| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 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 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. Certain prior year amounts have been reclassified to conform to the current year
presentation. 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. 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/loss 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 years ended December 31, 2023 and 2022 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 years ended December 31, 2023 and 2022 as such shares would have had an anti-dilutive effect: SCHEDULE
OF COMPUTATION OF DILUTED NET LOSS PER SHARE
As of December 31,
2023 2022
Stock options (a) 93,892 146,191
Warrants (b) 16,725 16,725
Unvested restricted stock 144,211 181,102
Anti-dilutive securities 144,211 181,102
(a) Shares
underlying stock options assumed pursuant to the merger agreement with Precision Healing,
Inc. (“Precision Healing”) in April 2022. See Note 3 for more information regarding
the Precision Healing merger.
(b) Shares
underlying warrants assumed pursuant to the merger agreement with Precision Healing in April
2022. See Note Revenue
Recognition The
Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). Revenues
are recognized when a purchase order is received from the customer and 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
2023 or 2022. 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 a purchase order is received from the customer, 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 years ended December 31, 2023 and 2022. SCHEDULE OF REVENUE FROM PRODUCT SALES AND ROYALTIES
2023 2022
For the Year Ended
December 31,
2023 2022
Soft tissue repair products $ 54,836,410 $ 41,653,954
Bone fusion products 9,952,432 3,987,891
Royalty revenue 201,000 201,000
Total Net Revenue $ 64,989,842 $ 45,842,845 The
Company recognizes royalty revenue from a development and license agreement with BioStructures, LLC. 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 Accounts
receivable are typically due within 30 days of invoicing. 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 bases the allowance on an assessment of
customer creditworthiness, historical payment experience, the age of outstanding receivables and other information as applicable and will record its allowance based on the estimated credit losses.
The Company recorded bad debt expense of $ 202,941 280,000 528,030 325,089 3,820 4,761 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 primarily
of finished goods, and also include an immaterial amount of raw materials and related packaging components. The Company recorded inventory
obsolescence expense of $ 406,812 540,090 446,917 523,832 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 December 31, December 31,
Life 2023 2022
Computers 3 5 $ 194,788 $ 172,154
Office equipment 3 7 201,785 87,225
Furniture and fixtures 5 10 304,338 258,414
Leasehold improvements 2 5 134,170 19,631
Internal use software 5 1,618,999 1,618,998
Property and equipment, gross 2,454,080 2,156,422
Less accumulated depreciation (1,196,124 ) (739,986 )
Property and equipment, net $ 1,257,956 $ 1,416,436 Depreciation
expense related to property and equipment was $ 456,138 407,769 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 depreciated 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 December 31, 2023 and December 31, 2022, all of the Company’s goodwill relates to the acquisition of Scendia Biologics, LLC
(“Scendia”) (see Note 4). 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. The Company 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). No impairment was recorded during the year ended December
31, 2023 and 2022. 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 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 years ended December 31, 2023 and 2022. 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 in the
Company’s Consolidated Statements of Cash Flows. As a result of the Precision Healing merger in April 2022 (see Note 3), as of
December 31, 2022, the Company does not have any investments which are recorded applying the equity method of accounting. 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, 2023 and 2022. 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, other than acquisition-related expenses, approximate
fair value because of the short-term nature of these instruments. The fair value of acquisition-related accrued expenses is categorized
as Level 2 of the fair value hierarchy. The value of these instruments has been estimated using discounted cash flow analysis based on
the Company’s incremental borrowing rate. The carrying value of the Company’s debt, which has variable interest rates determined
each month, approximates fair value based on instruments with similar terms (Level 2 inputs). The fair value of the contingent earnout
consideration and the acquisition date fair value of goodwill and intangibles related to the acquisitions discussed in Notes 3, 4 and
5 are based on Level 3 inputs. Liabilities
for contingent consideration for the Company’s Precision Healing, Scendia and Applied acquisitions 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 for the Precision Healing and Scendia acquisitions are reported under the line item captioned “Change in fair value of earnout
liabilities” in the Company’s Consolidated Statements of Operations. Due to the Applied Asset Purchase being accounted for
as an asset acquisition and given that the transaction did not include contingent shares, subsequent revaluations of contingent consideration
for the Applied acquisition results in an adjustment to the contingent consideration liability and the intellectual property intangible
asset with a cumulative catch-up amortization adjustment. The current year changes in fair value of earnout liabilities below are as
a result of a net decrease in the estimated fair value of the earnout liabilities established at the time of the Company’s Precision
Healing and Scendia acquisitions. The current year revaluation of earnout liability is a result of a decrease in the estimated earnout
liability established at the time of the Company’s Applied acquisition. The following table sets forth a summary of the changes
in fair value for the Level 3 contingent earnout considerations. SCHEDULE OF CHANGES IN FAIR VALUE FOR CONTINGENT EARNOUT CONSIDERATION
Balance at December 31, 2022 $ 7,166,691
Additions 893,000
Changes in fair value of earnout liabilities (3,449,895 )
Revaluation of earnout liability (94,000 )
Settlements (692,795 )
Balance at December 31, 2023 $ 3,823,001 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 ASC Topic 718, Compensation – Stock
Compensation (“ASC 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. Recently
Adopted Accounting Pronouncements In
June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses
(Topic 326). This update amends the impairment model by requiring entities to use a forward-looking approach based on expected
losses to estimate credit losses for most financial assets and certain other instruments that are not measured at fair value through
net income. The Company adopted the new guidance effective January 1, 2023. The adoption did not have a material impact on the
Company’s consolidated financial position, results of operations or cash flows. Recent
Accounting Pronouncements In
November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures
(“ASU 2023-07”), which requires disclosure of incremental segment information on an annual and interim basis. ASU
2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after
December 15, 2024 on a retrospective basis. The Company is currently evaluating the effect of this pronouncement on its
disclosures. In
December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU
2023-09”), which expands the disclosure required for income taxes. ASU 2023-09 is effective for fiscal years beginning after
December 16, 2024, with early adoption permitted. The amendment should be applied on a prospective basis while retrospective
application is permitted. The Company is currently evaluating the effect of this pronouncements on its disclosures. |
