Sanara MedTech Inc. (SMTI) FY 2023 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 to Consolidated Financial Statements 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, chronic wound and skincare markets. Our products, services and technologies are designed
to achieve our goal of providing 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 underlying intellectual property of, as well as the rights to manufacture and sell,
CellerateRX Surgical Activated Collagen (“CellerateRX Surgical”), our primary product, and HYCOL Hydrolyzed Collagen (“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”), both of which are related parties. 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 products from Rochal Industries,
LLC (“Rochal”) and Cook Biotech Inc. (“Cook Biotech”).

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. In December 2023,
we received 510(k) clearance from the U.S. Food and Drug Administration (“FDA”) for the Precision Healing diagnostic imager.
We are currently evaluating regulatory pathways for the Precision Healing LFA.

In
July 2022, we entered into a membership interest purchase agreement with Scendia Biologics, LLC (“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) ACTIGEN Verified
Inductive Bone Matrix (“ACTIGEN”) 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.

In
November 2023, we launched BIASURGE Advanced Surgical Solution (“BIASURGE”). BIASURGE is a no-rinse, advanced surgical solution
used for wound irrigation. It contains an antimicrobial preservative effective against a broad spectrum of pathogenic microorganisms.
BIASURGE is indicated for use in the mechanical cleansing and removal of debris, including microorganisms, from surgical wounds.

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Comprehensive
Value-Based Care Strategy

In
June 2020, we formed a subsidiary, United Wound and Skin Solutions, LLC (formerly known as “WounDerm”), to hold certain investments
and operations in wound and skincare virtual consult services. In 2023, WounDerm was renamed and is now doing business as “Tissue
Health Plus” (“THP”). THP is continuing its current mission to simplify skin health, starting with wound care through
a refined business plan. Through THP, we plan to offer a first of its kind value-based wound care program to payers and risk-bearing
entities such as accountable care organizations and value-based care (“VBC”) primary care companies, with Medicare Advantage
payers as the initial target segment for this program.

THP’s
programs are expected to enable payers to divest wound care spend risk, reduce wound related hospitalizations and improve patient quality
of life. THP plans to coordinate delivery of community and home-based wound care for its managed patients. Community based care spans
a variety of settings including physician offices, skilled nursing homes, assisted living facilities and senior living facilities. THP
programs are intended to integrate science and evidence-based medicine protocols to standardize wound prevention and treatment.

We
anticipate that THP’s customer contracts will have three-to-five-year terms. These contracts are expected to incorporate a mix
of value-based pricing methodologies including episodic, “per member per month”, and “fee for value” pricing.
We believe this approach is aligned with the financial goals of the payers and will help deliver outstanding clinical outcomes for the
patients.

Our
vision for our comprehensive approach consists of three key sets of planned capabilities:

We
are seeking a partner to facilitate commercialization of Tissue Health Plus and share in the cost of development of the program. Excluding noncash items, our full year operating expenses for THP in 2023 were approximately $5.2 million.

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 Seller pursuant to which we
acquired 100% of the issued and outstanding membership interests in Scendia from the Seller. Scendia provides clinicians and surgeons
with a full line of regenerative and orthobiologic technologies. Beginning in early 2022, we began co-promoting certain products with
Scendia, including: (i) TEXAGEN, (ii) BiFORM, (iii) ACTIGEN, and (iv) ALLOCYTE. Prior to the acquisition, Scendia owned 50% of the issued
and outstanding membership interests in Sanara Biologics, LLC (“Sanara Biologics”), and we owned the remaining 50% of the
membership interests. As a result of the acquisition, we indirectly acquired all the interests in Sanara Biologics, such that we now
hold 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. We made the first earnout
payment of approximately $693,000 in cash in August 2023. We expect the final earnout payment to be made in the third quarter of 2024.

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Applied
Asset Purchase

On
August 1, 2023, we entered into an Asset Purchase Agreement (the “Applied 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 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 Applied Purchase Agreement (collectively, the “Applied Purchased Assets”), and assumed certain
Assumed Liabilities (as defined in the Applied Purchase Agreement), upon the terms and subject to the conditions set forth in the Applied
Purchase Agreement (such transaction, the “Applied Asset Purchase”). The Applied Purchased Assets include the underlying
intellectual property of, as well as the rights to manufacture and sell, CellerateRX Surgical and HYCOL products for human wound care
use.

The
Applied 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 Applied Purchase Agreement provides
that the Sellers are entitled to receive up to an additional $10.0 million (the “Applied 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 Applied Earnout, SMAT shall pay the Sellers a pro-rata amount of the Applied Earnout based on collections from net
sales of the product, with such amount to be due credited against any Applied Earnout payments already made by SMAT (the “True-Up
Payment”). The Applied Earnout, minus the True-Up Payment and any Applied Earnout payments already made by SMAT, may be earned
at any point in the future, including after the True-Up Payment is made.

In
connection with the Applied Asset Purchase and pursuant to the Applied Purchase Agreement, effective August 1, 2023, 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. 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.

Recent
Developments

Loan
Agreement

In
connection with the entry into the Applied 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”). 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. 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.

Tufts
University License Agreement

In
December 2023, we signed an exclusive license agreement with Tufts University (“Tufts”) to develop and commercialize patented
technology covering 18 unique collagen peptides. As part of this agreement, we formed a new subsidiary, Sanara Collagen Peptides, LLC
(“SCP”) and have issued 10% of SCP’s outstanding units to Tufts. SCP has exclusive rights to develop and commercialize
new products based on the licensed patents and patents pending. SCP will pay royalties to Tufts based on net sales of licensed products
and technologies. Pursuant to the exclusive license agreement, royalties will be calculated at a rate of 1.5% or 3%, depending on the
type of product or technology developed. SCP will pay Tufts a minimum annual royalty of $50,000 on January 1 of the year following the
first anniversary of the first commercial sale of the licensed products or technologies. SCP will pay Tufts a $100,000 minimum annual
royalty on January 1 of each subsequent year during the royalty term specified in the exclusive license agreement.

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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. 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.

Revenue
streams from product sales and royalties are summarized below for the years ended December 31, 2023 and 2022.

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 to 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.

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Other
Income (Expense)

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

Results
of Operations

Net
Revenues. For the year ended December 31, 2023, we generated net revenues of $65.0 million compared to net revenues of $45.8
million for the year ended December 31, 2022, a 42% increase from the prior year. The higher net revenue for 2023 was primarily due to
increased sales of soft tissue repair products, including CellerateRX, and bone fusion products as a result of our increased market penetration, geographic expansion, 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 reduced industry wide due to the stringent screening required. During the fourth quarter of 2022 and the nine
months ended September 30, 2023, we were unable to fill certain orders for this product, which negatively impacted our sales growth.
The supply constraint was caused by significant supplier limits on qualifying eligible donor tissue and supplier necessity to subcontract
all processing to secondary suppliers. We have since expanded the ALLOCYTE product line with the release of ALLOCYTE Plus, which is processed
by an alternative supplier with in-house processing capabilities. Our first sales of ALLOCYTE Plus occurred in October 2023. We have
a sufficient supply of ALLOCYTE Plus to meet currently expected demand and believe we have measures in place to regularly stock the product
in the future.

Cost
of goods sold. Cost of goods sold for the year ended December 31, 2023, was $7.9 million, compared to costs of goods sold of
$6.4 million for the year ended December 31, 2022. The increase in cost of goods sold for 2023 was primarily due to higher sales volume
as a result of organic sales growth. Gross margins were approximately 88% and 86% for the years ended
December 31, 2023 and 2022, respectively. The gross margins for 2023 included lower margins realized on sales of certain bone fusion products, partially
offset by higher margins realized due to the elimination in consolidation of the CellerateRX Surgical royalty expense under the Sublicense
Agreement.

Selling,
general and administrative expenses. SG&A expenses for the year ended December 31, 2023, were $57.0 million compared to SG&A
expenses of $46.0 million for the year ended December 31, 2022. The higher SG&A expenses for 2023 were primarily due to higher direct sales and marketing expenses, which accounted
for approximately $8.0 million, or 76% of the increases compared to the prior year period. The higher direct sales and marketing expenses
for 2023 was primarily attributable to an increase in sales commissions of $6.9 million as a result of higher product sales. The year-ended
2023 included $1.2 million of increased costs as a result of sales force expansion and operational support. Our 2023 SG&A expenses also included $0.4 million of costs associated with an acquisition opportunity that we
abandoned during the first quarter of 2024. We expect our SG&A
expenses 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 year ended December 31, 2023, were $4.1 million compared to $3.4 million
for the year ended December 31, 2022. The higher R&D expenses in 2023 were primarily due to costs related to the Precision
Healing diagnostic imager and LFA. R&D expenses for 2023 also included costs associated with ongoing development projects for
our products in development.

Depreciation
and amortization expense. Depreciation and amortization expense for the year ended December 31, 2023, was $3.7 million compared
to $2.4 million for the year ended December 31, 2022. The increase in depreciation and amortization expense during 2023 was primarily
due to the amortization of intangible assets acquired as part of the Precision Healing, Scendia and Applied transactions.

Change
in fair value of earnout liabilities. Change in fair value of earnout liabilities was a benefit of $3.4 million for the year
ended December 31, 2023 compared to expense of $0.3 million for the year ended December 31, 2022. The current year benefit is as a result
of a decrease in the estimated fair value of the earnout liabilities established at the time of our Precision Healing and Scendia acquisitions.
The decrease in the estimated 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.

Other
income (expense). Other income (expense) for the year ended December 31, 2023 was $0.2 million compared to $1.4 million for
the year ended December 31, 2022. Other income (expense) for 2023 included interest expense, and amortization of debt issuance costs related
to the Term Loan entered into in conjunction with the Applied Asset Purchase. The higher other income (expense) in 2022 was primarily due to
a $1.0 million loss recognized due to the dissolution of our subsidiary, Sanara Pulsar, LLC (“Sanara Pulsar”). Sanara
Pulsar had minimal sales since its inception and was dissolved effective December 2022. The higher other income (expense) was also due to the
recognition of $0.4 million of loss from our equity method investment in Precision Healing prior to our acquisition of the remaining
interest in April 2022.

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Loss
before income taxes. We had a loss before income taxes of $4.4 million for the year ended December 31, 2023, compared to a
loss before income taxes of $13.9 million for the year ended December 31, 2022. The lower loss in 2023 was due to increased gross profits
and changes in fair value of earnout liabilities, partially offset by higher SG&A costs, higher R&D
expenses, and higher amortization of our acquired intangible assets as discussed above.

Income
tax benefit. We recognized net deferred tax liabilities associated with the Precision Healing and Scendia transactions. As of
December 31, 2022, 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 and Scendia acquisition, we
have reviewed the valuation allowance and determined that it should be reduced by the amount of the net deferred tax liabilities that
were recognized. This resulted in recognition of an income tax benefit of $5.8 million recognized for the year ended December 31, 2022.

Net
loss. For the year ended December 31, 2023, we had a net loss of $4.4 million, compared to a net loss of $8.1 million for the
year ended December 31, 2022. The lower net loss in 2023 was primarily due to additional gross profit realized on higher 2023 revenues.

Liquidity
and Capital Resources

Cash
on hand at December 31, 2023 was $5.1 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 could
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, pursuant to the Sales Agreement, were 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 had no obligation to sell
any of the shares under the Sales Agreement and could suspend or terminate the offering of our common stock pursuant to the Sales Agreement
upon notice to Cantor and subject to other conditions. Pursuant to the Sales Agreement, we paid Cantor a commission of 3.0% of the aggregate
gross proceeds from each sale of the shares.

In
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 paused the offering at the end of the first quarter of 2023 and did not reactivate it
during the remainder of 2023. The Registration Statement on Form S-3 relating to this offering expired in January 2024.

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 up to $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.
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 “Loan Agreement”
section below.

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, repayment of debt as it becomes due and for general corporate purposes. If
we seek to consummate acquisitions in the future, we expect to finance such acquisitions with the proceeds from equity or debt issuances.
Based on our current plan of operations, 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.

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 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.

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 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 final earnout payment to be made in the third
quarter of 2024.

Applied
Asset Purchase

On
August 1, 2023, we entered into the Applied Purchase Agreement by and among the Company, SMAT, Hymed, Applied and the Owner, pursuant
to which SMAT acquired the Applied Purchased Assets and assumed certain Assumed Liabilities upon the terms and subject to the conditions
set forth in the Applied Purchase Agreement. The transaction closed on August 1, 2023. The Applied 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 Applied 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 Applied Earnout,
SMAT shall pay the Sellers the True-Up Payment. The Applied Earnout, minus the True-Up Payment and any Applied 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.

47

Loan
Agreement

In
connection with the entry into the Applied 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 were 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 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. As of December 31, 2023, following an immaterial cash contribution
from Sanara, SMAT’s Debt Service Coverage Ratio was 1.3 to 1.0.

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. SMAT was in compliance with all financial covenants under
the Loan Agreement as of December 31, 2023. As of December 31, 2023, following an immaterial cash contribution from Sanara, SMAT’s Cash Flow
Leverage Ratio was 4.0 to 1.0.

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.

48

Cash
Flow Analysis

For
the year ended December 31, 2023, net cash used in operating activities was $3.2 million compared to $5.6 million used in operating activities
for the year ended December 31, 2022. The lower use of cash in 2023 was due to net revenue growth outpacing the growth of our cash operating
expenses and timing of cash expenditures for certain accrued payables and prepaids.

For
the year ended December 31, 2023, net cash used in investing activities was $10.2 million compared to $3.5 million used in investing
activities during the year ended December 31, 2022. The higher use of cash used in investing activities during 2023 was primarily due
to cash paid pursuant to the Applied Asset Purchase.

For
the year ended December 31, 2023, net cash provided by financing activities was $9.6 million as compared to $0.6 million used in financing
activities for the year ended December 31, 2022. The cash provided by financing activities during 2023 was due to net loan proceeds of
$9.7 million utilized for the Applied Asset Purchase and net proceeds received pursuant to sales of our common stock of $0.9 million,
partially offset by the Scendia earnout payment of $0.7 million and the net settlement of equity-based awards, which totaled $0.1 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, prior to the Applied Asset Purchase, licensed the rights to CellerateRX from
Applied. Sales of CellerateRX Surgical comprised the substantial majority of our sales during the twelve months ended December 31, 2023
and 2022. Prior to the Applied Asset Purchase discussed above, we paid 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 year ended December 31, 2023 and 2022, royalty expense was $1.0 million and $1.8 million, respectively, under the terms of this
agreement. Ronald T. Nixon, our Executive Chairman, is the founder and managing partner of Catalyst.

In
August 2023, we acquired the underlying intellectual property of, as well as 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. Since the Closing of the Applied
Asset Purchase, we indirectly make intercompany royalty payments to SMAT at the same rate as set forth in the Sublicense Agreement. These
intercompany royalty payments and the offsetting cost of goods sold were eliminated in consolidation effective as of August 1, 2023.

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 $174,486 of costs pursuant to the Catalyst Services Agreement during 2023.

49

Receivables
and Payables

We
had outstanding related party receivables totaling $8,400 at December 31, 2023, and $98,548 at December 31, 2022. We had outstanding
related party payables totaling $77,805 at December 31, 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

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 United States. The preparation of these consolidated
financial statements requires us 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. 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 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.
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 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:

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 primarily
of finished goods, and also include an immaterial amount of raw materials and related packaging components. We recorded inventory obsolescence
expense of $406,812 in 2023 and $540,090 in 2022. The allowance for obsolete and slow-moving inventory had a balance of $446,917 at December
31, 2023, and $523,832 at December 31, 2022.

Goodwill

The
excess of purchase price over the fair value of identifiable net assets acquired in business combinations is recorded as goodwill. As
of December 31, 2023 and 2022, all of our goodwill relates to the acquisition of Scendia. 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. We 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 we 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 years ended December 31, 2023 and 2022.

50

Impairment
of Long-Lived Assets

Long-lived
assets, including certain identifiable intangibles held and to be used by us, are reviewed for impairment whenever events or changes
in circumstances 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 fair value less cost to sell. No impairment
was recorded during the years ended December 31, 2023 and 2022.

Investments
in Equity Securities

Our
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.

We
apply the equity method of accounting for investments when we have 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 investment is adjusted each period for
our share of the investee’s income or loss and dividend paid, if any. We classify distributions received from our equity method
investment using the cumulative earnings approach on the Consolidated Statements of Cash Flows. As a result of the Precision Healing
merger in April 2022, we did not have any investments which are recorded applying the equity method of accounting as of December 31,
2023 or 2022.

We
reviewed the carrying value of our investments and have determined there was no impairment or observable price changes as of and for
the years ended December 31, 2023 and 2022.

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. A valuation allowance is provided if it is more likely than not that some
or all of a net deferred tax asset will not be realized.

We
recognized net deferred tax liabilities associated with the Precision Healing merger and the Scendia acquisition. As of the dates of
these acquisitions, prior to consideration of these acquired 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 and Scendia acquisition,
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 a 2022 income tax benefit of $5.8 million.

A
100% valuation allowance has been provided for the remaining net deferred tax assets as of December 31, 2023 and 2022, as our ability
to generate sufficient taxable income in the future is uncertain.

Off-Balance
Sheet Arrangements

None.