Sanara MedTech Inc. (SMTI) FY 2021 MD&A

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The
following discussion and analysis contains forward-looking statements about future revenues, operating results, plans and expectations.
Forward-looking statements are based on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties
and our results could differ materially from the results anticipated by our forward-looking statements as a result of many known or unknown
factors, including, but not limited to, those factors discussed in Part I, “Item 1A. Risk Factors.” Also, please read the
“Cautionary Statement Regarding Forward-Looking Statements” set forth at the beginning of this Annual Report on Form 10-K.

In
addition, the following discussion should be read in conjunction with Part I of this Annual Report on Form 10-K as well as our consolidated
financial statements and the related Notes contained elsewhere in this Annual Report on Form 10-K.

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 and chronic wound and skin care markets. Our portfolio of products and services will allow
us to deliver comprehensive wound and skin care solutions for patients in all care settings, including acute (hospitals and long-term
acute care hospitals (“LTACHs”)) and post-acute (wound care clinics, physician offices, skilled nursing facilities (“SNFs”),
home health, hospice, and retail). 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 wound and skin care products and technologies and are continually seeking to expand our offerings
for patients requiring wound and skin care 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. We
license our products from Applied Nutritionals, LLC (“AN”) (through a sublicense with CGI Cellerate RX, LLC (“CGI Cellerate
RX”), an affiliate of The Catalyst Group, Inc. (“Catalyst”)) and Rochal Industries, LLC (“Rochal”) and
have the right to exclusively distribute certain products manufactured by Cook Biotech Inc. (“Cook Biotech”).

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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 skin care virtual consult services. We anticipate that our various service offerings will allow
clinicians/physicians utilizing our technologies to collect and analyze large amounts of data on patient conditions and outcomes that
will improve treatment protocols and ultimately lead to more evidence-based formulary to improve patient outcomes. Through a combination
of our WounDerm services and our Sanara products, we believe we will be able to offer patient care solutions at every step in the continuum
of wound and skin care from diagnosis through healing.

Effective
July 1, 2021, we acquired certain assets from Rochal, including, among others, intellectual property, four 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.

Impact
of the COVID-19 Pandemic

Beginning
in March 2020, many states issued orders suspending elective surgeries in order to free-up hospital resources to treat COVID-19 patients.
This resulted in a reduction in demand for our surgical products beginning in the second half of March 2020. Additionally, most states
limited access to SNFs to only resident caregivers, which impeded our ability to provide education and product training to the clinicians
who use our products in these facilities. These restrictions resulted in an overall decline in sales for the second quarter of 2020.
During the second half of 2020 and the first quarter of 2021, we saw a strong rebound in product sales as restrictions on elective surgeries
eased in our primary markets in Texas, Florida, and the southeastern United States. During the second half of 2021, the United States
experienced a surge of COVID-19 cases as the Delta and Omicron variants of the virus impacted much of the country and negatively impacted
our sales in Texas, the northeastern United States, and other markets.

The
duration and effects of the pandemic remain uncertain; however, management believes that elective surgical procedures will continue to
be performed with the exception of certain geographic hotspots. Additionally, management believes that the majority of surgical procedures
impacted by COVID-19 and its variants will ultimately be performed. We will continue to closely monitor the pandemic in order to ensure
the safety of our people and our ability to serve our customers and patients.

Components
of Results of Operations

Sources
of Revenues

Our
revenue is derived primarily from sales of our surgical wound care products to hospitals and other acute care facilities, and sales of
our chronic wound care products to customers across the post-acute continuum of care. 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 our product is received by the customer.

The
vast majority of our product sales revenue is derived from sales of CellerateRX surgical powder.
Revenue streams from product sales and royalties are summarized below for the years ended December 31, 2021 and 2020. All revenue was
generated in the United States.

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 throughout the life of the patent, which expires in 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).

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Cost
of Goods Sold

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

Operating
Expenses

Selling,
general and administrative expenses (“SG&A”) consist primarily of salaries, sales commissions, benefits, bonuses, and
stock-based compensation. SG&A also includes outside legal counsel, audit fees, insurance premiums, rent, and other corporate expenses.
We expense all SG&A expenses as incurred. We expect our SG&A expenses to increase in absolute dollars and decrease as a percent
of revenue as we grow our commercial organization.

Research
and development expenses (“R&D”) include costs related to enhancements to our currently available products and additional
investments in our product and platform development pipelines. 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 as well as to bring new products to market.

Other
Income (Expense)

Other
income (expense) is primarily comprised of gains or losses on equity method investments, interest income, interest expense and other
non-operating activities. Interest income consists of interest earned on our cash and cash equivalents.

Results
of Operations

Revenues.
For the year ended December 31, 2021, we generated revenues of $24,143,919 compared to revenues of $15,586,976 for the year ended
December 31, 2020, a 55% increase from the prior year. The higher revenues in 2021 were due to increased sales of surgical wound care
products as we continued the execution of our strategy to expand our sales force and independent distribution network in both new and
existing U.S. markets. As discussed above under “—Impact of the COVID-19 Pandemic,” our sales have been adversely impacted
in 2020 and 2021 as a result of the COVID-19 pandemic, and the duration and future impact of the pandemic remain uncertain.

Cost
of goods sold. Cost of goods sold for the year ended December 31, 2021 was $2,311,221, compared to costs of goods sold of $1,616,625
for the year ended December 31, 2020. The increase over the prior year was primarily due to higher sales volume. Gross margins were approximately
90% for both years ended December 31, 2021 and 2020.

Selling,
general and administrative expenses (“SG&A”). SG&A expenses for the year ended December 31, 2021 were $28,053,176,
compared to SG&A expenses of $18,673,404 for the year ended December 31, 2020. The higher SG&A expenses in 2021 were primarily
due to increased selling costs resulting from sales force expansion and operational support, higher sales commission expense as a result
of higher product sales, higher non-cash equity compensation costs, higher payroll costs related to the mid-year addition of the Rochal
workforce, and higher costs associated with the launch of our WounDerm technology platform. In addition, costs related to travel and
in-person promotional activities increased in 2021 compared to 2020 as many in-person activities were cancelled or postponed in 2020
as a result of the COVID-19 pandemic. As part of our continued strategy to expand our sales reach in new and existing markets, we employed
eleven additional field sales managers since December 31, 2020. As of December 31, 2021, we had a total of 30 field sales managers.

Research
and development expenses. R&D expenses for the year ended December 31, 2021 were $558,704 compared to $40,190 for the year
ended December 31, 2020. The higher R&D expenses in 2021 were due to costs associated with several development projects for our currently
licensed products and technologies.

Depreciation
and amortization expense. Depreciation and amortization expense for the period ended December 31, 2021 was $596,975 compared
to $291,370 for the year ended December 31, 2020. The higher depreciation and amortization expense in 2021 was due to the amortization
of internal use software placed into service in 2021, and due to additional amortization related to the patents acquired from Rochal.

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Other
expense. Other expense for the year ended December 31, 2021 was $617,638 compared to other income of $589,468 for the
year ended December 31, 2020. The higher expense in 2021 was due to the recognition of a non-cash loss of $616,927 from our equity method
investment in Precision Healing Inc. (“Precision Healing”). Interest expense was $711 for the year ended December 31, 2021,
as compared to $11,528 for the year ended December 31, 2020. The higher interest expense in 2020 was due to interest expense associated
with our unsecured promissory note under the Paycheck Protection Program (described in further detail below), and interest on a convertible
promissory note which was converted to common stock in early 2020.

Net
income / loss. For the year ended December 31, 2021, we had a net loss of $7,993,795, compared to net loss of $4,445,145 for
the year ended December 31, 2020. The higher net loss in 2021 was due to increased SG&A costs described above, higher R&D expenses,
and the recognition of losses on our equity method investment.

Liquidity
and Capital Resources

Cash
on hand at December 31, 2021 was $18,652,841, compared to $455,366 at December 31, 2020. Historically, we have financed our operations
primarily from the sale of equity securities. In 2020, our principal sources of liquidity were cash generated from operations, availability
of our bank line of credit, and cash provided by an unsecured promissory note under the Paycheck Protection Program in the principal
amount of $583,000 (the “PPP Loan”) to Cadence Bank, N.A. (“Cadence”). All principal and interest under the
PPP Loan were forgiven in 2020. On February 12, 2021, we closed an underwritten public offering of 1,265,000 shares of our common
stock (including 165,000 shares of common stock issued pursuant to the full exercise by the underwriters of their option to purchase
additional shares of common stock) at a public offering price of $25.00 per share, resulting in gross proceeds of $31,625,000, before
deducting underwriting discounts and commissions and offering expenses. We expect our future needs for cash to include expanding our
salesforce, further development of our products, services and technologies pipeline, clinical studies and general corporate purposes,
including working capital and acquisitions. Based on our current plan of operations, including potential acquisitions, we believe our
cash on hand, when combined with expected cash flows from operations, 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. However, our ability to generate sufficient
cash flows from operations or fund any potential future acquisitions or other similar transactions depends on operating and economic
conditions, some of which are beyond our control. If additional capital is needed, we may not be able to obtain debt or equity financing
on terms favorable to us, or at all. We are continuing to evaluate all uses of cash, including opportunistic acquisitions, and whether
to pursue growth opportunities and whether such growth opportunities, additional sources of liquidity, including equity and/or debt financings,
are appropriate to fund any such growth opportunities.

On
January 15, 2021, we entered into a new loan agreement with Cadence (the “Loan Agreement”), providing for a $2.5 million
revolving line of credit. Pursuant to the terms of the Loan Agreement, the revolving line of credit was set to mature on January 13,
2023 and was secured by substantially all of our assets.

On
February 11, 2021, we made an $800,000 draw on the revolving line of credit. On February 19, 2021, we paid down the entire balance of
the revolving line of credit. Effective March 25, 2022, we terminated Loan Agreement and released Cadence from any obligation to make
advances under the Loan Agreement. No amounts of principal, interest or other fees and expenses were owed by the Company as of the termination
date. There is no assurance that we will enter into an additional loan agreement with Cadence or with another bank on similar terms,
or at all.

On
November 9, 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 as follows:
$600,000 in February, $500,000 in June, $500,000 in October, and $600,000 in December of 2021.

On
July 7, 2019, we executed a license agreement with Rochal whereby we 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”). Under the terms of the BIAKŌS License Agreement, we agreed
to pay Rochal $750,000 upon the completion of a capital raise, on or before December 31, 2022, of at least $10,000,000 through the sale
of our common stock or assets. In March 2021, we issued 20,834 shares of our common stock to Rochal as full payment of the $750,000,
which became due upon the completion of our capital raise in February 2021.

On
June 3, 2021, we invested $2,084,278 for 278,587 Class A Preferred Shares (the “Shares”) of Canada based Pixalere Healthcare,
Inc. (“Pixalere”). The Shares are convertible into 28.6% 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
our purchase of the Shares, Pixalere granted Pixalere Healthcare USA, LLC (“Pixalere USA”), our subsidiary, a royalty-free
exclusive license to use the Pixalere software and platform in the United States. In conjunction with the grant of the license, we issued
Pixalere a 27.3% equity ownership interest in Pixalere USA.

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On
July 14, 2021, we entered into an asset purchase agreement with Rochal, effective July 1, 2021, pursuant to which we purchased certain
assets of Rochal, including, among others, certain of Rochal’s intellectual property, furniture and equipment, supplies, rights
and claims, other than certain excluded assets, and assumed certain liabilities upon the terms and subject to the conditions set forth
in the asset purchase agreement. In exchange for the acquired assets, we paid Rochal (i) $496,100 in cash and (ii) 14,369 shares of common
stock.

On
July 17, 2020, we purchased Series B-2 Preferred Shares of Direct Dermatology Inc. for $500,000. We made additional investments in the
Series B-2 Preferred Shares in the amounts of $125,000 in November 2021 and $125,000 in December of 2021.

For
the year ended December 31, 2021, net cash used in operating activities was $4,814,526 compared to $4,034,518 used in operating activities
for the year ended December 31, 2020. The higher use of cash in 2021 was primarily due to higher operating expenses related to sales
force expansion, research and development, and the launch of our WounDerm technology platform.

For
the year ended December 31, 2021, net cash used in investing activities was $5,284,731 compared to $2,744,374 used in investing activities
during the year ended December 31, 2020. The cash used in investing activities during 2021 included $496,100 for the Rochal asset acquisition,
and our investments in non-marketable equity securities including $2.2 million for Precision Healing Inc. Series A-2 Preferred Shares,
$2.0 million for Pixalere Healthcare Inc. Class A Preferred Shares, and $250,000 for DirectDerm Series B-2 Preferred Shares.

For
the year ended December 31, 2021, net cash provided by financing activities was $28,296,732 as compared to $622,330 provided by financing
activities for the year ended December 31, 2020. The higher cash provided by financing activities in 2021 was due to proceeds received
pursuant to an underwritten public offering of 1,265,000 shares of our common stock at a public offering price of $25.00 per share resulting
in gross proceeds of $31,625,000, before underwriting discounts, commissions and other offering expenses.

Material
Transactions with Related Parties

CellerateRx
Sublicense Agreement

We
have an exclusive, world-wide sublicense to distribute CellerateRX products into the wound care and surgical markets from an affiliate
of Catalyst, CGI Cellerate RX, which licenses the rights to CellerateRX from AN. Sales of CellerateRX comprise the vast majority
of our sales. On January 26, 2021, we amended the term of the sublicense agreement to extend the term to May 17, 2050, with automatic
one-year renewals so long as annual net sales of CellerateRX exceed $1,000,000. We pay royalties based on our annual net sales of CellerateRX
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. Minimum royalties of $400,000 per year are payable
for the first five years of the sublicense agreement, which was entered on August 27, 2018. For the years ended December 31, 2021 and
2020, royalty expense recognized under the terms of this agreement totaled $856,755 and $479,809, respectively.

Ronald
T. Nixon, our Executive Chairman, is the founder and managing partner of Catalyst. Mr. Nixon and Catalyst, collectively with their affiliates,
including CGI Cellerate RX, beneficially owned 3,519,019 shares, or 46%, of our common stock as of December 31, 2021.

Convertible
Notes Payable

In
connection with the Cellerate Acquisition, we issued a 30-month convertible promissory note to CGI Cellerate RX, an affiliate of Catalyst,
in the principal amount of $1,500,000, bearing interest at 5% per annum, compounded quarterly. Interest on the promissory note was payable
quarterly but could have been deferred at our election to the maturity of the promissory note. Outstanding principal and interest were
convertible at CGI Cellerate RX’s option into shares of our common stock at a conversion price of $9.00 per share.

On
February 7, 2020, CGI Cellerate RX converted its $1,500,000 promissory note, including accrued interest of $111,911, into 179,101 shares
of our common stock.

Payables

We
had outstanding payables to related parties totaling $155,817 at December 31, 2021, and $223,589 at December 31, 2020.

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Receivables

We
had outstanding receivables to a related party totaling $79,787 at December 31, 2021, and $0 at December 31, 2020.

Product
License Agreements

On
July 7, 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 (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) approved. 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.

On
October 1, 2019, the Company executed a 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 (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.

On
May 4, 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.

Manufacturing
and Technical Services Agreements

On
September 9, 2020, we executed a manufacturing agreement with Rochal. Under the terms of the manufacturing agreement, Rochal agreed to
manufacture, package, and label products we licensed from Rochal. The manufacturing agreement includes customary terms and conditions.
The term of the agreement is for a period of five years unless extended by the mutual consent of the parties. For the year ended December
31, 2021, we incurred no inventory manufacturing costs with Rochal. The Company terminated this agreement on August 12, 2021.

On
September 9, 2020, we executed a technical services agreement with Rochal. Under the terms of the technical services agreement, Rochal
will provide its expertise and services on technical service projects identified by us for wound care, skin care and surgical site care
applications. The technical services agreement includes customary terms and conditions for our industry. For the year ended December
31, 2021, we incurred $337,746 of costs for Rochal technical services. The Company terminated this agreement on August 12, 2021.

Ronald
T. Nixon, our Executive Chairman, is also a director of Rochal, and indirectly a significant shareholder of Rochal, and through the potential
exercise of warrants a majority shareholder of Rochal. Ann Beal Salamone, a director, is a significant shareholder, the former president
and current Chairman of the Board of Rochal.

Rochal
Asset Acquisition

As
noted above, on July 14, 2021, we entered into an asset purchase agreement with Rochal, effective July 1, 2021, pursuant to which we
purchased certain assets of Rochal, including, among others, certain of Rochal’s intellectual property, furniture and equipment,
supplies, rights and claims, other than certain excluded assets, and assumed certain liabilities upon the terms and subject to the conditions
set forth in the asset purchase agreement. In exchange for the acquired assets, we paid Rochal (i) $496,100 in cash and (ii) 14,369 shares
of common stock.

Consulting
Agreement

Concurrent
with the Rochal asset purchase, on July 14, 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 the current Chair of the board of directors of Rochal.

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Critical
Accounting Policies and Estimates

Our
discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these consolidated financial
statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses. We base
our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The
results of these assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Under different assumptions or conditions, actual results may differ from these estimates. We have identified
certain significant accounting policies and estimates which involve a higher degree of judgment and complexity in making certain
estimates and assumptions that affect amounts reported in our consolidated financial statements, as summarized below.

Revenue
Recognition

We
recognize revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers,
which we adopted on January 1, 2018 using the modified retrospective method. Revenues are recognized when control of the promised goods
or services is transferred to the customer in an amount that reflects the consideration we expect to be entitled to receive in exchange
for transferring those goods or services. Revenue is recognized based on the following five step model:

Impairment
of Long-Lived Assets

Long-lived
assets, including certain identifiable intangibles held and to be used by our Company, are reviewed for impairment whenever events or
changes in circumstances, including the COVID-19 pandemic, indicate that the carrying amount of such assets may not be recoverable. We
continuously evaluate the recoverability of our long-lived assets based on estimated future cash flows and the estimated liquidation
value of such long-lived assets and provide 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
net realizable value. No impairment was recorded during the years ended December 31, 2021 and 2020.

Investment
in Equity Securities

Our
equity investments consist of non-marketable 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.

We
apply 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. Our 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 our consolidated statements of operations. Our equity method investments are adjusted each period
for our share of the investee’s income or loss and dividend paid, if any. We classify distributions received from equity method
investments using the cumulative earnings approach on the consolidated statements of cash flows.

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We
have reviewed the carrying value of our investments and have determined there was no impairment or observable price changes as of December
31, 2021.

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. We recorded inventory obsolescence expense of $251,826 for the year ended December 31, 2021 and
$318,076 for the year ended December 31, 2020. The allowance for obsolete and slow-moving inventory had a balance of $333,850 at December
31, 2021, and $276,603 at December 31, 2020. We considered the impact of COVID-19 on its recorded value of inventory and determined no
additional adjustment was necessary as of December 31, 2021.

Use
of Estimates

The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported in the financial statements and accompanying notes. The extent to which the COVID-19 pandemic
may directly or indirectly impact our business, financial condition, and results of operations is highly uncertain and subject to change.
We considered the potential impact of the COVID-19 pandemic on our estimates and assumptions and determined there was not a material
impact on our estimates and assumptions used in preparing our consolidated financial statements as of and for the years ended December
31, 2021 and 2020; however, actual results could differ from those estimates and there may be changes to our estimates in future periods.

Income
Taxes

We
account for income taxes in accordance with ASC Topic No. 740, “Income Taxes.” This standard requires us to provide a net
deferred tax asset or liability equal to the expected future tax benefit or expense of temporary reporting differences between book and
tax accounting and any available operating loss or tax credit carry forwards.

After
applying the provisions of Section 382 of the Internal Revenue Code, the unexpired net operating loss (“NOL”) carry forward
at December 31, 2020 was approximately $20.7 million, of which, approximately $5.1 million generated in 2017 and prior,
will expire between 2022 and 2037. Under the Tax Cuts and Jobs Act, the NOL generated during the years 2018 through 2021
of approximately $15.6 million will have an indefinite carryforward period but can generally only be used to offset 80% of taxable
income in any particular year. We may be subject to certain limitations in our annual utilization of NOL carry forwards to off-set future
taxable income pursuant to Section 382 of the Internal Revenue Code, which could result in NOLs expiring unused.

The components of the deferred income
tax assets and liabilities consisted of the following:

A
100% valuation allowance has been provided for all deferred tax assets, as our ability to generate sufficient taxable
income in the future is uncertain.

Off-Balance
Sheet Arrangements

None.