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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 9 Months Ended
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Sep. 30, 2022
Accounting Policies [Abstract] |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation and Basis of Presentation The accompanying unaudited consolidated financial statements include the accounts of Sanara MedTech Inc. and its wholly owned and majority-owned subsidiaries, as well as other entities in which the Company has a controlling financial interest. All significant intercompany profits, losses, transactions, and balances have been eliminated in consolidation. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management of the Company, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022, or any other period. These financial statements and notes should be read in conjunction with the financial statements for each of the two years ended December 31, 2021 and 2020, which are included in the Company’s most recent Annual Report on Form 10-K. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported revenue and expenses during the reporting period. The extent to which the COVID-19 pandemic may directly or indirectly impact the Company’s business, financial condition, and results of operations is highly uncertain and subject to change. The Company considered the potential impact of the COVID-19 pandemic on its estimates and assumptions and determined there was not a material impact on the Company’s estimates and assumptions used in preparing its unaudited consolidated financial statements as of and for the nine months ended September 30, 2022. However, actual results could differ from those estimates and there may be changes to the Company’s 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 diluted 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 similarly 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 common stock equivalents were excluded from the current and prior period calculations, as their inclusion would have been anti-dilutive during the three and nine months ended September 30, 2022 and 2021 due to the Company’s net loss. 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 nine months ended September 30, 2022 and 2021 as such shares would have had an anti-dilutive effect: SCHEDULE OF COMPUTATION OF DILUTED NET LOSS PER SHARE
|  | 2022 |  |  | 2021 |
|  | As of September 30, |
|  | 2022 |  |  | 2021 |
Stock options (a) |  |  | 155,691 |  |  |  | 11,500 |
Warrants (b) |  |  | 16,725 |  |  |  | - |
Unvested restricted stock |  |  | 192,215 |  |  |  | 111,590 |
Anti-dilutive securities |  |  | 192,215 |  |  |  | 111,590 |
(a) | Includes 144,191 stock options assumed pursuant to the merger agreement with Precision Healing Inc. (“Precision Healing”) in April 2022. See Note 4 for more information regarding the Precision Healing merger.
(b) | Warrants assumed pursuant to the merger agreement with Precision Healing in April 2022. See Note 4 for more information regarding the Precision Healing merger.
Revenue Recognition The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). 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 the 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 2022 or 2021. 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 only 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. Disaggregation of Revenue Revenue streams from product sales and royalties are summarized below for the three and nine months ended September 30, 2022 and 2021. SCHEDULE OF REVENUE FROM PRODUCT SALES AND ROYALTIES
|  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 30, |  |  | September 30, |
|  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
Product sales revenue |  | $ | 12,994,321 |  |  | $ | 5,773,692 |  |  | $ | 30,375,822 |  |  | $ | 16,959,761 |
Royalty revenue |  |  | 50,250 |  |  |  | 50,250 |  |  |  | 150,750 |  |  |  | 150,750 |
Total Net Revenue |  | $ | 13,044,571 |  |  | $ | 5,823,942 |  |  | $ | 30,526,572 |  |  | $ | 17,110,511 |
The Company recognizes royalty revenue from a development and license 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 license agreement have not exceeded the annual minimum of $201,000 ($50,250 per quarter). Accounts Receivable Allowances The Company establishes an allowance for doubtful accounts to provide for an estimate of accounts receivable which are not expected to be collectible. The Company recorded bad debt expense of $25,000 and $0 during the three months ended September 30, 2022 and 2021, respectively and $220,000 and $51,536 during the nine months ended September 30, 2022 and 2021, respectively. The allowance for doubtful accounts was $266,909 at September 30, 2022 and $64,899 at December 31, 2021. 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 provide for estimated customer rebates and other expected customer deductions. These allowances totaled $5,311 at September 30, 2022 and $34,379 at December 31, 2021. If circumstances related to customers change, estimates of the recoverability of receivables would be further adjusted. 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 $129,689 and $76,989 during the three months ended September 30, 2022 and 2021, respectively and $289,406 and $106,823 for the nine months ended September 30, 2022 and 2021, respectively. The allowance for obsolete and slow-moving inventory had a balance of $465,313 at September 30, 2022, and $333,850 at December 31, 2021. 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 two to ten years. Below is a summary of property and equipment for the periods presented: SCHEDULE OF PROPERTY AND EQUIPMENT
|  | Useful |  |  | September 30, |  |  | December 31, |
|  | Life |  |  | 2022 |  |  | 2021 |
Computers |  |  | 3-5 years |  |  | $ | 156,510 |  |  | $ | 104,568 |
Office equipment |  |  | 3-5 years |  |  |  | 50,214 |  |  |  | 21,731 |
Furniture and fixtures |  |  | 5-10 years |  |  |  | 258,414 |  |  |  | 221,565 |
Leasehold improvements |  |  | 2-5 years |  |  |  | 19,631 |  |  |  | 2,030 |
Internal use software |  |  | 5 years |  |  |  | 1,618,999 |  |  |  | 1,622,525 |
Property and equipment, gross |  |  |  |  |  |  | 2,103,768 |  |  |  | 1,972,419 |
Less accumulated depreciation |  |  |  |  |  |  | (633,168 | ) |  |  | (342,574 | )
Property and equipment, net |  |  |  |  |  | $ | 1,470,600 |  |  | $ | 1,629,845 |
Depreciation expense related to property and equipment was $106,347 and $92,408 for the three months ended September 30, 2022 and 2021, respectively and $300,655 and $127,448 for the nine months ended September 30, 2022 and 2021, respectively. Internal Use Software The Company accounts for costs incurred to develop or acquire computer software for internal use in accordance with ASC Topic 350-40, Intangibles – Goodwill and Other. 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 years. Goodwill The excess of purchase price over the fair value of identifiable net assets acquired in business combinations is recorded as goodwill. As of September 30, 2022, all of our goodwill relates to the acquisition of Scendia Biologics, LLC (“Scendia”) (see Note 5). Goodwill has an indefinite useful life and is not amortized. Goodwill is tested annually as of December 31 for impairment, or more frequently if circumstances indicate impairment may have occurred. We may first perform a qualitative assessment to determine if it is more likely than not that the fair value of the reporting unit is less than the respective carrying value. If it is determined that it is more likely than not that a reporting unit’s fair value is less than its carrying value, then the Company will determine the fair value of the reporting unit and record an impairment charge for the difference between fair value and carrying value (not to exceed the carrying amount of goodwill). Intangible Assets Intangible assets are stated at cost of acquisition less accumulated amortization and impairment loss, if any. Cost of acquisition includes the purchase price and any cost directly attributable to bringing the asset to its working condition for the intended use. The Company amortizes its finite-lived intangible assets on a straight-line basis over the estimated useful life of the respective assets, which is generally the life of the related patents or licenses, seven years for customer relationships and five years for assembled workforces. See Note 6 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 fair value less cost to sell. No impairment was recorded during the nine months ended September 30, 2022 or 2021. Investments in Equity Securities The Company’s equity investments consist of nonmarketable equity securities in privately held companies without readily determinable fair values. Unless accounted for under the equity method of accounting, the investments 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 applies the equity method of accounting to investments when it has significant influence, but not controlling interest, in the investee. Judgment regarding the level of influence over each equity method investment includes considering key factors such as ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany transactions. The Company’s proportionate share of the net income (loss) resulting from these investments is reported under the line item captioned “Share of losses from equity method investment” in the Company’s Consolidated Statements of Operations. The Company’s equity method investment is adjusted each period for the Company’s share of the investee’s income or loss and dividend paid, if any. The Company classifies distributions received from its equity method investment using the cumulative earnings approach on the consolidated statements of cash flows. The Company has reviewed the carrying value of its investments and has determined there was no impairment or observable price changes as of and for the nine-month periods ended September 30, 2022 and 2021. 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. 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 nonexchange-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. Liabilities for contingent consideration are measured at fair value each reporting period, with the acquisition-date fair value included as part of the consideration transferred. Subsequent changes in fair value are included as a component of “Other expense” in the Company’s Consolidated Statements of Operations. 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 the deferred tax asset will not be realized. Stock-based Compensation The Company accounts for stock-based compensation to employees and nonemployees in accordance with Accounting Standards Update 2018-07, Compensation - Stock Compensation (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 grants of common stock, including restricted stock awards. Research and Development Costs Research and development (“R&D”) expenses consist of personnel-related expenses, including salaries and benefits for all personnel directly engaged in R&D activities, contracted services, materials, prototype expenses and allocated overhead which is comprised of lease expense and other facilities-related costs. R&D expenses include costs related to enhancements to the Company’s currently available products and additional investments in the product and platform development pipeline. The Company expenses R&D costs as incurred. Recent Accounting Pronouncements There are no recently issued accounting pronouncements that have not yet been adopted that are expected to have a material effect on the Company’s consolidated results of operations, financial condition, or cash flows. Revision of Previously Issued Financial Statements As discussed in Note 4, the Company entered into a merger agreement with Precision Healing in April 2022. The merger was accounted for as an asset acquisition in the interim unaudited financial statements for the second quarter of 2022. Subsequent to the issuance of the second quarter 2022 unaudited financial statements, certain errors in the previously issued interim unaudited financial statements were identified. The Company evaluated the materiality of these adjustments from both a quantitative and qualitative perspective and concluded that they were immaterial to the previously issued interim unaudited financial statements taken as a whole. As such, the Company is revising the previously issued interim amounts to correct for these adjustments. These revisions have been effected in the accompanying unaudited financial statements as of and for the nine months ended September 30, 2022. These adjustments related to the omission of certain deferred tax assets and deferred tax liabilities that were generated as part of applying the purchase accounting prescribed by ASC Topic 805, Business Combinations (“ASC 805”) as well as a change in the classification of one of the intangible assets from indefinite-lived in-process research and development to finite-lived intellectual property, which the Company began amortizing as of the acquisition date. This was done as the primary intellectual property acquired was substantially completed at the time of acquisition. As a result of these adjustments, net intangible assets increased by $4,014,810 to $25,770,716 as of June 30, 2022. As a result of recognizing the net deferred tax liability in accounting for the acquisition, the Company also reduced its valuation allowance that had been previously provided against the Company’s existing net deferred tax assets (see Note 12 for more information). The effects of these adjustments were as follows for the three- and six-month periods ended June 30, 2022: SCHEDULE OF PRIOR PERIOD ADJUSTMENTS
|  | As Reported |  |  | Adjustment |  |  | As Restated |  |  | As Reported |  |  | Adjustment |  |  | As Restated |
|  | Three Months Ended June 30, 2022 |  |  | Six Months Ended June 30, 2022 |
|  | As Reported |  |  | Adjustment |  |  | As Adjusted |  |  | As Reported |  |  | Adjustment |  |  | As Adjusted |
Operating loss |  | $ | (3,194,469 | ) |  | $ | (127,096 | ) |  | $ | (3,321,565 | ) |  | $ | (5,971,341 | ) |  | $ | (127,096 | ) |  | $ | (6,098,437 | )
Income tax benefit |  | $ | - |  |  | $ | 4,141,906 |  |  | $ | 4,141,906 |  |  | $ | - |  |  | $ | 4,141,906 |  |  | $ | 4,141,906 |
Net income (loss) |  | $ | (3,257,896 | ) |  | $ | 4,014,810 |  |  | $ | 756,914 |  |  | $ | (6,414,401 | ) |  | $ | 4,014,810 |  |  | $ | (2,399,591 | )
Net income (loss) per share of common stock, basic |  | $ | (0.42 | ) |  | $ | 0.52 |  |  | $ | 0.10 |  |  | $ | (0.83 | ) |  | $ | 0.52 |  |  | $ | (0.31 | )
Net income (loss) per share of common stock, diluted |  | $ | (0.42 | ) |  | $ | 0.51 |  |  | $ | 0.09 |  |  | $ | (0.83 | ) |  | $ | 0.52 |  |  | $ | (0.31 | )

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