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3. COMMITMENTS AND CONTINGENCIES | 9 Months Ended
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Sep. 30, 2019
Commitments and Contingencies Disclosure [Abstract] |
COMMITMENTS AND CONTINGENCIES | Royalty agreements Effective January 3, 2008, a subsidiary of the Company entered into separate exclusive license agreements with both Applied Nutritionals, LLC (“Applied”) and its founder George Petito, pursuant to which the Company obtained the exclusive world-wide license to market products incorporating intellectual property covered by a patent related to CellerateRX products. Although the term of these licenses expired on February 27, 2018, the agreements permitted the Company to continue to sell and distribute products through August 27, 2018. Subsequent to the expiration of the license agreement between the Company and Applied, a new exclusive license was acquired by a Catalyst affiliate to distribute CellerateRX products into the wound care and surgical markets in the United States, Canada and Mexico. The Company and Catalyst entered into definitive agreements on August 27, 2018 that continued operations to market CellerateRX under a new sublicense granted by a Catalyst affiliate to Cellerate, LLC, a newly formed entity in which the Company and Catalyst each had a 50% ownership interest. The term of the sublicense extends through August 2028, with automatic one-year renewals through December 31, 2049, subject to termination at the end of any renewal term by either party on six months' notice. Cellerate, LLC pays royalties to Catalyst based on Cellerate, LLC’s 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. License agreements On July 8, 2019, the Company executed a license agreement with a related party, Rochal Industries, LLC (“Rochal”), whereby Sanara 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. The currently licensed products are BIAKŌS™ Antimicrobial Wound Gel, and FDA cleared BIAKŌS™ Antimicrobial Skin and Wound Cleanser. A director and indirect principal shareholder of Sanara is also a director of Rochal, and indirectly a significant shareholder of Rochal, and through the exercise of warrants potentially a majority shareholder. Another Company director is also a director and significant shareholder of Rochal. Key terms of the license agreement include:
1. | In consideration for the license, Sanara paid to Rochal $1,000,000 and agreed to pay an additional $500,000 upon FDA clearance of the BIAKŌS™ Antimicrobial Wound Gel product for sale within the United States.
2. | Subject to the occurrence of specified financing conditions in 2019, the Company will also pay Rochal $1,500,000, which at the Company’s option may be in cash or Common Stock; or a combination of cash and Common Stock.
3. | The Company will pay Rochal a royalty of:
a. | 4% of net sales of licensed products in countries in which patents are registered
b. | 2% of net sales of licensed products in countries without patent protection.
The minimum annual royalty due to Rochal will be $100,000 beginning with calendar year 2020. The annual minimum royalty will increase by 10% each subsequent calendar year up to a maximum amount of $150,000.
4. | Beginning with the 2020 calendar year, the Company will pay an additional royalty based on specific net profit targets related to the licensed products. Net profits for the licensed products are defined as net sales, less cost of goods sold (including royalties) and direct marketing and selling expenses. The additional royalty will be 25% of the amount of actual net profits in excess of the established net profit targets, subject to a maximum of $1,000,000 for any calendar year. The established net profit targets for each calendar year are:
a. | 2020 - $1,500,000
b. | 2021 - $5,000,000
c. | 2022 - $8,000,000
d. | 2023 - $10,000,000
e. | 2024 - $15,000,000
f. | Beginning in 2025 and for each calendar year thereafter, net profit targets will be equal to the immediately preceding calendar year’s net profit target incremented by the greater of (1) 50% of the U.S. dollar growth in the amount of net profit in the current year over net profit in the immediately preceding calendar year, or (2) the percentage of overall growth of the market for the category by which the licensed products are generally described.
Unless previously terminated by the parties, the License Agreement will expire with the related patents in December 2031. On October 1, 2019, the Company executed an additional 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. For more information, see Note 9 – Subsequent Events. Payables to Related Parties In addition to the convertible promissory note to Catalyst discussed in Note 2, the Company had outstanding payables to related parties totaling $188,228 at September 30, 2019, and $36,203 at December 31, 2018. Prepaid other - related party In the normal course of business, the Company may advance payments to its suppliers, inclusive of Wound Care Solutions, Limited, a related party due to its interest in Sanara Pulsar, LLC which is partly owned by the Company (see “Other commitments” below). As of September 30, 2019, and December 31, 2018, the balance due from the related party for future shipments and advances against future distributions was $335,876 and $0, respectively. 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. The Company has advanced to WCS $200,000. All distributions made by Sanara Pulsar, LLC to its members, not including tax distributions, will be made exclusively to Cellerate, LLC until such time as Cellerate, LLC has received an amount of distributions equal to such advances. In the event WCS’s Form K-l for the year 2020 does not allocate to WCS net income of at least $200,000 ("Target Net Income"), then Cellerate. LLC will, within 30 days after such determination, pay WCS the amount of funds representing the difference between Target Net Income and the actual amount of net income shown on WCS’s Form K-1 for the year 2020. For the years 2021 through 2024 Target Net Income will increase by 10% each year and in the event WCS’s Form K-1 for any of those years does not allocate to WCS net income in an amount at least equal to Target Net Income for such year, then Cellerate, LLC will, within 30 days after such determination, pay WCS the amount of funds representing the difference between Target Net Income and the actual amount of net income shown on WCS’s Form K-1 for the applicable year.

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