Form 10-Q Sanara MedTech Inc. For: Jun 30
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
or
For the transition period from ________ to ________
Commission
File Number
(Exact name of Registrant as specified in its charter)
(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 | ||
| 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 | |||
| 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 August 15, 2022, shares of the Issuer’s $0.001 par value common stock were issued and outstanding.
SANARA MEDTECH INC.
Form 10-Q
Quarter Ended June 30, 2022
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 |
Part I – Financial Information
Item 1. Financial Statements
SANARA MEDTECH INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| (Unaudited) | ||||||||
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Accounts receivable – related party | ||||||||
| Royalty receivable | ||||||||
| Inventory, net | ||||||||
| Prepaid and other assets | ||||||||
| Total current assets | ||||||||
| Long-term assets | ||||||||
| Property and equipment, net | ||||||||
| Right of use assets – operating leases | ||||||||
| Intangible assets, net | ||||||||
| Investment in equity securities | ||||||||
| Total long-term assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and shareholders’ equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accounts payable – related parties | ||||||||
| Accrued royalties and expenses | ||||||||
| Accrued bonuses and commissions | ||||||||
| Operating lease liabilities – current | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities | ||||||||
| Earnout liabilities – long-term | ||||||||
| Operating lease liabilities – long-term | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 4) | ||||||||
| Shareholders’ equity | ||||||||
| Common Stock: $ par value, shares authorized; issued and outstanding as of June 30, 2022 and issued and outstanding as of December 31, 2021 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Sanara MedTech shareholders’ equity | ||||||||
| Equity attributable to noncontrolling interest | ( | ) | ( | ) | ||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 3 |
SANARA MEDTECH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||
| Research and development | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other expense | ||||||||||||||||
| Interest and accretion expense | ( | ) | ( | ) | ( | ) | ||||||||||
| Share of losses from equity method investment | ( | ) | ( | ) | ( | ) | ||||||||||
| Total other expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Less: Net loss attributable to noncontrolling interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to Sanara MedTech shareholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share of common stock, basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of common shares outstanding, basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 4 |
SANARA MEDTECH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
| Common Stock | Additional | Total | ||||||||||||||||||||||
| $0.001 par value | Paid-In | Accumulated | Noncontrolling | Shareholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Interest | Equity | |||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Issuance of common stock for asset acquisitions | ||||||||||||||||||||||||
| Issuance of common stock in equity offering | ||||||||||||||||||||||||
| Share-based compensation | ||||||||||||||||||||||||
| Distribution to noncontrolling interest member | - | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Share-based compensation | ( | ) | ( | ) | ||||||||||||||||||||
| Capital contribution of noncontrolling interest member | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Common Stock | Additional | Total | ||||||||||||||||||||||
| $0.001 par value | Paid-In | Accumulated | Noncontrolling | Shareholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Interest | Equity | |||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Share-based compensation | ||||||||||||||||||||||||
| Net settlement and retirement of equity-based awards | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Share-based compensation | ||||||||||||||||||||||||
| Issuance of common stock for asset acquisitions | ||||||||||||||||||||||||
| Issuance of common stock options and warrants for asset acquisitions | - | |||||||||||||||||||||||
| Distribution to noncontrolling interest member | - | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 5 |
SANARA MEDTECH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Loss on disposal of asset | ||||||||
| Bad debt expense | ||||||||
| Inventory obsolescence | ||||||||
| Share-based compensation | ||||||||
| Accretion of earnout liabilities | ||||||||
| Noncash lease expense | ||||||||
| Losses from equity method investment | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | ( | ) | ( | ) | ||||
| Accounts receivable - related party | ( | ) | ||||||
| Inventory, net | ( | ) | ( | ) | ||||
| Prepaid and other assets | ||||||||
| Accounts payable | ||||||||
| Accounts payable - related parties | ( | ) | ||||||
| Accrued royalties and expenses | ||||||||
| Accrued bonuses and commissions | ||||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Proceeds from disposal of assets | ||||||||
| Purchases of intangible assets | ( | ) | ||||||
| Investment in equity securities | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Draw on line of credit | ||||||||
| Pay off line of credit | ( | ) | ||||||
| Public offering net proceeds | ||||||||
| Net settlement of equity-based awards | ( | ) | ||||||
| Distribution to noncontrolling interest member | ( | ) | ( | ) | ||||
| Net cash flows provided by (used in) financing activities | ( | ) | ||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Supplemental noncash investing and financing activities: | ||||||||
| Equity issued for asset acquisitions | ||||||||
| Earnout liabilities generated by asset acquisition | ||||||||
| Investment in equity securities converted in asset acquisition | ||||||||
| License agreement as capital contribution from noncontrolling interest member | ||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 6 |
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, services and technologies is designed to allow the Company 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, 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 solutions.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of Sanara MedTech Inc. and its wholly owned and majority-owned subsidiaries, as well as other entities in which the Company has a controlling financial interest. All significant intercompany profits, losses, transactions and balances have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management of the Company, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2022, are not necessarily indicative of the results that may be expected for the year ending December 31, 2022, or any other period. These financial statements and notes should be read in conjunction with the financial statements for each of the two years ended December 31, 2021 and 2020, which are included in the Company’s most recent Annual Report on Form 10-K.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. The extent to which the COVID-19 pandemic may directly or indirectly impact the Company’s business, financial condition, and results of operations is highly uncertain and subject to change. The Company considered the potential impact of the COVID-19 pandemic on its estimates and assumptions and determined there was not a material impact on the Company’s estimates and assumptions used in preparing its unaudited consolidated financial statements as of and for the six months ended June 30, 2022. However, actual results could differ from those estimates and there may be changes to the Company’s estimates in future periods.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
The Company computes income per share in accordance with Accounting Standards Codification (“ASC”) Topic 260, Earnings per Share, which requires the Company to present basic and diluted income per share when the effect is dilutive. Basic income per share is computed by dividing income available to common shareholders by the weighted average number of shares of common stock outstanding. Diluted income per share is computed 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 three and six months ended June 30, 2022 and 2021 due to the Company’s net loss.
| 7 |
| As of June 30, | ||||||||
| 2022 | 2021 | |||||||
| Stock options (a) | ||||||||
| Warrants (b) | ||||||||
| Unvested restricted stock | ||||||||
| (a) | ||
| (b) |
Revenue Recognition
The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). Revenues are recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for transferring those goods or services. Revenue is recognized based on the following five step model:
- Identification of the contract with a customer
- Identification of the performance obligations in the contract
- Determination of the transaction price
- Allocation of the transaction price to the performance obligations in the contract
- Recognition of revenue when, or as, the Company satisfies a performance obligation
Details of this five-step process are as follows:
Identification of the contract with a customer
Customer purchase orders are generally considered to be contracts under ASC 606. Purchase orders typically identify specific terms of products to be delivered, create the enforceable rights and obligations of both parties, and result in commercial substance. No other forms of contract revenue recognition, such as the completed contract or percentage of completion methods, were utilized by the Company in either 2022 or 2021.
Performance obligations
The Company’s performance obligation is generally limited to delivery of the requested items to its customers at the agreed upon quantities and prices.
Determination and allocation of the transaction price
The Company has established prices for its products. These prices are effectively agreed to when customers place purchase orders with the Company. Rebates and discounts, if any, are recognized in full at the time of sale as a reduction of net revenue. Allocation of transaction prices is not necessary where 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.
| 8 |
Disaggregation of Revenue
Revenue streams from product sales and royalties are summarized below for the six months ended June 30, 2022 and 2021. All revenue was generated in the United States; therefore, no geographical disaggregation was necessary.
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| Product sales revenue | $ | $ | ||||||
| Royalty revenue | ||||||||
| Total Net Revenue | $ | $ | ||||||
The
Company recognizes royalty revenue from a development and license agreement between BioStructures, LLC and the Company. The Company records
revenue each calendar quarter as earned per the terms of the agreement, which stipulates the Company will receive quarterly royalty payments
of at least $
Accounts Receivable Allowances
The
Company establishes an allowance for doubtful accounts to provide for an estimate of accounts receivable which are not expected to be
collectible. The Company recorded bad debt expense of $
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 to
| Useful | June 30, | December 31, | ||||||||||
| Life | 2022 | 2021 | ||||||||||
| Computers | $ | $ | ||||||||||
| Office equipment | ||||||||||||
| Furniture and fixtures | ||||||||||||
| Leasehold improvements | ||||||||||||
| Internal use software | ||||||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||||||
| Property and equipment, net | $ | $ | ||||||||||
Depreciation
expense related to property and equipment was $
| 9 |
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 years.
Intangible Assets
Intangible assets are stated at cost of acquisition less accumulated amortization and impairment loss, if any. Cost of acquisition includes the purchase price and any cost directly attributable to bringing the asset to its working condition for the intended use. The Company amortizes its finite-lived intangible assets on a straight-line basis over the estimated useful life of the respective assets, which is generally the life of the related patents (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 fair value less cost to sell. No impairment was recorded during the six months ended June 30, 2022 or 2021.
Investments in Equity Securities
The Company’s equity investments consist of nonmarketable equity securities in privately held companies without readily determinable fair values. Unless accounted for under the equity method of accounting, the investments are reported at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer.
The Company applies the equity method of accounting to investments when it has significant influence, but not controlling interest, in the investee. Judgment regarding the level of influence over each equity method investment includes considering key factors such as ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany transactions. The Company’s proportionate share of the net income (loss) resulting from these investments is reported under the line item captioned “Share of losses from equity method investment” in the Company’s consolidated statements of operations. The Company’s equity method investment is adjusted each period for the Company’s share of the investee’s income or loss and dividend paid, if any. The Company classifies distributions received from its equity method investment using the cumulative earnings approach on the consolidated statements of cash flows.
The Company has reviewed the carrying value of its investments and has determined there was no impairment or observable price changes as of and for the six-month periods ended June 30, 2022 and 2021.
Fair Value Measurement
As defined in ASC Topic 820, Fair Value Measurement (“ASC 820”), fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). This fair value measurement framework applies at both initial and subsequent measurement.
| 10 |
The three levels of the fair value hierarchy defined by ASC 820 are as follows:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.
Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include nonexchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. The carrying amounts of cash, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short-term nature of these instruments.
Liabilities for contingent consideration are measured at fair value each reporting period, with the acquisition-date fair value included as part of the consideration transferred. Subsequent changes in fair value are included as a component of “Other expense” in the consolidated statements of operations.
Income Taxes
Income taxes are accounted for under the asset and liability method, whereby deferred income taxes are recorded for temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities reflect the tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is provided if it is more likely than not that some or all of the deferred tax asset will not be realized.
The Company accounts for stock-based compensation to employees and nonemployees in accordance with Accounting Standards Update 2018-07, Compensation - Stock Compensation (Topic 718). Stock-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as expense over the stipulated vesting period, if any. The Company estimates the fair value of stock-based payments using the Black-Scholes option-pricing model for common stock options and warrants, and the closing price of the Company’s common stock for grants of common stock, including restricted stock awards.
Research and Development Costs
Research and development (“R&D”) expenses consist of personnel-related expenses, including salaries and benefits for all personnel directly engaged in R&D activities, contracted services, materials, prototype expenses and allocated overhead which is comprised of lease expense and other facilities-related costs. R&D expenses include costs related to enhancements to the Company’s currently available products, and additional investments in the product and platform development pipeline. The Company expenses R&D costs as incurred.
Recent Accounting Pronouncements
There are no recently issued accounting pronouncements that have not yet been adopted that are expected to have a material effect on the Company’s consolidated results of operations, financial condition or cash flows.
| 11 |
NOTE 3 – INTANGIBLE ASSETS
The carrying values of the Company’s intangible assets were as follows:
| June 30, 2022 | December 31, 2021 | |||||||||||||||||||||||
| Accumulated | Accumulated | |||||||||||||||||||||||
| Cost | Amortization | Net | Cost | Amortization | Net | |||||||||||||||||||
| Amortizable Intangible Assets: | ||||||||||||||||||||||||
| Product Licenses | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Patents and Other IP | ( | ) | ( | ) | ||||||||||||||||||||
| Assembled workforces and other | ( | ) | ( | ) | ||||||||||||||||||||
| Total | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Indefinite-lived Intangible Asset: | ||||||||||||||||||||||||
| In-process research and development | ||||||||||||||||||||||||
| Total intangible assets | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
In
March 2021, the Company issued shares of its common stock to Rochal Industries, LLC (“Rochal”), a related party, for
a $
On
April 4, 2022, the Company closed a merger transaction with Precision Healing pursuant to which Precision Healing became a wholly owned
subsidiary of the Company. As a result of the merger, the Company recorded an intangible asset of approximately $
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. Pursuant to the agreement, 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 is obligated to
pay Rochal $
As
of June 30, 2022, the weighted-average amortization period for finite-lived intangible assets was
| Remainder of 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ |
The Company has reviewed the carrying value of intangible assets and has determined there was no impairment on the Company’s intangible assets during either of the six months ended June 30, 2022 or 2021.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
License Agreements and Royalties
CellerateRX Activated Collagen
| 12 |
For
the six months ended June 30, 2022 and 2021, royalty expense, which is recorded in “Cost of goods sold” in the accompanying
Unaudited Consolidated Statements of Operations, was $
BIAKŌS Antimicrobial Wound Gel and BIAKŌS Antimicrobial Skin and Wound Cleanser
On July 7, 2019, the Company executed a license agreement with Rochal 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.
Future commitments under the terms of the BIAKŌS License Agreement include:
| ● | The
Company pays Rochal a royalty of |
| ● | The
Company pays additional royalty annually based on specific net profit targets from sales of the licensed products, subject to a maximum
of $ |
Unless previously terminated by the parties, the BIAKŌS License Agreement expires with the related patents in December 2031.
For
the six months ended June 30, 2022 and 2021, royalty expense, which is recorded in “Cost of goods sold” in the accompanying
Unaudited Consolidated Statements of Operations, 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 |
| ● | The
Company will pay additional royalties annually based on specific net profit targets from sales of the licensed products, subject
to a maximum of $ |
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 June 30, 2022.
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”).
Pursuant
to the Debrider License Agreement, 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 is obligated to pay Rochal $
| 13 |
Future commitments under the terms of the Debrider License Agreement include:
| ● | Upon
FDA clearance of the licensed products, the Company will pay Rochal $ |
| ● | The
Company will pay Rochal a royalty of |
| ● | The
Company will pay additional royalty annually based on specific net profit targets from sales of the licensed products, subject to
a maximum of $ |
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 June 30, 2022.
Resorbable Bone Hemostat
The
Company acquired a patent in 2009 for a resorbable bone hemostat and delivery system for orthopedic bone void fillers. In connection
with the patent acquisition, the Company entered into a royalty agreement to pay
Precision Healing Merger Agreement
On
April 4, 2022, the Company closed a merger transaction with Precision Healing pursuant to which Precision Healing became a wholly owned
subsidiary of the Company. Pursuant to the terms of the merger agreement, holders of Precision Healing common stock and preferred stock,
other than the Company, were entitled to receive closing consideration consisting of $
Upon
the closing of the merger, the Precision Healing outstanding options previously granted under the Precision Healing 2020 Stock Option
and Grant Plan (the “Precision Healing Plan”) converted pursuant to their terms into options to acquire an aggregate of
shares of Company common stock with a weighted exercise price of $ per share. These options expire between August 2030 and April
2031. In addition, outstanding and unexercised Precision Healing warrants converted into rights to receive warrants to purchase (i)
Pursuant
to the merger agreement, upon the achievement of certain performance thresholds, the securityholders of Precision Healing, including
the holders of options and warrants to purchase Precision Healing common stock and certain persons promised options to purchase Precision
Healing common stock, are also entitled to receive payments of up to $
| 14 |
Other Commitments
On
May 9, 2019, the Company organized Sanara Pulsar, LLC (“Sanara Pulsar”), a Texas limited liability company, which is owned
60% by the Company’s wholly owned subsidiary Cellerate, LLC, and 40% owned by Wound Care Solutions, Limited (“WCS”),
an unaffiliated company registered in the United Kingdom. At the time of the formation of Sanara Pulsar, it and 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 the event WCS’s annual Form K-l from Sanara Pulsar does not allocate to WCS net income
of at least $
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 (“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 24 months and a facility lease with a remaining term of 2 months as of June 30, 2022. All other leases are short-term leases, which for practical expediency, the Company has elected to not recognize as ROU assets and lease liabilities.
Effective
July 1, 2021, the Company assumed a facility lease pursuant to the Rochal asset purchase agreement (see Note 9). The Company intends
to renew this lease prior to its expiration on August 31, 2022. The base monthly rent was $
In
accordance with ASC Topic 842, Leases, the Company has recorded ROU assets of $
Maturity of Operating Lease Liabilities
| June 30, 2022 | ||||
| Remainder of 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total lease payments | ||||
| Less imputed interest | ( | ) | ||
| Present Value of Lease Liabilities | $ | |||
| Operating lease liabilities – current | ||||
| Operating lease liabilities – long-term | ||||
As
of June 30, 2022, the Company’s operating leases have a weighted average remaining lease term of
| 15 |
NOTE 6 – SHAREHOLDERS’ EQUITY
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 shares had been issued under the LTIP Plan and were available for issuance as of June 30, 2022.
On
January 18, 2021, the Company entered into an Equity Exchange Agreement (the “Exchange Agreement”), effective as of January
14, 2021, whereby the Company acquired the remaining equity interests in Woundyne Medical, LLC (“Woundyne”) in exchange for
the issuance of an aggregate of shares of the Company’s common stock with a fair value of $
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 shares of the Company’s common stock to the Underwriters at a price to the public of $ per share, less underwriting discounts and commissions (the “Offering”). Pursuant to the Underwriting Agreement, the Company granted the Underwriters a 30-day option to purchase up to an additional 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 additional shares of common stock, closed on February 17, 2021.
The
net proceeds to the Company from the Offering were approximately $
Following
the closing of the Offering in February 2021, the Company made a $
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) $
On
April 4, 2022, the Company closed a merger transaction with Precision Healing pursuant to which Precision Healing became a wholly owned
subsidiary of the Company. Pursuant to the terms of the merger agreement, holders of Precision Healing common stock and preferred stock,
other than the Company, were entitled to receive closing consideration consisting of $
Upon
the closing of the merger, the Precision Healing outstanding options previously granted under the Precision Healing Plan converted pursuant
to their terms into options to acquire an aggregate of shares of Company common stock with a weighted exercise price of $per share. These options expire between August 2030 and April 2031. In addition, outstanding and unexercised Precision Healing warrants
converted into rights to receive warrants to purchase (i)
Pursuant
to the merger agreement, upon the achievement of certain performance thresholds, the securityholders of Precision Healing, including
the holders of options and warrants to purchase Precision Healing common stock and certain persons promised options to purchase Precision
Healing common stock, are also entitled to receive payments of up to $
| 16 |
Restricted Stock Awards
During
the six months ended June 30, 2022, the Company issued restricted stock awards under the LTIP Plan which are subject to certain vesting
provisions and other terms and conditions set forth in each recipient’s respective restricted stock agreement. The Company granted
and issued shares, net of forfeitures, of restricted common stock to employees and directors of the Company. The fair value of
these awards was $
Share-based
compensation expense of $ was recognized in selling, general and administrative expenses during the six months ended June 30,
2022, and $ was recognized during the six months ended June 30, 2021. Equity awards totaling $
At June 30, 2022, there was $ of total unrecognized share-based compensation expense related to unvested share-based equity awards. Unrecognized share-based compensation expense is expected to be recognized over a weighted-average period of years.
| For the Six Months Ended | ||||||||
| June 30, 2022 | ||||||||
| Weighted Average | ||||||||
| Shares | Grant Date Fair Value | |||||||
| Non-vested at beginning of period | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Non-vested at June 30, 2022 | $ | |||||||
Stock Options
| For the Six Months Ended | ||||||||||||
| June 30, 2022 | ||||||||||||
| Weighted Average | Weighted Average | |||||||||||
| Options | Exercise Price | Remaining Contract Life | ||||||||||
| Outstanding at beginning of period | $ | |||||||||||
| Granted or assumed | ||||||||||||
| Exercised | - | |||||||||||
| Forfeited | - | |||||||||||
| Expired | - | |||||||||||
| Outstanding at June 30, 2022 | $ | |||||||||||
| Exercisable at June 30, 2022 | $ | |||||||||||
| 17 |
Warrants
A summary of the status of outstanding warrants to purchase common stock at June 30, 2022 and changes during the six-month period then ended is presented below:
| For the Six Months Ended | ||||||||||||
| June 30, 2022 | ||||||||||||
| Weighted Average | Weighted Average | |||||||||||
| Warrants | Exercise Price | Remaining Contract Life | ||||||||||
| Outstanding at beginning of period | $ | - | ||||||||||
| Granted or assumed | 8.3 | |||||||||||
| Exercised | - | |||||||||||
| Forfeited | - | |||||||||||
| Expired | - | |||||||||||
| Outstanding at June 30, 2022 | $ | |||||||||||
| Exercisable at June 30, 2022 | $ | |||||||||||
NOTE 7 – DEBT AND CREDIT FACILITIES
Revolving Line of Credit
On
January 15, 2021, the Company entered into a loan agreement (the “Loan Agreement”) with Cadence Bank, N.A. (“Cadence”)
providing for a $
On
February 11, 2021, the Company made an $
NOTE 8 – INVESTMENTS IN EQUITY SECURITIES
The Company’s equity investments consist of nonmarketable equity securities in privately held companies without readily determinable fair values. Unless accounted for under the equity method of accounting, the investments are reported at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer.
In July 2020, the Company made a $ long-term investment to purchase certain nonmarketable securities consisting of Series B-2 Preferred Shares of Direct Dermatology Inc. (“DirectDerm”), representing % ownership of DirectDerm at that time. Through this investment, the Company received exclusive rights to utilize DirectDerm’s technology in all acute and post-acute care settings such as skilled nursing facilities, home health, and wound clinics. The Company does not have the ability to exercise significant influence over DirectDerm’s operating and financial activities. In 2021, the Company purchased an additional shares of DirectDerm’s Series B-2 Preferred for $. On March 7, 2022, the Company purchased an additional shares of DirectDerm’s Series B-2 Preferred for $. The Company’s ownership of DirectDerm was % as of June 30, 2022.
On
November 9, 2020, the Company entered into agreements to purchase certain nonmarketable securities consisting of shares of Series
A Convertible Preferred Stock (the “Series A Stock”) of Precision Healing Inc. for an aggregate purchase price of $
As
discussed above, on April 4, 2022, the Company closed a merger transaction with Precision Healing pursuant to which Precision Healing
became a wholly owned subsidiary of the Company (see Note 10 for more information). As a result of the merger, the Company’s
equity method investment in Precision ceased on April 4, 2022. The Company has recorded $
| 18 |
On June 3, 2021, the Company invested $ to purchase Class A Preferred Shares (the “Shares”) of Pixalere Healthcare, Inc. (“Pixalere”). The Shares are convertible into % 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 the Company’s purchase of the Shares, Pixalere granted Pixalere Healthcare USA, LLC (“Pixalere USA”), a subsidiary of the Company, a royalty-free exclusive license to use the Pixalere software and platform in the United States. In conjunction with the grant of the license, the Company issued Pixalere a % equity ownership interest in Pixalere USA valued at $.
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 June 30, 2022.
The following summarizes the Company’s investments:
| June 30, 2022 | December 31, 2021 | |||||||||||||||
| Carrying Amount | Economic Interest | Carrying Amount | Economic Interest | |||||||||||||
| Equity Method Investment | ||||||||||||||||
| Precision Healing Inc. | $ | % | $ | % | ||||||||||||
| Cost Method Investments | ||||||||||||||||
| Direct Dermatology, 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 June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Investment | ||||||||||||||||
| Precision Healing Inc. | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Total | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
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 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) $
| Description | Amount | |||
| Net cash consideration | $ | |||
| Equity consideration (fair value) | ||||
| Net liabilities assumed | ||||
| Transaction costs | ||||
| Total purchase consideration | $ | |||
| 19 |
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 805, the Company 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 | $ | % | ||||||
The Company did not recognize any gain on the purchase of the net assets.
NOTE 10 – PRECISION HEALING MERGER
On April 1, 2022, the Company entered into a merger agreement by and among the Company, United Wound and Skin Solutions, LLC, a Delaware limited liability company and wholly owned subsidiary of the Company, Precision Healing, PH Merger Sub I, Inc., a Delaware corporation, PH Merger Sub II, LLC, a Delaware limited liability company, and Furneaux Capital Holdco, LLC (d/b/a BlueIO), solely in its capacity as the representative of the securityholders of Precision Healing. On April 4, 2022 (the “Closing Date”), the merger parties closed the transactions contemplated by the merger agreement and Precision Healing became a wholly owned subsidiary of the Company.
| 20 |
Precision Healing is developing a diagnostic imager and smart pad for assessing a patient’s wound and skin conditions. This comprehensive skin and wound assessment technology is designed to quantify biochemical markers to determine the trajectory of a wound’s condition to enable better diagnosis and treatment protocol. To date, Precision Healing has not generated revenues.
Pursuant
to the terms of the merger agreement, holders of Precision Healing common stock and preferred stock, other than the Company, were entitled
to receive closing consideration consisting of $
On
the Closing Date, the Precision Healing outstanding options previously granted under the Precision Healing Plan converted pursuant to
their terms into options to acquire an aggregate of shares of Company common stock with a weighted exercise price of $
Pursuant to the merger agreement, the Company assumed sponsorship of the Precision Healing Plan, effective as of the Closing Date, as well as the outstanding awards granted thereunder, the award agreements evidencing the grants of such awards and the remaining shares available under the Precision Healing Plan, in each case adjusted in the manner set forth in the merger agreement to such awards. Concurrent with the assumption of the Precision Healing Plan, the Company terminated the ability to offer future awards under the Precision Healing Plan.
Pursuant
to the merger agreement, upon the achievement of certain performance thresholds, the securityholders of Precision Healing, including
the holders of options and warrants to purchase Precision Healing common stock and certain persons promised options to purchase Precision
Healing common stock, are also entitled to receive payments of up to $
As the contingent earnout payments are not subject to any specific individual performance by the shareholders, the contingent shares are not subject to ASC Topic 718, Compensation – Stock Compensation. Further, as the contingent consideration was negotiated as part of the transfer of assets, the obligation will be measured at fair value and included in the total purchase consideration transferred. Additionally, the contingent earnout payments meet the criteria under ASC Topic 480, Distinguishing Liabilities from Equity (“ASC 480”) as the monetary value of the shares to be issued is predominantly based on the exercise contingency (i.e., revenue targets). Accordingly, the consideration will be classified as a liability at its estimated fair value at each reporting period with the subsequent change in fair value recognized as a gain or loss in accordance with ASC 480.
The total purchase consideration as determined by the Company was as follows:
| Consideration | Equity Shares | Dollar Value | ||||||
| Fair value of Sanara common shares issued | $ | |||||||
| Fair value of assumed options | ||||||||
| Fair value of assumed warrants | ||||||||
| Cash paid to non-accredited investors | ||||||||
| Cash paid for fractional shares | ||||||||
| Carrying value of equity method investment in Precision Healing | ||||||||
| Fair value of contingent earnout consideration | ||||||||
| Direct transaction costs | ||||||||
| Total purchase consideration | $ | |||||||
| 21 |
Based on guidance provided by ASC 805, the Company recorded the Precision Healing merger 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 in -process research and development based on the Company’s valuation models. These models assigned value to the acquired intellectual property based on estimated future cash flows. Accordingly, the Company accounted for the merger 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 estimated fair value of the gross assets acquired, the total fair value of the net assets acquired was primarily attributable to the intellectual property (i.e., in-process research and development) and assembled workforce.
The total purchase consideration was allocated based on the relative estimated fair value of such assets as follows:
| Description | Amount | Percent of Total | ||||||
| Cash | % | |||||||
| Net working capital (excluding cash) | ( | ) | ( | %) | ||||
| Fixed assets, net | % | |||||||
| In-process research and development | % | |||||||
| Assembled workforce | % | |||||||
| Net assets acquired | % | |||||||
NOTE 11 - RELATED PARTIES
Payables and Receivables with Related Parties
The
Company had outstanding payables to related parties totaling $
CellerateRX Sublicense Agreement
The
Company has an exclusive, world-wide sublicense to distribute CellerateRX Surgical and HYCOL products into the surgical and wound
care markets from an affiliate of The Catalyst Group, Inc. (“Catalyst”), CGI Cellerate RX, which licenses the rights to
CellerateRX from Applied Nutritionals. Sales of CellerateRX have comprised the majority of our sales during 2021 and the first half
of 2022. On January 26, 2021, the Company 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 the licensed products exceed $
Ronald T. Nixon, the Company’s Executive Chairman, is the founder and managing partner of Catalyst.
Product License Agreements
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. 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. Mr. Nixon 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.
On October 1, 2019, the Company executed the ABF License Agreement with Rochal whereby 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. Currently, the products covered by the ABF License Agreement are CuraShield Antimicrobial Barrier Film and a no sting skin protectant product.
On May 4, 2020, The Company executed a product license agreement with Rochal, whereby 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.
See Note 4 for more information on these product license agreements.
| 22 |
Rochal Asset Purchase
As
discussed in Note 9, on July 14, 2021, the Company 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, 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 Rochal (i) $
Consulting Agreement
Concurrent
with the Rochal 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 $
Mr. Nixon 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, the former president and current Chairman of the Board of Rochal.
NOTE 12 – SUBSEQUENT EVENTS
On
July 1, 2022, the Company entered into a membership interest purchase agreement by and among the Company, Scendia Biologics, LLC, a Delaware
limited liability company (“Scendia”), and Ryan Phillips (the “Seller”) pursuant to which, and in accordance
with the terms and conditions set forth therein, the Company acquired
Scendia
provides clinicians and surgeons with a full line of the regenerative and orthobiologic technologies for their patients through certain
customer accounts. Beginning in early 2022, the Company began co-promoting certain products with Scendia, including: (i) TEXAGEN Amniotic
Membrane Allograft, (ii) BiFORM Bioactive Moldable Matrix, (iii) AMPLIFY Verified Inductive Bone Matrix and (iv) ALLOCYTE Advanced Cellular
Bone Matrix. Prior to the Acquisition, Scendia owned
Pursuant
to the purchase agreement, the aggregate consideration for the acquisition was $
In
addition to the cash consideration and the stock consideration, the purchase agreement provides that the Seller is entitled to receive
two potential earnout payments, payable on an annual basis, not to exceed $
The Company has not yet completed its purchase accounting for this acquisition, including determining the preliminary fair value of the assets acquired, liabilities assumed and the fair value of contingent consideration.
| 23 |
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, 2021 and with the unaudited consolidated financial statements and related notes thereto presented in this Quarterly Report on Form 10-Q.
Cautionary Statement Regarding 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 selling, general and administrative expenses. 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,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “forecast,” “guidance,” “intend,” “may,” “plan,” “possible,” “potential,” “predict,” “preliminary,” “project,” “seeks,” “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:
| ● | shortfalls in forecasted revenue growth; | |
| ● | our ability to implement our comprehensive wound and skin care strategy through acquisitions and investments and our ability to realize the anticipated benefits of such acquisitions and investments; | |
| ● | our ability to meet our future capital requirements; | |
| ● | our ability to retain and recruit key personnel; | |
| ● | the intense competition in the markets in which we operate and our ability to compete within our markets; | |
| ● | the failure of our products to obtain market acceptance; | |
| ● | the effect of security breaches and other disruptions; | |
| ● | our ability to maintain effective internal controls over financial reporting; | |
| ● | our ability to develop and commercialize new products and products under development, including the manufacturing, distribution, marketing and sale of such products; | |
| ● | our ability to maintain and further grow clinical acceptance and adoption of our products; | |
| ● | the impact of competitors inventing products that are superior to ours; | |
| ● | disruptions of, or changes in, our distribution model, consumer base or the supply of our products; | |
| ● | our ability to manage product inventory in an effective and efficient manner; | |
| ● | the failure of third-party assessments to demonstrate desired outcomes in proposed endpoints; | |
| ● | our ability to successfully expand into wound and skin care virtual consult and other services; | |
| ● | our ability and the ability of our research and development partners to protect the proprietary rights to technologies used in certain of our products and the impact of any claim that we have infringed on intellectual property rights of others; | |
| ● | our dependence on technologies and products that we license from third parties; | |
| ● | the impact of the COVID-19 pandemic on our business, financial condition and results of operations; | |
| ● | the effects of current and future laws, rules, regulations and reimbursement policies relating to the labeling, marketing and sale of our products and our planned expansion into wound and skin care virtual consult and other services and our ability to comply with the various laws, rules and regulations applicable to our business; and | |
| ● | the effect of defects, failures or quality issues associated with our products. |
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, 2021, 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, services and technologies 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, 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 solutions 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.
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We currently market several products across chronic and surgical wound care applications and have multiple products in our pipeline. We currently 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”). We are also developing additional products in our own product pipeline.
Comprehensive Value-Based Care Strategy
In June 2020, we formed a subsidiary, United Wound and Skin Solutions, LLC (“UWSS”, or “WounDerm”), to hold certain investments and operations in wound and skin care virtual consult services. Through WounDerm, we plan to offer a comprehensive wound and skin solution and partner with value-based care providers with the dual goal of lowering the cost to treat wounds while improving clinical outcomes.
Our comprehensive solution consists of four key components: diagnostics, virtual consult services for wound care and dermatology, proprietary efficacious products, and a wound care and dermatology specific electronic medical record (“EMR”) and mobile application. We expect these components will work synergistically to allow clinicians to analyze and treat wound and dermatology conditions more efficiently than the current standard of care:
| ● | Diagnostics – Our proprietary diagnostics currently under development, which we recently acquired from Precision Healing, Inc. (“Precision Healing”), are designed to quantify key biomarkers that dictate the trajectory of wound healing and identify deficiencies to aide in treatment. Ultimately, we believe that our diagnostics will develop treatment algorithms based on the data collected by the Precision Healing technology. | |
| ● | Virtual Consult Services – Through our exclusive affiliation with Direct Dermatology Inc. and other affiliations, we are able to offer virtual consult services for wound care and dermatology provided by experienced, specialized physicians and clinicians. | |
| ● | Proprietary Products – We currently offer products for improving patient outcomes by addressing conditions that impact wound healing. We are currently conducting multiple studies to prove the efficacy of our products while developing new products in our six focus areas of (1) debridement, (2) biofilm removal, (3) hydrolyzed collagen, (4) advanced biologics, (5) negative pressure wound therapy products and (6) the oxygen delivery system segment of the wound and skin care market. | |
| ● | EMR and Mobile Application – Our EMR and mobile application were developed specifically for wound care and dermatology. We are currently developing the capability for the EMR and mobile application to offer wound tracking analytics, recommended treatments and decision support, and automated referrals. |
We believe that by offering a proprietary comprehensive solution for wound care and dermatology, we will be a value-added partner for providers in value-based care programs, such as Medicare Advantage and other risk-based contracts.
Recent Acquisitions
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.
On April 4, 2022, we closed a merger transaction with Precision Healing pursuant to which Precision Healing became a wholly owned subsidiary of the Company. Precision Healing is developing a diagnostic imager and smart pad for assessing a patient’s wound and skin conditions. This comprehensive skin and wound assessment technology is designed to quantify biochemical markers to determine the trajectory of a wound’s condition to enable better diagnosis and treatment protocol.
Recent Developments
Update on the COVID-19 Pandemic
During the second half of 2021, the United States experienced a surge of COVID-19 cases as the Delta and Omicron variants 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. During the first half of 2022, we do not believe our business was materially affected by COVID-19 restrictions on elective surgeries. 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.
Precision Healing Merger
As discussed above, on April 4, 2022, we closed a merger transaction with Precision Healing pursuant to which Precision Healing became our wholly owned subsidiary. Pursuant to the merger agreement, among other things, we agreed to (i) pay the holders of Precision Healing common stock and preferred stock closing consideration consisting of 165,738 shares of our common stock, which was issued to accredited investors, and $125,966 in cash, which was paid to stockholders who were not accredited investors, (ii) pay approximately $0.6 million of transaction expenses on behalf of the equity holders of Precision Healing, (iii) assume all outstanding options and warrants of Precision Healing and (iv) pay, subject to the achievement of certain performance thresholds, earnout consideration of up to $10.0 million which is payable in cash, or at our election, is payable to accredited investors in shares of our common stock.
Scendia Biologics Acquisition
On July 1, 2022, we entered into a membership interest purchase agreement by and among the Company, Scendia Biologics, LLC, a Delaware limited liability company (“Scendia”), and Ryan Phillips (the “Seller”) pursuant to which we acquired 100% of the issued and outstanding membership interests in Scendia from the Seller.
Scendia provides clinicians and surgeons with a full line of regenerative and orthobiologic technologies. Beginning in early 2022, the Company began co-promoting certain products with Scendia, including: (i) TEXAGEN Amniotic Membrane Allograft, (ii) BiFORM Bioactive Moldable Matrix, (iii) AMPLIFY Verified Inductive Bone Matrix and (iv) ALLOCYTE Advanced Cellular Bone Matrix. Prior to the acquisition, Scendia owned 50% of the issued and outstanding membership interests in Sanara Biologics, LLC (“Sanara Biologics”), and the Company owned the remaining 50% of the membership interests. As a result of the acquisition, the Company indirectly acquired all of the interests in Sanara Biologics, such that the Company now holds 100% of the issued and outstanding equity interests in Sanara Biologics.
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Pursuant to the purchase agreement, the aggregate consideration for the acquisition was $7.4 million, which consisted of (i) a $1.4 million cash payment, subject to certain adjustments, and (ii) 291,686 shares of our common stock with an agreed upon value of $6.0 million. Pursuant to the purchase agreement, at closing, we withheld 94,798 shares of common stock with an agreed upon value of $1.95 million (the “Indemnity Holdback Shares”), which such Indemnity Holdback Shares shall be withheld, issued, and released to the Seller after closing, as and to the extent provided in the purchase agreement, to satisfy the Seller’s indemnification obligations, if any.
In addition to the cash and stock consideration, the purchase agreement provides that the Seller is entitled to receive two potential earnout payments, payable on an annual basis, not to exceed $10.0 million in the aggregate. The earnout consideration is payable to the Seller in cash or, at our election, in up to 486,145 shares of our common stock upon the achievement of certain performance thresholds relating to net revenue attributable to sales of Scendia products during the two-year period following the closing.
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.
The vast majority of our product sales revenue is derived from sales of CellerateRX surgical powder. Revenue streams from product sales and royalties are summarized below for the six months ended June 30, 2022 and 2021. All revenue was generated in the United States.
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| Product sales revenue | $ | 17,381,501 | $ | 11,186,069 | ||||
| Royalty revenue | 100,500 | 100,500 | ||||||
| Total Net Revenue | $ | 17,482,001 | $ | 11,286,569 | ||||
We recognize royalty revenue from a development and license 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 license agreement have not exceeded the annual minimum of $201,000 ($50,250 per quarter).
Cost of Goods Sold
Cost of goods sold consists primarily 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 net 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 bring new products to market.
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Depreciation and amortization expenses include depreciation of fixed assets and amortization of intangible assets that have a finite life, such as product licenses, patents and assembled workforces.
Other Expense
Other expense is primarily comprised of losses on equity method investments, accretion expense on earnout liabilities, interest expense and other nonoperating activities.
Results of Operations
Net Revenues. For the three months ended June 30, 2022, we generated net revenues of $9,670,778 compared to net revenues of $6,277,133 for the three months ended June 30, 2021, representing a 54% increase from the prior year period. For the six months ended June 30, 2022, net revenues totaled $17,482,001 compared to net revenues of $11,286,569 for the six months ended June 30, 2021, representing a 55% increase from the prior year period. The higher net revenues in 2022 were primarily due to increased sales of surgical wound care products as a result of our increased market penetration and geographic expansion, and our continuing 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 June 30, 2022, was $958,086, compared to cost of goods sold of $536,405 for the three months ended June 30, 2021. Cost of goods sold for the six months ended June 30, 2022 was $1,763,167, compared to cost of goods sold of $1,010,838 for the six months ended June 30, 2021. The increases over the prior year periods were primarily due to higher sales volume in 2022. Gross margins were approximately 90% and 91% for the six months ended June 30, 2022 and 2021, respectively. The slightly lower gross margins in 2022 were due to non-cash obsolescence charges of approximately $130,000 related to certain inventory nearing its expiration date.
Selling, general and administrative expenses. SG&A expenses for the three months ended June 30, 2022, were $10,428,133, as compared to $6,562,144 for the three months ended June 30, 2021. SG&A expenses for the six months ended June 30, 2022, were $19,803,763 compared to SG&A expenses of $11,971,874 for the six months ended June 30, 2021. The higher SG&A expenses in 2022 were primarily due to higher direct sales and marketing expenses, which accounted for approximately $5.5 million, or 70% of the increase compared to prior year. The higher direct sales and marketing expenses were primarily attributable to an increase in sales commissions of $2.5 million as a result of higher product sales, and $1.3 million of increased costs as a result of sales force expansion and operational support. Costs related to travel and in-person promotional activities increased by $0.8 million in 2022 compared to 2021 due to the resumption of many in-person activities that were cancelled or postponed in 2021 as a result of the COVID-19 pandemic. The increase in 2022 SG&A expenses was also partly attributable to increased noncash equity compensation and higher payroll costs related to the mid-year addition of the Rochal workforce in July 2021. As part of our strategy to expand our sales reach in new and existing markets, we have employed nine additional field sales representatives since June 30, 2021. As of June 30, 2022, we had a total of 35 field sales representatives.
Research and development expenses. R&D expenses for the three months ended June 30, 2022, were $1,067,000 compared to $103,981 for the three months ended June 30, 2021. R&D expenses for the six months ended June 30, 2022, were $1,271,637 compared to $222,193 for the six months ended June 30, 2021. R&D expenses in the second quarter of 2022 included approximately $826,000 of costs related to our newly acquired Precision Healing multispectral imager and biomarker assay for assessing patient wound and skin conditions. The higher R&D expenses in 2022 were also partly due to several new development projects for our currently licensed products.
Depreciation and amortization expense. Depreciation and amortization expense for the three months ended June 30, 2022, was $412,028 compared to $100,807 for the three months ended June 30, 2021. Depreciation and amortization expense for the six months ended June 30, 2022, was $614,775 compared to $191,398 for the six months ended June 30, 2021. The higher depreciation and amortization expense in 2022 was due to the amortization of internal use software placed into service in 2021 and additional amortization related to the patents acquired from Rochal and the assembled workforce acquired from Precision Healing.
Other expense. Other expense for the three months ended June 30, 2022, was $63,427 compared to $179,769 for the three months ended June 30, 2021. Other expense for the six months ended June 30, 2022 was $443,060 compared to $279,615 for the six months ended June 30, 2021. The higher other expense for the six months ended June 30, 2022 was due to increased ownership in Precision Healing, resulting in recognition of a noncash loss of $379,633 from our equity method investment compared to $278,904 in 2021, and accretion expense of earnout liabilities of $63,427 recognized during the three months ended June 30, 2022.
Net loss. We had a net loss of $3,257,896 for the three months ended June 30, 2022, compared to a net loss of $1,205,973 for the three months ended June 30, 2021. For the six months ended June 30, 2022, we had a net loss of $6,414,401, compared to a net loss of $2,389,349 for the six months ended June 30, 2021. The higher net loss in 2022 was due to increased SG&A costs described above, higher R&D expenses, and the recognition of losses on our equity method investment in Precision Healing.
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Liquidity and Capital Resources
Cash on hand at June 30, 2022 was $12,678,846, compared to $18,652,841 at December 31, 2021. Historically, we have financed our operations primarily from the sale of equity securities. 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, 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.
On May 9, 2019, the Company organized Sanara Pulsar, LLC (“Sanara Pulsar”), a Texas limited liability company, which is owned 60% by the Company’s wholly owned subsidiary Cellerate, LLC, and 40% owned by Wound Care Solutions, Limited (“WCS”), an unaffiliated company registered in the United Kingdom. At the time of the formation of Sanara Pulsar, it and 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 the event WCS’s annual Form K-l from Sanara Pulsar does not allocate to WCS net income of at least $200,000 (the “Target Net Income”), the Company 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, as a distribution from Sanara Pulsar to WCS. For each of the years 2021 through 2024 the Target Net Income will increase by $20,000. In April 2022, the Company paid WCS $220,000 related to the fiscal 2021 Form K-1. All other distributions made by Sanara Pulsar to its members, not including tax distributions, will be made exclusively to the Company until such time as the Company has received an amount of distributions equal to all such advances to WCS.
On July 7, 2019, we executed a license agreement with Rochal, a related party, 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. 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 completion of our 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 27.3% 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, 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 Rochal (i) $496,100 in cash and (ii) 14,369 shares of our common stock, and assumed certain liabilities of $3,900.
On November 9, 2020, we entered into agreements to purchase shares of Series A Convertible Preferred Stock (the “Series A Stock”) of Precision Healing for an aggregate purchase price of $600,000. In 2021, we made additional purchases of Series A Stock as follows: $600,000 in February, $500,000 in June, $500,000 in October, and $600,000 in December.
On April 4, 2022, we closed a merger transaction with Precision Healing pursuant to which Precision Healing became our wholly owned subsidiary. Pursuant to the terms of the merger agreement, holders of Precision Healing common stock and preferred stock, other than the Company, were entitled to receive closing consideration consisting of $125,966 in cash consideration, which was paid to stockholders who were not accredited investors, 165,738 shares of our common stock, which was paid only to accredited investors, and the payment in cash of approximately $0.6 million of transaction expenses of Precision Healing. We recorded the issuance of the 165,738 shares to accredited investors and cash payments to non-accredited investors based on the closing price per share of our common stock on April 4, 2022 which was $30.75.
Upon the closing of the merger, the Precision Healing outstanding options previously granted under the Precision Healing Plan converted, pursuant to their terms, into options to acquire an aggregate of 144,191 shares of our common stock with a weighted exercise price of $10.71 per share. These options expire between August 2030 and April 2031. In addition, outstanding and unexercised Precision Healing warrants converted into rights to receive warrants to purchase (i) 4,424 shares of our common stock with an initial exercise price of $7.32 per share and an expiration date of April 22, 2031 and (ii) 12,301 shares of our common stock with an initial exercise price of $12.05 per share and an expiration date of August 10, 2030. Concurrent with the assumption of the Precision Healing Plan, we terminated the ability to offer future awards under the Precision Healing Plan.
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Pursuant to the merger agreement, upon the achievement of certain performance thresholds, the securityholders of Precision Healing, including the holders of options and warrants to purchase Precision Healing common stock and certain persons promised options to purchase Precision Healing common stock, are also entitled to receive payments of up to $10.0 million, which was accounted for as contingent consideration pursuant to ASC 805. The earnout consideration is payable in cash or, at our election, is payable to accredited investors in shares of our common stock at a price per share equal to the greater of (i) $27.13 or (ii) the average closing price of our common stock for the 20 trading days prior to the date such earnout consideration is due and payable. Pursuant to the merger agreement, a minimum percentage of the earnout consideration may be required to be issued to accredited investors in shares of our common stock for tax purposes. The amount and composition of the portion of earnout consideration payable is subject to adjustment and offsets as set forth in the merger agreement
On July 1, 2022, we entered into a membership interest purchase agreement by and among the Company, Scendia, and the Seller pursuant to which, and in accordance with the terms and conditions set forth therein, we acquired 100% of the issued and outstanding membership interests in Scendia from the Seller.
Pursuant to the purchase agreement, the aggregate consideration for the acquisition was $7.4 million, which consisted of (i) a $1.4 million cash payment, subject to certain adjustments, and (ii) 291,686 shares of common stock. Pursuant to the purchase agreement, at closing, we withheld 94,798 Indemnity Holdback Shares, which shall be withheld, issued, and released to the Seller after closing as and to the extent provided in purchase agreement to satisfy the Seller’s indemnification obligations, if any.
In addition to the cash consideration and the stock consideration, the purchase agreement provides that the Seller is entitled to receive two potential earnout payments, payable on an annual basis, not to exceed $10.0 million in the aggregate. The earnout consideration is payable to the Seller in cash or, at our election, in up to 486,145 shares of our common stock upon the achievement of certain performance thresholds relating to net revenue attributable to sales of Scendia products during the two-year period following the closing.
Cash Flow Analysis
For the six months ended June 30, 2022, net cash used in operating activities was $3,266,795 compared to $1,595,895 used in operating activities for the six months ended June 30, 2021. The higher use of cash in 2022 was primarily due to higher SG&A expenses related to sales force expansion, the addition of the Rochal workforce in mid-2021, higher R&D costs related to the acquired assets from Precision Healing, and the resumption of certain travel and promotional activities in 2022 which were cancelled or postponed in 2021 as a result of the COVID-19 pandemic.
For the six months ended June 30, 2022, net cash used in investing activities was $2,384,269 compared to $3,209,724 used in investing activities during the six months ended June 30, 2021. The lower use of cash used in investing activities in 2022 was primarily due to fewer cash investments in equity securities during the first half of 2022 , partially offset by purchases of intangible assets, primarily related to the Precision Healing merger.
For the six months ended June 30, 2022, net cash used in financing activities was $322,931 as compared to $28,739,257 provided by financing activities for the six months ended June 30, 2021. 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 Surgical and HYCOL products into the surgical and wound care markets from an affiliate of Catalyst, CGI Cellerate RX, which licenses the rights to CellerateRX from AN. Sales of CellerateRX have comprised the majority of our sales during 2021 and the first half of 2022. 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 six months ended June 30, 2022 and 2021, royalties accrued under the terms of this agreement totaled $812,966 and $404,220, respectively.
Ronald T. Nixon, our Executive Chairman, is the founder and managing partner of Catalyst.
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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, 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 Rochal (i) $496,100 in cash and (ii) 14,369 shares of common stock.
After the asset purchase, Rochal owned 95,203 shares of our common stock. Mr. Nixon 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.
Consulting Agreement
Concurrent with the Rochal asset purchase, on July 14, 2021, we 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, Ms. Salamone is entitled to receive an annual consulting fee of $177,697, with payments to be paid once per month. The consulting agreement has an initial term of three years, unless earlier terminated by the Company, and is subject to renewal.
Critical Accounting Estimates
Our unaudited consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles. Our discussion and analysis of our financial condition and operating results require the Company’s management to make judgments, assumptions and estimates that affect the amounts reported. Significant accounting policies and methods used in the preparation of our consolidated financial statements are summarized in Note 2, “Summary of Significant Accounting Policies” of the Notes to Unaudited Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q, and in the Notes to Consolidated Financial Statements in Part II, Item 8 of our 2021 Form 10-K. Historically, our critical accounting estimates have not differed materially from actual results. However, if our assumptions change, we may need to revise our estimates or take other corrective actions, either of which may also have a material adverse effect on our consolidated statements of operations, liquidity and financial condition.
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 June 30, 2022, pursuant to Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, our Certifying Officers concluded that, as of June 30, 2022, 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 June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| 30 |
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
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, 2021. For more information concerning our risk factors, please see “Item 1A. Risk Factors” in the Annual Report on Form 10-K for the year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of unregistered securities during the quarter ended June 30, 2022 that were not previously reported on a Current Report on Form 8-K.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
This item is not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
The following documents are filed as part of this Report or incorporated herein by reference:
| 31 |
* Filed herewith
# Certain schedules and exhibits 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.
** 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 Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.
| 32 |
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. | ||
| August 15, 2022 | By: | /s/ Michael McNeil |
Michael McNeil Chief Financial Officer (Principal Financial Officer and duly authorized officer) | ||
| 33 |
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, Zachary B. Fleming, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Sanara MedTech Inc. for the period ended June 30, 2022;
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;
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;
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:
(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;
(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;
(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
(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):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(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: August 15, 2022 | |
| /s/Zachary B. Fleming | |
| Zachary B. Fleming, Chief Executive Officer |
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 period ended June 30, 2022;
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;
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;
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:
(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;
(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;
(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
(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):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(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: August 15, 2022 | |
| /s/ Michael McNeil | |
| Michael McNeil, Chief Financial Officer |
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 June 30, 2022, as filed with the Securities and Exchange Commission on the date hereof, I, Zachary B. Fleming, 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:
| (1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
| (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. |
| August 15, 2022 | |
| /s/ Zachary B. Fleming | |
| Zachary B. Fleming, Chief Executive Officer |
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 June 30, 2022, 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:
| (1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
| (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. |
| August 15, 2022 | |
| /s/ Michael McNeil | |
| Michael McNeil, Chief Financial Officer |
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