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SCENDIA PURCHASE AGREEMENT | 9 Months Ended
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Sep. 30, 2022
Scendia Purchase Agreement |
SCENDIA PURCHASE AGREEMENT | NOTE 5 – 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 $1.3 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, issued, and released to the Seller after closing as and to the extent provided in the purchase agreement to satisfy the Seller’s indemnification obligations, if any. In addition to the cash 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 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 |  |  |  |  |  |  | 1,238,423 |
Fair value of contingent earnout consideration |  |  |  |  |  |  | 3,000,000 |
Total purchase consideration |  |  |  |  |  | $ | 10,270,489 |
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 |  |  | 3,277,536 |
Net assets acquired |  | $ | 10,270,489 |
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 $33,000 and $187,000 for the three and nine months ended September 30, 2022 which is included in “Selling, general and administrative expenses” in the accompanying Unaudited 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. In connection with the Scendia acquisition, the Company recognized an income tax benefit of $1,702,890 in the third quarter of 2022. See Note 12 for more information regarding the income tax benefit. Unaudited Pro Forma Financial Information The unaudited pro forma financial information in the table below summarizes the combined results of operations of the Company and Scendia as though the acquisition had occurred as of January 1, 2021. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of each period presented nor is it indicative of future results. The following pro forma financial information presented includes adjustments for net revenue and cost of goods sold related to transactions between the Company and Scendia that have been eliminated, as well as the pro forma depreciation and amortization charges from acquired tangible and intangible assets for the three and nine months ended September 30, 2021 and 2022. SCHEDULE OF BUSINESS ACQUISITION, PRO FORMA INFORMATION
|  |  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
|  |  | Three Months Ended |  |  | Nine Months Ended |
|  |  | September 30, |  |  | September 30, |
|  |  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
Net Revenue |  |  | $ | 13,044,571 |  |  | $ | 7,452,902 |  |  | $ | 36,454,704 |  |  | $ | 21,826,180 |
Net Loss |  |  | $ | (1,529,252 | ) |  | $ | (2,189,798 | ) |  | $ | (3,193,078 | ) |  | $ | (4,800,211 | )

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