| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | Background
and Basis of Presentation The
terms “Sanara MedTech,” “we,” “the Company,” “SMTI,” “our,” and “us”
as used in this report refer to Sanara MedTech Inc. and its consolidated subsidiaries. The accompanying unaudited 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 of 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 of the results
of the interim periods presented have been included. Operating results for the nine-month period ended September 30, 2020, are
not necessarily indicative of the results that may be expected for the year ending December 31, 2020, or any other period. These
financial statements and notes should be read in conjunction with the financial statements and the related notes for each of the
two years ended December 31, 2019, and December 31, 2018, included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2019. Reverse
Stock Split Effective
May 10, 2019, the Company effected a reverse stock split of the issued and outstanding shares of the Company’s common stock
at a ratio of one share for every 100 shares. Unless otherwise indicated, all share and per share information in this report have
been adjusted to reflect the reverse stock split. Cellerate
Acquisition On
August 28, 2018, the Company consummated definitive agreements that continued the Company’s operations to market its principal
products, CellerateRX® Surgical Activated Collagen® Peptides and CellerateRX® Hydrolyzed Collagen wound fillers
(“CellerateRX”), through a 50% ownership interest in a newly formed Texas limited liability company, Cellerate, LLC
which began operations on September 1, 2018. The remaining 50% ownership interest was held by an affiliate of The Catalyst Group,
Inc. (“Catalyst”), which acquired an exclusive world-wide license to distribute CellerateRX products. Cellerate, LLC
conducts operations with an exclusive sublicense from the Catalyst affiliate to distribute CellerateRX products into the wound
care and surgical markets in the United States, Canada and Mexico. On
March 15, 2019, the Company acquired Catalyst’s 50% interest in Cellerate, LLC (“the Cellerate Acquisition”)
in exchange for 1,136,815 shares of the Company’s newly created Series F Convertible Preferred Stock. Each share of Series
F Convertible Preferred Stock was convertible at the option of the holder, at any time, into 2 shares of common stock, adjusted
for the 1-for-100 reverse stock split of the Company’s common stock which became effective on May 10, 2019. Additionally,
each holder of Series F Convertible Preferred Stock was entitled to vote on all matters submitted for a vote of the Company’s
shareholders with votes equal to the number of shares of common stock into which such holder’s Series F Convertible Preferred
Stock could then be converted. Based on the closing price of the Company’s common stock on March 15, 2019 and the conversion
ratio of the Series F Convertible Preferred Stock, the fair value of the preferred shares issued to Catalyst was approximately
$12.5 million. Following the closing of the Cellerate Acquisition, Mr. Ronald T. Nixon, Founder and Managing Partner of Catalyst,
was elected to the Company’s Board of Directors effective March 15, 2019. The
Cellerate Acquisition was accounted for as a reverse merger and recapitalization because, immediately following the completion
of the transaction, Catalyst could obtain effective control of the Company upon conversion of its Series F Convertible Preferred
Stock and promissory note, both of which could occur at Catalyst’s option. Additionally, officers and senior executive positions
continued on as management of the combined entity after consummation of the Cellerate Acquisition. For accounting purposes, Cellerate,
LLC was deemed to be the accounting acquirer in the transaction and, consequently, the transaction was treated as a recapitalization
of Sanara MedTech. As part of the reverse merger and recapitalization, the net liabilities existing in the Company as of the date
of the Cellerate Acquisition totaling approximately $1,666,537, which included $508,973 of cash, were converted to equity. No
step-up in basis or intangible assets or goodwill was recorded in the Cellerate Acquisition. On
May 9, 2019, the Company organized Sanara Pulsar, LLC, a Texas limited liability company (“Sanara Pulsar”), which
is owned 60% by the Company’s wholly owned subsidiary Cellerate, LLC, and 40% owned by Wound Care Solutions, Limited, an
unaffiliated company registered in the United Kingdom (“WCS”). Net profits and losses and distributions are shared
by the members in proportion to their respective membership interests. The Company consolidates the operations and financial position
of Sanara Pulsar. On
June 9, 2020, the Company organized United Wound and Skin Solutions, LLC (“UWSS”), a Delaware limited liability company.
UWSS is a 100% owned subsidiary of the Company. Principles
of Consolidation The
unaudited consolidated financial statements include the accounts of Sanara MedTech Inc. and its wholly owned subsidiaries Wound
Care Innovations, LLC a Nevada limited liability company, Cellerate, LLC a Texas limited liability company, and UWSS. The consolidated
financial statements also include the accounts of Sanara Pulsar which is owned 60% by the Company’s wholly owned subsidiary
Cellerate, LLC, and 40% owned by WCS. All significant intercompany profits, losses, transactions and balances have been eliminated
in consolidation. Revenue
Recognition The
Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from
Contracts with Customers (“ASC 606”), which the Company adopted on January 1, 2018 using the modified retrospective
method. 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 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 2019 or 2020. 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 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 nine months ended September 30, 2020 and 2019. All revenue
was generated in the United States; therefore, no geographical disaggregation is necessary.
Nine
Months Ended
September
30,
2020 2019
Product
sales revenue $ 10,647,088 $ 8,304,792
Royalty
revenue 150,750 108,875
Total
Revenue $ 10,797,838 $ 8,413,667 The
Company recognizes royalty revenue from a development and licensing 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 licensing agreement have not exceeded the
annual minimum of $201,000 ($50,250 per quarter). Contract
Assets and Liabilities The
Company does not have any contract assets or contract liabilities. 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 $258,585 for the nine
months ended September 30, 2020, compared to $88,438 for the nine months ended September 30, 2019. The allowance for obsolete
and slow-moving inventory had a balance of $231,342 at September 30, 2020, and $43,650 at December 31, 2019. The Company considered
the impact of COVID-19 on its recorded value of inventory and determined no adjustment was necessary as of September 30, 2020. Allowance
for Doubtful Accounts The
Company establishes an allowance for doubtful accounts to ensure accounts receivable are not overstated due to uncollectible accounts.
The Company recorded bad debt expense of $30,000 during the nine months ended September 30, 2020, and $60,000 during the
nine months ended September 30, 2019. The allowance for doubtful accounts at September 30, 2020 was $65,719 and $60,012
at December 31, 2019. 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. If circumstances related to customers change, estimates
of the recoverability of receivables would be further adjusted. The Company considered the impact of COVID-19 in its analysis
of receivables and determined the allowance for doubtful accounts was appropriate at September 30, 2020. Use
of Estimates The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported in the financial statements and accompanying notes. The extent to which the COVID-19
pandemic may directly or indirectly impact our business, financial condition, and results of operations is highly uncertain and
subject to change. We considered the potential impact of the COVID-19 pandemic on our estimates and assumptions and determined
there was not a material impact on our estimates and assumptions used in preparing our consolidated financial statements as of
and for the nine months ended September 30, 2020; however, actual results could differ from those estimates and there may be changes
to our estimates in future periods. 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 net realizable value. No impairment was recorded during the nine months ended
September 30, 2020 and 2019. Investment
in Equity Securities The
Company’s equity investments consist of non-marketable equity securities in a privately held company without readily determinable
fair values, and 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 has reviewed the carrying value
of its investment and has determined there was no impairment or observable price changes as of September 30, 2020. Fair
Value Measurements 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 non-exchange-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. Income
Per Share The
Company computes income per share in accordance with ASC Topic 260, Earnings per Share, which requires the Company to present
basic and dilutive 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
similar 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 convertible instruments were excluded from the current and prior period calculations as their
inclusion would have been anti-dilutive during the nine months ended September 30, 2020 and September 30, 2019. 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, 2020 and 2019 as such shares would have had an anti-dilutive
effect:
As
of September 30,
2020 2019
Stock
options 11,500 11,500
Convertible
debt - 175,973
Preferred
shares - 2,273,630 Recently
Issued Accounting Pronouncements In
June 2016, the Financial Accounting Standards and Oversight Board (“FASB”) issued Accounting Standards Update No.
2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”)
which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13
replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition
of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years, beginning after
December 15, 2019. The adoption of this standard did not have a material impact on the Company’s consolidated financial
statements. |
