
existing geographic regions while penetrating further in existing
customer accounts will be enhanced.
●
Expand into new markets for our products and services.
In
2020 we made significant investments in virtual consult
technologies and services. The COVID-19 pandemic has dramatically
increased demand for these services with expanded reimbursements
and patients being more comfortable seeing their care provider
virtually. We believe that the virtual consult technologies and
services that we will offer, when combined with our innovative and
highly efficacious products, will offer a differentiated
comprehensive wound and skin care solution for patients and care
givers.
●
Launch new innovative products.
We are actively working with
third-party research and development partners to develop additional
proprietary products for the chronic and surgical wound and skin
care markets. We expect these products and services to deepen our
portfolio of technologies to treat chronic wounds as well as
improve surgical site outcomes. We are focused on offering
additional products and services that are more efficacious than
competing products and services and provide a stronger value
proposition (lower total cost to heal and less time to heal leading
to reduced costs to the healthcare system).
4
●
Capture patients throughout the entire continuum of care.
We
intend to continue expanding our platform to aid in treating wound
and skin care patients as they progress through the healing process
in all care settings. As discussed above, in June 2020, we formed a
subsidiary, UWSS, to hold certain investments in technologies and
operations in wound and skin care virtual consult services. We
believe our service offerings will allow us to collect and analyze
large amounts of data on patient conditions and outcomes that will
improve treatment protocols and ultimately lead to more
evidence-based healing formularies to improve outcomes in the
future. We anticipate that this data will also enable us to
participate in the creation of new standards of care that promote
patient compliance and enable direct dialogue between patients,
clinicians and payors, resulting in greater satisfaction for
patients, their caregivers, clinicians and payors.
●
Seek and establish partnerships and product, technology, and/or
services acquisitions.
We plan to continue to seek and
establish partnerships in the United States and internationally to
provide innovative products, services, and technologies. We believe
that partnerships will be a key driver of our growth in the future.
We also intend to selectively pursue acquisitions of businesses and
technologies that complement our existing strategy and
footprint.
●
Achieve meaningful operating margin improvement.
We expect
to increase our margins through a dual-pronged approach. First, as
we scale the sales of our products, the leverage on salaries and
infrastructure costs (legal, finance, commercial operations support
and rent) as a percentage of revenue should decrease, increasing
our operating margin. Second, we expect to achieve higher gross and
operating margins as our UWSS services are commercialized and reach
sufficient scale.
Competitive Strengths
●
Comprehensive solution for improved wound care outcomes.
We
are dedicated to offering a comprehensive portfolio of products and
services to improve wound care treatment outcomes. We are currently
developing the capability to provide telehealth services for the
diagnosis and treatment of wound and skin care patients. Our
product offerings are able to disinfect wounds and accelerate the
body’s healing process for acute and chronic wounds and allow
clinicians to provide a consistent plan of care for a patient from
diagnosis through treatment.
●
Wound care products for all care settings.
Our wound care
product portfolio allows clinicians to personalize solutions to
meet the needs of individual wound care patients in all care
settings including acute (hospitals and LTACHs) and post-acute
(wound care clinics, physician offices, SNFs, home health, hospice,
and retail). Our experienced wound care sales force is highly
trained to assist clinicians to effectively deploy the full
complement of our product portfolio to effectively treat
wounds.
●
Innovative pipeline and proven clinical performance.
We have
a robust pipeline of chronic and surgical wound and skin care
products that we expect to market in the near term. We believe the
efficacy of our offerings, will be proven via statistically
significant collected and analyzed clinical and health economic
outcomes data, resulting in expanded adoption of our products at a
lower overall cost to payors.
●
Attractive markets for acute and chronic wound care.
We
believe the acute and chronic wound care markets will continue to
see accelerated growth given favorable global tailwinds that
include an aging population, increasing costs of health care,
recognition of difficult-to-treat infection threats such as
biofilms, and the increasing prevalence of diabetes and obesity. We
believe there will be growing adoption of our products due to their
clinical efficacy and cost effectiveness for all key constituents
compared to traditional wound care products.
●
Proven executive leadership team with a long-term track record of
value creation.
We are led by a dedicated and seasoned
management team with significant industry experience who have
successfully executed our strategic implementation to date by
launching new products and technologies through investment in new
areas of growth. We believe our management has the vision and
experience to implement our future growth strategy.
Market Opportunities for our Products and Technology-Based
Services
In
October 2019, Centers for Medicare & Medicaid Services’
(“CMS”) reimbursement methodology for home health
agencies and SNFs (Patient Driven Group Model and Patient Driven
Payment Model, respectively) created unique opportunities to
provide efficacious wound healing inside of those sites of care in
unprecedented fashion. With those payment models now focused on a
patient’s characteristics (including number of wounds and
skin conditions) rather than the volume of services provided,
greater remuneration is provided to home health agencies and SNFs
for the treatment of wound care patients. As a result, the
incentive to transfer patients with both acute and chronic wounds
to more burdensome and costly care settings, such as inpatient or
outpatient wound-care centers, has been discouraged or eliminated.
This shift in vertical economics provides us with a unique
opportunity, in adjunctive fashion with home health agencies and
SNFs, to deliver highly technical and comprehensive wound care
where this most vulnerable patient population resides thus
achieving CMS’s desired results: better patient outcomes at a
lower total cost of care.
5
Chronic and Other Hard-to-Heal Wounds
According
to a study published by the
Value
in Health
journal, roughly 15% of the Medicare beneficiary
population has chronic nonhealing wounds. Chronic wounds do not
advance through the phases of healing in a normal progression and
do not show significant progress toward healing in 30 days. Factors
contributing to the chronicity of the wound may include pressure /
friction, trauma; insufficient blood flow and oxygenation in
locations such as the lower extremities; increased bacterial load;
excessive proteases; degraded growth factors; matrix
metalloproteinases (“MMPs”); senescent / aberrant
cells; or inappropriate treatment. Examples of chronic wounds
include DFUs, venous leg ulcers (“VLUs”), arterial
ulcers, pressure ulcers and hard-to-heal surgical/traumatic wounds.
In each of the various wound types, the presence of biofilms is a
frequent cause for chronification of wounds and the removal of
biofilms is a crucial step to commence healing. Biofilms need to be
eradicated to prevent further deterioration of the wound that may
result in additional negative patient outcomes. If not effectively
treated, these wounds can lead to potentially severe complications,
including further infection, osteomyelitis, fasciitis, amputation
and increased mortality. Chronic wounds are primarily seen in the
elderly population. For example, a 2019 study published in
Advances in Wound Care
reported that in the United States, 3% of the population over the
age of 65 had open wounds. According to the same study, in 2020,
the U.S. government estimated that the elderly population totaled
55 million people, suggesting that chronic wounds will continue to
be an increasingly persistent problem in this population. Four
common chronic and other hard-to-heal wounds are:
●
Diabetic Foot Ulcers.
Diabetes can lead to a reduction in
blood flow, which can cause patients to lose sensation in their
feet and may prevent them from noticing injuries, sometimes leading
to the development of DFUs, which are open sores or ulcers on the
feet that may take several weeks to heal, if ever. According to the
2020 National Diabetes Statistics Report by the Center for Disease
Control and Prevention, in the United States alone, over 34 million
people, or approximately 10% of the population, suffer from
diabetes, a chronic, life-threatening disease. Of those that suffer
from diabetes, approximately 1.7 million people (or 5% of diabetics
in the United States) will develop DFUs on a yearly basis,
according to the CEO of Corstrata, a digital healthcare and wound
management firm specializing in the treatment of foot
ulcers.
●
Venous Leg Ulcers.
VLUs develop as a result of vascular
insufficiency, or the inability for the vasculature of the leg to
return blood back toward the heart properly and, according to a
2013 report published by the
International Journal of Tissue Repair and
Regeneration
, VLUs affect approximately 600,000 people per
year in the United States alone. These ulcers usually form on the
sides of the lower leg, above the ankle and below the calf, and are
slow to heal and often recur if preventative steps are not taken.
The risk of venous ulcers can be increased as a result of a blood
clot forming in the deep veins of the legs, obesity, smoking, lack
of physical activity or work that requires many hours of
standing.
●
Pressure Ulcers.
Pressure ulcers, also known as decubitus
ulcers or bed sores, are injuries to skin and underlying tissue
resulting from prolonged pressure, or pressure in combination with
shear or friction. Constant pressure on an area of skin reduces
blood supply to the area and over time can cause the skin to break
down and form an open ulcer. These often occur in patients who are
hospitalized or confined to a chair or bed and most often form on
the skin over bony areas, where there is little cushion between the
bone and the skin, such as heels, ankles, hips and the tailbone.
Annually, 2.5 million pressure ulcers are treated in the United
States in acute care facilities alone, according to a 2006 study
published in the
Journal of the
American Medical Association
.
●
Surgical/traumatic wounds.
Surgical wounds form as a result
of various types of surgical procedures such as investigative or
corrective, minor or major, open (traditional) or minimal access
surgery, elective or emergency, and incisions (simple cuts) or
excision (removal of tissue), among others. Traumatic wounds form
as a result of cuts, lacerations or puncture wounds, which have
caused damage to the skin and underlying tissue. Severe traumatic
wounds may require surgical intervention to close the wound and
stabilize the patient. Surgical/traumatic hard-to-heal wounds
develop for various reasons, such as local surgical complications,
suboptimal closure techniques, presence of foreign materials,
exposed bones or tendons and infection. In the United States,
millions of people receive post-surgical wound care annually, and
the typical operative patient has comorbidities that create
challenges with post-operative wound healing.
Sanara Products
We
market and distribute wound and skin care products and services to
physicians, hospitals, clinics, and post-acute care settings. Our
products are primarily sold in the U.S. advanced wound care and
surgical tissue repair markets. We are actively seeking to expand
within our six focus areas of wound and skin care for the acute,
post-acute, and surgical markets: (1) debridement, (2) biofilm
removal, (3) hydrolyzed collagen, (4) advanced biologics, (5)
negative pressure wound therapy adjunct products, and (6) the
oxygen delivery system segment of the wound and skin care market.
The table below summarizes how we believe our current products and
product pipeline address our six focus areas:
6
Sanara’s
current product offerings include:
The
following products licensed from AN:
●
CellerateRX
Surgical Powder and Gel (through a sublicense with CGI Cellerate
RX, an affiliate of Catalyst);
●
HYCOL
Powder and Gel; and
The
following products licensed from Rochal:
●
BIAKŌS
AWC;
●
BIAKŌS
Antimicrobial Skin and Wound Irrigation Solution; and
●
BIAKŌS
Antimicrobial Skin and Wound Gel.
Collagen
is important in all phases of wound healing: hemostasis,
inflammation, proliferation and remodeling. Collagen promotes the
development of granulation (the formation of new tissue from the
bottom of the wound bed), angiogenesis/vascularization, and
re-epithelialization (the migration of cells across granulation
tissue to close the wound). A healthy body produces native collagen
as the first step in the healing process. Native collagen is an
insoluble, rigidly coiled helical molecule that is critical to
wound healing and one of the first tissue structures deposited into
the wound base by fibroblasts. Native collagen must then be
hydrolyzed by proteases (e.g., collagenase or MMPs) into its
soluble component amino acid peptides in order to realize
additional biological benefits. Hydrolyzed collagen results from
the conversion of the coiled collagen helix into peptides which
support the cellular activities and migration associated with
granulation, angiogenesis and re-epithelialization.
CellerateRX
Surgical is a medical hydrolysate of Type I bovine collagen
indicated for the management of surgical, traumatic, and partial-
and full-thickness wounds as well as first- and second-degree
burns. It is manufactured in what we believe to be a trade secret
process and the powder is further processed for use in a sterile,
surgical environment. The gel is typically applied
post-operatively. CellerateRX Surgical products are primarily
purchased by hospitals and ambulatory surgical centers for use by
surgeons on surgical wounds. The predominance of CellerateRX
Surgical is used in foot and ankle, neuro/spinal, orthopedic/hip
and knee replacement, ortho trauma, and ortho oncology surgeries.
Additional specialties benefiting from the use of CellerateRX
Surgical include cardiothoracic, colorectal, general, general
trauma, gynecologic oncology, hand, head and neck, Mohs, obstetrics
and gynecology (including caesarean deliveries),
plastic/reconstructive, urologic, and vascular.
7
CellerateRX
Surgical is used in operative cases where patients might have
trouble healing normally due to underlying health complications.
There is always a risk of complication with surgical incisions.
This is especially true in patients with certain comorbidities,
including obesity, diabetes and hypertension. These complications
can include surgical site infections, dehiscence (where an incision
opens after primary closure) and necrosis. Surgeons use CellerateRX
Surgical to complement the body’s normal healing process. By
helping the body heal normally without complications, improved
patient outcomes are achieved, thereby reducing downstream costs
related to complications (such as re-operation, longer
hospitalization, re-admittance, extended rehabilitative care and
other additional treatments). Wound infections have become
increasingly problematic due to the high rates of surgical patient
comorbidities and the financial strain on insurance carriers as
well as hospitals who suffer exorbitant costs for readmission of
these patients within 30 days of surgery.
In a
prospective study published by SciMedCentral in 2017, of 102
consecutive neurosurgery cases in which a mixture of 5 grams of
CellerateRX Surgical powder and 1 gram Vancomycin powder was
applied at closure, there were no cases of wound dehiscence,
infection, complication or allergic reaction to the product. This
compares to neurosurgery infection rates ranging from as high as
24% for cranioplasty surgery to 6.3% for spine surgery patients.
Two similar retrospective studies are underway using CellerateRX
powder in ortho/spine surgeries and general/colorectal
surgeries.
HYCOL
Hydrolyzed Collagen products are a medical hydrolysate of Type I
bovine collagen intended for the management of full and partial
thickness wounds including pressure ulcers, venous and arterial leg
ulcers and DFUs. HYCOL is primarily used in SNFs, wound care
centers and physician offices and is currently approved for
reimbursement under Medicare Part B. HYCOL provides the benefit of
hydrolyzed collagen fragments directly in the wound bed. Therefore,
unlike with the body’s own native collagen or native collagen
products, the body does not have to break HYCOL down before use,
which is extremely beneficial when treating elderly and otherwise
compromised patients with comorbidities such as diabetes and
cardiovascular disease.
We
believe our CellerateRX and HYCOL products are unique in
composition, superior to other products in clinical performance,
demonstrate the ability to reduce costs associated with the
standards of care for their intended uses and have been safely used
on over seventy-five thousand patients.
BIAKŌS
AWC is an FDA 510(k) cleared, patented product that laboratory
tests show effectively disrupts extracellular polymeric substances
to eradicate mature biofilm microbes. BIAKŌS AWC is indicated
for the mechanical removal of debris, dirt, foreign materials, and
microorganisms from wounds including stage I-IV pressure ulcers,
DFUs, 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, safety studies demonstrated that
BIAKŌS AWC is biocompatible and supports the wound healing
process. Initial sales of BIAKŌS AWC occurred in July
2019.
BIAKŌS
AWC is also available in an irrigation bottle (BIAKŌS
Antimicrobial Skin and Wound Irrigation Solution) that can be used
in conjunction with NPWTi-d and other wound irrigation
needs.
BIAKŌS
Antimicrobial Wound Gel is an antimicrobial hydrogel wound dressing
that can be used alone or in combination with BIAKŌS AWC. In
February 2020, we received notification of FDA 510(k) clearance for
BIAKŌS Antimicrobial Wound Gel and launched the product in
November 2020 to complement BIAKŌS AWC.
BIAKŌS
AWC and BIAKŌS Antimicrobial Wound Gel 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 remains in the wound for up to 72 hours helping to
continue disrupting biofilm microbes. In a study conducted in 2020,
BIAKŌS Antimicrobial Wound Gel, in combination with
BIAKŌS AWC, was compared to a number of wound cleansers to
treat chronic wounds such as pressure, diabetic, and venous ulcers
in the inflammatory phase of wound healing. The BIAKŌS system
reduced the biofilm burden by 7.5 logs (>99.99% reduction) by
the 24-hour time point and eradicated it by the 48-hour time point
while the remaining commercial controls reduced the
Methicillin-resistant Staphylococcus aureus (“MRSA”)
biofilms by less than 1 log. Below is a graphic summarizing the
efficacy of the use of BIAKŌS Antimicrobial Wound Gel in
combination with BIAKŌS AWC when reducing the MRSA mature
biofilm.
8
Sanara
MedTech recently executed a marketing and distribution agreement
with Cook Biotech to purchase, market, and distribute three
advanced biologics products:
●
FORTIFY
TRG Tissue Repair Graft;
●
FORTIFY
FLOWABLE Extracellular Matrix; and
●
VIM
Amnion Matrix.
FORTIFY TRG Tissue Repair Graft
is a freeze-dried, multi-layer small intestinal submucosa (SIS)
extracellular matrix (ECM) sheet. The graft is used for
implantation to reinforce soft tissue, has a thin profile, is
available in multiple sizes, and can be cut to size to accommodate
the patient’s anatomy. FORTIFY TRG Tissue Repair Graft is
provided sterile and can be hydrated with autologous blood fluid.
It is an FDA 510(k) cleared product and terminally sterilized. The
Company expects first sales of this product to occur in the second
half of 2021.
FORTIFY
FLOWABLE Extracellular Matrix is an advanced wound care device that
presents the SIS ECM technology in a way that can fill irregular
wound shapes and depths. FORTIFY FLOWABLE Extracellular Matrix is
indicated for the management of wounds including: partial and
full-thickness wounds, pressure ulcers, venous ulcers, diabetic
ulcers, chronic vascular ulcers, tunneled/undermined wounds,
surgical wounds (donor sites/grafts, post-Mohs surgery, post-laser
surgery, podiatric, wound dehiscence), trauma wounds (abrasions,
lacerations, second-degree burns, and skin tears) and draining
wounds. FORTIFY FLOWABLE Extracellular Matrix is provided sterile
and is intended for one-time use. It is a 510(k) cleared
product.
VIM
Amnion Matrix is a single layer sheet of amnion tissue that is
minimally processed to decellularize the material while maintaining
the structure and components of the extracellular matrix
environment. All tissues are collected from consenting donors,
tested for infectious diseases, and determined eligible for
transplantation by a licensed Medical Director. It is provided in
multiple sizes and terminally sterilized. The VIM Amnion Matrix is
intended for homologous use as a wound covering or barrier in
surgical, orthopedic, ophthalmic, and wound applications. It is
air-dried for off-the-shelf room temperature storage with no
product preparation. The graft is supplied sterile and is intended
for one-time use in a single patient.
9
We also
have the right to exclusively distribute PULSAR II Advanced Wound
Irrigation System (“PULSAR II”), a portable, no touch,
painless, selective hydro-mechanical debridement system that
effectively removes bacteria and necrotic tissue from wounds
without disrupting healthy tissue. While undergoing product
evaluations, it came to our attention that the pump component of
the Pulsar II could potentially overheat. As a result, we suspended
our plans for a full-scale product launch while we performed an
investigation. As a result of the investigation, we determined that
a simple design change was appropriate and our supplier, Wound Care
Solutions, Limited, agreed to credit us for our existing inventory
against any future purchases and implement a design enhancement for
future units. Pulsar II is a single patient use product, and there
currently are no Pulsar II units in the market. If we receive an
enhanced product that meets our quality standards, we intend to
relaunch the product, which we expect to occur, if at all, in late
2021.
Sanara Technology-Based Services
We are
currently developing the capability to offer various services
addressing chronic wound and skin care through our subsidiary UWSS.
UWSS was formed in June 2020, and we expect to report its
operations as a separate business division in 2021. UWSS currently
owns WounDerm and has investment interests in, or has exclusive
affiliations with, three companies, which include DirectDerm,
MGroup, and Precision Healing. We intend to begin launching
UWSS’s service offerings in 2021.
We
anticipate that our various service offerings will allow us to
collect large amounts of data on patient conditions and outcomes
that will improve treatment protocols and ultimately lead to more
evidence-based treatments to improve outcomes in the future. We
believe our planned service offerings through UWSS are complemented
by our existing product portfolio to complete the comprehensive
wound strategy.
UWSS
plans to offer the following services:
●
EMR software platform for both wound and skin
conditions
In
2020, we, through UWSS, made a minority investment in WounDerm to
fund further development of WounDerm’s imagery and data
sharing platform designed to meet our specified virtual
environment. In January 2021, we acquired the remaining interest of
WounDerm. WounDerm developed a software system that combines the
documentation functionality of wound care and dermatology EMRs with
a Health Insurance Portability and Accountability Act of 1996
(“HIPAA”)-secure online platform for provider and
caregiver collaboration. The software is expected to include a
complete wound and skin care specialty specific collaboration
platform that will allow for interoperability with client facing
EMRs, reduce the burden of duplicate documentation, and improve the
accuracy of assessments and treatment plans. Additionally, the
collaboration platform is expected to have the ability to import
images from any third party “wound tool” application or
EMR, as well as gather images and clinical information through an
Apple or Android based mobile app. We anticipate that the
proprietary software will provide for the correction of inaccurate
initial measurements performed by caregivers, as well as
adjustments for light and photo quality. We plan to have this
technology commercially available in mid-2021.
●
Virtual consultation services for both wound and skin care
conditions
DirectDerm is a
telemedicine company based in Palo Alto, California and has an
exclusive network of dermatologists licensed across 23 states who
have trained and/or teach at top U.S. medical institutions, and
whose service is covered by many of the major health plans in the
United States. UWSS is working to integrate its collaboration
platform into DirectDerm’s platform to provide virtual
consultations through DirectDerm’s network of board-certified
dermatologists to patients in all of UWSS’s healthcare
markets. DirectDerm plans to expand coverage to all 50 states in
2021.
MGroup
is a physician-owned and physician-led multispecialty wound care
group focused on utilizing telehealth and associated technologies
to build high-quality, cost-effective care delivery systems. MGroup
currently holds active medical licenses in 40 states with plans to
expand coverage to all 50 states in 2021. Our affiliation with
MGroup will provide us with the ability to offer wound care
telehealth services.
●
Diagnostic products and services for chronic wounds
The
Precision Healing product platform is a diagnostic imaging and
smart pad for assessing a patient’s wound and skin
conditions. This comprehensive skin and wound assessment technology
is designed to quantify biochemical markers to determine the
trajectory of a wound’s condition to enable better diagnosis
and treatment protocol. Precision Healing was formed by executives
and imaging specialists at Lumicell Corporation as well as
experienced wound care scientists and physicians. Precision Healing
expects to have its imaging device and smart pad commercially
available in 2021 and is currently being integrated into the
WounDerm EMR.
10
Sales and Marketing
We
currently employ seventeen surgical division regional sales
managers (“RSMs”) and five wound care division RSMs.
Our RSMs are recruited based on their previous industry experience
and professional performance and are required to have a minimum of
three years of experience successfully selling into similar
markets. We constantly evaluate new markets and sales opportunities
to add to our sales teams as warranted.
RSMs
are initially trained through an internal learning management
system, SanaraU, which gives them further product and surgical
specialty training including wound etiology, operating room
etiquette and credentialing requirements. After completing their
internal training, new hire RSMs participate in field training with
experienced RSM field trainers to get insights into best practice
as well as real world training. The initial training period lasts
approximately five weeks. RSMs are supported by regular updated
training modules on product information and best
practices.
A key
component of our sales and marketing efforts involves working with
physicians and clinicians to champion our products in their
facilities. Our surgical division works closely with surgeons and
health system stakeholders to demonstrate the efficacy and
beneficial impact of our products and successfully navigate the
hospital value analysis committee, (more commonly known as the
“VAC”), approval process, allowing our products to be
sold in those facilities. Similarly, our wound care division works
with clinicians to demonstrate the efficacy of our products in
their respective care settings. If our sales and marketing efforts
are successful, the clinicians then advocate for the use of our
products when medically necessary and push for their suppliers to
carry our products.
Our
surgical division markets and distributes CellerateRX Surgical.
CellerateRX Surgical is primarily purchased by hospitals and
ambulatory surgical centers for use by surgeons in their
facilities. CellerateRX Surgical is sold through a growing network
of independent surgical specialty sales agencies and Company
representatives who sell and support the products in surgical
settings. Over 750 hospitals and ambulatory surgical centers
currently have approval to use CellerateRX Surgical, with more
locations being consistently added. The current efforts of our
sales teams involve deeper penetration into these approved
locations.
Our
chronic wound division markets and distributes the following
products: BIAKŌS AWC, BIAKŌS Antimicrobial Skin and Wound
Gel, BIAKŌS Antimicrobial Skin and Wound Irrigation Solution,
and HYCOL powder and gel. Our chronic wound division primarily
distributes to post-acute care settings, including long-term care
facilities, home health, wound care centers, and professional
medical offices. Products are sold by Company representatives
supplemented by major medical-surgical distributors, independent
distributors, and DME distributors.
Manufacturing, Supply, and Production
We do
not own or operate and do not intend to establish our own
manufacturing facilities. We rely on, and plan to continue relying
on, contract manufacturing for our products. Our contract
manufacturing strategy is intended to drive cost leverage and scale
and avoid the high capital outlays and fixed costs associated with
constructing and operating manufacturing facilities. Our
manufacturing partners have internal compliance processes to
maintain the high quality and reliability of our products. They
utilize annual internal audits, combined with external audits by
regulatory agencies and commercial partners to monitor their
quality control practices. We believe our contract manufacturers
are well-positioned to support future expansion of our product
sales. We do source some packaging and marketing materials separate
from our licensing partners.
Reimbursement, Clinical Validation, and Clinical
Utility
We do
not promote our products based on their reimbursement status,
however, we are mindful of the benefits of a favorable
reimbursement coverage status to increase patient access and
support our research and development efforts to supply the highest
efficacy solutions.
Three
of our chronic wound care products (BIAKŌS Antimicrobial Skin
and Wound Gel, HYCOL Hydrolyzed Collagen Powder, and HYCOL
Hydrolyzed Collagen Gel) have HCPCS A codes and are eligible for
reimbursement through Medicare Part B. There is currently no
reimbursement for BIAKŌS AWC or BIAKŌS Antimicrobial Skin
and Wound Irrigation Solution. CellerateRX Surgical is currently
captured as part of the cost of the surgical
procedure.
We
anticipate that our UWSS services, once launched, will provide a
wealth of patient data to help us measure our products’
effectiveness on improving patient outcomes while simultaneously
reducing healthcare costs. We believe our reimbursement strategy,
including establishing the clinical validation, clinical utility
and health economics of our products, will allow us to drive
improved reimbursement coverage for our products and
technologies.
11
Competition
The
wound care market is served by a number of large, multi-product
line companies 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, Medline Industries, Inc., ConvaTec Group
plc, Mölnlycke Health Care AB, 3M Company, Integra
LifeSciences Holdings Corporation (which acquired ACell Inc. on
January 20, 2021) and numerous others. Many of our competitors are
significantly larger than we are and have greater financial and
personnel resources. We believe, however, that our products
outperform our competitors’ currently available equivalent
products for the specific application in which they are intended by
providing improved efficacy, better outcomes, and reduced cost of
patient care.
UWSS
plans to offer a comprehensive wound care and dermatology strategy
to expand cost-effective, high quality wound and skin care to all
patients throughout the care setting continuum. Although novel in
its comprehensive offerings and solutions, there are existing
competitors for each of the verticals in which UWSS plans to offer
services and solutions.
Existing
wound care imaging technology competitors include MolecuLight,
Wound-Vision, HyperMed Imaging, Inc., SpectralMD, Inc., Kent and
Tissue Analytics. However, we do not believe that any of these
existing platforms offer a bioassay evaluation in combination with
their imaging solution. In addition, there are existing wound
care-specific EMR documentation and telemedicine communication
platforms such as NetHealth, Swift Medical Inc., Corstrata, LLC and
Intellicure, Inc.
The
public health emergency caused by the COVID-19 pandemic has led to
the widespread adoption of telemedicine for all health care
clinical specialties, including wound care and dermatology. As
such, any clinical wound care or dermatology physician and/or
provider group that has incorporated telemedicine into their
practice could be considered competitive. However, the majority of
these groups are local or regional and do not incorporate the
comprehensive national care delivery platform that UWSS expects to
offer. Examples of large wound care specialty practices include
Vohra Physician Group, Healogics Specialty Physicians and
WoundTech.
Licensing Agreements
We do
not own the patents for the products we market, sell, and
distribute. We in-license the rights to market, sell, and
distribute our products from third parties.
CellerateRX Activated Collagen
On
August 27, 2018, we entered into an exclusive, world-wide
sublicense agreement with CGI Cellerate RX to distribute
CellerateRX Surgical and HYCOL products into the wound care and
surgical markets. We pay royalties of 3-5% of annual collected net
sales of CellerateRX Surgical and HYCOL. As amended, the term of
the sublicense extends through May 2050, with automatic
year-to-year renewal terms thereafter so long as our Net Sales (as
defined in the sublicense agreement) each year are equal to or in
excess of $1,000,000. If our 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.
BIAKŌS Antimicrobial Wound Gel and BIAKŌS Antimicrobial
Skin and Wound Cleanser
On July
7, 2019, we executed a license agreement with Rochal, whereby we
acquired an exclusive world-wide license to market, sell and
further develop antimicrobial products for the prevention and
treatment of microbes on the human body utilizing certain Rochal
patents and pending patent applications (the “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. Our 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 our directors is also a director and
significant shareholder of Rochal.
Recent
payments and future commitments under the terms of the BIAKŌS
License Agreement include:
●
In
March 2021, we issued 20,834 shares of our common stock to Rochal
as full payment of a $750,000 milestone which became due upon the
Company’s public offering of common stock in February
2021.
●
We will
pay Rochal a royalty of 2-4% of net sales. The minimum annual
royalty due to Rochal was $100,000 in 2020 and will increase by 10%
each subsequent calendar year up to a maximum amount of
$150,000.
●
We 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.
12
Unless
previously terminated by the parties, the BIAKŌS License
Agreement will expire with the related patents in December
2031.
CuraShield Antimicrobial Barrier Film and No Sting Skin
Protectant
On
October 1, 2019, we executed a license agreement with Rochal
whereby we acquired an exclusive world-wide license to market, sell
and further develop certain antimicrobial barrier film and skin
protectant products for use in the human health care market
utilizing certain Rochal patents and pending patent applications
(the “ABF License Agreement”). Currently, the products
covered by the ABF License Agreement are CuraShield Antimicrobial
Barrier Film and a no sting skin protectant product.
Future
commitments under the terms of the ABF License Agreement
include:
●
The
Company will pay Rochal a royalty of 2-4% of net sales. The minimum
annual royalty due to Rochal will be $50,000 beginning with the
first full calendar year following the year in which first
commercial sales of the products occur. The annual minimum royalty
will increase by 10% each subsequent calendar year up to a maximum
amount of $75,000.
●
We will
pay additional royalties annually based on specific net profit
targets from sales of the licensed products, subject to a maximum
of $500,000 during any calendar year.
Unless
previously terminated or extended by the parties, the ABF License
Agreement will terminate upon expiration of the last U.S. patent in
October 2033. No commercial sales or royalty payments had been made
under ABF License Agreement as of December 31, 2020.
Debrider License Agreement
On May
4, 2020, we executed a product license agreement with Rochal,
whereby we acquired an exclusive world-wide license to market, sell
and further develop a debrider for human medical use to enhance
skin condition or treat or relieve skin disorders, excluding uses
primarily for beauty, cosmetic, or toiletry purposes (the
“Debrider License Agreement”).
Future
commitments under the terms of the Debrider License Agreement
include:
●
At the
time Rochal issues a purchase order to its contract manufacturer
for the first good manufacturing practice run of the licensed
products, we will pay Rochal $600,000 in cash.
●
Upon
FDA clearance of the licensed products, we will pay Rochal $500,000
in cash and $1,000,000, which at our option may be paid in any
combination of cash and our common stock.
●
We will
pay Rochal a royalty of 2-4% of net sales. 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.
●
We will
pay additional royalty annually based on specific net profit
targets from sales of the licensed products, subject to a maximum
of $1,000,000 during any calendar year.
Unless
previously terminated or extended by the parties, the Debrider
License Agreement will expire in October 2034. No commercial sales
or royalties had been recognized under the Debrider License
Agreement as of December 31, 2020.
Cook Biotech Marketing and Distribution Agreement
On
December 17, 2020, we entered into a marketing and distribution
agreement with Cook Biotech whereby we were appointed as the
exclusive distributor in the United States of three Cook advanced
biologic products. The first two products, FORTIFY TRG Tissue
Repair Graft and FORTIFY FLOWABLE Extracellular Matrix, are for use
in the surgical wound care segment, and VIM Amnion Matrix is for
use in the chronic wound care and surgical wound care segments. We
expect to commercialize these products in the second half of
2021.
13
Under
the terms of the agreement, we will purchase the products from Cook
Biotech at initial transfer prices stipulated in the agreement.
Cook Biotech may update the transfer prices annually based on
changes in the US Producer’s Price Index. Minimum annual
order quantities will be agreed upon by both parties after the
first year of the contract term. The agreement will terminate on
the third anniversary of the date on which the first commercial
sale to us from Cook Biotech is made, with automatic two-year
renewal terms unless notice of non-renewal is given by one party at
least one year prior to the end of the initial term or renewal term
that is then in effect.
Resorbable Bone Hemostat
We
acquired a patent in 2009 for a resorbable bone hemostat and
delivery system for orthopedic bone void fillers. This patent is
not part of our long-term strategic focus. We subsequently licensed
the patent to a third party to market a bone void filler product
for which we receive a 3% royalty on product sales over the life of
the patent, which expires in 2023, with annual minimum royalties of
$201,000. We pay two unrelated third parties a combined royalty
equal to eight percent (8%) of our net revenues and royalties
generated from products that utilize the acquired patented bone
hemostat and delivery system. To date, royalties received by us
related to this licensing agreement have not exceeded the annual
minimum of $201,000 ($50,250 per quarter). Therefore, our annual
royalty obligation under the terms of the license agreement has
been $16,080 ($4,020 per quarter).
Government Regulation
Our
operations are subject to comprehensive federal, state, and local
laws and regulations in the jurisdictions in which we or our
research and development partners or affiliates do business. The
laws and regulations governing our business and interpretations of
those laws and regulations and are subject to frequent change. Our
ability to operate profitably will depend in part upon our ability,
and that of our research and development partners and affiliates,
to operate in compliance with applicable laws and regulations. The
laws and regulations relating to medical products and healthcare
services that apply to our business and that of our partners and
affiliates continue to evolve, and we must, therefore, devote
significant resources to monitoring developments in legislation,
enforcement, and regulation in such areas. As the applicable laws
and regulations change, we are likely to make conforming
modifications in our business processes from time to time. We
cannot provide assurance that a review of our business by courts or
regulatory authorities will not result in determinations that could
adversely affect our operations or that the regulatory environment
will not change in a way that restricts our
operations.
FDA Regulation
Our
medical products and operations are regulated by the FDA and other
federal and state agencies. The products we currently market are
regulated as medical devices in the United States under the Federal
Food, Drug, and Cosmetic Act (“FDCA”), as implemented
and enforced by the FDA. The FDA regulates the development,
testing, manufacturing, labeling, packaging, storage, installation,
servicing, advertising, promotion, marketing, distribution, import,
export, and market surveillance of our medical
devices.
In
addition, we have entered into an agreement to market and
distribute VIM Amnion Matrix for use in the chronic wound care and
surgical wound care segments. VIM Amnion Matrix is a tissue-based
product regulated by FDA under Section 361 of the PHSA (42 U.S.C.
§ 264) and 21 C.F.R. Part 1271.
Device Premarket Regulatory Requirements
Before
being introduced into the U.S. market, each medical device must
obtain marketing clearance or approval from FDA through the 510(k)
premarket notification process, the
de novo
classification process
(summarized below under
De Novo
Classification Process
), or the premarket approval
application (“PMA”) process, unless they are determined
to be Class I devices or to otherwise qualify for an exemption from
one of these available forms of premarket review and authorization
by the FDA. Under the FDCA, medical devices are classified into one
of three classes—Class I, Class II or Class
III—depending on the degree of risk associated with each
medical device and the extent of control needed to provide
reasonable assurance of safety and effectiveness. Classification of
a device is important because the class to which a device is
assigned determines, among other things, the necessity and type of
FDA review required prior to marketing the device. Class I devices
are those for which reasonable assurance of safety and
effectiveness can be assured by adherence to general controls that
include compliance with the applicable portions of the FDA’s
Quality System Regulation (“QSR”), as well as
regulations requiring facility registration and product listing,
reporting of adverse medical events, and appropriate, truthful and
non-misleading labeling, advertising, and promotional materials.
The Class I designation also applies to devices for which there is
insufficient information to determine that general controls are
sufficient to provide reasonable assurance of the safety and
effectiveness of the device or to establish special controls to
provide such assurance, but that are not life-supporting or
life-sustaining or for a use which is of substantial importance in
preventing impairment of human health, and that do not present a
potential unreasonable risk of illness of injury.
14
Class
II devices are those for which general controls alone are
insufficient to provide reasonable assurance of safety and
effectiveness and there is sufficient information to establish
“special controls.” These special controls can include
performance standards, post-market surveillance requirements,
patient registries and FDA guidance documents describing
device-specific special controls. While most Class I devices are
exempt from the 510(k) premarket notification requirement, most
Class II devices require a 510(k) premarket notification prior to
commercialization in the United States; however, the FDA has the
authority to exempt Class II devices from the 510(k) premarket
notification requirement under certain circumstances. As a result,
manufacturers of most Class II devices must submit 510(k) premarket
notifications to the FDA under Section 510(k) of the FDCA (21
U.S.C. § 360(k)) in order to obtain the necessary clearance to
market or commercially distribute such devices. To obtain 510(k)
clearance, manufacturers must submit to the FDA adequate
information demonstrating that the proposed device is
“substantially equivalent” to a predicate device
already on the market. A predicate device is a legally marketed
device that is not subject to PMA, meaning, (i) a device that was
legally marketed prior to May 28, 1976 (“preamendments
device”) and for which a PMA is not required, (ii) a device
that has been reclassified from Class III to Class II or I, or
(iii) a device that was found substantially equivalent through the
510(k) process. If the FDA agrees that the device is substantially
equivalent to a predicate device currently on the market, it will
grant 510(k) clearance to commercially market the device. If there
is no adequate predicate to which the manufacturer can compare its
proposed device, the proposed device is automatically classified as
a Class III device. In such cases, the device manufacturer must
then fulfill the more rigorous PMA requirements or can request a
risk-based classification determination for the device in
accordance with the
de novo
classification process.
The
de novo
classification
process allows a manufacturer whose novel device is automatically
classified into Class III to request down-classification of its
device to Class I or Class II on the basis that the device presents
low or moderate risk, rather than requiring the submission and
approval of a PMA application. Under the Food and Drug
Administration Safety and Innovation Act of 2012
(“FDASIA”), the FDA is required to classify a device
within 120 days following receipt of the
de novo
classification request. If the
manufacturer seeks reclassification into Class II, the
classification request must include a draft proposal for special
controls that are necessary to provide a reasonable assurance of
the safety and effectiveness of the medical device. The FDA may
reject the classification request if it identifies a legally
marketed predicate device that would be appropriate for a 510(k) or
determines that the device is not low to moderate risk or that
general controls would be inadequate to control the risks and
special controls cannot be developed.
Devices
that are intended to be life sustaining or life supporting, devices
that are implantable, devices that present a potential unreasonable
risk of harm or are of substantial importance in preventing
impairment of health, and devices that are not substantially
equivalent to a predicate device are placed in Class III and
generally require FDA approval through the PMA process, unless the
device is a preamendments device not yet subject to a regulation
requiring premarket approval. The PMA process is more demanding
than the 510(k) premarket notification process. For a PMA, the
manufacturer must demonstrate through extensive data, including
data from preclinical studies and clinical trials, that the device
is safe and effective. The PMA must also contain a full description
of the device and its components, a full description of the
methods, facilities and controls used for manufacturing, and
proposed labeling. Following receipt of a PMA, the FDA determines
whether the application is sufficiently complete to permit a
substantive review. If the FDA accepts the application for review,
it has 180 days under the FDCA to complete its review of a PMA,
although in practice, the FDA’s review often takes
significantly longer, and can take up to several years. Before
approving a PMA, the FDA generally also performs an on-site
inspection of manufacturing facilities for the product to ensure
compliance with the QSR.
Thus
far, all of the medical devices that we currently market and
distribute have been cleared through 510(k) premarket notifications
filed by our third-party research and development partners, who are
the manufacturers of such devices. We also are continuing to work
through the development process for a number of products in our
pipeline. We are currently working on final formulation and the
development of a retail marketing strategy for an over-the-counter
hand and skin cleanser. Our debrider product, as well a novel
dressing that delivers oxygen to the wound bed and a sterile
BIAKŌS product, are currently under development at Rochal, and
we are in discussions concerning the best path for seeking
clearance and approval for these products. We are also exploring
new indications of use and improved formulas for a next generation
CellerateRX and a next generation HYCOL.
Clinical
trials are almost always required to support PMAs and are sometimes
required to support 510(k) submissions. All clinical investigations
of devices to determine safety and effectiveness must be conducted
in accordance with the FDA’s investigational device exemption
(“IDE”), regulations that govern investigational device
labeling, prohibit promotion of the investigational device, and
specify recordkeeping, reporting and monitoring responsibilities of
study sponsors and study investigators. If the device presents a
“significant risk,” as defined by the FDA, the agency
requires the device sponsor to submit an IDE application to the
FDA, which must become effective prior to commencing human clinical
trials. The IDE will automatically become effective 30 days after
receipt by the FDA, unless the FDA denies the application or
notifies the company that the investigation is on hold and may not
begin until the sponsor provides supplemental information about the
investigation that satisfies FDA’s concerns. If the FDA
determines that there are deficiencies or other concerns with an
IDE that require modification of the study, the FDA may permit a
clinical trial to proceed under a conditional approval. In
addition, the study must be approved by, and conducted under the
oversight of, an institutional review board (“IRB”),
for each clinical site. If the device presents a non-significant
risk to the patient according to criteria established by FDA as
part of the IDE regulations, a sponsor may begin the clinical trial
after obtaining approval for the trial by one or more IRBs without
separate authorization from the FDA, but must still comply with
abbreviated IDE requirements, such as monitoring the investigation,
ensuring that the investigators obtain informed consent, and
labeling and record-keeping requirements.
15
Device Post-market Regulatory Requirements
After a
device is cleared or approved for commercialization, and prior to
marketing, numerous regulatory requirements apply to the various
entities responsible for preparing a device for distribution,
including the manufacturer (including specification developer),
contract manufacturers, relabelers/repackagers, sterilizers and
initial importer, as applicable. These include:
●
establishment
registration and device listing;
●
development
of a quality management system, including establishing and
implementing procedures to design and manufacture devices in
compliance with the QSR (unless a device category is exempt from
this requirement by the FDA, such as in the case of many Class I
devices);
●
labeling
regulations that prohibit the promotion of products for uncleared
or unapproved uses (known as off-label uses), as well as
requirements to provide accurate and non-misleading information and
adequate information on both risks and benefits of the
device;
●
FDA’s
unique device identification requirements that call for a unique
device identifier (“UDI”) on device labels, packages,
and in some cases, on the device itself, and submission of data to
the FDA’s Global Unique Device Identification Database
(“GUDID”);
●
medical
device reporting regulations that require manufacturers to report
to the FDA if a device may have caused or contributed to a death or
serious injury or malfunctioned in a way that would likely cause or
contribute to a death or serious injury if it were to
recur;
●
corrections
and removal reporting regulations that require manufacturers report
to the FDA field corrections and product recalls or removals if
undertaken to reduce a risk to health posed by the device or to
remedy a violation of the FDCA that may present a risk to health;
and
●
post-market
surveillance regulations, which apply to Class II or III devices if
the FDA has issued a post-market surveillance order and the failure
of the device would be reasonably likely to have serious adverse
health consequences, the device is expected to have significant use
in the pediatric population, the device is intended to be implanted
in the human body for more than one year, or the device is intended
to be used to support or sustain life and to be used outside a user
facility.
Our
research and development partners and their contract manufacturers
may be subject to periodic scheduled or unscheduled inspections by
the FDA. If we are required to register with the FDA, by becoming
the manufacturer or specification developer of any medical device
for instance, then we also may be subject to such inspections by
FDA. If the FDA believes we or any of our research and development
partners or their contract manufacturers are not in compliance with
the QSR, or other post-market requirements, it has broad authority
to take significant enforcement actions to compel compliance.
Specifically, if the FDA determines that we or our research and
development partners or their contract manufacturers failed to
comply with applicable regulatory requirements, the agency can take
a variety of compliance or enforcement actions, which may result in
any of the following sanctions:
●
untitled
letters, warning letters, fines, injunctions, consent decrees and
civil penalties;
●
customer
notifications or repair, replacement or refunds;
●
mandatory
recalls, withdrawals, or administrative detention or seizure of our
products;
●
operating
restrictions or partial suspension or total shutdown of
production;
●
refusing
or delaying requests for 510(k) marketing clearance or approval of
pre-market approval applications relating to new products or
modified products;
●
reclassifying
a 510(k)-cleared device or withdrawing PMA approval;
●
refusal
to grant export approvals for our products; or
●
pursuing
criminal prosecution.
16
Any
such enforcement action by the FDA would have a material adverse
effect on our business. In addition, these regulatory controls, as
well as any changes in FDA policies, can affect the time and cost
associated with the development, introduction, and continued
availability of new products.
HCT/P Regulatory Requirements
Human
cells, tissues, and cellular and tissue-based products
(“HCT/Ps”) are regulated by FDA’s Center for
Biologics Evaluation and Research (“CBER”) or Center
for Devices and Radiological Health (“CDRH”) depending
on the type of product, how it is manufactured and its intended
uses. HCT/Ps that meet all of the criteria described in 21 C.F.R.
§ 1271.10(a) are regulated by CBER under Section 361 of the
PHSA (42 U.S.C. § 264) and 21 C.F.R. Part 1271 only
(“361 products”). Although 361 products do not require
premarket review by FDA prior to commercialization, manufacturers
of 361 products must register with FDA, submit a list of HCT/Ps
manufactured, and comply with current good tissue practices
(“cGTP”), among other things.
We have
entered into an agreement to market and distribute VIM Amnion
Matrix, which is manufactured from amniotic membrane and will be
marketed as a 361 product. Cook Biotech, as the manufacturer, must
comply with all requirements of Section 361 of the PHSA and 21
C.F.R. Part 1271 that are applicable to the products and may be
subject to periodic scheduled or unscheduled inspections by the FDA
to ensure compliance with cGTP.
Federal Trade Commission Regulatory Oversight
Our
advertising for our products and services is subject to federal
truth-in-advertising laws enforced by the Federal Trade Commission,
or FTC, as well as comparable state consumer protection laws. Under
the Federal Trade Commission Act (“FTC Act”), the FTC
is empowered, among other things, to (a) prevent unfair methods of
competition and unfair or deceptive acts or practices in or
affecting commerce; (b) seek monetary redress and other relief for
conduct injurious to consumers; and (c) gather and compile
information and conduct investigations relating to the
organization, business, practices, and management of entities
engaged in commerce. The FTC has very broad enforcement authority,
and failure to abide by the substantive requirements of the FTC Act
and other consumer protection laws can result in administrative or
judicial penalties, including civil penalties, injunctions
affecting the manner in which we would be able to market services
or products in the future, or criminal prosecution.
Fraud and Abuse and Transparency Laws and Regulations
Our
business activities (and the business activities of our research
and development partners and affiliates), including, but not
limited to, research, sales, promotion, distribution and medical
education, are subject to regulation by numerous federal and state
regulatory and law enforcement authorities in the United States,
including the Department of Justice, the Department of Health and
Human Services and its various divisions, CMS, the Health Resources
and Services Administration, the Department of Veterans Affairs,
the Department of Defense, and state and local governments. Our
business activities must comply with numerous healthcare laws,
including, but not limited to, anti-kickback and false claims laws
and regulations as well as data privacy and security laws and
regulations, which are described below.
The
federal Anti-Kickback Statute prohibits, among other things, any
person or entity, from knowingly and willfully offering, paying,
soliciting, or receiving any remuneration, directly or indirectly,
overtly or covertly, in cash or in kind, to induce or in return for
purchasing, leasing, ordering, or arranging for or recommending the
purchase, lease, furnishing, or order of any item or service
reimbursable under Medicare, Medicaid, or other federal healthcare
programs, in whole or in part. The term “remuneration”
has been interpreted broadly to include anything of value. The
Anti-Kickback Statute has been interpreted to apply to arrangements
between pharmaceutical manufacturers on one hand and prescribers,
purchasers, formulary managers, and beneficiaries on the other.
There are certain statutory exceptions and regulatory safe harbors
protecting some common activities from prosecution. The exceptions
and safe harbors are drawn narrowly, and practices that involve
remuneration that may be alleged to be intended to induce
prescribing, purchases, or recommendations may be subject to
scrutiny if they do not qualify for an exception or safe harbor.
Failure to meet all of the requirements of a particular applicable
statutory exception or regulatory safe harbor does not make the
conduct per se illegal under the Anti-Kickback Statute. Instead,
the legality of the arrangement will be evaluated on a case-by-case
basis based on a cumulative review of all of its facts and
circumstances. Several courts have interpreted the statute’s
intent requirement to mean that if any one purpose of an
arrangement involving remuneration is to induce referrals of
federal healthcare covered business, the statute has been violated.
The Patient Protection and Affordable Care Act, of 2010, as amended
(the “ACA”), modified the intent requirement under the
Anti-Kickback Statute to a stricter standard, such that a person or
entity no longer needs to have actual knowledge of the statute or
specific intent to violate it in order to have committed a
violation. In addition, the ACA also provided that a violation of
the federal Anti-Kickback Statute is grounds for the government or
a whistleblower to assert that a claim for payment of items or
services resulting from such violation constitutes a false or
fraudulent claim for purposes of the federal civil False Claims Act
(the “FCA”). The ACA further created new federal
requirements for reporting, by applicable manufacturers of covered
drugs, payments and other transfers of value to physicians and
teaching hospitals, and ownership and investment interests held by
physicians and other healthcare providers and their immediate
family members.
17
The
federal civil FCA, prohibits, among other things, any person or
entity from knowingly presenting, or causing to be presented, a
false or fraudulent claim for payment to, or approval by, the
federal government, knowingly making, using, or causing to be made
or used a false record or statement material to a false or
fraudulent claim to the federal government, or avoiding,
decreasing, or concealing an obligation to pay money to the federal
government. A claim includes “any request or demand”
for money or property presented to the U.S. government. The civil
FCA has been used to assert liability on the basis of kickbacks and
other improper referrals, improperly reported government pricing
metrics such as Best Price or Average Manufacturer Price, or
submission of inaccurate information required by government
contracts, improper use of Medicare provider or supplier numbers
when detailing a provider of services, improper promotion of
off-label uses not expressly approved by the FDA in a drug’s
label, and allegations as to misrepresentations with respect to the
products supplied or services rendered. Several pharmaceutical and
other healthcare companies have further been sued under these laws
for allegedly providing free product to customers with the
expectation that the customers would bill federal programs for the
product. Intent to deceive is not required to establish liability
under the civil FCA; however, a change in Department of Justice
policy now prohibits enforcement actions for knowing violations of
law based on non-compliance with agency subregulatory guidance.
Civil FCA actions may be brought by the government or may be
brought by private individuals on behalf of the government, called
“qui tam” actions. If the government decides to
intervene in a qui tam action and prevails in the lawsuit, the
individual will share in the proceeds from any fines or settlement
funds. If the government declines to intervene, the individual may
pursue the case alone. Since 2004, these FCA lawsuits against
pharmaceutical companies have increased significantly in volume and
breadth, leading to several substantial civil and criminal
settlements, as much as $3.0 billion, regarding certain sales
practices and promoting off label drug uses. Civil FCA liability
may be imposed for Medicare or Medicaid overpayments, for example,
overpayments caused by understated rebate amounts, that are not
refunded within 60 days of discovering the overpayment, even if the
overpayment was not caused by a false or fraudulent
act.
The
government may further prosecute conduct constituting a false claim
under the criminal FCA. The criminal FCA prohibits the making or
presenting of a claim to the government knowing such claim to be
false, fictitious, or fraudulent and, unlike the civil FCA,
requires proof of intent to submit a false claim. The civil
monetary penalties statute is another potential statute under which
drug and device companies may be subject to enforcement. Among
other things, the civil monetary penalties statute imposes fines
against any person who is determined to have presented, or caused
to be presented, claims to a federal healthcare program that the
person knows, or should know, is for an item or service that was
not provided as claimed or is false or fraudulent.
HIPAA
also created federal criminal statutes that prohibit knowingly and
willfully executing, or attempting to execute, a scheme to defraud
or to obtain, by means of false or fraudulent pretenses,
representations, or promises, any of the money or property owned
by, or under the custody or control of, a healthcare benefit
program, regardless of whether the payor is public or private,
knowingly and willfully embezzling or stealing from a health care
benefit program, willfully obstructing a criminal investigation of
a health care offense, and knowingly and willfully falsifying,
concealing, or covering up by any trick or device a material fact
or making any materially false statements in connection with the
delivery of, or payment for, healthcare benefits, items, or
services relating to healthcare matters. The ACA, as amended,
modified the intent requirement under the certain portions of these
federal criminal statutes such that a person or entity no longer
needs to have actual knowledge of the statute or specific intent to
violate it.
The ACA
further created federal requirements for reporting, by applicable
manufacturers of covered therapeutics, payments and other transfers
of value to physicians and teaching hospitals, and ownership and
investment interests held by physicians and other healthcare
providers and their immediate family members.
Many
states have also adopted laws similar to each of the above federal
laws, which may be broader in scope and apply to items or services
reimbursed by any third-party payor, including commercial insurers,
and some have transparency laws that require reporting price
increases and related information. Certain state laws also regulate
manufacturers’ use of prescriber-identifiable data. Certain
states also require implementation of commercial compliance
programs and compliance with the pharmaceutical industry’s
voluntary compliance guidelines and the applicable compliance
guidance promulgated by the federal government, or otherwise
restrict payments or the provision of other items of value that may
be made to healthcare providers and other potential referral
sources; impose restrictions on marketing practices; or require
drug manufacturers to track and report information related to
payments, gifts, and other items of value to physicians and other
healthcare providers. These laws may affect our future sales,
marketing, and other promotional activities by imposing
administrative and compliance burdens.
If our
operations are found to be in violation of any of the laws or
regulations described above or any other laws that apply to us, we
may be subject to penalties or other enforcement actions, including
criminal and significant civil monetary penalties, damages, fines,
disgorgement, imprisonment, exclusion from participation in
government healthcare programs, corporate integrity agreements,
debarment from receiving government contracts or refusal of new
orders under existing contracts, reputational harm, diminished
profits and future earnings, and the curtailment or restructuring
of our operations, any of which could adversely affect our ability
to operate our business and our results of operations.
18
Telemedicine Standards, and Related Laws and
Guidelines
We have
entered into a management agreement with Mgroup, which is a
physician-owned multispecialty wound care group with active medical
licenses in over 40 states. Through this partnership, we
expect to make available coordinated telemedicine services on our
platform. In connection with this arrangement, we expect to
administer non-clinical services to support the delivery of
telemedicine services, including billing, scheduling and a wide
range of other administrative and support services, and will be
paid a pre-determined, fair market value amount for those
services. We have also entered into a professional
services agreement with and made a minority investment
in DirectDerm, a dermatology telemedicine company based in
California, which has an exclusive network of dermatologists
licensed across 23 states.
The
delivery of telemedicine services directly or through contractual
relationships is subject to various federal, state, and local laws,
regulations and approvals, relating to, among other things, the
health provider licensure, adequacy and continuity of medical care,
medical practice standards (including specific requirements when
providing healthcare utilizing telemedicine technologies and
consulting services among providers), medical records maintenance,
personnel supervision, and prerequisites for the prescription of
medication. The application of some of these laws to telemedicine
is unclear and subject to differing interpretation. Further, laws
and regulations specific to delivering medical services utilizing
telemedicine technologies continues to evolve with some states
incorporating modality and consent requirements for certain
telemedicine encounters.
Telemedicine
services also implicate state corporate practice of medicine and
fee-splitting laws which vary from state to state and are not
always consistent among states. In addition, these requirements are
subject to broad powers of interpretation, enforcement discretion
by state regulators, and, in some cases, dated (yet still valid)
case law. Some of these requirements may apply to us or our
partners, even if we do not have a physical presence in the state,
based solely on the engagement of a provider licensed in the state
or the provision of telemedicine to a resident of the state.
However, regulatory authorities or other parties, including
providers in our affiliated provider network, may assert that,
despite these arrangements, we are engaged in the corporate
practice of medicine or that our contractual arrangements with
affiliated physician groups constitute unlawful fee-splitting. In
this event, failure to comply could lead to adverse judicial or
administrative action against us and/or our providers, civil or
criminal penalties, receipt of cease-and-desist orders from state
regulators, loss of provider licenses, or the need to make changes
to the arrangements with our affiliated provider network; each of
which could interfere with our business or prompt other materially
adverse consequences.
U.S. Federal and State Health Information Privacy and Security
Laws
There
are numerous U.S. federal and state laws and regulations related to
the privacy and security of personally identifiable information
(“PII”), including health information. In particular,
HIPAA as amended by the Health Information Technology for Economic
and Clinical Health Act, and its respective implementing
regulations establishes privacy and security standards that limit
the use and disclosure of PHI, and require the implementation of
administrative, physical, and technical safeguards to ensure the
confidentiality, integrity and availability of individually
identifiable health information in electronic form. Our affiliated
network providers and our hospital, health system and other
provider clients are all regulated as covered entities under HIPAA.
Since the effective date of the HIPAA Omnibus Final Rule on
September 23, 2013, HIPAA’s requirements are also directly
applicable to the independent contractors, agents and other
“business associates” of covered entities that create,
receive, maintain or transmit protected health information
(“PHI”) in connection with providing services to
covered entities. We are a business associate under HIPAA when we
are working on behalf of our affiliated providers.
Violations
of HIPAA may result in civil and criminal penalties. The civil
penalties range from $119 to $59,522 per violation, with a cap of
$1.8 million per year for violations of the same standard during
the same calendar year. However, a single breach incident can
result in violations of multiple standards. We must also comply
with HIPAA’s breach notification rule. Under the breach
notification rule, covered entities must notify affected
individuals without unreasonable delay in the case of a breach of
unsecured PHI, which may compromise the privacy, security or
integrity of the PHI. In addition, notification must be provided to
Health and Human Services (“HHS”) and the local media
in cases where a breach affects more than 500 individuals. Breaches
affecting fewer than 500 individuals must be reported to HHS on an
annual basis. The regulations also require business associates of
covered entities to notify the covered entity of breaches by the
business associate.
State
attorneys general also have the right to prosecute HIPAA violations
committed against residents of their states. While HIPAA does not
create a private right of action that would allow individuals to
sue in civil court for a HIPAA violation, its standards have been
used as the basis for the duty of care in state civil suits, such
as those for negligence or recklessness in misusing personal
information. In addition, HIPAA mandates that HHS conduct periodic
compliance audits of HIPAA covered entities and their business
associates for compliance. It also tasks HHS with establishing a
methodology whereby harmed individuals who were the victims of
breaches of unsecured PHI may receive a percentage of the Civil
Monetary Penalty fine paid by the violator. In light of the HIPAA
Omnibus Final Rule, recent enforcement activity, and statements
from HHS, we expect increased federal and state HIPAA privacy and
security enforcement efforts.
19
HIPAA
also required HHS to adopt national standards establishing
electronic transaction standards that all healthcare providers must
use when submitting or receiving certain healthcare transactions
electronically.
Many
states in which we or our research and development partners may
operate also have laws that protect the privacy and security of
sensitive and personal information, including health information.
These laws may be similar to or even more protective than HIPAA and
other federal privacy laws. For example, the laws of the State of
California are more restrictive than HIPAA. Where state laws are
more protective than HIPAA, we must comply with the state laws to
which we are subject, in addition to HIPAA. In certain cases, it
may be necessary to modify our planned operations and procedures to
comply with these more stringent state laws. Not only may some of
these state laws impose fines and penalties upon violators, but
also some, unlike HIPAA, may afford private rights of action to
individuals who believe their personal information has been
misused. In addition, state laws are changing rapidly, and there is
discussion of a new federal privacy law or federal breach
notification law, to which we may be subject.
In
addition to HIPAA, state health information privacy laws, we may be
subject to other state and federal privacy laws, including laws
that prohibit unfair privacy and security practices and deceptive
statements about privacy and security and laws that place specific
requirements on certain types of activities, such as data security
and texting.
In
recent years, there have been a number of well-publicized data
breaches involving the improper use and disclosure of PII and PHI.
Many states have responded to these incidents by enacting laws
requiring holders of personal information to maintain safeguards
and to take certain actions in response to a data breach, such as
providing prompt notification of the breach to affected individuals
and state officials. In addition, under HIPAA and pursuant to the
related contracts that we enter into with our business associates,
we must report breaches of unsecured PHI to our contractual
partners following discovery of the breach. Notification must also
be made in certain circumstances to affected individuals, federal
authorities and others.
Employees
As of
March 30, 2021, we had a staff of 41, consisting of 40 full-time
employees and 1 part-time employee.
Corporate Information
We were
incorporated in Texas on December 14, 2001. On March 15, 2019, we
entered into a Share Exchange Agreement with CGI Cellerate RX, an
affiliate of Catalyst, pursuant to which we acquired
Catalyst’s 50% equity interest in Cellerate, LLC
(“Cellerate”) in exchange for 1,136,815 shares of our
newly created Series F Convertible Preferred Stock (the
“Cellerate Acquisition”). Prior to the consummation of
the Cellerate Acquisition, we and Catalyst each owned a 50% equity
interest in Cellerate. The Cellerate Acquisition was accounted for
as a reverse merger, and Cellerate was deemed to be the accounting
acquirer. In May 2019, we changed our name to Sanara MedTech
Inc.
Our
principal executive offices are located at 1200 Summit Ave, Suite
414, Fort Worth, Texas 76102, telephone number (817) 529-2300. Our
website address is www.sanaramedtech.com. Information accessed
through our website is not incorporated into this annual report and
is not a part of this annual report.
Available Information
The
Company electronically files reports with the Securities and
Exchange Commission (the “SEC”). The SEC maintains an
Internet site (www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers
that file electronically with the SEC. Copies of the
Company’s Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q and Current Reports on Form 8-K and amendments to those
reports filed or furnished to the SEC are also available free of
charge through the Company’s website
(http://www.sanaramedtech.com/), as soon as reasonably practicable
after electronically filing with or otherwise furnishing such
information to the SEC, and are available in print to any
shareholder who requests it.
Item 1A.
R
ISK FACTORS
The
risks below are those that we believe are the material risks that
we currently face, but are not the only risks facing us and our
business. If any of these risks actually occur, our business,
financial condition and results of operations could be materially
adversely affected. Below is a summary of our risk factors with a
more detailed discussion following.
20
●
The COVID-19
pandemic in the United States has and may continue to negatively
impact our business, financial condition and results of
operations.
●
We have had a
history of losses, which may continue as we expand our selling
efforts.
●
Our revenue growth
for a particular period is difficult to predict, and a shortfall in
forecast revenues may harm our operating results.
●
Our current
comprehensive wound and skin care strategy involves growth through
acquisitions and investments, which requires us to incur
substantial costs and potential liabilities for which we may never
realize the anticipated benefits.
●
If we cannot meet
our future capital requirements, our business will
suffer.
●
Failure to retain
and recruit key personnel would harm our ability to meet key
objectives.
●
Failure to manage
our growth strategy could harm our business.
●
We operate in
highly competitive markets and face competition from large,
well-established medical device manufacturers and telehealth
providers as well as new market entrants, and if we are unable to
compete within our markets or our products and services do not gain
market acceptance, our operating results and financial condition
could suffer.
●
Security breaches
and other disruptions could compromise our information and expose
us to liability, which would cause our business and reputation to
suffer.
●
If we fail to
maintain an effective system of internal controls over financial
reporting, we may not be able to accurately report our financial
results or prevent fraud and our business may be harmed and our
stock price may be adversely impacted.
●
The Loan Agreement
governing our revolving line of credit includes restrictive terms,
and our failure to comply with any of these terms could result in a
default, which would have an adverse effect on our
business.
●
We rely on our
research and development partners to design, manufacture and supply
the products we have licensed for marketing.
●
Our future success
will largely depend on our ability to maintain and further grow
clinical acceptance and adoption of our products, and we may be
unable to adequately educate healthcare practitioners on the use
and benefits of our products.
●
Competitors could
invent products superior to ours and cause our products and
technologies to become obsolete.
●
Disruption of, or
changes in, our distribution model or customer base could harm our
sales and margins.
●
If we are unable to
manage product inventory in an effective manner, our profitability
could be impaired.
●
Failure of any
third-party assessments to demonstrate desired outcomes in proposed
endpoints may result in adverse regulatory actions, reduce
physician usage or adoption of our products, or reduce the price,
coverage and/or reimbursement for our products, which could have a
negative impact on our business performance.
●
We may have
exposure to product liability claims.
●
Interruptions in
the supply of our products or inventory loss may adversely affect
our business, results of operations and financial
condition.
●
Our planned
expansion into wound and skin care virtual consult and other
services will require entrance into several markets in which we
have little or no experience and is dependent on our relationships
with affiliated professional entities to provide physician
services.
●
Recent and frequent
state legislative and regulatory changes specific to telemedicine
may present us with additional requirements and state compliance
costs, with potential operational impacts in certain
jurisdictions.
●
If we are unable to
adequately protect our intellectual property rights, we may not be
able to compete effectively.
●
CellerateRX
Surgical no longer has patent protection. Accordingly, CellerateRX
Surgical may be subject to competition from the sale of
substantially equivalent products that could adversely affect our
business and operations.
●
We are heavily
dependent on technologies and products we have licensed from third
parties, and we may need to license technologies and products in
the future, and if we fail to obtain licenses we need, or fail to
comply with our payment obligations in the agreements under which
we in-license intellectual property and other rights from third
parties, we could lose our ability to develop and commercialize our
products.
●
We may be found to
infringe on intellectual property rights of others.
●
Our business is
affected by numerous regulations relating to the labeling,
marketing and sale of our products.
●
Delays in or
changes to the FDA clearance and approval processes or ongoing
regulatory requirements could make it more difficult for us to
obtain FDA clearance or approval of new products or comply with
ongoing requirements.
●
Changes in
reimbursement policies and regulations by governmental or other
third-party payors may have an adverse impact on the use of our
products.
●
We rely on our
research and development partners to comply with applicable laws
and regulations relating to product classification and FDA
marketing authorization.
●
We and our
employees and contractors are subject, directly or indirectly, to
federal, state and foreign healthcare fraud and abuse laws,
including false claims laws. If we are unable to comply, or have
not fully complied, with such laws, we could face substantial
penalties.
21
●
Our or our research
and development partners’ use and disclosure of personally
identifiable information is subject to federal and state privacy
and security regulations, and our failure to comply with those
regulations or to adequately secure the information we hold could
result in significant liability or reputational harm and, in turn,
a material adverse effect on our client base, business, financial
condition and results of operations.
●
If we fail to
comply with extensive healthcare laws and government regulations,
we could suffer penalties or be required to make significant
changes to our operations.
●
Our officers,
employees, independent contractors, principal investigators and
commercial partners may engage in activities that are improper
under other laws and regulations, which would create liability for
us.
●
We could be
adversely affected if healthcare reform measures substantially
change the market for medical care or healthcare coverage in the
United States.
●
Defects, failures
or quality issues associated with our products could lead to
product recalls or safety alerts, adverse regulatory actions,
litigation and negative publicity that could materially adversely
affect our reputation, business, results of operations and
financial condition.
●
It is possible that
we will require additional capital to meet our financial
obligations and support business growth.
●
The trading price
of the shares of our common stock is highly volatile, and
purchasers of our common stock could incur substantial
losses.
●
Our common stock
does not have a vigorous trading market, and you may not be able to
sell your securities at or near ask prices, or at all.
●
The potential sale
of large amounts of common stock may have a negative effect upon
the market value of our shares.
●
A few of our
existing shareholders own a large percentage of our voting stock
and have control over matters requiring shareholder approval and
may delay or prevent a change in control or otherwise lead to
actual or potential conflicts of interest.
●
Our Certificate of
Formation includes provisions limiting the personal liability of
our directors for breaches of fiduciary duties under Texas
law.
●
Texas law and our
Certificate of Formation and bylaws contain anti-takeover
provisions that could delay or discourage takeover attempts that
shareholders may consider favorable.
●
Our failure to meet
the continued listing requirements of The Nasdaq Capital Market
could result in a delisting of our common stock.
Risks Related to How We Operate Our Business
The COVID-19 pandemic in the United States has and may continue to
negatively impact our business, financial condition and results of
operations.
The
COVID-19 pandemic 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 hospitals.
A
majority of our revenue is currently generated from the sale of
products in connection with surgical procedures, and a significant
portion of those sales are to hospitals. 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 clinicians who use our products in these facilities. These
restrictions resulted in an overall decline in sales for the second
quarter of 2020. During the third and fourth quarters of 2020, 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.
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.
22
We have had a history of losses, which may continue as we expand
our selling efforts.
We have
incurred net losses in most years since we began our current
operations in 2004. We plan to continue making significant
investments in our sales force and clinical programs, which
substantially increase our operating expenses. Consequently, we
will need to continue our revenue growth to become profitable in
future periods. We cannot offer any assurance that we will be able
to generate future sales growth. If we fail to achieve
profitability, our stock price may decline, and you may lose part
or all of your investment.
Our revenue growth for a particular period is difficult to predict,
and a shortfall in forecast revenues may harm our operating
results.
Because
we are a relatively small company, our revenue growth and,
consequently, results of operations are difficult to predict. We
plan our operating expense levels based primarily on forecasted
revenue levels. A shortfall in revenue could lead to operating
results being below expectations as we may not be able to quickly
reduce our fixed expenses in response to short-term revenue
shortfalls. We have experienced fluctuations in revenue and
operating results from quarter to quarter and anticipate that these
fluctuations will continue until we achieve a critical mass with
our product and service sales. These fluctuations can result from a
variety of factors, including:
●
economic
conditions worldwide, as well as economic conditions specific to
the healthcare industry, which could affect the ability of surgical
and post-acute facilities to purchase our products and could result
in a reduction in elective operative procedures;
●
governmental
regulations, including those adopted in response to the COVID-19
pandemic;
●
the
uncertainty surrounding our ability to attract new customers and
retain existing customers;
●
changes
in reimbursement rates for our products by government and private
insurers;
●
the
length and variability of our sales cycle, especially gaining
approvals for the use of our products in additional hospitals and
surgery centers, which makes it difficult to forecast the quarter
in which our sales will occur;
●
issues
including delays in the sourcing of our products;
●
the
timing of regulatory approvals;
●
the
timing of operating expense relating to the expansion of our
business and operations;
●
changes
in the pricing of our products and those of our
competitors;
●
the
development of new wound care products or product enhancements by
our competitors; and
●
actual
events, circumstances, outcomes and amounts differing from
assumptions and estimates used in preparing our operating plan and
how well we execute our strategy and operating plans.
As a
consequence, operating results for a particular future period are
difficult to predict and prior results are not necessarily
indicative of future results. Any of the foregoing factors, or any
other factors discussed elsewhere herein, could have a material
adverse effect on our business.
Our current comprehensive wound and skin care strategy involves
growth through acquisitions and investments, which requires us to
incur substantial costs and potential liabilities for which we may
never realize the anticipated benefits.
In
addition to internally generated growth, our current strategy to
expand into wound and skin care virtual consult and other services
involves growth through acquisitions and investments. Between
January 1, 2020 and December 31, 2020, we have made minority
shareholder investments in two businesses at a total cost of
approximately $1.1 million, and in February 2021, we made an
additional $0.6 million investment in such businesses. In addition,
in January 2021 we acquired WounDerm for aggregate consideration of
29,536 shares of our common stock.
23
We may
be unable to continue implementing our growth strategy, and our
strategy ultimately may be unsuccessful. We engage in evaluations
of potential acquisitions and investments and are in various stages
of discussion regarding possible acquisitions, certain of which, if
consummated, could be significant to us. Any new acquisition or
investment could result in material transaction expenses, increased
interest and amortization expense, increased depreciation expense
and increased operating expense, any of which could have a material
adverse effect on our operating results. In addition, if we are
unable to integrate businesses and operations that we acquire in
the future, our profitability could suffer. These acquisitions and
investments also involve other risks, including diversion of
management resources otherwise available for the running of our
business and the development of our business as well as risks
associated with entering markets in which our marketing teams and
sales force has limited experience or where experienced
distribution alliances are not available. We may not be able to
identify suitable acquisition or investment candidates in the
future, obtain acceptable financing or consummate any future
acquisitions or investments. In addition, certain potential
acquisitions may be subject to antitrust and competition laws,
which could impact our ability to pursue strategic acquisitions and
could result in mandated divestitures. If we are unsuccessful in
our current strategy to expand into wound and skin care virtual
consult and other services, we may be unable to meet our financial
targets and our financial performance could be materially and
adversely affected.
If we cannot meet our future capital requirements, our business
will suffer.
We have
a history of operating losses and negative cash flow from operating
activities, and future results of operations involve significant
risks and uncertainties. Factors that could affect our future
operating results and cause actual results to vary materially from
expectations include, but are not limited to, demand for our
products and services, new product and service offerings from
competitors, regulatory approval of our new products, technological
change, and dependence on key personnel. Although we have taken
steps to improve our overall liquidity, if our cash flow is
insufficient, we may be forced to seek additional debt or equity
financing in order to:
●
fund
operating losses;
●
increase
marketing to address the market for surgical, wound and skin care
products and services;
●
take
advantage of opportunities, including more rapid expansion or
acquisitions of complementary products or businesses;
●
hire,
train and retain employees;
●
develop
and/or distribute new products; and/or
●
respond
to economic and competitive pressures.
If our
capital needs are met through the issuance of equity or convertible
debt securities, the percentage ownership of our current
shareholders may be reduced which may have a negative impact on the
market price of our common stock. Our future success may be
determined in large part by our ability to obtain additional
financing, and the incurrence of indebtedness would result in
increased debt service obligations which could result in operating
and financing covenants that would restrict our operations. There
can be no assurance that such financing would be available or, if
available, that such financing could be obtained upon terms
acceptable to us. If adequate funds are not available, or are not
available on acceptable terms, our operating results and financial
condition may suffer.
Failure to retain and recruit key personnel would harm our ability
to meet key objectives.
Our
success depends, in large part, on our ability to attract and
retain skilled executive, managerial, sales and marketing
personnel. We compete for such personnel with other companies, some
of which have greater financial resources than we do to recruit and
retain personnel. There can be no assurance that we will be able to
find and attract additional qualified employees or retain any such
executive officers and other key personnel. The inability to hire
qualified personnel or the loss of services of our executive
officers or key personnel may have a material adverse effect on our
business. Further, any inability on our part to enforce non-compete
arrangements related to key personnel who have left our company or
may leave our company in the future could have a material adverse
effect on our business.
Failure
to manage our growth strategy could harm our
business.
Our
ability to successfully implement our business plan and market and
sell our surgical, wound and skin care products and services
requires an effective plan for managing our future growth. We plan
to increase the scope of our operations at a rapid rate. Future
expansion efforts will be expensive and may strain our internal
operating resources. To manage future growth effectively, we must
maintain and enhance our financial and accounting systems and
controls, integrate new personnel and manage expanded operations.
If we do not manage growth properly, it could harm our operating
results and financial condition.
24
We operate in highly competitive markets and face competition from
large, well-established medical device manufacturers and telehealth
providers as well as new market entrants, and if we are unable to
compete within our markets or our products and services do not gain
market acceptance, our operating results and financial condition
could suffer.
Competition
from other medical device companies is significant and could be
significantly affected by new product introductions and other
activities of market participants. We compete with other companies
in acquiring rights to products or technologies from third-party
developers. Although our products have performed well in customer
evaluations, we are a relatively unknown brand in a market
dominated by companies with extensive product lines and large
customer bases. We may not, even with more efficacious products, be
able to secure contracts and achieve significant growth with large
national accounts.
In
addition, if we launch our wound and skin care virtual consult and
other service offerings, we will face competition from other
telehealth providers. The public health emergency caused by the
COVID-19 pandemic has led to the widespread adoption of
telemedicine for most health care clinical specialties, including
wound care and dermatology. As such, any clinical wound care or
dermatology physician and/or provider group that has incorporated
telemedicine into their practice could be considered competitive.
If we are unable to compete with other telehealth providers, our
operating results and financial condition may suffer.
Several
factors may limit the market acceptance of our products and
services, including the timing of regulatory approvals and market
entry relative to competitive products and services, the
availability of alternative products and services, the price of our
products and services relative to alternative products and
services, the availability of third-party reimbursement and the
extent of marketing efforts by third-party distributors or agents
that we retain. There can be no assurance that our products or
services will receive market acceptance in a commercially viable
period of time, if at all. Furthermore, there can be no assurance
that we can develop products and services that are more effective
or achieve greater market acceptance than competitive products and
services, or that our competitors will not succeed in developing or
acquiring products and technologies that are more effective than
those being developed by us, that would render our products and
technologies less competitive or obsolete.
Our
competitors enjoy several competitive advantages over us, including
but not limited to:
●
large
and established distribution networks in the U.S. and/or in
international markets;
●
greater
financial, managerial and other resources for products research and
development, sales and marketing efforts and protecting and
enforcing intellectual property rights;
●
greater
name recognition;
●
larger
consumer bases;
●
more
expansive portfolios of products and intellectual property rights;
and
●
greater
experience in obtaining and maintaining regulatory approvals and/or
clearances from the FDA and other regulatory agencies.
The
presence of competition in our market may lead to pricing pressure
which would make it more difficult to sell our products and
services at a profitable price or may prevent us from selling our
products at all. Our failure to compete effectively would have a
material adverse effect on our business.
Security breaches and other disruptions could compromise our
information and expose us to liability, which would cause our
business and reputation to suffer.
In the
ordinary course of our business, we use networks to collect and
store sensitive data, including intellectual property, proprietary
business information and important information of our customers,
suppliers and business partners, as well as personally identifiable
information of our customers and employees. The secure processing,
maintenance and transmission of this information is critical to our
operations. Despite our security measures, our information
technology and infrastructure may be vulnerable to attacks by
hackers or breached due to employee error, malfeasance or other
disruptions. Any such breach could compromise our networks and the
information stored there could be accessed, publicly disclosed,
lost or stolen. Any such access, disclosure or other loss of
information could result in the loss of existing customers,
difficulty in attracting new customers, backlash from negative
public relations, legal claims or proceedings, liability under laws
that protect the privacy of personal information, and regulatory
penalties. Further, such access, disclosure or loss may cause
disruption of our operations and the services we provide to
customers, damage to our reputation, and cause a loss of confidence
in our products and services, which could adversely affect our
business.
We have
programs, processes and technologies in place to prevent, detect,
contain, respond to and mitigate security related threats and
potential incidents. We undertake considerable ongoing improvements
to our systems, connected devices and information-sharing products
in order to minimize vulnerabilities, in accordance with industry
and regulatory standards. Because the techniques used to obtain
unauthorized access change frequently and can be difficult to
detect, anticipating, identifying or preventing these intrusions or
mitigating them if and when they occur, may be
challenging.
25
If we fail to maintain an effective system of internal controls
over financial reporting, we may not be able to accurately report
our financial results or prevent fraud and our business may be
harmed and our stock price may be adversely impacted.
Effective
internal controls over financial reporting are necessary for us to
provide reliable financial reports and to effectively prevent
fraud. Any inability to provide reliable financial reports or to
prevent fraud could harm our business. The Sarbanes-Oxley Act of
2002 (the “Sarbanes-Oxley Act”) requires management to
evaluate and assess the effectiveness of our internal control over
financial reporting. In order to comply with the requirements of
the Sarbanes-Oxley Act, we are required to continuously evaluate
and, where appropriate, enhance our policies, procedures and
internal controls. If we fail to maintain the adequacy of our
internal controls over financial reporting, we could be subject to
litigation or regulatory scrutiny and investors could lose
confidence in the accuracy and completeness of our financial
reports. We cannot provide any assurance that in the future we will
be able to fully comply with the requirements of the Sarbanes-Oxley
Act or that management will conclude that our internal control over
financial reporting is effective. If we fail to fully comply with
the requirements of the Sarbanes-Oxley Act, our business may be
harmed and our stock price may decline. In addition, because of its
inherent limitations, internal control over financial reporting may
not prevent or detect misstatements.
For
instance, our assessment, testing and evaluation of the design and
operating effectiveness of our internal control over financial
reporting resulted in our conclusion that as of December 31, 2019,
our internal control over financial reporting was not effective,
due to our small size and limited segregation of duties. As a
result of such determination, we implemented additional controls,
including the hiring of an additional full-time accounting
professional in January 2020, which enabled us to properly
segregate duties, and concluded that the material weakness was
remediated as of June 30, 2020. While we have concluded that the
material weakness has been remediated, projections of any
evaluation of the effectiveness of internal control over financial
reporting for future periods are subject to the risk that controls
may become inadequate because of changes in conditions or if the
degree of compliance with the policies or procedures deteriorate
over time.
The Loan Agreement governing our revolving line of credit includes
restrictive terms, and our failure to comply with any of these
terms could result in a default, which would have an adverse effect
on our business and prospects.
On
January 15, 2021, we entered into a loan agreement (the “Loan
Agreement”) with Cadence Bank, N.A. (“Cadence”)
that provides for a $2.5 million revolving line of credit. The Loan
Agreement governing our revolving line of credit requires us to
maintain compliance with certain financial covenants, including,
among others, a minimum liquidity of $1.0 million as of December
31, 2020 and March 31, 2021, a minimum Tangible Net Worth (as
defined in the Loan Agreement) of $1.0 million and, beginning with
the fiscal quarter ending June 30, 2021, a minimum Interest
Coverage Ratio (as defined in the Loan Agreement) of 1.5 to 1.0. A
breach of these covenants could result in a default under the Loan
Agreement. If amounts owed under the Loan Agreement are accelerated
because of a default and we are unable to pay such amounts, Cadence
may have the right to assume control of substantially all of our
assets.
If we
are unable to refinance or repay amounts that we borrow under our
revolving line of credit prior to its maturity date, our cash flow
would be directed to the repayment of our debt and would not be
available for operating our business. No assurance can be given
that any refinancing or additional financing will be possible when
needed or that we will be able to negotiate acceptable terms. In
addition, our access to capital is affected by prevailing
conditions in the financial and capital markets and other factors
beyond our control. There can be no assurance that market
conditions will be favorable at the times that we require new or
additional financing.
Risks Related to Our Products
We rely on our research and development partners to design,
manufacture and supply the products we have licensed for marketing.
If one of our partners fails to perform adequately or fulfill our
needs, we may be required to incur significant costs. We may also
face significant delays in our product introductions and
commercialization.
We do
not currently own any facility that may be used as a manufacturing
and processing facility, and we rely on our research and
development partners, from whom we license all of the products we
currently commercialize, to design, manufacture and supply such
products.
Our
research and development partners responsible for manufacturing our
products and their contract manufacturers are obliged to operate in
accordance with FDA’s current good manufacturing practices
(“cGMP”), current good tissue practices
(“cGTP”), and the Quality System Regulation
(“QSR”), as applicable, as well as other regulations
applicable to medical product manufacturers. The manufacture of
regulated medical products in compliance with cGMP, cGTP, and the
QSR, as applicable, requires significant expertise and capital
investment, including the development of advanced manufacturing
techniques and process controls. Manufacturers of medical products
often encounter difficulties in production, including difficulties
with production costs and yields, quality control, including
product stability and quality assurance testing, shortages of
qualified personnel, as well as compliance with strictly enforced
regulatory requirements, other federal and state regulatory
requirements and foreign regulations. If our research and
development partners or their contract manufacturers were to
encounter any of these difficulties or otherwise fail to comply
with their obligations to us or under applicable regulations, our
ability to commercialize our products would be jeopardized. Any
delay or interruption in the supply of products could have a
material adverse effect on our business.
26
The
manufacturers of our products may be unable to comply with
applicable FDA, state and foreign regulatory requirements. The FDA
or similar foreign regulatory agencies may also implement new
standards at any time, or change their interpretation and
enforcement of existing standards for manufacture, packaging or
testing of regulated products. We have little control over the
manufacturers’ compliance with these regulations and
standards. A failure of any of our current or future research and
development partners or their contract manufacturers to establish
and follow cGMP, cCTP, and the QSR, as applicable, and to document
their adherence to such practices may lead to significant delays in
obtaining marketing authorization of future products or the
ultimate launch of products. Failure by our current or future
partners or manufacturers or us to comply with applicable
regulations could also result in sanctions being imposed on us or
our partners, including fines, injunctions, civil penalties,
failure of the government to grant marketing authorization, delays,
suspension or withdrawal of authorization, seizures or recalls of
products, operating restrictions, and criminal prosecutions. If the
safety of any product supplied is compromised due to the
manufacturers’ failure to adhere to applicable laws or for
other reasons, we may not be able to successfully commercialize our
products. Any of these factors could cause a delay of
commercialization of our products, entail higher costs or impair
our reputation.
Our future success will largely depend on our ability to maintain
and further grow clinical acceptance and adoption of our products,
and we may be unable to adequately educate healthcare practitioners
on the use and benefits of our products.
Healthcare
practitioners play a significant role in determining the course of
a patient’s treatment and, ultimately, the type of products,
if any, that will be used to treat the patient. As a result, our
commercial success is heavily dependent on our ability to educate
practitioners on the use of our products in both surgical and
post-acute care settings. Acceptance and adoption of our products
in our markets depends on educating healthcare practitioners as to
the distinctive characteristics, benefits, safety, clinical
efficacy and cost-effectiveness of our products, including
potential comparisons to our competitors’ products, and on
training healthcare practitioners in the proper application of our
products. If we are not successful in convincing healthcare
practitioners of the merits and advantages of our products compared
to our competitors’ products, they may not use our products
and we will be unable to increase our sales and sustain growth or
profitability.
Convincing
healthcare practitioners to dedicate the time and energy necessary
to properly train to use new products and techniques is
challenging, and we may not be successful in these efforts. In
particular, as healthcare resources are strained due to the ongoing
COVID-19 pandemic, it may be more difficult to convince healthcare
practitioners to commit their time and resources to learning to use
a new product. If healthcare practitioners are not properly
trained, they may use our products ineffectively, resulting in
unsatisfactory patient outcomes, negative publicity or lawsuits
against us. Accordingly, even if our products show superior
benefits, safety or efficacy, based on head-to-head clinical
trials, in comparison to alternative treatments, our success will
depend on our ability to gain and maintain market acceptance for
our products. If we fail to do so, our sales will not grow and our
business, financial condition and results of operations will be
adversely affected. We may not have adequate resources to
effectively educate the medical community and our efforts may not
be successful due to physician resistance or negative perceptions
regarding our products.
Healthcare
practitioners may be hesitant to change their medical treatment
practices for the following reasons, among others:
●
lack or
perceived lack of evidence supporting greater efficacy versus
standard of care;
●
perceived
liability risks generally associated with the use of new products
and procedures;
●
limited
or lack of availability of coverage and reimbursement within
healthcare payment systems;
●
existing
sole-source supply contracts with purchasing entities, such as
hospital systems and group purchasing organizations, that do not
use our products;
●
pressure
to contain costs and use lower cost alternatives to our products;
and
●
the
time commitment that may be required for training to use new
products or technologies.
27
Competitors could invent products superior to ours and cause our
products and technologies to become obsolete.
The
wound care sector of the medical products industry is characterized
by a multitude of technologies and intense competition. Our
competitors currently manufacture and distribute a variety of
products that are, in many respects, comparable to our products.
Many suppliers of competing products are considerably larger and
have much greater resources than we have. In addition, many
specialized products companies have formed collaborations with
large, established companies to support research, development and
commercialization of wound care products which may be competitive
with ours. Academic institutions, government agencies and other
public and private research organizations are also conducting
research activities and may commercialize wound care products on
their own or through joint ventures. It is possible that these
competitors may develop technologies and products that are more
effective than any we currently have. If this occurs, any of our
products and technology affected by these developments could become
obsolete.
Disruption of, or changes in, our distribution model or customer
base could harm our sales and margins.
If we
fail to manage the distribution of our products properly, or if the
financial condition or operations of our reseller channels weaken,
there may be a material adverse effect on our business.
Furthermore, a change in the mix of our customers between service
provider and enterprise, or a change in the mix of direct and
indirect sales, could adversely affect our business.
Several
factors could also result in disruption of or changes in our
distribution model or customer base, which could harm our sales and
margins, including the following:
●
in some
instances, we compete with some of our resellers through our direct
sales, which may lead these channel partners to use other suppliers
that do not compete; and
●
some of
our resellers may have insufficient financial resources and may not
be able to withstand changes in business conditions.
If we are unable to manage product inventory in an effective and
efficient manner, our profitability could be impaired.
Many
factors affect the efficient use and planning of product inventory,
such as effectiveness of predicting demand, effectiveness of
preparing manufacturing to meet demand, efficiently meeting product
mix and product demand requirements and product expiration. Our
products have a shelf life of between 18 months and three years. If
we are unable to manage our product inventory efficiently or within
expected budget goals, or keep sufficient finished and in-process
product on hand to meet demand, our operating margins and long-term
growth prospects could be impaired.
We
place orders with our suppliers based on forecasts of demand and,
in some instances, may acquire additional inventory to accommodate
anticipated demand. Our forecasts are based on management’s
judgment and assumptions, each of which may introduce error into
our estimates. If we overestimate customer demand, our excess or
obsolete inventory may increase significantly, which would reduce
our gross margin and adversely affect our financial results.
Conversely, if we underestimate customer demand or if insufficient
manufacturing capacity is available, we would miss revenue
opportunities and potentially lose market share and damage our
customer relationships.
Failure of any third-party assessments to demonstrate desired
outcomes in proposed endpoints may result in adverse regulatory
actions, reduce physician usage or adoption of our products, or
reduce the price, coverage and/or reimbursement for our products,
which could have a negative impact on our business
performance.
Our
collaborators regularly conduct clinical studies designed to test a
variety of endpoints associated with product performance and use
across a number of applications. If a clinical study conducted by
our collaborators fails to demonstrate statistically significant
results supporting performance, use benefits or compelling health
economic outcomes from using our products, physicians may elect not
to use our products as a treatment for conditions that may benefit
from them. Furthermore, in the event of an adverse clinical study
outcome, our products may not achieve
“standard-of-care” designations, where they exist, for
the conditions in question, which could deter the adoption of our
products. Also, if serious adverse events are reported during the
conduct of a study, it could affect continuation of the study,
product marketing authorization by regulatory authorities and
product adoption by healthcare professionals or could cause
regulatory authorities to impose other restrictions on the product
or require additional warning or precaution statements to appear on
the product labeling. If our collaborators are unable to develop a
body of statistically significant evidence from our clinical
studies, whether due to adverse results or the inability to
complete properly designed studies, public and private payors could
refuse to cover our products, limit the manner in which they cover
our products, or reduce the price they are willing to pay or
reimburse for our products.
28
We may have exposure to product liability claims.
Although
we have contractual indemnity from the manufacturers of our current
products for certain liability claims related to their production,
we could face a product liability claim outside of the scope of the
contractual indemnities. We do not have, and do not anticipate
obtaining, contractual indemnification from parties supplying raw
materials or parties marketing the products we sell. In any event,
indemnification from the manufacturers of our products or from any
other party is limited by the terms of the indemnity and by the
creditworthiness of the indemnifying party. A successful product
liability claim or series of claims brought against us could result
in judgments, fines, damages and liabilities that could have a
material adverse effect on our business. We may incur significant
expense investigating and defending these claims, even if they do
not result in liability. Moreover, even if no judgments, fines,
damages or liabilities are imposed on us, our reputation could
suffer as result of a product liability claim, which could have a
material adverse effect on our business.
Product
liability insurance for the healthcare industry may become
prohibitively expensive, to the extent it is available at all. We
may not be able to maintain such insurance on acceptable terms or
be able to secure increased coverage as commercialization of our
products progresses, nor can we be sure that existing or future
claims against us will be covered by our product liability
insurance. In the event that we do not have adequate insurance or
contractual indemnification, product liability claims relating to
defective products could have a material adverse effect on our
business.
Interruptions in the supply of our products or inventory loss may
adversely affect our business, results of operations and financial
condition.
Our
products are manufactured using technically complex processes
requiring specialized facilities, highly specific raw materials and
other production constraints. The complexity of these processes, as
well as strict company and government standards for the manufacture
and storage of our products, subjects us to production risks. In
addition to ongoing production risks, process deviations or
unanticipated effects of approved process changes may result in
non-compliance with regulatory requirements including stability
requirements or specifications. Most of our products must be stored
and transported within a specified temperature range. For example,
if environmental conditions deviate from that range, our
products’ remaining shelf-lives could be impaired or their
safety and efficacy could be adversely affected, making them
unsuitable for use. These deviations may go undetected. Severe
weather conditions and natural disasters may make compliance with
these processes and maintenance of these standards more difficult,
and climate change threatens more extreme weather events, which
could increase our production risks. The occurrence of actual or
suspected production and distribution problems can lead to lost
inventories, and in some cases recalls, with consequential
reputational damage and the risk of product liability. The
investigation and remediation of any identified problems can cause
production delays and result in substantial additional expenses.
Any unforeseen failure in the storage of our products or loss in
supply could result in a loss of our market share and negatively
affect our revenues and operations.
Increased prices for, or unavailability of, raw materials used in
our products could adversely affect our business, results of
operations and financial condition.
Our
profitability is affected by the prices of the raw materials used
in the manufacture of our products. These prices may fluctuate
based on a number of factors beyond our control, including changes
in supply and demand, general economic conditions, labor costs,
fuel related delivery costs, competition, import duties, excises
and other indirect taxes, currency exchange rates, and government
regulation. Due to the highly competitive nature of the healthcare
industry and the cost containment efforts of our customers and
third-party payors, we may be unable to pass along cost increases
for key components or raw materials through higher prices to our
customers. If the cost of key components or raw materials
increases, and we are unable fully to recover these increased costs
through price increases or offset these increases through other
cost reductions, we could experience lower margins and
profitability. Significant increases in the prices of raw materials
that cannot be recovered through productivity gains, price
increases or other methods could adversely affect our business,
results of operations and financial condition.
Risks Related to Our Planned Expansion into Wound and Skin Care
Virtual Consult and Other Services
Our planned expansion into wound and skin care virtual consult and
other services could have a material adverse effect on our
business, financial condition or results of
operations.
We are
currently developing the capability to offer various services
addressing chronic wound and skin care through our wholly owned
subsidiary UWSS. UWSS’s services are expected to launch in
2021 and include an EMR software platform for both wound and skin
conditions through WounDerm, which we acquired in January 2021,
skin and wound virtual consult services through our affiliations
with DirectDerm and MGroup, and diagnostic products and services
for chronic wounds through our affiliation with Precision Healing.
Our planned expansion into wound and skin care virtual consult and
other services subjects us to risks associated with the use of new
and novel technologies, operational, financial, regulatory, legal
and reputational risks, as well as the risk that we may be unable
to timely or successfully launch our service offerings. The success
of UWSS’s operations depends upon our ability to
commercialize UWSS’s service offerings, and our failure to do
so could negatively affect our ability to generate revenue from
these activities.
29
Our planned expansion into wound and skin care virtual consult and
other services will require entrance into several markets in which
we have little or no experience, which may not be successful and
could be costly.
As part
of our planned expansion into wound and skin care virtual consult
services, we will be required to enter into other markets in which
we have little to no experience, including EMR, telehealth and
healthcare diagnostics. While we intend to expand our staff with
individuals with more experience in the EMR, telehealth and
diagnostic markets and will closely scrutinize individuals we
engage, we cannot provide assurance that we will be able to retain
or continue to hire well-qualified and experienced individuals or
that our assessment of individuals we retain will be accurate. As
we enter new markets, we will face new technological and
operational risks and challenges with which we are unfamiliar and
may incur significant costs. Entering new markets requires
substantial management efforts and skills to mitigate these risks
and challenges. Our lack of experience with certain of these new
markets may result in unsuccessful new market entries. If we do not
manage our entry into new markets properly, these costs and risks
could harm our business, financial condition or results of
operations.
Our planned expansion into the telehealth business is dependent on
our relationships with affiliated professional entities to provide
physician services, and our business would be adversely affected if
those relationships were disrupted.
There
is a risk that U.S. state authorities in some jurisdictions may
find that any future contractual relationships we enter into with
our affiliated professional entities who provide telehealth
services violate laws prohibiting the corporate practice of
medicine and professional fee-splitting laws. These laws generally
prohibit the practice of medicine by lay persons or entities or
sharing of professional fees with lay persons and are intended to
prevent unlicensed persons or entities from interfering with or
inappropriately influencing a physician’s professional
judgment. The corporate practice of medicine prohibition exists in
some form, by statute, regulation, board of medicine or attorney
general guidance, or case law, in most states and is subject to
change and to evolving interpretations by state boards of medicine,
state attorneys general and state courts. As such, we will be
required to continually monitor our compliance with laws in every
jurisdiction in which we plan to operate, and we cannot guarantee
that subsequent interpretation of the corporate practice of
medicine laws will not circumscribe our future business operations.
State corporate practice of medicine doctrines could also subject
physicians to penalties for aiding the corporate practice of
medicine, which could discourage physicians from participating in
our network of providers.
Due to
the prevalence of the corporate practice of medicine doctrine,
including in the states where we plan to conduct our telehealth
business, we expect to continue contracting with provider-entities
through management services agreements. Although we expect that
these relationships will continue, we cannot guarantee that they
will. A material change in our relationships with these provider
entities, whether resulting from a dispute among the parties, a
change in government regulation, or the loss of these affiliations,
could impair our ability to provide services to our future clients
and could have a material adverse effect on our business, financial
condition and results of operations. Any scrutiny, investigation or
litigation with regard to our future arrangements with these
professional entities could have a material adverse effect on our
business, financial condition, and results of
operations.
Recent and frequent state legislative and regulatory changes
specific to telemedicine may present us with additional
requirements and state compliance costs, with potential operational
impacts in certain jurisdictions.
The
state laws and regulations specific to telemedicine vary from state
to state and are continually evolving. In some cases, these laws
and regulations target “direct to consumer” telehealth
service offerings rather than specialty consultative services, such
as our planned acute telemedicine service offerings, and
incorporate informed consent, modality, medical records and follow
up care and other requirements. Thus, where new legislation and
regulations apply to our planned expansion into telemedicine
services, we may incur costs to monitor, evaluate, and modify
operational processes for compliance. All such activities will
increase our costs and could, in certain circumstances, impact our
ability to make telemedicine services available in a particular
state.
Risks Related to Intellectual Property
If we are unable to adequately protect our intellectual property
rights, we may not be able to compete effectively.
Part of
our success depends on our and our research development
partners’ ability to protect proprietary rights to
technologies used in certain of our products. We and our research
development partners rely on patents, copyrights, trademarks and
trade secret laws to establish and maintain proprietary rights in
our technology and products. However, these legal means afford only
limited protection and may not adequately protect our or our
research development partners’ rights or permit us to gain or
keep a competitive advantage. Patents and patent applications for
the products we have may not be broad enough to prevent competitors
from introducing similar products into the market. Our or our
research development partners’ patents or attempts to enforce
them may not be upheld by the courts. Efforts to enforce any of our
or our research development partners’ proprietary rights
could be time-consuming and expensive, which could adversely affect
our business and prospects and divert management’s attention.
There can be no assurance that our or our research and development
partners’ proprietary rights will not be challenged,
invalidated or circumvented or that such rights will in fact
provide competitive advantages to us.
30
CellerateRX Surgical is not currently protected by any pending
patent application nor any unexpired patent. Accordingly,
CellerateRX Surgical may be subject to competition from the sale of
substantially equivalent products that could adversely affect our
business and operations.
CellerateRX
Surgical has no patent protection, and therefore, in order to
continue to obtain commercial benefits from CellerateRX Surgical,
we will rely on product manufacturing trade secrets, know-how and
related non-patent intellectual property. The effect of CellerateRX
Surgical’s lack of patent protection depends, among other
things, upon the nature of the market and the position of our
products in the market from time to time, the size of the market,
the complexities and economics of manufacturing a competitive
product and applicable regulatory approval requirements. In the
event that competition develops substantially equivalent products,
this competition could have a material adverse effect on our
business, financial condition and operating results. The entrance
into the market of a product substantially equivalent to
CellerateRX Surgical may erode our product’s market share,
which may have a material adverse effect on our business, financial
condition and results of operations.
We are heavily dependent on technologies and products we have
licensed from third parties, and we may need to license
technologies and products in the future, and if we fail to obtain
licenses we need, or fail to comply with our payment obligations in
the agreements under which we in-license intellectual property and
other rights from third parties, we could lose our ability to
develop and commercialize our products.
We are
heavily dependent on licenses from our research and development
partners for all of our technologies and products and are party to
a sublicense agreement with CGI Cellerate RX, license agreements
with Rochal and a marketing and distribution agreement with Cook
Biotech. Our sublicense agreement and license agreements require
that we pay royalties to the sublicensor or licensor, as
applicable, based on our net sales of the sublicensed and licensed
products.
No
assurance can be given that our existing sublicense agreement,
license agreements or marketing and distribution agreement will be
extended on reasonable terms or at all. In addition, we expect we
will need to license intellectual property, technology and products
from third parties in the future and that these licenses will be
material to our business. No assurance can be given that we will
meet our minimum performance obligations or generate sufficient
revenue or raise additional financing to meet our payment
obligations in our agreements with CGI Cellerate RX, Rochal and
Cook Biotech or other license or marketing and distribution
agreements we enter into with third parties in the future. Any
failure to meet our minimum performance obligations or make the
payments required by our agreements may permit the licensor or
supplier to terminate the agreement. If we were to lose or
otherwise be unable to maintain these licenses or marketing and
distribution agreements for any reason, it would halt our ability
to commercialize our pipeline products. Furthermore, such loss of
these licenses or marketing and distribution agreements may enable
development of new products that may compete with our pipeline
products, and our competitors may gain proprietary position. Any of
the foregoing could result in a material adverse effect on our
business or results of operations.
We may be found to infringe on intellectual property rights of
others.
Third
parties, including customers, may in the future assert claims or
initiate litigation related to exclusive patent, copyright,
trademark and other intellectual property rights to technologies
and related standards that are relevant to us. These assertions may
emerge over time as a result of our growth and the general increase
in the pace of patent claim assertions, particularly in the U.S.
Because of the existence of a large number of patents in the
healthcare field, the secrecy of some pending patent applications
and the rapid rate of issuance of new patents, we believe that it
is not economically practical or even possible to determine in
advance whether a product or any of its components infringes or
will infringe the patent rights of others. The asserted claims or
initiated litigation can include claims against us or our
manufacturers, suppliers or customers alleging infringement of
their proprietary rights with respect to our existing or future
products or components of those products. Regardless of the merit
of these claims, they can be time-consuming, result in costly
litigation and diversion of technical and management personnel, or
require us to develop a non-infringing technology or enter into
license agreements. Where claims are made by customers, resistance
even to unmeritorious claims could damage customer relationships.
There can be no assurance that licenses will be available on
acceptable terms and conditions, if at all, or that our
indemnification by our suppliers will be adequate to cover our
costs if a claim were brought directly against us or our customers.
Furthermore, because of the potential for high court awards that
are not necessarily predictable, it is not unusual to find even
arguably unmeritorious claims settled for significant amounts. If
any infringement or other intellectual property claim made against
us by any third party is successful, or if we fail to develop
non-infringing technology or license the proprietary rights on
commercially reasonable terms and conditions, our business could be
materially and adversely affected.
31
Risks Related to Regulations
Our business is affected by numerous regulations relating to the
labeling, marketing and sale of our products.
Government
regulation by the FDA and similar agencies in other countries is a
significant factor in the development, manufacturing and marketing
of our products and in the acquisition or licensing of new
products. Complying with government regulations is often time
consuming and expensive and may involve delays or actions adversely
impacting the marketing and sale of our current or future
products.
Following
initial regulatory approval or clearance of any products that we or
our research and development partners may develop, we and/or our
research and development partners will be subject to continuing
regulatory review, including, but not limited to:
●
establishment
registration and device listing requirements;
●
QSR,
which governs the methods used in, and the facilities and controls
used for, the design, manufacture, packaging, labeling, storage,
installation, and servicing of finished devices;
●
labeling
requirements, which mandate the inclusion of certain content in
medical device labels and labeling, and when fully implemented,
will generally require the label and package of medical devices to
include a unique device identifier, and which also prohibit the
promotion of products for uncleared or unapproved, i.e.,
“off-label,” indications;
●
the
Medical Device Reporting regulation, which requires that
manufacturers and importers report to the FDA if their device may
have caused or contributed to a death or serious injury or
malfunctioned in a way that would likely cause or contribute to a
death or serious injury if it were to recur; and
●
the
Reports of Corrections and Removals regulation, which requires that
manufacturers and importers report to the FDA recalls (i.e.,
corrections or removals) if undertaken to reduce a risk to health
posed by the device or to remedy a violation of the FDCA that may
present a risk to health and that manufacturers and importers keep
records of recalls that they determine to be not
reportable.
Failure
to comply with applicable regulatory requirements can result in,
among other things, the FDA or other governmental
authorities:
●
imposing
fines and penalties on us;
●
preventing
us from manufacturing or selling our products;
●
delaying
or denying pending applications for approval or clearance of our
products or of new uses or modifications to our existing products,
or withdrawing or suspending current approvals or
clearances;
●
ordering
or requesting a recall of our products;
●
issuing
warning letters, untitled letters, or “It has Come to Our
Attention” letters;
●
imposing
operating restrictions, including a partial or total shutdown of
production or investigation of any or all of our
products;
●
refusing
to permit to import or export of our products;
●
detaining
or seizing our products;
●
obtaining
injunctions preventing us from manufacturing or distributing any or
all of our products;
●
commencing
criminal prosecutions or seeking civil penalties; and
●
requiring
changes in our advertising and promotion practices.
32
The
manufacturing facilities we or our research and development
partners use (and may use) to make any of our FDA-regulated
products are or may become subject to periodic review and
inspection by the FDA. If a previously unknown problem with a
product or a manufacturing or laboratory facility used or
contracted by us or one of our research and development partners is
discovered, the FDA may impose restrictions on that product or on
the manufacturing facility, including requiring us and/or our
research and development partner to withdraw the product from the
market. Any changes to an approved or cleared product, including
the way it is manufactured or promoted, often requires FDA review
and separate approval or clearance before the product, as modified,
may be marketed. In addition, for products we develop in the
future, we and our contract manufacturers may be subject to ongoing
FDA requirements for submission of safety and other post-market
approval information. If we violate regulatory requirements at any
stage, whether before or after marketing approval or clearance is
obtained, we may be fined, be forced to remove a product from the
market or experience other adverse consequences, which would
materially harm our financial results. Additionally, due to
limitations imposed on us by the scope of the cleared or approved
indications or intended use of our products and by FDA and Federal
Trade Commission (“FTC”) regulations relating to
promotional claims, we may not be able to obtain the labeling
claims necessary or desirable for product promotion.
Distribution
of our products outside the United States is subject to extensive
government regulation. These regulations, including the
requirements for marketing authorizations or product licenses
necessary to bring a medical product to market, the time required
for regulatory review and the sanctions imposed for violations,
vary from country to country. We do not know whether we will obtain
the marketing authorizations or product licenses necessary to
market our products in such countries or that we will not be
required to incur significant costs in obtaining or maintaining
these regulatory approvals.
If we fail to obtain or experience significant delays in obtaining
regulatory clearances or approvals to market future medical device
products, we will be unable to commercialize these products until
such clearance or approval is obtained.
The
developing, testing, manufacturing, marketing and selling of
medical devices is subject to extensive regulation by governmental
authorities in the U.S. and other countries. The process of
obtaining regulatory clearance and approval of certain medical
technology products is costly and time consuming. Inherent in the
development of new medical products is the potential for delay
because product testing, including clinical evaluation, is
typically required, especially for drugs, biologics and high-risk
devices, before such products can be approved for human use. With
respect to medical devices, such as those that we currently market,
before a new medical device, or a new indicated use of, or claim
for, an existing product can be marketed (unless it is a Class I
device), it must first receive either premarket clearance under
Section 510(k) of the Federal Food, Drug and Cosmetic Act or
approval of a PMA from the FDA, or be reclassified and receive
marketing authorization through the de novo classification process,
unless an exemption applies.
In the
510(k)-clearance process, the FDA must determine that the proposed
device is “substantially equivalent” to a Class I or II
device legally on the market, known as a “predicate”
device, with respect to intended use, technology, safety and
effectiveness to clear the proposed device for marketing. Clinical
data is sometimes required to support substantial equivalence for
certain device types. The PMA pathway requires an applicant to
demonstrate the safety and effectiveness of the device for its
intended use based, in part, on extensive data including, but not
limited to, technical, preclinical, clinical trial, manufacturing
and labeling data. The PMA process is typically required for
devices that are deemed to pose the greatest risk, such as
life-sustaining, life-supporting or implantable devices. If a
device is novel and there is no appropriate predicate to which the
applicant can demonstrate substantial equivalence, the device will
be automatically classified as a Class III device and require
approval through the PMA process prior to commercialization, unless
the applicant submits a
de
novo
classification request demonstrating that the novel
device should be reclassified into Class I or II. Demonstrating
that a novel device should be reclassified to Class I or II from
Class III typically requires extensive information and data on the
benefits and risks of the device, including performance data and
frequently data from one or more clinical studies. The 510(k), PMA
and
de novo
classification
approval processes can be expensive and lengthy.
Failure
to comply with applicable regulatory requirements can result in,
among other things, suspension or withdrawal of clearances or
approvals, seizure or recall of products, injunctions against the
manufacture, holding, distribution, marketing and sale of a product
and civil and criminal sanctions. Furthermore, changes in existing
regulations or the adoption of new regulations could prevent us
from obtaining, or affect the timing of, future regulatory
clearances or approvals. Meeting regulatory requirements and
evolving government standards may delay marketing of any new
products developed by us for a considerable period of time, impose
costly procedures upon our activities and result in a competitive
advantage to larger companies that compete against us.
We
cannot assure you that the FDA or other regulatory agencies will
clear or approve any products developed by us on a timely basis, if
at all, or, if granted, that clearance or approval will not entail
limiting the indicated uses for which we may market the product,
which could limit the potential market for any of these
products.
Changes to the FDA clearance and approval processes or ongoing
regulatory requirements could make it more difficult for us to
obtain FDA clearance or approval of new products or comply with
ongoing requirements.
New
government regulations may be enacted and changes in FDA policies
and regulations and, their interpretation and enforcement, could
prevent or delay regulatory clearance or approval of new products.
We cannot predict the likelihood, nature or extent of adverse
government regulation that may arise from future legislation or
administrative action, either in the U.S. or abroad. Therefore, we
do not know whether we or our research and development partners
will be able to continue to comply with such regulations or whether
the costs of such compliance will have a material adverse effect on
our business. Changes could, among other things, require different
labeling, monitoring of patients, interaction with physicians,
education programs for patients or physicians, curtailment of
necessary supplies, or limitations on product distribution. These
changes, or others required by the FDA could have an adverse effect
on our business, and specifically, on the sales of affected
products. The evolving and complex nature of regulatory science and
regulatory requirements, the broad authority and discretion of the
FDA and the generally high level of regulatory oversight results in
a continuing possibility that from time to time, we will be
adversely affected by regulatory actions despite ongoing efforts
and commitment to achieve and maintain full compliance with all
regulatory requirements. If we or our research and development
partners are not able to maintain regulatory compliance, we may not
be permitted to market our products and our business would
suffer.
33
Modifications to our current products may require new marketing
clearances or approvals or require us to cease marketing or recall
the modified products until such clearances or approvals are
obtained.
Any
modification to an FDA-cleared product that could significantly
affect its safety or efficacy, or that would constitute a major
change or modification in its indicated use, requires a new FDA
510(k) clearance or, possibly, a PMA. In addition, any significant
modification to an FDA-approved product, such as a new indication
for use, labeling changes, or manufacturing changes, requires
submission of a PMA supplement or 30-day notice for changes to
manufacturing procedures or methods of manufacture that affect the
safety and effectiveness of the product. The FDA requires every
manufacturer to make its own determination as to whether a
modification requires a new 510(k) clearance or PMA, but the FDA
may review and disagree with any decision reached by the
manufacturer. In the future, we or our research and development
partners may make additional modifications to our products after
they have received FDA clearance or approval and, in appropriate
circumstances, determine that new clearance or approval is
unnecessary. Regulatory authorities may disagree with our or our
research and development partners’ decisions not to seek new
clearance or approval and may require us or the research and
development partner that controls the marketing authorization for
the respective device to obtain clearance or approval for previous
modifications to our products. If that were to occur for a
previously cleared or approved product, we may be required to cease
marketing or recall the modified device until we obtain, or our
research and development partner obtains, the necessary clearance
or approval. Under these circumstances, we may also be subject to
significant regulatory fines or other penalties. If any of the
foregoing were to occur, our financial condition and results of
operations could be negatively impacted.
Failure to obtain or maintain adequate reimbursement or insurance
coverage for drugs, if any, could limit our ability to market those
drugs and decrease our ability to generate revenue. Changes in
reimbursement policies and regulations by governmental or other
third-party payors may have an adverse impact on the use of our
products.
The
pricing, coverage, and reimbursement of our products, if any, must
be sufficient to support our commercial efforts and other
development programs, and the availability and adequacy of coverage
and reimbursement by third-party payors, including governmental and
private insurers, are essential for most patients to be able to
afford medical treatments. Sales of our products depend
substantially, both domestically and abroad, on the extent to which
the costs of our products, if any, will be paid for or reimbursed
by health maintenance, managed care, and similar healthcare
management organizations, or government payers and private payors.
If coverage and reimbursement are not available, or are available
only in limited amounts, we may have to subsidize or provide
medical products for free or we may not be able to successfully
commercialize our products.
A
significant portion of our wound care products are purchased
principally for the Medicare and Medicaid eligible population by
hospital outpatient clinics, wound care clinics, durable medical
equipment (“DME”) suppliers and SNFs, which typically
bill various third-party payors, primarily state and federal
healthcare programs (e.g., Medicare and Medicaid), and managed care
plans, for the products and services provided to their patients.
Although the majority of our wound care products are currently
eligible for reimbursement under Medicare Part B, adjustments to
our reimbursement amounts or a change in CMS’s reimbursement
policies could have an adverse effect on our market opportunities
in this area. The ability of our customers to obtain appropriate
reimbursement for products and services from third-party payors is
critical to the success of our business because reimbursement
status affects which products our customers purchase. In addition,
our ability to obtain reimbursement approval in foreign
jurisdictions may affect our ability to expand our product
offerings internationally.
Third-party
payors have adopted, and are continuing to adopt, a number of
policies intended to curb rising healthcare costs. These policies
include the imposition of conditions of payment by foreign, state
and federal healthcare programs as well as private insurance plans,
and the reduction in reimbursement amounts applicable to specific
products and services.
Changes
in healthcare systems in the U.S. or internationally in a manner
that significantly reduces reimbursement for procedures using our
products or denies coverage for these procedures would also have an
adverse impact on the acceptance of our products and the prices
which our customers are willing to pay for them.
Moreover,
increasing efforts by governmental and private payors in the United
States and abroad to limit or reduce healthcare costs may result in
restrictions on coverage and the level of reimbursement for new
medical products and, as a result, they may not cover or provide
adequate payment for our products. We expect to experience pricing
pressures in connection with our products due to the increasing
trend toward managed healthcare, including the increasing influence
of health maintenance organizations and additional legislative
changes. The downward pressure on healthcare costs in general, and
prescription drugs or biologics in particular, has and is expected
to continue to increase in the future. As a result, profitability
of our current or future products, may be more difficult to
achieve.
34
We rely on our research and development partners to comply with
applicable laws and regulations relating to product classification
and FDA marketing authorization.
We rely
on our research and development partners, from whom we license all
of the products we currently commercialize, to determine the
appropriate classification for each such product and to comply with
applicable regulations related to obtaining the proper marketing
authorization. With respect to each medical device product we
license, our respective research and development partner designs
the product and determines whether the device should be classified
as a Class I, II, or III device and the appropriate FDA marketing
authorization pathway to pursue (i.e., 510(k), PMA or
de novo
classification). In addition,
we rely on our research and development partners to determine
whether specific legal or regulatory definitions or exemptions
apply to particular medical products, which individually may be
subject to FDA oversight as a device, drug, biologic or human
cellular or tissue-based product. The FDA has broad regulatory
authority to interpret and enforce the laws and regulations that
govern medical products in commercial distribution, and any adverse
determination by the FDA relating to one of our licensed products
could require significant cost and effort to comply.
For
example, our research and development partner, Cook Biotech, from
whom we have the right to exclusively distribute three biologic
products for surgical and wound care applications, has determined
that one such product, VIM Amnion Matrix, is intended for
homologous use as a wound covering or barrier. It is possible that
the FDA, after evaluating the product, its intended use and any
promotional claims, may not agree with Cook Biotech’s
conclusion that the VIM Amnion Matrix product is intended for
homologous use, which would change the legal framework under which
the product is regulated and may require Cook Biotech and us to
incur substantial costs and expend significant effort to bring the
product into compliance with applicable regulations. Such action by
the FDA may also require us to cease marketing operations relating
to the VIM Amnion Matrix product until the appropriate corrections
are complete.
We and our employees and contractors are subject, directly or
indirectly, to federal, state and foreign healthcare fraud and
abuse laws, including false claims laws. If we are unable to
comply, or have not fully complied, with such laws, we could face
substantial penalties.
Our
operations are subject to various federal, state and foreign fraud
and abuse laws. These laws may affect our operations, including the
financial arrangements and relationships through which we market,
sell and distribute our products. U.S. federal and state laws that
affect our ability to operate include, but are not limited
to:
●
the
federal Anti-Kickback Statute, which prohibits, among other things,
persons or entities from knowingly and willfully soliciting,
receiving, offering or paying any remuneration (including any
kickback, bribe, or rebate), directly or indirectly, overtly or
covertly, in cash or in kind in return for, the purchase,
recommendation, leasing or furnishing of an item or service
reimbursable under a federal healthcare program, such as the
Medicare and Medicaid programs;
●
federal
civil and criminal false claims laws and civil monetary penalty
laws, which prohibit, among other things, individuals or entities
from knowingly presenting, or causing to be presented, claims for
payment or approval from Medicare, Medicaid, or other government
payors that are false or fraudulent;
●
Section
242 of HIPAA codified at 18 U.S.C. § 1347, which created new
federal criminal statutes that prohibit a person from knowingly and
willfully executing a scheme or from making false or fraudulent
statements to defraud any healthcare benefit program (i.e., public
or private);
●
federal
transparency laws, including the so-called federal
“sunshine” law, which requires the tracking and
disclosure to the federal government by pharmaceutical and medical
device manufacturers of payments and other transfers of value to
physicians and teaching hospitals as well as ownership and
investment interests that are held by physicians and their
immediate family members; and
●
state
law equivalents of each of these federal laws, such as
anti-kickback and false claims laws that may apply to items or
services reimbursed by any third-party payer, including commercial
insurers, state laws that require pharmaceutical and medical device
companies to comply with their industry’s voluntary
compliance guidelines and the applicable compliance guidance
promulgated by the federal government or otherwise restrict certain
payments that may be made to healthcare providers and other
potential referral sources, state laws that require drug and
medical device manufacturers to report information related to
payments and other transfers of value to physicians and other
healthcare providers or marketing expenditures, state laws that
prohibit giving gifts to licensed healthcare professionals and
state laws governing the privacy and security of health information
in certain circumstances, many of which differ from each other in
significant ways and may not have the same effect, thus
complicating compliance efforts in certain circumstances, such as
specific disease states.
35
In
particular, activities and arrangements in the healthcare industry
are subject to extensive laws and regulations intended to prevent
fraud, waste and other abusive practices. These laws and
regulations may restrict or prohibit a wide range of activities or
other arrangements related to the development, marketing or
promotion of products, including pricing and discounting of
products, provision of customer incentives, provision of
reimbursement support, other customer support services, provision
of sales commissions or other incentives to employees and
independent contractors and other interactions with healthcare
practitioners, other healthcare providers and
patients.
Because
of the breadth of these laws and the narrow scope of the statutory
or regulatory exceptions and safe harbors available, our business
activities could be challenged under one or more of these laws.
Relationships between medical product manufacturers and health care
providers are an area of heightened scrutiny by the government. We
engage in various activities, including the conduct of speaker
programs to educate physicians, the provision of reimbursement
advice and support to customers, and the provision of customer and
patient support services, that have been the subject of government
scrutiny and enforcement action within the medical device
industry.
Government
expectations and industry best practices for compliance continue to
evolve and past activities may not always be consistent with
current industry best practices. Further, there is a lack of
government guidance as to whether various industry practices comply
with these laws, and government interpretations of these laws
continue to evolve, all of which create compliance uncertainties.
Any non-compliance could result in regulatory sanctions, criminal
or civil liability and serious harm to our reputation. Although we
have a comprehensive compliance program designed to ensure that our
employees’ and commercial partners’ activities and
interactions with healthcare professionals and patients are
appropriate, ethical, and consistent with all applicable laws,
regulations, guidelines, policies and standards, it is not always
possible to identify and deter misconduct, and the precautions we
take to detect and prevent this activity may not be effective in
preventing such conduct, mitigating risks, or reducing the chance
of governmental investigations or other actions or lawsuits
stemming from a failure to comply with these laws or
regulations.
If a
government entity opens an investigation into possible violations
of any of these laws (which may include the issuance of subpoenas),
we would have to expend significant resources to defend ourselves
against the allegations. Allegations that we, our officers, or our
employees violated any one of these laws can be made by individuals
called “whistleblowers” who may be our employees,
customers, competitors or other parties. Government policy is to
encourage individuals to become whistleblowers and file a complaint
in federal court alleging wrongful conduct. The government is
required to investigate all of these complaints and decide whether
to intervene. If the government intervenes and we are required to
pay damages, which in such cases are typically set at three times
the actual monetary damages, to the government, the whistleblower,
as a reward, is awarded a percentage of such damages or any
settlement amount. If the government declines to intervene, the
whistleblower may proceed on her own and, if she is successful, she
will receive a percentage of any judgment or settlement amount the
company is required to pay. The government may also initiate an
investigation on its own. If any such actions are instituted
against us, those actions could have a significant impact on our
business, including the imposition of significant fines, and other
sanctions that may materially impair our ability to run a
profitable business. In particular, if our operations are found to
be in violation of any of the laws described above or if we agree
to settle with the government without admitting to any wrongful
conduct or if we are found to be in violation of any other
governmental regulations that apply to us, we, our officers and
employees may be subject to sanctions, including civil and criminal
penalties, damages, fines, exclusion from participation in
government health care programs, such as Medicare and Medicaid,
imprisonment, the curtailment or restructuring of our operations
and the imposition of a corporate integrity agreement, any of which
could adversely affect our business, results of operations and
financial condition.
Our research and development partners’ use and disclosure of
personally identifiable information, including health information,
is subject to federal and state privacy and security regulations,
and our failure to comply with those regulations or to adequately
secure the information we hold could result in significant
liability or reputational harm and, in turn, a material adverse
effect on our client base, business, financial condition and
results of operations.
Numerous
state and federal laws and regulations, including HIPAA, govern the
collection, dissemination, use, privacy, confidentiality, security,
availability and integrity of PII, including protected health
information. HIPAA establishes a set of basic national privacy and
security standards for the protection of PHI by health plans,
healthcare clearinghouses and certain healthcare providers,
referred to as covered entities, and the business associates with
whom such covered entities contract for services, which likely
includes us. HIPAA requires healthcare providers and business
associates to develop and maintain policies and procedures with
respect to PHI that is used or disclosed, including the adoption of
administrative, physical, and technical safeguards to protect such
information. HIPAA also implemented the use of standard transaction
code sets and standard identifiers that covered entities must use
when submitting or receiving certain electronic healthcare
transactions, including activities associated with the billing and
collection of healthcare claims. HIPAA imposes mandatory penalties
for certain violations. HIPAA also authorizes state attorneys
general to file suit on behalf of their residents. Courts will be
able to award damages, costs and attorneys’ fees related to
violations of HIPAA in such cases. While HIPAA does not create a
private right of action allowing individuals to sue us in civil
court for violations of HIPAA, its standards have been used as the
basis for duty of care in state civil suits such as those for
negligence or recklessness in the misuse or breach of
PHI.
36
In
addition, HIPAA mandates that the Secretary of HHS conduct periodic
compliance audits of HIPAA covered entities or business associates
for compliance with the HIPAA Privacy and Security Standards. HIPAA
further requires that patients be notified of any unauthorized
acquisition, access, use or disclosure of their unsecured PHI that
compromises the privacy or security of such information, with
certain exceptions related to unintentional or inadvertent use or
disclosure by employees or authorized individuals. HIPAA specifies
that such notifications must be made without unreasonable delay and
in no case later than 60 calendar days after discovery of the
breach. If a breach affects 500 patients or more, it must be
reported to HHS without unreasonable delay, and HHS will post the
name of the breaching entity on its public web site. Breaches
affecting 500 patients or more in the same state or jurisdiction
must also be reported to the local media. If a breach involves
fewer than 500 people, the covered entity must record it in a log
and notify HHS at least annually.
Numerous
other federal and state laws protect the confidentiality, privacy,
availability, integrity and security of PII, including PHI. These
laws in many cases are more restrictive than, and may not be
preempted by, the HIPAA rules and may be subject to varying
interpretations by courts and government agencies, creating complex
compliance issues for us and our clients and potentially exposing
us to additional expense, adverse publicity and liability. In
addition, new health information standards, whether implemented
pursuant to HIPAA, congressional action or otherwise, could have a
significant effect on the manner in which we must handle healthcare
related data, and the cost of complying with standards could be
significant. If we do not comply with existing or new laws and
regulations related to PHI, we could be subject to criminal or
civil sanctions.
Because
of the extreme sensitivity of the PII we or our partners may store
and transmit, the security features of our technology platforms are
very important. If our security measures, some of which may be
managed by third parties, are breached or fail, unauthorized
persons may be able to obtain access to sensitive client and
patient data, including HIPAA-regulated PHI. As a result, our
reputation could be severely damaged, adversely affecting client or
investor confidence. Clients may curtail their use of or stop using
our products and services, which would cause our business to
suffer. In addition, we could face litigation, damages for contract
breach, penalties and regulatory actions for violation of HIPAA and
other applicable laws or regulations and significant costs for
remediation, notification to individuals and for measures to
prevent future occurrences. Any potential security breach could
also result in increased costs associated with liability for stolen
assets or information, repairing system damage that may have been
caused by such breaches, incentives offered to client or other
business partners in an effort to maintain our business
relationships after a breach and implementing measures to prevent
future occurrences, including organizational changes, deploying
additional personnel and protection technologies, training
employees and engaging third-party experts and consultants. While
we maintain insurance covering certain security and privacy damages
and claim expenses, our coverage may not be sufficient to
compensate for all liability.
Government regulation of healthcare creates risks and challenges
with respect to our compliance efforts and our business
strategies.
The
healthcare industry is highly regulated and is subject to changing
political, legislative, regulatory, and other influences. Existing
and new laws and regulations affecting the healthcare industry
could create unexpected liabilities for us, could cause us to incur
additional costs, and could restrict our operations. Many
healthcare laws are complex, and their application to specific
products and services may not be clear. In particular, many
existing healthcare laws and regulations, when enacted, did not
anticipate the services that we aim to provide. However, these laws
and regulations may nonetheless be applied to our business. Our
failure to accurately anticipate the application of these laws and
regulations, or other failure to comply, could create liability for
us, result in adverse publicity and materially affect its business,
financial condition, and results of operations.
If we fail to comply with extensive healthcare laws and government
regulations, we could suffer penalties or be required to make
significant changes to our operations.
The
healthcare industry is required to comply with extensive and
complex laws and regulations at the federal, state and local
government levels relating to, among other things:
●
licensure
of health providers, certification of organizations and enrollment
with government reimbursement programs;
●
necessity
and adequacy of medical care;
●
relationships
with physicians and other referral sources and referral
recipients;
●
billing
and coding for services;
37
●
properly
handling overpayments;
●
quality
of medical equipment and services;
●
qualifications
of medical and support personnel;
●
confidentiality,
maintenance, data breach, identity theft and security issues
associated with health-related and personal information and medical
records; and
●
communications
with patients and consumers.
Among
these laws are the federal Stark Law, the federal Anti-Kickback
Statute, the FCA, and similar state laws. If we fail to comply with
applicable laws and regulations, we could suffer civil sanctions
and criminal penalties, including the loss of our ability to
participate in the Medicare, Medicaid and other federal and state
healthcare programs. While we endeavor to ensure that our financial
relationships with referral sources such as hospitals and
physicians comply with the applicable laws (including applicable
safe harbors and exceptions), evolving interpretations or
enforcement of these laws and regulations could subject our current
practices to allegations of impropriety or illegality or could
require us to make changes in our operations. A determination that
we have violated these or other laws, or the public announcement
that we are being investigated for possible violations of these or
other laws, could have a material adverse effect on our business,
financial condition, results of operations or prospects, and our
business reputation could suffer significantly. In addition, other
legislation or regulations at the federal or state level may be
adopted that adversely affect our business.
Our officers, employees, independent contractors, principal
investigators, consultants, and commercial partners may engage in
misconduct or activities that are improper under other laws and
regulations, which would create liability for us.
We are
exposed to the risk that our officers, employees, independent
contractors (including contract research organizations CROs),
principal investigators, consultants and commercial partners may
engage in fraudulent conduct or other illegal activity and/or may
fail to disclose unauthorized activities to us. Misconduct by these
parties could include, but is not limited to, intentional, reckless
and/or negligent failures to comply with:
●
the
laws and regulations of the FDA and its foreign counterparts
requiring, among other things, compliance with good manufacturing
practice and/or quality system requirements, post-market vigilance
reporting, product marketing authorization requirements, facility
registration requirements, the reporting of true, complete and
accurate information to such regulatory bodies, including but not
limited to safety problems associated with the use of our
products;
●
laws
and regulations of the FDA and its foreign counterparts concerning
the conduct of clinical trials and the protection of human research
subjects, including but not limited to good clinical
practices;
●
other
laws and regulations of the FDA and its foreign counterparts
relating to the manufacture, processing, packing, holding,
investigating or distributing in commerce of medical devices,
biological products and/or HCT/Ps;
●
manufacturing
standards we have established; or
●
healthcare
fraud and abuse laws, including but not limited to, the
Anti-Kickback Statute, the Stark Law, the FCA, and state law
equivalents.
In
particular, companies involved in the manufacture of medical
products are subject to laws and regulations intended to ensure
that medical products that will be used in patients are safe and
effective, and, specifically, that they are not adulterated or
misbranded, that they are properly labeled, and have the identity,
strength, quality and purity that which they are represented to
possess. Further, companies involved in the research and
development of medical products are subject to extensive laws and
regulations intended to protect research subjects and ensure the
integrity of data generated from clinical trials and of the
regulatory review process. Any misconduct in any of these areas,
whether by our own employees or by contractors, vendors, business
associates, consultants, or other entities acting as our agents,
could result in regulatory sanctions, criminal or civil liability
and serious harm to our reputation. Although we have a
comprehensive compliance program designed to ensure that our
employees’, CRO partners’, principal
investigators’, consultants’, and commercial
partners’ activities and interactions with healthcare
professionals and patients are appropriate, ethical, and consistent
with all applicable laws, regulations, guidelines, policies and
standards, it is not always possible to identify and deter
misconduct, and the precautions we take to detect and prevent this
activity may not be effective in preventing such conduct,
mitigating risks, or reducing the chance of governmental
investigations or other actions or lawsuits stemming from a failure
to comply with these laws or regulations. If any such actions are
instituted against us, or our CRO partners, principal
investigators, consultants, or commercial partners, those actions
could have a significant impact on our business, including the
imposition of significant fines, and other sanctions that may
materially impair our ability to run a profitable
business.
38
We could be adversely affected if healthcare reform measures
substantially change the market for medical care or healthcare
coverage in the United States.
On
March 23, 2010, President Obama signed the Patient Protection and
Affordable Care Act (P.L. 111-148) and on March 30, 2010, the
signed the Health Care and Education Reconciliation Act (P.L.
111-152), collectively commonly referred to as the
“Healthcare Reform Law.” The Healthcare Reform Law
included a number of new rules regarding health insurance, the
provision of healthcare, conditions to reimbursement for healthcare
services provided to Medicare and Medicaid patients, and other
healthcare policy reforms. Through the law-making process,
substantial changes have been and continue to be made to the system
for paying for healthcare in the United States, including changes
made to extend medical benefits to certain Americans who lacked
insurance coverage and to contain or reduce healthcare costs (such
as by reducing or conditioning reimbursement amounts for healthcare
services and drugs, and imposing additional taxes, fees, and rebate
obligations on pharmaceutical and medical device companies). This
legislation was one of the most comprehensive and significant
reforms ever experienced by the healthcare industry in the United
States and has significantly changed the way healthcare is financed
by both governmental and private insurers. This legislation has
impacted the scope of healthcare insurance and incentives for
consumers and insurance companies, among others. Additionally, the
Healthcare Reform Law’s provisions were designed to encourage
providers to find cost savings in their clinical operations. This
environment has caused changes in the purchasing habits of
consumers and providers and resulted in specific attention to the
pricing negotiation, product selection and utilization review
surrounding pharmaceuticals and medical devices. This attention may
result in our current commercial products, products we may
commercialize or promote in the future, and our therapeutic
candidates, being chosen less frequently or the pricing being
substantially lowered. At this stage, it is difficult to estimate
the full extent of the direct or indirect impact of the Healthcare
Reform Law on us.
These
structural changes could entail further modifications to the
existing system of private payors and government programs (such as
Medicare and Medicaid), creation of government-sponsored healthcare
insurance sources, or some combination of both, as well as other
changes. Restructuring the coverage of medical care in the U.S.
could impact the reimbursement for medical services and procedures,
prescribed drugs, biologics and medical devices, including our
current commercial products, those we and our development or
commercialization partners are currently developing or those that
we may commercialize or promote in the future. If reimbursement for
the products we currently commercialize or promote, any product we
may commercialize or promote, or approved therapeutic candidates is
substantially reduced or otherwise adversely affected in the
future, or rebate obligations associated with any pharmaceutical
product we commercialize or promote are substantially increased, it
could have a material adverse effect on our reputation, business,
financial condition or results of operations.
Extending
medical benefits to those who currently lack coverage will likely
result in substantial costs to the U.S. federal government, which
may force significant additional changes to the healthcare system
in the United States. Much of the funding for expanded healthcare
coverage may be sought through cost savings. While some of these
savings may come from realizing greater efficiencies in delivering
care, improving the effectiveness of preventive care and enhancing
the overall quality of care, much of the cost savings may come from
reducing the cost of care and increased enforcement activities.
Cost of care could be reduced further by decreasing the level of
reimbursement for medical services or products (including our
current commercial products, our development or commercialization
partners or any product or medical service we may commercialize or
promote), or by restricting coverage (and, thereby, utilization) of
medical services or products. In either case, a reduction in the
utilization of, or reimbursement for our current commercial
products, any product we may commercialize or promote or for which
we receive marketing approval or clearance in the future, could
have a material adverse effect on our reputation, business,
financial condition, or results of operations.
Several
states and private entities initially mounted legal challenges to
the Healthcare Reform Law, and they continue to litigate various
aspects of the legislation. On July 26, 2012, the U.S. Supreme
Court generally upheld the provisions of the Healthcare Reform Law
at issue as constitutional. However, the U.S. Supreme Court held
that the legislation improperly required the states to expand their
Medicaid programs to cover more individuals. As a result, the
states have a choice as to whether they will expand the number of
individuals covered by their respective state Medicaid programs.
Some states have not expanded their Medicaid programs and have
chosen to develop other cost-saving and coverage measures to
provide care to currently uninsured individuals. Many of these
efforts to date have included the institution of Medicaid-managed
care programs. The manner in which these cost-saving and coverage
measures are implemented could have a material adverse effect on
our reputation, business, financial condition or results of
operations.
Further,
the healthcare regulatory environment has seen significant changes
in recent years and is still in flux. Legislative initiatives to
modify, limit, replace, or repeal the Healthcare Reform Law and
judicial challenges continue. We cannot predict the impact on our
business of future legislative and legal challenges to the
Healthcare Reform Law or other changes to the current laws and
regulations. The uncertainty around the future of the Healthcare
Reform Law, and in particular the impact to reimbursement levels,
may lead to uncertainty or delay in the purchasing decisions of our
customers, which may in turn negatively impact our product sales.
If there are not adequate reimbursement levels, our business and
results of operations could be adversely
affected.
39
The
financial impact of U.S. healthcare reform legislation over the
next few years will depend on a number of factors, including the
policies reflected in implementing regulations and guidance and
changes in sales volumes for therapeutics affected by the
legislation. From time to time, legislation is drafted, introduced
and passed in the U.S. Congress that could significantly change the
statutory provisions governing coverage, reimbursement, and
marketing of medical products and services. In addition,
third-party payor coverage and reimbursement policies are often
revised or interpreted in ways that may significantly affect our
business and our products.
While
in office, President Trump supported the repeal of all or portions
of the Healthcare Reform Law. President Trump also issued an
executive order in which he stated that it is his
administration’s policy to seek the prompt repeal of the
Healthcare Reform Law and in which he directed executive
departments and federal agencies to waive, defer, grant exemptions
from, or delay the implementation of the provisions of the
Healthcare Reform Law to the maximum extent permitted by law.
Congress has enacted legislation that repeals certain portions of
the Healthcare Reform Law, including but not limited to the Tax
Cuts and Jobs Act, passed in December 2017, which included a
provision that eliminates the penalty under the Healthcare Reform
Law’s individual mandate, effective January 1, 2019, as well
as the Bipartisan Budget Act of 2018, passed in February 2018,
which, among other things, repealed the Independent Payment
Advisory Board (which was established by the Healthcare Reform Law
and was intended to reduce the rate of growth in Medicare
spending).
Additionally,
in December 2018, a district court in Texas held that the
individual mandate is unconstitutional and that the rest of the
Healthcare Reform Law is, therefore, invalid. On appeal, the Fifth
Circuit Court of Appeals affirmed the holding on the individual
mandate but remanded the case back to the lower court to reassess
whether and how such holding affects the validity of the rest of
the Healthcare Reform Law. On March 2, 2020, the U.S. Supreme Court
granted the petitions for writs of certiorari to review this case
and allocated one hour for oral arguments, which occurred on
November 10, 2020. A decision from the Supreme Court is expected to
be issued in spring 2021. It is unclear how this litigation and
other efforts to repeal and replace the Healthcare Reform Law will
impact the policies and programs implemented under the Healthcare
Reform Law and the medical products industry more generally. We
also cannot predict the impact that this litigation against the
Healthcare Reform Law will have on our business, and there is
uncertainty as to what healthcare programs and regulations may be
implemented or changed at the federal and/or state level in the
United States or the effect of any future legislation or
regulation. Furthermore, we cannot predict what actions the Biden
administration will implement in connection with the Healthcare
Reform Law. However, it is possible that such initiatives could
have an adverse effect on our ability to obtain approval and/or
successfully commercialize products in the United States in the
future. For example, any changes that reduce, or impede the ability
to obtain, reimbursement for the type of products or services we
currently or intend to commercialize in the United States or that
reduce medical procedure volumes could adversely affect our
operations and/or future business plans.
Defects, failures or quality issues associated with our products
could lead to product recalls or safety alerts, adverse regulatory
actions, litigation and negative publicity that could materially
adversely affect our reputation, business, results of operations
and financial condition.
Quality
is extremely important to us and our customers due to the serious
and costly consequences of product failure. Quality and safety
issues may occur with respect to any of our products, and our
future operating results will depend on our ability to maintain an
effective quality control system and effectively train and manage
our workforce with respect to our quality system. The development,
manufacture and control of medical devices are subject to extensive
and rigorous regulation by numerous government agencies, including
the FDA and similar foreign agencies. Compliance with these
regulatory requirements, including but not limited to the
FDA’s QSR, good manufacturing practices and adverse
events/recall reporting requirements in the United States and other
applicable regulations worldwide, is subject to continual review
and is monitored rigorously through periodic inspections by the FDA
and foreign regulatory authorities. The FDA and foreign regulatory
authorities may also require post-market testing and surveillance
to monitor the performance of products cleared or approved for use
in their jurisdictions. Our manufacturing facilities and those of
our suppliers and independent sales agencies are also subject to
periodic regulatory inspections. If the FDA or other regulatory
authority were to conclude that we or our suppliers have failed to
comply with any of these requirements, it could institute a wide
variety of enforcement actions, ranging from a public warning
letter to more severe sanctions, such as product recalls or
seizures, withdrawals, monetary penalties, consent decrees,
injunctive actions to halt the manufacture or distribution of
products, import detentions of products made outside the United
States, export restrictions, restrictions on operations or other
civil or criminal sanctions. Civil or criminal sanctions could be
assessed against our officers, employees, or us. Any adverse
regulatory action, depending on its magnitude, may restrict us from
effectively manufacturing, marketing, and selling our
products.
In
addition, we cannot predict the results of future legislative
activity or future court decisions, any of which could increase
regulatory requirements, subject us to government investigations or
expose us to unexpected litigation. Any regulatory action or
litigation, regardless of the merits, may result in substantial
costs, divert management’s attention from other business
concerns and place additional restrictions on our sales or the use
of our products. In addition, negative publicity, including
regarding a quality or safety issue, could damage our reputation,
reduce market acceptance of our products, cause us to lose
customers and decrease demand for our products. Any actual or
perceived quality issues may also result in issuances of
physician’s advisories against our products or cause us to
conduct voluntary recalls. Any product defects or problems,
regulatory action, litigation, negative publicity or recalls could
disrupt our business and have a material adverse effect on our
business, results of operations and financial
condition.
40
Risks Related to Ownership of Our Common Stock
The issuance of shares upon the exercise of derivative securities
may cause immediate and substantial dilution to our existing
shareholders.
As of
March 30, 2021, we had 11,500 shares of common stock that were
issuable upon the exercise of vested outstanding stock options. The
issuance of shares upon the exercise of these options may result in
dilution to the equity interest and voting power of holders of our
common stock.
In the
future, we may also issue additional shares of common stock or
other securities convertible into or exchangeable for shares of
common stock. For instance, certain of the product license
agreements we have entered into with third parties require us to
make payments to such third parties upon the occurrence of certain
events. Pursuant to these product license agreements, we may choose
to make such payments in shares of our common stock. The issuance
of additional shares of our common stock may substantially dilute
the ownership interests of our existing shareholders. Furthermore,
sales of a substantial amount of our common stock in the public
market, or the perception that these sales may occur, could reduce
the market price of our common stock. This could also impair our
ability to raise additional capital through the sale of our
securities.
It is possible that we will require additional capital to meet our
financial obligations and support business growth.
We
intend to continue to make significant investments to support our
business growth and expect to require additional funds to respond
to business challenges. Accordingly, we may need to engage in
equity or debt financings to secure additional funds. If we raise
additional funds through future issuances of equity or convertible
debt securities, our existing shareholders could suffer significant
dilution, and any new equity securities we issue could have rights,
preferences and privileges superior to those of holders of our
common stock. Any debt financing that we secure in the future could
involve restrictive covenants relating to our capital raising
activities and other financial and operational matters, which may
make it more difficult for us to obtain additional capital and to
pursue business opportunities, including potential acquisitions. We
may not be able to obtain additional financing on terms favorable
to us, if at all. If we are unable to obtain adequate financing or
financing on terms satisfactory to us when and if we require it,
our ability to continue to support our business growth and to
respond to business challenges could be significantly impaired, and
our business may be harmed.
The trading price of the shares of our common stock is highly
volatile, and purchasers of our common stock could incur
substantial losses.
The
market price of our common stock has been and is likely to continue
to be highly volatile and could fluctuate widely in response to
various factors, many of which are beyond our control, including
the following:
●
technological
innovations or new products and services by us or by our
competitors, including announcements by us or our competitors of
significant contracts, acquisitions, strategic partnerships or
capital commitments;
●
additions
or departures of key personnel;
●
changes
in expectations as to our future financial
performance;
●
the
continued impact of the COVID-19 pandemic on our business
operations;
●
sales
of our common stock;
●
our
ability to execute our business plan;
●
loss of
any strategic relationship;
●
industry
developments;
41
●
changes
in financial estimates by any securities analysts who follow our
common stock, our failure to meet these estimates or failure of
those analysts to initiate or maintain coverage of our common
stock;
●
general
market conditions, including market volatility;
●
fluctuations
in stock market prices and trading volumes of similar
companies;
●
economic,
political and other external factors;
●
period-to-period
fluctuations in our financial results;
●
applicable
regulatory developments in the United States and foreign countries,
both generally or specific to us and our products; and
●
intellectual
property, product liability or other litigation against
us.
Although
publicly traded securities are subject to price and volume
fluctuations, it is likely that our common stock will experience
these fluctuations to a greater degree than the securities of more
established and better capitalized organizations.
Our common stock does not have a vigorous trading market, and you
may not be able to sell your securities at or near ask prices, or
at all.
Although
there is a public market for our common stock, trading volume has
been historically low, which could impact our stock price and your
ability to sell shares of our common stock at or near ask prices,
or at all. We can give no assurance that a more active and liquid
public market for the shares of our common stock will develop in
the future.
The potential sale of large amounts of common stock may have a
negative effect upon the market value of our shares.
Sales
of a significant number of shares of our common stock in the public
market could harm the market price of our common stock and make it
more difficult for us to raise funds through future offerings of
common stock. As additional shares of our common stock become
available for resale in the public market, the supply of our common
stock will increase, which could decrease the price of our common
stock.
We have not paid, and we are unlikely to pay, cash dividends on our
securities in the near future. Because we have no current plans to
pay cash dividends on our common stock for the foreseeable future,
you may not receive any return on investment unless you sell your
common stock for a price greater than that which you paid for
it.
We have
not paid and do not currently intend to pay dividends on our common
stock, which may limit the current return available on an
investment in our stock. Future dividends on our stock, if any,
will depend on our future earnings, capital requirements, financial
condition and such other factors as our management may consider
relevant. Currently, we intend to retain earnings, if any, to
increase our net worth and reserves. Consequently, shareholders
will only realize an economic gain on their investment in our
common stock if the price appreciates. Shareholders should not
purchase our common stock expecting to receive cash dividends.
Because we currently do not pay dividends, and there may be limited
trading in our common stock, shareholders may not have any manner
to liquidate or receive any payment on their common stock.
Therefore, our failure to pay dividends may cause shareholders to
not see any return on their common stock even if we are successful
in our business operations. In addition, because we do not pay
dividends, we may have trouble raising additional funds, which
could affect our ability to expand our business
operations.
A few of our existing shareholders own a large percentage of our
voting stock and have control over matters requiring shareholder
approval and may delay or prevent a change in control or otherwise
lead to actual or potential conflicts of interest.
As of
March 30, 2021, our directors owned, and through their affiliates
controlled, more than 50% of our outstanding common stock. As a
result, our directors and their affiliates could have the ability
to exert substantial influence over all matters requiring approval
by our shareholders, including (i) the election and removal of
directors, (ii) any proposed merger, consolidation, or sale of all
or substantially all of our assets as well as other corporate
transactions and (iii) any amendment to our Certificate of
Formation, as amended (the “Certificate of Formation”).
This concentration of control could be disadvantageous to other
shareholders having different interests. This significant
concentration of share ownership may adversely affect the trading
price for our common stock because investors sometimes perceive
disadvantages in owning stock in companies with controlling
shareholders.
42
In
addition, our Certificate of Formation contains a provision which
under the Texas Business Organizations Code (the
“TBOC”) could allow the shareholders who own a majority
of our common stock to approve certain major transactions without
the approval of other shareholders that otherwise would be required
under Texas corporation law.
Our Certificate of Formation includes provisions limiting the
personal liability of our directors for breaches of fiduciary
duties under Texas law.
Our
Certificate of Formation contains a provision eliminating a
director’s personal liability to the fullest extent permitted
under Texas law. Pursuant to the TBOC, a corporation has the power
to indemnify its directors and officers against judgments and
certain expenses other than judgments that are actually and
reasonably incurred in connection with a proceeding, provided that
there is a determination that the individual acted in good faith
and in a manner reasonably believed to be in or not opposed to the
best interests of the corporation and, with respect to any criminal
proceeding, had no reasonable cause to believe the
individual’s conduct was unlawful. However, no
indemnification may be made in respect of any proceeding in which
such individual is liable to the corporation or improperly received
a personal benefit and is found liable for willful misconduct,
breach of the duty of loyalty owned to the corporation, or an act
or omission deemed not to be committed in good faith.
The
principal effect of the limitation on liability provision is that a
shareholder will be unable to prosecute an action for monetary
damages against a director unless the shareholder can demonstrate a
basis for liability for which indemnification is not available
under the TBOC. This provision, however, should not limit or
eliminate our rights or any shareholder’s rights to seek
non-monetary relief, such as an injunction or rescission, in the
event of a breach of a director’s fiduciary duty. This
provision will not alter a director’s liability under federal
securities laws. The inclusion of this provision in our Certificate
of Formation may discourage or deter shareholders or management
from bringing a lawsuit against directors for a breach of their
fiduciary duties, even though such an action, if successful, might
otherwise have benefited us and our shareholders.
Texas law and our Certificate of Formation and bylaws contain
anti-takeover provisions that could delay or discourage takeover
attempts that shareholders may consider favorable.
Under
our Certificate of Formation, our board of directors can authorize
the issuance of preferred stock, which could diminish the rights of
holders of our common stock and make a change of control of the
Company more difficult even if it might benefit our shareholders.
The board of directors is authorized to issue shares of preferred
stock in one or more series and to fix the voting powers,
preferences and other rights and limitations of the preferred
stock. Accordingly, we may issue shares of preferred stock with a
preference over our common stock with respect to dividends or
distributions on liquidation or dissolution, or that may otherwise
adversely affect the voting or other rights of the holders of
common stock. Issuances of preferred stock, depending upon the
rights, preferences and designations of the preferred stock, may
have the effect of delaying, deterring or preventing a change of
control, even if that change of control might benefit our
shareholders.
In
addition, provisions of our Certificate of Formation and bylaws may
delay or discourage transactions involving an actual or potential
change in our control or change in our management, including
transactions in which shareholders might otherwise receive a
premium for their shares, or transactions that our shareholders
might otherwise deem to be in their best interests. For example,
our Certificate of Formation and bylaws (i) do not provide for
cumulative voting rights (therefore allowing the holders of a
majority of the shares of common stock entitled to vote in any
election of directors to elect all of the directors standing for
election, if they should so choose), (ii) require that special
meetings of the shareholders be called by the Chairman of the board
of directors, the President or the board of directors, or by the
holders of not less than ten percent (10%) of all the shares
issued, outstanding and entitled to vote, (iii) permit our board of
directors to alter, amend or repeal our bylaws or to adopt new
bylaws, and (iv) enable our board of directors to increase the
number of persons serving as directors and to fill vacancies
created as a result of the increase by a majority vote of the
directors present at a meeting of directors.
While
we are subject to the provisions of Title 2, Chapter 21, Subchapter
M of the TBOC, which provides that a Texas corporation that
qualifies as an “issuing public corporation” (as
defined in the TBOC) may not engage in specified types of business
combinations, including mergers, consolidations and asset sales,
with a person, or an affiliate or associate of that person, who is
an “affiliated shareholder,” the restrictions in Title
2, Chapter 21, Subchapter M of the TBOC do not apply to us because
we have elected, in the manner provided under the TBOC, not to be
subject to such provisions.
43
Our failure to meet the continued listing requirements of The
Nasdaq Capital Market could result in a delisting of our common
stock.
Our
shares of common stock are currently listed for trading on The
Nasdaq Capital Market under the symbol “SMTI.” If we
fail to satisfy the continued listing requirements of The Nasdaq
Stock Market, LLC (“Nasdaq”), such as the corporate
governance requirements, the shareholder’s equity requirement
or the minimum closing bid price requirement, Nasdaq may take steps
to delist our common stock. Such a delisting or even notification
of failure to comply with such requirements would likely have a
negative effect on the price of our common stock and would impair
your ability to sell or purchase our common stock when you wish to
do so. In the event of a delisting, we expect that we would take
actions to restore our compliance with Nasdaq’s listing
requirements, but we can provide no assurance that any such action
taken by us would allow our common stock to become listed again,
stabilize the market price or improve the liquidity of our common
stock, prevent our common stock from dropping below the Nasdaq
minimum bid price requirement or prevent future non-compliance with
Nasdaq’s listing requirements.
ITEM 1B.
U
NRESOLVED STAFF
COMMENTS
None.
ITEM 2.
P
ROPERTIES
We do
not own any buildings or other real property. We have one material
operating lease which consists of an office space lease with a
remaining lease term of 42 months as of December 31, 2020. Our
leased office consists of 5,877 square feet of rentable space
located in Summit Office Park, a twin-building, mid-rise, 242,000
square foot office park located on the perimeter of the Fort Worth,
Texas central business district. The monthly base rental payments
for our office lease are as follows:
|
|
|
Monthly
|
|
From
|
Through
|
Base
Rental
|
|
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 of
December 31, 2020, our operating lease has a remaining lease term
of 3.5 years and a discount rate of 6.25%.
We
periodically enter into operating lease contracts for office space
and equipment. Arrangements are evaluated at inception to determine
whether such arrangements constitute a lease. In accordance with
the transition guidance of Accounting Standards Codification
(“ASC”) Topic No. 842, such arrangements are included
in our balance sheet as of January 1, 2019.
See
Note 7
to the financial
statements for additional information on our operating
leases.
ITEM 3.
L
EGAL
PROCEEDINGS
From
time to time, we may be involved in claims and legal actions that
arise in the ordinary course of business. To our knowledge, there
are no material pending legal proceedings to which we are a party
or of which any of our property is the subject.
I
TEM 4. MINE SAFETY
DISCLOSURES
This
item is not applicable.
44
PART II
ITEM 5.
M
ARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our
common stock is traded on The Nasdaq Capital Market under the
trading symbol “SMTI.” The closing price of our common
stock as reported by Nasdaq on March 29, 2021 was
$28.75.
Reverse Stock Split and Reduction of Authorized Capital
Stock
On
May 10, 2019, we completed a recapitalization of our Company which
included:
(1) a
1-for-100 reverse stock split of the outstanding common stock under
which every shareholder received one share of common stock for
every 100 shares of common stock held;
(2) the
reduction of the authorized capital stock of the Company to
20,000,000 shares of common stock and 2,000,000 shares of preferred
stock; and
(3) the
change of the name of the Company from “Wound Management
Technologies, Inc.” to “Sanara MedTech
Inc.”
In
addition, on June 6, 2019 we changed the trading symbol of our
common stock to “SMTI”. The post-split common stock is
traded under the CUSIP number 79957L100.
Record Holders
As of
March 30, 2021, there were 220 shareholders of record and there
were 7,617,122 shares of common stock issued and outstanding. The
number of shareholders of record does not reflect the number of
persons or entities who held stock in nominee or street name
through various brokerage firms.
Dividends
We have
never declared or paid any cash dividends on our common stock and
we do not intend to pay cash dividends in the foreseeable future.
We currently expect to retain any future earnings to fund our
operations and the expansion of our business.
Recent Sales of Unregistered Securities
None.
ITEM 6.
S
ELECTED FINANCIAL
DATA
On
November 19, 2020, the SEC issued final rules to amend Regulation
S-K. These changes are effective for annual filings for the first
fiscal year ending on or after August 9, 2021, and early adoption
is permitted. We elected to adopt the amendments to Item 301 of
Regulation S-K in their entirety, which remove the requirement to
furnish selected financial data for each of the last five fiscal
years.
ITEM 7.
M
ANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis contains
forward-looking statements about future revenues, operating
results, plans and expectations. Forward-looking statements are
based on a number of assumptions and estimates that are inherently
subject to significant risks and uncertainties and our results
could differ materially from the results anticipated by our
forward-looking statements as a result of many known or unknown
factors, including, but not limited to, those factors discussed in
Part I, Item 1A. Risk Factors. Also, please read the
“Cautionary Statement Regarding Forward-Looking
Statements” set forth at the beginning of this Annual Report
on Form 10-K.
In
addition, the following discussion should be read in conjunction
with Part I of this Annual Report on Form 10-K as well as our
consolidated financial statements and the related Notes contained
elsewhere in this Annual Report on Form 10-K.
45
Overview
We are
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. Our portfolio of products and
services will allow us to deliver comprehensive wound and skin care
solutions for patients in all care settings, including acute
(hospitals and long-term acute care hospitals
(“LTACHs”)) and post-acute (wound care clinics,
physician offices, skilled nursing facilities (“SNFs”),
home health, hospice, and retail). Each of our products, services,
and technologies contributes to our overall goal of achieving
better clinical outcomes at a lower overall cost for patients
regardless of where they receive care. We strive to be one of the
most innovative and comprehensive providers of effective wound and
skin care products and technologies and are continually seeking to
expand our offerings for patients requiring wound and skin care
treatments across the entire continuum of care in the United
States.
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 intend to
begin marketing three biologic products for surgical and 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
wound and skin care virtual consult services. We anticipate that
our various service offerings will allow clinicians/physicians
utilizing our technologies to collect 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.
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 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 clinicians who use our products in these facilities. These
restrictions resulted in an overall decline in sales for the second
quarter of 2020. During the third and fourth quarters of 2020, 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.
As a
result of the COVID-19 pandemic, we 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 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.
Cellerate Acquisition
Effective
August 28, 2018, we consummated definitive agreements that
continued operations to market our principal product, CellerateRX,
through a 50% ownership interest in a newly formed entity,
Cellerate, LLC (“Cellerate”), which began operations on
September 1, 2018. The remaining 50% ownership interest was held by
an affiliate of Catalyst, which acquired the exclusive license to
CellerateRX products. Cellerate conducted operations with an
exclusive sublicense from the Catalyst affiliate to distribute
CellerateRX products in the United States, Canada and Mexico (which
sublicense was subsequently amended to include worldwide
distribution rights). In connection with the formation of
Cellerate, we issued a convertible promissory note to an affiliate
of Catalyst in the original principal amount of $1.5 million, which
was convertible into shares of our common stock at a conversion
price of $9.00 per share.
On
March 15, 2019, we acquired Catalyst’s 50% interest in
Cellerate in exchange for the issuance of 1,136,815 shares of our
newly created Series F Convertible Preferred Stock (the
“Cellerate Acquisition”). Each share of Series F
Convertible Preferred Stock was convertible at the option of the
holder, at any time, into two shares of common stock. Additionally,
each holder of Series F Convertible Preferred Stock was entitled to
vote on all matters submitted for a vote of our shareholders with
votes equal to the number of shares of common stock into which such
holder’s shares of Series F Convertible Preferred Stock could
then be converted. Following the closing of the Cellerate
Acquisition, Mr. Ronald T. Nixon, Founder and Managing Partner of
Catalyst, was elected to our board of directors, effective March
15, 2019.
46
The
Cellerate Acquisition was accounted for as a reverse merger and
recapitalization because, immediately following the completion of
the transaction, Catalyst could obtain effective control of the
Company upon conversion of its convertible preferred stock and
convertible promissory note, both of which could occur at
Catalyst’s option. Additionally, Cellerate’s officers
and senior executive positions continued on as management of the
combined entity after consummation of the Cellerate Acquisition.
For accounting purposes, Cellerate was deemed to be the acquirer in
the transaction and, consequently, the Cellerate Acquisition was
treated as a recapitalization of Sanara MedTech. As part of the
reverse merger and recapitalization, the net liabilities existing
in the Company as of the date of the Cellerate Acquisition totaling
approximately $1,666,537, which included $508,973 of cash, were
converted to equity as part of the Cellerate Acquisition. No
step-up in basis or intangible assets or goodwill was recorded in
this transaction.
The
Company’s financials for the twelve months ended December 31,
2019 do not include revenues and expenses related to the
predecessor for the period January 1, 2019 through March 15, 2019.
During this period, the predecessor’s revenues were
approximately $34,000 and expenses were approximately
$348,000.
Reverse Stock Split
Effective
May 10, 2019, we effected a reverse stock split of the issued and
outstanding shares of our common stock at a ratio of one share for
every 100 shares. All share and per share information in this
discussion and analysis has been adjusted to reflect the reverse
stock split.
Components of Results of Operations
Sources of Revenues
Our
revenue is derived primarily from sales of our surgical wound care
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 of procedure by one of our
sales representatives. We generally recognize revenue when our
product is received by the customer.
Revenue
streams from product sales and royalties are summarized below for
the years ended December 31, 2020 and 2019. All revenue was
generated in the United States.
|
|
Year Ended
December 31,
|
|
|
|
2020
|
2019
|
|
Surgical
|
$
14,463,182
|
$
10,597,234
|
|
Wound
Care
|
922,794
|
1,010,404
|
|
Royalty
revenue
|
201,000
|
159,125
|
|
Total
Revenue
|
$
15,586,976
|
$
11,766,763
|
We
recognize royalty revenue from a development and licensing
agreement with BioStructures, LLC. We record revenue each calendar
quarter as earned per the terms of the agreement which stipulates
that we will receive quarterly royalty payments of at least
$50,250. Under the terms of the development and license agreement,
royalties of 2.0% are recognized on sales of products containing
our patented resorbable bone hemostasis. The minimum annual royalty
due to our Company is $201,000 per year throughout the life of the
patent which expires in 2023. These royalties are payable in
quarterly installments of $50,250. To date, royalties related to
this development and licensing agreement have not exceeded the
annual minimum of $201,000 ($50,250 per quarter).
Cost of Goods Sold
Cost of
goods sold consists of the acquisition costs from the manufacturers
of our licensed products, raw material costs for certain components
sourced directly by our Company, and all royalties related due as a
result of the sale of our products. Our gross profit represents
total revenue less the cost of goods sold, and gross margin is
gross profit expressed as a percentage of total
revenue.
Operating Expenses
Selling,
general and administrative expenses (“SG&A”)
consist primarily of salaries, sales commissions, benefits,
bonuses, and stock-based compensation. SG&A also includes
outside legal counsel, audit fees, insurance premiums, rent, and
other corporate expenses. We expense all SG&A expenses as
incurred. We expect our SG&A expenses to increase in absolute
dollars and decrease as a percent of revenue as we grow our
commercial organization.
47
Other Income (Expense)
Other
income (expense) is primarily comprised of interest income,
interest expense and other non-operating activities. Interest
expense during 2020 consisted primarily of interest expense
associated with our unsecured promissory note under the Paycheck
Protection Program (the “PPP”) pursuant to the
Coronavirus Aid, Relief and Economic Security Act, and for 2019,
consisted primarily of interest on amounts due on our revolving
line of credit that matured in June 2020. Interest income consists
of interest earned on our cash and cash equivalents.
Results of Operations
Revenues.
For the year ended December 31, 2020,
we generated revenues of $15,586,976 compared to revenues of
$11,766,763 for the year ended December 31, 2019, a 32% increase
from the prior year.
The higher
revenues in
2020
were primarily
due to increased sales of surgical wound care products as we
continued the execution of our strategy to expand our sales force
and independent distribution network in both new and existing U.S.
markets.
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 clinicians who use our products in these facilities. These
restrictions resulted in an overall decline in sales for the second
quarter of 2020.
During
the third and fourth quarters of 2020, 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. Fourth quarter revenues of $4,789,138 were up 43%
compared to the fourth quarter of 2019, and represented a record
high sales quarter for the Company.
Cost of goods sold
.
Cost of goods sold for the year ended December 31, 2020 was
$1,616,625, compared to costs of goods sold of $1,209,300 for the
year ended December 31, 2019. The increase over prior year was
primarily due to higher sales volume.
Selling, general
and
administrative
expenses
(“SG&A”).
SG&A expenses for the year ended December 31, 2020 were
$18,683,594 compared to SG&A expenses of $13,067,569 for the
year ended December 31, 2019. The higher SG&A expenses in 2020
were primarily due to increased payroll costs resulting from sales
force expansion and operational support, higher sales commission
expense as a result of higher product sales, and higher costs
related to the expansion of our comprehensive wound and skin care
strategy.
The
higher SG&A expenses are consistent with our strategy of
building out a larger sales force and independent distribution
network and the expansion of our comprehensive wound and skin care
strategy. New sales representatives generally take six to twelve
months to begin generating significant revenue. We expect SG&A
expenses to decline as a percentage of revenue in the next two
years as revenue generated by new sales representatives begins to
offset the cost of the sales force expansion.
Interest
expense
.
Interest expense was $11,528 for the year ended December 31, 2020,
as compared to $105,919 for the year ended December 31, 2019. The
lower interest expense was primarily due to declines in draws on
our revolving line of credit that matured in June 2020 and the
conversion of an interest-bearing promissory note to common stock
in early 2020.
Net income / loss
.
For the year ended
December 31, 2020, we had a net loss of $4,445,145, compared to net
loss of $2,835,778 for the year ended December 31, 2019. Our fourth
quarter net loss of $266,453 was favorably impacted by the
recognition of $586,174 of Other income related to the forgiveness
of our PPP Loan, and a $342,930 reduction of SG&A due to the
capitalization of certain SG&A costs as internal use software.
The net loss in 2020 was due to higher SG&A costs described
above, which have been driven by our strategy to expand our
geographic coverage through significant investments in sales force
expansion, operational support and the expansion of our
comprehensive wound and skin care strategy.
Liquidity and Capital Resources
Cash on
hand at December 31, 2020 was $455,366, compared to $6,611,928 at
December 31, 2019. Historically, we have financed our operations
primarily from the sale of equity securities. During 2019 and 2020,
our principal sources of liquidity have been cash generated from
operations, utilization of our bank line of credit that matured in
June 2020, cash provided by an unsecured promissory note in the
principal amount of $583,000 (“the PPP Loan”) to
Cadence Bank, N.A. (“Cadence”) pursuant to the PPP, and
$10,000,000 in proceeds received from a private placement of our
common stock in October 2019.
48
On
February 12, 2021, we closed an underwritten public offering of
1,265,000 shares of our common stock at a public offering price of
$25.00 per share resulting in gross proceeds of $31,625,000, before
deducting underwriting discounts and commissions and estimated
offering expenses. We expect to use the net proceeds from the
offering to expand our salesforce and for further development of
its products, services and technologies pipeline, clinical studies
and general corporate purposes, including working capital (see
Note 13
to the consolidated
financial statements contained elsewhere in this Annual Report on
Form 10-K for more information on this offering). Based on our
current plan of operations, including acquisitions, we believe our
cash on hand, when combined with expected cash flows from
operations and amounts available under our revolving credit
facility, will be sufficient to fund our growth strategy and to
meet our anticipated operating expenses and capital expenditures
for at least the next twelve months.
On
January 15, 2021, we entered into a new loan agreement with Cadence
(the “Loan Agreement”), providing for a $2.5 million
revolving line of credit. The revolving line of credit matures on
January 13, 2023, and is secured by substantially all of our
assets. Any amounts outstanding will bear interest of 0.75% plus
the “Prime Rate” designated in the “Money
Rates” section of the Wall Street Journal. Proceeds from the
line of credit are to be used to provide additional working capital
in support of current assets and for other general corporate
purposes and may not be used for acquisitions.
The
line of credit contains customary representations and warranties
and requires us to maintain compliance with certain financial
covenants, including, among others, a minimum liquidity of
$1,000,000 as of December 31, 2020 and March 31, 2021, a minimum
Tangible Net Worth (as defined in the Loan Agreement) of $1,000,000
and, beginning with the fiscal quarter ending June 30, 2021, a
minimum Interest Coverage Ratio (as defined in the Loan Agreement)
of 1.5 to 1.0. The Loan Agreement also contains customary events of
default. If such an event of default occurs, Cadence would be
entitled to take various actions, including the acceleration of
amounts due under the Loan Agreement. We generally may (and must,
under certain circumstances) prepay all or a portion of the
principal outstanding on the revolving line of credit prior to its
contractual maturity. As of March 30, 2021, no amounts were owed
under the Loan Agreement.
As a
result of the COVID-19 pandemic, beginning in March 2020, we
significantly reduced costs in areas such as payroll, consulting,
business travel, and other discretionary spending. We are
continuing to monitor our cash flow and plan to make additional
expenditure adjustments as necessary. In November 2020, we were
informed that the full amount of the PPP Loan was forgiven. The
forgiveness of the loan was recognized as Other income at that
time. If appropriate, we may pursue additional financing including
issuing additional stock and incurring additional debt to support
our strategic initiatives. If we are unable to obtain additional
funding for operations at any time in the future, we may not be
able to continue expanding the business as currently planned which
would require us to modify various aspects of our
operations.
On
November 9, 2020, our subsidiary, UWSS, entered into agreements to
purchase shares of Series A Convertible Preferred Stock (the
“Series A Stock”) of Precision Healing Inc.
(“Precision Healing”) for an aggregate purchase price
of $600,000. The Series A Stock is convertible into 150,000 shares
of common stock of Precision Healing and has a senior liquidity
preference relative to the common shareholders. As stipulated in
the agreements with Precision Healing, UWSS invested an additional
$600,000 in February 2021 for 150,000 additional shares of Series A
Stock. The additional shares of Series A Stock will convert into
shares of common stock of Precision Healing at a ratio based on the
date Precision Healing delivers a development milestone related to
a wound diagnostic tool currently under development.
On July
7, 2019, we executed a license agreement with Rochal whereby we
acquired an exclusive world-wide license to market, sell and
further develop antimicrobial products for the prevention and
treatment of microbes on the human body utilizing certain Rochal
patents and pending patent applications (the “BIAKŌS
License Agreement”). Under the terms of the BIAKŌS
License Agreement, we agreed to pay Rochal $750,000 upon the
completion of a capital raise, on or before December 31, 2022, of
at least $10,000,000 through the sale of our common stock or
assets. At our option, the $750,000 payment may be paid in any
combination of cash and our common stock. In March 2021, we issued
20,834 shares of our common stock to Rochal as full payment of the
$750,000 which became due upon the Company’s completion of a
capital raise in February 2021.
For the
year ended December 31, 2020, net cash used in operating activities
was $4,034,518 compared to $2,167,401 used in operating activities
for the year ended December 31, 2019. The higher use of cash in
2020 was primarily due to our investment in sales force expansion,
corporate infrastructure, and start-up costs related to telehealth
services including the development of electronic imagery and data
sharing technology to support virtual consultation and
diagnostics.
For the
year ended December 31, 2020, net cash used in investing activities
was $2,744,374 compared to $1,197,097 used in investing activities
during the year ended December 31, 2019. The cash used in investing
activities during 2020 was primarily due to our entry into a
product license agreement with Rochal in May 2020, which included
an initial cash payment of $600,000, along with a $500,000
milestone payment made to Rochal during the first quarter of 2020
as a result of FDA clearance of BIAKŌS Antimicrobial Wound
Gel. During the third quarter of 2020, a $500,000 long-term
investment was made to purchase a minority interest in DirectDerm.
During the fourth quarter of 2020, a $600,000 long-term investment
was made in Precision Healing.
For the
year ended December 31, 2020, net cash provided by financing
activities was $622,330 as compared to $9,800,005 provided by
financing activities for the year ended December 31, 2019. The cash
provided by financing activities in 2020 was primarily related to
funds received from the PPP Loan. Cash provided by financing
activities for the year ended December 31, 2019 was due to proceeds
received from a $10,000,000 private placement of our common stock
in October 2019.
49
Material Transactions with Related Parties
CellerateRx Sublicense Agreement
We have
an exclusive, world-wide sublicense to distribute CellerateRX
products into the wound care and surgical markets from an affiliate
of Catalyst, CGI Cellerate RX, which licenses the rights to
CellerateRX from AN. Sales of CellerateRX have comprised the
majority of our sales during 2018, 2019 and 2020. On January 26,
2021, we amended the term of the sublicense agreement to extend the
term to May 17, 2050, with automatic one-year renewals so long as
annual net sales of CellerateRX exceed $1,000,000. We pay royalties
based on our 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, which
was entered on August 27, 2018. For the years ended December 31,
2020 and 2019, royalties due under the terms of this agreement
totaled $479,809 and $400,000, respectively.
Ronald
T. Nixon, our Executive Chairman, is the founder and managing
partner of Catalyst. Mr. Nixon and Catalyst, collectively with
their affiliates, including CGI Cellerate RX, beneficially owned
3,481,406 shares of our common stock as of December 31,
2020.
Convertible Notes Payable
In
connection with the Cellerate Acquisition, we issued a 30-month
convertible promissory note to CGI Cellerate RX, an affiliate of
Catalyst, in the principal amount of $1,500,000, bearing interest
at a 5% annual interest rate, compounded quarterly. Interest on the
promissory note was payable quarterly but could have been deferred
at our election to the maturity of the promissory note. Outstanding
principal and interest were convertible at CGI Cellerate RX’s
option into shares of our common stock at a conversion price of
$9.00 per share.
On
February 7, 2020, CGI Cellerate RX converted its $1,500,000
promissory note, including accrued interest of $111,911, into
179,101 shares of our common stock. As of December 31, 2020, there
were no related party promissory notes or accrued interest
outstanding.
Payables
We had
outstanding payables to related parties totaling $223,589 at
December 31, 2020, and $68,668 at December 31, 2019.
Manufacturing and Technical Services Agreements
On
September 9, 2020, we executed a manufacturing agreement with
Rochal. Under the terms of the manufacturing agreement, Rochal
agreed to manufacture, package, and label products we licensed from
Rochal. The manufacturing agreement includes customary terms and
conditions. The term of the agreement is for a period of five years
unless extended by the mutual consent of the parties. For the year
ended December 31, 2020, we incurred $285,155 of inventory
manufacturing costs with Rochal.
On
September 9, 2020, we executed a technical services agreement with
Rochal. Under the terms of the technical services agreement, Rochal
will provide its expertise and services on technical service
projects identified by us for wound care, skin care and surgical
site care applications. The technical services agreement includes
customary terms and conditions for our industry. For the year ended
December 31, 2020, we incurred $364,881 of costs for Rochal
technical services. We may terminate this agreement at any
time.
Ronald
T. Nixon, our Executive Chairman, 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.
Ann Beal Salamone, a director, is a significant shareholder, the
former president and current Chairman of the Board of
Rochal.
Impact of Inflation and Changing Prices
Inflation
and changing prices have not had a material impact on our
historical results of operations. We do not currently anticipate
that inflation and changing prices will have a material impact on
our future results of operations.
50
Critical Accounting Policies
Our
discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements,
which have been prepared in accordance with accounting principles
generally accepted in the U.S. The preparation of these
consolidated financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities,
and expenses. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under
the circumstances. The results of these assumptions form the basis
for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Under
different assumptions or conditions, actual results may differ from
these estimates. We have identified certain significant accounting
policies which involve a higher degree of judgment and complexity
in making certain estimates and assumptions that affect amounts
reported in our consolidated financial statements, as summarized
below.
Revenue Recognition
We
recognize revenue in accordance with Accounting Standards
Codification (“ASC”) Topic 606, Revenue from Contracts
with Customers, which we 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 we expect 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, we satisfy a performance
obligation
Impairment of Long-Lived Assets
Long-lived
assets, including certain identifiable intangibles held and to be
used by our Company, are reviewed for impairment whenever events or
changes in circumstances, including the COVID-19 pandemic, indicate
that the carrying amount of such assets may not be recoverable. We
continuously evaluate the recoverability of our long-lived assets
based on estimated future cash flows and the estimated liquidation
value of such long-lived assets and provide 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 years ended December 31, 2020
and 2019.
Investment in Equity Securities
Our
investments consist of non-marketable equity securities in
privately held companies without readily determinable fair values,
and are reported at cost minus impairment, if any, plus or minus
changes resulting from observable price changes in orderly
transactions for the identical or similar investment of the same
issuer. We have reviewed the carrying value of our investments and
have determined there was no impairment or observable price changes
as of December 31, 2020.
Inventories
Inventories
are stated at the lower of cost or net realizable value, with cost
computed on a first-in, first-out basis. Inventories consist of
finished goods and related packaging components. We recorded
inventory obsolescence expense of $318,076 for the year ended
December 31, 2020 and $120,442 for the year ended December 31,
2019. The allowance for obsolete and slow-moving inventory had a
balance of $276,603 at December 31, 2020, and $43,650 at December
31, 2019. We considered the impact of COVID-19 on our recorded
value of inventory and determined no adjustment was necessary as of
December 31, 2020.
Use of Estimates
The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. The extent to which
the COVID-19 pandemic may directly or indirectly impact our
business, financial condition, and results of operations is highly
uncertain and subject to change. We considered the potential impact
of the COVID-19 pandemic on our estimates and assumptions and
determined there was not a material impact on our estimates and
assumptions used in preparing our consolidated financial statements
as of and for the year ended December 31, 2020; however, actual
results could differ from those estimates and there may be changes
to our estimates in future periods.
51
Income Taxes
We
account for income taxes in accordance with ASC Topic No. 740,
“Income Taxes.” This standard requires us to provide a
net deferred tax asset or liability equal to the expected future
tax benefit or expense of temporary reporting differences between
book and tax accounting and any available operating loss or tax
credit carry forwards.
After
applying the provisions of Section 382 of the Internal Revenue
Code, the unexpired net operating loss (“NOL”) carry
forward at December 31, 2020 was approximately $13.5 million, of
which, approximately $5.5 million, generated in 2017 and prior,
will expire between 2021 and 2037. Under the Tax Cuts and Jobs Act,
the NOLs generated in 2018, 2019 and 2020, of approximately $8.0
million, will have an indefinite carryforward period but can
generally only be used to offset 80% of taxable income in any
particular year. We may be subject to certain limitations in our
annual utilization of NOL carry forwards to off-set future taxable
income pursuant to Section 382 of the Internal Revenue Code, which
could result in NOLs expiring unused.
The
non-current deferred tax asset is summarized below:
|
|
2020
|
2019
|
|
Net
operating loss carry forwards (21% as of December 31,
2019)
|
$
2,827,835
|
$
1,876,114
|
|
Valuation
allowance
|
(2,827,835
)
|
(1,876,114
)
|
|
Net
non-current deferred tax asset
|
$
-
|
$
-
|
A 100%
valuation allowance has been provided for all deferred tax assets,
as the ability of the Company to generate sufficient taxable income
in the future is uncertain.
Off-Balance Sheet Arrangements
None.
ITEM 7A.
Q
UANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a
smaller reporting company, we are not required to provide this
information.
52
ITEM 8.
F
INANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
SANARA MEDTECH INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
|
54
|
|
|
|
|
|
55
|
|
|
|
|
|
56
|
|
|
|
|
|
57
|
|
|
|
|
|
58
|
|
|
|
|
|
59
|
53
R
EPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Shareholders and Board of Directors of
Sanara
MedTech Inc.
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets of Sanara
MedTech Inc. and its subsidiaries (collectively, the
“Company”) as of December 31, 2020 and 2019, and the
related consolidated statements of operations, changes in
stockholders’ equity, and cash flows for the years then
ended, and the related notes (collectively referred to as the
“financial statements”). In our opinion, the financial
statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2020 and 2019, and the
results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted
in the United States of America.
Basis for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) ("PCAOB") and are
required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express
no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
Critical Audit Matters
Critical audit
matters are matters arising from the current period audit of the
financial statements that were communicated or required to be
communicated to the audit committee and that: (1) relate to
accounts or disclosures that are material to the financial
statements and (2) involved our especially challenging, subjective,
or complex judgments. We determined that there are no critical
audit matters.
/s/ MaloneBailey, LLP
www.malonebailey.com
We have
served as the Company's auditor since 2014.
Houston,
Texas
March
30, 2021
54
SANARA MEDTECH INC. AND SUBSIDIARIES
CONSOLIDATED
B
ALANCE
SHEETS
|
|
December 31,
|
December 31,
|
|
Assets
|
2020
|
2019
|
|
Current assets
|
|
|
|
Cash
|
$
455,366
|
$
6,611,928
|
|
Accounts
receivable, net of allowances of $100,189 and $73,162
|
2,217,533
|
1,285,165
|
|
Royalty
receivable
|
49,344
|
50,250
|
|
Inventory,
net of allowance for obsolescence of $276,603 and
$43,650
|
1,148,253
|
746,519
|
|
Prepaid
and other assets
|
611,817
|
161,902
|
|
Total current assets
|
4,482,313
|
8,855,764
|
|
|
|
|
|
Long-term assets
|
|
|
|
Property,
plant and equipment, net of accumulated depreciation of $124,691
and $60,694
|
678,589
|
204,953
|
|
Right
of use assets – operating leases
|
467,653
|
585,251
|
|
Intangible
assets, net of accumulated amortization of $827,108 and
$603,580
|
3,097,666
|
1,471,194
|
|
Investment
in equity securities
|
1,100,000
|
-
|
|
Total long-term assets
|
5,343,908
|
2,261,398
|
|
|
|
|
|
Total assets
|
$
9,826,221
|
$
11,117,162
|
|
|
|
|
|
Liabilities and shareholders' equity
|
|
|
|
Current liabilities
|
|
|
|
Accounts
payable
|
$
271,251
|
$
337,504
|
|
Accounts
payable – related parties
|
223,589
|
68,668
|
|
Accrued
royalties and expenses
|
502,191
|
528,060
|
|
Accrued
bonus and commissions
|
2,417,277
|
1,588,056
|
|
Operating
lease liability - current
|
125,587
|
117,533
|
|
Total current liabilities
|
3,539,895
|
2,639,821
|
|
|
|
|
|
Long-term liabilities
|
|
|
|
Operating
lease liability – long term
|
355,797
|
481,384
|
|
Convertible
notes payable – related party
|
-
|
1,500,000
|
|
Accrued
interest - related party
|
-
|
103,557
|
|
Other
long-term liabilities
|
90,293
|
-
|
|
Total long-term liabilities
|
446,090
|
2,084,941
|
|
|
|
|
|
Total liabilities
|
3,985,985
|
4,724,762
|
|
|
|
|
|
Shareholders' equity
|
|
|
|
Series
F Convertible Preferred Stock: $10 par value, 1,200,000 shares
authorized; none issued and outstanding as of December 31, 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; 6,297,008
issued and outstanding as of December 31, 2020 and 3,571,001 issued
and outstanding as of December 31, 2019
|
6,297
|
3,571
|
|
Additional
paid-in capital
|
13,176,576
|
(2,081,829
)
|
|
Accumulated
deficit
|
(7,032,242
)
|
(2,675,802
)
|
|
Total Sanara MedTech shareholders' equity
|
6,150,631
|
6,614,090
|
|
Equity attributable
to noncontrolling interest
|
(310,395
)
|
(221,690
)
|
|
Total shareholders' equity
|
5,840,236
|
6,392,400
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
$
9,826,221
|
$
11,117,162
|
The accompanying notes are an integral part of these consolidated
financial statements.
55
SANARA MEDTECH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
O
PERATIONS
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
|
|
|
|
Net Revenue
|
$
15,586,976
|
$
11,766,763
|
|
|
|
|
|
Cost of goods sold
|
1,616,625
|
1,209,300
|
|
|
|
|
|
Gross profit
|
13,970,351
|
10,557,463
|
|
|
|
|
|
Operating expenses
|
|
|
|
Selling,
general and administrative expenses
|
18,683,594
|
13,067,569
|
|
Depreciation
and amortization
|
291,370
|
119,951
|
|
Bad
debt expense
|
30,000
|
110,000
|
|
Total operating expenses
|
19,004,964
|
13,297,520
|
|
|
|
|
|
Operating loss
|
(5,034,613
)
|
(2,740,057
)
|
|
|
|
|
|
Other income / (expense)
|
|
|
|
Other
income
|
14,822
|
10,198
|
|
Interest
expense
|
(11,528
)
|
(105,919
)
|
|
Debt
forgiveness
|
586,174
|
-
|
|
Total other income / (expense)
|
589,468
|
(95,721
)
|
|
|
|
|
|
Net loss
|
(4,445,145
)
|
(2,835,778
)
|
|
|
|
|
|
Less:
Net loss attributable to noncontrolling interest
|
(88,705
)
|
(21,690
)
|
|
|
|
|
|
Net loss attributable to Sanara MedTech common
shareholders
|
$
(4,356,440
)
|
$
(2,814,088
)
|
|
|
|
|
|
Basic
loss per share of Common stock
|
$
(0.76
)
|
$
(1.32
)
|
|
|
|
|
|
Diluted
loss per share of Common stock
|
$
(0.76
)
|
$
(1.32
)
|
|
|
|
|
|
Weighted
average number of common shares outstanding basic
|
5,734,537
|
2,132,745
|
|
|
|
|
|
Weighted
average number of common shares outstanding diluted
|
5,734,537
|
2,132,745
|
The accompanying notes are an integral part of these consolidated
financial statements.
56
SANARA MEDTECH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
E
QUITY
|
|
Preferred Stock
Series F
|
Common
Stock
|
Additional
|
|
|
|
|
Total
|
||
|
|
$10 par
value
|
$0.001 par
value
|
Paid-In
|
Treasury
Stock
|
Accumulated
|
Noncontrolling
|
Shareholders'
|
|||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Shares
|
Amount
|
Income/(Deficit)
|
Interest
|
Equity
|
|
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
)
|
|
Treasury stock
retirement
|
-
|
-
|
(41
)
|
-
|
-
|
41
|
-
|
-
|
-
|
-
|
|
Repurchase and
cancellation of fractional shares
|
-
|
-
|
(243
)
|
-
|
(1,061
)
|
-
|
-
|
-
|
-
|
(1,061
)
|
|
Private placement
stock issue
|
-
|
-
|
1,204,820
|
1,205
|
9,998,800
|
-
|
-
|
-
|
-
|
10,000,005
|
|
Advance on future
noncontrolling interest distribution
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(200,000
)
|
(200,000
)
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(2,814,088
)
|
(21,690
)
|
(2,835,778
)
|
|
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 Stock
|
(1,136,815
)
|
(11,368,150
)
|
2,273,630
|
2,274
|
11,365,876
|
-
|
-
|
-
|
-
|
-
|
|
Conversion of
Promissory Note to Common Stock
|
-
|
-
|
179,101
|
179
|
1,611,732
|
-
|
-
|
-
|
-
|
1,611,911
|
|
Issuance of Common
Stock for intangible asset
|
-
|
-
|
60,000
|
60
|
749,940
|
-
|
-
|
-
|
-
|
750,000
|
|
Employee stock
purchase program
|
-
|
-
|
3,735
|
4
|
39,326
|
-
|
-
|
-
|
-
|
39,330
|
|
Share-based
compensation
|
-
|
-
|
209,541
|
209
|
1,491,531
|
-
|
-
|
-
|
-
|
1,491,740
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(4,356,440
)
|
(88,705
)
|
(4,445,145
)
|
|
Balance at December
31, 2020
|
-
|
$
-
|
6,297,008
|
$
6,297
|
$
13,176,576
|
-
|
$
-
|
$
(7,032,242
)
|
$
(310,395
)
|
$
5,840,236
|
The accompanying notes are an integral part of these consolidated
financial statements.
57
SANARA
MEDTECH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
C
ASH
FLOWS
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
Net
loss
|
$
(4,445,145
)
|
$
(2,835,778
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities
|
|
|
|
Depreciation
and amortization
|
291,370
|
119,951
|
|
Interest expense on
convertible debt
|
8,354
|
61,934
|
|
Interest expense on
PPP loan
|
3,174
|
-
|
|
Loss on disposal of
asset
|
2,897
|
15,944
|
|
Bad debt
expense
|
30,000
|
110,000
|
|
Inventory
obsolescence
|
318,076
|
120,442
|
|
Share-based
compensation
|
1,402,897
|
-
|
|
Noncash lease
expense
|
117,598
|
99,009
|
|
Debt forgiveness,
including interest
|
(586,174
)
|
-
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
(961,462
)
|
(324,368
)
|
|
Inventory
|
(719,810
)
|
(401,647
)
|
|
Prepaid
and other assets
|
(449,915
)
|
(554,969
)
|
|
Accounts
payable
|
(66,253
)
|
(65,037
)
|
|
Accounts
payable - related parties
|
154,921
|
(19,599
)
|
|
Accrued
royalties and expenses
|
(25,870
)
|
282,004
|
|
Accrued
liabilities
|
890,824
|
1,224,713
|
|
Net cash used in operating activities
|
(4,034,518
)
|
(2,167,401
)
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
Purchase of
property and equipment
|
(544,374
)
|
(182,825
)
|
|
Cash received in
reverse acquisition
|
-
|
508,973
|
|
Repurchase and
cancellation of fractional shares
|
-
|
(1,061
)
|
|
Proceeds from
disposal of assets
|
-
|
301
|
|
Purchase of
intangible assets
|
(1,100,000
)
|
(1,522,485
)
|
|
Investment in
equity securities
|
(1,100,000
)
|
-
|
|
Net cash used in investing activities
|
(2,744,374
)
|
(1,197,097
)
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
Draw on line of
credit
|
-
|
2,200,000
|
|
Pay off line of
credit
|
-
|
(2,200,000
)
|
|
Proceeds from PPP
Loan
|
583,000
|
-
|
|
Private placement
stock issue
|
-
|
10,000,005
|
|
Advance on future
noncontrolling interest distribution
|
-
|
(200,000
)
|
|
Common stock issued
for Employee Stock Purchase Plan
|
39,330
|
-
|
|
Net cash provided by financing activities
|
622,330
|
9,800,005
|
|
|
|
|
|
Net increase (decrease) in cash
|
(6,156,562
)
|
6,435,507
|
|
Cash, beginning of period
|
6,611,928
|
176,421
|
|
Cash, end of period
|
$
455,366
|
$
6,611,928
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
Interest
|
$
-
|
$
43,985
|
|
Income
taxes
|
-
|
-
|
|
|
|
|
|
Supplemental noncash 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 issued
for purchase 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 consolidated
financial statements.
58
SANARA MEDTECH INC. AND SUBSIDIARIES
N
OTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1 – NATURE OF BUSINESS AND BACKGROUND
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. Our portfolio of products and services will allow us
to deliver comprehensive wound and skin care solutions for patients
in all care settings, including acute (hospitals and long-term
acute care hospitals) and post-acute (wound care clinics, physician
offices, skilled nursing facilities (“SNFs”), home
health, hospice, and retail). Each of our products, services, and
technologies contributes to our overall goal of achieving better
clinical outcomes at a lower overall cost for patients regardless
of where they receive care. We strive to be one of the most
innovative and comprehensive providers of effective wound and skin
care products and technologies and are continually seeking to
expand our offerings for patients requiring wound and skin care
treatments across the entire continuum of care in the United
States.
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 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 clinicians who use our products in these facilities. These
restrictions resulted in an overall decline in sales for the second
quarter of 2020. During the third and fourth quarters of 2020, 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.
As a
result of the COVID-19 pandemic, we 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 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.
Cellerate Acquisition
On August 28, 2018, the Company consummated definitive agreements
that continued the Company’s operations to market its
principal products, CellerateRX Surgical Activated Collagen
Peptides and CellerateRX Hydrolyzed Collagen wound fillers
(“CellerateRX”), through a 50% ownership interest in a
newly formed Texas limited liability company, Cellerate, LLC which
began operations on September 1, 2018. The remaining 50% ownership
interest was held by an affiliate of The Catalyst Group, Inc.
(“Catalyst”), which acquired an exclusive world-wide
license to distribute CellerateRX products. Cellerate, LLC conducts
operations with an exclusive sublicense from the Catalyst affiliate
to distribute CellerateRX products into the wound care and surgical
markets in the United States, Canada and Mexico.
On March 15, 2019, the Company acquired Catalyst’s 50%
interest in Cellerate, LLC (“the Cellerate
Acquisition”) in exchange for 1,136,815 shares of the
Company’s newly created Series F Convertible Preferred Stock.
Each share of Series F Convertible Preferred Stock was convertible
at the option of the holder, at any time, into 2 shares of common
stock, adjusted for the 1-for-100 reverse stock split of the
Company’s common stock which became effective on May 10,
2019. Additionally, each holder of Series F Convertible Preferred
Stock was entitled to vote on all matters submitted for a vote of
the Company’s shareholders with votes equal to the number of
shares of common stock into which such holder’s Series F
Convertible Preferred Stock could then be converted. Based on the
closing price of the Company’s common stock on March 15, 2019
and the conversion ratio of the Series F Convertible Preferred
Stock, the fair value of the preferred shares issued to Catalyst
was approximately $12.5 million. Following the closing of the
Cellerate Acquisition, Mr. Ronald T. Nixon, Founder and Managing
Partner of Catalyst, was elected to the Company’s board of
directors effective March 15, 2019.
59
The Cellerate Acquisition was accounted for as a reverse merger and
recapitalization because, immediately following the completion of
the transaction, Catalyst could obtain effective control of the
Company upon conversion of its Series F Convertible Preferred Stock
and promissory note, both of which could occur at Catalyst’s
option. Additionally, officers and senior executive positions
continued on as management of the combined entity after
consummation of the Cellerate Acquisition. For accounting purposes,
Cellerate, LLC was deemed to be the accounting acquirer in the
transaction and, consequently, the transaction was treated as a
recapitalization of Sanara MedTech. As part of the reverse
merger and recapitalization, the net liabilities existing in the
Company as of the date of the Cellerate Acquisition totaling
approximately $1,666,537, which included $508,973 of cash, were
converted to equity. No step-up in basis or intangible assets
or goodwill was recorded in the Cellerate Acquisition.
Reverse Stock Split
Effective May 10, 2019, the Company effected a reverse stock split
of the issued and outstanding shares of the Company’s common
stock at a ratio of one share for every one-hundred shares. All
share and per share information in the consolidated financial
statements and the accompany notes have been adjusted to reflect
the reverse stock split. Concurrent with the reverse stock split,
the Company changed its corporate name from Wound Management
Technologies, Inc. to Sanara MedTech Inc.
The reverse stock split did not change a shareholder’s
ownership percentage of the Company's common stock, except for the
small effect where the reverse stock split would result in a
shareholder owning a fractional share. No fractional shares were
issued as a result of the reverse split. Shareholders who were
otherwise entitled to receive a fractional share received a cash
payment based on the market price of a share of the common stock on
May 13, 2019.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Sanara MedTech Inc. and its 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 Solutions, Limited, an unaffiliated
company registered in the United Kingdom
(“WCS”)
.
All
significant intercompany profits, losses, transactions and balances
have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. The extent to which
the COVID-19 pandemic may directly or indirectly impact our
business, financial condition, and results of operations is highly
uncertain and subject to change. We considered the potential impact
of the COVID-19 pandemic on our estimates and assumptions and
determined there was not a material impact on our estimates and
assumptions used in preparing our consolidated financial statements
as of and for the
year
ended
December 31, 2020
. However, actual results could differ from those
estimates and there may be changes to our estimates in future
periods.
Cash and Cash Equivalents
The
Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash
equivalents.
Income / Loss Per Share
The
Company computes income per share in accordance with Accounting
Standards Codification (“ASC”) Topic 260, Earnings per
Share, which requires the Company to present basic and dilutive
income per share when the effect is dilutive. Basic income per
share is computed by dividing income available to common
shareholders by the weighted average number of shares of common
stock outstanding. Diluted income per share is computed similar to
basic income per share except that the denominator is increased to
include the number of additional shares of common stock that would
have been outstanding if the potential shares of common stock had
been issued and if the additional shares of common stock were
dilutive. All convertible instruments were excluded from the
current and prior period calculations as their inclusion would have
been anti-dilutive during the
years
ended
December 31, 2020
and
2019 due to the Company's net
loss.
The calculation of basic and diluted net loss per share for the
years ended
December 31, 2020
and
2019
are
as follows:
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
Numerator for basic and diluted net loss per share:
|
|
|
|
Net
loss attributable to Sanara MedTech common
shareholders
|
$
(4,356,440
)
|
$
(2,814,088
)
|
|
Denominator for basic and diluted net loss per share:
|
|
|
|
Weighted
average shares used to compute diluted net loss per
share
|
5,734,537
|
2,132,745
|
|
|
|
|
|
Basic
and diluted net loss per share attributable to common
shareholders
|
$
(0.76
)
|
$
(1.32
)
|
60
The
following table summarizes the shares of common stock that were
potentially issuable but were excluded from the computation of
diluted net loss per share
for the
years ended
December 31, 2020
and
2019
as
such shares would have had an anti-dilutive
effect:
|
|
As of December 31,
|
|
|
|
2020
|
2019
|
|
|
|
|
|
Stock
options
|
11,500
|
11,500
|
|
Convertible
debt
|
-
|
178,173
|
|
Preferred
shares
|
-
|
2,273,630
|
|
Unvested
restricted stock
|
170,178
|
-
|
Revenue Recognition
The Company recognizes revenue in accordance with ASC Topic
606, Revenue from Contracts with Customers (“ASC
606”), which the Company adopted on January 1, 2018 using the
modified retrospective method. Revenues are recognized when control
of the promised goods or services is transferred to the customer in
an amount that reflects the consideration the Company expects to be
entitled to receive in exchange for transferring those goods or
services. Revenue is recognized based on the following five step
model:
- Identification of the contract with a customer
- Identification of the performance obligations in the
contract
- Determination of the transaction price
- Allocation of the transaction price to the performance
obligations in the contract
- Recognition of revenue when, or as, the Company satisfies a
performance obligation
Details of this five-step process are as follows:
Identification of the contract with a customer
Customer purchase orders are generally considered to be contracts
under ASC 606. Purchase orders typically identify specific terms of
products to be delivered, create the enforceable rights and
obligations of both parties, and result in commercial substance. No
other forms of contract revenue recognition, such as the completed
contract or percentage of completion methods, were utilized by the
Company in either
2019
or
2020
.
Performance obligations
The Company’s performance obligation is generally limited to
delivery of the requested items to its customers at the agreed upon
quantities and prices.
Determination and allocation of the transaction price
The Company has established prices for its products. These prices
are effectively agreed to when customers place purchase orders with
the Company. Rebates and discounts, if any, are recognized in full
at the time of sale as a reduction of net revenue. Allocation of
transaction prices is not necessary where one performance
obligation exists.
Recognition of revenue as performance obligations are
satisfied
Product revenues are recognized when the products are delivered,
and control of the goods and services passes to the
customer.
61
Disaggregation of Revenue
Revenue streams from product sales and royalties are summarized
below for the
twelve
months
ended
December 31, 2020 and 2019.
All revenue was generated in the United States;
therefore, no geographical disaggregation was
necessary.
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
Product
sales revenue
|
$
15,385,976
|
$
11,607,638
|
|
Royalty
revenue
|
201,000
|
159,125
|
|
Total Revenue
|
$
15,586,976
|
$
11,766,763
|
The Company recognizes royalty revenue from a development and
licensing agreement between BioStructures, LLC and the Company. The
Company records revenue each calendar quarter as earned per the
terms of the agreement which stipulates the Company will receive
quarterly royalty payments of at least $50,250. Under the terms of
the development and license agreement, royalties of 2.0% are
recognized on sales of products containing the Company’s
patented resorbable bone hemostasis. The minimum annual royalty due
to the Company is $201,000 per year throughout the life of the
patent which expires in 2023. These royalties are payable in
quarterly installments of $50,250. To date, royalties related to
this development and licensing agreement have not exceeded the
annual minimum amount of $201,000 ($50,250 per
quarter).
Contract Assets and Liabilities
The Company does not have any contract assets or contract
liabilities.
Accounts Receivable Allowances
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
and
$110,000 in 2020 and 2019
, respectively. The allowance for doubtful
accounts at
December 31, 2020
was
$64,989 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. The Company also establishes other allowances to ensure
accounts receivable are not overstated due to customer rebates and
product returns. These allowances totaled $35,200 at
December 31, 2020 and $13,150
at
December 31, 2019.
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 its accounts receivable
allowances were appropriate at
December 31, 2020
.
Inventories
Inventories
are stated at the lower of cost or net realizable value, with cost
computed on a first-in, first-out basis. Inventories consist of
finished goods and related packaging components. The Company
recorded inventory obsolescence expense of $318,076 in 2020 and
$120,442 in 2019. The allowance for obsolete and slow-moving
inventory had a balance of $276,603 at December 31, 2020, and
$43,650 at December 31, 2019. The Company considered the impact of
COVID-19 on its recorded value of inventory and determined no
adjustment was necessary as of December 31, 2020.
Property and Equipment
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation is recorded using the straight-line
method over the estimated useful lives of the related assets,
ranging from three to ten years. Below is a summary of property and
equipment for the periods presented:
|
|
December 31,
|
December 31,
|
|
|
2020
|
2019
|
|
Computers
|
$
87,252
|
$
87,310
|
|
Office
equipment
|
22,597
|
22,312
|
|
Furniture
and fixtures
|
205,871
|
153,995
|
|
Leasehold
improvements
|
2,030
|
2,030
|
|
Capitalized
software development costs
|
485,530
|
-
|
|
|
803,280
|
265,647
|
|
Less
accumulated depreciation
|
(124,691
)
|
(60,694
)
|
|
|
|
|
|
Property
and equipment, net
|
$
678,589
|
$
204,953
|
62
Depreciation expense related to property and equipment was $67,842
for the twelve months ended December 31, 2020, and $29,940 for the
twelve months ended December 31, 2019.
The
Company considered the impact the COVID-19 pandemic may have had on
the carrying value of its property and equipment and determined
that no impairment loss had occurred as of
December 31, 2020
. The Company will
continue to assess the COVID-19 pandemic's impact on its business
including any indicators of impairment of property and
equipment.
Internal Use Software
The
Company accounts for costs incurred to develop computer software
for internal use in accordance with ASC 350-40. The Company
capitalizes the costs incurred during the application development
stage, which generally includes third-party developer fees to
design the software configuration and interfaces, coding,
installation, and testing.
The
Company begins capitalization of qualifying costs when both the
preliminary project stage is completed, and management has
authorized further funding for the completion of the project. Costs
incurred during the preliminary project stage along with post
implementation stages of internal-use computer software are
expensed as incurred. The Company also capitalizes costs related to
specific upgrades and enhancements when it is probable the
expenditures will result in additional functionality. Capitalized
development costs are classified as property and equipment, net in
the consolidated balance sheets and are amortized over the
estimated useful life of the software, which is generally five to
seven years.
Intangible Assets
Intangible
Assets are stated at cost of acquisition less accumulated
amortization and impairment loss, if any. Cost of acquisition
includes purchase price and any cost directly attributable to
bringing the asset to its working condition for the intended use.
The Company amortizes its intangible assets on a straight-line
basis over the useful life of the respective assets which is
generally the life of the related patents (if
applicable).
See
Note 4
for more information
on intangible assets.
Impairment of Long-Lived Assets
Long-lived assets, including certain identifiable intangibles held
and to be used by the Company, are reviewed for impairment whenever
events or changes in circumstances, including the COVID-19
pandemic, indicate that the carrying amount of such assets may not
be recoverable. The Company continuously evaluates the
recoverability of its long-lived assets based on estimated future
cash flows and the estimated liquidation value of such long-lived
assets and provides for impairment if such undiscounted cash flows
are insufficient to recover the carrying amount of the long-lived
assets. If impairment exists, an adjustment is made to write the
asset down to its fair value, and a loss is recorded as the
difference between the carrying value and fair value. Fair values
are determined based on quoted market values, undiscounted cash
flows or internal and external appraisals, as applicable. Assets to
be disposed of are carried at the lower of carrying value or
estimated net realizable value. No impairment was recorded
during the years ended
December 31,
2020
and 2019.
Investments in Equity Securities
The Company’s equity investments consist of non-marketable
equity securities in privately held companies without readily
determinable fair values, and are reported at cost minus
impairment, if any, plus or minus changes resulting from observable
price changes in orderly transactions for the identical or similar
investment of the same issuer. The Company has reviewed the
carrying value of its investments and has determined there was no
impairment or observable price changes as of December 31,
2020.
Fair Value Measurement
As defined in ASC Topic 820, Fair Value Measurement (“ASC
820”), fair value is the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date (exit price).
The Company utilizes market data or assumptions that market
participants would use in pricing the asset or liability, including
assumptions about risk and the risks inherent in the inputs to the
valuation technique. These inputs can be readily observable, market
corroborated, or generally unobservable. ASC 820 establishes a fair
value hierarchy that prioritizes the inputs used to measure fair
value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities
(level 1 measurement) and the lowest priority to unobservable
inputs (level 3 measurement). This fair value measurement framework
applies at both initial and subsequent measurement.
63
The three levels of the fair value hierarchy defined by ASC 820 are
as follows:
Level 1 – Quoted prices are available in active markets for
identical assets or liabilities as of the reporting date. Active
markets are those in which transactions for the asset or liability
occur in sufficient frequency and volume to provide pricing
information on an ongoing basis. Level 1 primarily consists of
financial instruments such as exchange-traded derivatives,
marketable securities and listed equities.
Level 2 – Pricing inputs are other than quoted prices in
active markets included in Level 1, which are either directly or
indirectly observable as of the reported date. Level 2 includes
those financial instruments that are valued using models or other
valuation methodologies. These models are primarily
industry-standard models that consider various assumptions,
including quoted forward prices for commodities, time value,
volatility factors, and current market and contractual prices for
the underlying instruments, as well as other relevant economic
measures. Substantially all of these assumptions are observable in
the marketplace throughout the full term of the instrument, can be
derived from observable data or are supported by observable levels
at which transactions are executed in the marketplace. Instruments
in this category generally include non-exchange-traded derivatives
such as commodity swaps, interest rate swaps, options and
collars.
Level 3 – Pricing inputs include significant inputs that are
generally less observable from objective sources. These inputs may
be used with internally developed methodologies that result in
management’s best estimate of fair value.
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.
Income Taxes
Income
taxes are accounted for under the asset and liability method,
whereby deferred income taxes are recorded for temporary
differences between financial statement carrying amounts and the
tax basis of assets and liabilities. Deferred tax assets and
liabilities reflect the tax rates expected to be in effect for the
years in which the differences are expected to reverse. A valuation
allowance is provided if it is more likely than not that some or
all of the deferred tax asset will not be
realized.
Advertising Expense
In
accordance with ASC Topic No. 720-35-25-1, the Company recognizes
advertising expenses the first time the advertising takes place.
Such costs are expensed immediately if such advertising is not
expected to occur.
Share-based Compensation
The
Company accounts for stock-based compensation to employees and
nonemployees in accordance with Accounting Standards Update
(“ASU”) 2018-07 Topic 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.
Research and Development Costs
Research
and development expenses include costs for contracted services
related to improvements to manufacturing processes, enhancements to
the Company’s currently available products, and additional
investments in the product and platform development pipeline. The
Company expenses research and development costs as
incurred.
Recently Adopted Accounting Pronouncements
In 2019, the Company changed its method of accounting for leases
due to the adoption of ASU No. 2016-02, Leases; as modified by ASUs
2018-01, 2018-10, 2018-11, and 2018-20.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, Simplifications to
Accounting for Income Taxes, which removes 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 Company is currently evaluating the impact of the
adoption of this standard on the Company's consolidated financial
statements.
64
NOTE 3 – NOTES PAYABLE
Convertible Notes Payable – Related Party
As part of the Cellerate Acquisition, the Company issued a 30-month
convertible promissory note to
CGI Cellerate RX, LLC
(“CGI Cellerate RX”), an affiliate of
The Catalyst Group, Inc.
(“
Catalyst”),
in
the principal amount of $1,500,000, bearing interest at a 5% annual
interest rate, compounded quarterly. Interest on the promissory
note was payable quarterly but could have been deferred at the
Company’s election to the maturity of the promissory note.
Outstanding principal and interest were convertible at
CGI
Cellerate RX
’s option into
shares of the Company’s common stock at a conversion price of
$9.00 per share.
On February 7, 2020, CGI Cellerate RX 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 December
31, 2020, there were no related party promissory notes or accrued
interest outstanding.
The
table below summarizes amounts due to related parties, including
accrued interest separately recorded, as of
December 31, 2020
and 2019:
|
|
|
Principal Amount
|
Accrued Interest
|
||
|
Note Payable
|
Terms of the agreement
|
2020
|
2019
|
2020
|
2019
|
|
|
|
|
|
|
|
|
August 27, 2018
Promissory Note
|
A $1,500,000 note
payable (i) interest accrues at 5% per annum and compounds
quarterly (ii) original maturity date of March 1, 2021
|
$
-
|
$
1,500,000
|
$
-
|
$
103,557
|
|
|
|
|
|
|
|
|
Total
|
|
$
-
|
$
1,500,000
|
$
-
|
$
103,557
|
|
|
|
|
|
|
|
NOTE 4 – INTANGIBLE ASSETS
The
carrying values of the Company’s finite-lived intangible
assets were as follows:
|
|
December 31, 2020
|
December 31, 2019
|
||||
|
|
|
Accumulated
|
|
|
Accumulated
|
|
|
|
Cost
|
Amortization
|
Net
|
Cost
|
Amortization
|
Net
|
|
Product
Licenses
|
$
3,350,000
|
$
(264,909
)
|
$
3,085,091
|
$
1,500,000
|
$
(48,876
)
|
$
1,451,124
|
|
Patent
|
510,310
|
(510,310
)
|
-
|
510,310
|
(510,310
)
|
-
|
|
Software
and Other
|
64,464
|
(51,889
)
|
12,575
|
64,464
|
(44,394
)
|
20,070
|
|
|
|
|
|
|
|
|
|
Total
|
$
3,924,774
|
$
(827,108
)
|
$
3,097,666
|
$
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”), a related party,
upon FDA clearance
of BIAKŌS Antimicrobial Wound Gel pursuant to the terms of the
BIAKŌS License Agreement. The milestone payment was recorded
as an addition to intangible assets. During the second quarter of
2020, the Company entered into the Debrider License Agreement which
required an initial payment of $1,350,000 to Rochal which consisted
of $600,000 in cash and $750,000 in the Company’s common
stock.
65
As of
December 31, 2020, the weighted-average amortization period for all
intangible assets was 12.8 years. Amortization expense related to
intangible assets was $223,528 for the twelve months ended December
31, 2020 and $90,011 for the twelve months ended December
31,
2019. The estimated
remaining amortization expense as of December 31, 2020 is as
follows:
|
2021
|
$
258,059
|
|
2022
|
255,645
|
|
2023
|
250,564
|
|
2024
|
250,564
|
|
2025
|
250,564
|
|
Thereafter
|
1,832,270
|
|
Total
|
$
3,097,666
|
The Company has reviewed the carrying value of intangible assets
due to the events and circumstances surrounding the COVID-19
pandemic.
The Company does not believe the impact of
COVID-19 has created an
impairment
loss on the Company’s intangible assets as of
December
31
, 2020. Accordingly, there was
no impairment loss recognized on the Company’s
intangible assets during the
twelve
months ended
December 31, 2020
.
NOTE 5 – CUSTOMERS AND SUPPLIERS
The
Company had no customers in 2020 that accounted for at least 10% of
Company’s annual sales or whose accounts receivable exceeded
10% of the year-end balance. The Company had one customer which
accounted for approximately 10% of Company’s sales in 2019,
and one customer that accounted for 10% of the outstanding accounts
receivable at the end of 2019.
The
Company’s principal revenue producing products are purchased
from one manufacturer. If this supplier became unable to provide
finished goods inventory in a timely manner, the Company’s
business, operating results, and financial condition could be
materially adversely affected.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
License Agreements and Royalties
CellerateRX Activated Collagen
On
August 27, 2018, the Company entered into an exclusive, world-wide
sublicense agreement with CGI Cellerate RX to distribute
CellerateRX Surgical and HYCOL products into the wound care and
surgical markets. The Company pays royalties of 3-5% of annual
collected net sales of CellerateRX Surgical and HYCOL. As amended,
the term of the sublicense extends through May 2050, with automatic
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.
For the years ended December 31, 2020
and 2019
, royalties due under the terms of this agreement
totaled $479,809 and $400,000, respectively.
BIAKŌS Antimicrobial Wound Gel and BIAKŌS Antimicrobial
Skin and Wound Cleanser
On July
7, 2019, the Company executed a license agreement with Rochal, a
related party, whereby the Company acquired an exclusive world-wide
license to market, sell and further develop antimicrobial products
for the prevention and treatment of microbes on the human body
utilizing certain Rochal patents and pending patent applications
(the “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.
Recent
and future commitments under the terms of the BIAKŌS License
Agreement include:
●
In
March 2021, the Company issued 20,834 shares of its common stock to
Rochal as full payment of a $750,000 milestone which became due
upon the Company’s public offering of common stock in
February 2021.
●
The
Company will pay Rochal a royalty of 2-4% of net sales. The minimum
annual royalty due to Rochal was $100,000 in 2020 and will increase
by 10% each subsequent calendar year up to a maximum amount of
$150,000.
●
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.
66
Unless
previously terminated by the parties, the BIAKŌS License
Agreement will expire with the related patents in December
2031.
For the
years ended December 31, 2020
and 2019, royalty expense recognized under this agreement was
$100,000 and $1,206, respectively.
CuraShield Antimicrobial Barrier Film and No Sting Skin
Protectant
On
October 1, 2019, the Company executed a license agreement with
Rochal whereby the Company acquired an exclusive world-wide license
to market, sell and further develop certain antimicrobial barrier
film and skin protectant products for use in the human health care
market utilizing certain Rochal patents and pending patent
applications (the “ABF License Agreement”). Currently,
the products covered by the ABF License Agreement are CuraShield
Antimicrobial Barrier Film and a no sting skin protectant
product.
Future
commitments under the terms of the ABF License Agreement
include:
●
The
Company will pay Rochal a royalty of 2-4% of net sales. The minimum
annual royalty due to Rochal will be $50,000 beginning with the
first full calendar year following the year in which first
commercial sales of the products occur. The annual minimum royalty
will increase by 10% each subsequent calendar year up to a maximum
amount of $75,000.
●
The
Company will pay additional royalties annually based on specific
net profit targets from sales of the licensed products, subject to
a maximum of $500,000 during any calendar year.
Unless previously terminated or extended by the parties, the ABF
License Agreement will terminate upon expiration of the last U.S.
patent in October 2033.
No commercial sales or royalties have been recognized under this
agreement as of December 31, 2020.
Debrider License Agreement
On May
4, 2020, The Company executed a product license agreement with
Rochal, whereby the Company acquired an exclusive world-wide
license to market, sell and further develop a debrider for human
medical use to enhance skin condition or treat or relieve skin
disorders, excluding uses primarily for beauty, cosmetic, or
toiletry purposes (the “Debrider License
Agreement”).
Future
commitments under the terms of the Debrider License Agreement
include:
●
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.
●
Upon
FDA clearance of the licensed products, the Company will pay Rochal
$500,000 in cash and $1,000,000, which at the Company’s
option may be paid in any combination of cash and its common
stock.
●
The
Company will pay Rochal a royalty of 2-4% of net sales. 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.
●
The
Company will pay additional royalty annually based on specific net
profit targets from sales of the licensed products, subject to a
maximum of $1,000,000 during any calendar year.
Unless
previously terminated or extended by the parties, the Debrider
License Agreement will expire in October 2034.
No commercial sales or royalties have been recognized under this
agreement as of December 31, 2020.
67
Resorbable Bone Hemostat
The Company acquired a patent in 2009 for a resorbable bone
hemostat and delivery system for orthopedic bone void
fillers. This patent is not part of the Company’s
long-term strategic focus. The Company subsequently licensed
the patent to a third party to market a bone void filler product
for which the Company receives a 3% royalty on product sales over
the life of the patent, which expires in 2023, with annual minimum
royalties of $201,000. The Company pays two unrelated third parties
a combined royalty equal to eight percent (8%) of the
Company’s net revenues or minimum royalties generated from
products that utilize the Company’s acquired patented bone
hemostat and delivery system. To date, royalties received by
the Company related to this licensing agreement have not exceeded
the annual minimum of $201,000 ($50,250 per quarter). Therefore,
the Company’s annual royalty obligation under the terms of
the license agreement has been $16,080 ($4,020 per
quarter).
Other Commitments
At the time of the formation of Sanara Pulsar, it and WCS entered
into a supply agreement whereby Sanara Pulsar became the exclusive
distributor in the United States of certain wound care products
that utilize intellectual property developed and owned by WCS. In
2019, the Company advanced to WCS $200,000 and recorded the payment
as a reduction of non-controlling interests. In the event
WCS’s Form K-l from Sanara Pulsar for the year 2020 does not
allocate to WCS net income of at least $200,000 (the “Target
Net Income”), then Cellerate, LLC will, within 30 days after
such determination, pay WCS the amount of funds representing the
difference between the Target Net Income and the actual amount of
net income shown on WCS’s Form K-1 for the year 2020. For
each of the years 2021 through 2024 the Target Net Income will
increase by 10%, and in the event WCS’s Form K-1 for any of
those years does not allocate to WCS net income in an amount at
least equal to the Target Net Income for such year, then Cellerate,
LLC will, within 30 days after such determination, pay WCS the
amount of funds representing the difference between the Target Net
Income and the actual amount of net income shown on WCS’s
Form K-1 for the applicable year. All other distributions made by
Sanara Pulsar to its members, not including tax distributions, will
be made exclusively to Cellerate, LLC until such time as Cellerate,
LLC has received an amount of distributions equal to all such
advances to WCS.
NOTE 7 - OPERATING LEASES
The Company periodically enters into operating lease contracts for
office space and equipment. Arrangements are evaluated at inception
to determine whether such arrangements constitute a lease. In
accordance with the transition guidance of ASC 842, such
arrangements are included on the consolidated balance sheets as of
January 1, 2019.
Right of use assets, which we refer to as “ROU assets,”
represent the right to use an underlying asset for the lease
term,
and lease liabilities
represent the obligation to make lease payments arising from the
lease. Operating lease ROU assets and liabilities were recognized
on the transition date based on the present value of lease payments
over the respective lease term, with the office space ROU asset
adjusted for deferred rent liability.
The Company has two operating leases: an office space lease with a
remaining lease term of
42
months
and a copier lease with a remaining lease term of
seven
months as of
December 31, 2020
. In accordance with the transition guidance of
ASC 842, such arrangements are included
on the consolidated
balance sheets
as of January 1,
2019.
All other leases are
short-term leases, which for practical expediency, the Company has
elected to not recognize as lease assets and lease
liabilities.
In March 2017, the Company executed a new office lease for office
space located in Fort Worth, Texas. On July 1, 2019, the Company
amended the office lease agreement which became effective on August
22, 2019 upon completion by the landlord of certain leasehold
improvements. Under the terms of the amended lease agreement, the
Company leased an additional 1,682 rentable square feet of office
space, which brought the total square footage leased to 5,877. The
amended lease agreement extended the original term of the lease for
a period of 36 months through June 30, 2024. The monthly base
rental payments under the amended lease agreement are as
follows:
|
|
|
Monthly
|
|
From
|
Through
|
Base Rental
|
|
August
22, 2019
|
June
30, 2020
|
$
12,243.75
|
|
July
1, 2020
|
June
30, 2021
|
$
12,488.63
|
|
July
1, 2021
|
June
30, 2022
|
$
12,488.63
|
|
July
1, 2022
|
June
30, 2023
|
$
12,733.50
|
|
July
1, 2023
|
June
30, 2024
|
$
12,978.38
|
As the implicit rate in the leases is not determinable, the
discount rate applied to determine the present value of lease
payments is the Company’s incremental borrowing rate of
6.25%. The office space lease agreement contains no renewal terms,
so no lease liability is recorded beyond the termination date. The
copier lease can be automatically renewed but no lease liability is
recorded beyond the initial termination date as exercising this
option is not reasonably certain.
68
In
accordance with ASC Topic 842, the Company has recorded lease
assets of $467,653 and a related lease liability of $481,384 as of
December 31, 2020.
The Company
recorded amortization expense of $117,598 in 2020 for its leased
assets.
Cash paid in 2020 for amounts included in the
measurement of operating lease liabilities as of December 31, 2020
was $150,886. The present value of our operating lease liabilities
is shown below.
Maturity of Operating Lease Liabilities
|
|
December 31, 2020
|
|
2021
|
$
151,317
|
|
2022
|
151,333
|
|
2023
|
154,271
|
|
2024
|
77,870
|
|
2025
|
-
|
|
Thereafter
|
-
|
|
|
|
|
Total
lease payments
|
534,791
|
|
Less
imputed interest
|
(53,407
)
|
|
Present
Value of Lease Liabilities
|
$
481,384
|
|
|
|
|
Operating
lease liability - current
|
125,587
|
|
Operating
lease liability – long term
|
355,797
|
As of
December 31, 2020, our operating leases have a weighted average
remaining lease term of 3.5 years and a weighted average discount
rate of 6.25%.
NOTE 8 – STOCKHOLDERS’ EQUITY
Preferred Stock
On March 13, 2019, the Company established a new series of
preferred stock consisting of 1,200,000 shares of Series F
Convertible Preferred Stock, par value of $10.00 per share. Each
share of Series F Convertible Preferred Stock was convertible at
the option of the holder, at any time, into 2 shares of common
stock. Additionally, each holder of Series F Convertible Preferred
Stock was entitled to vote on all matters submitted for a vote of
the Company’s shareholders with votes equal to the number of
shares of common stock into which such holder’s Series F
Convertible Preferred shares could then be converted. The Series F
Convertible Preferred Stock ranked senior to the Company’s
common stock as to the payment of dividends (if any) and the
distribution of assets. Upon liquidation of the Company, holders of
Series F Convertible Preferred Stock were entitled to a liquidation
preference of $5.00 per share.
On February 7, 2020,
CGI Cellerate RX, an affiliate of
Catalyst,
converted its entire
holdings of its 30-month $1,500,000 convertible promissory note and
1,136,815 shares of Series F Convertible Preferred Stock into
shares of the Company’s common stock. The Company issued an
aggregate of 2,452,731 shares of common stock in the conversions.
After the conversions, Catalyst and its affiliates controlled the
voting of a total of 3,416,587 shares of the Company’s common
stock, which represented 54.3% of the
6,297,008
shares
of common stock outstanding as of
December 31,
2020
.
On December 30, 2020, the Company, following the approval of the
Company’s board of directors, filed a Resolution Relating to
a Series of Shares (the “Resolution”) with the
Secretary of State of the State of Texas, which was effective upon
filing, for the purpose of eliminating the Company’s Series F
Convertible Preferred Stock. No shares of the Series F Convertible
Preferred Stock were outstanding at the time the Resolution was
filed. Following the filing of the Resolution, the shares
previously authorized under the Series F Convertible Preferred
Stock resumed the status of authorized but unissued shares of
preferred stock of the Company.
Common Stock
On May 10, 2019 the Company effected a 1-for-100 reverse stock
split of the Company’s issued and outstanding shares of
common stock. Concurrent with the reverse stock split, the Company
changed its corporate name from Wound Management Technologies, Inc.
to Sanara MedTech Inc.
69
The reverse stock split was previously approved by shareholders of
a majority of the Company’s outstanding voting stock on March
21, 2019. On May 10, 2019, the Company’s common stock began
trading on the OTCQB market under the symbol “WNDMD”
and traded under that symbol until June 6, 2019, at which time the
Company changed its trading symbol to “SMTI”. The
post-split common stock is traded under a new CUSIP number
79957L100. In connection with the reverse stock split, the Company
also made a corresponding adjustment to the Company’s
authorized capital stock to reduce the authorized common stock to
20,000,000 shares and the authorized preferred stock to 2,000,000
shares, effective May 10, 2019.
The reverse stock split did not change shareholders’
ownership percentage of the Company's common stock, except for the
small effect where the reverse stock split would result in a
shareholder owning a fractional share. No fractional shares were
issued as a result of the reverse split. Shareholders who were
otherwise entitled to receive a fractional share received a cash
payment based on the market price of a share of the common stock on
May 13, 2019.
On October 15, 2019, Company closed a private placement of
1,204,820 shares of its common stock at a price of $8.30 per share.
All shares sold by the Company were newly issued shares. The
purchasers in the offering were related party entities to three
members of the Company’s board of directors.
On February 21, 2020, the Company filed a Registration Statement on
Form S-8 which registered an aggregate of 2,000,000 shares of its
common stock that may be issued under the Sanara MedTech Inc. 2014
Omnibus Long-Term Incentive Plan. The Registration Statement on
Form S-8 also covers such additional and indeterminate number of
securities as may become issuable pursuant to the provisions of the
plan relating to adjustments for changes resulting from a share
dividend, share split or similar change. At the Company’s
Annual Meeting of Shareholders held on July 9, 2020, the Company
approved the Restated 2014 Omnibus Long-Term Incentive Plan (the
“LTIP Plan”) in which the Company’s directors,
officers, employees and consultants are eligible to participate. A
total of 248,276 shares had been issued under the LTIP Plan and
1,751,724 were available to issue as of
December 31,
2020
.
Restricted Stock Awards
During
the year ended December 31, 2020, the Company issued restricted
share awards under the LTIP Plan which are subject to certain
vesting provisions and other terms and conditions set forth in each
recipient’s restricted stock agreement.
●
The Company granted
and issued 209,541 shares, net of forfeitures, of restricted common
stock to Company employees, directors, and certain consultants of
the Company. The fair value of these awards is based on the closing
price of the Company’s common stock on the respective grant
dates; then, is recognized as compensation expense on a
straight-line basis over the vesting period of the
award.
●
The Company also
issued 3,735 restricted shares to certain employees under a
restricted stock purchase program which was made available to all
employees in April 2020. Share-based compensation expense related
to the stock purchase program was determined as the fair value of
the stock at purchase date in excess of its purchase price. The
stock purchase program ended on December 31, 2020.
Share-based
compensation expense of $1,402,897, of which $92,516 related to the
stock purchase program, was recognized in selling, general and
administrative expenses during the twelve months ended December 31,
2020. No share-based expense was recognized during the twelve
months ended December 31, 2019.
At
December 31, 2020, there was $1,470,827 of total unrecognized
share-based compensation expense related to unvested share-based
equity awards. Unrecognized share-based compensation expense is
expected to be recognized over a weighted-average period of 0.9
years.
Below
is a summary of restricted stock activity for the twelve months
ended December 31, 2020:
|
|
For the Year Ended
|
|
|
|
December 31, 2020
|
|
|
|
Shares
|
Weighted Average
Grant Date Fair Value
|
|
Non-vested
at beginning of period
|
-
|
$
-
|
|
Granted
|
214,894
|
14.05
|
|
Vested
|
(43,098
)
|
13.58
|
|
Forfeited
|
(1,618
)
|
11.15
|
|
Non-vested
at December 31, 2020
|
170,178
|
$
14.20
|
70
Stock Options
A
summary of the status of outstanding stock options at December 31,
2020 and changes during the twelve-month period then ended is
presented below:
|
|
For the Year Ended
|
||
|
|
December 31, 2020
|
||
|
|
|
Weighted Average
|
Weighted Average Remaining
|
|
|
Options
|
Exercise Price
|
Contract Life
|
|
Outstanding
at beginning of period
|
11,500
|
$
6.00
|
|
|
Granted
|
-
|
-
|
|
|
Exercised
|
-
|
-
|
|
|
Forfeited
|
-
|
$
-
|
|
|
Expired
|
-
|
-
|
|
|
Outstanding
at December 31, 2020
|
11,500
|
$
6.00
|
2.0
|
|
|
|
|
|
|
Exercisable
at December 31, 2020
|
11,500
|
$
6.00
|
2.0
|
NOTE 9 – INCOME TAXES
The
Company accounts for income taxes in accordance with ASC Topic No.
740, “Income Taxes.” This standard requires the Company
to provide a net deferred tax asset or liability equal to the
expected future tax benefit or expense of temporary reporting
differences between book and tax accounting and any available
operating loss or tax credit carry forwards.
After
applying the provisions of Section 382 of the Internal Revenue
Code, the unexpired net operating loss (“NOL”) carry
forward at December 31, 2020 was approximately $13.5 million, of
which, approximately $5.5 million, generated in 2017 and prior,
will expire between 2021 and 2037. Under the Tax Cuts and Jobs Act,
the NOL generated in 2018, 2019 and 2020, of approximately $8.0
million, will have an indefinite carryforward period but can
generally only be used to offset 80% of taxable income in any
particular year. We may be subject to certain limitations in our
annual utilization of NOL carry forwards to off-set future taxable
income pursuant to Section 382 of the Internal Revenue Code, which
could result in NOLs expiring unused.
The
non-current deferred tax asset is summarized below:
|
|
2020
|
2019
|
|
Net
operating loss carry forwards
|
$
2,827,835
|
$
1,876,114
|
|
Valuation
allowance
|
(2,827,835
)
|
(1,876,114
)
|
|
Net
non-current deferred tax asset
|
$
-
|
$
-
|
A 100%
valuation allowance has been provided for all deferred tax assets,
as the ability of the Company to generate sufficient taxable income
in the future is uncertain.
Reconciliations
of the expected federal income tax benefit based on the statutory
income tax rate of 21% to the actual benefit for the years ended
December 31, 2020
and 2019 are
listed below.
|
|
2020
|
2019
|
|
Expected
federal income tax benefit
|
$
914,852
|
$
605,767
|
|
Goodwill
amortization
|
-
|
65,957
|
|
Change
in valuation allowance
|
(1,020,111
)
|
(294,050
)
|
|
NOL
carryover adjusted for expiration
|
111,345
|
(302,134
)
|
|
Pass
through entity income allocation
|
-
|
(94,151
)
|
|
Meals
and entertainment
|
(24,859
)
|
(29,741
)
|
|
Stock-based
compensation
|
(103,657
)
|
48,352
|
|
PPP Loan
Forgiveness
|
122,430
|
-
|
|
Income
tax expense (benefit)
|
$
-
|
$
-
|
All tax
years starting with 2017 are open for examination.
NOTE 10 – DEBT AND CREDIT FACILITIES
Revolving Line of Credit
In December 2018, Cellerate, LLC executed agreements with
Cadence Bank, N.A.(“
Cadence”) which provided Cellerate, LLC
access to a revolving line of credit up to a maximum principal
amount of $1,000,000. The line of credit was used to support the
short-term working capital requirements of Cellerate, LLC. On June
21, 2019, the Company modified the revolving line of credit with
Cadence to increase the maximum principal amount from $1,000,000 to
$2,500,000. On October 16, 2019, the Company paid down the entire
$2,200,000 balance of the revolving line of credit with cash
proceeds received from a private placement of the Company’s
common stock. This revolving line of credit matured on June 19,
2020.
71
See
Note
13
for information regarding a
new credit facility established in early 2021.
Promissory Note – Paycheck Protection Program
On
April 22, 2020, the Company executed an unsecured promissory note
(the “PPP Loan”) to Cadence Bank, N.A.
(“Cadence”) pursuant to the Paycheck Protection Program
(the “PPP”) under Division A, Title I of the federal
Coronavirus Aid, Relief, and Economic Security Act (the
“CARES Act”). The Company used the PPP Loan proceeds
for covered payroll costs and other costs in accordance with the
relevant terms and conditions of the CARES Act.
The PPP
Loan was in the principal amount of $583,000 and bore interest at a
fixed rate of 1.00% per annum. Under the terms of the PPP and the
CARES Act, the Company applied for forgiveness of the full amount
due on the PPP Loan. In November 2020, full amount of the PPP Loan,
including accrued interest, was forgiven and reported under Other
income in the consolidated statements of operations.
NOTE 11 – INVESTMENT IN EQUITY SECURITIES
The Company’s equity investments consist of non-marketable
equity securities in privately held companies without readily
determinable fair values, and are reported at cost minus
impairment, if any, plus or minus changes resulting from observable
price changes in orderly transactions for the identical or similar
investment of the same issuer.
The
Company made a $500,000 long-term investment in July 2020 to
purchase certain non-marketable securities consisting of 7,142,857
Series B-2 Preferred Shares of Direct Dermatology Inc.
(“DirectDerm”), representing 2.9% ownership of
DirectDerm at that time. Through this investment, the Company
received exclusive rights to utilize DirectDerm’s technology
in all acute and post-acute care settings such as skilled nursing
facilities, home health, and wound clinics. The Company does not
have the ability to exercise significant influence over
DirectDerm’s operating and financial activities.
On
November 9, 2020, the Company entered into agreements to purchase
certain non-marketable securities consisting of 150,000 shares of
Series A Convertible Preferred Stock (the “Series A
Stock”) of Precision Healing Inc. (“Precision
Healing”) for an aggregate purchase price of $600,000. The
Series A Stock is convertible into 150,000 shares of common stock
of Precision Healing and has a senior liquidity preference relative
to the common shareholders. The Company invested an additional
$600,000 in February 2021 for 150,000 additional shares of Series A
Stock. The additional shares of Series A Stock will convert into
shares of common stock of Precision Healing at a ratio based on the
date Precision Healing delivers a development milestone related to
a wound diagnostic tool currently under development.
The Company has reviewed the carrying value of its investments and
has determined there was no impairment or observable price changes
as of December 31, 2020.
NOTE 12 - RELATED PARTIES
Payables to Related Parties
The
Company had outstanding payables to related parties totaling
$223,589 at December 31, 2020, and $68,668 at December 31, 2019.
Manufacturing and Technical Services Agreements – related
parties
On
September 9, 2020, the Company executed a manufacturing agreement
with Rochal. Under the terms of the manufacturing agreement, Rochal
agreed to manufacture, package, and label products licensed from
Rochal by the Company. The manufacturing agreement includes
customary terms and conditions for the Company’s industry.
The term of the agreement is for a period of five years unless
extended by the mutual consent of the parties. For the year ended
December 31, 2020, the Company incurred $285,155 of inventory
manufacturing costs with Rochal.
72
On
September 9, 2020, the Company executed a technical services
agreement with Rochal. Under the terms of the technical services
agreement, Rochal will provide its expertise and services on
technical service projects identified by the Company for wound
care, skin care and surgical site care applications. The technical
services agreement includes customary terms and conditions for the
Company’s industry. For the year ended December 31, 2020, the
Company incurred $364,881 of costs for Rochal technical services.
The Company may terminate this agreement at any time.
NOTE 13 - SUBSEQUENT EVENTS
In
accordance with applicable accounting standards for the disclosure
of events that occur after the balance sheet date but before the
financial statements are issued, all significant events or
transactions that occurred after December 31, 2020, are outlined
below.
Public Offering of Common Stock
On
February 12, 2021, the Company entered into an underwriting
agreement (the “Underwriting Agreement”) with Cantor
Fitzgerald & Co. as representative of the 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, 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
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 estimated offering expenses payable by the Company.
Through an insured cash sweep service, the net proceeds have been
deposited in accounts insured by the Federal Deposit Insurance
Corporation. The Company may invest the net proceeds in
investment-grade, interest-bearing securities such as money market
funds, certificates of deposit, or direct or guaranteed obligations
of the U.S. government.
The
Underwriting Agreement contains customary representations,
warranties, and covenants of the Company and also provides for
customary indemnification by each of the Company and the
Underwriters against certain liabilities and customary contribution
provisions in respect of those liabilities.
Revolving Line of Credit
On
January 15, 2021, the Company entered into a Loan Agreement (the
“Loan Agreement”) with Cadence providing for a $2.5
million revolving line of credit. The revolving line of credit
matures on January 13, 2023, and is secured by substantially all of
the Company’s assets. Any amounts outstanding will bear
interest of 0.75% plus the “Prime Rate” designated in
the “Money Rates” section of the Wall Street Journal.
Proceeds from the line of credit are to be used to provide the
Company with additional working capital in support of current
assets and for other general corporate purposes and may not be used
for acquisitions.
The
line of credit contains customary representations and warranties
and requires the Company to maintain compliance with certain
financial covenants, including, among others, a minimum liquidity
of $1,000,000 as of December 31, 2020 and March 31, 2021, a minimum
Tangible Net Worth (as defined in the Loan Agreement) of $1,000,000
and, beginning with the fiscal quarter ending June 30, 2021, a
minimum Interest Coverage Ratio (as defined in the Loan Agreement)
of 1.5 to 1.0. The Loan Agreement also contains customary events of
default. If such an event of default occurs, Cadence would be
entitled to take various actions, including the acceleration of
amounts due under the Loan Agreement. The Company generally may
(and must, under certain circumstances) prepay all or a portion of
the principal outstanding on the revolving line of credit prior to
its contractual maturity.
On
February 11, 2020, the Company made an $800,000 draw on the
revolving line of credit. On February 19, the Company paid down the
entire balance of the revolving line of credit. As of March 30,
2021, there were no outstanding amounts owed by the Company under
the Loan Agreement.
Equity Exchange Agreement
On
January 18, 2021, the Company entered into an Equity Exchange
Agreement (the “Exchange Agreement”), effective as of
January 14, 2021, with two individuals who each owned 50% of the
outstanding equity interests in Woundyne Medical, LLC
(“Woundyne”). Pursuant to the Exchange Agreement, the
Company acquired 100% of the issued and outstanding equity
interests of Woundyne in exchange for the issuance of an aggregate
of 29,536 shares of the Company’s common stock. The primary
asset acquired by the Company is the Woundyne software platform
which allows data related to chronic and surgical wounds to be
tracked, monitored, and interfaced with the software user’s
electronic medical records. Woundyne has no other material assets,
liabilities, or revenues. The issuance of these shares was
capitalized as internal use software. The Company subsequently
changed the name of Woundyne Medical, LLC to WounDerm,
LLC.
The
sale of the shares of the Company’s common stock was exempt
from registration under the Securities Act of 1933, as amended (the
“Securities Act”), pursuant to the exemption provided
in Section 4(a)(2) of the Securities Act and Rule 506(b)
promulgated thereunder as a sale to accredited investors with whom
the Company had a pre-existing relationship.
ITEM 9.
C
HANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A.
C
ONTROLS AND
PROCEDURES
Evaluation of 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 SEC under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”),
is recorded, processed, summarized and reported within the time
periods specified by the SEC’s rules and forms, and that
information is accumulated and communicated to our management,
including our principal executive and principal financial officers
(whom we refer to in this periodic report as our Certifying
Officers), as appropriate to allow timely decisions regarding
required disclosure. Our management evaluated, with the
participation of our Certifying Officers, the effectiveness of our
disclosure controls and procedures as of
December 31,
2020
, pursuant to Rule 13a-15(b)
under the Exchange Act. Based upon that evaluation, our Certifying
Officers concluded that, as of
December 31, 2020
, our disclosure controls and procedures were
effective.
73
Management’s Report on Internal Control over Financial
Reporting
Management
is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act. Our internal control over
financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of the consolidated financial statements for external
reporting purposes in accordance with generally accepted accounting
principles.
Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness of internal control
over financial reporting to future periods are subject to the risk
that controls may become inadequate because of changes in
conditions or that the degree of compliance with the policies or
procedures may deteriorate over time.
Management believes that our policies and procedures provide
reasonable assurance that our operations are conducted with a high
standard of business ethics. In management's opinion, our financial
statements present fairly, in all material respects, our financial
position, results of operations, and cash flows. Management
recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving their objectives. Management applies its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures.
The Company’s management, specifically its Certifying
Officers, has assessed the effectiveness of the Company’s
internal control over financial reporting as of
December 31,
2020
using the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control – Integrated Framework
(2013) and SEC guidance on conducting such
assessments. Based on this assessment, management has
concluded that the Company’s internal control over financial
reporting was effective as of December 31,
2020.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial
reporting that occurred during the quarter ended December
31, 2020 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.
No Attestation Report of Registered Public Accounting
Firm
This
Annual Report on Form 10-K does not include an attestation report
of our registered public accounting firm regarding internal control
over financial reporting. Management’s report was not subject
to attestation by our registered public accounting firm pursuant to
the rules of the SEC that permit us to provide only
management’s report in this Annual Report on Form
10-K.
ITEM 9B.
O
THER
INFORMATION
None.
74
PART III
ITEM 10.
D
IRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE
Board of Directors
The
following table sets forth the names, ages and positions of the
current directors of the Company.
|
NAME
|
AGE
|
POSITION
|
YEAR FIRST ELECTED
|
|
Ronald T. Nixon
|
65
|
Executive Chairman
|
2019
|
|
J. Michael Carmena
|
65
|
Vice Chairman
|
2019
|
|
James W. Stuckert
|
83
|
Director
|
2015
|
|
Ann Beal Salamone
|
70
|
Director
|
2019
|
|
Kenneth E. Thorpe
|
64
|
Director
|
2019
|
|
Robert A. DeSutter
|
52
|
Director
|
2020
|
|
Sara N. Ortwein
|
62
|
Director
|
2020
|
Ronald T.
Nixon,
age
65
,
has been a director of the
Company since March 2019 and has served as Executive Chairman of
the board of directors since May 2019. As Executive Chairman, he
has been involved in strategy planning, execution and identifying
prospective partnerships and acquisition opportunities for the
Company. Mr. Nixon is the Founder and Managing Partner of The
Catalyst Group, Inc., a private investment firm that provides
growth capital and strategic advisory services to private
companies. Mr. Nixon serves on the board of directors of LHC Group,
Inc. as well as a number of private companies, including Trilliant
Surgical, LLC, Rochal, and Triad Life Sciences, Inc. Mr. Nixon also
serves on the Engineering Advisory Board for the Cockrell School of
Engineering at the University of Texas at Austin, where he was the
previous vice chairman. Mr. Nixon holds a Bachelor’s degree
in Mechanical Engineering from the University of Texas at Austin
and is a registered professional engineer (inactive) in Texas. We
believe that Mr. Nixon’s extensive experience with
acquisitions and the capital markets contributes greatly to the
composition of our board of directors and its ability to oversee
the Company’s strategic growth strategy.
J. Michael
Carmena,
age
65
,
has served as Vice Chairman
of the Board and Principal Executive Officer of the Company since
May 2019, and
served as
Chief
Executive Officer from February 2018 to May 2019. He served as
Chief Financial Officer from December 2016 to April 2018. Prior to
joining the Company, Mr. Carmena served as Senior Director,
Business & Sales Operations of Smith and Nephew plc (successor
to Healthpoint Biotherapeutics) from 2010 to 2013. He served as
Senior Director, Finance & Administration of Healthpoint
Biotherapeutics from 2008 to 2010 and as Controller from 1998 to
2008, prior to which he held senior financial positions in a
company engaged in oil and gas exploration and production, ranching
and financial asset management. Mr. Carmena began his professional
career in 1978 with Arthur Andersen & Co. and became a CPA in
1981. Mr. Carmena earned a Bachelor of Business Administration
degree from Texas Christian University. Mr. Carmena’s
extensive wound care experience and leadership roles in finance,
operations, acquisitions, and divestitures make him a valuable
contributor to the Company’s board of directors.
James W.
Stuckert,
age 83, has been a director of the Company since
September 2015. He has been engaged in personal investing
activities from 2004 to 2019. Mr. Stuckert served as Chairman and
Chief Executive Officer of J.J.B. Hilliard, W.L. Lyons, LLC from
December 1995 until December 2003, prior to which he served in
executive and broker positions from 1963. J.J.B. Hilliard, W.L.
Lyons, LLC is a full-service financial asset management firm
headquartered in Louisville, Kentucky. Mr. Stuckert was an initial
investor and served 24 years on the board of directors of Royal
Gold, Inc. He previously has served as chairman of SenBanc Fund; a
director of DataBeam, Inc.; a board member of the Securities
Industry Association and chairman of its regional firms committee;
and a past member of the nominating committee of the New York Stock
Exchange. Mr. Stuckert has served as a member of the board of
trustees of the University of Kentucky and as chairman of its
Finance Committee and as chairman of its Presidential Search
Committee. He has also served as chairman of a local
hospital’s investment committee. Mr. Stuckert earned a
bachelor’s degree in Mechanical Engineering and a Master of
Business Administration degree from the University of Kentucky. We
believe that Mr. Stuckert’s experience as an accomplished
CEO, along with his many years of experience serving as a member of
numerous company boards make him a valuable contributor to our
board of directors.
Ann Beal
Salamone, M.S.
, age
70
,
has been a director of the
Company since August 2019. Ms. Salamone
is a co-founder of Rochal and has served as its
chairman since September 2019, prior to which she served as its
president from 1986 to September 2019. She is one of the principal
inventors of Rochal’s liquid bandages, antimicrobial
compositions and skin regeneration products for burn and wound
treatment, and she has participated in the development of products
for electronics, water purification, personal care and healthcare.
Ms. Salamone has co-founded six companies and invested in and
served on the board of directors of several private entrepreneurial
companies. Ms. Salamone is a member of the National Academy of
Engineering and The Academy of Medicine, Engineering & Science
of Texas. We believe that Ms. Salamone’s medical research and
development background, along with her company leadership
experience provides a valuable scientific and business perspective
to our board of directors.
75
Kenneth E.
Thorpe, Ph.D.,
age
64
,
has been a director of the
Company since August 2019. He has been
the Robert W. Woodruff Professor and Chair of the
Department of Health Policy & Management of the Rollins School
of Public Health of Emory University in Atlanta, Georgia since
1999. From 1983 to 1999 he held faculty positions in the public
health departments at Tulane University, the University of North
Carolina at Chapel Hill, Harvard University and Columbia
University. Since 2007 Dr. Thorpe has served as Chairman of the
Partnership to Fight Chronic Disease. He served on the Board of
Directors of LHC Group, Inc. in 2010; was a consultant in the
Governor’s Office and Legislature of West Virginia in 2011;
and was Co-Chair of the Partnership for the Future of Medicare in
2013. From 1993 to 1995, Dr. Thorpe served as Deputy Assistant
Secretary for Health Policy in the U.S. Department of Health and
Human Services where he coordinated all financial estimates and
program impacts of the Clinton administration’s healthcare
reform proposals. In 1991 he was awarded the Young Investigator
Award as the most promising health services researcher in the
country under age 40 by the Association for Health Services
Research. He has authored multiple articles and books on healthcare
financing, insurance and healthcare reform. Dr. Thorpe received his
Bachelor of Arts degree from the University of Michigan, Master of
Arts degree from Duke University, and Ph.D. from the Rand Graduate
School.
We believe that Dr.
Thorpe’s nationally recognized expertise in health policy and
value-based purchasing strategies provides valuable insight to our
board of directors.
Robert A. DeSutter
,
age 52, is a managing director in Piper Sandler healthcare
investment banking. Mr. DeSutter has 28 years of investment banking
experience. He served as healthcare global group head from 2003 to
2018. Mr. DeSutter has decades of medical technology transaction
experience on numerous buy and sell-side, friendly and hostile,
strategic and financial buyer and public and private deals on a
global basis. Mr. DeSutter has completed financing transactions
involving public and private equity, convertible debt and
senior/sub debt. Mr. DeSutter was an investor and Board member for
his family’s sporting goods business, Great Plains Sporting
Goods LLC, from 2002 to 2009, which ultimately sold to a public
company. Mr. DeSutter is a graduate of the University of Minnesota
Carlson School of Management and the University of Virginia’s
Darden Graduate School of Business. Recognized as a global leader
in healthcare investment banking, we believe that Mr. DeSutter is
an invaluable contributing member of our board of
directors.
Sara N. Ortwein
, age
62, retired from ExxonMobil in March 2019, after a
thirty-eight-year career. Prior to retiring, she was president of
XTO Energy, a subsidiary of ExxonMobil, from November 2016 through
February 2019 and was responsible for ExxonMobil’s
unconventional oil and gas business. Ms. Ortwein also served in
various roles including president of ExxonMobil Upstream Research
Company, senior manager within ExxonMobil’s U.S. production
operations, and corporate upstream advisor to senior management at
ExxonMobil’s headquarters in Irving, Texas. Ms. Ortwein
earned a Bachelor of Science degree in civil engineering at the
University of Texas at Austin before joining Exxon Company, U.S.A.
in 1980. We believe that Ms. Ortwein’s extensive leadership
experience with a top five global company contributes greatly to
the composition of our board of directors.
There are no agreements or understandings between our directors and
executive officers or any other person pursuant to which they were
selected as a director or executive officer.
Executive Officers
The
following table sets forth the names, ages and positions of the
executive officers of the Company.
|
NAME
|
|
AGE
|
|
POSITION
|
|
J. Michael Carmena
|
|
65
|
|
Principal Executive Officer
|
|
Michael D. McNeil
|
|
56
|
|
Chief Financial Officer
|
|
Shawn M. Bowman
|
|
45
|
|
Co-Chief Operating Officer and President, Wound Care
|
|
Zachary B. Fleming
|
|
46
|
|
Co-Chief Operating Officer and President, Surgical
|
|
Christopher A. Morrison
|
|
50
|
|
President, Telehealth Services
|
J. Michael
Carmena
serves as the Principal
Executive Officer of the Company and has served as an executive
officer of the Company since December 2016. His business experience
is discussed above in “Board of
Directors.”
Michael D. McNeil,
age 56, has served as the Company’s Chief Financial Officer
since April 2018. Prior to joining the Company, Mr. McNeil served
as Controller for Smith and Nephew’s U.S. Advanced Wound
Management Division from 2012 to 2018. Mr. McNeil previously served
as Controller and Assistant Controller with Healthpoint
Biotherapeutics from 1999 to 2012. Prior to his employment at
Healthpoint, Mr. McNeil held several finance and internal audit
positions with Burlington Resources, Snyder Oil Corporation, and
Union Pacific Corporation. Mr. McNeil earned his Bachelor of
Science in Business Administration from the University of Nebraska
and is a Texas certified public accountant.
76
Shawn M. Bowman,
age
45, has served as President, Wound Care Division since May 2019,
and was named Co-Chief Operating Officer on January 28, 2020. Mr.
Bowman previously served as the Company’s Vice President and
General Manager, Wound Care since September 2018. Mr. Bowman will
be responsible for leading the strategic expansion of the
Company’s wound care division. Mr. Bowman has over eighteen
years of experience in the medical device, biologics and
pharmaceutical industries. Prior to joining Sanara MedTech, Mr.
Bowman built two successful teams as Senior Vice President of
Wellsense, and as a National Sales Director for Smith &
Nephew’s Advanced Wound Management Division. Mr. Bowman
earned a Bachelor of Science in Marketing from the University of
Connecticut.
Zachary B. Fleming,
age 46
,
was appointed to
the position of President, Surgical Division on May 28, 2019, and
was named Co-Chief Operating Officer on January 28, 2020. Mr.
Fleming joined the Company as Vice President of Sales in November
2017 and was promoted to Vice President, Surgical in September
2018. Mr. Fleming will be responsible for the continued expansion
and management of the surgical sales force as well as new product
introductions. Mr. Fleming has spent over fourteen years in the
medical industry with Healthpoint Biotherapeutics, Smith &
Nephew and Sanara MedTech. Mr. Fleming earned a Bachelor of Science
from Indiana University.
Christopher A.
Morrison
,
M.D.,
age 50, has served as the President, Telehealth Services since
October 2020 and was designated as an executive officer of the
Company on February 8, 2021. Dr. Morrison is board-certified by
both the American Board of Family Medicine and the American Board
of Preventive Medicine. Dr. Morrison is the founder and former CEO
of Nautilus Health Care Group, where he served in such capacity
from 2000 until Nautilus Health Care Group was acquired by
Healogics, Inc. in 2012, where he then served as President and
Executive Medical Director of Healogics Specialty Physicians. In
2018, Dr. Morrison founded MGroup Strategies, an investment and
consulting firm focused on helping health care service and
technology companies build innovative and market-leading strategies
with a focus on the complexities of multi-state corporate practice
of medicine requirements and the positive influence of telemedicine
in the future of health care. Dr. Morrison earned a Bachelor of
Science degree in Biology and a Medical Doctorate degree from
Indiana University.
Indebtedness of Directors and Executive Officers
None of
our directors or executive officers or their respective associates
or affiliates is indebted to us.
Involvement in Certain Legal Proceedings
There have been no material legal proceedings that would require
disclosure under the federal securities laws that are material to
an evaluation of the ability or integrity of our directors or
executive officers or in which any director, officer, nominee or
principal stockholder, or any affiliate thereof, is a party adverse
to us or has a material interest adverse to us.
Family Relationships
There
are no family relationships among our directors or executive
officers.
Director Nominations by Security Holders
There have been no material changes to the procedures by which
security holders may recommend nominees to our board of directors
since those procedures were described in our proxy statement for
our 2020 Annual Meeting of Shareholders.
Committees of the Board of Directors
Audit Committee
We have
a standing audit committee established within the meaning of
Section 3(a)(58)(A) of the Exchange Act. Our audit committee
consists of Mr. DeSutter, Mr. Stuckert and Mr. Thorpe, with Mr.
Stuckert serving as chairman. Our board of directors has determined
that each of Mr. DeSutter, Mr. Stuckert and Mr. Thorpe are
independent under Nasdaq listing standards and Rule 10A-3(b)(1) of
the Exchange Act. Our board of directors has also determined that
each member of our audit committee can read and understand
fundamental financial statements in accordance with applicable
requirements. In arriving at these determinations, the board of
directors has examined each audit committee member’s scope of
experience and the nature of their current and prior
employment.
77
The
functions of the audit committee include, among other
things:
●
selecting
a qualified firm to serve as the independent registered public
accounting firm to audit our financial statements and prepare or
issue an audit report;
●
helping
to ensure the independence and performance of the independent
registered public accounting firm;
●
discussing
the scope and results of the audit with the independent registered
public accounting firm, and reviewing, with management and the
independent accountants, our annual and quarterly financial
statements, as well as all internal control reports;
●
establishing
and overseeing procedures for employees to submit concerns
confidentially and anonymously about questionable accounting or
auditing matters;
●
reviewing
our policies on risk assessment and risk management, including our
major financial risk exposures and cybersecurity
risks;
●
reviewing
and approving related-party transactions;
●
obtaining
and reviewing a report by the independent registered public
accounting firm that describes our internal quality-control
procedures, any material issues with such procedures, and any steps
taken to deal with such issues when required by applicable law;
and
●
approving
(or, as permitted, pre-approving) all audit and all permissible
non-audit services, to be provided by the independent registered
public accounting firm.
Our
board of directors has designated Mr. DeSutter as an “audit
committee financial expert” as defined under the applicable
SEC rules and determined that he has accounting or related
financial management expertise as required under Nasdaq rules. A
copy of the audit committee charter is available on our website at
www.sanaramedtech.com/corporate-governance/
.
Compensation Committee
Our
compensation committee consists of Mr. DeSutter and Mr. Thorpe,
with Mr. Thorpe serving as the chairman. Our board of directors has
determined that each of Mr. DeSutter and Mr. Thorpe are independent
under Nasdaq listing standards and “non-employee
directors” as defined in Rule 16b-3 promulgated under the
Exchange Act. The compensation committee, with input from our
Principal Executive Officer, reviews and approves, or recommends
that our board of directors approve, the compensation of our
executive officers. Prior to the formation of the compensation
committee, our board of directors reviewed and approved both
director and executive officer compensation, and our board of
directors continues to review and approve director compensation. A
copy of the compensation committee charter is available on our
website at
www.sanaramedtech.com/corporate-governance/
.
The
functions of the compensation committee include, among other
things:
●
reviewing
and approving our goals and objectives applicable to the
compensation of our executive officers;
●
determining
and approving the compensation of our executive
officers;
●
reviewing
and approving and, when appropriate, recommending that our board of
directors approve any employment agreements and any severance
arrangements for our executive officers;
●
reviewing,
administering and making recommendations to our board of directors
with respect to our incentive equity plans;
●
reviewing
our incentive compensation arrangements to determine whether they
encourage excessive risk-taking and evaluating compensation
policies and practices that could mitigate any such risk;
and
●
evaluating
and approving plans, policies, programs and arrangements relating
to compensation and benefits of our employees.
78
Nominating and Corporate Governance Committee
Our
nominating and corporate governance committee consists of Mr.
DeSutter, Mr. Stuckert and Mr. Thorpe, with Mr. DeSutter serving as
chairman. A copy of the nominating and corporate governance
committee charter is available on our website at
www.sanaramedtech.com/corporate-governance/
.
The
functions of the nominating and corporate governance committee
include, among other things:
●
identifying
individuals qualified to serve on our board of directors and its
committees consistent with criteria approved by our board of
directors;
●
recommending
a slate of director nominees for approval by our board of directors
for election by the shareholders of the Company at the annual
meeting;
●
recommending
director nominees to fill any vacancies on our board of directors,
in accordance with our Certificate of Formation, bylaws and Texas
law;
●
reviewing
and making recommendations regarding the structure and composition
of the committees of our board of directors;
●
developing
and making recommendations to our board of directors with regard to
our corporate governance guidelines applicable to us;
and
●
developing
and recommending to our board of directors for approval the
Principal Executive Officer succession plan.
Meetings and Committees of the Board
Our
business is managed under the direction of the board of directors.
The board of directors meets on a regular basis, at least
quarterly, to review significant developments affecting the Company
and to act on matters requiring the approval of the board or
directors. In addition to regularly scheduled meetings, the board
of directors also holds special meetings when the Company faces a
matter requiring attention or action by the board of
directors.
Nominations
The
nominating and corporate governance committee is responsible for
identifying qualified candidates to be appointed as nominees for
director. When identifying director nominees, the board of
directors may consider, among other factors, the potential
nominee’s reputation, integrity, independence from the
Company, skills and business, government or other professional
acumen, bearing in mind the composition of the board of directors
and the current state of the Company and the industry generally.
The board of directors may also consider the number of other public
companies for which the person serves as director and the
availability of the person’s time and commitment to the
Company. In the case of current directors being considered for
re-nomination, the board of directors will also consider the
director’s tenure as a member of the board of directors, the
director’s history of attendance at meetings of the board of
directors and the director’s preparation for and
participation in such meetings.
Shareholders
seeking to nominate director candidates may do so in compliance
with the Company’s Bylaws. Any recommendation must be in
writing to the Corporate Secretary of the Company and provide the
recommended candidate’s name, biographical data and
qualifications.
Following
identification of the need to add or re-elect a director to the
board of directors, and consideration of the above criteria and any
shareholder recommendations, the board of directors submits its
recommended nominees to the shareholders for election at a meeting
of shareholders.
Board Leadership Structure
The
leadership structure of the board of directors provides that
two individuals serve the positions of Chairman of the board of
directors and Principal Executive Officer of the Company. The board
of directors currently believes that this leadership structure best
serves the board of directors’ objectives of oversight of
management and the performance of its roles and responsibilities on
behalf of shareholders. This structure facilitates the ability of
the Executive Chairman to focus efforts on strategic planning and
growth of the Company and allows the Principal Executive Officer to
concentrate on management and operations of the
Company.
79
Risk
Management
The
board of directors is responsible for overseeing the
Company’s management and operations. The audit
committee
provides
general oversight of the integrity of the Company’s financial
statements, the Company’s compliance with legal and
regulatory requirements, the independent auditor’s
qualifications and independence, and risk assessment and
management. We believe that the board of directors provides
effective oversight of risk management functions. On a regular
basis we perform a risk review wherein the management team
evaluates the risks we expect to face in the upcoming year and over
a longer-term horizon. Plans are then developed to address the
risks identified. In addition, members of our management team
periodically present to the Board the strategies, issues and plans
for the areas of our business for which they are responsible. While
the board of directors oversees risk management, our management
team is responsible for the Company’s day-to-day risk
management processes. Additionally, the board of directors requires
that management raise exceptional issues to the board of directors.
We believe this division of responsibilities is the most effective
approach for addressing the risks we face and that the board of
directors leadership structure supports this approach.
Meeting Attendance
The
board of directors met twelve times in 2020 and acted four times by
unanimous written consent. All of the directors attended in excess
of 75 percent of the total number of meetings of the board of
directors and the committees on which they served.
Code of Ethics
The
Company adopted a Code of Ethics and Business Conduct (“Code
of Ethics”) applicable to all directors, officers and
employees. The Code of Ethics addresses, among other things, honest
and ethical conduct, conflicts of interest, business opportunities,
fair dealing, confidentiality and disciplinary measures. The Code
of Ethics can be found on the Company’s website at
www.sanaramedtech.com
under the Investors Relations tab.
We intend to disclose any
amendments to our Code of Ethics on our website at
www.sanaramedtech.com
under
the Investors Relations tab.
Shareholder Communications with the Board of Directors
Any
Company shareholder or other interested party who wishes to
communicate with the non-management directors as a group may direct
such communications by writing to the:
Corporate
Secretary
Sanara
MedTech Inc.
1200
Summit Avenue, Suite 414
Fort
Worth, TX 76102
The
communication must be clearly addressed to the board of directors
or to a specific director. If a response is desired, the individual
should also provide contact information such as name, address and
telephone number.
All
such communications will be reviewed initially by the Corporate
Secretary, who will forward to the appropriate director(s) all
correspondence, except for items of the following
nature:
●
advertising;
●
promotions of a
product or service;
●
patently offensive
material; and
●
matters completely
unrelated to the Board’s functions, Company performance,
Company policies or that could not reasonably be expected to affect
the Company’s public perception.
The
Corporate Secretary will prepare a periodic summary report of all
such communications for the board of directors. Correspondence not
forwarded to the board of directors will be retained by the Company
and will be made available to any director upon such
director’s request.
ITEM 11.
E
XECUTIVE
COMPENSATION
Overview
The compensation program for our executive officers, as presented
in the Summary Compensation Table below, is administered by our
board of directors. The intent of our compensation program is to
align our executives’ interests with those of our
shareholders, while providing reasonable and competitive
compensation.
80
The purpose of this Executive Compensation discussion is to provide
information about the material elements of compensation that we pay
or award to, or that is earned by: (i) the individuals who served
as our principal executive officer during fiscal 2020; (ii) our two
most highly compensated executive officers, other than the
individuals who served as our principal executive officer, who were
serving as executive officers, as determined in accordance with the
rules and regulations promulgated by the SEC, as of December 31,
2020, with compensation during fiscal year 2020 of $100,000 or
more; and (iii) up to two additional individuals for whom
disclosure would have been provided pursuant to clause (ii) but for
the fact that such individuals were not serving as executive
officers on December 31, 2020. We refer to these individuals as our
“named executive officers.” For 2020, our named
executive officers and the positions in which they served are
listed below. We have also included one additional individual on a
voluntary basis:
●
J.
Michael Carmena, our Principal Executive Officer;
●
Michael
D. McNeil, our Chief Financial Officer;
●
Zachary
B. Fleming, our Co-Chief Operating Officer and President, Surgical;
and
●
Shawn
M. Bowman, our Co-Chief Operating Officer and President, Wound
Care.
The
following table and the accompanying notes provide summary
information for each of the last two fiscal years concerning cash
and non-cash compensation awarded to, earned by or paid to our
named executive officers (or those acting in a similar
capacity).
SUMMARY COMPENSATION TABLE
|
|
|
|
Salary
|
Bonus
|
Stock awards
|
All other compensation
|
Total
|
|
Name and Principal Position
|
|
Year
|
($)
(1)
|
($)
(2)
|
($)
(3)
|
($)
(4)
|
($)
|
|
|
|
|
|
|
|
|
|
|
J. Michael Carmena,
Principal Executive Officer
|
|
2020
|
185,000
|
75,000
|
232,226
|
8,000
|
500,226
|
|
|
|
2019
|
200,000
|
75,000
|
-
|
9,600
|
284,600
|
|
|
|
|
|
|
|
|
|
|
Michael D. McNeil,
Chief Financial Officer
|
|
2020
|
161,875
|
87,500
|
153,519
|
6,837
|
409,731
|
|
|
|
2019
|
168,000
|
70,500
|
-
|
5,085
|
243,585
|
|
|
|
|
|
|
|
|
|
|
Zachary B. Fleming,
Co-Chief Operating Officer and President, Surgical
|
|
2020
|
208,125
|
112,500
|
246,755
|
24,785
|
592,165
|
|
|
|
2019
|
204,167
|
115,000
|
-
|
11,746
|
330,913
|
|
|
|
|
|
|
|
|
|
|
Shawn M. Bowman,
Co-Chief Operating Officer and President, Wound Care
|
|
2020
|
208,125
|
90,000
|
225,159
|
28,305
|
551,589
|
|
|
|
2019
|
204,167
|
105,000
|
-
|
11,746
|
320,913
|
Notes to Summary Compensation Table
(1)
Represents the
amount of base salary actually earned by the named executive
officer. For additional information concerning our named executive
officer base salaries, see “Narrative Disclosure to Summary
Compensation Table” below.
(2)
Represents cash
bonuses earned in the respective years.
(3)
The amounts reported in this column do not reflect the actual
economic value realized by our named executive officers. In
accordance with SEC rules, this column represents the aggregate
grant date fair value of shares underlying stock awards, calculated
based on the closing price of the Company’s common stock on
the date of grant in accordance with ASC 718.
(4)
Represents amounts
paid as reimbursement of certain income taxes, our 4% matching
contribution under our 401(k) savings plan, and the payment of
certain auto allowances.
81
NARRATIVE DISCLOSURE TO SUMMARY COMPENSATION TABLE
Executive Compensation Overview
Our compensation committee determines and approves the compensation
provided to our executive officers. Executive compensation
typically consists of a base salary, an annual cash bonus and
longer-term incentive compensation of equity-based incentive
awards. The intent of our compensation program is to, among other
things, align our executives’ interests with those of our
shareholders, while providing reasonable and competitive
compensation.
Compensation Changes in Response to COVID-19
In response to the uncertainty surrounding the COVID-19 global
pandemic and in an effort to dampen its adverse financial effect on
the Company, we reduced the base salaries for employees holding
positions of senior manager and above by 10%, effective April 1,
2020. To offset the reduction in the base salaries and to encourage
retention and job performance, the board of directors determined in
September 2020 to (i) award restricted stock to certain employees
and (ii) adopt an Employee Stock Purchase Plan, under our 2014
Omnibus Long Term Incentive Plan, as amended and restated, where
participating employees were provided the opportunity to purchase
our restricted stock at a discounted price. See “Stock
Awards” below for more information.
Base Salary
The base salaries of our named executive officers are described in
further detail below:
|
|
Base Salaries
|
|
|
|
Name
|
2019
(1)
|
2020
(2)
|
% Change
|
|
J. Michael Carmena
|
$
200,000
|
$
180,000
|
-10%
|
|
Michael D. McNeil
|
$
175,000
|
$
157,500
|
-10%
|
|
Zachary B. Fleming
|
$
225,000
|
$
202,500
|
-10%
|
|
Shawn M. Bowman
|
$
225,000
|
$
202,500
|
-10%
|
(1)
Represents base salary
in effect as of December 31, 2019.
(2)
Represents base salary
in effect following reduction effective April 1,
2020.
As described above, the Company reduced the base salaries of our
named executive officers by 10% effective April 1,
2020.
Stock Awards
Following the base salary reductions described above, in September
2020, our board of directors granted the named executive officers
the following awards of restricted stock in an effort to encourage
enhanced job performance and provide retention
incentives:
|
Executive Officer
|
|
Shares of restricted stock
(1)
|
|
J. Michael Carmena
|
|
1,425
|
|
Michael D. McNeil
|
|
1,247
|
|
Zachary B. Fleming
|
|
1,603
|
|
Shawn M. Bowman
|
|
1,603
|
(1)
For
each named executive officer, 50% of
the shares vested on
January 1, 2021, and the other 50% will vest on July 1,
2021.
In February and April 2020, our board of directors approved the
following annual restricted stock grants to our named executive
officers:
|
Executive Officer
|
|
Shares of restricted stock
(1)
|
|
J. Michael Carmena
|
|
17,249
|
|
Michael D. McNeil
|
|
10,637
|
|
Zachary B. Fleming
|
|
18,105
|
|
Shawn M. Bowman
|
|
16,065
|
(1)
For each named
executive officer,
the
shares of restricted stock vest on various dates beginning in March
2020 and ending in January 2023.
82
Cash Bonuses
In March 2021, the compensation committee approved discretionary
cash bonuses, as shown above in the Summary Compensation Table, for
our named executive officers based on Company and individual
performance in 2020.
Other Compensation
Benefits and Retirement Plans
. We provide company benefits
that we believe are standard in the industry to all of our
employees, including our named executive officers. These benefits
consist of a group medical insurance program for employees and
their qualified dependents, the majority of which is currently paid
for by the Company. We sponsor a 401(k) tax deferred savings plan,
whereby we match a portion of each employees’ contributions
in cash. Participation in the plan is voluntary and all employees
of the Company who are 18 years of age are eligible to participate.
The Company matches employee contributions dollar-for-dollar on the
first 4% of an employee’s pre‑tax earnings, subject to
individual IRS limitations.
We do
not sponsor any pension benefit plans and none of our named
executive officers contribute to such a plan.
Non-Qualified Deferred Compensation
.
We do not sponsor any non-qualified
defined compensation plans or other non-qualified deferred
compensation plans and none of our named executive officers
contribute to any such plans.
Perquisites and Indemnification
. We do not typically provide
perquisites to our named executive officers that are not available
to employees generally. However, from time to time, we may provide
perquisites for recruitment or retention purposes. We have agreed
to pay Mr. Carmena an auto allowance of $800 per month, and Messrs.
Bowman and Fleming each receive auto allowances in the amount of
$900 per month. In addition, pursuant to our organizational
documents, we are required to indemnify, to the fullest extent
permitted by applicable law, any person who was or is made, or is
threatened to be made, a party, or is otherwise involved in any
action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, by reason of the fact that he or
she, or a person for whom he or she is a legal representative, is
or was a director or an officer of the Company, including our named
executive officers.
Employment Agreements
We have
employment agreements with two of our named executive officers, Mr.
Bowman and Mr. Fleming. We do not have employment agreements with
Mr. Carmena or Mr. McNeil. Pursuant to our employment arrangements
with Messrs. Carmena and McNeil, we pay them an annual salary that
is subject to periodic adjustment by our compensation committee,
and our compensation committee may award them an annual
discretionary cash bonus and discretionary equity awards. Our
employment agreements with Mr. Bowman and Mr. Fleming are described
below.
Bowman and Fleming Agreements
. Effective June 1, 2019, we
entered into employment agreements with each of Mr. Bowman and Mr.
Fleming. Each agreement provides for an initial two-year term, with
automatic one-year renewals unless either party gives prior notice
to the other party of its desire to terminate the agreement. Each
agreement provides for an initial base salary of $225,000, a
one-time bonus payment of $25,000, an annual bonus opportunity
equal to 50% of base salary, and an initial stock grant equal to
$112,500. The initial stock grant vests in one-third increments for
each year completed after the date of issuance. In the event the
executive is terminated by the Company without cause, the executive
shall be entitled to receive a severance package which includes one
year of base salary following the effective date of termination,
paid in twelve equal monthly installments, and continued
participation in any health care benefits provided by the Company
to its employees, provided the executive delivers to the Company an
executed release of claims.
Long-Term Incentive Plan
2014 LTIP
. On May 9, 2014, our board of directors approved
the 2014 Omnibus Long-Term Incentive Plan (the “LTIP”),
which went into effect on September 3, 2014. Our board of directors
subsequently amended and restated the LTIP, effective February 10,
2020 to, among other things, account for the reverse stock split
that was effected in May 2019. We may issue up to 2,000,000 shares
of common stock pursuant to awards under the LTIP. The purpose of
the LTIP is to (i) attract and retain skilled and qualified
officers, employees and directors who are expected to contribute to
our success by providing long-term incentive compensation
opportunities competitive with those made available by other
companies; (ii) motivate participants to achieve the long-term
success and growth of the Company; (iii) facilitate ownership of
shares of the Company; and (iv) align the interests of the
participants with those of our shareholders. Under the LTIP, we are
authorized to grant stock options, stock appreciation rights,
restricted stock, restricted stock units, and performance share
awards to our officers, directors, employees and consultants. The
LTIP is administered by our board of directors.
The LTIP will terminate on September
3, 2024, but previously granted awards will remain outstanding
until they expire by their terms or under the terms of the
LTIP.
83
Pursuant
to the terms of the LTIP, except as otherwise provided in an award
agreement, upon the occurrence of a Change in Control, all
outstanding stock options and all restricted share awards
immediately become fully exercisable and vested. Under the LTIP, a
“Change in Control” is defined as (i) a sale of all or
substantially all of the assets of the Company to any person or
entity that is not a wholly owned subsidiary of the Company; (ii) a
merger or consolidation to which the Company is a party if all
persons who were shareholders of the Company immediately prior to
the effective date of the merger or consolidation become beneficial
owners (as defined in Rule 13d-3 under the Exchange Act) of
securities having less than 50% of the total combined voting power
for election of directors (or comparable governing body) of the
surviving corporation or other entity following the effective date
of such merger or consolidation; or (iii) the approval by
shareholders of the Company of any plan or proposal for the
liquidation of the Company or its subsidiaries (other than into the
Company).
Change of Control
Upon a
Change in Control of the Company, all restricted stock awards
become fully vested. No executive officers are otherwise entitled
to any payments as a result of a Change in Control of the
Company.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
The
following table provides information concerning outstanding equity
awards as of December 31, 2020, for our named executive officers.
Market value was determined using the last sale price of our common
stock on December 31, 2020, which was $49.90
|
|
OPTION AWARDS
|
STOCK AWARDS
|
||||
|
Name
|
Number of securities underlying unexercised options(Exercisable)
(#)
|
Number of securities underlying unexercised options(Unexercisable)
(#)
|
Option exercise price ($)
|
Option expiration date
|
Number of shares or units of stock that have not vested (#)
(1)
|
Market value of shares of units of stock that have not vested
($)
|
|
Zachary
B. Fleming
|
2,000
|
-
|
6
|
12/31/2022
|
13,674
|
682,333
|
|
Shawn
M. Bowman
|
-
|
-
|
-
|
-
|
12,314
|
614,469
|
|
J.
Michael Carmena
|
5,000
|
-
|
6
|
12/31/2022
|
16,941
|
845,356
|
|
Michael
D. McNeil
|
1,000
|
-
|
6
|
4/13/2023
|
11,038
|
550,796
|
(1)
Represents restricted shares that will vest as
follows:
|
Name
|
|
Shares of restricted stock
|
|
Vesting Schedule
|
|
Zachary B. Fleming
|
|
3,034
|
|
50% on January 1, 2021 and on the next anniversary
thereof
|
|
|
|
9,037
|
|
50% on January 1, 2022 and on the next anniversary
thereof
|
|
|
|
1,603
|
|
50% on January 1, 2021 and six months thereafter
|
|
Shawn M. Bowman
|
|
1,007
|
|
50% on January 1, 2021 and on the next anniversary
thereof
|
|
|
|
9,037
|
|
50% on January 1, 2022 and on the next anniversary
thereof
|
|
|
|
667
|
|
50% on January 1, 2021 and on the next anniversary
thereof
|
|
|
|
1,603
|
|
50% on January 1, 2021 and six months thereafter
|
|
J. Michael Carmena
|
|
3,467
|
|
50% on January 1, 2021 and on the next anniversary
thereof
|
|
|
|
12,049
|
|
33% on January 1, 2021 and on each of the two subsequent
anniversaries thereof
|
|
|
|
1,425
|
|
50% on January 1, 2021 and six months thereafter
|
|
Michael D. McNeil
|
|
1,694
|
|
50% on January 1, 2021 and on the next anniversary
thereof
|
|
|
|
8,097
|
|
33% on January 1, 2021 and on each of the two subsequent
anniversaries thereof
|
|
|
|
1,247
|
|
50% on January 1, 2021 and six months thereafter
|
84
2020
DIRECTOR
COMPENSATION
The
following table sets forth summary information regarding the
compensation of our non-employee directors for 2020.
|
Name
|
Fees earned or paid in cash
|
Stock awards (2)
|
All other compensation
|
Total
|
|
|
($)
|
($)
|
($)
|
($)
|
|
Ronald
T. Nixon
|
-
|
80,603
|
-
|
80,603
|
|
James
W. Stuckert
|
-
|
80,603
|
-
|
80,603
|
|
Ann
Beal Salamone
|
-
|
26,872
|
-
|
26,872
|
|
Kenneth
E. Thorpe
|
-
|
26,872
|
-
|
26,872
|
|
Robert
A. DeSutter
|
-
|
-
|
-
|
-
|
|
Sara
N. Ortwein
|
-
|
-
|
-
|
-
|
|
S.
Oden “Denny” Howell Jr. (1)
|
-
|
80,603
|
-
|
80,603
|
(1)
S. Oden
“Denny” Howell, Jr. did not stand for reelection at the
Company’s annual meeting on July 9, 2020 and ceased being a
director on that date.
(2)
In accordance with SEC rules, this column represents the aggregate
grant date fair value of shares underlying stock awards, calculated
based on the closing price of the Company’s common stock on
the date of grant in accordance with ASC 718.
The
aggregate number of outstanding restricted stock awards held by
each director as of December 31, 2020, was as follows:
|
Director
|
Shares of restricted stock
|
|
Ronald
T. Nixon
|
4,820
|
|
James
W. Stuckert
|
4,820
|
|
Ann
Beal Salamone
|
1,607
|
|
Kenneth
E. Thorpe
|
1,607
|
|
Robert
A. DeSutter
|
-
|
|
Sara
N. Ortwein
|
-
|
|
S.
Oden “Denny” Howell Jr.
|
-
|
We
reimburse each director for reasonable travel expenses related to
such director’s attendance at board of directors and
committee meetings. In 2020, certain non-employee directors
received restricted stock grants with three-year vesting
restrictions.
The
Company does not sponsor a pension benefits plan, a non-qualified
deferred compensation plan or a non-equity incentive plan for its
directors.
ITEM 12.
S
ECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
following table provides information as of December 31, 2020, as
adjusted for the 1-for-100 reverse stock split which became
effective May 10, 2019, regarding shares of common stock that may
be issued under the Company's existing equity compensation
plans:
|
Plan
Category
|
Number of shares
to be issued upon the exercise of outstanding options
|
Weighted average
exercise price of outstanding options
|
Number of shares
remaining available for future issuance under equity compensation
plans (excluding shares reflected in the 2nd column)
|
|
Equity compensation
plans approved by shareholders
|
11,500
|
$
6.00
|
1,751,724
|
|
Equity compensation
plans not approved by shareholders
|
—
|
—
|
—
|
85
The
following table sets forth, as of March 30, 2021, the number and
percentage of outstanding shares of our common stock owned by:
(a) each person who is known by us to be the beneficial owner
of more than 5% of our outstanding shares of common stock;
(b) each of our directors; (c) the named executive
officers as defined in Item 402 of Regulation S-K; and
(d) all current directors and executive officers, as a group.
As of March 30, 2021, there were 7,617,122 shares of common stock
issued and outstanding and no shares of Preferred Stock issued and
outstanding.
Beneficial
ownership has been determined in accordance with Rule 13d-3 under
the Exchange Act. Under this rule, certain shares may be deemed to
be beneficially owned by more than one person (if, for example,
persons share the power to vote or the power to dispose of the
shares). In addition, shares are deemed to be beneficially owned by
a person if the person has the right to acquire shares (for
example, upon exercise of an option or warrant) within 60 days of
the date as of which the information is provided. In computing the
percentage ownership of any person, the number of shares is deemed
to include the number of shares beneficially owned by such person
by reason of such acquisition rights. As a result, the percentage
of shares beneficially owned by a person as shown in the following
table does not necessarily reflect the person’s actual voting
power at any particular date.
Except
as noted in the footnotes below, we believe, based on information
provided to us, that the persons named in the table below have sole
voting and investment power with respect to all vested shares of
common stock beneficially owned by them and the business address
for each person is c/o Sanara MedTech Inc., 1200 Summit Ave, Suite
414, Fort Worth, Texas 76102.
|
|
Common Stock
|
|
|
NAME
|
Number of shares beneficially owned
|
Beneficial ownership percentage
|
|
Directors and Named Executive Officers
|
|
|
|
Ronald
T. Nixon (1)
|
3,502,240
|
46.0
%
|
|
James
W. Stuckert (2)
|
946,403
|
12.4
%
|
|
J.
Michael Carmena (3)
|
14,014
|
*
|
|
Zachery
Fleming (4)
|
10,353
|
*
|
|
Shawn
Bowman (5)
|
6,992
|
*
|
|
Michael
McNeil (6)
|
6,016
|
*
|
|
Ann
Beal Salamone (7)
|
1,606
|
*
|
|
Kenneth
E. Thorpe (8)
|
1,606
|
*
|
|
All directors and executive officers as a group (9
persons)
|
4,502,948
|
59.1
%
|
|
Certain Beneficial Owners
|
|
|
|
S.
Oden “Denny” Howell Jr. (9)
|
490,394
|
6.4
%
|
|
CGI
Cellerate RX, LLC (10)
|
2,452,731
|
32.2
%
|
|
FA
Sanara, LLC (11)
|
963,856
|
12.7
%
|
* Less
than 1%.
(1) Mr. Nixon is a director of the Company and a manager of
Catalyst Rochal, LLC, which owns 100% of the equity interest of CGI
Cellerate RX, LLC which owns 2,452,731 shares of the
Company’s common stock. Catalyst Rochal, LLC also controls
the voting of 80,834 shares owned by Rochal Industries, LLC. Mr.
Bradley J. Gurasich is also a manager of Catalyst Rochal and may be
deemed to share beneficial ownership of the shares of common stock
beneficially owned by CGI Cellerate RX, LLC and Catalyst Rochal,
LLC. FA Sanara, LLC owns 963,856 shares of the Company’s
common stock. FA Sanara, LLC is managed by Family Alignment, LLC,
which is managed by Catalyst Group, Inc. of which Mr. Nixon is
President. Mr. Nixon, through a relationship of control of CGI
Cellerate RX, LLC, Catalyst Rochal, LLC, and FA Sanara, LLC, may be
deemed to share beneficial ownership of the shares of common stock
beneficially owned by CGI Cellerate RX, LLC, Rochal Industries, LLC
and FA Sanara, LLC. The table above excludes 2,410 unvested,
restricted shares held by Mr. Nixon which will vest on January 1,
2022. Mr. Nixon may be deemed to have shared power to vote and
dispose of 3,497,421 shares, and sole power to vote and dispose of
4,819 shares.
(2) Excludes 2,410 unvested, restricted shares held by Mr.
Stuckert, which will vest on January 1, 2022.
(3) Excludes 11,298 unvested, restricted shares held by Mr.
Carmena, which have various vesting dates. Includes stock options
currently exercisable for the purchase of 5,000 shares of Common
Stock.
(4) Excludes 11,355 unvested, restricted shares held by Mr.
Fleming, which have various vesting dates. Includes stock options
currently exercisable for the purchase of 2,000 shares of Common
Stock.
86
|
(5) Excludes 10,676 unvested, restricted shares held by Mr. Bowman,
which have various vesting dates.
(6) Excludes 6,868 unvested, restricted shares held by Mr. McNeil,
which have various vesting dates. Includes stock options currently
exercisable for the purchase of 1,000 shares of Common
Stock.
(7) Excludes 804 unvested, restricted shares held by Ms. Salamone,
which will vest on January 1, 2022.
(8) Excludes 804 unvested, restricted shares held by Mr. Thorpe,
which will vest on January 1, 2022.
(9) Based on the Schedule 13D/A filed by
S. Oden
“Denny” Howell, Jr. on November 18, 2019 and certain
other information available to the Company.
(10) Includes 2,452,731 shares held by CGI Cellerate RX, LLC. Mr.
Nixon and Mr. Gurasich are managers of Catalyst Rochal, LLC, which
owns 100% of the equity interest of CGI Cellerate RX, LLC. Mr.
Nixon and Mr. Gurasich, through a relationship of control of CGI
Cellerate RX, LLC,
may be
deemed to share beneficial ownership of the shares of common stock
beneficially owned by CGI Cellerate RX, LLC and have shared voting
power to vote the shares held by CGI Cellerate RX, LLC. This
information is based on the Schedule 13D/A filed
by
CGI Cellerate RX, LLC on February 12, 2020 and
certain other information available to the Company. The business
address for CGI Cellerate RX, LLC is 1375 Enclave Parkway Houston,
Texas 77077.
(11) FA Sanara, LLC is managed by Family Alignment, LLC, which is
managed by Catalyst Group, Inc. of which Mr. Nixon is President.
Mr. Nixon, through a relationship of control of FA Sanara, LLC, may
be deemed to share beneficial ownership of the shares of common
stock beneficially owned by FA Sanara, LLC and have shared voting
power to vote the shares held by FA Sanara, LLC. This information
is based on the Schedule 13D/A filed by FA Sanara, LLC on February
12, 2020 and certain other information available to the Company.
The business address for FA Sanara, LLC is 7500 Rialto Blvd. Bldg.
II, Suite 220 Austin, Texas 73735.
|
There are no arrangements currently known to us, the operation of
which may at a subsequent date result in a change of control of the
Company.
ITEM 13.
C
ERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The
Company was a participant in the following transactions with
related parties since January 1, 2019.
CGI Cellerate RX, LLC
Upon
conversion of certain debt and equity securities in early 2020, CGI
Cellerate RX, LLC owned more than 30% of our common stock. CGI
Cellerate RX, LLC is an affiliate of The Catalyst Group Inc., whose
Founder and Managing Partner is our Executive Chairman, Mr.
Nixon.
Professional Services
Since
the formation of Cellerate, LLC in 2018, CGI Cellerate RX, LLC has
provided monthly professional services in inventory procurement for
the Company. Billings totaled approximately $117,000 in 2020 and
$174,000 in 2019.
Promissory Note
On
February 7, 2020, CGI Cellerate RX, LLC converted its $1,500,000
promissory note, including accrued interest of $111,911, into
179,101 shares of our common stock.
Rochal Industries, LLC
Rochal
owns 80,834 shares of our common stock, and Mr. Nixon, our
Executive Chairman, is, with respect to Rochal, a director, a
significant shareholder indirectly, and a majority shareholder with
the exercise of certain warrants. Additionally, Ms. Salamone, a
director of the Company, is Rochal’s Board Chairman and a
significant shareholder of Rochal.
Product License Agreements
On July
7, 2019, the Company executed the BIAKŌS License Agreement
with Rochal whereby the Company acquired an exclusive world-wide
license to market, sell and further develop antimicrobial products
for the prevention and treatment of microbes on the human body
utilizing certain Rochal patents and pending patent applications.
The initial payment of $1,000,000 was made to Rochal in 2019. In
2020, the Company made a $500,000 milestone payment upon FDA
clearance of BIAKŌS Antimicrobial Wound Gel. Following the
closing of the Company’s common stock offering in February of
2021, the Company made the $750,000 Post Capital Raise Payment (as
defined in the BIAKŌS License Agreement) to Rochal in the form
of 20,834 shares of our common stock. Subsequent payments pursuant
to this license will be in the form of (i) a 2%-4% royalty on net
sales of BIAKŌS products, subject to an annual minimum of up
to $150,000 and (ii) a 25% royalty on net profit in excess of
target up to an annual maximum of $1,000,000.
87
On
October 1, 2019, the Company executed the
ABF License Agreement
with Rochal whereby
the Company acquired an exclusive world-wide license to market,
sell and further develop certain antimicrobial barrier film and
skin protectant products for use in the human health care market
utilizing certain Rochal patents and pending patent applications.
Currently, the products covered by the ABF License Agreement are
BIAKŌS Antimicrobial Barrier Film and Curashield No Sting Skin
Protectant. We made the initial payment of $500,000 to Rochal in
2019. Subsequent payments pursuant to this license will be in the
form of (i) a 2%-4% royalty on net sales of products covered in the
ABF license, subject to an annual minimum of up to $75,000 and (ii)
a 25% royalty on net profit in excess of target up to an annual
maximum of $500,000.
On May 4, 2020, the Company executed the
Debrider License
Agreement
with Rochal, whereby the
Company acquired an exclusive world-wide license to market, sell
and further develop an autolytic debrider for human medical
use to enhance skin condition or treat or relieve skin disorders,
excluding uses primarily for beauty, cosmetic, or toiletry
purposes. In 2020, we made t
he initial payment of $600,000
to Rochal in cash. The remaining $750,000 of the initial payment
was made in the form of 60,000 shares of our common stock. Future
milestone payments under the Debrider License Agreement are as
follows: (i) $600,000 for the first good manufacturing practice run
of product and (ii) $500,000 in cash and $1,000,000 payable in
either cash or common stock upon FDA clearance of Atterase Debrider
product. Subsequent payments pursuant to this license will be in
the form of (i) a 2%-4% royalty on net sales of products covered in
the Debrider license, subject to an annual minimum of up to
$150,000 and (ii) a 25% royalty on net profit in excess of target
up to an annual maximum of $1,000,000.
Manufacturing Services
The
Company purchased from Rochal approximately $285,000 of BIAKŌS
inventory in 2020 and $134,000 in 2019. On September 9, 2020, we
executed a manufacturing agreement with Rochal to formalize terms
with respect to manufacturing, packaging, and labeling all products
licensed from Rochal. The manufacturing agreement includes
customary terms and conditions. The term of the agreement is for a
period of five years unless extended by the mutual consent of the
parties.
Technical Services
The
Company incurred approximately $365,000 of technical services in
2020 and $61,000 in 2019 from Rochal. On September 9, 2020, we
executed a technical services agreement with Rochal to formalize
terms with respect to technical services provided by Rochal. Under
the terms of this agreement, Rochal provides its expertise on
technical projects identified by us for wound care, skin care and
surgical site care applications. The technical services agreement
includes customary terms and conditions for our industry. We may
terminate this agreement at any time.
Royalty
Pursuant
to the BIAKŌS product license agreement, the Company incurred
royalty expense of $100,000 in 2020 and approximately $1,000 in
2019. The royalty expense incurred in 2020 represented the annual
minimum royalty which did not apply in 2019.
Director Independence
Under
the rules of Nasdaq, independent directors must comprise a majority
of a listed company’s board of directors, subject to
specified exceptions and certain phase-in periods available to
companies that do not yet have a class of common stock registered
under the Exchange Act. In addition, Nasdaq rules require that,
subject to specified exceptions, each member of a listed
company’s audit, compensation and nominating and corporate
governance committees be independent.
Our
board of directors has undertaken a review of the composition of
our board of directors, our committees and the independence of each
director. Based upon information requested from and provided by
each director concerning their background, employment and
affiliations, including family relationships, the board of
directors has determined that Robert A. DeSutter, Sara Ortwein,
James W. Stuckert and Kenneth E. Thorpe are
“independent” as that term is defined under applicable
Nasdaq rules.
ITEM 14.
P
RINCIPAL ACCOUNTING FEES
AND SERVICES
Audit Fees
.
We engaged
MaloneBailey, LLP to conduct annual audits and review of quarterly
financial statements for the
years ended December 31, 2020
and December 31, 2019.
Audit fees for
services performed were $71,000 and
$88,000
, respectively.
88
Audit-Related Fees
. We engaged
MaloneBailey, LLP
to provide consent for
Registration Statements on Form S-3 and Form S-8 filed in 2020.
Audit-related f
ees totaled
$4,650
for the
years ended
December 31, 2020 and $0 in December 31, 2019.
Tax Fees.
We engaged
Haynie
& Company as our accountants for tax-related services
for the years ended December 31, 2020 and December 31, 2019, and
paid $30,211 and $24,951, respectively.
All Other Fees
. We paid no other fees to independent public
accountants.
Audit Committee Pre-Approval Policy
The
Company’s audit committee is to pre-approve all audit,
audit-related and non-audit services provided by the independent
registered public accounting firm. These services may include audit
services, audit-related services and other services. The audit
committee may also pre-approve particular services on a
case-by-case basis. The independent public accountants are required
to periodically report to the audit committee regarding the extent
of services provided by the independent public accountants in
accordance with such pre-approval. The audit committee may also
delegate pre-approval authority to one or more of its members. Such
member(s) must report any decisions to the board of directors at
the next scheduled meeting of the board of directors.
PART IV
ITEM 15.
E
XHIBITS AND FINANCIAL
STATEMENT SCHEDULES
(a)
Financial
Statements
Refer
to Index to Financial Statements appearing on page
F-1.
(b)
Financial Statement
Schedules
No
financial statement schedules are provided because the information
called for is not required or is shown in the financial statements
or the notes thereto.
(c)
Exhibits
The
exhibits listed below are filed or incorporated by reference as a
part of this report.
|
Exhibit No.
|
|
Description
|
|
|
|
|
|
|
Share
Exchange Agreement between Catalyst CellerateRX, LLC and WNDM
Medical Inc. (incorporated by reference to Exhibit 2.1 to the
Company’s Current Report on Form 8-K dated March 21,
2019).
|
|
|
|
|
|
|
3.1
*
|
|
Articles of Incorporation of Sanara MedTech Inc. (as amended
through December 30, 2020).
|
|
|
|
|
|
|
Bylaws (incorporated by reference to Exhibit 3.2 to the
Company’s Registration Statement on Form S-1 filed April 11,
2008).
|
|
|
|
|
|
|
4.1
*
|
|
Description of Securities.
|
|
|
|
|
|
10.1.1
†
|
|
Sanara MedTech Inc. Restated 2014 Omnibus Long-Term Incentive Plan
dated February 10, 2020 effective upon shareholder approval on July
9, 2020 (incorporated by reference to Exhibit A to the
Company’s Definitive Proxy Statement on Schedule 14A filed on
June 25, 2020).
|
|
|
|
|
|
10.1.2
†*
|
|
Form of
Restricted Stock Award Agreement under the
Sanara MedTech Inc. Restated 2014 Omnibus
Long-Term Incentive Plan.
|
|
|
|
|
|
10.2
†
|
|
Employment
Agreement dated June 1, 2019 between Sanara MedTech Inc. and Shawn
M. Bowman (incorporated by reference to Exhibit 10.2 to the
Company’s Annual Report on Form 10-K filed on March 26,
2020).
|
|
|
|
|
89
|
10.3
†
|
|
Employment
Agreement dated June 1, 2019 between Sanara MedTech Inc. and
Zachary B. Fleming (incorporated by reference to Exhibit 10.3 to
the Company’s Annual Report on Form 10-K filed on March 26,
2020).
|
|
|
|
|
|
|
Contribution
Agreement dated August 27, 2018 between Wound Care Innovations, LLC
and Catalyst Cellerate RX, LLC
(incorporated by reference to Exhibit 10.1 to the
Company’s Quarterly Report on Form 10-Q filed November 14,
2018)
.
|
|
|
|
|
|
|
|
Operating
Agreement dated August 27, 2018 between Wound Care Innovations, LLC
and Catalyst Cellerate RX, LLC
(incorporated by reference to Exhibit 10.2 to the
Company’s Quarterly Report on Form 10-Q filed November 14,
2018).
|
|
|
|
|
|
|
|
Sublicense
Agreement dated August 27, 2018 between Catalyst Cellerate RX, LLC
and Cellerate, LLC
(incorporated by
reference to Exhibit 10.3 to the Company’s Quarterly Report
on Form 10-Q filed November 14, 2018).
|
|
|
|
|
|
|
|
First
Amendment of Sublicense Agreement dated May 31, 2019, between
Cellerate, LLC, as Sublicensee, and CGI Cellerate RX, LLC, as
Sublicensor (incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed January 26,
2021).
|
|
|
|
|
|
|
|
Second
Amendment of Sublicense Agreement dated January 26, 2021, between
Cellerate, LLC, as Sublicensee, and CGI Cellerate RX, LLC, as
Sublicensor (incorporated by reference to Exhibit 10.3 to the
Company’s Current Report on Form 8-K filed January 26,
2021).
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Exclusive
License Agreement dated July 8, 2019 between Sanara MedTech Inc.
and Rochal Industries, LLC (incorporated by reference to Exhibit
10.1 to the Company’s Quarterly Report on Form 10-Q filed on
August 14, 2019).
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Amendment
No. 1 to Exclusive License Agreement dated May 4, 2020 between
Sanara MedTech Inc. and Rochal Industries, LLC (incorporated by
reference to Exhibit 10.1 to the Company’s Quarterly Report
on Form 10-Q filed on November 13, 2020).
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Exclusive
License Agreement dated October 1, 2019 between Sanara MedTech Inc.
and Rochal Industries, LLC (incorporated by reference to Exhibit
10.1 to the Company’s Quarterly Report on Form 10-Q filed on
November 14, 2019).
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Exclusive
License Agreement dated May 4, 2020 between Sanara MedTech Inc. and
Rochal Industries, LLC (incorporated by reference to Exhibit 10.1
to the Company’s Quarterly Report on Form 10-Q filed on May
12, 2020).
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Promissory
Note, dated April 22, 2020, between Sanara MedTech Inc., as
Borrower, and Cadence Bank, N.A., as Lender (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed on April 29, 2020).
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Loan
Agreement, dated January 15, 2021, between the Company, as
Borrower, and Cadence Bank, N.A, as Lender (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed on January 22, 2021).
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21.1
*
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List of
Subsidiaries.
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23.1
*
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Consent
of MaloneBailey, LLP.
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31.1
*
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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.
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31.2
*
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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.
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32.1
**
|
|
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.
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90
|
32.2
**
|
|
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.
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101*
|
|
Interactive Data Files pursuant to Rule 405 of Regulation
S-T
|
* Filed
herewith
** The
certifications attached as Exhibit 32.1 and Exhibit 32.2 are not
deemed “filed” with the Securities and Exchange
Commission and are not to be incorporated by reference into any
filing of Sanara MedTech Inc. under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended,
whether made before or after the date of this Annual Report on Form
10-K, irrespective of any general incorporation language contained
in such filing.
†
Identifies a management contract or compensatory plan
ITEM 16.
F
ORM 10-K
SUMMARY
None.
91
SIGNATURES
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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SANARA MEDTECH INC.
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March
30, 2021
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By:
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/s/
Michael
McNeil
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Michael
McNeil
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Chief
Financial Officer
(Principal
Financial Officer and duly authorized officer)
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|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates
indicated.
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Signature
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Title
|
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Date
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/s/
J.
Michael Carmena
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|
Vice
Chairman and PEO (Principal Executive Officer)
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|
March
30, 2021
|
|
J. Michael Carmena
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/s/
Michael
McNeil
|
|
Chief
Financial Officer (Principal Financial and Accounting
Officer)
|
|
March
30, 2021
|
|
Michael
McNeil
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/s/
James
W. Stuckert
|
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Director
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|
March
30, 2021
|
|
James
W. Stuckert
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/s/
Ronald
T. Nixon
|
|
Chairman
|
|
March
30, 2021
|
|
Mr.
Ronald T. Nixon
|
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/s/
Kenneth E. Thorpe
|
|
Director
|
|
March
30, 2021
|
|
Kenneth
E. Thorpe
|
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/s/ Ann
Beal Salamone
|
|
Director
|
|
March
30, 2021
|
|
Ann
Beal Salamone
|
|
|
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|
|
|
|
/s/
Robert
DeSutter
|
|
Director
|
|
March
30, 2021
|
|
Robert
DeSutter
|
|
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/s/
Sara
Ortwein_____________
|
|
Director
|
|
March
30, 2021
|
|
Sara
Ortwein
|
|
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92
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Registrant S Common Equity, Related Shareholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 1 Nature Of Business and BackgroundNote 2 -- Summary Of Significant Accounting PoliciesNote 3 Notes PayableNote 4 Intangible AssetsNote 5 Customers and SuppliersNote 6 - Commitments and ContingenciesNote 7 - Operating LeasesNote 8 Stockholders EquityNote 9 Income TaxesNote 10 Debt and Credit FacilitiesNote 11 Investment in Equity SecuritiesNote 12 - Related PartiesNote 13 - Subsequent EventsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits and Financial Statement SchedulesItem 16. Form 10-k Summary