SCENDIA PURCHASE AGREEMENT

6 Months Ended

Jun. 30, 2023

Scendia Purchase Agreement

SCENDIA PURCHASE AGREEMENT

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.

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:

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:

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.