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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023

or

☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number 001-39678

SANARA MEDTECH INC.

(Exact name of Registrant as specified in its charter)

Texas |  | 59-2219994
(State or other jurisdiction of |  | (I.R.S. Employer
incorporation or organization) |  | Identification No.)

1200 Summit Ave, Suite 414, Fort Worth, Texas 76102

(Address of principal executive offices)

(817) 529-2300

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class |  | Trading Symbol(s) |  | Name of each exchange on which registered
Common Stock, $0.001 par value |  | SMTI |  | The Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒Yes☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer | Accelerated filer | Non-accelerated filer | Smaller reporting company | Emerging growth company
☐ | ☐ | ☒ | ☒ | ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 14, 2023, 8,521,872 shares of the Issuer’s common stock, $0.001 par value per share, were outstanding.

SANARA MEDTECH INC.

Form 10-Q

Quarter Ended June 30, 2023

|  | Page
Part I – Financial Information |  | 3
Item 1. Financial Statements |  | 3
Consolidated Balance Sheets as of June 30, 2023 (Unaudited) and December 31, 2022 |  | 3
Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2023 and 2022 |  | 4
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) for the Three and Six Months Ended June 30, 2023 and 2022 |  | 5
Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2023 and 2022 |  | 6
Notes to Unaudited Consolidated Financial Statements |  | 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |  | 26
Item 3. Quantitative and Qualitative Disclosures about Market Risk |  | 35
Item 4. Controls and Procedures |  | 35
Part II – Other Information |  | 36
Item 1. Legal Proceedings |  | 36
Item 1A. Risk Factors |  | 36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |  | 37
Item 3. Defaults Upon Senior Securities |  | 37
Item 4. Mine Safety Disclosures |  | 37
Item 5. Other Information |  | 37
Item 6. Exhibits |  | 38
Signatures |  | 39

Sanara, Sanara MedTech, our logo and our other trademarks or service marks appearing in this report are the property of Sanara MedTech Inc. Trade names, trademarks and service marks of other companies appearing in this report are the property of their respective owners. Solely for convenience, the trademarks, service marks and trade names included in this report are without the ®, ™ or other applicable symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks and trade names.

Unless otherwise indicated, “Sanara MedTech,” “Sanara,” “the Company,” “our,” “us,” or “we,” refer to Sanara MedTech Inc. and its consolidated subsidiaries.

2

Part I – Financial Information

ITEM 1. FINANCIAL STATEMENTS

SANARA MEDTECH INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|  | 2023 |  |  | 2022 |
|  | (Unaudited) |  |  |  |
|  | June 30, |  |  | December 31, |
|  | 2023 |  |  | 2022 |
Assets |  |  |  |  |  |
Current assets |  |  |  |  |  |  |  |
Cash |  | $ | 6,060,228 |  |  | $ | 8,958,995 |
Accounts receivable, net |  |  | 7,141,105 |  |  |  | 6,805,761 |
Accounts receivable – related party |  |  | 20,662 |  |  |  | 98,548 |
Accounts receivable |  |  |  |  |  |  |  |
Royalty receivable |  |  | 49,344 |  |  |  | 99,594 |
Inventory, net |  |  | 4,420,864 |  |  |  | 3,549,000 |
Prepaid and other assets |  |  | 485,734 |  |  |  | 1,104,611 |
Total current assets |  |  | 18,177,937 |  |  |  | 20,616,509 |
Long-term assets |  |  |  |  |  |  |  |
Property and equipment, net |  |  | 1,240,269 |  |  |  | 1,416,436 |
Right of use assets – operating leases |  |  | 2,030,938 |  |  |  | 806,402 |
Goodwill |  |  | 3,601,781 |  |  |  | 3,601,781 |
Intangible assets, net |  |  | 30,143,578 |  |  |  | 31,509,980 |
Investment in equity securities |  |  | 3,084,278 |  |  |  | 3,084,278 |
Total long-term assets |  |  | 40,100,844 |  |  |  | 40,418,877 |
Total assets |  | $ | 58,278,781 |  |  | $ | 61,035,386 |
Liabilities and shareholders’ equity |  |  |  |  |  |  |  |
Current liabilities |  |  |  |  |  |  |  |
Accounts payable |  | $ | 1,016,180 |  |  | $ | 1,392,701 |
Accounts payable – related parties |  |  | 96,656 |  |  |  | 34,036 |
Accounts payable |  |  |  |  |  |  |  |
Accrued royalties and expenses |  |  | 1,895,706 |  |  |  | 2,144,475 |
Accrued bonuses and commissions |  |  | 5,899,255 |  |  |  | 7,758,284 |
Earnout liabilities – current |  |  | 700,000 |  |  |  | 1,162,880 |
Operating lease liabilities – current |  |  | 273,539 |  |  |  | 313,933 |
Total current liabilities |  |  | 9,881,336 |  |  |  | 12,806,309 |
Long-term liabilities |  |  |  |  |  |  |  |
Earnout liabilities – long-term |  |  | 5,653,534 |  |  |  | 6,003,811 |
Operating lease liabilities – long-term |  |  | 1,779,413 |  |  |  | 505,291 |
Total long-term liabilities |  |  | 7,432,947 |  |  |  | 6,509,102 |
Total liabilities |  |  | 17,314,283 |  |  |  | 19,315,411 |
Commitments and contingencies (Note 8) |  |  | - |  |  |  | - |
Shareholders’ equity |  |  |  |  |  |  |  |
Common Stock: $0.001 par value, 20,000,000 shares authorized; 8,439,745 issued and outstanding as of June 30, 2023 and 8,299,957 issued and outstanding as of December 31, 2022 |  |  | 8,440 |  |  |  | 8,300 |
Additional paid-in capital |  |  | 67,881,419 |  |  |  | 65,213,987 |
Accumulated deficit |  |  | (26,740,930 | ) |  |  | (23,394,757 | )
Total Sanara MedTech shareholders’ equity |  |  | 41,148,929 |  |  |  | 41,827,530 |
Equity attributable to noncontrolling interest |  |  | (184,431 | ) |  |  | (107,555 | )
Total shareholders’ equity |  |  | 40,964,498 |  |  |  | 41,719,975 |
Total liabilities and shareholders’ equity |  | $ | 58,278,781 |  |  | $ | 61,035,386 |

The accompanying notes are an integral part of these unaudited consolidated financial statements.

3

SANARA MEDTECH INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

|  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
|  | Three Months Ended |  |  | Six Months Ended |
|  | June 30, |  |  | June 30, |
|  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Net Revenue |  | $ | 15,753,164 |  |  | $ | 9,670,778 |  |  | $ | 31,275,081 |  |  | $ | 17,482,001 |
Cost of goods sold |  |  | 2,187,516 |  |  |  | 958,086 |  |  |  | 4,313,175 |  |  |  | 1,763,167 |
Gross profit |  |  | 13,565,648 |  |  |  | 8,712,692 |  |  |  | 26,961,906 |  |  |  | 15,718,834 |
Operating expenses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Selling, general and administrative expenses |  |  | 13,811,476 |  |  |  | 10,428,133 |  |  |  | 26,780,545 |  |  |  | 19,803,763 |
Research and development |  |  | 1,177,128 |  |  |  | 1,067,000 |  |  |  | 2,494,452 |  |  |  | 1,271,637 |
Depreciation and amortization |  |  | 803,694 |  |  |  | 539,124 |  |  |  | 1,582,569 |  |  |  | 741,871 |
Change in fair value of earnout liabilities |  |  | (360,470 | ) |  |  | 63,427 |  |  |  | (813,157 | ) |  |  | 63,427 |
Total operating expenses |  |  | 15,431,828 |  |  |  | 12,097,684 |  |  |  | 30,044,409 |  |  |  | 21,880,698 |
Operating loss |  |  | (1,866,180 | ) |  |  | (3,384,992 | ) |  |  | (3,082,503 | ) |  |  | (6,161,864 | )
Other expense |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest expense and other |  |  | - |  |  |  | - |  |  |  | (6 | ) |  |  | - |
Share of losses from equity method investment |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (379,633 | )
Total other expense |  |  | - |  |  |  | - |  |  |  | (6 | ) |  |  | (379,633 | )
Loss before income taxes |  |  | (1,866,180 | ) |  |  | (3,384,992 | ) |  |  | (3,082,509 | ) |  |  | (6,541,497 | )
Income tax benefit |  |  | - |  |  |  | 4,141,906 |  |  |  | - |  |  |  | 4,141,906 |
Net income (loss) |  |  | (1,866,180 | ) |  |  | 756,914 |  |  |  | (3,082,509 | ) |  |  | (2,399,591 | )
Less: Net loss attributable to noncontrolling interest |  |  | (38,447 | ) |  |  | (12,512 | ) |  |  | (76,876 | ) |  |  | (39,693 | )
Net income (loss) attributable to Sanara MedTech shareholders |  | $ | (1,827,733 | ) |  | $ | 769,426 |  |  | $ | (3,005,633 | ) |  | $ | (2,359,898 | )
Net income (loss) per share: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | (0.22 | ) |  | $ | 0.10 |  |  | $ | (0.37 | ) |  | $ | (0.31 | )
Diluted |  | $ | (0.22 | ) |  | $ | 0.09 |  |  | $ | (0.37 | ) |  | $ | (0.31 | )
Weighted average common shares outstanding: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  | 8,226,271 |  |  |  | 7,791,431 |  |  |  | 8,200,173 |  |  |  | 7,699,422 |
Diluted |  |  | 8,226,271 |  |  |  | 8,162,983 |  |  |  | 8,200,173 |  |  |  | 7,699,422 |

The accompanying notes are an integral part of these unaudited consolidated financial statements.

4

SANARA MEDTECH INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

|  | Shares |  |  | Amount |  |  | Capital |  |  | Deficit |  |  | Interest |  |  | Equity |
|  | Common Stock |  |  | Additional |  |  |  |  |  |  |  |  | Total |
|  | $0.001 par value |  |  | Paid-In |  |  | Accumulated |  |  | Noncontrolling |  |  | Shareholders’ |
|  | Shares |  |  | Amount |  |  | Capital |  |  | Deficit |  |  | Interest |  |  | Equity |
Balance at December 31, 2021 |  |  | 7,676,662 |  |  | $ | 7,677 |  |  | $ | 45,867,768 |  |  | $ | (15,235,044 | ) |  | $ | (488,397 | ) |  | $ | 30,152,004 |
Share-based compensation |  |  | 137,076 |  |  |  | 136 |  |  |  | 1,622,982 |  |  |  | - |  |  |  | - |  |  |  | 1,623,118 |
Net settlement and retirement of equity-based awards |  |  | (3,343 | ) |  |  | (3 | ) |  |  | (52,284 | ) |  |  | (50,644 | ) |  |  | - |  |  |  | (102,931 | )
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (3,129,324 | ) |  |  | (27,181 | ) |  |  | (3,156,505 | )
Balance at March 31, 2022 |  |  | 7,810,395 |  |  | $ | 7,810 |  |  | $ | 47,438,466 |  |  | $ | (18,415,012 | ) |  | $ | (515,578 | ) |  | $ | 28,515,686 |
Share-based compensation |  |  | 39,268 |  |  |  | 39 |  |  |  | 703,361 |  |  |  | - |  |  |  | - |  |  |  | 703,400 |
Issuance of common stock for asset acquisitions |  |  | 165,738 |  |  |  | 166 |  |  |  | 5,096,278 |  |  |  | - |  |  |  | - |  |  |  | 5,096,444 |
Issuance of common stock options and warrants for acquisitions |  |  | - |  |  |  | - |  |  |  | 4,612,645 |  |  |  | - |  |  |  | - |  |  |  | 4,612,645 |
Distribution to noncontrolling interest member |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (220,000 | ) |  |  | (220,000 | )
Net income |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 769,426 |  |  |  | (12,512 | ) |  |  | 756,914 |
Balance at June 30, 2022 |  |  | 8,015,401 |  |  | $ | 8,015 |  |  | $ | 57,850,750 |  |  | $ | (17,645,586 | ) |  | $ | (748,090 | ) |  | $ | 39,465,089 |

|  | Common Stock |  |  | Additional |  |  |  |  |  |  |  |  | Total |
|  | $0.001 par value |  |  | Paid-In |  |  | Accumulated |  |  | Noncontrolling |  |  | Shareholders’ |
|  | Shares |  |  | Amount |  |  | Capital |  |  | Deficit |  |  | Interest |  |  | Equity |
Balance at December 31, 2022 |  |  | 8,299,957 |  |  | $ | 8,300 |  |  | $ | 65,213,987 |  |  | $ | (23,394,757 | ) |  | $ | (107,555 | ) |  | $ | 41,719,975 |
Share-based compensation |  |  | 74,781 |  |  |  | 75 |  |  |  | 597,230 |  |  |  | - |  |  |  | - |  |  |  | 597,305 |
Net settlement and retirement of equity-based awards |  |  | (15,854 | ) |  |  | (16 | ) |  |  | (315,572 | ) |  |  | (340,354 | ) |  |  | - |  |  |  | (655,942 | )
Issuance of common stock in equity offering |  |  | 26,143 |  |  |  | 26 |  |  |  | 1,033,735 |  |  |  | - |  |  |  | - |  |  |  | 1,033,761 |
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1,177,900 | ) |  |  | (38,429 | ) |  |  | (1,216,329 | )
Balance at March 31, 2023 |  |  | 8,385,027 |  |  | $ | 8,385 |  |  | $ | 66,529,380 |  |  | $ | (24,913,011 | ) |  | $ | (145,984 | ) |  | $ | 41,478,770 |
Balance |  |  | 8,385,027 |  |  | $ | 8,385 |  |  | $ | 66,529,380 |  |  | $ | (24,913,011 | ) |  | $ | (145,984 | ) |  | $ | 41,478,770 |
Share-based compensation |  |  | 33,355 |  |  |  | 33 |  |  |  | 1,127,299 |  |  |  | - |  |  |  | - |  |  |  | 1,127,332 |
Net settlement and retirement of equity-based awards |  |  | 21,363 |  |  |  | 22 |  |  |  | 224,740 |  |  |  | (186 | ) |  |  | - |  |  |  | 224,576 |
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1,827,733 | ) |  |  | (38,447 | ) |  |  | (1,866,180 | )
Net income (loss) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1,827,733 | ) |  |  | (38,447 | ) |  |  | (1,866,180 | )
Balance at June 30, 2023 |  |  | 8,439,745 |  |  | $ | 8,440 |  |  | $ | 67,881,419 |  |  | $ | (26,740,930 | ) |  | $ | (184,431 | ) |  | $ | 40,964,498 |
Balance |  |  | 8,439,745 |  |  | $ | 8,440 |  |  | $ | 67,881,419 |  |  | $ | (26,740,930 | ) |  | $ | (184,431 | ) |  | $ | 40,964,498 |

The accompanying notes are an integral part of these unaudited consolidated financial statements.

5

SANARA MEDTECH INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

|  | 2023 |  |  | 2022 |
|  | Six Months Ended |
|  | June 30, |
|  | 2023 |  |  | 2022 |
Cash flows from operating activities: |  |  |  |  |  |  |  |
Net loss |  | $ | (3,082,509 | ) |  | $ | (2,399,591 | )
Adjustments to reconcile net loss to net cash used in operating activities: |  |  |  |  |  |  |  |
Depreciation and amortization |  |  | 1,582,569 |  |  |  | 741,871 |
Loss on disposal of property and equipment |  |  | - |  |  |  | 2,500 |
Bad debt expense |  |  | 86,000 |  |  |  | 195,000 |
Inventory obsolescence |  |  | 69,990 |  |  |  | 159,717 |
Share-based compensation |  |  | 1,724,637 |  |  |  | 1,288,335 |
Noncash lease expense |  |  | 144,628 |  |  |  | 116,143 |
Loss on equity method investment |  |  | - |  |  |  | 379,633 |
Benefit from deferred income taxes |  |  | - |  |  |  | (4,141,906 | )
Change in fair value of earnout liabilities |  |  | (813,157 | ) |  |  | 63,427 |
Changes in operating assets and liabilities: |  |  |  |  |  |  |  |
Accounts receivable, net |  |  | (371,094 | ) |  |  | (1,170,829 | )
Accounts receivable – related party |  |  | 77,886 |  |  |  | (130,797 | )
Inventory, net |  |  | (941,854 | ) |  |  | (423,764 | )
Prepaid and other assets |  |  | 618,877 |  |  |  | 177,861 |
Accounts payable |  |  | (376,521 | ) |  |  | 294,772 |
Accounts payable – related parties |  |  | 62,620 |  |  |  | 589,675 |
Accrued royalties and expenses |  |  | (248,769 | ) |  |  | 761,377 |
Accrued bonuses and commissions |  |  | (1,859,029 | ) |  |  | 346,887 |
Operating lease liabilities |  |  | (135,436 | ) |  |  | (117,106 | )
Net cash used in operating activities |  |  | (3,461,162 | ) |  |  | (3,266,795 | )
Cash flows from investing activities: |  |  |  |  |  |  |  |
Purchases of property and equipment |  |  | (40,650 | ) |  |  | (80,892 | )
Proceeds from disposal of assets |  |  | 650 |  |  |  | 345 |
Purchases of intangible assets |  |  | - |  |  |  | (2,053,722 | )
Investment in equity securities |  |  | - |  |  |  | (250,000 | )
Net cash used in investing activities |  |  | (40,000 | ) |  |  | (2,384,269 | )
Cash flows from financing activities: |  |  |  |  |  |  |  |
Equity offering net proceeds |  |  | 1,033,761 |  |  |  | - |
Net settlement of equity-based awards |  |  | (431,366 | ) |  |  | (102,931 | )
Distribution to noncontrolling interest member |  |  | - |  |  |  | (220,000 | )
Net cash provided by (used in) financing activities |  |  | 602,395 |  |  |  | (322,931 | )
Net decrease in cash |  |  | (2,898,767 | ) |  |  | (5,973,995 | )
Cash, beginning of period |  |  | 8,958,995 |  |  |  | 18,652,841 |
Cash, end of period |  | $ | 6,060,228 |  |  | $ | 12,678,846 |
Cash paid during the period for: |  |  |  |  |  |  |  |
Interest |  | $ | 6 |  |  | $ | - |
Supplemental noncash investing and financing activities: |  |  |  |  |  |  |  |
Right of use assets obtained in exchange for lease obligations |  |  | 1,369,164 |  |  |  | - |
Equity issued for acquisitions |  |  | - |  |  |  | 9,709,089 |
Earnout liabilities generated by acquisitions |  |  | - |  |  |  | 3,882,151 |
Investment in equity securities converted in asset acquisition |  |  | - |  |  |  | 1,803,440 |

The accompanying notes are an integral part of these unaudited consolidated financial statements.

6

SANARA MEDTECH INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – NATURE OF BUSINESS AND BACKGROUND

Sanara MedTech Inc. (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. Certain prior year amounts have been reclassified to conform to the current year presentation.

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 interim periods are not necessarily indicative of the results that may be expected for the full year 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.

7

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 six months ended June 30, 2023 and 2022, as such shares would have had an anti-dilutive effect:

SCHEDULE OF COMPUTATION OF DILUTED NET LOSS PER SHARE

|  | 2023 |  |  | 2022 |
|  | As of June 30, |
|  | 2023 |  |  | 2022 |
Stock options (a) |  |  | 124,191 |  |  |  | 155,691 |
Warrants (b) |  |  | 16,725 |  |  |  | 16,725 |
Unvested restricted stock |  |  | 164,755 |  |  |  | 199,136 |
Anti-dilutive securities |  |  | 164,755 |  |  |  | 199,136 |

| (a) | 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.

8

Disaggregation of Revenue

Revenue streams from product sales and royalties are summarized below for the three and six months ended June 30, 2023 and 2022.

SCHEDULE OF REVENUE FROM PRODUCT SALES AND ROYALTIES

|  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
|  | Three Months Ended |  |  | Six Months Ended |
|  | June 30, |  |  | June 30, |
|  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Soft tissue repair products |  | $ | 13,249,742 |  |  | $ | 9,569,441 |  |  | $ | 26,122,223 |  |  | $ | 17,327,648 |
Bone fusion products |  |  | 2,453,172 |  |  |  | 51,087 |  |  |  | 5,052,358 |  |  |  | 53,853 |
Royalty revenue |  |  | 50,250 |  |  |  | 50,250 |  |  |  | 100,500 |  |  |  | 100,500 |
Total Net Revenue |  | $ | 15,753,164 |  |  | $ | 9,670,778 |  |  | $ | 31,275,081 |  |  | $ | 17,482,001 |

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 $50,000 and $180,000 during the three months ended June 30, 2023 and 2022, respectively, and $86,000 and $195,000 during the six months ended June 30, 2023 and 2022, respectively. The allowance for doubtful accounts was $354,189 at June 30, 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 $3,100 at June 30, 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 $39,479 and $87,898 for the three months ended June 30, 2023 and 2022, respectively, and $69,990 and $159,717 for the six months ended June 30, 2023 and 2022, respectively. The allowance for obsolete and slow-moving inventory had a balance of $349,405 at June 30, 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 |  | June 30, |  |  | December 31, |
|  | Life |  | 2023 |  |  | 2022 |
Computers |  | 3-5 years |  | $ | 191,611 |  |  | $ | 172,154 |
Office equipment |  | 3-7 years |  |  | 97,097 |  |  |  | 87,225 |
Furniture and fixtures |  | 5-10 years |  |  | 265,584 |  |  |  | 258,414 |
Leasehold improvements |  | 2-5 years |  |  | 23,131 |  |  |  | 19,631 |
Internal use software |  | 5 years |  |  | 1,618,999 |  |  |  | 1,618,998 |
Property and equipment, gross |  |  |  |  | 2,196,422 |  |  |  | 2,156,422 |
Less accumulated depreciation |  |  |  |  | (956,153 | ) |  |  | (739,986 | )
Property and equipment, net |  |  |  | $ | 1,240,269 |  |  | $ | 1,416,436 |

Depreciation expense related to property and equipment was $108,492 and $101,584 for the three months ended June 30, 2023 and 2022, respectively, and $216,166 and $194,308 for the six months ended June 30, 2023 and 2022, respectively.

9

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 June 30, 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 six months ended June 30, 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 six months ended June 30, 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), the Company does not have any investments which are recorded applying the equity method of accounting as of June 30, 2023.

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The Company has reviewed the carrying value of its investments and has determined there was no impairment or observable price changes as of and for the six months ended June 30, 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 and 4 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

Additions |  |  | - |
Balance at December 31, 2022 |  | $ | 7,166,691 |
Additions |  |  | - |
Changes in fair value of earnout liabilities |  |  | (813,157 | )
Settlements |  |  | - |
Balance at June 30, 2023 |  | $ | 6,353,534 |

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.

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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. The Company adopted the new guidance effective January 1, 2023. The adoption had no impact on the Company’s 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 Topic 805, Business Combinations (“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.

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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 (“Phillips”) 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 Phillips.

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.

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Pursuant to the purchase agreement, Phillips 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 were withheld to the extent provided in the purchase agreement to satisfy Phillips’ indemnification obligations and subsequently issued and released to Phillips in July 2023.

In addition to the cash consideration and the stock consideration, the purchase agreement provides that Phillips 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 Phillips 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 Phillips, 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.

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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

|  | June 30, 2023 |  |  | December 31, 2022 |
|  |  |  |  | Accumulated |  |  |  |  |  |  |  |  | Accumulated |  |  |  |
|  | Cost |  |  | Amortization |  |  | Net |  |  | Cost |  |  | Amortization |  |  | Net |
Amortizable Intangible Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Product Licenses |  | $ | 4,793,879 |  |  | $ | (1,149,604 | ) |  | $ | 3,644,275 |  |  | $ | 4,793,879 |  |  | $ | (980,583 | ) |  | $ | 3,813,296 |
Patents and Other IP |  |  | 21,935,580 |  |  |  | (2,105,580 | ) |  |  | 19,830,000 |  |  |  | 21,935,580 |  |  |  | (1,492,057 | ) |  |  | 20,443,523 |
Customer relationships and other |  |  | 7,947,332 |  |  |  | (1,278,029 | ) |  |  | 6,669,303 |  |  |  | 7,947,332 |  |  |  | (694,171 | ) |  |  | 7,253,161 |
Total |  | $ | 34,676,791 |  |  | $ | (4,533,213 | ) |  | $ | 30,143,578 |  |  | $ | 34,676,791 |  |  | $ | (3,166,811 | ) |  | $ | 31,509,980 |

As of June 30, 2023, the weighted-average amortization period for finite-lived intangible assets was 14.3 years. Amortization expense related to intangible assets was $695,202 and $437,540 for the three months ended June 30, 2023 and 2022, respectively, and $1,366,403 and $547,563 for the six months ended June 30, 2023 and 2022, respectively. The estimated remaining amortization expense as of June 30, 2023 for finite-lived intangible assets is as follows:

SCHEDULE OF FUTURE AMORTIZATION EXPENSE

Remainder of 2023 |  | $ | 1,390,403 |
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 |  | $ | 30,143,578 |

The Company has reviewed the carrying value of intangible assets and has determined there was no impairment during either of the six months ended June 30, 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 June 30, 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.

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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 six months ended June 30, 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 June 30, 2023.

The following summarizes the Company’s investments for the periods presented:

SCHEDULE OF INVESTMENTS

|  | June 30, 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

|  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
|  | Three Months ended June 30, |  |  | Six Months Ended June 30, |
|  | 2023 |  |  | 2022 |  |  | 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.

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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 90, 43 and 26 months as of June 30, 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 $2,030,938 and a related lease liability of $2,052,952 as of June 30, 2023. The Company recorded lease expense of $184,575 and $126,815 for the six months ended June 30, 2023 and 2022, respectively, for its leased assets. Cash paid for amounts included in the measurement of operating lease liabilities was $175,382 and $127,777 for the six months ended June 30, 2023 and 2022, respectively. The present value of the Company’s operating lease liabilities as of June 30, 2023 is shown below.

Maturity of Operating Lease Liabilities

SCHEDULE OF OPERATING LEASE LIABILITY

|  | June 30, 2023 |
Remainder of 2023 |  | $ | 178,783 |
2024 |  |  | 424,753 |
2025 |  |  | 450,551 |
2026 |  |  | 365,911 |
2027 |  |  | 297,947 |
2028 |  |  | 295,689 |
Thereafter |  |  | 604,050 |
Total lease payments |  |  | 2,617,684 |
Less imputed interest |  |  | (564,732 | )
Present Value of Lease Liabilities |  | $ | 2,052,952 |
Operating lease liabilities – current |  |  | 273,539 |
Operating lease liabilities – long-term |  |  | 1,779,413 |

As of June 30, 2023, the Company’s operating leases had a weighted average remaining lease term of 6.4 years and a weighted average discount rate of 7.51%.

NOTE 8 - COMMITMENTS AND CONTINGENCIES

License Agreements and Royalties

CellerateRX Surgical Activated Collagen

In August 2018, the Company entered an exclusive, world-wide sublicense agreement (the “Sublicense Agreement”) with CGI Cellerate RX, LLC (“CGI Cellerate RX”) to distribute CellerateRX Surgical Activated Collagen (Powder and Gel) (“CellerateRX Surgical”) and HYCOL Hydrolyzed Collagen (Powder and Gel) (“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 $1,069,244 and $812,966 for the six months ended June 30, 2023 and 2022, respectively. Sales of CellerateRX Surgical comprised the substantial majority of the Company’s sales during the six months ended June 30, 2023 and 2022.

As discussed further in Note 12, on August 1, 2023, the Company purchased certain assets from Applied Nutritionals, LLC (“Applied”), including the rights to manufacture and sell CellerateRX Surgical and HYCOL products. In connection with the purchase of such assets, Applied assigned its license agreement with CGI Cellerate RX to a wholly owned subsidiary of the Company, and no further royalties will be due to Applied thereunder.

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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 $65,000 and $60,000 for the six months ended June 30, 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 June 30, 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.

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Unless previously terminated or extended by the parties, the Debrider License Agreement will expire in October 2034. No commercial sales or royalties have been recognized under this agreement as of June 30, 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.

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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 were withheld to the extent provided in the purchase agreement to satisfy Phillips’ indemnification obligations and subsequently issued and released to Phillips in July 2023.

In addition to the cash consideration and the stock consideration, the purchase agreement provides that Phillips 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 Phillips 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 587,804 shares had been issued under the LTIP Plan and 1,412,196 were available for issuance as of June 30, 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.

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Pursuant to the merger agreement, upon the achievement of certain performance thresholds, the securityholders of Precision Healing, including the holders of options and warrants to purchase Precision Healing common stock and certain persons promised options to purchase Precision Healing common stock, are also entitled to receive payments of up to $10.0 million, which was accounted for as contingent consideration pursuant to ASC 805. The earnout consideration is payable in cash or, at 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 were withheld to the extent provided in the purchase agreement to satisfy Phillips’ indemnification obligations and subsequently issued and released to Phillips in July 2023.

In addition to the cash consideration and the stock consideration, the purchase agreement provides that Phillips 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 Phillips 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 June 30, 2023, the Company did not sell any shares of common stock pursuant to the Sales Agreement. During the six months ended June 30, 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 pursuant to the Sales Agreement.

Restricted Stock Awards

During the six months ended June 30, 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 108,136 shares, net of forfeitures, of restricted common stock to employees, directors, and certain advisors of the Company under the LTIP Plan during the six months ended June 30, 2023. The fair value of these awards was $4,293,988 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 $1,724,637 and $1,288,335 was recognized in “Selling, general and administrative expenses” in the accompanying Consolidated Statements of Operations during the six months ended June 30, 2023 and 2022, respectively, and $1,127,332 and $703,400 was recognized during the three months ended June 30, 2023 and 2022, respectively.

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At June 30, 2023, there was $4,844,361 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 six months ended June 30, 2023:

SUMMARY OF RESTRICTED STOCK ACTIVITY

|  | For the Six Months Ended |
|  | June 30, 2023 |
|  |  |  |  | Weighted Average |
|  |  | Shares |  |  | Grant Date Fair Value |
Nonvested at beginning of period |  |  | 181,102 |  |  | $ | 22.89 |
Granted |  |  | 114,284 |  |  |  | 39.28 |
Vested |  |  | (124,483 | ) |  |  | 22.22 |
Forfeited |  |  | (6,148 | ) |  |  | 31.71 |
Nonvested at June 30, 2023 |  |  | 164,755 |  |  | $ | 34.36 |

Stock Options

A summary of the status of outstanding stock options at June 30, 2023 and changes during the six months then ended is presented below:

SCHEDULE OF STOCK OPTION ACTIVITY

|  | For the Six Months Ended |
|  | June 30, 2023 |
|  |  |  |  | Weighted Average |  |  | Weighted Average |
|  |  |  |  | Exercise |  |  | Remaining |
|  | Options |  |  | Price |  |  | Contract Life |
Outstanding at beginning of period |  |  | 146,191 |  |  | $ | 10.65 |  |  |  |  |
Granted or assumed |  |  | - |  |  |  |  |  |  |  | - |
Exercised |  |  | (22,000 | ) |  |  | 11.47 |  |  |  |  |
Forfeited |  |  | - |  |  |  |  |  |  |  | - |
Expired |  |  | - |  |  |  |  |  |  |  | - |
Outstanding at June 30, 2023 |  |  | 124,191 |  |  | $ | 10.50 |  |  |  | 7.3 |
Exercisable at June 30, 2023 |  |  | 124,191 |  |  | $ | 10.50 |  |  |  | 7.3 |

Warrants

A summary of the status of outstanding warrants to purchase common stock at June 30, 2023 and changes during the six months then ended is presented below:

SCHEDULE OF WARRANTS TO PURCHASE COMMON STOCK

|  | For the Six Months Ended |
|  | June 30, 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 June 30, 2023 |  |  | 16,725 |  |  | $ | 10.80 |  |  |  | 7.3 |
Exercisable at June 30, 2023 |  |  | 16,725 |  |  | $ | 10.80 |  |  |  | 7.3 |

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NOTE 10 – INCOME TAXES

As discussed in Note 3, the Company recognized net deferred tax liabilities associated with the Precision Healing merger. Prior to consideration of these deferred tax liabilities, the Company had net deferred tax assets in excess of the deferred tax liabilities being recognized, however, a 100% valuation allowance had previously been provided against the Company’s net deferred tax assets. As a result of the recording of the net deferred tax liabilities related to the Precision Healing merger, the Company reviewed the valuation allowance and determined that it should be reduced by the amount of the deferred tax liabilities that were recognized. This resulted in a year-to-date income tax benefit of $4.1 million in the six months ended June 30, 2022.

NOTE 11 – RELATED PARTIES

CellerateRX Surgical 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 Surgical from Applied. Sales of CellerateRX Surgical have comprised the substantial majority of the Company’s sales during the six months ended June 30, 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 June 30, 2023 and 2022, royalty expense, which is recorded in “Cost of goods sold” in the accompanying Consolidated Statements of Operations, was $548,430 and $443,733, respectively under the terms of this agreement. For the six months ended June 30, 2023 and 2022, royalty expense was $1,069,244 and $812,966, respectively. Ronald T. Nixon, the Company’s Executive Chairman, is the founder and managing partner of Catalyst.

As discussed further in Note 12, on August 1, 2023, the Company purchased certain assets from Applied, including the rights to manufacture and sell CellerateRX Surgical and HYCOL products. In connection with the purchase of such assets, Applied assigned its license agreement with CGI Cellerate RX to a wholly owned subsidiary of the Company, and no further royalties will be due to Applied thereunder.

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.

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Catalyst Transaction Advisory Services Agreement

In March 2023, the Company entered into a Transaction Advisory Services Agreement (the “Catalyst Services Agreement”) effective March 1, 2023 with Catalyst, a related party. Pursuant to the Catalyst 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 “Catalyst Services”).

Pursuant to the Catalyst 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 Catalyst 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 Catalyst Services rendered under the Catalyst Services Agreement, with all reimbursements being contingent upon the prior approval of the Audit Committee of the Company’s Board of Directors. The Company incurred $72,986 of expenses pursuant to the Catalyst Services Agreement in the three and six months ended June 30, 2023.

NOTE 12 – SUBSEQUENT EVENTS

Applied Asset Purchase

On August 1, 2023, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) by and among the Company, as guarantor, Sanara MedTech Applied Technologies, LLC, a Texas limited liability company and wholly owned subsidiary of the Company (“SMAT”), The Hymed Group Corporation, a Delaware corporation (“Hymed”), Applied, a Delaware limited liability company (Applied, together with Hymed, the “Sellers”), and Dr. George D. Petito (the “Owner”), pursuant to which SMAT acquired certain assets of the Sellers and the Owner, including, among others, the Sellers’ and Owner’s inventory, intellectual property, manufacturing and related equipment, goodwill, rights and claims, other than certain excluded assets, all as more specifically set forth in the Purchase Agreement (collectively, the “Purchased Assets”), and assumed certain Assumed Liabilities (as defined in the Purchase Agreement), upon the terms and subject to the conditions set forth in the Purchase Agreement (such transaction, the “Applied Asset Purchase”). The Purchased Assets include the rights to manufacture and sell CellerateRX Surgical and HYCOL products for human wound care use. The transaction closed on August 1, 2023.

The Purchased Assets were purchased for an initial aggregate purchase price of $15.25 million, consisting of (i) $9.75 million in cash (the “Cash Closing Consideration”), (ii) 73,809 shares of the Company’s common stock (the “Stock Closing Consideration”) with an agreed upon value of $3.0 million and (iii) $2.5 million in cash (the “Installment Payments”), to be paid in four equal installments on each of the next four anniversaries of the closing of the Applied Asset Purchase (the “Closing”).

Prior to the Closing, the Company licensed certain of its products from Applied through the Sublicense Agreement with CGI Cellerate RX. Pursuant to the Sublicense Agreement, the Company has an exclusive, world-wide sublicense to distribute CellerateRX Surgical and HYCOL products into the surgical and wound care markets. The Company pays royalties based on the annual Net Sales (as defined in the Sublicense Agreement) of licensed products consisting of 3% of all collected Net Sales each year up to $12.0 million, 4% of all collected Net Sales each year that exceed $12.0 million up to $20.0 million, and 5% of all collected Net Sales each year that exceed $20.0 million. In connection with the Applied Asset Purchase, Applied assigned its license agreement with CGI Cellerate RX to SMAT.

In addition to the Cash Closing Consideration, Stock Closing Consideration and Installment Payments, the Purchase Agreement provides that the Sellers are entitled to receive up to an additional $10.0 million (the “Earnout”), which is payable to the Sellers in cash, upon the achievement of certain performance thresholds relating to SMAT’s collections from net sales of a collagen-based product currently under development. Upon expiration of the seventh anniversary of the Closing, to the extent the Sellers have not earned the entirety of the Earnout, SMAT shall pay the Sellers a pro-rata amount of the Earnout based on collections from net sales of the product, with such amount to be due credited against any Earnout payments already made by SMAT (the “True-Up Payment”). The Earnout, minus the True-Up Payment and any Earnout payments already made by SMAT, may be earned at any point in the future, including after the True-Up Payment is made.

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Professional Services Agreement

In connection with the Applied Asset Purchase and pursuant to the Purchase Agreement, effective August 1, 2023, the Company entered into a professional services agreement (the “Petito Services Agreement”) with the Owner, pursuant to which the Owner, as an independent contractor, agreed to provide certain services to the Company, including, among other things, assisting with the development of products already in development and assisting with research, development, formulation, invention and manufacturing of any future products (the “Petito Services”). As consideration for the Petito Services, the Owner is entitled to receive: (i) a base salary of $12,000 per month during the term of the Petito Services Agreement, (ii) a royalty payment equal to three percent (3%) of the actual collections from net sales of certain products the Owner develops or co-develops that reach commercialization, (iii) a royalty payment equal to five percent (5%) for the first $50.0 million in aggregate collections from net sales of certain future products and a royalty payment of two and one-half percent (2.5%) on aggregate collections from net sales of certain future products on any amounts exceeding $50.0 million but up to $100.0 million, (iv) $500,000 in cash in the event that 510(k) clearance is issued for any future product accepted by the Company and (v) $1.0 million in cash in the event that a U.S. patent is issued for a certain product; provided that with respect to the incentive payments described in (iv) and (v) of the foregoing, the Owner shall not earn more than $2.5 million.

The Petito Services Agreement has an initial term of three years and is subject to automatic successive one-month renewals unless earlier terminated in accordance with its terms. The Petito Services Agreement may be terminated upon the Owner’s death or disability or by the Company or the Owner “For Cause” (as defined in the Petito Services Agreement); provided, however, that the base salary described in (i) of the foregoing paragraph shall survive termination through the three-year initial term and the royalty payments and incentive payments described in (ii)-(v) of the foregoing paragraph shall survive termination of the Petito Services Agreement.

Loan Agreement

In connection with the entry into the Purchase Agreement, on August 1, 2023, SMAT, as borrower, and the Company, as guarantor, entered into a loan agreement (the “Loan Agreement”) with Cadence Bank (the “Bank”) providing for, among other things, an advancing term loan in the aggregate principal amount of $12.0 million (the “Term Loan”), which was evidenced by an advancing promissory note. Pursuant to the Loan Agreement, the Bank agreed to make, at any time and from time to time prior to February 1, 2024, one or more advances to SMAT.

The proceeds of the advances under the Loan Agreement will be used for working capital and for purposes of financing up to one hundred percent (100%) of the Cash Closing Consideration and Installment Payments for the Applied Asset Purchase and related fees and expenses, including any subsequent payments that may be due to the Sellers after the Closing. On August 1, 2023, the Bank, at the request of SMAT, made an advance for $9.75 million. The proceeds from the advance were used to fund the Cash Closing Consideration for the Applied Asset Purchase.

Advances under the Term Loan will begin amortizing in monthly installments commencing on August 5, 2024. All remaining unpaid balances under the Term Loan are due and payable in full on August 1, 2028 (the “Maturity Date”). SMAT may prepay amounts due under the Term Loan. All accrued but unpaid interest on the unpaid principal balance of outstanding advances is due and payable monthly, beginning on September 5, 2023 and continuing monthly on the fifth day of each month thereafter until the Maturity Date. The unpaid principal balance of outstanding advances bears interest, subject to certain conditions, at the lesser of the Maximum Rate (as defined in the Loan Agreement) or the Base Rate, which is for any day, a rate per annum equal to the term secured overnight financing rate (Term SOFR) (as administered by the Federal Reserve Bank of New York) for a one-month tenor in effect on such day plus three percent (3.0%).

The obligations of SMAT under the Loan Agreement and the other loan documents delivered in connection therewith are guaranteed by the Company and are secured by a first priority security interest in substantially all of the existing and future assets of SMAT.

The Loan Agreement contains customary representations and warranties and certain covenants that limit (subject to certain exceptions) the ability of SMAT and the Company to, among other things, (i) create, assume or guarantee certain liabilities, (ii) create, assume or suffer liens securing indebtedness, (iii) make or permit loans and advances, (iv) acquire any assets outside the ordinary course of business, (v) consolidate, merge or sell all or a material part of its assets, (vi) pay dividends or other distributions on, or redeem or repurchase, interest in an obligor, including the Company, as guarantor (vii) cease, suspend or materially curtail business operations or (viii) engage in certain affiliate transactions. In addition, the Loan Agreement contains financial covenants that require SMAT to maintain (i) a minimum Debt Services Coverage Ratio and (ii) a maximum Cash Flow Leverage Ratio, in each case, as defined and calculated according to the procedures set forth in the Loan Agreement. Pursuant to the Loan Agreement, in the event that SMAT fails to comply with the financial covenants described above, the Company is required to contribute cash to SMAT in an amount equal to the amount required to satisfy the financial covenants.

The Loan Agreement also contains customary events of default. If such an event of default occurs, the Bank would be entitled to take various actions, including the acceleration of amounts due under the Loan Agreement and actions permitted to be taken by a secured creditor.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the financial condition and results of operations of Sanara MedTech Inc. (together with its wholly owned or majority-owned subsidiaries on a consolidated basis, the “Company,” “Sanara MedTech,” “Sanara,” “our,” “us,” or “we”) should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022 and with the unaudited consolidated financial statements and related notes thereto presented in this Quarterly Report on Form 10-Q.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “aims,” “anticipates,” “believes,” “contemplates,” “continue,” “could,” “estimates,” “expects,” “forecast,” “guidance,” “intends,” “may,” “plans,” “possible,” “potential,” “predicts,” “preliminary,” “projects,” “seeks,” “should,” “target,” “will” or “would” or the negative of these words, variations of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Such forward-looking statements are subject to certain risks, uncertainties and assumptions relating to factors that could cause actual results to differ materially from those anticipated in such statements, including, without limitation, the following:

● | shortfalls in forecasted revenue growth;
● | our ability to implement our comprehensive wound and skincare strategy through acquisitions and investments and our ability to realize the anticipated benefits of such acquisitions and investments;
● | our ability to meet our future capital requirements;
● | our ability to retain and recruit key personnel;
● | the intense competition in the markets in which we operate and our ability to compete within our markets;
● | the failure of our products to obtain market acceptance;
● | the effect of security breaches and other disruptions;
● | our ability to maintain effective internal controls over financial reporting;
● | our ability to develop and commercialize new products and products under development, including the manufacturing, distribution, marketing and sale of such products;
● | our ability to maintain and further grow clinical acceptance and adoption of our products;
● | the impact of competitors inventing products that are superior to ours;
● | disruptions of, or changes in, our distribution model, consumer base or the supply of our products;
● | our ability to manage product inventory in an effective and efficient manner;
● | the failure of third-party assessments to demonstrate desired outcomes in proposed endpoints;
● | our ability to successfully expand into wound and skincare virtual consult and other services;
● | our ability and the ability of our research and development partners to protect the proprietary rights to technologies used in certain of our products and the impact of any claim that we have infringed on intellectual property rights of others;
● | our dependence on technologies and products that we license from third parties;
● | the effects of current and future laws, rules, regulations and reimbursement policies relating to the labeling, marketing and sale of our products and our planned expansion into wound and skincare virtual consult and other services and our ability to comply with the various laws, rules and regulations applicable to our business; and
● | the effect of defects, failures or quality issues associated with our products.

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For a more detailed discussion of these and other factors that may affect our business and that could cause the actual results to differ materially from those anticipated in forward-looking statements, see “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, Part II, Item 1A “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Forward-looking statements speak only as of the date on which they are made, and the Company does not assume any obligation to update these forward-looking statements, except to the extent required by applicable securities laws.

OVERVIEW

We are a medical technology company focused on developing and commercializing transformative technologies to improve clinical outcomes and reduce healthcare expenditures in the surgical, chronic wound and skincare markets. Each of our products, services and technologies contributes to our overall goal of achieving better clinical outcomes at a lower overall cost for patients regardless of where they receive care. We strive to be one of the most innovative and comprehensive providers of effective surgical, wound and skincare solutions and are continually seeking to expand our offerings for patients requiring treatments across the entire continuum of care in the United States.

We currently market several products across surgical and chronic wound care applications and have multiple products in our pipeline. On August 1, 2023, we acquired, among other things, the right to manufacture and sell CellerateRX Surgical Activated Collagen (Powder and Gel) (“CellerateRX Surgical”), our primary product, and HYCOL Hydrolyzed Collagen (Powder and Gel) (“HYCOL”) from Applied Nutritionals, LLC (“Applied”) for human wound care use (for more information regarding this acquisition, see the “Recent Acquisitions” section below). Prior to such time, we had licensed the rights to these products through a sublicense agreement (the “Sublicense Agreement”) with CGI Cellerate RX, LLC (“CGI Cellerate RX”), an affiliate of The Catalyst Group, Inc. (“Catalyst”). In connection with the asset purchase, Applied assigned its license agreement with CGI Cellerate RX to a wholly owned subsidiary of the Company. We also license certain of our products from Rochal Industries, LLC (“Rochal”) and through our subsidiary, Scendia Biologics, LLC (“Scendia”), and have the right to exclusively distribute certain products manufactured by Cook Biotech Inc.

In July 2021, we acquired certain assets from Rochal, including, among others, intellectual property, four U.S. Food and Drug Administration (“FDA”) 510(k) clearances, rights to license certain products and technologies currently under development, equipment and supplies. As a result of the asset purchase, our pipeline now contains product candidates for mitigation of opportunistic pathogens and biofilm, wound re-epithelialization and closure, necrotic tissue debridement and cell compatible substrates. Since our acquisition of assets from Rochal, we have been developing additional products in our own product pipeline.

In April 2022, we entered into a merger agreement through which Precision Healing Inc. (“Precision Healing”) became a wholly owned subsidiary of the Company. Precision Healing is developing a diagnostic imager and lateral flow assay (“LFA”) for assessing a patient’s wound and skin conditions. This comprehensive wound and skin assessment technology is designed to quantify biochemical markers to determine the trajectory of a wound’s condition to enable better diagnosis and treatment protocol. During the first quarter of 2023, we submitted a 510(k) premarket notification to the FDA for the Precision Healing diagnostic imager. We also plan to submit a 510(k) premarket notification for the Precision Healing LFA in 2023.

In July 2022, we entered into a membership interest purchase agreement with Scendia and Ryan Phillips (“Phillips”) pursuant to which we acquired 100% of the issued and outstanding membership interests in Scendia from Phillips. Since our acquisition of Scendia, we have been selling a full line of regenerative and orthobiologic technologies including (i) TEXAGEN Amniotic Membrane Allograft (“TEXAGEN”), (ii) BiFORM Bioactive Moldable Matrix (“BiFORM”), (iii) AMPLIFY Verified Inductive Bone Matrix (“AMPLIFY”) and (iv) ALLOCYTE Advanced Cellular Bone Matrix (“ALLOCYTE”).

In November 2022, we established a partnership with InfuSystem Holdings, Inc. (“InfuSystem”) focused on delivering a complete wound care solution targeted at improving patient outcomes, lowering the cost of care, and increasing patient and provider satisfaction. The partnership is expected to enable InfuSystem to offer innovative products, including Cork Medical, LLC’s negative pressure wound therapy devices and supplies, and our advanced wound care product line and associated services to new customers.

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COMPREHENSIVE VALUE-BASED CARE STRATEGY

In June 2020, we formed a subsidiary, United Wound and Skin Solutions, LLC (“UWSS” or “WounDerm”), to hold certain investments and operations in wound and skincare virtual consult services. Through WounDerm, we plan to offer a comprehensive wound and skincare solution and partner with value-based care providers with the dual goal of lowering the cost to treat wounds while improving clinical outcomes.

Our comprehensive solution consists of four key components: diagnostics, virtual consult services for wound care and dermatology, proprietary efficacious products, and a wound care and dermatology specific electronic medical record (“EMR”) and mobile application. We expect these components will work synergistically to allow clinicians to analyze and treat wound and dermatology conditions more efficiently than the current standard of care:

● Diagnostics – Our proprietary imager and LFA currently under development, which we recently acquired through our acquisition of Precision Healing, are designed to quantify key biomarkers that dictate the trajectory of wound healing and identify deficiencies to aid in treatment. Ultimately, we believe that our diagnostics will lead to treatment algorithms based on the data collected by the Precision Healing technology.

● Virtual Consult Services – Through our exclusive affiliation with Direct Dermatology Inc., we can offer virtual consult services for wound care and dermatology provided by experienced, specialized physicians and clinicians.

● Proprietary Products – We currently offer products for improving patient outcomes by addressing conditions that impact wound healing. We are currently conducting multiple studies to prove the efficacy of our products while developing and exploring new products and opportunities in our six focus areas of (1) debridement, (2) biofilm removal, (3) hydrolyzed collagen, (4) advanced biologics, (5) negative pressure wound therapy products and (6) the oxygen delivery system segment of the wound and skincare market.

● EMR and Mobile Application – Our EMR and mobile application were developed specifically for wound care and dermatology. We are currently developing the capability for the EMR and mobile application to offer wound tracking analytics, recommended treatments and decision support and automated referrals.

We believe that by offering a proprietary comprehensive solution for wound care and dermatology, we will be a value-added partner for providers in value-based care programs, such as Medicare Advantage and other risk-based contracts.

RECENT ACQUISITIONS

Precision Healing

In April 2022, we closed a merger transaction with Precision Healing, pursuant to which Precision Healing became a wholly owned subsidiary of the Company. Precision Healing is developing a diagnostic imager and LFA for assessing a patient’s wound and skin conditions. This comprehensive wound and skin assessment technology is designed to quantify biochemical markers to determine the trajectory of a wound’s condition to enable better diagnosis and treatment protocol.

Pursuant to the merger agreement, among other things, we agreed to (i) pay the holders of Precision Healing common stock and preferred stock closing consideration consisting of 165,738 shares of our common stock, which was issued to accredited investors, and $125,966 in cash, which was paid to stockholders who were not accredited investors (ii) pay approximately $0.6 million of transaction expenses on behalf of the equity holders of Precision Healing, (iii) assume all outstanding options and warrants of Precision Healing and (iv) pay, subject to the achievement of certain performance thresholds, earnout consideration of up to $10.0 million which is payable in cash or, at our election, is payable to accredited investors in shares of our common stock.

Scendia

In July 2022, we entered into a membership interest purchase agreement by and among the Company, Scendia and Phillips pursuant to which we acquired 100% of the issued and outstanding membership interests in Scendia from Phillips. Scendia provides clinicians and surgeons with a full line of regenerative and orthobiologic technologies. Beginning in early 2022, the Company began co-promoting certain products with Scendia, including: (i) TEXAGEN, (ii) BiFORM, (iii) AMPLIFY and (iv) ALLOCYTE. 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 aggregate consideration at closing for the acquisition was $7.6 million, which consisted of (i) a $1.6 million cash payment, subject to certain adjustments, and (ii) 291,686 shares of our common stock, with an agreed upon value of $6.0 million. Pursuant to the purchase agreement, at closing, we withheld 94,798 shares of common stock with an agreed upon value of $1.95 million (the “Indemnity Holdback Shares”), which such Indemnity Holdback Shares were withheld to the extent provided in the purchase agreement to satisfy Phillips’ indemnification obligations and subsequently issued and released to Phillips in July 2023.

In addition to the cash and stock consideration, the purchase agreement provides that Phillips is entitled to receive two potential earnout payments, payable on an annual basis, not to exceed $10.0 million in the aggregate. The earnout consideration is payable to Phillips in cash or, at our election, in up to 486,145 shares of our common stock upon the achievement of certain performance thresholds relating to net revenue attributable to sales of Scendia products during the two-year period following the closing.

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Applied Asset Purchase

On August 1, 2023, we entered into an Asset Purchase Agreement (the “Purchase Agreement”) by and among the Company, as guarantor, Sanara MedTech Applied Technologies, LLC, a wholly owned subsidiary of the Company (“SMAT”), Applied, The Hymed Group Corporation (“Hymed” and together with Applied, the “Sellers”), and Dr. George D. Petito (the “Owner”), pursuant to which SMAT acquired certain assets of the Sellers and the Owner, including, among others, the Sellers’ and Owner’s inventory, intellectual property, manufacturing and related equipment, goodwill, rights and claims, other than certain excluded assets, all as more specifically set forth in the Purchase Agreement (collectively, the “Purchased Assets”), and assumed certain Assumed Liabilities (as defined in the Purchase Agreement), upon the terms and subject to the conditions set forth in the Purchase Agreement (such transaction, the “Applied Asset Purchase”). The Purchased Assets include the rights to manufacture and sell the CellerateRX Surgical and HYCOL products for human wound care use. The transaction closed on August 1, 2023.

The Purchased Assets were purchased for an initial aggregate purchase price of $15.25 million, consisting of (i) $9.75 million in cash (the “Cash Closing Consideration”), (ii) 73,809 shares of our common stock (the “Stock Closing Consideration”) with an agreed upon value of $3.0 million and (iii) $2.5 million in cash (the “Installment Payments”), to be paid in four equal installments on each of the next four anniversaries of the closing of the Applied Asset Purchase (the “Closing”).

In addition to the Cash Closing Consideration, Stock Closing Consideration and Installment Payments, the Purchase Agreement provides that the Sellers are entitled to receive up to an additional $10.0 million (the “Earnout”), which is payable to the Sellers in cash, upon the achievement of certain performance thresholds relating to SMAT’s collections from net sales of a collagen-based product currently under development. Upon expiration of the seventh anniversary of the Closing, to the extent the Sellers have not earned the entirety of the Earnout, SMAT shall pay the Sellers a pro-rata amount of the Earnout based on collections from net sales of the product, with such amount to be due credited against any Earnout payments already made by SMAT (the “True-Up Payment”). The Earnout, minus the True-Up Payment and any Earnout payments already made by SMAT, may be earned at any point in the future, including after the True-Up Payment is made.

RECENT DEVELOPMENTS

Sanara Pulsar, LLC

In May 2019, we organized Sanara Pulsar, LLC, a Texas limited liability company (“Sanara Pulsar”), which was owned 60% by our wholly owned subsidiary Cellerate, LLC, and 40% by Wound Care Solutions, Limited (“WCS”), an unaffiliated company registered in the United Kingdom. At the time of the formation of Sanara Pulsar, Sanara Pulsar and WCS entered into a supply agreement whereby Sanara Pulsar became the exclusive distributor in the United States of certain wound care products, including the Sanara Pulsar II AWI Wound Debridement System, that utilized intellectual property developed and owned by WCS (collectively, the “Pulsar Products”). When we formed Sanara Pulsar, we believed the Pulsar Products would provide clinicians with a novel debridement solution. We also believed the Pulsar Products would receive an expanded reimbursement code for use by all clinician types.

Ultimately, we did not receive an additional reimbursement code, which limited the adoption of the Pulsar Products. Sanara Pulsar, which had minimal sales since its inception, was dissolved effective December 2022. As a result, we recorded a $1.0 million noncash loss on disposal of investment in the fourth quarter of 2022.

Professional Services Agreement

In connection with the Applied Asset Purchase and pursuant to the Purchase Agreement, effective August 1, 2023 (the “Effective Date”), we entered into a professional services agreement (the “Petito Services Agreement”) with the Owner, pursuant to which the Owner, as an independent contractor, agreed to provide certain services to us, including, among other things, assisting with the development of products already in development and assisting with research, development, formulation, invention and manufacturing of any future products (the “Petito Services”). As consideration for the Petito Services, the Owner is entitled to receive: (i) a base salary of $12,000 per month during the term of the Petito Services Agreement, (ii) a royalty payment equal to three percent (3%) of the actual collections from net sales of certain products the Owner develops or co-develops that reach commercialization, (iii) a royalty payment equal to five percent (5%) for the first $50.0 million in aggregate collections from net sales of certain future products and a royalty payment of two and one-half percent (2.5%) on aggregate collections from net sales of certain future products on any amounts exceeding $50.0 million but up to $100.0 million, (iv) $500,000 in cash in the event that 510(k) clearance is issued for any future product accepted by the Company and (v) $1.0 million in cash in the event that a U.S. patent is issued for a certain product; provided that with respect to the incentive payments described in (iv) and (v) of the foregoing, the Owner shall not earn more than $2.5 million.

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The Petito Services Agreement has an initial term of three years and is subject to automatic successive one-month renewals unless earlier terminated in accordance with its terms. The Petito Services Agreement may be terminated upon the Owner’s death or disability or by us or the Owner “For Cause” (as defined in the Petito Services Agreement); provided, however, that the base salary described in (i) of the foregoing paragraph shall survive termination through the three-year initial term and the royalty payments and incentive payments described in (ii)-(v) of the foregoing paragraph shall survive termination of the Petito Services Agreement.

Loan Agreement

In connection with the entry into the Purchase Agreement, on August 1, 2023, we, as guarantor, and SMAT, as borrower, entered into a loan agreement (the “Loan Agreement”) with Cadence Bank (the “Bank”) providing for, among other things, an advancing term loan in the aggregate principal amount of $12.0 million (the “Term Loan”). On August 1, 2023, the Bank made an advance under the Term Loan for $9.75 million, the proceeds of which were used to fund the Cash Closing Consideration for the Applied Asset Purchase. For more information regarding the Loan Agreement, see the “Liquidity and Capital Resources” section below.

COMPONENTS OF RESULTS OF OPERATIONS

Sources of Revenues

Our revenue is derived primarily from sales of our soft tissue repair and bone fusion products to hospitals and other acute care facilities. In particular, the substantial majority of our product sales revenue is derived from sales of CellerateRX surgical powder. Our revenue is driven by direct orders shipped by us to our customers, and to a lesser extent, direct sales to customers through delivery at the time of procedure by one of our sales representatives. We generally recognize revenue when a purchase order is received from the customer and our product is received by the customer.

For the three and six months ended June 30, 2023, our revenues included $3.0 million and $6.2 million, respectively, of revenue generated by Scendia, which we acquired in July 2022. Revenue streams from product sales and royalties are summarized below for the three and six months ended June 30, 2023 and 2022.

|  | Three Months Ended |  |  | Six Months Ended |
|  | June 30, |  |  | June 30, |
|  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Soft tissue repair products |  | $ | 13,249,742 |  |  | $ | 9,569,441 |  |  | $ | 26,122,223 |  |  | $ | 17,327,648 |
Bone fusion products |  |  | 2,453,172 |  |  |  | 51,087 |  |  |  | 5,052,358 |  |  |  | 53,853 |
Royalty revenue |  |  | 50,250 |  |  |  | 50,250 |  |  |  | 100,500 |  |  |  | 100,500 |
Total Net Revenue |  | $ | 15,753,164 |  |  | $ | 9,670,778 |  |  | $ | 31,275,081 |  |  | $ | 17,482,001 |

We recognize royalty revenue from a development and licensing agreement with BioStructures, LLC. We record revenue each calendar quarter as earned per the terms of the agreement which stipulates that we will receive quarterly royalty payments of at least $50,250. Under the terms of the development and license agreement, royalties of 2.0% are recognized on sales of products containing our patented resorbable bone hemostasis. The minimum annual royalty due to us is $201,000 per year through the end of 2023. These royalties are payable in quarterly installments of $50,250. To date, royalties related to this development and licensing agreement have not exceeded the annual minimum of $201,000 ($50,250 per quarter).

Cost of Goods Sold

Cost of goods sold consists primarily of the acquisition costs from the manufacturers of our licensed products, raw material costs for certain components sourced directly by us, and all related royalties due as a result of the sale of our products. Our gross profit represents total net revenue less the cost of goods sold, and gross margin represents gross profit expressed as a percentage of total revenue.

Operating Expenses

Selling, general and administrative (“SG&A”) expenses consist primarily of salaries, sales commissions, benefits, bonuses and stock-based compensation. SG&A also includes outside legal counsel fees, audit fees, insurance premiums, rent and other corporate expenses. We expense all SG&A expenses as incurred.

Research and development (“R&D”) expenses include costs related to enhancements to our currently available products and additional investments in our product, services and technologies development pipeline. This includes personnel-related expenses, including salaries and benefits for all personnel directly engaged in R&D activities, contracted services, materials, prototype expenses and allocated overhead, which is comprised of lease expense and other facilities-related costs. We expense R&D costs as incurred. We generally expect that R&D expenses will increase as we continue to support product enhancements and bring new products to market.

Depreciation and amortization expenses include depreciation of fixed assets and amortization of intangible assets that have a finite life, such as product licenses, patents and intellectual property, customer relationships and assembled workforces.

Change in fair value of earnout liabilities represents our measurement of the change in fair value at the balance sheet date of our earnout liabilities that were established at the time of our Precision Healing and Scendia acquisitions.

Other Expense

Other expense is primarily comprised of losses on equity method investments, interest expense and other nonoperating activities.

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RESULTS OF OPERATIONS

Net Revenues. For the three months ended June 30, 2023, we generated net revenues of $15.8 million compared to net revenues of $9.7 million for the three months ended June 30, 2022, a 63% increase from the prior year period. For the six months ended June 30, 2023, we generated net revenues of $31.3 million compared to net revenues of $17.5 million for the six months ended June 30, 2022, a 79% increase from the prior year period. Net revenues for the three and six months ended June 30, 2023 included $3.0 million and $6.2 million, respectively, of Scendia sales. The higher net revenues for the three and six months ended June 30, 2023 were primarily due to increased sales of soft tissue repair products and, to a lesser extent, bone fusion products, as a result of our increased market penetration and geographic expansion, additional revenues as a result of the Scendia acquisition and our continuing strategy to expand our independent distribution network in both new and existing U.S. markets.

During the third quarter of 2022, we began to experience supply issues with the ALLOCYTE product line. The amount of qualifying eligible donor tissue was significantly impacted due to stringent donor screening requirements. During the fourth quarter of 2022 and the first half of 2023, we were unable to fill certain orders for this product which negatively impacted our sales. We anticipate resolution of the supply issues in the second half of 2023.

Cost of goods sold. Cost of goods sold for the three months ended June 30, 2023, was $2.2 million, compared to costs of goods sold of $1.0 million for the three months ended June 30, 2022. Cost of goods sold for the six months ended June 30, 2023, was $4.3 million, compared to costs of goods sold of $1.8 million for the six months ended June 30, 2022. The increases in cost of goods sold for the three and six months ended June 30, 2023 were due to higher sales volume as a result of organic sales growth and our acquisition of Scendia. Gross margins were approximately 86% and 90% for the three and six months ended June 30, 2023 and 2022, respectively. The lower gross margins for the three and six months ended June 30, 2023 were primarily due to lower margins realized on sales of certain Scendia products.

Selling, general and administrative expenses. SG&A expenses for the three months ended June 30, 2023, were $13.8 million compared to SG&A expenses of $10.4 million for the three months ended June 30, 2022. SG&A expenses for the six months ended June 30, 2023, were $26.8 million compared to SG&A expenses of $19.8 million for the six months ended June 30, 2022. Our SG&A expenses for the three and six months ended June 30, 2023 included $0.8 million and $2.0 million of costs, respectively, related to Scendia operations. The higher SG&A expenses for the three and six months ended June 30, 2023 were primarily due to higher direct sales and marketing expenses, which accounted for approximately $2.3 million and $5.8 million, respectively, or 69% and 83%, respectively, of the increases compared to the prior year periods. The higher direct sales and marketing expenses for the three and six months ended June 30, 2023 were primarily attributable to an increase in sales commissions of $2.3 million and $5.2 million, respectively, as a result of higher product sales. The six months ended June 30, 2023 also included $0.6 million of increased costs as a result of sales force expansion and operational support. We expect our SG&A expenses to continue to decline as a percentage of net revenues as our sales growth outpaces the costs of sales force expansion and corporate overhead.

Research and development expenses. R&D expenses for the three months ended June 30, 2023, were $1.2 million compared to $1.1 million for the three months ended June 30, 2022. R&D expenses for the six months ended June 30, 2023, were $2.5 million compared to $1.3 million for the six months ended June 30, 2022. The higher R&D expenses for the three and six months ended June 30, 2023 were primarily due to costs related to the Precision Healing diagnostic imager and LFA for assessing patient wound and skin conditions. R&D expenses for the three and six months ended June 30, 2023 also included costs associated with ongoing development projects for our currently licensed products.

Depreciation and amortization expense. Depreciation and amortization expense for the three months ended June 30, 2023, was $0.8 million compared to $0.5 million for the three months ended June 30, 2022. The higher depreciation and amortization expense during the three months ended June 30, 2023 was primarily due to the amortization of intangible assets acquired as part of the Scendia transaction. Depreciation and amortization expense for the six months ended June 30, 2023, was $1.6 million compared to $0.7 million for the six months ended June 30, 2022. The higher depreciation and amortization expense during the six months ended June 30, 2023 was primarily due to the amortization of intangible assets acquired as part of the Precision Healing and Scendia transactions.

Change in fair value of earnout liabilities. Change in fair value of earnout liabilities was a benefit of $0.4 million for the three months ended June 30, 2023 compared to expense of $0.1 million for the three months ended June 30, 2022. Change in fair value of earnout liabilities was a benefit of $0.8 million for the six months ended June 30, 2023 compared to an expense of $0.1 million for the six months ended June 30, 2022. The current year benefits are as a result of a decrease in the fair value of the earnout liabilities established at the time of our Precision Healing and Scendia acquisitions. The decrease in the fair value was due to a change in the discount factor utilized in the valuation models, a decrease in the projected undiscounted amounts to be paid, as well as adjustments to the projected timing of the payments to be made, partially offset by accretion. The prior year period expenses were due to the accretion of the earnout liabilities.

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Other expense. We did not have other expense for either of the three months ended June 30, 2023 or 2022. Other expense for the six months ended June 30, 2023 was $6 compared to $379,633 for the six months ended June 30, 2022. Other expense in the six months ended June 30, 2022 was due to losses from equity method investment in Precision Healing prior to our acquisition of the remaining interest in April 2022.

Loss before income taxes. We had a loss before income taxes of $1.9 million for the three months ended June 30, 2023, compared to a loss before income taxes of $3.4 million for the three months ended June 30, 2022. For the six months ended June 30, 2023, we had a loss before income taxes of $3.1 million, compared to a loss before income taxes of $6.5 million for the six months ended June 30, 2022. The lower loss for the three and six months ended June 30, 2023 was due to operating expenses increasing at a slower rate than net sales in addition to the benefit recorded as a result of the change in fair value of earnout liabilities.

Income tax benefit. As discussed in Note 10 to the accompanying unaudited consolidated financial statements, we recognized net deferred tax liabilities associated with the Precision Healing merger. Prior to consideration of these deferred tax liabilities, we had net deferred tax assets in excess of the deferred tax liabilities being recognized, however, a 100% valuation allowance had previously been provided against our net deferred tax assets. As a result of the recording of the net deferred tax liabilities related to the Precision Healing merger, we reviewed the valuation allowance and determined that it should be reduced by the amount of the deferred tax liabilities that were recognized. This resulted in recognition of an income tax benefit of $4.1 million in the three months ended June 30, 2022.

Net loss. For the three months ended June 30, 2023, we had a net loss of $1.9 million, compared to net income of $0.8 million for the three months ended June 30, 2022. For the six months ended June 30, 2023, we had a net loss of $3.1 million, compared to a net loss of $2.4 million for the six months ended June 30, 2022.

LIQUIDITY AND CAPITAL RESOURCES

Cash on hand at June 30, 2023 was $6.1 million, compared to $9.0 million at December 31, 2022. Historically, we have financed our operations primarily from the sale of equity securities. In February 2023, we entered into a Controlled Equity Offering SM Sales Agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co., as sales agent (“Cantor”), pursuant to which we may offer and sell from time to time, to or through Cantor, shares of our common stock having an aggregate offering price of up to $75.0 million.

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 our instructions, including any price, time period or size limits specified by us. We have no obligation to sell any of the shares under the Sales Agreement and may at any time suspend or terminate the offering of our 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, we will pay Cantor a commission of 3.0% of the aggregate gross proceeds from each sale of the shares.

During the three months ended June 30, 2023, we did not sell any shares of common stock pursuant to the Sales Agreement. During the six months ended June 30, 2023, we sold an aggregate of 26,143 shares of common stock for gross proceeds of approximately $1.1 million and net proceeds of approximately $1.0 million pursuant to the Sales Agreement.

We expect our future needs for cash to include funding potential acquisitions, further developing our products, services and technologies pipeline and clinical studies, expanding our sales force and for general corporate purposes. Based on our current plan of operations, we believe our cash on hand, when combined with expected cash flows from operations and proceeds from the Term Loan discussed above, will be sufficient to fund our growth strategy and to meet our anticipated operating expenses and capital expenditures for at least the next twelve months.

Precision Healing Merger

In November 2020, we entered into agreements to purchase shares of Series A Convertible Preferred Stock (the “Series A Stock”) of Precision Healing for an aggregate purchase price of $600,000. In 2021, we made additional purchases of Series A Stock: $600,000 in February, $500,000 in June, $500,000 in October, and $600,000 in December.

In April 2022, we closed a merger transaction with Precision Healing pursuant to which Precision Healing became our wholly owned subsidiary. Pursuant to the terms of the merger agreement, holders of Precision Healing common stock and preferred stock, other than the Company, were entitled to receive closing consideration, consisting of $125,966 in cash, which was paid to stockholders who were not accredited investors, 165,738 shares of our common stock, which was paid only to accredited investors, and the payment in cash of approximately $0.6 million of transaction expenses of Precision Healing. We recorded the issuance of the 165,738 shares to accredited investors and cash payments to nonaccredited investors based on the closing price per share of our common stock on April 4, 2022, which was $30.75.

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Upon the closing of the merger, 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 our 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 our common stock with an initial exercise price of $7.32 per share and an expiration date of April 22, 2031, and (ii) 12,301 shares of our common stock with an initial exercise price of $12.05 per share and an expiration date of August 10, 2030. Concurrent with the assumption of the Precision Healing Plan, we terminated the ability to offer future awards under the Precision Healing Plan.

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 Accounting Standards Codification Topic 805, Business Combinations. The earnout consideration is payable in cash or, at our election, is payable to accredited investors in shares of our common stock at a price per share equal to the greater of (i) $27.13 or (ii) the average closing price of our common stock for the 20 trading days prior to the date such earnout consideration is due and payable. Pursuant to the merger agreement, a minimum percentage of the earnout consideration may be required to be issued to accredited investors in shares of our common stock for tax purposes. The amount and composition of the portion of earnout consideration payable is subject to adjustment and offsets as set forth in the merger agreement. We do not anticipate making an earnout consideration payment prior to January 2025. For more details relating to the contingent earnout consideration payable pursuant to the Precision Healing merger agreement, see Note 3 to the unaudited consolidated financial statements.

Scendia Acquisition

In July 2022, we entered into a membership interest purchase agreement by and among the Company, Scendia and Phillips pursuant to which, and in accordance with the terms and conditions set forth therein, we acquired 100% of the issued and outstanding membership interests in Scendia from Phillips.

Pursuant to the purchase agreement, Phillips 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 our common stock. Pursuant to the purchase agreement, at closing, we withheld 94,798 shares of common stock with an agreed upon value of $1.95 million (the “Indemnity Holdback Shares”), which such Indemnity Holdback Shares were withheld to the extent provided in the purchase agreement to satisfy the Phillips’ indemnification obligations and subsequently issued and released to Phillips in July 2023.

In addition to the cash consideration and the stock consideration, the purchase agreement provides that Phillips is entitled to receive two potential earnout payments, payable on an annual basis, not to exceed $10.0 million in the aggregate. The earnout consideration is payable to Phillips in cash or, at our election, in up to 486,145 shares of our common stock upon the achievement of certain performance thresholds relating to net revenue attributable to sales of Scendia products during the two-year period following the closing. We made the first earnout payment of approximately $693,000 in cash in August 2023. We expect the second earnout payment to be made in the third quarter of 2024. For more details relating to the contingent earnout consideration payable pursuant to the purchase agreement, see Note 4 to the unaudited consolidated financial statements.

Applied Asset Purchase

On August 1, 2023, we entered into the Purchase Agreement by and among the Company, SMAT, Hymed, Applied and the Owner, pursuant to which SMAT acquired the Purchased Assets and assumed certain Assumed Liabilities upon the terms and subject to the conditions set forth in the Purchase Agreement. The transaction closed on August 1, 2023. The Purchased Assets were purchased for an initial aggregate purchase price of $15.25 million, consisting of (i) $9.75 million in cash, (ii) 73,809 shares of our common stock, with an agreed upon value of $3.0 million and (iii) $2.5 million in cash, to be paid in four equal installments on each of the next four anniversaries of the Closing.

In addition to the Cash Closing Consideration, Stock Closing Consideration and Installment Payments, the Purchase Agreement provides that the Sellers are entitled to receive up to an additional $10.0 million, which is payable to the Sellers in cash, upon the achievement of certain performance thresholds relating to SMAT’s collections from net sales of a collagen-based product currently under development. Upon expiration of the seventh anniversary of the Closing, to the extent the Sellers have not earned the entirety of the Earnout, SMAT shall pay the Sellers the True-Up Payment. The Earnout, minus the True-Up Payment and any Earnout payments already made by SMAT, may be earned at any point in the future, including after the True-Up Payment is made.

Since the closing of the Applied Asset Purchase, we make intercompany royalty payments to SMAT at the same rate as set forth in the Sublicense Agreement. SMAT intends to use the royalties received to repay borrowings under the Term Loan. As described under “Loan Agreement” below, SMAT is required to maintain compliance with certain maintenance covenants and is limited in its ability to distribute or lend cash to the Company without consent of the Bank.

Loan Agreement

In connection with the entry into the Purchase Agreement, on August 1, 2023, we, as guarantor, and SMAT, as borrower, entered into the Loan Agreement with the Bank providing for, among other things, a Term Loan in the aggregate principal amount of $12.0 million, which was evidenced by an advancing promissory note. Pursuant to the Loan Agreement, the Bank agreed to make, at any time and from time to time prior to February 1, 2024, one or more advances to SMAT.

The proceeds of the advances under the Loan Agreement will be used for working capital and for purposes of financing up to one hundred percent (100%) of the Cash Closing Consideration and Installment Payments for the Applied Asset Purchase and related fees and expenses, including any subsequent payments that may be due to the Sellers after the Closing. On the Effective Date, the Bank, at the request of SMAT, made an advance for $9.75 million. The proceeds from the advance were used to fund the Cash Closing Consideration for the Applied Asset Purchase.

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Advances under the Term Loan will begin amortizing in monthly installments commencing on August 5, 2024. All remaining unpaid balances under the Term Loan are due and payable in full on August 1, 2028 (the “Maturity Date”). SMAT may prepay amounts due under the Term Loan. All accrued but unpaid interest on the unpaid principal balance of outstanding advances is due and payable monthly, beginning on September 5, 2023 and continuing monthly on the fifth day of each month thereafter until the Maturity Date. The unpaid principal balance of outstanding advances bears interest, subject to certain conditions, at the lesser of the Maximum Rate (as defined in the Loan Agreement) or the Base Rate, which is for any day, a rate per annum equal to the term secured overnight financing rate (Term SOFR) (as administered by the Federal Reserve Bank of New York) for a one-month tenor in effect on such day plus three percent (3.0%).

The obligations of SMAT under the Loan Agreement and the other loan documents delivered in connection therewith are guaranteed by us and are secured by a first priority security interest in substantially all of the existing and future assets of SMAT.

The Loan Agreement contains customary representations and warranties and certain covenants that limit (subject to certain exceptions) the ability of SMAT and us to, among other things, (i) create, assume or guarantee certain liabilities, (ii) create, assume or suffer liens securing indebtedness, (iii) make or permit loans and advances, (iv) acquire any assets outside the ordinary course of business, (v) consolidate, merge or sell all or a material part of its assets, (vi) pay dividends or other distributions on, or redeem or repurchase, interest in an obligor, including us as guarantor, (vii) cease, suspend or materially curtail business operations or (viii) engage in certain affiliate transactions. In addition, the Loan Agreement contains financial covenants that require SMAT to maintain (i) a minimum Debt Services Coverage Ratio and (ii) a maximum Cash Flow Leverage Ratio, in each case, as defined and calculated according to the procedures set forth in the Loan Agreement. Pursuant to the Loan Agreement, in the event that SMAT fails to comply with the financial covenants described above, we are required to contribute cash to SMAT in an amount equal to the amount required to satisfy the financial covenants. SMAT is limited in its ability to distribute or lend cash to the Company without consent of the Bank.

Pursuant to the Loan Agreement, starting with the three months ended September 30, 2023 and for each quarter thereafter, SMAT will be required to maintain a minimum Debt Service Coverage Ratio (as defined below) of 1.2 to 1.0, which ratio is calculated as of the last day of the applicable fiscal quarter. The “Debt Service Coverage Ratio” is the ratio of (a) the sum of the following during the preceding twelve (12) month period, subject to annualization in certain circumstances: (i) earnings before interest, taxes, depreciation, amortization, stock compensation expense and gains or losses on sales of assets outside the ordinary course of business (“EBITDA”) minus (ii) capital expenditures, minus (iii) cash taxes, minus (iv) dividends and distributions, to (b) the sum of (i) the current portion of long-term debt, (ii) Installment Payments made during the preceding twelve (12) month period and (iii) interest expense during the preceding twelve (12) month period, subject to annualization in certain circumstances.

The Loan Agreement also requires SMAT to, subject to certain conditions, maintain a maximum Cash Flow Leverage Ratio (as defined below) of not more than (a) 4.5 to 1.0 as of the last day of the fiscal quarter ending on September 30, 2023, (b) 4.0 to 1.0 as of the last day of each fiscal quarter ending on December 31, 2023, and March 31, 2024, (c) 3.5 to 1.0 as of the last day of each fiscal quarter ending on June 30, 2024, and September 30, 2024, and (d) 3.0 to 1.0 as of the last day of each fiscal quarter thereafter. The “Cash Flow Leverage Ratio” is the ratio of all Funded Debt (as defined in the Loan Agreement) to certain multiples of EBITDA during the preceding twelve (12) month period, subject to annualization in certain circumstances.

The Loan Agreement also contains customary events of default. If such an event of default occurs, the Bank would be entitled to take various actions, including the acceleration of amounts due under the Loan Agreement and actions permitted to be taken by a secured creditor.

Cash Flow Analysis

For the six months ended June 30, 2023, net cash used in operating activities was $3.5 million compared to $3.3 million used in operating activities for the six months ended June 30, 2022. The slightly higher use of cash was primarily due to an increase in inventory and higher payouts of accrued bonuses and commissions during the first half of 2023.

For the six months ended June 30, 2023, net cash used in investing activities was $0.04 million compared to $2.4 million used in investing activities during the six months ended June 30, 2022. The lower use of cash used in investing activities during the six months ended June 30, 2023 was primarily due to cash paid for acquisitions during the six months ended June 30, 2022.

For the six months ended June 30, 2023, net cash provided by financing activities was $0.6 million as compared to $0.3 million used in financing activities for the six months ended June 30, 2022. The cash provided by financing activities during the six months ended June 30, 2023 was due to net proceeds received pursuant to sales of our common stock of $1.0 million, partially offset by the net settlement of equity-based awards, which totaled $0.4 million.

MATERIAL TRANSACTIONS WITH RELATED PARTIES

CellerateRX Surgical Sublicense Agreement

We have an exclusive, world-wide sublicense to distribute CellerateRX Surgical and HYCOL products into the surgical and wound care markets from an affiliate of Catalyst, CGI Cellerate RX, which licenses the rights to CellerateRX from Applied. Sales of CellerateRX Surgical comprised the substantial majority of our sales during the six months ended June 30, 2023 and 2022. In January 2021, we amended the term of the Sublicense Agreement to extend the term to May 17, 2050, with automatic successive one-year renewals so long as annual net sales of the licensed products exceed $1.0 million. We pay 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 $12.0 million, 4% of all collected Net Sales each year that exceed $12.0 million up to $20.0 million, and 5% of all collected Net Sales each year that exceed $20.0 million. For the three months ended June 30, 2023 and 2022, royalty expense was $548,430 and $443,733, respectively under the terms of this agreement. For the six months ended June 30, 2023 and 2022, royalty expense was $1,069,244 and $812,966, respectively, under the terms of this agreement. Ronald T. Nixon, our Executive Chairman, is the founder and managing partner of Catalyst.

As discussed above, in August 2023, we acquired the rights to manufacture and sell CellerateRX Surgical and HYCOL products from Applied. In connection with this acquisition, Applied assigned its license agreement with CGI Cellerate RX to a wholly owned subsidiary of the Company, and no further royalties will be due to Applied thereunder.

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Consulting Agreement

In July 2021, we entered into an asset purchase agreement with Rochal, a related party. Concurrent with the Rochal asset purchase, we entered into a consulting agreement with Ann Beal Salamone pursuant to which Ms. Salamone agreed to provide us 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 us, 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 us, and is subject to renewal. Ms. Salamone is a director of the Company, is a significant shareholder and the current Chair of the board of directors of Rochal.

Catalyst Transaction Advisory Services Agreement

In March 2023, we entered into a Transaction Advisory Services Agreement (the “Catalyst Services Agreement”) effective March 1, 2023 with Catalyst, a related party. Pursuant to the Catalyst 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 us in connection with any merger, acquisition, recapitalization, divestiture, financing, refinancing, or other similar transaction in which we may be, or may consider becoming, involved, and any such additional services as mutually agreed upon in writing by and between Catalyst and us (the “Catalyst Services”).

Pursuant to the Catalyst Services Agreement, we 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 Catalyst 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 Catalyst Services rendered under the Catalyst Services Agreement, with all reimbursements being contingent upon the prior approval of the Audit Committee of our Board of Directors. We incurred $72,986 of expenses pursuant to the Catalyst Services Agreement during the six months ended June 30, 2023.

Receivables and Payables

We had outstanding related party receivables totaling $20,662 at June 30, 2023, and $98,548 at December 31, 2022. We had outstanding related party payables totaling $96,656 at June 30, 2023, and $34,036 at December 31, 2022.

IMPACT OF INFLATION AND CHANGING PRICES

Inflation and changing prices have not had a material impact on our historical results of operations. We do not currently anticipate that inflation and changing prices will have a material impact on our future results of operations.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes. Although we base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, actual results may differ from the estimates on which our financial statements are prepared at any given point of time. Changes in these estimates could materially affect our consolidated financial position, results of operations or cash flows. Significant items that are subject to such estimates and assumptions include revenue and expense accruals, the fair value measurement of assets and liabilities and the allocation of purchase price to the fair value of assets acquired. Our critical accounting policies have not significantly changed since December 31, 2022 and are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, we are not required to provide this information.

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to our management, including our principal executive and principal financial officers (whom we refer to in this periodic report as our Certifying Officers), as appropriate to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of our Certifying Officers, the effectiveness of our disclosure controls and procedures as of June 30, 2023, pursuant to Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, our Certifying Officers concluded that, as of June 30, 2023, our disclosure controls and procedures were effective.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II — Other Information

ITEM 1. LEGAL PROCEEDINGS

From time to time, we may be involved in claims and legal actions that arise in the ordinary course of business. To our knowledge, there are no material pending legal proceedings to which we are a party or of which any of our property is the subject.

ITEM 1A. RISK FACTORS

Except as provided below, there were no material changes to the Risk Factors disclosed in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022. For more information concerning our risk factors, please see “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022.

We may fail to realize all of the anticipated benefits of the Applied Asset Purchase, or such benefits may take longer to realize than expected.

We may fail to realize all of the anticipated benefits of the Applied Asset Purchase, including expected operational, research and development and cost synergies, or such benefits may not be achieved within the anticipated timeframe. In addition, in connection with the Applied Asset Purchase, we acquired control of the manufacturing of our CellerateRX Surgical and HYCOL products, which was previously controlled by the Sellers. If we are unable to maintain or replace the Sellers’ manufacturing process, our sales of CellerateRX Surgical and HYCOL products could be jeopardized.

Furthermore, we have incurred significant transaction costs in connection with the Applied Asset Purchase, including payment of certain fees and expenses incurred in connection with the Applied Asset Purchase and the financing of the Applied Asset Purchase, and our future financial results could be impacted if the intangible assets we acquired in the Applied Asset Purchase become impaired. The failure to realize the anticipated benefits of the Applied Asset Purchase or any of our other recent acquisitions could cause an interruption of, or a loss of momentum in, our operations and could result in a material adverse effect on our financial condition, results of operations or cash flows.

Our indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations.

A significant portion of our future cash flow is required to pay interest and principal on our outstanding indebtedness, and we may be unable to generate sufficient cash flow from operations, or have future borrowings available, to enable us to repay our indebtedness or to fund other liquidity needs. Among other consequences, this indebtedness could:

| ● | require us to use a significant percentage of our cash flow from operations for debt service and the satisfaction of repayment obligations, and not for other purposes, such as funding working capital and capital expenditures or making future acquisitions;
| ● | cause our interest expense to increase if there is a general increase in interest rates, because a portion of our indebtedness bears interest at floating rates;
| ● | limit our flexibility in planning for or reacting to changes in our business and limit our ability to exploit future business opportunities;
| ● | cause us to be more highly leveraged than some of our competitors, which may place us at a competitive disadvantage; and

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Our outstanding indebtedness is subject to certain operating and financial covenants that restrict our business and financing activities and may adversely affect our cash flow and our ability to operate our business.

The Loan Agreement requires us and SMAT, to maintain compliance with certain operating and financial covenants, which provide that we or SMAT, among other things, may not, subject to certain exceptions:

| ● | create or permit the existence of additional liens on our assets;
| ● | enter into any pledge agreements or arrangements;
| ● | with respect to SMAT, make investments in or provide capital contributions to other entities;
| ● | enter into a merger or consolidation or acquire any assets outside of the ordinary course of business;
| ● | dispose of a material part of our assets or property or enter into any sale-leaseback transactions;
| ● | with respect to SMAT, pay dividends or distributions of our capital stock, without the prior written consent of the Bank;
| ● | make or permit to remain outstanding any loans;
| ● | change the nature of our business;
| ● | enter into transactions with affiliates other than in the ordinary course of business on an arm’s-length basis; or
| ● | amend, modify or obtain or grant a waiver of any provision of any document or instrument evidencing or securing any of our subordinated indebtedness.

In addition, starting with the quarter ending September 30, 2023, SMAT is required to maintain a minimum Debt Service Coverage Ratio of 1.2 to 1.0, which ratio is calculated as of the last day of the applicable fiscal quarter. SMAT is also required to maintain as of the end of each fiscal quarter a maximum Cash Flow Leverage Ratio of not more than (a) 4.5 to 1.0 as of the last day of the fiscal quarter ending on September 30, 2023, (b) 4.0 to 1.0 as of the last day of each fiscal quarter ending on December 31, 2023, and March 31, 2024, (c) 3.5 to 1.0 as of the last day of each fiscal quarter ending on June 30, 2024, and September 30, 2024, and (d) 3.0 to 1.0 as of the last day of each fiscal quarter thereafter.

Further, in the event that SMAT fails to comply with its financial covenants, we are required to contribute cash to SMAT in an amount equal to the amount required to satisfy the financial covenants, and we may not have sufficient funds available to fulfill such obligation.

A breach of any of the covenants under our loan agreements, subject to certain cure periods, will result in an event of default, which could cause all of our outstanding indebtedness under the Loan Agreement to become immediately due and payable, and a default interest rate of an additional 5.0% per annum may be applied to the outstanding loan balance. If our indebtedness is accelerated, we cannot be certain that we will have sufficient funds available to pay the accelerated indebtedness or that we will have the ability to refinance the accelerated indebtedness on terms favorable to us or at all.

As a result of the negative covenants contained in the Loan Agreement and the need for cash to pay interest and principal amortization payments required under the Loan Agreement, the Company may not have access to cash it otherwise would have for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes.

Pursuant to the Loan Agreement, SMAT is subject to restrictions on making certain payments, including dividends, other distributions and loans, to the Company. As a result, although SMAT may use its cash to repay the Term Loan, the Company may not have access to cash it otherwise would have for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes.

If our Executive Chairman ceases to serve as the Chairman of the Board of Directors of the Company or SMAT, such event could result in an event of default under the Loan Agreement.

The Loan Agreement provides that if Ron Nixon, our Executive Chairman, ceases to serve as Chairman of the Board of Directors of the Company or SMAT, an event of default will occur under the Loan Agreement, unless a successor, acceptable to the Bank, is elected or appointed within 10 business days of such event. If such an event were to occur and we are unable to find a replacement suitable to the Bank, we would be in default and all of our outstanding indebtedness could become immediately due and payable, and a default interest rate of an additional 5.0% per annum may be applied to the outstanding loan balance.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There were no sales of unregistered securities during the quarter ended June 30, 2023 that were not previously reported on a Current Report on Form 8-K.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

This item is not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

The exhibits listed below are filed as part of this Report or incorporated herein by reference.

Exhibit No. |  | Description
2.1# |  | Asset Purchase Agreement, dated July 14, 2021, by and between Sanara MedTech Inc., as Purchaser, and Rochal Industries, LLC, as Seller (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 19, 2021).
2.2# |  | Agreement and Plan of Merger, dated April 1, 2022, by and among Sanara MedTech Inc., United Wound and Skin Solutions, LLC, Precision Healing Inc., PH Merger Sub I, Inc., PH Merger Sub II, LLC and Furneaux Capital Holdco, LLC (d/b/a BlueIO) (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on April 4, 2022).
2.3# |  | Membership Interest Purchase Agreement, dated July 1, 2022, by and among Sanara MedTech Inc., Scendia Biologics, LLC and Ryan Phillips (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on July 5, 2022).
2.4# |  | Asset Purchase Agreement, dated August 1, 2023, by and among Sanara MedTech Inc., Sanara MedTech Applied Technologies, LLC, The Hymed Group Corporation, Applied Nutritionals, LLC and Dr. George D. Petito (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on August 2, 2023).
3.1 |  | Articles of Incorporation of Sanara MedTech Inc. (as amended through December 30, 2020) (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed on March 30, 2021).
3.2 |  | Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 filed April 11, 2008).
10.1+ |  | Professional Services Agreement, dated August 1, 2023, by and between Sanara MedTech Inc. and Dr. George D. Petito (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 2, 2023).
10.2+ |  | Loan Agreement, dated August 1, 2023, between Sanara MedTech Applied Technologies, LLC, Sanara MedTech Inc. and Cadence Bank (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on August 2, 2023).
31.1* |  | Certification of Principal Executive Officer in accordance with 18 U.S.C. Section 1350, as adopted by Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* |  | Certification of Principal Financial Officer in accordance with 18 U.S.C. Section 1350, as adopted by Section 302 of the Sarbanes-Oxley Act of 2002.
32.1** |  | Certification of Principal Executive Officer in accordance with 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
32.2** |  | Certification of Principal Financial Officer in accordance with 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS |  | Inline XBRL Instance Document.
101.SCH |  | Inline XBRL Taxonomy Extension Schema Document.
101.CAL |  | Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF |  | Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB |  | Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE |  | Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104 |  | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

* Filed herewith

** The certifications attached as Exhibit 32.1 and Exhibit 32.2 are not deemed “filed” with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Sanara MedTech Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

# Certain schedules and exhibits to this agreement have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished supplementally to the Securities and Exchange Commission or its staff upon request. If indicated on the first page of such agreement, certain confidential information has been excluded pursuant to Item 601(b)(2)(ii) of Regulation S-K. Such excluded information is not material and is the type that the Company treats as private or confidential.

+ Certain schedules and exhibits to this agreement have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished supplementally to the Securities and Exchange Commission or its staff upon request. Certain confidential information has been excluded pursuant to Item 601(b)(10)(iv) of Regulation S-K. Such excluded information is not material and is the type that the Company treats as private or confidential.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

| SANARA MEDTECH INC.
August 14, 2023 | By: | /s/ Michael D. McNeil
|  | Michael D. McNeil
|  | Chief Financial Officer
|  | (Principal Financial Officer and duly authorized officer)

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