Sanara MedTech(SMTI) - 2023 Q1 - Quarterly Report

Part I – Financial Information This section presents the unaudited consolidated financial statements and management's discussion and analysis Item 1. Financial Statements Presents unaudited consolidated financial statements, including balance sheets, operations, equity changes, cash flows, and detailed explanatory notes Consolidated Balance Sheets Total assets and shareholders' equity slightly decreased from December 2022 to March 2023, mainly due to reduced current assets Consolidated Balance Sheets | Metric | March 31, 2023 ($) | December 31, 2022 ($) | | :----------------------------- | :------------- | :---------------- | | Cash | $7,286,437 | $8,958,995 | | Total Current Assets | $19,007,678 | $20,616,509 | | Total Assets | $59,967,354 | $61,035,386 | | Total Current Liabilities | $10,601,797 | $12,806,309 | | Total Liabilities | $18,488,584 | $19,315,411 | | Total Shareholders' Equity | $41,478,770 | $41,719,975 | Consolidated Statements of Operations Net revenue increased 99% year-over-year, reducing net loss from $3.2 million to $1.2 million despite higher operating expenses Consolidated Statements of Operations | Metric | Three Months Ended March 31, 2023 ($) | Three Months Ended March 31, 2022 ($) | | :------------------------------------- | :-------------------------------- | :-------------------------------- | | Net Revenue | $15,521,917 | $7,811,223 | | Cost of goods sold | $2,125,659 | $805,081 | | Gross profit | $13,396,258 | $7,006,142 | | Total operating expenses | $14,612,581 | $9,783,014 | | Operating loss | $(1,216,323) | $(2,776,872) | | Net loss attributable to Sanara MedTech shareholders | $(1,177,900) | $(3,129,324) | | Net loss per share, basic and diluted | $(0.14) | $(0.41) | Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity slightly decreased due to net loss, partially offset by share-based compensation and equity offering proceeds Consolidated Statements of Changes in Shareholders' Equity | Metric | Balance at December 31, 2022 ($) | Balance at March 31, 2023 ($) | | :-------------------------------- | :--------------------------- | :-------------------------- | | Total Shareholders' Equity | $41,719,975 | $41,478,770 | | Share-based compensation | - | $597,305 | | Net settlement and retirement of equity-based awards | - | $(655,942) | | Issuance of common stock in equity offering | - | $1,033,761 | | Net loss | - | $(1,216,329) | Consolidated Statements of Cash Flows Operating cash outflow decreased year-over-year, while financing activities provided cash, resulting in a net decrease in cash Consolidated Statements of Cash Flows | Metric | Three Months Ended March 31, 2023 ($) | Three Months Ended March 31, 2022 ($) | | :------------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(1,741,313) | $(2,112,478) | | Net cash used in investing activities | $(27,055) | $(294,352) | | Net cash provided by (used in) financing activities | $95,810 | $(102,931) | | Net decrease in cash | $(1,672,558) | $(2,509,761) | | Cash, end of period | $7,286,437 | $16,143,080 | Notes to Unaudited Consolidated Financial Statements Detailed notes explain business, accounting policies, acquisitions, intangible assets, equity investments, leases, commitments, and related party transactions NOTE 1 – Nature of Business and Background This note describes Sanara MedTech Inc.'s business as a medical technology company focused on improving clinical outcomes and reducing healthcare costs - Sanara MedTech Inc. is a medical technology company focused on developing and commercializing transformative technologies to improve clinical outcomes and reduce healthcare expenditures in the surgical, chronic wound, and skincare markets[18] - The company's overall goal is to achieve better clinical outcomes at a lower overall cost for patients across the United States[18] NOTE 2 — Summary of Significant Accounting Policies This note outlines the company's key accounting policies, including revenue recognition, goodwill, intangible assets, and recent accounting standard updates - Revenue is recognized in accordance with ASC Topic 606, when control of promised goods or services is transferred to the customer[25][29] Revenue Streams (Three Months Ended March 31) | Revenue Type | 2023 ($) | 2022 ($) | | :------------- | :----------- | :----------- | | Product sales | $15,471,667 | $7,760,973 | | Royalty revenue | $50,250 | $50,250 | | Total Net Revenue | $15,521,917 | $7,811,223 | - Goodwill, primarily from the Scendia acquisition, has an indefinite useful life and is tested annually for impairment[38] - Intangible assets are amortized on a straight-line basis over their estimated useful lives, generally the life of related patents/licenses, seven years for customer relationships, and five years for assembled workforces[39] - The company adopted ASU 2016-13 (Credit Losses) effective January 1, 2023, with no material impact on its financial statements[55] NOTE 3 – Precision Healing Merger This note details the April 2022 acquisition of Precision Healing, including merger consideration, contingent earnouts, and accounting treatment - In April 2022, Sanara MedTech acquired Precision Healing, which is developing a diagnostic imager and lateral flow assay for wound and skin conditions[57][58] - The merger consideration included $125,966 in cash, 165,738 shares of common stock, and the assumption of 144,191 stock options and 16,725 warrants[59][60] - Securityholders are entitled to receive up to $10.0 million in contingent earnout payments based on performance thresholds, payable in cash or stock[62] - The merger was accounted for as an asset acquisition, with the purchase consideration primarily allocated to finite-lived intellectual property and assembled workforce[64][65] NOTE 4 – Scendia Purchase Agreement This note describes the July 2022 acquisition of Scendia Biologics, including consideration, earnout payments, and resulting goodwill - In July 2022, the Company acquired 100% of Scendia Biologics, LLC, gaining a full line of regenerative and orthobiologic technologies and full ownership of Sanara Biologics, LLC[66][67] - The closing consideration included approximately $1.6 million in cash and 291,686 shares of common stock, with 94,798 shares withheld as Indemnity Holdback Shares[68] - The seller is entitled to two potential earnout payments, not exceeding $10.0 million in aggregate, based on net revenue targets, payable in cash or stock[69] - The acquisition was recorded as a business combination, resulting in $3,601,781 in goodwill[71] NOTE 5 – Intangible Assets This note provides details on the company's amortizable intangible assets, including product licenses, patents, customer relationships, and amortization expense Amortizable Intangible Assets (Net) | Asset Type | March 31, 2023 ($) | December 31, 2022 ($) | | :-------------------------- | :------------- | :---------------- | | Product Licenses | $3,740,785 | $3,813,296 | | Patents and Other IP | $20,136,762 | $20,443,523 | | Customer relationships and other | $6,961,232 | $7,253,161 | | Total | $30,838,779 | $31,509,980 | Amortization Expense (Three Months Ended March 31) | Metric | 2023 ($) | 2022 ($) | | :--------------- | :------- | :------- | | Amortization Expense | $671,201 | $110,023 | - The weighted-average amortization period for finite-lived intangible assets was 14.3 years as of March 31, 2023[73] NOTE 6 – Investments in Equity Securities This note outlines the company's nonmarketable equity investments and the cessation of its equity method investment in Precision Healing Inc - The company holds nonmarketable equity securities in Direct Dermatology Inc. ($1,000,000 carrying amount) and Pixalere Healthcare Inc. ($2,084,278 carrying amount), accounted for at cost[75][78][80] - The equity method investment in Precision Healing Inc. ceased in April 2022 due to the merger, with a $379,633 loss recorded in Q1 2022[77][80] NOTE 7 - Operating Leases This note details the company's operating lease liabilities, right-of-use assets, and key lease terms, including a recent office lease amendment Operating Lease Liabilities | Metric | March 31, 2023 ($) | | :-------------------------------- | :------------- | | Right of Use Assets | $2,099,021 | | Present Value of Lease Liabilities | $2,112,570 | | Operating lease liabilities – current | $253,381 | | Operating lease liabilities – long-term | $1,859,189 | - The company amended its primary office lease in March 2023 to obtain additional space and extend the term[82] - As of March 31, 2023, the weighted average remaining lease term was 6.6 years with a weighted average discount rate of 7.49%[84] NOTE 8 - Commitments and Contingencies This note describes the company's royalty obligations, license agreements, contingent earnout payments, and the dissolution of Sanara Pulsar, LLC - The company pays royalties for CellerateRX Surgical and HYCOL products (3-5% of net sales), with royalty expense of $520,814 in Q1 2023[85][86] - License agreements with Rochal for BIAKŌS, CuraShield, and a debrider product involve royalties (2-4% of net sales) and minimum annual royalty commitments[88][91][92] - Contingent earnout payments of up to $10.0 million each are associated with the Precision Healing merger and Scendia acquisition[99][101] - Sanara Pulsar, LLC was dissolved in December 2022, with an accrued payment of $242,000 related to fiscal 2022[102] NOTE 9 – Shareholders' Equity This note details common stock outstanding, LTIP plan shares, equity offering proceeds, and share-based compensation expense Common Stock Outstanding | Date | Shares Outstanding | | :----------- | :----------------- | | March 31, 2023 | 8,385,027 | | December 31, 2022 | 8,299,957 | - The company has an LTIP Plan with 1,445,551 shares available for issuance as of March 31, 2023[103] - In Q1 2023, the company sold 26,143 shares of common stock through a Controlled Equity Offering for approximately $1.0 million in net proceeds[112] - Share-based compensation expense was $597,305 for the three months ended March 31, 2023, with $4,803,372 of total unrecognized expense remaining[114] NOTE 10 - Related Parties This note outlines significant transactions and agreements with related parties, including sublicense, license, and consulting agreements - The company has an exclusive sublicense with CGI Cellerate RX (an affiliate of Catalyst, where the Executive Chairman is a managing partner) for CellerateRX products, which comprise the substantial majority of sales[118][119] - Multiple license agreements exist with Rochal Industries, LLC (where the Executive Chairman and another director are significant shareholders/directors) for antimicrobial and debrider products[120][121][122] - A consulting agreement with Ann Beal Salamone (a director) provides for an annual fee of $177,697[123] Related Party Balances | Metric | March 31, 2023 ($) | December 31, 2022 ($) | | :-------------------------- | :------------- | :---------------- | | Related Party Receivables | $23,946 | $98,548 | | Related Party Payables | $23,289 | $34,036 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, liquidity, and capital resources for Q1 2023, emphasizing revenue growth, acquisitions, and future outlook Cautionary Statement Regarding Forward-Looking Statements This section warns that the report contains forward-looking statements subject to various risks and uncertainties, including revenue and strategy execution - The report contains forward-looking statements subject to various risks and uncertainties, including shortfalls in revenue growth, ability to implement strategy, capital requirements, competition, market acceptance, and intellectual property protection[128] Overview This section provides an overview of Sanara MedTech's business, its focus on medical technology, and recent strategic acquisitions and partnerships - Sanara MedTech is a medical technology company focused on developing and commercializing transformative technologies in surgical, chronic wound, and skincare markets[131] - The company expanded through the acquisition of Precision Healing (diagnostic imager, LFA) in April 2022 and Scendia (regenerative/orthobiologic technologies) in July 2022[134][135] - A partnership with InfuSystem Holdings, Inc. was established in November 2022 to deliver complete wound care solutions[136] Comprehensive Value-Based Care Strategy This section outlines the company's strategy to offer comprehensive wound and skincare solutions through diagnostics, virtual consults, products, and EMR - The company's strategy, through its subsidiary WounDerm, aims to offer a comprehensive wound and skincare solution to value-based care providers[137] - The solution consists of four key components: diagnostics (Precision Healing imager/LFA), virtual consult services (Direct Dermatology affiliation), proprietary products (six focus areas), and a specialized EMR/mobile application[138][139][141][142] Recent Acquisitions This section summarizes the Precision Healing merger and Scendia acquisition, detailing the consideration and contingent earnout payments for each - The Precision Healing merger (April 2022) involved cash, common stock, assumed options/warrants, and up to $10.0 million in contingent earnout payments[144][145] - The Scendia acquisition (July 2022) involved $1.6 million cash, 291,686 shares of common stock, and up to $10.0 million in contingent earnout payments[146][147][148] Recent Developments This section highlights the dissolution of Sanara Pulsar, LLC in December 2022 due to limited product adoption, resulting in a noncash loss - Sanara Pulsar, LLC was dissolved effective December 2022 due to limited adoption of its wound debridement products, resulting in a $1.0 million noncash loss on disposal of investment in Q4 2022[151] Components of Results of Operations This section breaks down the key components of the company's results of operations, including revenue sources, cost of goods sold, and operating expenses - Revenue is primarily derived from sales of surgical products, with a substantial majority from CellerateRX surgical powder, and royalty revenue from a development and licensing agreement[152][154] - Cost of goods sold includes acquisition costs, raw materials, and royalties[155] - Operating expenses comprise Selling, General and Administrative (SG&A), Research and Development (R&D), Depreciation and Amortization, and Change in fair value of earnout liabilities[156][157][158] Results of Operations This section analyzes the company's financial performance for the three months ended March 31, 2023, detailing revenue, expenses, and net loss Key Financial Results (Three Months Ended March 31) | Metric | 2023 | 2022 | Change (YoY) | | :------------------------------------- | :----------- | :----------- | :----------- | | Net Revenues | $15.5 million | $7.8 million | 99% increase | | Scendia Sales Contribution | $3.0 million | - | - | | Cost of goods sold | $2.1 million | $0.8 million | 162.5% increase | | Gross Margins | 86% | 90% | -4 percentage points | | SG&A expenses | $13.0 million | $9.4 million | 38.3% increase | | R&D expenses | $1.3 million | $0.2 million | 550% increase | | Depreciation and amortization expense | $0.8 million | $0.2 million | 300% increase | | Change in fair value of earnout liabilities | $0.5 million benefit | $0 | - | | Net loss | $1.2 million | $3.2 million | 62.5% decrease | - Supply issues with the ALLOCYTE product line negatively impacted sales in Q4 2022 and Q1 2023, with resolution anticipated in the second half of 2023[161] - Higher SG&A expenses were primarily due to increased sales commissions ($2.9 million) and sales force expansion ($0.5 million)[163] - Increased R&D expenses were mainly due to costs related to the Precision Healing diagnostic imager and LFA development[164] Liquidity and Capital Resources This section discusses the company's cash position, equity offering, and ability to fund operations and growth for the next twelve months Cash on Hand | Date | Amount ($ millions) | | :----------- | :----------- | | March 31, 2023 | $7.3 million | | December 31, 2022 | $9.0 million | - The company entered into a Controlled Equity Offering Sales Agreement for up to $75.0 million, selling 26,143 shares for $1.0 million net proceeds in Q1 2023[168][170] - Expected cash on hand and cash flows from operations are believed to be sufficient to fund growth and operating expenses for at least the next twelve months[171] - The first potential earnout payment for the Scendia acquisition is anticipated in October 2023, while the Precision Healing earnout is not expected before January 2025[175][178] Cash Flow Analysis This section analyzes net cash flows from operating, investing, and financing activities for the three months ended March 31, 2023 and 2022 Net Cash Flow Activities (Three Months Ended March 31) | Activity | 2023 ($ millions) | 2022 ($ millions) | | :------------------------------------- | :------------- | :------------- | | Net cash used in operating activities | $(1.7) million | $(2.1) million | | Net cash used in investing activities | $(27,055) | $(294,352) | | Net cash provided by (used in) financing activities | $0.1 million | $(0.1) million | - The lower use of cash in investing activities in 2023 was primarily due to no cash investments in equity securities[180] - Cash provided by financing activities in 2023 was due to net proceeds from common stock sales, partially offset by equity-based award settlements[181] Material Transactions with Related Parties This section details significant transactions with related parties, including sublicense agreements, consulting fees, and advisory services - The company has an exclusive sublicense with CGI Cellerate RX (an affiliate of Catalyst, where the Executive Chairman is a managing partner) for CellerateRX products, with royalty expense of $520,814 in Q1 2023[182][183] - A consulting agreement with Ann Beal Salamone (a director) provides for an annual fee of $177,697[184] - A Transaction Advisory Services Agreement with Catalyst was entered in March 2023; no expenses were incurred in Q1 2023[185][186] Impact of Inflation and Changing Prices This section assesses the historical and anticipated impact of inflation and changing prices on the company's financial results - Inflation and changing prices have not had a material impact on historical results and are not anticipated to have a material impact on future results[188] Critical Accounting Estimates This section identifies the company's critical accounting estimates, including revenue accruals, fair value measurements, and purchase price allocations - Significant accounting estimates include revenue and expense accruals, fair value measurement of assets and liabilities, and allocation of purchase price to acquired assets[189] - No significant changes to critical accounting policies have occurred since December 31, 2022[189] Item 3. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, Sanara MedTech Inc. is exempt from providing market risk disclosures - The company is not required to provide quantitative and qualitative disclosures about market risk as it is a smaller reporting company[190] Item 4. Controls and Procedures Management evaluated disclosure controls and procedures as effective, with no material changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures as evaluated on March 31, 2023 - The company's disclosure controls and procedures were evaluated and deemed effective as of March 31, 2023[191] Changes in Internal Control over Financial Reporting This section states that no material changes occurred in internal control over financial reporting during the quarter ended March 31, 2023 - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2023[192] Part II – Other Information This section provides other required information, including legal proceedings, risk factors, equity sales, defaults, and exhibits Item 1. Legal Proceedings The company is not aware of any material pending legal proceedings - To the company's knowledge, there are no material pending legal proceedings[195] Item 1A. Risk Factors No material changes to the Risk Factors previously disclosed in the Annual Report on Form 10-K for 2022 - No material changes to the Risk Factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022[196] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities occurred during Q1 2023 that were not previously reported - There were no sales of unregistered securities during the quarter ended March 31, 2023, that were not previously reported on a Current Report on Form 8-K[197] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities - No defaults upon senior securities[198] Item 4. Mine Safety Disclosures This item is not applicable to the company - This item is not applicable to the company[199] Item 5. Other Information No other information to report under this item - No other information to report[200] Item 6. Exhibits This section lists all exhibits filed or incorporated by reference, including agreements, organizational documents, and certifications - Exhibits include the Controlled Equity Offering Sales Agreement, Asset Purchase Agreement, Merger Agreement, Membership Interest Purchase Agreement, organizational documents, and various certifications[203] Signatures The report is signed by Michael D. McNeil, Chief Financial Officer of Sanara MedTech Inc., on May 15, 2023 - The report was signed by Michael D. McNeil, Chief Financial Officer of Sanara MedTech Inc., on May 15, 2023[209]