UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2023

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

For the transition period from ________ to ________

Commission File Number 001-39678

SANARA MEDTECH INC.

(Exact name of Registrant as specified in its charter)

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

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

(Address of principal executive offices)

(817) 529-2300

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

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

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

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

SANARA MEDTECH INC.

Form 10-Q

Quarter Ended June 30, 2023

		Page

*Part I – Financial Information*		3

Item 1. Financial Statements		3

Consolidated Balance Sheets as of June 30, 2023 (Unaudited) and December 31, 2022		3

Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2023 and 2022		4

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) for the Three and Six Months Ended June 30, 2023 and 2022		5

Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2023 and 2022		6

Notes to Unaudited Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		26

Item 3. Quantitative and Qualitative Disclosures about Market Risk		35

Item 4. Controls and Procedures		35

*Part II – Other Information*		36

Item 1. Legal Proceedings		36

Item 1A. Risk Factors		36

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		37

Item 3. Defaults Upon Senior Securities		37

Item 4. Mine Safety Disclosures		37

Item 5. Other Information		37

Item 6. Exhibits		38

Signatures		39

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

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

Part I – Financial Information

ITEM 1. FINANCIAL STATEMENTS

SANARA MEDTECH INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	2023			2022
	(Unaudited)
	June 30,			December 31,
	2023			2022
Assets
Current assets
Cash	$	6,060,228		$	8,958,995
Accounts receivable, net		7,141,105			6,805,761
Accounts receivable – related party		20,662			98,548
Accounts receivable
Royalty receivable		49,344			99,594
Inventory, net		4,420,864			3,549,000
Prepaid and other assets		485,734			1,104,611
Total current assets		18,177,937			20,616,509

Long-term assets
Property and equipment, net		1,240,269			1,416,436
Right of use assets – operating leases		2,030,938			806,402
Goodwill		3,601,781			3,601,781
Intangible assets, net		30,143,578			31,509,980
Investment in equity securities		3,084,278			3,084,278
Total long-term assets		40,100,844			40,418,877

Total assets	$	58,278,781		$	61,035,386

Liabilities and shareholders’ equity
Current liabilities
Accounts payable	$	1,016,180		$	1,392,701
Accounts payable – related parties		96,656			34,036
Accounts payable
Accrued royalties and expenses		1,895,706			2,144,475
Accrued bonuses and commissions		5,899,255			7,758,284
Earnout liabilities – current		700,000			1,162,880
Operating lease liabilities – current		273,539			313,933
Total current liabilities		9,881,336			12,806,309

Long-term liabilities
Earnout liabilities – long-term		5,653,534			6,003,811
Operating lease liabilities – long-term		1,779,413			505,291
Total long-term liabilities		7,432,947			6,509,102

Total liabilities		17,314,283			19,315,411

Commitments and contingencies (Note 8)		-			-

Shareholders’ equity
Common Stock: $0.001 par value, 20,000,000 shares authorized; 8,439,745 issued and outstanding as of June 30, 2023 and 8,299,957 issued and outstanding as of December 31, 2022		8,440			8,300
Additional paid-in capital		67,881,419			65,213,987
Accumulated deficit		(26,740,930	)		(23,394,757	)
Total Sanara MedTech shareholders’ equity		41,148,929			41,827,530
Equity attributable to noncontrolling interest		(184,431	)		(107,555	)
Total shareholders’ equity		40,964,498			41,719,975
Total liabilities and shareholders’ equity	$	58,278,781		$	61,035,386

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

SANARA MEDTECH INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	2023			2022			2023			2022
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2023			2022			2023			2022

Net Revenue	$	15,753,164		$	9,670,778		$	31,275,081		$	17,482,001

Cost of goods sold		2,187,516			958,086			4,313,175			1,763,167

Gross profit		13,565,648			8,712,692			26,961,906			15,718,834

Operating expenses
Selling, general and administrative expenses		13,811,476			10,428,133			26,780,545			19,803,763
Research and development		1,177,128			1,067,000			2,494,452			1,271,637
Depreciation and amortization		803,694			539,124			1,582,569			741,871
Change in fair value of earnout liabilities		(360,470	)		63,427			(813,157	)		63,427
Total operating expenses		15,431,828			12,097,684			30,044,409			21,880,698

Operating loss		(1,866,180	)		(3,384,992	)		(3,082,503	)		(6,161,864	)

Other expense
Interest expense and other		-			-			(6	)		-
Share of losses from equity method investment		-			-			-			(379,633	)
Total other expense		-			-			(6	)		(379,633	)

Loss before income taxes		(1,866,180	)		(3,384,992	)		(3,082,509	)		(6,541,497	)
Income tax benefit		-			4,141,906			-			4,141,906

Net income (loss)		(1,866,180	)		756,914			(3,082,509	)		(2,399,591	)

Less: Net loss attributable to noncontrolling interest		(38,447	)		(12,512	)		(76,876	)		(39,693	)

Net income (loss) attributable to Sanara MedTech shareholders	$	(1,827,733	)	$	769,426		$	(3,005,633	)	$	(2,359,898	)

Net income (loss) per share:
Basic	$	(0.22	)	$	0.10		$	(0.37	)	$	(0.31	)
Diluted	$	(0.22	)	$	0.09		$	(0.37	)	$	(0.31	)
Weighted average common shares outstanding:
Basic		8,226,271			7,791,431			8,200,173			7,699,422
Diluted		8,226,271			8,162,983			8,200,173			7,699,422

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

SANARA MEDTECH INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

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

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

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

SANARA MEDTECH INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	2023			2022
	Six Months Ended
	June 30,
	2023			2022

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

Cash paid during the period for:
Interest	$	6		$	-
Supplemental noncash investing and financing activities:
Right of use assets obtained in exchange for lease obligations		1,369,164			-
Equity issued for acquisitions		-			9,709,089
Earnout liabilities generated by acquisitions		-			3,882,151
Investment in equity securities converted in asset acquisition		-			1,803,440

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

SANARA MEDTECH INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – NATURE OF BUSINESS AND BACKGROUND

Sanara MedTech Inc. (together with its wholly owned and majority-owned subsidiaries on a consolidated basis, the “Company”) is a medical technology company focused on developing and commercializing transformative technologies to improve clinical outcomes and reduce healthcare expenditures in the surgical, chronic wound and skincare markets. Each of the Company’s products, services and technologies contributes to the Company’s overall goal of achieving better clinical outcomes at a lower overall cost for patients regardless of where they receive care. The Company strives to be one of the most innovative and comprehensive providers of effective surgical, wound and skincare solutions and is continually seeking to expand its offerings for patients requiring treatments across the entire continuum of care in the United States.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of Sanara MedTech Inc. and its wholly owned and majority-owned subsidiaries, as well as other entities in which the Company has a controlling financial interest. All significant intercompany profits, losses, transactions and balances have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year presentation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management of the Company, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year period. These financial statements and notes should be read in conjunction with the financial statements for each of the two years ended December 31, 2022 and 2021, which are included in the Company’s most recent Annual Report on Form 10-K.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported revenue and expenses during the reporting period. However, actual results could differ from those estimates and there may be changes to the Company’s estimates in future periods.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Income/Loss Per Share

The Company computes income/loss per share in accordance with Accounting Standards Codification (“ASC”) Topic 260, Earnings per Share, which requires the Company to present basic and diluted income per share when the effect is dilutive. Basic income per share is computed by dividing income available to common shareholders by the weighted average number of shares of common stock outstanding. Diluted income per share is computed similarly to basic income per share, except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if the potential shares of common stock had been issued and if the additional shares of common stock were dilutive.

The following table summarizes the shares of common stock that were potentially issuable but were excluded from the computation of diluted net loss per share for the six months ended June 30, 2023 and 2022, as such shares would have had an anti-dilutive effect:

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

	^(a)	Shares underlying stock options assumed pursuant to the merger agreement with Precision Healing, Inc. (“Precision Healing”) in April 2022. See Note 3 for more information regarding the Precision Healing merger.

	^(b)	Shares underlying warrants assumed pursuant to the merger agreement with Precision Healing in April 2022. See Note 3 for more information regarding the Precision Healing merger.

Revenue Recognition

The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). Revenues are recognized when a purchase order is received from the customer and control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for transferring those goods or services. Revenue is recognized based on the following five-step model:

- Identification of the contract with a customer

- Identification of the performance obligations in the contract

- Determination of the transaction price

- Allocation of the transaction price to the performance obligations in the contract

- Recognition of revenue when, or as, the Company satisfies a performance obligation

Details of this five-step process are as follows:

Identification of the contract with a customer

Customer purchase orders are generally considered to be contracts under ASC 606. Purchase orders typically identify the specific terms of products to be delivered, create the enforceable rights and obligations of both parties and result in commercial substance. No other forms of contract revenue recognition, such as the completed contract or percentage of completion methods, were utilized by the Company in either 2023 or 2022.

Performance obligations

The Company’s performance obligation is generally limited to delivery of the requested items to its customers at the agreed upon quantities and prices.

Determination and allocation of the transaction price

The Company has established prices for its products. These prices are effectively agreed to when customers place purchase orders with the Company. Rebates and discounts, if any, are recognized in full at the time of sale as a reduction of net revenue. Allocation of transaction prices is not necessary where only one performance obligation exists.

Recognition of revenue as performance obligations are satisfied

Product revenues are recognized when a purchase order is received from the customer, the products are delivered and control of the goods and services passes to the customer.

Disaggregation of Revenue

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

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

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

Accounts Receivable Allowances

Accounts receivable are typically due within 30 days of invoicing. The Company establishes an allowance for doubtful accounts to provide for an estimate of accounts receivable which are not expected to be collectible. The Company recorded bad debt expense of $50,000 and $180,000 during the three months ended June 30, 2023 and 2022, respectively, and $86,000 and $195,000 during the six months ended June 30, 2023 and 2022, respectively. The allowance for doubtful accounts was $354,189 at June 30, 2023 and $269,850 at December 31, 2022. Bad debt reserves are maintained based on a variety of factors, including the length of time receivables are past due and a detailed review of certain individual customer accounts. The Company also establishes other allowances to provide for estimated customer rebates and other expected customer deductions. These allowances totaled $3,100 at June 30, 2023 and $4,761 at December 31, 2022. If circumstances related to customers change, estimates of the recoverability of receivables would be further adjusted.

Inventories

Inventories are stated at the lower of cost or net realizable value, with cost computed on a first-in, first-out basis. Inventories consist of finished goods and related packaging components. The Company recorded inventory obsolescence expense of $39,479 and $87,898 for the three months ended June 30, 2023 and 2022, respectively, and $69,990 and $159,717 for the six months ended June 30, 2023 and 2022, respectively. The allowance for obsolete and slow-moving inventory had a balance of $349,405 at June 30, 2023, and $523,832 at December 31, 2022.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the related assets, ranging from two to ten years. Below is a summary of property and equipment for the periods presented:

SCHEDULE OF PROPERTY AND EQUIPMENT


	Useful	June 30,			December 31,
	Life	2023			2022
Computers	3-5 years	$	191,611		$	172,154
Office equipment	3-7 years		97,097			87,225
Furniture and fixtures	5-10 years		265,584			258,414
Leasehold improvements	2-5 years		23,131			19,631
Internal use software	5 years		1,618,999			1,618,998

Property and equipment, gross			2,196,422			2,156,422
Less accumulated depreciation			(956,153	)		(739,986	)

Property and equipment, net		$	1,240,269		$	1,416,436

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

Internal Use Software

The Company accounts for costs incurred to develop or acquire computer software for internal use in accordance with ASC Topic 350-40, Intangibles – Goodwill and Other. The Company capitalizes the costs incurred during the application development stage, which generally includes third-party developer fees to design the software configuration and interfaces, coding, installation and testing.

The Company begins capitalization of qualifying costs when both the preliminary project stage is completed and management has authorized further funding for the completion of the project. Costs incurred during the preliminary project stage along with post implementation stages of internal-use computer software are expensed as incurred. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Capitalized development costs are classified as “Property and equipment, net” in the Consolidated Balance Sheets and are amortized over the estimated useful life of the software, which is generally five years.

Goodwill

The excess of purchase price over the fair value of identifiable net assets acquired in business combinations is recorded as goodwill. As of June 30, 2023, all the Company’s goodwill relates to the acquisition of Scendia Biologics, LLC (“Scendia”) (see Note 4). Goodwill has an indefinite useful life and is not amortized. Goodwill is tested annually as of December 31 for impairment, or more frequently if circumstances indicate impairment may have occurred. The Company may first perform a qualitative assessment to determine if it is more likely than not that the fair value of the reporting unit is less than the respective carrying value. If it is determined that it is more likely than not that a reporting unit’s fair value is less than its carrying value, then the Company will determine the fair value of the reporting unit and record an impairment charge for the difference between fair value and carrying value (not to exceed the carrying amount of goodwill). No impairment was recorded during the six months ended June 30, 2023.

Intangible Assets

Intangible assets are stated at cost of acquisition less accumulated amortization and impairment loss, if any. Cost of acquisition includes the purchase price and any cost directly attributable to bringing the asset to its working condition for the intended use. The Company amortizes its finite-lived intangible assets on a straight-line basis over the estimated useful life of the respective assets which is generally the life of the related patents or licenses, seven years for customer relationships and five years for assembled workforces. See Note 5 for more information on intangible assets.

Impairment of Long-Lived Assets

Long-lived assets, including certain identifiable intangibles held and to be used by the Company, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Company continuously evaluates the recoverability of its long-lived assets based on estimated future cash flows and the estimated liquidation value of such long-lived assets and provides for impairment if such undiscounted cash flows are insufficient to recover the carrying amount of the long-lived assets. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value. Fair values are determined based on quoted market values, undiscounted cash flows or internal and external appraisals, as applicable. Assets to be disposed of are carried at the lower of carrying value or estimated fair value less cost to sell. No impairment was recorded during the six months ended June 30, 2023 and 2022.

Investments in Equity Securities

The Company’s equity investments consist of nonmarketable equity securities in privately held companies without readily determinable fair values. Unless accounted for under the equity method of accounting, the investments are reported at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer.

The Company applies the equity method of accounting to investments when it has significant influence, but not controlling interest, in the investee. Judgment regarding the level of influence over each equity method investment includes considering key factors such as ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany transactions. The Company’s proportionate share of the net income (loss) resulting from these investments is reported under the line item captioned “Share of losses from equity method investment” in the Company’s Consolidated Statements of Operations. The Company’s equity method investment is adjusted each period for the Company’s share of the investee’s income or loss and dividend paid, if any. The Company classifies distributions received from its equity method investment using the cumulative earnings approach in the Company’s Consolidated Statements of Cash Flows. As a result of the Precision Healing merger in April 2022 (see Note 3), the Company does not have any investments which are recorded applying the equity method of accounting as of June 30, 2023.

The Company has reviewed the carrying value of its investments and has determined there was no impairment or observable price changes as of and for the six months ended June 30, 2023 or 2022.

Fair Value Measurement

As defined in ASC Topic 820, Fair Value Measurement (“ASC 820”), fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). This fair value measurement framework applies at both initial and subsequent measurement.

The three levels of the fair value hierarchy defined by ASC 820 are as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include nonexchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.

Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

The carrying amounts of cash, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short-term nature of these instruments. The fair value of the contingent earnout consideration and the acquisition date fair value of goodwill and intangibles related to the acquisitions discussed in Notes 3 and 4 are based on Level 3 inputs.

Liabilities for contingent consideration are measured at fair value each reporting period, with the acquisition-date fair value included as part of the consideration transferred. Subsequent changes in fair value are reported under the line item captioned “Change in fair value of earnout liabilities” in the Company’s Consolidated Statements of Operations. The following table sets forth a summary of the changes in fair value for the Level 3 contingent earnout consideration.

Additions			-
Balance at December 31, 2022		$	7,166,691

SEC Form 10-Q filed by Sanara MedTech Inc.