NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – NATURE OF BUSINESS AND BACKGROUND
Sanara
MedTech Inc. (together with its wholly owned and majority-owned subsidiaries on a consolidated basis, 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, chronic wound and skincare markets. 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 surgical, wound
and skincare solutions and is continually seeking to expand its offerings for patients requiring treatments across the entire continuum
of care in the United States.
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation and Basis of Presentation
The
accompanying unaudited consolidated financial statements include the accounts of Sanara MedTech Inc. and its wholly owned and
majority-owned subsidiaries, as well as other entities in which the Company has a controlling financial interest. All significant
intercompany profits, losses, transactions and balances have been eliminated in consolidation.
The
accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the
opinion of management of the Company, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three-month period ended March 31, 2023 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2023, 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, 2022 and 2021, which are included in the Company’s most
recent Annual Report on Form 10-K.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date
of the consolidated financial statements, and the reported revenue and expenses during the reporting period. However, actual results
could differ from those estimates and there may be changes to the Company’s estimates in future periods.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Income/Loss
Per Share
The
Company computes income/loss per share in accordance with Accounting Standards Codification (“ASC”) Topic 260, Earnings per
Share, which requires the Company to present basic and diluted income per share when the effect is dilutive. Basic income per share is
computed by dividing income available to common shareholders by the weighted average number of shares of common stock outstanding. Diluted
income per share is computed similarly to basic income per share, except that the denominator is increased to include the number of additional
shares of common stock that would have been outstanding if the potential shares of common stock had been issued and if the additional
shares of common stock were dilutive. All common stock equivalents were excluded from the current and prior period calculations as their
inclusion would have been anti-dilutive during the three months ended March 31, 2023 and 2022 due to the Company’s net loss.
The
following table summarizes the shares of common stock that were potentially issuable but were excluded from the computation of diluted
net loss per share for the three months ended March 31, 2023 and 2022 as such shares would have had an anti-dilutive effect:
SCHEDULE OF COMPUTATION OF DILUTED NET LOSS PER SHARE
| |
| | | |
| | |
| |
As of March 31, | |
| |
2023 | | |
2022 | |
Stock options (a) | |
| 146,191 | | |
| 11,500 | |
Warrants (b) | |
| 16,725 | | |
| - | |
Unvested restricted stock | |
| 181,887 | | |
| 179,180 | |
Anti-dilutive securities | |
| 181,887 | | |
| 179,180 | |
|
(a) | Includes 144,191
shares underlying stock options assumed pursuant to the merger agreement with Precision Healing, Inc. (“Precision
Healing”) in April 2022. See Note 3 for more information regarding the Precision Healing merger. |
|
(b) | Shares
underlying warrants assumed pursuant to the merger agreement with Precision Healing in April 2022. See Note 3 for more information
regarding the Precision Healing merger. |
Revenue
Recognition
The
Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). Revenues
are recognized when a purchase order is received from the customer and control of the promised goods or services is transferred to the
customer in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for transferring those
goods or services. Revenue is recognized based on the following five-step model:
- Identification of the contract with a customer
- Identification of the performance obligations in the contract
- Determination of the transaction price
- Allocation of the transaction price to the performance obligations in the contract
- Recognition of revenue when, or as, the Company satisfies a performance obligation
Details
of this five-step process are as follows:
Identification
of the contract with a customer
Customer
purchase orders are generally considered to be contracts under ASC 606. Purchase orders typically identify the specific terms of products
to be delivered, create the enforceable rights and obligations of both parties and result in commercial substance. No other forms of
contract revenue recognition, such as the completed contract or percentage of completion methods, were utilized by the Company in either
2023 or 2022.
Performance
obligations
The
Company’s performance obligation is generally limited to delivery of the requested items to its customers at the agreed upon quantities
and prices.
Determination
and allocation of the transaction price
The
Company has established prices for its products. These prices are effectively agreed to when customers place purchase orders with the
Company. Rebates and discounts, if any, are recognized in full at the time of sale as a reduction of net revenue. Allocation of transaction
prices is not necessary where only one performance obligation exists.
Recognition
of revenue as performance obligations are satisfied
Product
revenues are recognized when a purchase order is received from the customer, the products are delivered and control of the goods and
services passes to the customer.
Disaggregation
of Revenue
Revenue
streams from product sales and royalties are summarized below for the three months ended March 31, 2023 and 2022.
SCHEDULE
OF REVENUE FROM PRODUCT SALES AND ROYALTIES
| |
| | | |
| | |
| |
Three Months Ended | |
| |
March 31, | |
| |
2023 | | |
2022 | |
Product sales revenue | |
$ | 15,471,667 | | |
$ | 7,760,973 | |
Royalty revenue | |
| 50,250 | | |
| 50,250 | |
Total Net Revenue | |
$ | 15,521,917 | | |
$ | 7,811,223 | |
The
Company recognizes royalty revenue from a development and license agreement with BioStructures, LLC. The Company records
revenue each calendar quarter as earned per the terms of the agreement, which stipulates the Company will receive quarterly royalty payments
of at least $50,250. Under the terms of the development and license agreement, royalties of 2.0% are recognized on sales of products
containing the Company’s patented resorbable bone hemostasis. The minimum annual royalty due to the Company is $201,000 per year
through the end of 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).
Accounts
Receivable Allowances
Accounts
receivable are typically due within 30 days of invoicing. The Company establishes an allowance for doubtful accounts to provide for an
estimate of accounts receivable which are not expected to be collectible. The Company recorded bad debt expense of $36,000 and $15,000
during the three months ended March 31, 2023 and 2022, respectively. The allowance for doubtful accounts was $304,994 at March 31, 2023
and $269,850 at December 31, 2022. Bad debt reserves are maintained based on a variety of factors, including the length of time receivables
are past due and a detailed review of certain individual customer accounts. The Company also establishes other allowances to provide
for estimated customer rebates and other expected customer deductions. These allowances totaled $3,905 at March 31, 2023 and $4,761 at
December 31, 2022. If circumstances related to customers change, estimates of the recoverability of receivables would be further adjusted.
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 $30,511 for the three months ended March
31, 2023 and $71,819 for the three months ended March 31, 2022. The allowance for obsolete and slow-moving inventory had a balance of
$462,521 at March 31, 2023, and $523,832 at December 31, 2022.
Property
and Equipment
Property
and equipment are stated at cost, less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated
useful lives of the related assets, ranging from two to ten years. Below is a summary of property and equipment for the periods presented:
SCHEDULE
OF PROPERTY AND EQUIPMENT
| |
| |
| | | |
| | |
| |
Useful | |
March 31, | | |
December 31, | |
| |
Life | |
2023 | | |
2022 | |
Computers | |
3-5 years | |
$ | 187,173 | | |
$ | 172,154 | |
Office equipment | |
3-7 years | |
| 97,097 | | |
| 87,225 | |
Furniture and fixtures | |
5-10 years | |
| 260,578 | | |
| 258,414 | |
Leasehold improvements | |
2-5 years | |
| 19,631 | | |
| 19,631 | |
Internal use software | |
5 years | |
| 1,618,999 | | |
| 1,618,998 | |
| |
| |
| | | |
| | |
Property and equipment, gross | |
| |
| 2,183,478 | | |
| 2,156,422 | |
Less accumulated depreciation | |
| |
| (847,661 | ) | |
| (739,986 | ) |
| |
| |
| | | |
| | |
Property and equipment, net | |
| |
$ | 1,335,817 | | |
$ | 1,416,436 | |
Depreciation
expense related to property and equipment was $107,674 and $92,724 for the three months ended March 31, 2023 and 2022, respectively.
Internal
Use Software
The
Company accounts for costs incurred to develop or acquire computer software for internal use in accordance with ASC Topic 350-40, Intangibles
– Goodwill and Other. The Company capitalizes the costs incurred during the application development stage, which generally includes
third-party developer fees to design the software configuration and interfaces, coding, installation and testing.
The
Company begins capitalization of qualifying costs when both the preliminary project stage is completed and management has authorized
further funding for the completion of the project. Costs incurred during the preliminary project stage along with post implementation
stages of internal-use computer software are expensed as incurred. The Company also capitalizes costs related to specific upgrades and
enhancements when it is probable the expenditures will result in additional functionality. Capitalized development costs are classified
as “Property and equipment, net” in the Consolidated Balance Sheets and are amortized over the estimated useful life of the
software, which is generally five years.
Goodwill
The
excess of purchase price over the fair value of identifiable net assets acquired in business combinations is recorded as goodwill. As
of March 31, 2023, all the Company’s goodwill relates to the acquisition of Scendia Biologics, LLC (“Scendia”) (see
Note 4). Goodwill has an indefinite useful life and is not amortized. Goodwill is tested annually as of December 31 for impairment,
or more frequently if circumstances indicate impairment may have occurred. The Company may first perform a qualitative assessment to
determine if it is more likely than not that the fair value of the reporting unit is less than the respective carrying value. If it is
determined that it is more likely than not that a reporting unit’s fair value is less than its carrying value, then the Company
will determine the fair value of the reporting unit and record an impairment charge for the difference between fair value and carrying
value (not to exceed the carrying amount of goodwill). No impairment was recorded during the three months ended March 31, 2023.
Intangible
Assets
Intangible
assets are stated at cost of acquisition less accumulated amortization and impairment loss, if any. Cost of acquisition includes the
purchase price and any cost directly attributable to bringing the asset to its working condition for the intended use. The Company amortizes
its finite-lived intangible assets on a straight-line basis over the estimated useful life of the respective assets which is generally
the life of the related patents or licenses, seven years for customer relationships and five years for assembled workforces. See Note
5 for more information on intangible assets.
Impairment
of Long-Lived Assets
Long-lived
assets, including certain identifiable intangibles held and to be used by the Company, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Company continuously evaluates
the recoverability of its long-lived assets based on estimated future cash flows and the estimated liquidation value of such long-lived
assets and provides for impairment if such undiscounted cash flows are insufficient to recover the carrying amount of the long-lived
assets. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference
between the carrying value and fair value. Fair values are determined based on quoted market values, undiscounted cash flows or internal
and external appraisals, as applicable. Assets to be disposed of are carried at the lower of carrying value or estimated fair value less
cost to sell. No impairment was recorded during the three months ended March 31, 2023 and 2022.
Investments
in Equity Securities
The
Company’s equity investments consist of nonmarketable equity securities in privately held companies without readily determinable
fair values. Unless accounted for under the equity method of accounting, the investments are reported at cost minus impairment, if any,
plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the
same issuer.
The
Company applies the equity method of accounting to investments when it has significant influence, but not controlling interest, in
the investee. Judgment regarding the level of influence over each equity method investment includes considering key factors such as
ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany
transactions. The Company’s proportionate share of the net income (loss) resulting from these investments is reported under
the line item captioned “Share of losses from equity method investment” in the Company’s Consolidated Statements
of Operations. The Company’s equity method investment is adjusted each period for the Company’s share of the
investee’s income or loss and dividend paid, if any. The Company classifies distributions received from its equity method
investment using the cumulative earnings approach in the Company’s Consolidated Statements of Cash Flows. As a result of the
Precision Healing merger in April 2022 (see Note 3), we do not have any investments which are recorded applying the equity method of
accounting as of March 31, 2023.
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 three months ended March 31, 2023 or 2022.
Fair
Value Measurement
As
defined in ASC Topic 820, Fair Value Measurement (“ASC 820”), fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company
utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about
risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or
generally unobservable. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and
the lowest priority to unobservable inputs (Level 3 measurement). This fair value measurement framework applies at both initial and subsequent
measurement.
The
three levels of the fair value hierarchy defined by ASC 820 are as follows:
Level
1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets
are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on
an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and
listed equities.
Level
2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly
observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies.
These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities,
time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic
measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be
derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments
in this category generally include nonexchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.
Level
3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used
with internally developed methodologies that result in management’s best estimate of fair value.
The
carrying amounts of cash, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short-term
nature of these instruments. The fair value of the contingent earnout consideration and the acquisition date fair value of goodwill and intangibles related
to the acquisitions discussed in Notes 3, 4 and 5 are based on Level 3 inputs.
Liabilities
for contingent consideration 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 reported under the line item captioned “Change in fair
value of earnout liabilities” in the Company’s Consolidated Statements of Operations. The following table sets forth a summary
of the changes in fair value for the Level 3 contingent earnout consideration.
SCHEDULE
OF CHANGES IN FAIR VALUE FOR CONTINGENT EARNOUT CONSIDERATION
| |
| | |
Balance December 31, 2022 | |
$ | 7,166,691 | |
Additions | |
| - | |
Changes in fair value of earnout liabilities | |
| (452,687 | ) |
Settlements | |
| - | |
Balance March 31, 2023 | |
$ | 6,714,004 |
Income
Taxes
Income
taxes are accounted for under the asset and liability method, whereby deferred income taxes are recorded for temporary differences between
financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities reflect the tax
rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is provided if it
is more likely than not that some or all the deferred tax asset will not be realized.
Stock-based
Compensation
The
Company accounts for stock-based compensation to employees and nonemployees in accordance with Accounting Standards Update (“ASU”)
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, services and technologies development pipeline. The Company expenses R&D
costs as incurred.
Recently
Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). This update
amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses
for most financial assets and certain other instruments that aren’t measured at fair value through net income. We have adopted the
new guidance effective January 1, 2023. The adoption had no impact on our consolidated financial position, results of operations or cash
flows.
Recently
Issued 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 financial condition, results of operations or cash flows.
NOTE
3 – PRECISION HEALING MERGER
In
April 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.
Precision
Healing is developing a diagnostic imager and lateral flow assay 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 $125,966 in cash, which was paid to stockholders who were not accredited investors, 165,738
shares of the Company’s 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. The Company recorded the issuance of the 165,738 shares to accredited investors
and cash payments to nonaccredited investors based on the closing price per share of the Company’s common stock on the Closing
Date, which was $30.75.
On
the Closing Date, the outstanding Precision Healing options previously granted under the Precision Healing Inc. 2020 Stock Option
and Grant Plan (the “Precision Healing Plan”) converted, pursuant to their terms, into options to acquire an aggregate
of 144,191
shares of Company common stock with a weighted average 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 Company 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 the Company’s common stock with an initial exercise price of $12.05
per share and an expiration date of August
10, 2030.
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. 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 $10.0 million, which was accounted for as contingent consideration
pursuant to ASC 805. The earnout consideration is payable in cash or, at the Company’s election, is payable to accredited investors
in shares of Company common stock at a price per share equal to the greater of (i) $27.13 or (ii) the average closing price of Company
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 Company 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.
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 (“ASC 718”). Further, as the contingent
consideration was negotiated as part of the transfer of assets, the obligation was 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 contingent consideration is 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:
SCHEDULE
OF PURCHASE CONSIDERATIONS
Consideration | |
Equity Shares | | |
Dollar Value | |
Fair value of Sanara common shares issued | |
| 165,738 | | |
$ | 5,096,444 | |
Fair value of assumed options | |
| 144,191 | | |
| 4,109,750 | |
Fair value of assumed warrants | |
| 16,725 | | |
| 502,895 | |
Cash paid to nonaccredited investors | |
| | | |
| 125,370 | |
Cash paid for fractional shares | |
| | | |
| 596 | |
Carrying value of equity method investment in Precision Healing | |
| | | |
| 1,803,440 | |
Fair value of contingent earnout consideration | |
| | | |
| 3,882,151 | |
Direct transaction costs | |
| | | |
| 1,061,137 | |
Total purchase consideration | |
| | | |
$ | 16,581,783 | |
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 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 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, and classified as, finite-lived intellectual property
and assembled workforce in the second quarter of 2022. The total purchase consideration was allocated based on the relative estimated
fair value of such assets as follows:
SCHEDULE
OF PURCHASE CONSIDERATION ON FAIR VALUE OF ASSETS ACQUIRED
| |
| | |
Description | |
Amount | |
Cash | |
$ | 32,202 | |
Net working capital (excluding cash) | |
| (308,049 | ) |
Fixed assets, net | |
| 9,228 | |
Noncontrolling interest in Sanara Biologics, LLC | |
| | |
Customer relationships | |
| | |
Deferred tax assets | |
| 278,661 | |
Intellectual property | |
| 20,325,469 | |
Assembled workforce | |
| 664,839 | |
Deferred tax liabilities | |
| (4,420,567 | ) |
Goodwill | |
| | |
Net assets acquired | |
$ | 16,581,783 | |
NOTE
4 – SCENDIA PURCHASE AGREEMENT
In
July 2022, the Company entered into a membership interest purchase agreement by and among the Company, Scendia, a Delaware limited liability
company, and Ryan Phillips (the “Seller”) pursuant to which, and in accordance with the terms and conditions set forth therein,
the Company 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 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 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 the interests in Sanara Biologics, such that the Company now holds 100% of the issued and outstanding equity interests in
Sanara Biologics.
Pursuant
to the purchase agreement, the Seller was entitled to receive closing consideration consisting of (i) approximately $1.6 million of cash,
subject to certain adjustments, and (ii) 291,686 shares of common stock of the Company. Pursuant to the purchase agreement, at closing,
the Company 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 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 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, which was accounted for as
contingent consideration pursuant to ASC 805. The earnout consideration is payable to the Seller in cash or, at the Company’s election,
in up to 486,145 shares of the Company’s 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.
As
the contingent earnout payments are not subject to any specific individual performance by the Seller, the contingent shares are not
subject to ASC 718. Further, as the contingent consideration was negotiated as part of the transfer of assets, the obligation was
measured at fair value and included in the total purchase consideration transferred. Additionally, the contingent earnout payments
meet the criteria under 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 contingent consideration is 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, subject to typical post-closing adjustments, as determined by the Company was as follows:
SCHEDULE
OF PURCHASE CONSIDERATIONS
Consideration | |
Equity Shares | | |
Dollar Value | |
Fair value of Sanara common shares issued | |
| 291,686 | | |
$ | 6,032,066 | |
Cash consideration | |
| | | |
| 1,562,668 | |
Fair value of contingent earnout consideration | |
| | | |
| 3,000,000 | |
Total purchase consideration | |
| | | |
$ | 10,594,734 | |
Based
on guidance provided by ASC 805, the Company recorded the Scendia acquisition as a business combination. The purchase consideration was
allocated to the individual assets according to their fair values as a percentage of the total fair value of the net assets purchased.
The excess of the purchase consideration over the net assets purchased was recorded as goodwill. The total purchase consideration was
allocated as follows:
SCHEDULE
OF PURCHASE CONSIDERATION ON FAIR VALUE OF ASSETS ACQUIRED
| |
| | |
Description | |
Amount | |
Cash | |
$ | 201,406 | |
Net working capital (excluding cash) | |
| 1,294,499 | |
Fixed assets, net | |
| 42,300 | |
Noncontrolling interest in Sanara Biologics, LLC | |
| 2,638 | |
Customer relationships | |
| 7,155,000 | |
Deferred tax liabilities | |
| (1,702,890 | ) |
Goodwill | |
| 3,601,781 | |
Net assets acquired | |
$ | 10,594,734 | |
The
goodwill acquired consists of expected synergies from the acquisition to the Company’s overall corporate strategy. The Company
does not expect any of the goodwill to be deductible for income tax purposes. The Company incurred acquisition costs of approximately
$187,000 in 2022, which is included in “Selling, general and administrative expenses” in the accompanying Consolidated Statements
of Operations. The purchase accounting is preliminary as the assessment of purchase consideration and allocation of fair value is still
subject to post-closing adjustments and the Company is still gathering and evaluating available information to determine if further adjustments
are needed.
NOTE
5 – INTANGIBLE ASSETS
The
carrying values of the Company’s intangible assets were as follows for the periods presented:
SCHEDULE
OF FINITE LIVED INTANGIBLE ASSETS
| |
March 31, 2023 | | |
December 31, 2022 | |
| |
| | |
Accumulated | | |
| | |
| | |
Accumulated | | |
| |
| |
Cost | | |
Amortization | | |
Net | | |
Cost | | |
Amortization | | |
Net | |
Amortizable Intangible Assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Product Licenses | |
$ | 4,793,879 | | |
$ | (1,053,094 | ) | |
$ | 3,740,785 | | |
$ | 4,793,879 | | |
$ | (980,583 | ) | |
$ | 3,813,296 | |
Patents and Other IP | |
| 21,935,580 | | |
| (1,798,818 | ) | |
| 20,136,762 | | |
| 21,935,580 | | |
| (1,492,057 | ) | |
| 20,443,523 | |
Customer relationships and other | |
| 7,947,332 | | |
| (986,100 | ) | |
| 6,961,232 | | |
| 7,947,332 | | |
| (694,171 | ) | |
| 7,253,161 | |
Total | |
$ | 34,676,791 | | |
$ | (3,838,012 | ) | |
$ | 30,838,779 | | |
$ | 34,676,791 | | |
$ | (3,166,811 | ) | |
$ | 31,509,980 | |
As
of March 31, 2023, the weighted-average amortization period for finite-lived intangible assets was 14.3 years. Amortization expense related
to intangible assets was $671,201 and $110,023 for the three months ended March 31, 2023 and 2022, respectively. The estimated remaining
amortization expense as of March 31, 2023 for finite-lived intangible assets is as follows:
SCHEDULE OF FUTURE AMORTIZATION EXPENSE
| |
| | |
Remainder of 2023 | |
$ | 2,085,604 | |
2024 | |
| 2,780,806 | |
2025 | |
| 2,780,806 | |
2026 | |
| 2,763,550 | |
2027 | |
| 2,649,698 | |
2028 | |
| 2,616,456 | |
Thereafter | |
| 15,161,859 | |
Total | |
$ | 30,838,779 | |
The
Company has reviewed the carrying value of intangible assets and has determined there was no impairment during either of the three months
ended March 31, 2023 or 2022.
NOTE
6 – 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 $500,000 long-term investment to purchase certain nonmarketable securities consisting of 7,142,857 Series
B-2 Preferred Shares of Direct Dermatology Inc. (“DirectDerm”), representing approximately 2.9% 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 3,571,430 shares of
DirectDerm’s Series B-2 Preferred for $250,000. In March 2022, the Company purchased an additional 3,571,429 shares of DirectDerm’s
Series B-2 Preferred for $250,000. The Company’s ownership of DirectDerm was approximately 8.1% as of March 31, 2023.
In
November 2020, the Company entered into agreements to purchase certain nonmarketable securities consisting of 150,000 shares of Series
A Convertible Preferred Stock (the “Series A Stock”) of Precision Healing for an aggregate purchase price of $600,000. The
Series A Stock was convertible into 150,000 shares of common stock of Precision Healing and had a senior liquidation preference relative
to the common shareholders. This initial investment represented approximately 12.6% ownership of Precision Healing’s outstanding
voting securities. In February 2021, the Company invested $600,000 to purchase 150,000 additional shares of Series A Stock which was
convertible into 150,000 shares of common stock of Precision Healing. This resulted in ownership of approximately 22.4% of Precision
Healing’s outstanding voting securities. With this level of significant influence, the Company transitioned to the equity method
of accounting for this investment. In June 2021, the Company invested $500,000 for 125,000 additional shares of Series A Stock, which
increased the Company’s ownership of Precision Healing’s outstanding voting securities to approximately 29.0%. In October
and December of 2021, 125,000 and 150,000 more shares of Series A Stock were purchased for $500,000 and $600,000, respectively.
As
discussed above, in April 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 3 for more information). As a result of the merger, the Company’s
equity method investment in Precision Healing ceased in April 2022. The Company has recorded $379,633
in the three months ended March 31, 2022 as its share of the loss from this equity method investment for the period prior to
acquisition.
In
June 2021, the Company invested $2,084,278 to purchase 278,587 Class A Preferred Shares (the “Shares”) of Canada-based Pixalere
Healthcare Inc. (“Pixalere”). The Shares are convertible into approximately 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 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 27.3% equity ownership interest in Pixalere USA valued at
$93,879.
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 does 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 March 31, 2023.
The
following summarizes the Company’s investments for the periods presented:
SCHEDULE
OF INVESTMENTS
| |
March 31, 2023 |
|
|
December 31, 2022 | |
| |
Carrying Amount | | |
Economic Interest | | |
Carrying Amount | | |
Economic Interest | |
Equity Method Investment | |
| | |
| | |
| | |
| |
Precision Healing Inc. | |
$ | - | | |
| - | % | |
$ | - | | |
| - | % |
| |
| | | |
| | | |
| | | |
| | |
Cost Method Investments | |
| | | |
| | | |
| | | |
| | |
Direct Dermatology, Inc. | |
| 1,000,000 | | |
| | | |
| 1,000,000 | | |
| | |
Pixalere Healthcare Inc. | |
| 2,084,278 | | |
| | | |
| 2,084,278 | | |
| | |
Total Cost Method Investments | |
| 3,084,278 | | |
| | | |
| 3,084,278 | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Total Investments | |
$ | 3,084,278 | | |
| | | |
$ | 3,084,278 | | |
| | |
The
following summarizes the loss from the equity method investment reflected in the Consolidated Statements of Operations:
SCHEDULE
OF LOSS FROM EQUITY METHOD INVESTMENT
| |
| | | |
| | |
| |
Three Months ended March 31, | |
| |
2023 | | |
2022 | |
Investment | |
| | |
| |
Precision Healing Inc. | |
$ | - | | |
$ | (379,633 | ) |
| |
| | | |
| | |
Total | |
$ | - | | |
$ | (379,633 | ) |
Loss from equity method
investment | |
$ | - | | |
$ | (379,633 | ) |
NOTE
7 - OPERATING LEASES
The
Company periodically enters 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 three material operating leases for office space. In March 2023, the Company amended its primary office lease to obtain
additional space, as well as extend the term. The leases have remaining lease terms of 93, 46
and 29
months as of March 31, 2023. For practical expediency, the Company has
elected to not recognize ROU assets and lease liabilities related to short-term leases.
In
accordance with ASC Topic 842, Leases, the Company has recorded ROU assets of $2,099,021 and a related lease liability of $2,112,570
as of March 31, 2023. The Company recorded lease expense of $88,419 for the three months ended March 31, 2023 for its leased assets
and $63,407 for the three months ended March 31, 2022. Cash paid for amounts included in the measurement of operating lease liabilities
was $87,691 for the three months ended March 31, 2023 and $63,889 for the three months ended March 31, 2022. The present value of the
Company’s operating lease liabilities as of March 31, 2023 is shown below.
Maturity
of Operating Lease Liabilities
SCHEDULE
OF OPERATING LEASE LIABILITY
| |
| | |
| |
March 31, 2023 | |
Remainder of 2023 | |
$ | 266,473 | |
2024 | |
| 424,753 | |
2025 | |
| 450,551 | |
2026 | |
| 365,911 | |
2027 | |
| 297,947 | |
2028 | |
| 295,689
| |
Thereafter | |
| 604,050 | |
Total lease payments | |
| 2,705,374 | |
Less imputed interest | |
| (592,804 | ) |
Present Value of Lease Liabilities | |
$ | 2,112,570 | |
| |
| | |
Operating lease liabilities – current | |
| 253,381 | |
Operating lease liabilities – long-term | |
| 1,859,189 | |
As
of March 31, 2023, the Company’s operating leases had a weighted average remaining lease term of 6.6 years and a weighted average
discount rate of 7.49%.
NOTE
8 - COMMITMENTS AND CONTINGENCIES
License
Agreements and Royalties
CellerateRX
Activated Collagen
In
August 2018, the Company entered an exclusive, world-wide sublicense agreement with CGI Cellerate RX, LLC (“CGI Cellerate RX”)
to distribute CellerateRX Surgical and HYCOL products into the surgical and wound care markets. Pursuant to the sublicense agreement,
the Company pays royalties of 3-5% of annual collected net sales of CellerateRX Surgical and HYCOL. As amended in January 2021, the term
of the sublicense extends through May 2050, with automatic successive year-to-year renewal terms thereafter so long as the Company’s
Net Sales (as defined in the sublicense agreement) each year are equal to or in excess of $1,000,000. If the Company’s Net Sales
fall below $1,000,000 for any year after the initial expiration date, CGI Cellerate RX will have the right to terminate the sublicense
agreement upon written notice.
Under
this agreement, royalty expense, which is recorded in “Cost of goods sold” in the accompanying Consolidated Statements of
Operations, totaled $520,814 and $369,233, respectively for the three months ended March 31, 2023 and 2022. Sales of CellerateRX comprised the substantial majority of the Company’s sales during the three months ended March 31, 2023 and 2022.
BIAKŌS
Antimicrobial Wound Gel and BIAKŌS Antimicrobial Skin and Wound Cleanser
In
July 2019, the Company executed a license agreement with Rochal Industries, LLC (“Rochal”), a related party, pursuant to
which 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) cleared.
Future
commitments under the terms of the BIAKŌS License Agreement include:
|
● |
The
Company pays Rochal a royalty of 2-4% of net sales. The minimum annual royalty due to Rochal was $120,000 for 2022 and will increase
by $10,000 each subsequent calendar year up to a maximum amount of $150,000. |
|
|
|
|
● |
The
Company pays additional royalty annually based on specific net profit targets from sales of the licensed products, subject to a maximum
of $1,000,000 during any calendar year. |
Unless
previously terminated by the parties, the BIAKŌS License Agreement expires with the related patents in December 2031.
Under
this agreement, royalty expense, which is recorded in “Cost of goods sold” in the accompanying Consolidated Statements of
Operations, was $32,500 and $30,000 for the three months ended March 31, 2023 and 2022, respectively. The Company’s Executive Chairman
is a director of Rochal, and indirectly a significant shareholder of Rochal, and through the potential exercise of warrants, a majority
shareholder of Rochal. Another one of the Company’s directors is also a director and significant shareholder of Rochal.
CuraShield
Antimicrobial Barrier Film and No Sting Skin Protectant
In
October 2019, the Company executed a license agreement with Rochal pursuant to which the Company acquired an exclusive world-wide license
to market, sell and further develop certain antimicrobial barrier film and skin protectant products for use in the human health care
market utilizing certain Rochal patents and pending patent applications (the “ABF License Agreement”). Currently, the products
covered by the ABF License Agreement are CuraShield Antimicrobial Barrier Film and a no sting skin protectant product.
Future
commitments under the terms of the ABF License Agreement include:
|
● |
The
Company will pay Rochal a royalty of 2-4% of net sales. The minimum annual royalty due to Rochal will be $50,000 beginning with the
first full calendar year following the year in which first commercial sales of the products occur. The annual minimum royalty will
increase by 10% each subsequent calendar year up to a maximum amount of $75,000. |
|
|
|
|
● |
The
Company will pay additional royalties annually based on specific net profit targets from sales of the licensed products, subject
to a maximum of $500,000 during any calendar year. |
Unless
previously terminated or extended by the parties, the ABF License Agreement will terminate upon expiration of the last U.S. patent in
October 2033. No commercial sales or royalties had been recognized under this agreement as of March 31, 2023.
Debrider
License Agreement
In
May 2020, the Company executed a product license agreement with Rochal, pursuant to which the Company acquired an exclusive world-wide
license to market, sell and further develop a debrider for human medical use to enhance skin condition or treat or relieve skin disorders,
excluding uses primarily for beauty, cosmetic, or toiletry purposes (the “Debrider License Agreement”).
Future
commitments under the terms of the Debrider License Agreement include:
|
● |
Upon
FDA clearance of the licensed products, the Company will pay Rochal $500,000 in cash and an additional $1,000,000, which at the Company’s
option may be paid in any combination of cash and its common stock. |
|
|
|
|
● |
The
Company will pay Rochal a royalty of 2-4% of net sales. The minimum annual royalty due to Rochal will be $100,000 beginning with
the first full calendar year following the year in which first commercial sales of the licensed products occur and increase by 10%
each subsequent calendar year up to a maximum amount of $150,000. |
|
|
|
|
● |
The
Company will pay additional royalty annually based on specific net profit targets from sales of the licensed products, subject to
a maximum of $1,000,000 during any calendar year. |
Unless
previously terminated or extended by the parties, the Debrider License Agreement will expire in October 2034. No commercial sales or
royalties have been recognized under this agreement as of March 31, 2023.
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 8% of the Company’s net revenues, including royalty
revenues, generated from products that utilize the Company’s acquired patented bone hemostat and delivery system. This patent is
not part of the Company’s long-term strategic focus. The Company subsequently licensed the patent to a third party to market a
bone void filler product for which the Company receives a 2% royalty on product sales through the end of 2023, with annual minimum royalties
of $201,000. To date, royalty revenues received by the Company related to this licensing agreement have not exceeded the annual minimum
of $201,000 ($50,250 per quarter). Therefore, the Company’s annual royalty obligation has been $16,080 ($4,020 per quarter), with
the expense being reported in “Cost of goods sold” in the accompanying Consolidated Statements of Operations.
Rochal
Asset Acquisition
In
July 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. 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 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.
Precision
Healing Merger Agreement
In
April 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 $125,966 in cash consideration, which was paid
to stockholders who were not accredited investors, 165,738 shares of the Company’s 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. The Company recorded the
issuance of the 165,738 shares to accredited investors and cash payments to nonaccredited investors based on the closing price per share
of the Company’s 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 Company common stock with a weighted average 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 Company 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 the Company’s 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, 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 $10.0 million, which was accounted for as contingent consideration
pursuant to ASC 805. The earnout consideration is payable in cash or, at the Company’s election, is payable to accredited investors
in shares of Company common stock at a price per share equal to the greater of (i) $27.13 or (ii) the average closing price of Company
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 Company 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. See Note 3 for more information regarding the merger with Precision Healing.
Scendia
Purchase Agreement
In
July 2022, the Company closed the Scendia acquisition pursuant to which Scendia became a wholly owned subsidiary of the Company. Pursuant
to the purchase agreement, the aggregate consideration for the acquisition at closing was approximately $7.6 million, subject to customary
post-closing adjustments. The consideration consisted of (i) approximately $1.6 million of cash, subject to certain adjustments, and
(ii) 291,686 shares of common stock of the Company. Pursuant to the purchase agreement, at closing, the Company withheld 94,798 Indemnity
Holdback Shares, which such Indemnity Holdback Shares shall be withheld 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 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, which was accounted for as
contingent consideration pursuant to ASC 805. The earnout consideration is payable to the Seller in cash or, at the Company’s election,
in up to 486,145 shares of the Company’s 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. See Note 4 for more information regarding
the acquisition of Scendia.
Other
Commitments
In
May 2019, the Company organized Sanara Pulsar, LLC (“Sanara Pulsar”), a Texas limited liability company, which was 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. Pursuant to the operating agreement of Sanara Pulsar, in the event WCS’s annual Form K-l does
not allocate to WCS net income of at least $200,000 (the “Target Net Income”), the Company is required, within 30 days after
such determination, to 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 was to increase by 10%. In April 2022, the Company paid WCS $220,000 related to the fiscal 2021 Form K-1 and in December 2022,
the Company accrued an additional payment of $242,000 related to the projected fiscal 2022 Form K-1. Sanara Pulsar, which had minimal sales since its inception, was dissolved
effective December 2022, and accordingly, there will be no additional payments made beyond the accrued payment.
NOTE
9 – SHAREHOLDERS’ EQUITY
Common
Stock
At
the Company’s Annual Meeting of Shareholders held in July 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 554,449 shares had been issued under the LTIP Plan and 1,445,551 were available for issuance as of March 31, 2023.
In
April 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 $125,966 in cash consideration, which was paid
to stockholders who were not accredited investors, 165,738 shares of the Company’s 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. The Company recorded the
issuance of the 165,738 shares to accredited investors and cash payments to nonaccredited investors based on the closing price per share
of the Company’s 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 Company common stock with a weighted average 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 Company 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 the Company’s 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, 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 $10.0 million, which was accounted for as contingent consideration
pursuant to ASC 805. The earnout consideration is payable in cash or, at the Company’s election, is payable to accredited investors
in shares of Company common stock at a price per share equal to the greater of (i) $27.13 or (ii) the average closing price of Company
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 Company 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. See Note 3 for more information regarding the merger with Precision Healing.
In
July 2022, the Company closed the Scendia acquisition pursuant to which Scendia became a wholly owned subsidiary of the Company. Pursuant
to the purchase agreement, the aggregate consideration at closing for the acquisition was approximately $7.6 million, subject to customary
post-closing adjustments. The consideration consisted of (i) approximately $1.6 million of cash, subject to certain adjustments, and
(ii) 291,686 shares of common stock of the Company. Pursuant to the purchase agreement, at closing, the Company withheld 94,798 Indemnity
Holdback Shares, which such Indemnity Holdback Shares shall be withheld 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 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, which was accounted for as
contingent consideration pursuant to ASC 805. The earnout consideration is payable to the Seller in cash or, at the Company’s election,
in up to 486,145 shares of the Company’s 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. See Note 4 for more information regarding
the acquisition of Scendia.
In
February 2023, the Company entered into a Controlled Equity Offering SM Sales Agreement (the “Sales Agreement”)
with Cantor Fitzgerald & Co., as sales agent (“Cantor”), pursuant to which the Company may offer and sell from time to
time, to or through Cantor, shares of the Company’s common stock having an aggregate offering price of up to $75,000,000.
Sales
of the shares, if any, pursuant to the Sales Agreement, may be made in sales deemed to be an “at the market offering” as
defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended. Upon delivery of a placement notice and subject to
the terms and conditions of the Sales Agreement, Cantor agreed to use commercially reasonable efforts consistent with its normal trading
and sales practices, applicable state and federal law, rules and regulations and the rules of The Nasdaq Capital Market to sell the shares
from time to time based upon the Company’s instructions, including any price, time period or size limits specified by the Company.
The Company has no obligation to sell any of the shares under the Sales Agreement and may at any time suspend or terminate the offering
of its common stock pursuant to the Sales Agreement upon notice to Cantor and subject to other conditions. Cantor’s obligations
to sell the shares under the Sales Agreement are subject to satisfaction of certain conditions, including customary closing conditions.
Pursuant to the Sales Agreement, the Company will pay Cantor a commission of 3.0% of the aggregate gross proceeds from each sale of the
shares.
During
the three months ended March 31, 2023, the Company sold an aggregate of 26,143 shares of common stock for gross proceeds of approximately
$1,066,000 and net proceeds of approximately $1,034,000, of which approximately $752,000 was received in March 2023 and approximately
$282,000 was received in early April 2023.
Restricted
Stock Awards
During
the three months ended March 31, 2023, 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 74,781
shares, net of forfeitures, of restricted common stock to employees, directors, and certain advisors of the Company under the LTIP
Plan during the three months ended March 31, 2023. The fair value of these awards was $3,125,667
based on the closing price of the Company’s common stock on the respective grant dates, which will be recognized as
compensation expense on a straight-line basis over the vesting period of the awards.
Share-based
compensation expense of $597,305 and $584,935 was recognized in “Selling, general and administrative expenses” in the accompanying
Consolidated Statements of Operations, during the three months ended March 31, 2023 and 2022, respectively.
At
March 31, 2023, there was $4,803,372 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 1.2 years.
Below
is a summary of restricted stock activity for the three months ended March 31, 2023:
SUMMARY
OF RESTRICTED STOCK ACTIVITY
| |
For the Three Months Ended | |
| |
March 31, 2023 | |
| |
| | |
Weighted Average | |
| |
Shares | | |
Grant Date Fair Value | |
Nonvested at beginning of period | |
| 181,102 | | |
$ | 22.89 | |
Granted | |
| 76,518 | | |
| 41.43 | |
Vested | |
| (73,996 | ) | |
| 19.88 | |
Forfeited | |
| (1,737 | ) | |
| 25.61 | |
Nonvested at March 31, 2023 | |
| 181,887 | | |
$ | 31.77 | |
Stock
Options
A
summary of the status of outstanding stock options at March 31, 2023 and changes during the three months then ended is presented below:
SCHEDULE
OF STOCK OPTION ACTIVITY
| |
For the Three Months Ended | |
| |
March 31, 2023 | |
| |
| | |
Weighted Average | | |
Weighted Average | |
| |
| | |
Exercise | | |
Remaining | |
| |
Options | | |
Price | | |
Contract Life | |
Outstanding at beginning of period | |
| 146,191 | | |
$ | 10.65 | | |
| | |
Granted or assumed | |
| - | | |
| - | | |
| | |
Exercised | |
| - | | |
| - | | |
| | |
Forfeited | |
| - | | |
| - | | |
| | |
Expired | |
| - | | |
| - | | |
| | |
Outstanding at March 31, 2023 | |
| 146,191 | | |
$ | 10.65 | | |
| 7.4 | |
| |
| | | |
| | | |
| | |
Exercisable at March 31, 2023 | |
| 146,191 | | |
$ | 10.65 | | |
| 7.4 | |
Warrants
A
summary of the status of outstanding warrants to purchase common stock at March 31, 2023 and changes during the three months then ended
is presented below:
SCHEDULE OF WARRANTS TO PURCHASE COMMON STOCK
| |
For the Three Months Ended | |
| |
March 31, 2023 | |
| |
| | |
Weighted Average | | |
Weighted Average | |
| |
| | |
Exercise | | |
Remaining | |
| |
Warrants | | |
Price | | |
Contract Life | |
Outstanding at beginning of period | |
| 16,725 | | |
$ | 10.80 | | |
| | |
Granted or assumed | |
| - | | |
| - | | |
| | |
Exercised | |
| - | | |
| - | | |
| | |
Forfeited | |
| - | | |
| - | | |
| | |
Expired | |
| - | | |
| - | | |
| | |
Outstanding at March 31, 2023 | |
| 16,725 | | |
$ | 10.80 | | |
| 7.5 | |
| |
| | | |
| | | |
| | |
Exercisable at March 31, 2023 | |
| 16,725 | | |
$ | 10.80 | | |
| 7.5 | |
NOTE
10 - RELATED PARTIES
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 substantial majority of the Company’s sales
during the three months ended March 31, 2023 and 2022. In January 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 $1,000,000. The
Company pays royalties based on the annual Net Sales of licensed products (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. For the three months ended March 31, 2023
and 2022, royalty expense, which is recorded in “Cost of goods sold” in the accompanying Consolidated Statements of
Operations, was $520,814
and $369,233,
respectively under the terms of this agreement.
Ronald
T. Nixon, the Company’s Executive Chairman, is the founder and managing partner of Catalyst.
Product
License Agreements
In
July 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) cleared. 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 significant shareholder and the current Chair of the board of directors
of Rochal.
In
October 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.
In
May 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 8 for more information on these product license agreements.
Consulting
Agreement
Concurrent
with the Rochal asset purchase, in July 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 $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. Ms. Salamone
is a director of the Company and is a significant shareholder and the current Chair of the board of directors of Rochal.
Catalyst
Transaction Advisory Services Agreement
In
March 2023, the Company entered into a Transaction Advisory Services Agreement (the “Services Agreement”) effective March 1, 2023
with Catalyst, a related party. Pursuant to the Services Agreement, Catalyst, by and through its directors, officers, employees and affiliates
that are not simultaneously serving as directors, officers or employees of the Company (collectively, the “Covered Persons”),
agreed to perform certain transaction advisory, business and organizational strategy, finance, marketing, operational and strategic planning,
relationship access and corporate development services for the Company in connection with any merger, acquisition, recapitalization,
divestiture, financing, refinancing, or other similar transaction in which the Company may be, or may consider becoming, involved, and
any such additional services as mutually agreed upon in writing by and between Catalyst and the Company (the “Services”).
Pursuant
to the Services Agreement, the Company agreed to reimburse Catalyst for (i) compensation actually paid by Catalyst to any of the
Covered Persons at a rate no more than a rate consistent with industry practice for the performance of services similar to the
Services, as documented in reasonably sufficient detail, and (ii) all reasonable out-of-pocket costs and expenses payable to
unaffiliated third parties, as documented in customary expense reports, as each of (i) and (ii) is incurred in connection with the
Services rendered under the Services Agreement, with all reimbursements being contingent upon the prior approval of the Audit
Committee of the Company’s Board of Directors. No expenses were incurred pursuant to the Services Agreement in the three months ended March 31, 2023.