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8. COMMITMENTS AND CONTINGENCIES | 12 Months Ended
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Dec. 31, 2019
Commitments and Contingencies Disclosure [Abstract] |
COMMITMENTS AND CONTINGENCIES | LICENSE AGREEMENTS AND ROYALTIES CellerateRX® Activated Collagen® The Company has an exclusive sublicense to distribute CellerateRX® Activated Collagen® products into the wound care and surgical markets in the United States, Canada and Mexico. The Company pays specified royalties to Applied Nutritionals, LLC based on annual net sales of CellerateRX. The term of the sublicense extends through August 2028, with automatic one-year renewals through December 31, 2049, subject to termination at the end of any renewal term by either party on six months' notice. The Company pays royalties based on its annual net sales of CellerateRX consisting of 3% of all collected net sales each year up to $12,000,000, 4% of all collected net sales each year that exceed $12,000,000 up to $20,000,000, and 5% of all collected net sales each year that exceed $20,000,000. Minimum royalties of $400,000 per year are payable for the first five years of the sublicense agreement. BIAKŌS™ Antimicrobial Barrier Film and Curashield™ No Sting Skin Protectant On October 1, 2019, the Company executed an additional license agreement with Rochal Industries, LLC (“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 BIAKŌS™ Antimicrobial Barrier Film and Curashield™ No Sting Skin Protectant. The Executive Chairman of the Company is also a director of Rochal, and indirectly a significant shareholder of Rochal, and through the potential exercise of warrants a majority shareholder of Rochal. Another Company director is also a director and significant shareholder of Rochal. Key terms of the ABF License Agreement include:
1. | In consideration for the license, the Company paid Rochal $500,000 in October 2019.
2. | Subject to the occurrence of specified Company financing conditions in 2020, Sanara will also pay Rochal $500,000, which at Rochal’s option may be in cash or the Company’s Common Stock; or a combination of cash and Sanara 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 $50,000 beginning with the first full calendar year following the year in which first commercial sales of the products occur (the “First Revenue Year”). The annual minimum royalty will increase by 10% each subsequent calendar year up to a maximum amount of $75,000.
4. | Beginning with the First Revenue 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 $500,000 for any calendar year. The established net profit targets for each calendar year are:
a. | First Revenue Year - $1,500,000
b. | Second revenue year - 2021 - $5,000,000
c. | Third revenue year - $8,000,000
d. | Fourth revenue year - $10,000,000
e. | Fifth revenue year - $15,000,000
f. | Beginning with the sixth revenue year 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 or extended by the parties, the ABF License Agreement will terminate upon expiration of the last U.S. patent in October 2033. The foregoing summary of the ABF License Agreement does not purport to be complete and is qualified in its entirety by reference to the ABF License Agreement. The Company filed a copy of the ABF License Agreement as an exhibit to its Quarterly Report on Form 10-Q filed on November 14, 2019. BIAKŌS™ Antimicrobial Wound Gel and BIAKŌS™ Antimicrobial Skin and Wound Cleanser On July 8, 2019, the Company executed a license agreement with Rochal Industries, LLC (“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 “License Agreement”). Currently, the products covered by the License Agreement are BIAKŌS™ Antimicrobial Wound Gel, and FDA cleared BIAKŌS™ Antimicrobial Skin and Wound Cleanser. The Executive Chairman of the Company is also a director of Rochal, and indirectly a significant shareholder of Rochal, and through the potential exercise of warrants a majority shareholder of Rochal. Another Company director is also a director and significant shareholder of Rochal. Key terms of the License Agreement include:
1. | In consideration for the license, the Company 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. | The Company will pay Rochal a royalty of:
a. | 4% of net sales of licensed products in countries in which patents are registered
b. | 2% of net sales of licensed products in countries without patent protection.
The minimum annual royalty due to Rochal will be $100,000 beginning with calendar year 2020. The annual minimum royalty will increase by 10% each subsequent calendar year up to a maximum amount of $150,000.
3. | 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. The foregoing summary of the License Agreement does not purport to be complete and is qualified in its entirety by reference to the License Agreement. The Company filed a copy of the License Agreement as an exhibit to its Quarterly Report on Form 10-Q filed on August 14, 2019. 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). OPERATING LEASES The Company has two operating leases: an office space lease with a remaining lease term of 54 months and a copier lease with a remaining lease term of 19 months as of December 31, 2019. In accordance with the transition guidance of ASC 842, such arrangements are included in our balance sheet as of January 1, 2019. All other leases are short-term leases for which out of practical expediency the Company has elected to not recognize lease assets and lease liabilities. In March 2017, and as amended in March 2018, the Company executed a new office lease effective April 1, 2019 for office space located at 1200 Summit Ave., Suite 414, Fort Worth, TX 76102. On July 1, 2019, the Company amended the office lease agreement which became effective on August 22, 2019 upon completion by landlord of certain leasehold improvements (the “Commencement Date). 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 extends the original term of the lease for a period of 36 months through June 30, 2024. Upon the Commencement Date of the amended lease, the monthly base rental payments are as follows:
From | Through | Monthly Base Rental
Commencement Date | June 30, 2020 | $12,243.75
July 1, 2020 | June 30, 2021 | $12,488.63
July 1, 2021 | June 30, 2022 | $12,488.63
July 1, 2022 | June 30, 2023 | $12,733.50
July 1, 2023 | June 30, 2024 | $12,978.38
As the implicit rate in the leases is not determinable, the discount rate applied to determine the present value of lease payments is the Company’s incremental borrowing rate of 6.25%. The office space lease agreement contains no renewal terms, so no lease liability is recorded beyond the termination date. The copier lease can be automatically renewed but no lease liability is recorded beyond the initial termination date as exercising this option is not reasonably certain. In accordance with the transition guidance of ASC 842, such arrangements are included in our balance sheet as of January 1, 2019. All other leases are short-term leases for which out of practical expediency the Company has elected to not recognize lease assets and lease liabilities. As a result of the adoption of ASC 842, the Company has recorded lease assets of $585,251 and a related lease liability of $598,917 as of December 31, 2019. Cash paid for amounts included in measurement of operating lease liabilities as of December 31, 2019 was $95,530 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. All 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 such advances. In the event WCS’s Form K-l from Sanara Pulsar for the year 2020 does not allocate to WCS net income of at least $200,000 ("Target Net Income"), then Cellerate. LLC 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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