Sanara MedTech Inc 10-Q for FY2021 Q3
Sanara MedTech Inc. (SMTI)
About this 10-Q
Sanara MedTech Inc filed this 10-Q on November 12, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $5.82M
- up 35.2% from $4.31M a year earlier
- Net loss
- $2.05M
- compared with a net loss of $1.21M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________
Commission File Number
(Exact name of Registrant as specified in its charter) |
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| |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
(Address of principal executive offices)
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
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| The |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
☐ | Smaller reporting company | ||
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| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of November 12, 2021,
SANARA MEDTECH INC.
Form 10-Q
Quarter Ended September 30, 2021
Sanara, Sanara MedTech, our logo and our other trademarks or service marks appearing in this report are the property of Sanara MedTech Inc. Trade names, trademarks and service marks of other companies appearing in this report are the property of their respective owners. Solely for convenience, the trademarks, service marks and trade names included in this report are without the ®, ™ or other applicable symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks and trade names.
Unless otherwise indicated, “Sanara,” “we,” “us,” “our,” and “the Company,” refer to Sanara MedTech Inc. and its consolidated subsidiaries.
| 2 |
| Table of Contents |
Part I – Financial Information
Item 1. Financial Statements
SANARA MEDTECH INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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| (Unaudited) |
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| September 30, |
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| December 31, |
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| 2020 |
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Assets |
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Current assets |
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Cash |
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Accounts receivable, net of allowances of $ |
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Accounts receivable - related party |
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Royalty receivable |
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Inventory, net of allowance for obsolescence of $ |
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Prepaid and other assets |
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Total current assets |
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Long-term assets |
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Property and equipment, net of accumulated depreciation of $ |
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Right of use assets – operating leases |
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Intangible assets, net of accumulated amortization of $ |
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Investment in equity securities |
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Total long-term assets |
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Total assets |
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Liabilities and shareholders’ equity |
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Current liabilities |
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Accounts payable |
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Accounts payable – related parties |
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Accrued royalties and expenses |
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Accrued bonus and commissions |
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Operating lease liability - current |
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Total current liabilities |
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Long-term liabilities |
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Operating lease liability – long term |
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Other long-term liabilities |
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Total long-term liabilities |
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Total liabilities |
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Shareholders’ equity |
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Common Stock: $ |
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Additional paid-in capital |
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Accumulated deficit |
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Total Sanara MedTech shareholders’ equity |
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Equity attributable to noncontrolling interest |
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Total shareholders’ equity |
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Total liabilities and shareholders’ equity |
| $ |
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| $ |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 3 |
| Table of Contents |
SANARA MEDTECH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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| Three Months Ended |
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| Nine Months Ended |
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| September 30, |
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| 2021 |
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| 2020 |
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Net Revenue |
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| $ |
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| $ |
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Cost of goods sold |
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Gross profit |
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Operating expenses |
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Selling, general and administrative expenses |
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Research and development |
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Depreciation and amortization |
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Total operating expenses |
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Operating loss |
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Other income (expense) |
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Other income |
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Interest expense |
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Share of losses from equity method investment |
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Total other income (expense) |
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Net loss |
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Less: Net loss attributable to noncontrolling interest |
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Net loss attributable to Sanara MedTech common shareholders |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
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Net loss per share of common stock, basic and diluted |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
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Weighted average number of common shares outstanding, basic and diluted |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 4 |
| Table of Contents |
SANARA MEDTECH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
|
| Preferred Stock Series F |
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| Common Stock |
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| Additional |
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| Total |
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| $10 par value |
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| $0.001 par value |
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| Paid-In |
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| Accumulated |
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| Noncontrolling |
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| Shareholders' |
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| Shares |
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| Amount |
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| Shares |
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| Amount |
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| Capital |
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| Income/(Deficit) |
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| Interest |
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| Equity |
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Balance at December 31, 2019 |
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| $ |
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| $ |
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| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ |
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Conversion of Preferred Shares to Common Stock |
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Conversion of Promissory Note to Common Stock |
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Share-based compensation |
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| - |
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Net loss |
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| - |
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| - |
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| ( | ) |
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Balance at March 31, 2020 |
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| - |
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| $ |
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| $ |
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| $ |
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| $ | ( | ) |
| $ | ( | ) |
| $ |
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Share-based compensation |
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| - |
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Net loss |
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| - |
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| - |
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| ( | ) |
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Balance at June 30, 2020 |
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| - |
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| $ |
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| $ |
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| $ |
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| $ | ( | ) |
| $ | ( | ) |
| $ |
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Issuance of Common Stock for intangible asset |
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| - |
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Employee stock purchase program |
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| - |
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Share-based compensation |
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| - |
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Net loss |
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| - |
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| - |
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Balance at September 30, 2020 |
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| - |
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| $ |
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| $ |
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| $ |
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| $ | ( | ) |
| $ | ( | ) |
| $ |
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| Preferred Stock Series F |
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| Common Stock |
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| Additional |
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| Total |
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| $10 par value |
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| $0.001 par value |
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| Paid-In |
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| Accumulated |
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| Noncontrolling |
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| Shareholders' |
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| Shares |
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| Amount |
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| Shares |
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| Amount |
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| Capital |
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| Income/Deficit) |
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| Interest |
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| Equity |
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Balance at December 31, 2020 |
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| - |
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| $ |
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| $ |
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| $ |
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| $ | ( | ) |
| $ | ( | ) |
| $ |
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Issuance of common stock for asset acquisitions |
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| - |
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Issuance of common stock in equity offering |
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Share-based compensation |
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| - |
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Distribution to noncontrolling interest member |
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| - |
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| - |
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Net loss |
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| - |
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| - |
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Balance at March 31, 2021 |
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| - |
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| $ |
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| $ |
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| $ |
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| $ | ( | ) |
| $ | ( | ) |
| $ |
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Share-based compensation |
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| - |
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Capital contribution of noncontrolling interest member |
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| - |
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| - |
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Net loss |
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| - |
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| - |
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Balance at June 30, 2021 |
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| - |
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| $ |
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| $ |
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| $ |
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| $ | ( | ) |
| $ | ( | ) |
| $ |
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Issuance of common stock for asset acquisitions |
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| - |
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Share-based compensation |
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| - |
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Net loss |
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| - |
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| - |
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| ( | ) |
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| ( | ) |
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| ( | ) | ||
Balance at September 30, 2021 |
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| - |
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| $ |
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| $ |
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| $ |
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| $ | ( | ) |
| $ | ( | ) |
| $ |
| |||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 5 |
| Table of Contents |
SANARA MEDTECH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
| Nine Months Ended |
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| September 30, |
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| 2021 |
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| 2020 |
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Cash flows from operating activities: |
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Net loss |
| $ | ( | ) |
| $ | ( | ) |
Adjustments to reconcile net loss to net cash used in operating activities |
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Depreciation and amortization |
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Interest expense on convertible debt |
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| - |
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Loss on disposal of asset |
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| - |
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Bad debt expense |
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Inventory obsolescence |
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Share-based compensation |
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Noncash lease expense |
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Loss on equity method investment |
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| 472,747 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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Accounts receivable - related party |
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Inventory |
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Prepaid - related parties |
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| - |
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| ( | ) |
Prepaid and other assets |
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Accounts payable |
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| ( | ) | |
Accounts payable - related parties |
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Accrued royalties and expenses |
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Accrued bonus and commissions |
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Accrued Interest |
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| - |
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| |
Net cash used in operating activities |
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| ( | ) |
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Cash flows from investing activities: |
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Purchase of property and equipment |
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| ( | ) |
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| ( | ) |
Purchase of intangible assets |
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| ( | ) |
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| ( | ) |
Investment in equity securities |
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| ( | ) |
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Net cash used in investing activities |
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Cash flows from financing activities: |
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Draw on line of credit |
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Pay off line of credit |
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Proceeds from PPP Loan |
|
| - |
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Public offering net proceeds |
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Common stock issued for Employee Stock Purchase Plan |
|
| - |
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Distribution to noncontrolling interest shareholders |
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Net cash provided by financing activities |
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Net increase (decrease) in cash |
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| ( | ) | |
Cash, beginning of period |
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Cash, end of period |
| $ |
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| $ |
| ||
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Cash paid during the period for: |
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Interest |
| $ |
|
| $ |
| ||
Income taxes |
|
| - |
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| |
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Supplemental noncash investing and financing activities: |
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Common stock issued for conversion of Series F Preferred Stock |
|
| - |
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| |
Common stock issued for conversion of related party debt and interest |
|
| - |
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Common stock issued for asset acquisitions |
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License agreement as capital contribution from noncontrolling interest member |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 6 |
| Table of Contents |
SANARA MEDTECH INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – NATURE OF BUSINESS AND BACKGROUND
Sanara MedTech Inc. (“we”, “our”, the “Company”) is a medical technology company focused on developing and commercializing transformative technologies to improve clinical outcomes and reduce healthcare expenditures in the surgical and chronic wound and skin care markets. The Company’s portfolio of products and services is designed to allow us to deliver comprehensive wound and skin care solutions for patients in all care settings, including acute (hospitals and long-term acute care hospitals) and post-acute (wound care clinics, physician offices, skilled nursing facilities (“SNFs”), home health, hospice, and retail). Each of the Company’s products, services, and technologies contributes to the Company’s overall goal of achieving better clinical outcomes at a lower overall cost for patients regardless of where they receive care. The Company strives to be one of the most innovative and comprehensive providers of effective wound and skin care products and technologies.
Impact of the COVID-19 Pandemic
Beginning in March 2020, many states issued orders suspending elective surgeries in order to free-up hospital resources to treat COVID-19 patients. This resulted in a reduction in demand for the Company’s surgical products beginning in the second half of March 2020. Additionally, most states limited access to SNFs to only resident caregivers, which impeded the Company’s ability to provide education and product training to the clinicians who use the Company’s products in these facilities. These restrictions resulted in an overall decline in sales for the second quarter of 2020. During the second half of 2020 and the first half of 2021, the Company saw a strong rebound in product sales as restrictions on elective surgeries eased in its primary markets in Texas, Florida, and the southeastern United States. During the third quarter of 2021, the United States experienced a surge of COVID-19 cases as the Delta variant of the virus impacted much of the country and negatively impacted the Company’s sales in Texas, the northeastern United States, and other markets.
The duration and effects of the pandemic remain uncertain; however, management believes that elective surgical procedures will continue to be performed with the exception of certain geographic hotspots. Additionally, management believes that the majority of surgical procedures impacted by COVID-19 and its variants will ultimately be performed. The Company continues to closely monitor the pandemic in order to ensure the safety of the Company’s people and its ability to serve its customers and patients.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
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. Certain prior period amounts in the consolidated financial statements and accompanying notes have been reclassified to conform to the current period’s presentation. 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, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 2021, 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, 2020, and December 31, 2019, included in the Company’s most recent Annual Report on Form 10-K.
Principles of Consolidation
The accompanying unaudited consolidated financial statements include the accounts of Sanara MedTech Inc., 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.
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. 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 the unaudited consolidated financial statements as of and for the nine months ended September 30, 2021. 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 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 common stock equivalents were excluded from the current and prior period calculations, as their inclusion would have been anti-dilutive during the nine months ended September 30, 2021 and 2020 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, 2021 and 2020 as such shares would have had an anti-dilutive effect:
|
| As of September 30, |
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| 2021 |
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| 2020 |
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Stock options |
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Unvested restricted stock |
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Revenue Recognition
The Company recognizes revenue in accordance with 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 2020 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 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, 2021 and 2020. All revenue was generated in the United States; therefore, no geographical disaggregation was necessary.
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| Nine Months Ended |
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| September 30, |
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| 2020 |
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Product sales revenue |
| $ |
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| $ |
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Royalty revenue |
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Total Revenue |
| $ |
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| $ |
| ||
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 that the Company will receive quarterly royalty payments of at least $50,250. Under the terms of the development and license agreement, royalties of
Contract Assets and Liabilities
The Company does not have any contract assets or contract liabilities.
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 $
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 $
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 three to ten years. Below is a summary of property and equipment for the periods presented:
|
| September 30, |
|
| December 31, |
| ||
|
| 2021 |
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| 2020 |
| ||
Computers |
| $ |
|
| $ |
| ||
Office equipment |
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Furniture and fixtures |
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Leasehold improvements |
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Internal use software |
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Less accumulated depreciation |
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| ( | ) |
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| ( | ) |
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Property and equipment, net |
| $ |
|
| $ |
| ||
Depreciation expense related to property and equipment was $
The Company considered the impact the COVID-19 pandemic may have had on the carrying value of its property and equipment and determined that no impairment loss had occurred as of September 30, 2021. The Company will continue to assess the COVID-19 pandemic’s impact on its business including any indicators of impairment of property and equipment.
Internal Use Software
The Company accounts for costs incurred to develop 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 to seven years.
Intangible Assets
Intangible assets are stated at cost of acquisition less accumulated amortization and impairment loss, if any. Cost of acquisition includes purchase price and any cost directly attributable to bringing the asset to its working condition for the intended use. The Company amortizes its intangible assets on a straight-line basis over the useful life of the respective assets which is generally the life of the related patents (if applicable).
See Note 3 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 net realizable value. No impairment was recorded during the nine months ended September 30, 2021 and 2020.
Investments in Equity Securities
The Company’s equity investments consist of non-marketable 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 our consolidated statements of operations. The Company’s equity method investments are 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 equity method investments 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 September 30, 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 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. The carrying amounts of cash, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short-term nature of these instruments. The Company does not have any assets or liabilities that are required to be measured and recorded at fair value on a recurring basis.
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 of the deferred tax asset will not be realized. A full valuation allowance has been recognized against our net deferred tax asset.
We file various federal and state and local tax returns based on federal and state local consolidation and stand-alone tax rules as applicable.
Advertising Expense
In accordance with ASC Topic No. 720-35-25-1, the Company recognizes advertising expenses the first time the advertising takes place. Advertising expenses are expensed as incurred.
Share-based Compensation
The Company accounts for stock-based compensation to employees and nonemployees in accordance with Accounting Standards Update (“ASU”) 2018-07 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 common stock issuances.
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 December 2019, the Financial Accounting Standards Board issued ASU 2019-12, Simplifications to Accounting for Income Taxes, which removes certain exceptions to the general principles of Topic 740 and adds guidance to reduce complexity in accounting for income taxes. The ASU is effective for annual and interim periods in fiscal years beginning December 15, 2020. The adoption of this standard by the Company effective January 1, 2021, did not have a material effect on the Company’s consolidated financial statements.
NOTE 3 – INTANGIBLE ASSETS
The carrying values of the Company’s finite-lived intangible assets were as follows:
|
| September 30, 2021 |
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| December 31, 2020 |
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| Accumulated |
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| Cost |
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| Amortization |
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| Net |
|
| Cost |
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| Amortization |
|
| Net |
| ||||||
Product Licenses |
| $ |
|
| $ | ( | ) |
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
| ||||
Patents and Other IP |
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| ( | ) |
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| ( | ) |
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Software and Other |
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Total |
| $ |
|
| $ | ( | ) |
| $ |
|
| $ |
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| $ | ( | ) |
| $ |
| ||||
In March 2021, the Company issued 20,834 shares of its common stock to Rochal Industries, LLC (“Rochal”) for a $750,000 milestone payment required per the terms of a licensing agreement with Rochal. The payment became due upon the Company’s public offering of common stock in February 2021. The milestone payment was recorded as an addition to intangible assets.
As of September 30, 2021, the weighted-average amortization period for all intangible assets was
Remainder of 2021 |
| $ |
| |
2022 |
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| |
2023 |
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| |
2024 |
|
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| |
2025 |
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Thereafter |
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Total |
| $ |
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The Company has reviewed the carrying value of intangible assets due to the events and circumstances surrounding the COVID-19 pandemic. The Company does not believe the impact of COVID-19 or any other matters have created an impairment loss on the Company’s intangible assets as of September 30, 2021. Accordingly, there was no impairment loss recognized on the Company’s intangible assets during the nine months ended September 30, 2021.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
License Agreements and Royalties
CellerateRX® Activated Collagen®
On August 27, 2018, the Company entered into an exclusive, world-wide sublicense agreement with CGI Cellerate RX, LLC (“CGI Cellerate RX”) to distribute CellerateRX Surgical and HYCOL products into the wound care and surgical markets. Pursuant to the sublicense agreement, the Company pays royalties of 3-5% of annual collected net sales of CellerateRX Surgical and HYCOL. As amended on January 26, 2021, the term of the sublicense extends through May 2050, with automatic successive year-to-year renewal terms thereafter so long as the Company’s Net Sales (as defined in the sublicense agreement) each year are equal to or in excess of $1,000,000. If the Company’s Net Sales fall below $1,000,000 for any year after the initial expiration date, CGI Cellerate RX will have the right to terminate the sublicense agreement upon written notice. Minimum royalties of $
For the nine months ended September 30, 2021 and 2020, royalty expense accrued under the terms of this agreement totaled $
BIAKŌS Antimicrobial Wound Gel and BIAKŌS Antimicrobial Skin and Wound Cleanser
On July 7, 2019, the Company executed a license agreement with Rochal, a related party, 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 “BIAKŌS License Agreement”). Currently, the products covered by the BIAKŌS License Agreement are BIAKŌS Antimicrobial Wound Gel and BIAKŌS Antimicrobial Skin and Wound Cleanser. Both products are 510(k) approved. The Company’s Executive Chairman is a director of Rochal, and indirectly a significant shareholder of Rochal, and through the potential exercise of warrants, a majority shareholder of Rochal. Another one of the Company’s directors is also a director and significant shareholder of Rochal.
Recent and future commitments under the terms of the BIAKŌS License Agreement include:
| ● | In March 2021, the Company issued 20,834 shares of its common stock to Rochal as full payment of a $750,000 milestone which became due upon the Company’s public offering of common stock in February 2021. |
| ● | The Company pays Rochal a royalty of 2-4% of net sales. The minimum annual royalty due to Rochal was $100,000 in 2020 and will increase by 10% each subsequent calendar year up to a maximum amount of $150,000. |
| ● | The Company pays additional royalty annually based on specific net profit targets from sales of the licensed products, subject to a maximum of $1,000,000 during any calendar year. |
Unless previously terminated by the parties, the BIAKŌS License Agreement expires with the related patents in December 2031.
For the nine months ended September 30, 2021 and 2020, royalty expense recognized under this agreement was $
CuraShield Antimicrobial Barrier Film and No Sting Skin Protectant
On October 1, 2019, the Company executed a license agreement with Rochal pursuant to which 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 CuraShield Antimicrobial Barrier Film and a no sting skin protectant product.
Future commitments under the terms of the ABF License Agreement include:
| ● | The Company will pay Rochal a royalty of 2-4% of net sales. 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 annual minimum royalty will increase by 10% each subsequent calendar year up to a maximum amount of $75,000. |
| ● | The Company will pay additional royalties annually based on specific net profit targets from sales of the licensed products, subject to a maximum of $500,000 during any calendar year. |
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.
No commercial sales or royalties have been recognized under this agreement as of September 30, 2021.
Debrider License Agreement
On May 4, 2020, the Company executed a product license agreement with Rochal, pursuant to which the Company acquired an exclusive world-wide license to market, sell and further develop a debrider for human medical use to enhance skin condition or treat or relieve skin disorders, excluding uses primarily for beauty, cosmetic, or toiletry purposes (the “Debrider License Agreement”).
Future commitments under the terms of the Debrider License Agreement include:
| ● | At the time Rochal issues a purchase order to its contract manufacturer for the first good manufacturing practice run of the licensed products, the Company will pay Rochal $600,000 in cash. |
| ● | Upon FDA clearance of the licensed products, the Company will pay Rochal $500,000 in cash and $1,000,000, which at the Company’s option may be paid in any combination of cash and its common stock. |
| ● | The Company will pay Rochal a royalty of 2-4% of net sales. The minimum annual royalty due to Rochal will be $100,000 beginning with the first full calendar year following the year in which first commercial sales of the licensed products occur and increase by 10% each subsequent calendar year up to a maximum amount of $150,000. |
| ● | The Company will pay additional royalty annually based on specific net profit targets from sales of the licensed products, subject to a maximum of $1,000,000 during any calendar year. |
Unless previously terminated or extended by the parties, the Debrider License Agreement will expire in October 2034.
No commercial sales or royalties have been recognized under this agreement as of September 30, 2021.
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 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 $
Other Commitments
At the time of the formation of Sanara Pulsar, it and Wound Care Solutions, Limited (“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. 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 (the “Target Net Income”), then Cellerate, LLC will, within 30 days after such determination, pay WCS the amount of funds representing the difference between the Target Net Income and the actual amount of net income shown on WCS’s Form K-1 for the year 2020. In March 2021, the Company paid WCS $200,000 for the year 2020. For each of the years 2021 through 2024 the Target Net Income will increase by 10%, 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 the 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 the Target Net Income and the actual amount of net income shown on WCS’s Form K-1 for the applicable year. All other 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 all such advances to WCS.
NOTE 5 - OPERATING LEASES
The Company periodically enters into operating lease contracts for office space and equipment. Arrangements are evaluated at inception to determine whether such arrangements constitute a lease.
Right of use assets, which we refer to as “ROU assets,” represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities were recognized on the transition date based on the present value of lease payments over the respective lease term, with the office space ROU asset adjusted for deferred rent liability.
The Company has two active operating leases: an office space lease with a remaining lease term of 33 months and a facility lease with a remaining term of 11 months as of September 30, 2021. All other leases are short-term leases, which for practical expediency, the Company has elected to not recognize as lease assets and lease liabilities.
Effective July 1, 2021, the Company assumed an office lease pursuant to the Rochal asset purchase agreement. This lease expires August 31, 2022. The base monthly rent was $8,504 through August 31, 2021, then increased to $8,808 for the remainder of the lease. As the implicit rate in the leases was not determinable, the discount rate applied to determine the present value of lease payments was the 4% borrowing rate on the Company’s line of credit as of the assumption date. The office space lease agreement contains no renewal terms; therefore, no lease liability was recorded beyond the termination date. Additionally, the Company assumed the subleasing of a portion of the office space to a subtenant at a monthly rate of $975. Sublease income is recognized on a straight-line basis over the term of the sublease agreement, whose expiration corresponds to that of the master lease agreement, and is presented as a reduction of general and administrative expense in the Company’s consolidated statements of operations. Sublease income totaled $2,925 during the fiscal year ended September 30, 2021.
In accordance with ASC Topic 842, the Company has recorded lease assets of $
Maturity of Operating Lease Liabilities
|
| September 30, 2021 |
| |
Remainder of 2021 |
| $ |
| |
2022 |
|
|
| |
2023 |
|
|
| |
2024 |
|
|
| |
2025 |
|
|
| |
Thereafter |
|
|
| |
|
|
|
|
|
Total lease payments |
|
|
| |
Less imputed interest |
|
| ( | ) |
Present Value of Lease Liabilities |
| $ |
| |
|
|
|
|
|
Operating lease liability – current |
|
|
| |
Operating lease liability – long term |
|
|
| |
As of September 30, 2021, the Company’s operating leases have a weighted average remaining lease term of
NOTE 6 – SHAREHOLDERS’ EQUITY
Preferred Stock
On February 7, 2020, CGI Cellerate RX, an affiliate of The Catalyst Group, Inc. (“Catalyst”), converted its entire holdings of its 30-month $
Common Stock
At the Company’s Annual Meeting of Shareholders held on July 9, 2020, the Company approved the Restated 2014 Omnibus Long-Term Incentive Plan (the “LTIP Plan”) in which the Company’s directors, officers, employees and consultants are eligible to participate. A total of 253,573 shares had been issued under the LTIP Plan and 1,746,427 were available for issuance as of September 30, 2021.
On January 18, 2021, the Company entered into an Equity Exchange Agreement (the “Exchange Agreement”), effective as of January 14, 2021, with two individuals who each owned
On February 12, 2021, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Cantor Fitzgerald & Co. as representative of several underwriters named therein (collectively, the “Underwriters”), pursuant to which the Company agreed to issue and sell an aggregate of
The net proceeds to the Company from the Offering were $
Following the closing of the Offering in February of 2021, the Company made the $
On July 14, 2021, the Company entered into an asset purchase agreement with Rochal, effective July 1, 2021, pursuant to which the Company purchased certain assets of Rochal, including, among others, certain of Rochal’s intellectual property, furniture and equipment, supplies, rights and claims, other than certain excluded assets, all as more specifically set forth in the asset purchase agreement. In exchange for the acquired assets, the Company paid to Rochal (i) $
Restricted Stock Awards
During the nine months ended September 30, 2021, the Company granted and issued
Share-based compensation expense of $
At September 30, 2021, there was $
Below is a summary of restricted stock activity for the nine months ended September 30, 2021:
|
| For the Nine Months Ended |
| |||||
|
| September 30, 2021 |
| |||||
|
|
|
|
| Weighted Average |
| ||
|
| Shares |
|
| Grant Date Fair Value |
| ||
Non-vested at beginning of period |
|
|
|
| $ |
| ||
Granted |
|
|
|
|
|
| ||
Vested |
|
| ( | ) |
|
|
| |
Forfeited |
|
| ( | ) |
|
|
| |
Non-vested at September 30, 2021 |
|
|
|
| $ |
| ||
Stock Options
A summary of the status of outstanding stock options at September 30, 2021 and changes during the nine-month period then ended is presented below:
|
| For the Nine Months Ended |
| |||||||||
|
| September 30, 2021 |
| |||||||||
|
|
|
| Weighted Average |
|
| Weighted Average |
| ||||
|
| Options |
|
| Exercise Price |
|
| Remaining Contract Life |
| |||
Outstanding at beginning of period |
|
|
|
| $ |
|
|
|
| |||
Granted |
|
| - |
|
|
|
|
|
|
| ||
Exercised |
|
| - |
|
|
|
|
|
|
| ||
Forfeited |
|
| - |
|
|
|
|
|
|
| ||
Expired |
|
| - |
|
|
| - |
|
|
|
| |
Outstanding at September 30, 2021 |
|
|
|
| $ |
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2021 |
|
|
|
| $ |
|
|
|
| |||
NOTE 7 – DEBT AND CREDIT FACILITIES
Revolving Line of Credit
In December 2018, the Company executed agreements with Cadence Bank, N.A.(“Cadence”) which provided the Company access to a revolving line of credit up to a maximum principal amount of $
On January 15, 2021, the Company entered into a loan agreement (the “Loan Agreement”) with Cadence providing for a $
The line of credit contains customary representations and warranties and requires the Company to maintain compliance with certain financial covenants, including, among others, a minimum liquidity of $
On February 11, 2021, the Company made an $
On June 29, 2021, the Company amended the revolving line of credit with Cadence to modify certain financial covenants which included changing the initial measurement period of the minimum Interest Coverage Ratio (as defined in the Loan Agreement) from June 2021 to March 2022 (the “Modification Agreement”). In connection with this change, beginning with the fiscal quarter ended June 30, 2021, through the fiscal quarter ending December 31, 2021, the required minimum Tangible Net Worth (as defined in the Loan Agreement) was raised from $1,000,000 to $
NOTE 8 – INVESTMENT IN EQUITY SECURITIES
The Company’s equity investments consist of non-marketable equity securities in privately held companies 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 made a $
On November 9, 2020, the Company entered into agreements to purchase certain non-marketable securities consisting of
In February 2021, the Company invested $
On June 3, 2021, the Company invested $
The Company has reviewed the characteristics of the Shares in accordance with ASC Topic 323, Investments – Equity Method and Joint Ventures. Due to the substantive liquidation preferences of the Shares over Pixalere’s common stock, the Shares are not “in-substance” common stock, and therefore, the Company will not utilize the equity method of accounting for this investment. In accordance with ASC Topic 321, Investments - Equity Securities, this investment was reported at cost as of September 30, 2021.
The following summarizes the Company’s investments:
|
| September 30, 2021 |
|
| December 31, 2020 |
|
| ||||||||
|
| Carrying Amount |
|
| Economic Interest |
|
| Carrying Amount |
|
| Economic Interest | ||||
Equity Method Investment |
|
|
|
|
|
|
|
|
|
|
| ||||
Precision Healing Inc. |
| $ |
|
|
| % |
| $ |
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cost Method Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Direct Dermatology, Inc. |
|
|
|
|
|
|
|
|
|
|
|
| |||
Precision Healing Inc. |
|
|
|
|
|
|
|
|
|
|
|
| |||
Pixalere Healthcare, Inc. |
|
|
|
|
|
|
|
|
| - |
|
|
| ||
Total Cost Method Investments |
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total Investments |
| $ |
|
|
|
|
|
| $ |
|
|
| |||
The following summarizes the loss from the equity method investment reflected in the consolidated statements of operations:
|
| Three Months ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
Investment |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Precision Healing Inc. |
| $ | ( | ) |
| $ |
|
| $ | ( | ) |
| $ |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| $ | ( | ) |
| $ |
|
| $ | ( | ) |
| $ |
| ||
| 18 |
| Table of Contents |
NOTE 9 – ROCHAL ASSET ACQUISITION
On July 14, 2021, the Company entered into an asset purchase agreement with Rochal, effective July 1, 2021, pursuant to which the Company purchased certain assets of Rochal, including, among others, certain of Rochal’s intellectual property, furniture and equipment, supplies, rights and claims, other than certain excluded assets, all as more specifically set forth in the asset purchase agreement, and assume certain liabilities upon the terms and subject to the conditions set forth in the asset purchase agreement. In exchange for the acquired assets, the Company paid to Rochal (i) $
Description |
| Amount |
| |
Net cash consideration |
| $ |
| |
Equity consideration (fair value) |
|
|
| |
Net liabilities assumed |
|
|
| |
Transaction costs |
|
|
| |
Total purchase consideration |
| $ |
| |
Prior to the transaction, the Company entered into product license agreements with Rochal, pursuant to which the Company acquired exclusive world-wide licenses to market, sell and further develop certain antimicrobial barrier film and skin protectant products, antimicrobial products for the prevention and treatment of microbes on the human body utilizing certain of Rochal’s patents and a debrider for human medical use to enhance skin condition or treat or relieve skin disorders. Pursuant to the asset purchase agreement, each of the foregoing licenses were retained by Rochal and were excluded from the purchased assets.
Pursuant to the asset purchase agreement, for the three-year period after the effective date, Rochal is entitled to receive consideration for any new product relating to the business that is directly and primarily based on an invention conceived and reduced to practice by a member or members of Rochal’s science team. For the three-year period after the effective date, Rochal is also entitled to receive an amount in cash equal to twenty-five percent of the proceeds actually received for any Grant (as defined in the asset purchase agreement) by either the Company or Rochal. In addition, the Company agreed to use commercially reasonable efforts to perform Minimum Development Efforts (as defined in the asset purchase agreement) with respect to certain products under development, which if obtained, will entitle the Company to intellectual property rights from Rochal in respect of such products.
In connection with the asset purchase agreement, the Company hired certain employees of Rochal on an “at will” basis, with the terms of such employment being consistent with the Company’s current employment agreements.
Concurrent with the asset purchase, on July 14, 2021, the Company entered into a consulting agreement with Ann Beal Salamone pursuant to which Ms. Salamone agreed to provide the Company with consulting services with respect to, among other things, writing new patents, conducting patent intelligence, and participating in certain grant and contract reporting. In consideration for the consulting services to be provided to the Company, Ms. Salamone is entitled to receive an annual consulting fee of $
Based on guidance provided by ASC Topic 805, Business Combinations, the Company has recorded the Rochal asset purchase as an asset acquisition due to the determination that substantially all of the fair value of the assets acquired was concentrated in a group of similar identifiable assets. The Company believes the “substantially all” criterion was met with respect to the acquired intellectual property (i.e., patents, patent applications, and patent applications to be written) based on the Company’s internal valuation models. These models assigned value to the acquired intellectual property based on estimated future cash flows over the life of the respective patents and patent applications. Accordingly, the Company accounted for the acquisition of the purchased net assets as an asset acquisition.
The purchase consideration, plus transaction costs, was allocated to the individual assets according to their fair values as a percentage of the total fair value of the assets purchased, with no goodwill recognized. Based on the Company’s internal valuation performed, the total fair value of the net assets acquired was attributable to the intellectual property (i.e., patents) and assembled workforce. Due to the de minimis estimated fair value of furniture and equipment acquired, the Company did not allocate any amounts to such assets. The total purchase consideration was allocated based on the relative estimated fair value of such assets as follows:
Description | Amount | Percent of Total | ||||||
| Patents and Intellectual Property | $ | % | ||||||
| Assembled Workforce | % | |||||||
|
|
|
|
|
| |||
Total purchase consideration |
| $ |
|
|
| % | ||
| 19 |
| Table of Contents |
NOTE 10 - RELATED PARTIES
Payables to Related Parties
The Company had outstanding payables to related parties totaling $
Payables to Related Parties
The Company had outstanding receivables from related parties totaling $
Manufacturing and Technical Services Agreements – Related Parties
On September 9, 2020, the Company executed a manufacturing agreement with Rochal. Under the terms of the manufacturing agreement, Rochal agreed to manufacture, package, and label products licensed from Rochal by the Company. The manufacturing agreement includes customary terms and conditions for the Company’s industry. The term of the agreement is for a period of five years unless extended by the mutual consent of the parties. For the nine months ended September 30, 2021, the Company incurred no inventory manufacturing costs with Rochal. The Company terminated this agreement on August 12, 2021.
On September 9, 2020, the Company executed a technical services agreement with Rochal. Under the terms of the technical services agreement, Rochal will provide its expertise and services on technical service projects identified by the Company for wound care, skin care and surgical site care applications. The technical services agreement includes customary terms and conditions for the Company’s industry. For the nine months ended September 30, 2021, the Company incurred $
Rochal Asset Purchase
On July 14, 2021, the Company entered into an asset purchase agreement with Rochal, effective July 1, 2021, pursuant to which the Company purchased certain assets of Rochal, including, among others, certain of Rochal’s intellectual property, furniture and equipment, supplies, rights and claims, other than certain excluded assets, all as more specifically set forth in the asset purchase agreement, and assumed certain liabilities upon the terms and subject to the conditions set forth in the asset purchase agreement. In exchange for the acquired assets, the Company paid to Rochal (i) $
After the asset purchase, Rochal owned
| 20 |
| Table of Contents |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of Sanara MedTech Inc. (collectively with its consolidated subsidiaries, the “Company,” “Sanara MedTech,” “Sanara,” “SMTI,” “we,” “our,” or “us”) should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020 and with the unaudited consolidated financial statements and related notes thereto presented in this Quarterly Report on Form 10-Q.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may discuss expectations as to future trends, plans, events, results of operations or financial condition, or state other information relating to the Company, including, without limitation, statements concerning the impact of the COVID-19 pandemic and our expectations for SG&A expense. Statements, other than statements of historical fact, included in this Quarterly Report on Form 10-Q are forward-looking statements and generally may be identified by words such as “anticipate,” “believe,” “continue,” “contemplate,” “could,” “estimate,” “expect,” “forecast,” “guidance,” “intend,” “may,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” or other similar words, phrases or expressions. These statements should be viewed with caution and are subject to various risks and uncertainties, many of which are outside of the Company’s control. The following factors, among others, could cause actual results to differ materially from those in the forward-looking statements:
| · | unanticipated changes in the markets for the Company’s business; |
| · | unanticipated downturns in business relationships with customers or their purchases from us; |
| · | the potential effects on our businesses from natural disasters; |
| · | the availability of credit to customers and suppliers; |
| · | competitive pressures on sales and pricing; |
| · | unanticipated changes in the cost of inventory and other operating costs; |
| · | the introduction of competing products; |
| · | unexpected technical or marketing difficulties; unexpected claims, charges, litigation or dispute resolutions; |
| · | new laws and governmental regulations; stock market and currency fluctuations; |
| · | war, civil or political unrest or terrorism; |
| · | the course of the COVID-19 pandemic and government responses thereto; and |
| · | unanticipated deterioration of economic and financial conditions in the United States and around the world. |
For a more detailed discussion of these and other factors that may affect our business and that could cause the actual results to differ materially from those anticipated in these forward-looking statements, see “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020, Part II, Item 1A, “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Forward-looking statements speak only as of the date on which they are made, and the Company does not assume any obligation to update these forward-looking statements.
Overview
We are a medical technology company focused on developing and commercializing transformative technologies to improve clinical outcomes and reduce healthcare expenditures in the surgical and chronic wound and skin care markets. Our portfolio of products and services is designed to allow us to deliver comprehensive wound and skin care solutions for patients in all care settings, including acute (hospitals and long-term acute care hospitals (“LTACHs”)) and post-acute (wound care clinics, physician offices, skilled nursing facilities (“SNFs”), home health, hospice, and retail). Each of our products, services, and technologies contributes to our overall goal of achieving better clinical outcomes at a lower overall cost for patients regardless of where they receive care. We strive to be one of the most innovative and comprehensive providers of effective wound and skin care products and technologies and are continually seeking to expand our offerings for patients requiring wound and skin care treatments across the entire continuum of care in the United States.
We currently market seven products across chronic and surgical wound care applications and have multiple products in our pipeline. We license our products from research and development partners Applied Nutritionals, LLC (“AN”) (through a sublicense with CGI Cellerate RX, LLC (“CGI Cellerate RX”), an affiliate of The Catalyst Group, Inc. (“Catalyst”)) and Rochal Industries, LLC (“Rochal”) and have the right to exclusively distribute certain products under development by Cook Biotech Inc. (“Cook Biotech”). In 2021, we began marketing two biologic products for surgical applications pursuant to our marketing and distribution agreement with Cook Biotech.
| 21 |
| Table of Contents |
In June 2020, we formed a subsidiary, United Wound and Skin Solutions LLC (“UWSS”), to hold certain investments and operations in wound and skin care virtual consult services. We anticipate that our various service offerings will allow clinicians/physicians utilizing our technologies to collect and analyze large amounts of data on patient conditions and outcomes that will improve treatment protocols and ultimately lead to more evidence-based formulary to improve patient outcomes. We intend to launch our initial virtual consult service offerings in late 2021. Through a combination of our UWSS services and our Sanara products, we believe we will be able to offer patient care solutions at every step in the continuum of wound and skin care from diagnosis through healing.
Effective July 1, 2021, we acquired certain assets from Rochal, including, among others, intellectual property, four FDA 510(k) clearances, rights to license certain products and technologies currently under development, equipment and supplies. As a result of the asset purchase, our pipeline now contains product candidates for mitigation of opportunistic pathogens and biofilm, wound re-epithelialization and closure, necrotic tissue debridement and cell compatible substrates.
Impact of the COVID-19 Pandemic
Beginning in March 2020, many states issued orders suspending elective surgeries in order to free-up hospital resources to treat COVID-19 patients. This resulted in a reduction in demand for our surgical products beginning in the second half of March 2020. Additionally, most states limited access to SNFs to only resident caregivers, which impeded our ability to provide education and product training to the clinicians who use our products in these facilities. These restrictions resulted in an overall decline in sales for the second quarter of 2020. During the second half of 2020 and the first quarter of 2021, we saw a strong rebound in product sales as restrictions on elective surgeries eased in our primary markets in Texas, Florida, and the southeastern United States. During the third quarter of 2021, the United States experienced a surge of COVID-19 cases as the Delta variant of the virus impacted much of the country and negatively impacted our sales in Texas, the northeastern United States, and other markets.
The duration and effects of the pandemic remain uncertain; however, management believes that elective surgical procedures will continue to be performed with the exception of certain geographic hotspots. Additionally, management believes that the majority of surgical procedures impacted by COVID-19 and its variants will ultimately be performed. We will continue to closely monitor the pandemic in order to ensure the safety of our people and our ability to serve our customers and patients.
Recent Developments
February 2021 Offering
On February 12, 2021, we entered into an underwriting agreement (the “Underwriting Agreement”) with Cantor Fitzgerald & Co. as representative of several underwriters named therein (collectively, the “Underwriters”), pursuant to which we agreed to issue and sell an aggregate of 1,100,000 shares of our common stock to the Underwriters at a price to the public of $25.00 per share, less underwriting discounts and commissions (the “Offering”). Pursuant to the Underwriting Agreement, we granted the Underwriters a 30-day option to purchase up to an additional 165,000 shares of common stock at the public offering price, less underwriting discounts and commissions, which the Underwriters exercised in full. The Offering, including the purchase of the 165,000 additional shares of common stock, closed on February 17, 2021.
The net proceeds to us from the Offering were $28.9 million, after (i) giving effect to the Underwriters’ full exercise of its option to purchase additional shares of common stock, and (ii) deducting the underwriting discounts and commissions and offering expenses payable by us.
Pixalere Investment
On June 3, 2021, we invested $2,084,278 to purchase 278,587 Class A Preferred Shares (the “Shares”) of Pixalere Healthcare, Inc. (“Pixalere”). The Shares are convertible into 28.6% of the outstanding equity of Pixalere. Pixalere provides a cloud-based wound care software tool that empowers nurses, specialists and administrators to deliver better care for patients. In connection with our purchase of the Shares, Pixalere granted Pixalere Healthcare USA, LLC (“Pixalere USA”), our subsidiary, a royalty-free exclusive license to use the Pixalere software and platform in the United States. In conjunction with the grant of the license, we issued Pixalere a 27.3% equity ownership interest in Pixalere USA valued at $93,879 .
Rochal Asset Purchase and Consulting Agreement
On July 14, 2021, we entered into an asset purchase agreement with Rochal, effective July 1, 2021, pursuant to which we purchased certain assets of Rochal, including, among others, certain of Rochal’s intellectual property, furniture and equipment, supplies, rights and claims, other than certain excluded assets, and assumed certain liabilities upon the terms and subject to the conditions set forth in the asset purchase agreement. In exchange for the acquired assets, we paid to Rochal (i) $496,100 in cash and (ii) 14,369 shares of the Company’s common stock, and assumed certain net liabilities of $3,900.
| 22 |
| Table of Contents |
Prior to the transaction, we entered into product license agreements with Rochal, pursuant to which we acquired exclusive world-wide licenses to market, sell and further develop certain antimicrobial barrier film and skin protectant products, antimicrobial products for the prevention and treatment of microbes on the human body utilizing certain of Rochal’s patents and a debrider for human medical use to enhance skin condition or treat or relieve skin disorders. Pursuant to the Rochal asset purchase agreement, each of the foregoing licenses were retained by Rochal and were excluded from the purchased assets.
Pursuant to the asset purchase agreement, for the three-year period after the effective date, Rochal is entitled to receive consideration for any new product relating to the business that is directly and primarily based on an invention conceived and reduced to practice by a member or members of Rochal’s science team. For the three-year period after the effective date, Rochal is also entitled to receive an amount in cash equal to twenty-five percent of the proceeds actually received for any Grant (as defined in the asset purchase agreement) by either us or Rochal. In addition, we agreed to use commercially reasonable efforts to perform Minimum Development Efforts (as defined in the asset purchase agreement) with respect to certain products under development, which if obtained, will entitle us to intellectual property rights from Rochal in respect of such products.
In connection with the asset purchase agreement, we hired certain employees of Rochal on an “at will” basis, with the terms of such employment being consistent with our current employment agreements.
Components of Results of Operations
Sources of Revenues
Our revenue is derived primarily from sales of our surgical products to hospitals and other acute care facilities, and sales of our chronic wound care products to customers across the post-acute continuum of care. Our revenue is driven by direct orders shipped by us to our customers, and to a lesser extent, direct sales to customers through delivery at the time of procedure by one of our sales representatives. We generally recognize revenue when our product is received by the customer.
Revenue streams from product sales and royalties are summarized below for the nine months ended September 30, 2021 and September 30, 2020. All revenue was generated in the United States.
|
| Nine Months Ended |
| |||||
|
| September 30, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Surgical |
| $ | 16,356,308 |
|
| $ | 9,977,084 |
|
Wound Care |
|
| 603,453 |
|
|
| 670,004 |
|
Royalty revenue |
|
| 150,750 |
|
|
| 150,750 |
|
Total Revenue |
| $ | 17,110,511 |
|
| $ | 10,797,838 |
|
We recognize royalty revenue from a development and licensing agreement with BioStructures, LLC. We record revenue each calendar quarter as earned per the terms of the agreement which stipulates that we 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 our patented resorbable bone hemostasis. The minimum annual royalty due to us 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).
Cost of Goods Sold
Cost of goods sold consists of the acquisition costs from the manufacturers of our licensed products, raw material costs for certain components sourced directly by us, and all related royalties due as a result of the sale of our products. Our gross profit represents total revenue less the cost of goods sold, and gross margin is gross profit expressed as a percentage of total revenue.
Operating Expenses
Selling, general and administrative expenses (“SG&A”) consist primarily of salaries, sales commissions, benefits, bonuses, and stock-based compensation. SG&A also includes outside legal counsel, audit fees, insurance premiums, rent, and other corporate expenses. We expense all SG&A expenses as incurred.
Research and development expenses (“R&D”) include costs related to enhancements to our currently available products and additional investments in our product and platform development pipeline. This includes 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. We expense R&D costs as incurred. We generally expect that R&D expenses will increase as we continue to support product enhancements as well as to bring new products to market.
| 23 |
| Table of Contents |
Other Income (Expense)
Other income (expense) is primarily comprised of gains or losses on equity method investments, interest income, interest expense and other non-operating activities.
Results of Operations
Revenues. For the three months ended September 30, 2021, we generated revenues of $5,823,942 compared to revenues of $4,306,324 for the three months ended September 30, 2020, representing a 35% increase from the prior year period. For the nine months ended September 30, 2021, revenues totaled $17,110,511 compared to revenues of $10,797,838 for the nine months ended September 30, 2020, representing a 58% increase from the prior year period. The higher revenues in 2021 were primarily due to increased penetration of surgical wound care products by our sales force additions last year and our continuing present strategy to expand our independent distribution network in both new and existing U.S. markets.
Cost of goods sold. Cost of goods sold for the three months ended September 30, 2021, was $517,611, compared to cost of goods sold of $447,935 for the three months ended September 30, 2020. Cost of goods sold for the nine months ended September 30, 2021 was $1,528,449, compared to cost of goods sold of $1,126,798 for the nine months ended September 30, 2020. The increase over the prior year period was primarily due to higher sales volume.
Selling, general and administrative expenses. SG&A expenses for the three months ended September 30, 2021, were $6,920,105, as compared to $5,072,402 for the three months ended September 30, 2020. SG&A expenses for the nine months ended September 30, 2021, were $18,891,979 compared to SG&A expenses of $13,632,967 for the nine months ended September 30, 2020. The higher SG&A expenses in 2021 were primarily due to increased selling costs resulting from sales force expansion and operational support, higher sales commission expense as a result of higher product sales, and the addition of the Rochal workforce effective July 1, 2021. Direct sales and marketing costs represented approximately 70% of the higher SG&A costs incurred in 2021. As part of our strategy to expand our sales reach in new and existing markets, we employed ten additional field sales managers since September 30, 2020. As of September 30, 2021, we had a total of 29 field sales managers.
Research and development expenses. R&D expenses for the three months ended September 30, 2021, were $35,674 compared to $11,022 for the three months ended September 30, 2020. Our third quarter 2021 R&D expenses included a $108,060 reclassification of R&D expenses to SG&A based on guidance provided by ASC Topic 730, Research and Development. R&D expenses for the nine months ended September 30, 2021, were $257,867 compared to $11,022 for the nine months ended September 30, 2020. The higher R&D expenses in 2021 were due to several development projects for our currently licensed products.
Other income (expense). Other expense for the three months ended September 30, 2021, was $193,843 compared to income of $98,792 for the three months ended September 30, 2020. Other expense for the nine months ended September 30, 2021 was $473,458 compared to income of $3,863 for the nine months ended September 30, 2020. The higher Other expense in 2021 was due to the recognition of a non-cash loss of $472,747 from our equity method investment in Precision Healing. Interest expense was $711 for the nine months ended September 30, 2021, as compared to $10,913 for the nine months ended September 30, 2020. The higher interest expense in 2020 was due to interest expense associated with our unsecured promissory note under the Paycheck Protection Program, and interest on a convertible promissory note which was converted to common stock in early 2020.
Net income (loss). We had a net loss of $2,047,861 for the three months ended September 30, 2021, compared to net loss of $1,208,123 for the three months ended September 30, 2020. The higher net loss in the third quarter of 2021 was primarily due to higher SG&A expenses which were approximately $1.8 million higher than prior year, partially offset by higher third quarter gross profit which was $1.4 million higher than the same period in 2020. Third quarter 2021 depreciation, amortization, and other expenses collectively were approximately $0.4 million higher compared to prior year. For the nine months ended September 30, 2021, we had a net loss of $4,437,210, compared to net loss of $4,178,692 for the nine months ended September 30, 2020. The higher net loss for the three and nine months ended September 30, 2021 was primarily due to higher SG&A expenses, partially offset by higher revenues. The higher SG&A expenses in 2021 were primarily driven by increased selling costs as a result of sales force expansion and higher sales commissions due to higher product sales.
Liquidity and Capital Resources
Cash on hand at September 30, 2021 was $22,371,434, compared to $455,366 at December 31, 2020. Historically, we have financed our operations primarily from the sale of equity securities. In 2020, our principal sources of liquidity were cash generated from operations, availability of our bank line of credit, and cash provided by an unsecured promissory note under the Paycheck Protection Program in the principal amount of $583,000 (the “PPP Loan”) to Cadence Bank, N.A. (“Cadence”). On February 12, 2021, we closed an underwritten public offering of 1,265,000 shares of our common stock at a public offering price of $25.00 per share resulting in gross proceeds of $31,625,000, before deducting underwriting discounts and commissions and offering expenses. We expect our future needs for cash to include expanding our salesforce, further development of our products, services and technologies pipeline, clinical studies and general corporate purposes, including working capital and acquisitions. Based on our current plan of operations, including acquisitions, we believe our cash on hand, when combined with expected cash flows from operations and amounts available under our revolving credit facility, will be sufficient to fund our growth strategy and to meet our anticipated operating expenses and capital expenditures for at least the next twelve months.
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On January 15, 2021, we entered into a new loan agreement with Cadence (the “Loan Agreement”), providing for a $2.5 million revolving line of credit. The revolving line of credit matures on January 13, 2023, and is secured by substantially all of our assets. Any amounts outstanding will bear interest of 0.75% plus the “Prime Rate” designated in the “Money Rates” section of the Wall Street Journal. Proceeds from the line of credit are to be used to provide additional working capital in support of current assets and for other general corporate purposes and may not be used for acquisitions.
The line of credit contains customary representations and warranties and requires us to maintain compliance with certain financial covenants, including, among others, a minimum liquidity of $1,000,000 as of December 31, 2020 and March 31, 2021, a minimum Tangible Net Worth (as defined in the Loan Agreement) of $1,000,000 and, beginning with the fiscal quarter ending June 30, 2021, a minimum Interest Coverage Ratio (as defined in the Loan Agreement) of 1.5 to 1.0. The Loan Agreement also contains customary events of default. If such an event of default occurs, Cadence would be entitled to take various actions, including the acceleration of amounts due under the Loan Agreement. We generally may (and must, under certain circumstances) prepay all or a portion of the principal outstanding on the revolving line of credit prior to its contractual maturity. On February 11, 2021, we made an $800,000 draw on the revolving line of credit. On February 19, 2021, we paid down the entire balance of the revolving line of credit. As of September 30, 2021, no amounts were owed under the Loan Agreement.
On June 29, 2021, we amended the revolving line of credit with Cadence to modify certain financial covenants which included changing the initial measurement period of the minimum Interest Coverage Ratio (as defined in the Loan Agreement) from June 2021 to March 2022 (the “Modification Agreement”). In connection with this change, beginning with the fiscal quarter ended June 30, 2021 through the fiscal quarter ending December 31, 2021, the required minimum Tangible Net Worth (as defined in the Loan Agreement) was raised from $1,000,000 to $10,000,000, and the required Minimum Cash Balance (as defined in the Modification Agreement) is $3,000,000. The Company was in compliance with all of these covenants as of September 30, 2021. Beginning with the fiscal quarter ending March 31, 2022, the financial covenants return to the original terms specified in the Loan Agreement.
On November 9, 2020, our subsidiary, UWSS, entered into agreements to purchase shares of Series A Convertible Preferred Stock (the “Series A Stock”) of Precision Healing Inc. (“Precision Healing”) for an aggregate purchase price of $600,000. UWSS made additional investments of $600,000 in February 2021 and $500,000 in June 2021 for 275,000 additional shares of Series A Stock.
On July 7, 2019, we executed a license agreement with Rochal whereby we 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 “BIAKŌS License Agreement”). Under the terms of the BIAKŌS License Agreement, we agreed to pay Rochal $750,000 upon the completion of a capital raise, on or before December 31, 2022, of at least $10,000,000 through the sale of our common stock or assets. At our option, the $750,000 payment may have been paid in any combination of cash and our common stock. In March 2021, we issued 20,834 shares of our common stock to Rochal as full payment of the $750,000 which became due upon the Company’s completion of a capital raise in February 2021.
On June 3, 2021, we invested $2,084,278 for 278,587 Class A Preferred Shares (the “Shares”) of Canada based Pixalere Healthcare, Inc. (“Pixalere”). The Shares are convertible into 28.6% of the outstanding equity of Pixalere. Pixalere provides a cloud-based wound care software tool that empowers nurses, specialists and administrators to deliver better care for patients. In connection with our purchase of the Shares, Pixalere granted Pixalere Healthcare USA, LLC (“Pixalere USA”), our subsidiary, a royalty-free exclusive license to use the Pixalere software and platform in the United States. In conjunction with the grant of the license, we issued Pixalere a 27.3% equity ownership interest in Pixalere USA valued at $93,879.
On July 14, 2021, we entered into an asset purchase agreement with Rochal, effective July 1, 2021, pursuant to which we purchased certain assets of Rochal, including, among others, certain of Rochal’s intellectual property, furniture and equipment, supplies, rights and claims, other than certain excluded assets, and assumed certain liabilities upon the terms and subject to the conditions set forth in the asset purchase agreement. In exchange for the acquired assets, we paid to Rochal (i) $496,100 in cash and (ii) 14,369 shares of the Company’s common stock, and assumed certain net liabilities of $3,900.
Cash Flow Analysis
For the nine months ended September 30, 2021, net cash used in operating activities was $3,030,168 compared to $3,443,449 used in operating activities for the nine months ended September 30, 2020. The lower use of cash in 2021 was primarily due to cash generated from higher sales revenues.
For the nine months ended September 30, 2021, net cash used in investing activities was $3,793,021 compared to $1,657,456 used in investing activities during the nine months ended September 30, 2020. The increase in cash used in investing activities in 2021 was due to the purchase of 275,000 additional shares of Series A Stock of Precision Healing for $1,100,000, and the purchase of 278,587 Shares of Pixalere for $2,084,278. The cash used in investing activities in 2020 was due to a $500,000 milestone payment made to Rochal as a result of FDA clearance of BIAKŌS Antimicrobial Wound Gel and a $600,000 initial payment upon acquisition of the debrider product license agreement from Rochal.
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For the nine months ended September 30, 2021, net cash provided by financing activities was $28,739,257 as compared to $609,220 provided by financing activities for the nine months ended September 30, 2020. The cash provided by financing activities in 2021 was due to proceeds received pursuant to an underwritten public offering of 1,265,000 shares of our common stock at a public offering price of $25.00 per share resulting in gross proceeds of $31,625,000, before deducting underwriting discounts and commissions and offering expenses.
Material Transactions with Related Parties
CellerateRX Sublicense Agreement
We have an exclusive, world-wide sublicense to distribute CellerateRX products into the wound care and surgical markets from an affiliate of Catalyst, CGI Cellerate RX, LLC (“CGI Cellerate RX”), which licenses the rights to CellerateRX from Applied Nutritionals. Sales of CellerateRX have comprised the majority of our sales during 2018, 2019 and 2020. On January 26, 2021, we amended the term of the sublicense agreement to extend the term to May 17, 2050, with automatic successive one-year renewals so long as annual net sales of CellerateRX exceed $1,000,000. We pay royalties based on our annual Net Sales of CellerateRX (as defined in the sublicense agreement) 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, which was entered on August 27, 2018. For the nine months ended September 30, 2021 and 2020, royalties accrued under the terms of this agreement totaled $756,951 and $337,639, respectively.
Ronald T. Nixon, our Executive Chairman, is the founder and managing partner of Catalyst. Mr. Nixon and Catalyst, collectively with their affiliates, including CGI Cellerate RX, beneficially owned 3,519,019 shares of our common stock as of September 30, 2021.
Convertible Notes Payable
On March 15, 2019, we acquired Catalyst’s 50% interest in Cellerate, LLC in exchange for the issuance of 1,136,815 shares of our newly created Series F Convertible Preferred Stock (the “Cellerate Acquisition”). In connection with the Cellerate Acquisition, we issued a 30-month convertible promissory note to CGI Cellerate RX, an affiliate of Catalyst, in the principal amount of $1,500,000, bearing interest at a 5% annual interest rate, compounded quarterly. Interest on the promissory note was payable quarterly but could have been deferred at our election to the maturity of the promissory note. Outstanding principal and interest were convertible at CGI Cellerate RX’s option into shares of our common stock at a conversion price of $9.00 per share.
On February 7, 2020, CGI Cellerate RX converted its $1,500,000 promissory note, including accrued interest of $111,911, into 179,101 shares of our common stock. CGI Cellerate RX also converted its 1,136,815 shares of Series F Convertible Preferred Stock into shares of the Company’s common stock. For more information, see Note 6 to the unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q. As of September 30, 2021, there were no related party promissory notes or accrued interest outstanding.
Rochal Asset Purchase
On July 14, 2021, we entered into an asset purchase agreement with Rochal, effective July 1, 2021, pursuant to which we purchased certain assets of Rochal, including, among others, certain of Rochal’s intellectual property, furniture and equipment, supplies, rights and claims, other than certain excluded assets, all as more specifically set forth in the asset purchase agreement, and assume certain liabilities upon the terms and subject to the conditions set forth in the asset purchase agreement. In exchange for the acquired assets, the Company paid to Rochal (i) $496,100 in cash and (ii) 14,369 shares of the Company’s common stock, and assumed certain net liabilities of $3,900. Based on the trading price of the Company’s common stock on July 14, 2021, the fair value of the equity consideration transferred was determined to be $584,244.
After the asset purchase, Rochal owned 95,203 shares of the Company’s common stock. Ronald T. Nixon, the Company’s Executive Chairman, is, with respect to Rochal, a director, a significant shareholder indirectly and a majority shareholder with the exercise of certain warrants. Additionally, Ann Beal Salamone, a director of the Company, is a significant shareholder, former president and current Chair of the board of directors of Rochal. See Note 9 for more information regarding this transaction.
Manufacturing and Technical Services Agreements
On September 9, 2020, we executed a manufacturing agreement with Rochal. Under the terms of the manufacturing agreement, Rochal agreed to manufacture, package, and label products we licensed from Rochal. The manufacturing agreement includes customary terms and conditions. The term of the agreement is for a period of five years unless extended by the mutual consent of the parties. For the nine months ended September 30, 2021 and September 2020, we incurred no inventory manufacturing costs with Rochal under this agreement. The Company terminated this agreement on August 12, 2021. There were no penalties or payments due to Rochal in connection with the termination of this agreement.
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On September 9, 2020, we executed a technical services agreement with Rochal. Under the terms of the technical services agreement, Rochal will provide its expertise and services on technical service projects identified by us for wound care, skin care and surgical site care applications. The technical services agreement includes customary terms and conditions for our industry. For the nine months ended September 30, 2021, we incurred $234,153 of costs for Rochal technical services, compared to $174,200 for the same period in 2020. The Company terminated this agreement on August 12, 2021. There were no penalties or payments due to Rochal in connection with the termination of this agreement.
Ronald T. Nixon, our Executive Chairman, 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. Ann Beal Salamone, a director, is a significant shareholder and current Chairman of the Board of Rochal.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses.
We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The results of these assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Under different assumptions or conditions, actual results may differ from these estimates. We have identified certain significant accounting policies which involve a higher degree of judgment and complexity in making certain estimates and assumptions that affect amounts reported in our consolidated financial statements, as summarized below.
Revenue Recognition
We recognize revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, which we 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 we expect 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, we satisfy a performance obligation |
Impairment of Long-Lived Assets
Long-lived assets, including certain identifiable intangibles held and to be used by our 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. We continuously evaluate the recoverability of our long-lived assets based on estimated future cash flows and the estimated liquidation value of such long-lived assets and provide 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, 2021 and 2020.
Investment in Equity Securities
Our investments consist of non-marketable equity securities in privately held companies without readily determinable fair values. Unless accounted for under the equity method of accounting, these 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. We have reviewed the carrying value of our investments and have determined there was no impairment or observable price changes as of September 30, 2021.
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The Company applies the equity method of accounting to investments when it has significant influence, but not a 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 our consolidated statements of operations. The Company’s equity method investments are 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 equity method investments using the cumulative earnings approach on the consolidated statements of cash flows.
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. We recorded inventory obsolescence expense of $106,823 for the nine months ended September 30, 2021 and $258,585 for the nine months ended September 30, 2020. The allowance for obsolete and slow-moving inventory had a balance of $184,870 at September 30, 2021, and $276,603 at December 31, 2020. We considered the impact of COVID-19 on its recorded value of inventory and determined no adjustment was necessary as of September 30, 2021.
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, 2021; however, actual results could differ from those estimates and there may be changes to our estimates in future periods.
Off-Balance Sheet Arrangements
None.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide this information.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission (“SEC”) under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to our management, including our principal executive and principal financial officers (whom we refer to in this periodic report as our Certifying Officers), as appropriate to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of our Certifying Officers, the effectiveness of our disclosure controls and procedures as of September 30, 2021, pursuant to Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, our Certifying Officers concluded that, as of September 30, 2021, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part II — Other Information
Item 1. Legal Proceedings
From time to time, we may be involved in claims and legal actions that arise in the ordinary course of business. To our knowledge, there are no material pending legal proceedings to which we are a party or of which any of our property is the subject.
Item 1a. Risk Factors
Other than as described below, there were no material changes to the Risk Factors disclosed in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020. For more information concerning our risk factors, please see “Item 1A. Risk Factors” in the Form 10-K for the year ended December 31, 2020.
Historically, we have relied heavily on third parties to file and pursue the applications necessary to gain regulatory approvals for the products we market and license. We now expect to have the capability to develop certain of our pipeline candidates in-house, and will be subject to FDA requirements as well as other regulations applicable to medical product manufacturers.
On July 14, 2021, we entered into an asset purchase agreement with Rochal Industries LLC (“Rochal”), effective July 1, 2021, pursuant to which we purchased certain assets of Rochal, including, among others, intellectual property, FDA 510(k) clearances for four medical devices, rights to license certain product candidates and technologies currently under development, equipment, and supplies. Through the asset purchase, our pipeline now contains products and product candidates intended for mitigation of opportunistic pathogens and biofilm, wound re-epithelialization and closure, necrotic tissue debridement, and cell compatible substrates. Historically, we have relied heavily on third parties to file and pursue the applications necessary to gain regulatory approvals for the products we market and license. We now expect to have the capability to develop certain of our pipeline candidates in-house, and will be subject to FDA requirements, including the FDA’s current good manufacturing practices (“cGMP”), current good tissue practices (“cGTP”), and the Quality System Regulation (“QSR”), as applicable, as well as other regulations applicable to medical product manufacturers. While we previously relied on our research and development partners to pursue regulatory approvals for the products we market and license, we will now be responsible for gaining approval of certain of our product candidates through regulatory bodies on our own. We may be unable to comply with applicable FDA, state and foreign regulatory requirements and may not be able to successfully commercialize our products on our own, which could have a material adverse effect on our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of unregistered securities during the quarter ended September 30, 2021 that were not previously reported on a Current Report on Form 8-K.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosure
This item is not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
The following documents are filed as part of this Report:
Exhibit No. |
| Description |
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2.1# |
| Asset Purchase Agreement, dated July 14, 2021, by and between Sanara MedTech Inc., as Purchaser, and Rochal Industries, LLC, as Seller (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of the Company filed on July 19, 2021 by the Company with the SEC). |
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10.1 |
| Consulting Agreement, dated July 14, 2021, by and between Sanara MedTech Inc. and Ann Beal Salamone (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of the Company filed on July 19, 2021 by the Company with the SEC). |
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101.CAL |
| Inline XBRL Calculation Linkbase Document. |
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101.DEF |
| Inline XBRL Definition Linkbase Document. |
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101.LAB |
| Inline XBRL Label Linkbase Document. |
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101.PRE | Inline XBRL Presentation Linkbase Document. | |
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104 |
| Cover Page Interactive Data File (Formatted as Inline XBRL and contained in Exhibit 101). |
* | Filed herewith |
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# | Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Sanara MedTech Inc. hereby undertakes to furnish supplementally copies of any of the omitted schedules upon request by the Securities and Exchange Commission or its staff. |
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** | The certifications attached as Exhibit 32.1 and Exhibit 32.2 are not deemed “filed” with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Sanara MedTech Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| SANARA MEDTECH INC. |
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November 12, 2021 | By: | /s/ Michael McNeil |
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| Michael McNeil |
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| Chief Financial Officer (Principal Financial Officer and duly authorized officer) |
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EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
IN ACCORDANCE WITH 18 U.S.C. SECTION 1350,
AS ADOPTED BY SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, J. Michael Carmena, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Sanara MedTech Inc. for the nine months ended September 30, 2021; |
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| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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| (a) | All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 12, 2021
| /s/ J. Michael Carmena |
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| J. Michael Carmena, Principal Executive Officer |
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EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
IN ACCORDANCE WITH 18 U.S.C. SECTION 1350,
AS ADOPTED BY SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael McNeil, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Sanara MedTech Inc. for the nine months ended September 30, 2021; |
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| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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| (a) | All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 12, 2021
| /s/ Michael McNeil |
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| Michael McNeil, Chief Financial Officer |
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EXHIBIT 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
IN ACCORDANCE WITH 18 U.S.C. SECTION 1350,
AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Sanara MedTech Inc. (the “Company”) for the period ended September 30, 2021 as filed with the Securities and Exchange Commission on the date hereof, I, J. Michael Carmena, in my capacity as Principal Executive Officer of the Company and not in my individual capacity, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
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| (1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Report. |
November 12, 2021
| /s/ J. Michael Carmena |
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| J. Michael Carmena, Principal Executive Officer |
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EXHIBIT 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
IN ACCORDANCE WITH 18 U.S.C. SECTION 1350,
AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Sanara MedTech Inc. (the “Company”) for the period ended September 30, 2021 as filed with the Securities and Exchange Commission on the date hereof, I, Michael McNeil, in my capacity as Chief Financial Officer of the Company and not in my individual capacity, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
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| (1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Report. |
November 12, 2021
| /s/ Michael McNeil |
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| Michael McNeil, Chief Financial Officer |
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