| 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
(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 2.0 201,000 50,250 201,000 50,250 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 0 220,000 51,536 266,909 64,899 5,311 34,379 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 76,989 289,406 106,823 465,313 333,850 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 $ 156,510 $ 104,568
Office
equipment 3 5 50,214 21,731
Furniture
and fixtures 5 10 258,414 221,565
Leasehold
improvements 2 5 19,631 2,030
Internal
use software 5 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 92,408 300,655 127,448 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. 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 25,770,716 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 ) |
