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EX-32.1 - EX-32.1 - Fuse Medical, Inc.fzmd-ex321_6.htm
EX-31.2 - EX-31.2 - Fuse Medical, Inc.fzmd-ex312_7.htm
EX-31.1 - EX-31.1 - Fuse Medical, Inc.fzmd-ex311_8.htm
EX-10.2 - EX-10.2 - Fuse Medical, Inc.fzmd-ex102_77.htm
EX-10.1 - EX-10.1 - Fuse Medical, Inc.fzmd-ex101_78.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended: March 31, 2020 

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

Commission File Number: 000-10093

Fuse Medical, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

59-1224913

(State or other jurisdiction of 

 

(I.R.S. Employer 

incorporation or organization) 

 

Identification No.) 

 

 

 

1565 N. Central Expressway, Suite 220, Richardson, TX

 

75080

(Address of principal executive offices)

 

(Zip Code)

(469) 862-3030

(Registrant's telephone number, including area code)

 

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, or a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “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

 

 

 

 

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

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 of revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    Yes  ☐    No  ☐

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

 

FZMD

 

OTCPink

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: As of May 11, 2020, 73,124,458 shares of the registrant’s common stock, $0.01 par value, were outstanding.

 

1


 

FUSE MEDICAL, INC.

FORM 10-Q

INDEX

 

 

 

 

PAGE

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

 

F-1

 

Condensed Consolidated Balance Sheets at March 31, 2020 (Unaudited) and December 31, 2019

 

F-1

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2020 and 2019 (Unaudited)

 

F-2

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2020 and 2019 (Unaudited)

 

F-3

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 (Unaudited) 

 

F-4

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

F-5

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

3

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

10

Item 4.

Controls and Procedures

 

10

PART II. OTHER INFORMATION

Item 5.

Other Information

 

11

Item 6.

Exhibits

 

11

Signatures

 

13

 

 

 

2


 

PART I. FINANCIAL INFORMATION 

Item 1.   Condensed Consolidated Financial Statements

FUSE MEDICAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in dollars, except share data)

 

 

 

March 31,

2020

 

 

December 31,

2019

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

753,268

 

 

$

1,099,310

 

Accounts receivable, net of allowance of $1,958,621 and $1,343,278, respectively

 

 

4,414,311

 

 

 

6,174,299

 

Inventories, net of allowance of $3,886,920 and $3,805,730, respectively

 

 

7,801,964

 

 

 

7,855,887

 

Prepaid expenses and other current assets

 

 

117,370

 

 

 

39,850

 

Total current assets

 

 

13,086,913

 

 

 

15,169,346

 

Property and equipment, net

 

 

43,768

 

 

 

32,639

 

Intangible assets, net

 

 

1,186,265

 

 

 

1,206,620

 

Goodwill

 

 

1,972,886

 

 

 

1,972,886

 

Total assets

 

$

16,289,832

 

 

$

18,381,491

 

Liabilities and Stockholders' Equity (Accumulated Deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,571,692

 

 

$

2,752,854

 

Accrued expenses

 

 

2,762,931

 

 

 

3,302,904

 

Notes payable - related parties

 

 

150,000

 

 

 

150,000

 

Senior secured revolving credit facility

 

 

1,503,320

 

 

 

1,752,501

 

Total current liabilities

 

 

6,987,943

 

 

 

7,958,259

 

Earn-out liability

 

 

11,645,365

 

 

 

11,645,365

 

Total liabilities

 

 

18,633,308

 

 

 

19,603,624

 

Commitments and contingencies

 

 

-

 

 

 

-

 

Stockholders' equity (Accumulated deficit):

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; 20,000,000 shares authorized, no shares issued and

   outstanding

 

 

-

 

 

 

-

 

Common stock, $0.01 par value; 100,000,000 shares authorized, 73,124,458 shares issued and outstanding as of March 31, 2020 and December 31, 2019.

 

 

731,245

 

 

 

731,245

 

Additional paid-in capital

 

 

805,091

 

 

 

642,435

 

Accumulated deficit

 

 

(3,879,812

)

 

 

(2,595,813

)

Total stockholders' deficit

 

 

(2,343,476

)

 

 

(1,222,133

)

Total liabilities and stockholders' equity (Accumulated deficit)

 

$

16,289,832

 

 

$

18,381,491

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

F-1


 

FUSE MEDICAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in dollars, except per share data)

 

 

For the Three Months Ended March 31,

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

Net revenues

$

4,636,503

 

 

$

4,770,659

 

Cost of revenues

 

1,982,896

 

 

 

1,975,345

 

Gross profit

 

2,653,607

 

 

 

2,795,314

 

Operating expenses:

 

 

 

 

 

 

 

Selling, general, administrative and other

 

2,480,771

 

 

 

2,364,168

 

Commissions

 

1,391,117

 

 

 

1,005,531

 

Depreciation and amortization

 

29,983

 

 

 

25,724

 

Total operating expenses

 

3,901,871

 

 

 

3,395,423

 

Operating loss

 

(1,248,264

)

 

 

(600,109

)

Other expense:

 

 

 

 

 

 

 

Interest expense

 

31,001

 

 

 

25,435

 

Total other expense

 

31,001

 

 

 

25,435

 

Operating loss before tax

 

(1,279,265

)

 

 

(625,544

)

Income tax expense/(benefit)

 

4,734

 

 

 

(114,546

)

Net loss

$

(1,283,999

)

 

$

(510,998

)

Net loss per common share - basic and diluted

$

(0.02

)

 

$

(0.01

)

Weighted average number of Common Stock outstanding - basic and  diluted

 

70,221,566

 

 

 

70,221,566

 

 

See notes to unaudited condensed consolidated financial statements.

 

 


F-2


 

FUSE MEDICAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

(in dollars, except share data)

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Total

 

Balance, December 31, 2019

 

 

73,124,458

 

 

$

731,245

 

 

$

642,435

 

 

$

(2,595,813

)

 

$

(1,222,133

)

Stock based compensation

 

 

-

 

 

 

-

 

 

 

162,656

 

 

 

-

 

 

 

162,656

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,283,999

)

 

 

(1,283,999

)

Balance, March 31, 2020

 

 

73,124,458

 

 

$

731,245

 

 

$

805,091

 

 

$

(3,879,812

)

 

$

(2,343,476

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Total

 

Balance, December 31, 2018

 

 

74,600,181

 

 

$

746,002

 

 

$

-

 

 

$

720,682

 

 

$

1,466,684

 

Stock based compensation

 

 

-

 

 

 

-

 

 

 

244,407

 

 

 

-

 

 

 

244,407

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(510,998

)

 

 

(510,998

)

Balance, March 31, 2019

 

 

74,600,181

 

 

$

746,002

 

 

$

244,407

 

 

$

209,684

 

 

$

1,200,093

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

 

 

 

F-3


 

FUSE MEDICAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

 

For the Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(1,283,999

)

 

$

(510,998

)

Adjustments to reconcile net loss to net cash provided by operating

      activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

29,983

 

 

 

25,724

 

Share-based compensation

 

 

162,656

 

 

 

244,407

 

Provision for bad debts and discounts

 

 

615,343

 

 

 

164,642

 

Provision for slow moving inventory

 

 

81,190

 

 

 

29,444

 

Benefits for deferred taxes

 

 

-

 

 

 

(125,028

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

1,144,645

 

 

 

1,841,061

 

Inventories

 

 

(27,267

)

 

 

46,682

 

Prepaid expenses and other current assets

 

 

(77,520

)

 

 

(2,665

)

Accounts payable

 

 

(181,162

)

 

 

(1,194,504

)

Accrued expenses

 

 

(539,973

)

 

 

(430,751

)

Net cash (used in) provided by operating activities

 

 

(76,104

)

 

 

88,014

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(20,757

)

 

 

-

 

Net cash used in investing activities

 

 

(20,757

)

 

 

-

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Payments on senior secured revolving credit facility, net

 

 

(249,181

)

 

 

(80,577

)

Net cash used in financing activities

 

 

(249,181

)

 

 

(80,577

)

 

 

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

 

(346,042

)

 

 

7,437

 

Cash and cash equivalents - beginning of period

 

 

1,099,310

 

 

 

844,314

 

Cash and cash equivalents - end of period

 

$

753,268

 

 

$

851,751

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

21,788

 

 

$

20,756

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

 

F-4


 

FUSE MEDICAL, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2020
(Unaudited)

Note 1. Nature of Operations

Overview

Fuse Medical, Inc., a Delaware corporation (the “Company”), was initially incorporated in 1968 as American Metals Service, Inc., a Florida corporation.  In July 1999, American Metals Service, Inc. changed its name to GolfRounds, Inc. and was redomiciled to Delaware through a merger. Effective May 28, 2014, Golf Rounds amended its certificate of incorporation to change its name to Fuse Medical, Inc., and Fuse Medical, LLC, an unrelated entity, merged with and into a wholly-owned subsidiary of Fuse Medical, Inc., with Fuse Medical, LLC surviving as a wholly-owned subsidiary of Fuse Medical, Inc. The transaction was accounted for as a reverse merger. The Company was the legal acquirer, and Fuse Medical, LLC was deemed the accounting acquirer. During 2015, certificates of termination were filed for Fuse Medical, LLC and its two subsidiaries. 

On December 19, 2016 (the “Change-in-Control Date”), the Company entered into a Stock Purchase Agreement by and between the

Company, NC 143 Family Holdings, LP, a Texas limited partnership (“NC 143”) which is controlled by Mark W. Brooks (“Mr.

Brooks”), the Company’s Chairman of the Board of Directors (“Board”) and President; and Reeg Medical Industries, Inc., a Texas

corporation (“RMI”), which is owned and controlled by Christopher C. Reeg (“Mr. Reeg”), the Company’s Chief Executive Officer and Secretary, which resulted in a change-in-control of the Company.

 

On December 31, 2017, the Company completed the acquisition of CPM Medical Consultants, LLC (“CPM”) pursuant to the securities purchase agreement dated December 15, 2017 (“CPM Acquisition Agreement”). Subsequent to the Change-in-Control Date, CPM and Company operations are consolidated. (See “Note 3. CPM Acquisition.”)

On August 1, 2018, (“Maxim Closing Date”) the Company completed the acquisition of Palm Springs Partners, LLC d/b/a Maxim Surgical (“Maxim”), pursuant to the securities purchase agreement (“Maxim Purchase Agreement”).  As of the Maxim Closing Date, Maxim and Company operations are consolidated. (See Note 4, “Maxim Acquisition”)

 

Basis of Presentation

The interim unaudited condensed consolidated financial statements included herein reflect all material adjustments (consisting of normal recurring adjustments and reclassifications and non-recurring adjustments) which, in the opinion of the Company’s management, are ordinary and necessary for a fair presentation of results for the interim periods. Certain information and footnote disclosures required under generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The Company’s management believes the disclosures are adequate to make the information presented not misleading.

The condensed consolidated balance sheet information as of December 31, 2019, was derived from the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2019 (“2019 Annual Report”), Filed with the SEC pursuant to Section 13 of 15(d) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on March 30, 2020. These interim unaudited condensed consolidated financial statements should be read in conjunction with the 2019 Annual Report.

The results of operations for the three months ended March 31, 2020, are not necessarily indicative of the results to be expected for the entire fiscal year or for any other period as the Company has historically experienced seasonal trends with greater revenue and volume between the last two calendar quarters compared to the first two calendar quarters of the year.

Going Concern

 

The accompanying interim unaudited condensed consolidated financial statements have been prepared as if the Company will continue as a going concern. Through March 31, 2020, the Company has accumulated losses of $3,879,812 and a stockholders’ deficit of $2,343,476. Revenue declined by $134,156 in the first quarter of 2020 versus the same quarter in 2019, as the Company has been impacted by restrictions as a result of the novel coronavirus SARS-CoV-2 global pandemic (“COVID-19”). The Company was out of compliance with a loan covenant in its Amended and Restated Business Loan Agreement (“RLOC”) with ZB, N.A., d/b/a Amegy Bank (“Amegy Bank”) at March 31, 2020 to maintain minimum EBITDA. The RLOC functions as a senior secured revolving loan facility. On May 21, 2020, the Company and Amegy Bank executed a Limited Waiver and Fifth Amendment to the RLOC, which waived the EBITDA event of default and extended the termination date of the RLOC until November 4, 2020. (See Note 13,

F-5


FUSE MEDICAL, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2020
(Unaudited)

 

“Subsequent Events”). At various times during the years ended December 31, 2018 and 2019 the Company was also out of compliance with one or more covenants contained in its RLOC, but obtained waivers from Amegy Bank to cure the violations, along with reductions in the Company’s aggregate contractual borrowing limits under the RLOC. The Company’s management has determined that these conditions and events raise substantial doubt about the ability of the Company to continue as a going concern.

 

The Company’s ability to continue as a going concern for at least one year beyond the date of this filing is dependent upon the easing of restrictions imposed on elective surgeries by civil authorities as a result of COVID-19, as well as the Company’s, (i) successful execution of key branding initiatives, (ii) introduction, commercialization and sales of new proprietary products and product lines, (iii) increased sales of existing products, with strategic emphasis direct sales to medical facilities (“Retail Cases”), and increasing the percentage of Retail Cases sold as a percentage of all cases sold by the Company (sales volume based on medical procedures in which the Company’s products are sold and used “Cases”), and (iv) continued cost reductions. Additionally, the Company will need to refinance its with RLOC Amegy Bank with a new credit facility on commercially reasonable terms, or obtain equity financing. On April 15 2020, the Company received a Payroll Protection Program (“PPP”) loan of approximately $361,400 under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Proceeds from the PPP Loan will be used to cover payroll, mortgage interest, rent, and utility costs over the eligible period.

 

The interim unaudited condensed consolidated financial statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.

Note 2. Significant Accounting Policies

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, CPM, and Maxim. Intercompany transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the interim unaudited condensed consolidated financial statements in accordance with GAAP, requires the Company’s management to make estimates and assumptions that affect the Company’s reported amounts in the interim unaudited condensed consolidated financial statements.

Actual results could differ from those estimates. Significant estimates on the accompanying interim unaudited condensed consolidated financial statements include the allowance for doubtful accounts, valuation of inventories, the Company’s effective income tax rate, and the recoverability of deferred tax assets, which are based upon the Company’s management expectation of future taxable income and allowable deductions, and the fair value calculations of stock-based compensation, goodwill, finite lived intangibles and the earn-out (“Earn-Out”) liability.

Segment Reporting

In accordance with Accounting Standards Update (“ASU”) No. 280, “Segment Reporting,” the Company uses the management approach for determining its reportable segments. The management approach is based upon the way that management reviews performance and allocates resources. The Company’s Chief Executive Officer serves as the Company’s chief operating decision maker, and the management team review operating results on a consolidated basis for purposes of allocating resources and evaluating the financial performance of the Company. The Company has integrated the operations of both CPM and Maxim. Accordingly, the Company has determined that it has one operating segment and, therefore, one reporting segment.

Earnings (loss) Per Common Share

Earnings (loss) per common share, basic is calculated by dividing the net income/(loss) attributable to common stockholders by the weighted-average number of Common Stock outstanding during the period, without consideration of Common Stock equivalents. Shares of restricted stock are included in the basic weighted-average number of Common Stock outstanding from the time they vest.

F-6


FUSE MEDICAL, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2020
(Unaudited)

 

Diluted earnings (loss) per common share is computed by dividing net income/(loss) by the weighted-average number of common share equivalents outstanding for the period determined using the treasury stock method. For the three months ended March 31, 2020 and 2019, the Company excluded the effects of outstanding stock options, convertible notes and, to the extent in the money, restricted stock as their effects were antidilutive due to the Company’s operating loss during these periods.  

For the three months ended March 31, 2020, restricted stock and Common Stock equivalents of 5,620,488 have been excluded from diluted earnings per share because to include them would have been antidilutive. (see Note 9, “Stockholders Equity” for the terms and conditions of restricted stock)

Fair Value Measurements

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The Company classifies assets and liabilities recorded at fair value under the fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. The fair value measurements are classified under the following hierarchy:

Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets and liabilities in active markets;

Level 2—Observable inputs, other than quoted market prices, that are either directly or indirectly observable in the marketplace for identical or similar assets and liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities; and

Level 3—Unobservable inputs that are supported by little or no market activity that are significant to the fair value of assets or liabilities.

In connection with the CPM Acquisition in December 2017, the Company recorded an earn-out liability as part of the purchase consideration.  The fair value of the earn-out liability is being re-measured at each reporting period using Level 3 inputs with changes in fair value recorded in earnings. The earn-out payments are based on the financial performance of the Company between January 1, 2018 and December 31, 2034. The base amount of the earn-out ranges from $0 to $16,000,000 with an additional bonus payment of $10,000,000 subject to the Company meeting certain earnings thresholds as defined in the CPM Acquisition Agreement.  The fair value of the earn-out liability was calculated using the Monte Carlo simulation, which was then applied to the estimated earn-out payments. There was no change in the earn-out liability for the three months ended March 31, 2020 and there were no significant changes in the Level 3 inputs from those utilized at December 31, 2019. The required earnings thresholds have not been met from inception of the agreement through March 31, 2020, and as such, there have been no payments required for either the base or bonus earn-out tranches.

Financial Instruments

The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments. The recorded values of notes payable approximate their respective fair values based upon their effective interest rates.

 

The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments. The recorded values of notes payable approximate their respective fair values based upon their effective interest rates.

Cash and Cash Equivalents

The Company considers highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. There were no cash equivalents at March 31, 2020, and December 31, 2019. The Company’s cash is concentrated in two large financial institutions that at times may exceed federally insured limits of $250,000 per financial institution. The Company has not experienced any financial institution losses from inception through March 31, 2020. As of March 31, 2020, and December 31, 2019, there were deposits of $290,363 and $599,309, respectively, which were greater than federally insured limits.

F-7


FUSE MEDICAL, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2020
(Unaudited)

 

Accounts Receivable and Allowances

Accounts receivable are non-interest bearing and are stated at gross invoice amounts less an allowance for doubtful accounts receivable and an allowance for contractual discount pricing. Credit is extended to customers based on an evaluation of their financial condition, industry reputation, and other factors considered by the Company’s management. The Company generally does not require collateral or other security interest to support accounts receivable. Based on trends and specific factors, the customer’s credit terms may be modified, including required payment upon delivery.

The Company performs regular on-going credit evaluations of its customers as deemed relevant. As events, trends, and circumstances warrant, the Company’s management estimates the amounts that are more likely than not to be uncollectible. These amounts are recognized as bad debt expense and are reflected within selling, general, administrative and other expenses on the Company’s accompanying interim unaudited condensed consolidated statements of operations.

When accounts are deemed uncollectible, they are often referred to the Company’s outside legal firm for litigation. Accounts deemed uncollectible are written-off in the period when the Company has exhausted its efforts to collect overdue and unpaid receivables or otherwise has evaluated other circumstances that indicate that the Company should abandon such efforts. Accounts deemed uncollectible are removed from the Company’s accounts receivable portfolio, with a corresponding offset to the allowance for doubtful accounts receivable. The Company may record additional allowances for doubtful accounts based on known trends and expectations to ensure the Company’s accounts receivable portfolio is recorded at net realizable value. Specific allowances are re-evaluated and adjusted as additional facts and information become available. Previously written-off accounts receivable subsequently collected are recognized as a reduction of bad debt expense when funds are received.

The Company’s management estimates its allowance for contractual discount pricing, by evaluating specific accounts where information indicates the customer is offered contractual pricing and discount allowances. In these arrangements, the Company’s management uses assumptions and judgement, based on the best available facts and circumstances to record a specific allowance for the amounts due from those customers. The allowance is offset by a corresponding reduction to revenue. These specific allowances are re-evaluated, analyzed, and adjusted as additional information becomes available to determine the total amount of the allowance. The Company may record additional allowances based on trends and expectations to ensure the Company’s accounts receivable portfolio is recorded at net realizable value.

Inventories

Inventories are stated at the lower of cost or net realizable value (first-in, first-out) less an allowance for slow-moving inventory, expired inventory, and inventory obsolescence. Inventories consist entirely of finished goods and include internal and external fixation products; upper and lower extremity plating and total joint reconstruction; soft tissue fixation and augmentation for sports medicine procedures; spinal implants for trauma, degenerative disc disease, and deformity indications (collectively, “Orthopedic Implants”) and osteo-biologics and regenerative tissue which include human allografts, substitute bone materials and tendons, as well as regenerative tissues and fluids (collectively, “Biologics”). The Company reviews the market value of inventories whenever events and circumstances indicate that the carrying value of inventories may not be recoverable from the estimated future sales price less cost of disposal and normal gross profit. In cases where the market values are less than the carrying value, a write-down is recognized equal to an amount by which the carrying value exceeds the market value of inventories.

Property and Equipment

Property and equipment are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets per the following table. Expenditures for additions and improvements are capitalized, while repairs and maintenance are expensed as incurred. The Company reviews long-lived assets for impairment annually or whenever changes in circumstances indicate that the carrying amount of an asset might not be recoverable.

 

Category

 

Useful Life

Computer equipment and software

 

3 years

Furniture and fixtures

 

3 years

Office equipment

 

3 years

Software

 

3 years

 

F-8


FUSE MEDICAL, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2020
(Unaudited)

 

Upon the retirement or disposition of property and equipment, the related cost and accumulated depreciation is removed. A gain is recorded when consideration received is more than the disposed asset’s cost, net of depreciation, and a loss is recorded when consideration received is less than the disposed asset’s cost, net of depreciation.

Long-Lived Assets

The Company reviews other long-lived assets for indicators of impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The evaluation is performed at the lowest level of identifiable cash flows, which is at the individual asset level or the asset group level. The undiscounted cash flows expected to be generated by the related assets are estimated over their useful life based on updated projections. If the evaluation indicates that the carrying amount of the assets may not be recoverable, any potential impairment is measured based upon the fair value of the related assets or asset group as determined by an appropriate market appraisal or other valuation technique. Assets classified as held for sale, if any, are recorded at the lower of carrying amount or fair value less costs to sell.

Goodwill and Other Intangible Assets

Goodwill is determined based on an acquisition purchase price in excess of the fair value of identified net assets acquired.  Intangible assets with lives restricted by contractual, legal or other means are amortized over their useful lives. 

Goodwill is not amortized, but is tested at in the fourth quarter each year for impairment, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount.  The Company performs its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. If the carrying value of a reporting unit exceeds its fair value, an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. As of March 31, 2020, the Company evaluated certain qualitative factors including, (i) macroeconomic factors resulting from the COVID-19 pandemic, (ii) the Company’s operating loss and overall financial performance, (iii) the Company’s stock price, and (iv) specific cost-saving actions taken by the Company in response to the COVID-19 pandemic in concluding that the reported amount of goodwill was not more likely than not impaired.

 

Accounting Standards Codification (“ASC”) 350-30-35-18 indicates that an intangible asset that is not subject to amortization shall be tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired.  The Company’s 510(k) intangible asset has an indefinite life. The Company does not believe that a triggering event has occurred as of March 31, 2020.

The Company’s intangible assets subject to amortization consist primarily of acquired non-compete agreements and customer relationships. Amortization expense is calculated using the straight-line method over the asset’s expected useful life. 

Revenue Recognition

The Company’s revenues are generated from the sales of Orthopedic Implants and Biologics to support orthopedic surgeries. The Company obtains purchase orders from its customers for the sale of its products which sets forth the general terms and conditions including line item pricing and payment terms (generally due upon receipt). The Company recognizes revenue when its customers obtain control over the assets (generally when the title passes upon shipment or when a product is utilized in a surgery) and it is probable that the Company will collect substantially all the amounts due. Individual promised goods are the Company’s only performance obligation.

Due to the nature of its products, the Company’s product returns have been historically immaterial.

The Company includes shipping and handling fees in net revenues. Shipping and handling that costs are associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold on the Company’s accompanying interim unaudited condensed consolidated statement of operations.

Revenue Differentiation

F-9


FUSE MEDICAL, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2020
(Unaudited)

 

The Company measures sales volume based on medical procedures in which the Company’s products are sold and used (Cases). The Company considers Cases resulting from direct sales to medical facilities to be Retail Cases and Cases resulting from sales to third parties, such as non-medical facilities, distributors, or sub-distributors, to be wholesale cases (“Wholesale Cases”). Some of the Company’s sales for Wholesale Cases are on a consignment basis with a third party. When consigned, the revenue is not recorded until the device is implanted in a patient during surgery. In the Company’s industry, Retail Cases are typically sold at higher price points than Wholesale Cases, resulting in greater revenue and gross profit per Case.

 

 

 

Three Months Ended

 

Category

 

March 31, 2020

 

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

Retail

 

$

4,126,923

 

 

$

3,769,818

 

Wholesale

 

 

509,580

 

 

 

1,000,841

 

Total

 

$

4,636,503

 

 

$

4,770,659

 

Cost of Revenues

Cost of revenues consists of (i) cost of goods sold, (ii) freight and shipping costs for items sold to customers, (iii) cost of storage, (iv) investment in medical instruments, which are expensed when acquired, (v) inventory shrink, and (vi) an estimate for slow-moving, expired inventory, and inventory obsolescence.

Stock-Based Compensation

Stock-based compensation expense is measured at the grant date fair value of the award and is expensed over the requisite service period. For employee stock-based awards, the Company calculates the fair value of the award on the date of grant using the Black-Scholes option pricing model. Determining the fair value of stock-based awards at the grant date under this model requires judgment, including estimating volatility, employee stock option exercise behaviors and forfeiture rates. The assumptions used in calculating the fair value of stock-based awards represent the Company's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. For non-employee stock-based awards, the Company calculates the fair value of the award on the date of grant in the same manner as employee awards, however, the awards are revalued at the end of each reporting period and the pro-rata compensation expense is adjusted accordingly until such time the non-employee award is fully vested, at which time the total compensation recognized to date shall equal the fair value of the stock-based award as calculated on the measurement date, which is the date at which the award recipient’s performance is complete. The estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised.

Recent Accounting Pronouncements

Accounting pronouncements issued or effective in 2020 by the Financial Accounting Standards Board (the “FASB”), did not or are not believed by the Company’s management to have a material impact on the Company's present or future unaudited condensed consolidated financial statements.

Note 3. CPM Acquisition

On December 29, 2017, the Company completed the CPM Acquisition, pursuant to the CPM Acquisition Agreement. The Company issued 50 million shares of its Common Stock, par value $0.01 per share, in exchange for one-hundred percent (100%) of the outstanding membership interests of CPM, at an agreed-upon value of $0.20 per share of Common Stock, equaling a value of $10,000,000. The remaining $26,000,000 of the purchase price consideration may be paid by the Company to NC 143 in the form of contingent Earn-Out payments based on the Company achieving certain future profitability targets for years after 2017. The effective date of the CPM Acquisition was December 31, 2017 (the “CPM Effective Date”).

The Company recorded $19,244,543 as a contingent liability related to the fair value of the $26,000,000 Earn-Out liability as of the CPM Effective Date, with a corresponding offset to additional paid-in capital on the Company’s accompanying interim unaudited condensed consolidated balance sheets. For the year ended December 31, 2019 and 2018, the Company determined the earnings threshold, as detailed in the CPM Acquisition Agreement, were not met and therefore no payments for either the base or bonus Earn-Out tranches would be achieved, based on the Company’s 2019 and 2018 financial performance.

As of December 31, 2019, the Earn-Out was remeasured to fair value under the probability weighted income approach. As a result, the fair value of the Earn-Out liability was reduced by $1,936,164 from $13,581,529 to $11,645,365. The Earn-Out liability was reduced by $5,663,014 with the offset reflected as “Change in fair value of contingent purchase consideration” on the Company’s consolidated

F-10


FUSE MEDICAL, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2020
(Unaudited)

 

balance sheet as of December 31, 2019. For the year ended December 31, 2018, the Earn-Out was re-measured to fair value under the probability weighted income approach. As a result, the initial fair value of the Earn-Out liability was reduced by $5,663,014 from $19,244,543 to $13,581,529. The Company’s management will evaluate the estimated fair value of the Earn-Out liability each reporting period. (See Note 2, “Fair Value Measurements.”)

The CPM Acquisition Agreement provided for a working capital post-closing adjustment (“CPM Post-Closing Adjustment”) for certain changes in CPM’s current assets and current liabilities pursuant to the CPM Acquisition Agreement. The CPM Post-Closing Adjustment was calculated to be $397,463 and was paid in cash on June 27, 2018, to NC 143, with a corresponding offset to additional paid-in capital on the Company’s accompanying interim unaudited condensed consolidated balance sheets.

Note 4.  Maxim Acquisition

On the Maxim Closing Date, the Company completed the Maxim Acquisition pursuant to the Maxim Purchase Agreement. (See Note 1, “Nature of Operations – Overview.”)

The Company issued 4,210,526 shares of its Common Stock to RMI and Mr. Amir David Tahernia (the “Sellers”) in exchange for one-hundred percent (100%) of the outstanding Maxim Interests, at an agreed-upon value of $0.76 per share of Common Stock, which was equal to the 30-day volume-weighted average price (“VWAP”) of the Common Stock as of three (3) business days prior to the Maxim Closing Date.

The Company accounted for the Maxim Acquisition as a business combination and recorded the assets acquired and liabilities assumed at their respective estimated fair values as of the Maxim Closing Date. The assets acquired and liabilities assumed were recorded as of the Maxim Closing Date at their respective fair values and consolidated with those of the Company.

The Maxim Purchase Agreement provided for a working capital post-closing adjustment (“Maxim Post-Closing Adjustment”) based on the Maxim Closing Date balance sheet for certain changes in Maxim’s current assets and current liabilities pursuant to the Maxim Purchase Agreement. The Maxim Post-Closing Adjustment was calculated to be $81,757.

To finalize the Maxim Post-Closing Adjustment, the Company issued an aggregate of 120,231 shares of Common Stock to the Sellers on October 4, 2018 at an agreed-upon value of $0.68 per share of Common Stock, which was equal to the 30-day VWAP of the Company’s Common Stock as of October 1, 2018.

The Company recorded the excess of the aggregate purchase price over the estimated fair values of the identifiable assets acquired as goodwill, which is not deductible for tax purposes. Goodwill is primarily attributable to the benefits the Company expects to realize by expanding its product offerings and addressable markets, thereby contributing to an expanded revenue base. The results of Maxim operations are included in the Company’s interim unaudited condensed consolidated statements of operations subsequent to the Maxim Closing Date.

The Company is managed and operates in one operating and reporting segment, as Maxim Surgical integrated into the Company’s existing operations.

Note 5. Property and Equipment

Property and equipment consisted of the following at March 31, 2020, and December 31, 2019:

 

 

 

March 31,

2020

 

 

December 31,

2019

 

Computer equipment and software

 

$

72,060

 

 

$

51,303

 

Office equipment

 

 

-

 

 

 

20,333

 

Property and equipment costs

 

 

72,060

 

 

 

71,636

 

Less: accumulated depreciation

 

 

(28,292

)

 

 

(38,997

)

Property and equipment, net

 

$

43,768

 

 

$

32,639

 

 

Depreciation expense for the three months ended March 31, 2020, and 2019 was $9,628 and $5,369, respectively. During the first quarter of 2020, the Company disposed of $20,333 of fully depreciated assets.

F-11


FUSE MEDICAL, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2020
(Unaudited)

 

Note 6. Goodwill and Intangible Assets

The following table summarizes the Company’s goodwill and other intangible assets:

 

 

 

March 31,

2020

 

 

December 31, 2019

 

 

Amortization period

(years)

Intangible assets:

 

 

 

 

 

 

 

 

 

 

Non-compete agreements

 

$

61,766

 

 

$

61,766

 

 

2

510(k) product technology

 

 

704,380

 

 

 

704,380

 

 

Indefinite

Customer relationships

 

 

555,819

 

 

 

555,819

 

 

11

Total intangible assets

 

 

1,321,965

 

 

 

1,321,965

 

 

 

Less: accumulated amortization

 

 

(135,700

)

 

 

(115,345

)

 

 

Intangible assets, net

 

 

1,186,265

 

 

 

1,206,620

 

 

 

Goodwill

 

$

1,972,886

 

 

$

1,972,886

 

 

Indefinite

 

Amortization expense for the three months ended March 31, 2020 and 2019 was $20,355.  

 

The Company’s intangible assets subject to amortization consist primarily of acquired non-compete agreements, product technology and customer relationships.

Note 7. Revolving Line of Credit

Effective December 31, 2017, the Company became party to the RLOC with Amegy Bank. The RLOC contains customary representation, warranties, covenants, events of default, and is collateralized by substantially all of the Company’s assets. The Company’s Chairman of the Board and President initially personally guaranteed fifty percent (50%) of the outstanding RLOC amount.

On September 21, 2018, the Company executed the First Amendment to the RLOC with Amegy Bank (the “First Amendment”). The First Amendment (i) waived the Company’s events of default under the RLOC through the fiscal quarter ended September 30, 2018, and (ii) added a covenant that the Company achieve quarterly net income of $700,000 or more for the fiscal quarter ending on September 30, 2018.

On November 19, 2018 the Company executed the Second Amendment to the RLOC with Amegy Bank (the “Second Amendment”).

The Second Amendment (i) waived the Company’s events of default under the RLOC, (ii) reduced the aggregate limit of the RLOC to $4,000,000, (iii) extended the maturity date to November 4, 2019, (iv) revised the variable interest rate to the one-month LIBOR rate plus four percent (4.00%) per annum, and (v) amended the financial covenants to state that the Company will not permit: the Fixed Charge Coverage Ratio of any calendar quarter end from and after the quarter ending June 30, 2019, to be less than 1.25 to 1.00; EBITDA to be less than $700,000 for the fiscal quarter ending December 31, 2018, and $100,000 for the fiscal quarter ending March 31, 2019; modified the event of default related to consecutive quarterly losses to be applicable from and after the quarter ending June 30, 2019.

On May 9, 2019, the Company executed the Third Amendment to the RLOC with Amegy Bank. Pursuant to the Third Amendment, Amegy Bank (i) waived the Company’s events of default under the RLOC, (ii) reduced the aggregate limit of the RLOC to $3,500,000, (iii) reduced the limit of credit card exposure to $500,000, (iv) reduced borrowing base component of Inventory to 30%, (v) amended the financial covenants to state that the Company will not permit EBITDA to be less than $100,000 for the fiscal quarter ending June 30, 2019 and $500,000 for the fiscal quarter ending September 30, 2019 and (vi) rescinded the Loan Sweep Feature, requiring the Company to give notice of each requested loan by delivery of Advance Request to Amegy Bank.

On December 18, 2019, the Company executed the Fourth Amendment to the RLOC with Amegy Bank. Pursuant to the Fourth Amendment, Amegy Bank (i) waived the Company’s events of default under the RLOC, (ii) reduced the aggregate limit of the RLOC to $2,750,000, (iii) reduced and limited the annual salary of the Company’s Chairman of the Board and President, Mr. Brooks, to not exceed $550,000, (iv) amended the financial covenants to state that the Company will not permit EBITDA to be less than $600,000 for the fiscal quarter ending December 31, 2019 and $125,000 for the fiscal quarter ending March 31, 2020, (v) extended the termination date of the RLOC to May 4, 2020 and (vi) provides for our Chairman of the Board and President to personally guarantee one hundred percent (100%) of the outstanding RLOC amount.

F-12


FUSE MEDICAL, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2020
(Unaudited)

 

The Company was not in compliance with the minimum quarterly EBITDA requirement of $125,000 for the three months ended March 31, 2020. On May 21, 2020, the Company and Amegy Bank executed a Limited Waiver and Fifth Amendment to the RLOC, which waived the minimum EBITDA maintenance event of default for the fiscal quarter ended March 31, 2020 and extended the termination date of the RLOC until November 4, 2020. (“See Note 13. Subsequent Events”)

The outstanding balance of the RLOC was $1,503,320 and $1,752,501 at March 31, 2020 and December 31, 2019, respectively. Interest expense incurred on the RLOC was $24,270 and $18,778 for the three months ended March 31, 2020 and 2019, respectively, and is reflected in interest expense on the Company’s accompanying interim unaudited condensed consolidated statements of operations. Accrued interest on the RLOC at March 31, 2020 and December 31, 2019 was $6,919 and $4,437, respectively, and is reflected in accrued expenses on the Company’s accompanying interim unaudited condensed consolidated balance sheets. At March 31, 2020, the effective interest rate was 5.646%.

Note 8. Notes Payable – Related Parties

During July 2016 through October 2016, the Company obtained three working capital loans from NC 143 and RMI in the aggregate amount of $150,000 in exchange for convertible promissory notes (“Notes”) bearing ten percent (10%) interest per annum until December 31, 2016 (“Maturity Date”), and eighteen percent (18%) interest per annum for periods subsequent to the Maturity Date. The Notes’ remain outstanding and principal and interest are due and payable, upon demand of the payee and at the holder’s sole discretion. The Notes’ holders have the right to convert all or any portion of the then unpaid principal and interest balance into shares of the Company’s Common Stock at a conversion price of $0.08 per share.

During the three months ended March 31, 2020, and 2019, interest expense of $6,732 and $6,658, respectively, is reflected in interest expense on the Company’s accompanying interim unaudited condensed consolidated statements of operations. As of March 31, 2020, and December 31, 2019, accrued interest was $92,827 and $86,096, respectively, which is reflected in accrued expenses on the Company’s accompanying interim unaudited condensed consolidated balance sheets.

 

Note 9. Stockholders’ Equity

Stock-Based Compensation

The 2018 Amended and Restated Equity Incentive Plan of Fuse Medical, Inc. (“2018 Equity Plan”), is the Company’s stock-based compensation plan, which the Company’s Board adopted on April 5, 2017, and subsequently amended and restated on December 13, 2018. The 2018 Equity Plan provides for the granting of equity awards, including qualified incentive and non-qualified stock options, stock appreciation awards, and restricted stock awards to employees, directors, consultants, and advisors. Awards granted pursuant to the 2018 Equity Plan are subject to a vesting schedule as set forth in individual agreements.

The Company’s management estimates the fair value of stock-based compensation utilizing the Black-Scholes option pricing model. Black-Scholes option pricing is calculated using several variables such as the expected option term, expected volatility of the Company’s stock price over the expected option term, expected risk-free interest rate over the expected option term, expected dividend yield rate over the expected option term, and an estimate of expected forfeiture rates. The Company’s management believes this valuation methodology is appropriate for estimating the fair value of stock options granted to employees and directors, which are subject to ASC Topic 718 requirements. The Company’s management estimates of fair value may not be reflective of actual future values or amounts ultimately realized by recipients of these grants. The Company recognizes compensation on a straight-line basis over the requisite service period for each award.

The Company’s management utilizes the simplified method to estimate the expected life for stock options granted to employees, as the Company does not have sufficient historical data regarding stock option exercises. The risk-free interest rate is based on the U.S. Treasury yields with terms equivalent to the expected life of the related option at the time of the grant. Dividend yield is based on historical trends. While the Company’s management believes these estimates are reasonable, the compensation expense recorded would increase if the expected life was increased, a higher expected volatility was used, or if the expected dividend yield increased.

The Company made an accounting policy election to account for forfeitures when they occur, versus estimating the number of awards that are expected to vest, in accordance with ASU 2016-09.

Non-Qualified Stock Option Awards

For the three months ended March 31, 2019, the Board granted 900,000 non-qualified stock option awards (“NQSO’s) to the Company’s product advisory board members, certain key employees and marketing representatives. The Board did not grant any

F-13


FUSE MEDICAL, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2020
(Unaudited)

 

NQSOs for the three months ended March 31, 2020. For the three months ended March 31, 2020, and 2019, the Company amortized $162,656 and $244,407, respectively, relating to the vesting of NQSOs, which is included in selling, general, administrative, and other expenses on the Company’s accompanying interim unaudited condensed consolidated statements of operations. The Company will recognize approximately $963,104 in expense in future periods as the NQSOs vest. The Company recognizes stock compensation expense on a straight-line basis over the requisite service period for each award, which are subject to a vesting schedule as set forth in individual agreements.

The following reflected the NQSO’s that were granted, exercised, forfeited or expired during the three months ended March 31, 2020.

 

 

 

No. of

Shares

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual

Term

 

 

Aggregate

Intrinsic

Value

 

Balance outstanding at December 31, 2019

 

 

3,948,333

 

 

$

0.61

 

 

 

6.1

 

 

$

157,000

 

Granted

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Exercised

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Forfeited

 

 

(3,333

)

 

 

1.00

 

 

 

8.0

 

 

 

-

 

Expired

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Balance outstanding at March 31, 2020

 

 

3,945,000

 

 

$

0.60

 

 

 

6.1

 

 

$

557,000

 

Exercisable at March 31, 2020

 

 

2,031,667

 

 

$

0.45

 

 

 

3.7

 

 

$

484,500

 

 

Restricted Common Stock

The non-vested restricted stock awards (“RSA”s), as of March 31, 2020, were granted to the Company’s Board members as compensation. These awards vest only upon: (i) the occurrence of one of the Accelerating Events: (a) a Change in Control (as defined in RSA Agreement); or (b) listing of the Company’s Common Stock on either NYSE or NASDAQ Stock Market; and (ii) the director’s delivery to the Company of a Notice of Acceleration of Vesting (as defined in RSA Agreement), within the Acceleration Notice Period.

 

As of March 31, 2020, and 2019,it was not probable that the performance conditions on the outstanding options would be met, therefore, no expense has been recorded for these awards for the three months ended March 31, 2020 and 2019.

There was no RSA’s that were granted, exercised or forfeited during the three months ended March 31, 2020.

 

 

Number of

Shares

 

 

Fair Value

 

 

Weighted Average Grant Date Fair Value

 

Non-vested, December 31, 2019

 

2,902,892

 

 

$

1,382,800

 

 

$

0.48

 

Granted

 

-

 

 

 

-

 

 

 

-

 

Vested

 

-

 

 

 

-

 

 

 

-

 

Forfeited

 

-

 

 

 

-

 

 

 

-

 

Non-vested, March 31, 2020

 

2,902,892

 

 

$

1,382,800

 

 

$

0.48

 

 

 

F-14


FUSE MEDICAL, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2020
(Unaudited)

 

Note 10. Income Taxes

The Company is subject to U.S. federal income taxes, in addition to state and local income taxes.

The components of income tax expense (benefit) are as follows:

 

 

For the

Three Months Ended March 31, 2020

 

 

For the

Three Months Ended March 31, 2019

 

Current:

 

 

 

 

 

 

 

 

Federal

 

$

-

 

 

$

-

 

State

 

 

4,734

 

 

 

10,482

 

Income tax expense

 

 

4,734

 

 

 

10,482

 

Deferred:

 

 

 

 

 

 

 

 

Federal

 

 

-

 

 

 

(125,028

)

State

 

 

-

 

 

 

-

 

Income tax benefit

 

 

-

 

 

 

(125,028

)

Total income tax expense (benefit), net

 

$

4,734

 

 

$

(114,546

)

Significant components of the Company's deferred income tax assets and liabilities are as follows:

 

 

March 31, 2020

 

 

December 31, 2019

 

Deferred tax assets:

 

 

 

 

 

 

 

 

Net operating loss carryover

 

$

513,841

 

 

$

373,033

 

Accounts receivable

 

 

411,310

 

 

 

282,088

 

Compensation

 

 

398,763

 

 

 

364,605

 

Inventory

 

 

671,408

 

 

 

734,524

 

Other

 

 

24,648

 

 

 

-

 

Total deferred tax assets

 

 

2,019,970

 

 

 

1,754,250

 

 

 

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Intangibles

 

 

(214,824

)

 

 

(218,427

)

Property and equipment

 

 

(5,922

)

 

 

(6,239

)

Total deferred tax liabilities

 

 

(220,746

)

 

 

(224,666

)

 

 

 

 

 

 

 

 

 

Deferred tax assets, net

 

 

1,799,224

 

 

 

1,529,584

 

 

 

 

 

 

 

 

 

 

Valuation allowance:

 

 

 

 

 

 

 

 

    Beginning of year

 

 

(1,529,584

)

 

 

-

 

   Increase during the year

 

 

(269,640

)

 

 

(1,529,584

)

      Ending balance

 

 

(1,799,224

)

 

 

(1,529,584

)

 

 

 

 

 

 

 

 

 

Net deferred tax asset

 

$

-

 

 

$

-

 

 

A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized.  The Company recorded a valuation allowance totaling $269,640 for the three months ended March 31, 2020 due to the uncertainty of realization.  Management believes that based upon the history of losses that the Company has incurred to date and its projection of future taxable operating income for the foreseeable future, it is more likely than not that the Company will not be able to realize the tax benefit associated with deferred tax assets. The valuation allowance established as of March 31, 2020 was $1,799,224.

At March 31, 2020, the Company estimates it has approximately $2,446,861 of net operating loss carryforwards, $899,331 of which will expire 2020 through 2037. The Company’s management believes its tax positions are more likely than not of being upheld upon examination. As such, the Company has not recorded a liability for unrecognized tax benefits. As of March 31, 2020, the Company’s tax years 2016 through 2018 remain open for Internal Revenue Service (“IRS”) audit. The Company has not received a notice of audit from the IRS for any of the open tax years.

F-15


FUSE MEDICAL, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2020
(Unaudited)

 

A reconciliation of income tax computed at the U.S. statutory rate to the effective income tax rate is as follows:

 

 

 

Three Months Ended

 

 

 

March 31, 2020

 

 

March 31, 2019

 

Expected U.S. federal incomes as statutory rate

 

21.0%

 

 

21.0%

 

Change in deferred tax asset valuation allowance

 

-21.1%

 

 

0.0%

 

State and local income taxes, net of federal benefit

 

-0.3%

 

 

-1.3%

 

Permanent differences

 

0.0%

 

 

-0.6%

 

Other

 

0.0%

 

 

-0.8%

 

Effective tax rate

 

-0.4%

 

 

18.3%

 

Our effective income tax rates for the three months ended March 31, 2020 and 2019 were (0.4%) and 18.3%, respectively.   The decrease from the prior period is driven by the valuation allowance allocated to the deferred tax asset for the current period.  

Note 11. Concentrations

Concentration of Revenues, Accounts Receivable and Suppliers

For the three months ended March 31, 2020, and 2019, the following significant customers had an individual percentage of total revenues equaling ten percent (10%) or greater:

 

 

For the Three Months Ended

 

 

March 31, 2020

 

 

March 31, 2019

 

Customer 1

 

11.5

%

 

 

11.8

%

Customer 2

 

11.0

%

 

 

0.0

%

Totals

 

22.5

%

 

 

11.8

%

 

At March 31, 2020 and December 31, 2019, there were no significant customers that had a concentration of accounts receivable representing ten percent (10%) or greater of accounts receivable:

 

For the three months ended March 31, 2020 and 2019, the following significant suppliers represented ten percent (10%) or greater of goods purchased:

 

 

For the Three Months Ended

 

 

March 31, 2020

 

 

March 31, 2019

 

Supplier 1

 

20.7

%

 

 

21.2

%

Supplier 2

 

13.3

%

 

 

5.3

%

Supplier 3

 

12.1

%

 

 

4.5

%

Totals

 

46.1

%

 

 

31.0

%

 

Note 12. Related Party Transactions

Lease with 1565 North Central Expressway, LP

For its principal executive office, the Company leases an aggregate of approximately 11,500 square-foot space at 1565 North Central Expressway, Suite 220, Richardson, Texas 75080 from 1565 NCE, LP, a real estate investment company that is owned and controlled by Mr. Brooks. The Company’s lease arrangement includes (1) the lease acquired pursuant to the CPM Acquisition effective January 1, 2013 and (2) a lease effective July 14, 2017 entered into to support the Company’s relocation of its Fort Worth, Texas corporate offices to CPM’s executive offices. Both leases terminated December 31, 2017, with month-to-month renewals. For the three months ended March 31, 2020, and 2019, the Company paid approximately $42,000 and $42,000 in rent expense, which is reflected in selling,

F-16


FUSE MEDICAL, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2020
(Unaudited)

 

general, administrative, and other expenses in the Company’s accompanying unaudited condensed consolidated statements of operations.

AmBio Contract

The Company engaged AmBio Staffing, LLC (“AmBio”), a Texas licensed Professional Employment Organization, to provide payroll processing, employee benefit administration, and related human capital services effective January 1, 2017. Mr. Brooks owns and controls AmBio. As of March 31, 2020, AmBio operations support approximately 39 full time equivalents (“FTE”). Of those 39 FTEs, 31 FTEs directly support the Company, 7 FTEs support the operations of other companies, and 1 FTE are shared between the Company and other companies.

As of March 31, 2020, and December 31, 2019, the Company owed amounts to AmBio of approximately $0.00 and $169,944, respectively, which is reflected in the accounts payable on the Company’s unaudited condensed consolidated balance sheets. For the three months ended March 31, 2020, and 2019, the Company paid approximately $50,869 and $51,000, respectively, to AmBio in administrative fees, which is reflected in selling, general, administrative, and other expenses in the Company’s accompanying unaudited condensed consolidated statements of operations.  

Operations

Historically, the Company conducts various related-party transactions with entities that are owned by or affiliated with Mr. Brooks and Mr. Reeg. These transactions are based on wholesale contractual agreements that the Company’s management believes are on terms and conditions substantially similar to other third-party contractual arrangements. As described more fully below, these transactions include: selling and purchasing of inventory on wholesale basis, commissions earned and paid, and shared-service fee arrangements.

MedUSA Group, LLC

MedUSA Group, LLC (“MedUSA”) is a sub-distributor owned and controlled by Mr. Brooks and Mr. Reeg.

During the three months ended March 31, 2020 and 2019, the Company:

 

sold Orthopedic Implants and Biologics products to MedUSA in the amounts of approximately $25,131 and $300,000, respectively, which is reflected in net revenues in the Company’s accompanying unaudited condensed consolidated statements of operations;

 

 

had no purchases of Orthopedic Implants, medical instruments, or Biologics from MedUSA, and

 

 

incurred approximately $682,580 and $617,000, respectively, in commission costs, which is reflected in commissions in the Company’s accompanying unaudited condensed consolidated statements of operations.

As of March 31, 2020, and December 31, 2019, the Company had approximately $448,724 and $598,405, respectively, of unpaid commission costs due to MedUSA.

As of March 31, 2020, and December 31, 2019, the Company had outstanding balances due from MedUSA of approximately $578,631 and $555,421, respectively. These amounts are reflected in accounts receivable in the Company’s accompanying unaudited condensed consolidated balance sheets.

As of March 31, 2020, and December 31, 2019, the Company had no outstanding balances owed to MedUSA.

Payment terms per our stocking and distribution agreement with MedUSA are 30 days from receipt of invoice. As of March 31, 2020, MedUSA has a past due balance of approximately $576,412.

Texas Overlord, LLC

Texas Overlord, LLC (“Overlord”) is an investment holding company owned and controlled by Mr. Brooks.

During the three months ended March 31, 2020 and 2019 the Company:

 

purchased approximately $0 and $25,000, respectively, in Orthopedic Implants and medical instruments, and Biologics from Overlord, which is reflected within inventories on the Company’s accompanying unaudited condensed consolidating balance sheets; and

F-17


FUSE MEDICAL, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2020
(Unaudited)

 

 

Incurred approximately $45,000 and $0, respectively, in commission costs, which is reflected in commissions in the Company’s accompanying unaudited condensed consolidated statements of operations.

As of March 31, 2020, and December 31, 2019, the Company had approximately $15,000 of unpaid commission costs due to Overlord.

As of March 31, 2020, and December 31, 2019, the Company had no outstanding balances due from Overlord.

NBMJ, Inc.

NBMJ, Inc. d/b/a Incare Technology (“NBMJ”) is a durable medical equipment, wound care, and surgical supplies distributor owned and controlled by Mr. Brooks.

During the three months ended March 31, 2020, and 2019, the Company sold Biologics products to NBMJ in the amounts of approximately $978, and $122,000, respectively, which are reflected in net revenues in the Company’s accompanying unaudited condensed consolidated statements of operations.

As of March 31, 2020, and December 31, 2019, the Company has outstanding balances due from NBMJ of approximately $978 and $0, respectively. These amounts are reflected in accounts receivable in the Company’s accompanying unaudited condensed consolidated balance sheets.

Bass Bone and Spine Specialists

 

Bass Bone & Spine Specialists (“Bass”) operates as a sub-distributor of surgical implants and is owned and controlled by Mr. Brooks.

 

During the three months ended March 31, 2020, and 2019, the Company:

 

 

sold Orthopedic Implants and Biologics products to Bass in the amounts of approximately $31,657 and $62,000, respectively, which is reflected in net revenues in the Company’s accompanying unaudited condensed consolidated statements of operations;

 

incurred approximately $0 and $9,000, respectively, in commission costs to Bass, which is reflected in commissions in the Company’s accompanying unaudited condensed consolidated statements of operations.

 

As of March 31, 2020, and December 31, 2019, the Company has outstanding balances due from Bass of approximately $24,379

and $7,149, respectively. These amounts are reflected in accounts receivable in the Company’s accompanying unaudited condensed consolidated balance sheets.

 

Payment terms per the stock and distribution agreement are 30 days from receipt of invoice.

Sintu, LLC

Sintu, LLC (“Sintu”) operates as a sub-distributor of surgical implants and is owned and controlled by Mr. Brooks.

During the three months ended March 31, 2020, and 2019, the Company incurred approximately $266,329 and $78,000, respectively, in commission costs to Sintu, which is reflected in commissions on the Company’s accompanying unaudited condensed consolidated statement of operations.

Tiger Orthopedics, LLC

 

Tiger Orthopedics, LLC (“Tiger”) operates as a sub-distributor of surgical implants and is owned and controlled by Mr. Brooks.

 

During the three months ended March 31, 2020, and 2019, the Company sold Orthopedic Implants and Biologics products to Tiger in the amounts of approximately $32,600 and $50,000, respectively, which is reflected in net revenues in the Company’s accompanying unaudited condensed consolidated statements of operations;

 

F-18


FUSE MEDICAL, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2020
(Unaudited)

 

As of March 31, 2020, and December 31, 2019, the Company has outstanding balances due from Tiger of approximately $650 and $30,525, respectively. These amounts are reflected in accounts receivable in the Company’s accompanying unaudited condensed consolidated balance sheets.

 

Payment terms per the stocking and distribution agreement are 30 days from receipt of invoice.

 

Modal Manufacturing, LLC

 

Modal Manufacturing, LLC (“Modal”) is a manufacturer of medical devices owned and controlled by Mr. Brooks.

 

During the three months ended March 31, 2020 and 2019, the Company purchased approximately $220,919 and $86,831 respectively, in Orthopedic Implants and medical instruments from Modal, which is reflected within inventories, net of allowance on the Company’s accompanying unaudited condensed consolidated balance sheets.

 

As of March 31, 2020, and December 31, 2019, the Company had outstanding balances due from Modal of approximately $40,700 and $40,700, respectively. This is reflected in accounts receivable in the Company’s accompanying condensed consolidated balance sheets.

 

Payment terms per the stocking and distribution agreement are 30 days form receipt of invoice. As of March 31, 2020, the Company had approximately $172,378 of accounts payable due to Modal.

Note 13. Subsequent Events

In preparing these unaudited condensed consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through May 22, 2020, the date the unaudited condensed consolidated financial statements were available to be issued.

 

There are many uncertainties regarding the current COVID-19 pandemic, and the Company is closely monitoring the impact of the pandemic on all aspects of its business, including how it will impact its customers, employees, suppliers, vendors, business partners and distribution channels. Because government-imposed restrictions on elective surgeries did not go into effect in Dallas County until March 19, 2020, pandemic-related effects did not materially adversely affect the Company’s financial results and business operations in the Company’s for the full three months ended March 31, 2020. The Company’s management, however, is unable to predict the impact that COVID-19 will have on its financial position and operating results for the three months ended June 30, 2020 and thereafter due to numerous uncertainties, including the ability of cities, states and counties to safely and quickly lift COVID-19 related restrictions on businesses and the population generally. The Company’s management expects to continue to assess the evolving impact of the COVID-19 pandemic and intends to make adjustments to its responses accordingly.

 

On April 11, 2020, the Company was informed by Amegy Bank, that the Company had received approval from the U.S. Small Business Administration (“SBA”) to fund the Company’s request for a loan under the SBA’s Paycheck Protection Program (“PPP Loan”) created as part of the recently enacted CARES Act administered by the SBA. In connection with the PPP Loan, the Company has entered into the promissory note in principal amount of $361,400 attached as Exhibit 10.1 to this Form 10-Q. In accordance with the requirements of the CARES Act, the Company intends to use the proceeds from the PPP Loan primarily for payroll costs. The PPP Loan is scheduled to mature on April 11, 2022, has a 1.00% interest rate, and is subject to the terms and conditions applicable to all loans made pursuant to the Paycheck Protection Program as administered by the SBA under the CARES Act.

 

F-19


FUSE MEDICAL, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2020
(Unaudited)

 

On May 21, 2020, the Company and Amegy Bank executed a Limited Waiver and Fifth Amendment to the RLOC, which waived the EBITDA event of default for the three months ended March 31, 2020 and extended the termination date of the RLOC until November 4, 2020. (See Note 7, “Revolving Line of Credit”).

 

In conjunction with obtaining the waiver under the RLOC, the Company obtained an additional $200,000 in capital in the form of subordinated debt from affiliates of Messrs. Brooks and Reeg. Specifically, on May 6, 2020, the Company borrowed $180,000 from NC 143, a limited partnership controlled by Mr. Brooks, and $20,000 from RMI, a company owned and controlled by Mr. Reeg, in exchange for two promissory notes which are unsecured, bear interest at 0.25% per annum until May 6, 2022, the maturity date, and 10.0% per annum after the maturity date.  Principal and interest are due and payable on the maturity date, provided, however, any payment of principal and interest on the loans is subordinated to payment of all indebtedness under the RLOC.

 

The Company’s management concluded there are no other material events or transactions for potential recognition or disclosure.

 

F-20


 

 

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

Explanatory Note 

As used in this report on Form 10-Q, “we”, “us”, “our”, and the “Company” refer to Fuse Medical, Inc, a Delaware corporation. 

This discussion and analysis should be read in conjunction with the interim unaudited condensed consolidated financial statements of our Company and the related notes included in this report for the periods presented (our “Financial Statements”), the audited consolidated financial statements of our Company and the related notes thereto and the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (our “2019 Annual Report”), filed with the Securities and Exchange Commission (the “SEC”) pursuant to Section 13 or 15(d) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on March 30, 2020.

Overview

We are a manufacturer and national distributor of medical devices. We provide a broad portfolio of orthopedic implants including:

 

Foot and Ankle: internal and external fixation products;

 

Orthopedics: upper and lower extremity plating and total joint reconstruction implants;

 

Sports Medicine: soft tissue fixation and augmentation for sports medicine procedures;

 

Spine: full spinal implants for trauma, degenerative disc disease, and deformity indications (collectively, we refer to these bulleted products as “Orthopedic Implants”).

We also provide a wide array of osteo-biologics and regenerative tissues, which include human allografts, substitute bone materials, tendons, and amniotic tissues and fluids, which we refer to as (“Biologics”).

All of our medical devices are approved by the U.S. Food and Drug Administration (“FDA”) for sale in the United States, and all of our Biologics suppliers are licensed tissue banks accredited by the American Association of Tissue Banks. Additionally, we are an FDA-registered medical device specification developer and repackager/relabeler, and manufacturer of record, (a “Manufacturer”). We are seeking to grow our manufacturing operations, both by internal product development and by acquiring existing FDA approved devices.

 

Impact of Coronavirus

 

General Economic Conditions

 

During the first quarter of 2020, the novel coronavirus SARS-CoV-2 global pandemic ("COVID-19") significantly impacted the global economy. The impact has been profound, has continued in May 2020 and is likely to persist for months to come. The overall extent and duration of COVID-19 on businesses and economic activity generally remains unclear, but a severe recession is expected. Economic effects from COVID-19, which have impacted virtually all countries and industries, have included:

 

 

 

Many small businesses being forced to interrupt their operations and as a result, lay off employees or even close;

 

 

 

Large-scale population lock-downs, travel restrictions and social-distancing measures have been implemented, driving a sharp decline in consumer and business spending; and

 

 

 

Significant declines and volatility in global financial markets, including approximate 23.2% and 20.0% declines in the Dow Jones Industrial Average and S&P 500 Index, respectively, during the first quarter.

 

Governments around the world have responded to COVID-19 with economic stimulus measures, including a $2 trillion emergency relief bill passed in the United States. These measures are intended to steady businesses and consumers until economic activity and financial markets meaningfully recover. The timing and magnitude of any such recovery, however, remains uncertain.

 

 

 

 

3


 

Impact to Fuse

 

COVID-19 presents significant risks to our business plan. During our first quarter 2020 and as a response to COVID-19, the Governor of Texas declared a state of disaster and issued an executive order effective March 19, 2020 requiring hospitals to defer all elective surgeries.

Until March 19, 2020 we were experiencing improvements in revenues over last year. The disaster declaration in Texas, and other governmental jurisdictions, and the deferral of all elective surgeries, has adversely impacted our results of operations for the first quarter 2020, in particular, for periods subsequent to March 19, 2020. We anticipate that business and economic changes resulting from COVID-19 will also adversely impact our second quarter 2020.

On April 17, 2020, the Governor of Texas issued an executive order permitting hospital facilities to begin elective surgeries effective April 22, 2020 with certain restrictions, including to maintain a percentage of available beds for potential COVID-19 related patients. We believe the resumption of elective surgeries, including deferred elective surgeries will help to gradually increase demand for our products over the remainder of the year such that we expect fourth quarter volumes to return to levels commensurate with our typical seasonal fourth quarter volume levels.

Our products support patient conditions which are degenerative in nature. While most of our Cases are currently considered elective, they are typically necessary for a patient to restore mobility, reduce pain and increase quality of life. Based on discussions with physicians and hospitals, we anticipate that surgeries will be slow to start after April 22, 2020, but demand will accelerate as a result of “pent up demand” once operations stabilize and remaining restrictions are reduced and eventually lifted. As a result, we believe our annual revenues for 2020 will fall within a range of 4% to 6% lower compared to 2019. Revenues during our second quarter are anticipated to be significantly lower, with revenues increasing throughout the third and the traditionally highest, fourth quarter of the year.

In an effort to reduce costs and offset the economic impact of COVID-19, during the first quarter of 2020 we reduced payroll and other related costs by approximately $1.9 million on an annualized basis. Additionally, we have applied for and received funds in the amount of $361,400 from the Payroll Protection Program loan (“PPP Loan”) authorized under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Further, we have applied for an Economic Injury Disaster Loan with the Small Business Administration (“SBA”) and are awaiting approval. We will continue to evaluate other forms of disaster assistance through the SBA and other sources as appropriate.  

During the three months ended March 31, 2020 but prior to executive orders prohibiting elective surgeries and imposing stay-at-home requirements, our revenues derived from new customers was approximately $1.1 million or approximately 23% of revenues. Further, revenue per case (a “Case” represents sales volume based on medical procedures in which our products were sold and used) increased during the first quarter of 2020 as a result of our continued operational shift to retail versus wholesale revenues.

 

Current Trends and Outlook

Seasonality

We are subject to seasonal fluctuations in sales, which cause fluctuations in quarterly results of operations. Because of the seasonality of our business, results for any quarter are not necessarily indicative of results that may be achieved in other quarters or for a full fiscal year.

Historically, we typically experience greater revenue and greater volume, as a percentage of revenue, during the last two (2) calendar quarters compared to the first two (2) calendar quarters of the year. This increase is primarily due to more patient annual healthcare deductibles being met during the last two (2) quarters of the calendar year compared to the first two (2) quarters of the calendar year, which is partially satisfied by elective surgeries. We use this seasonality trend to assist us in enterprise-wide resource planning such as purchasing and product inventory logistics.

Prior to the government-imposed shelter-in-place mandates and prohibitions on elective surgeries, revenues for the first quarter of 2020 were consistent with our historical seasonality trends.

Retail and Wholesale Cases

We believe our comprehensive selection of Orthopedic Implants and Biologics products is essential to our ability to acquire new customers and increase sales volume, revenues, and profitability. We continue to review and evaluate our product lines, ensuring we maintain a high-quality and cost-effective selection of Orthopedic Implants and Biologics.

4


 

Retail. Under our retail distribution model, (“Retail Model”), we sell directly to our end customers, which consist of hospitals and medical facilities, utilizing (i) our full-time sales representatives whom we employ or engage as independent contractors and (ii) independent sales representatives who work on a non-exclusive basis. In both instances, we pay the sales representative a commission with respect to sales made by the representative. We refer to sales through our Retail Model as Retail Cases (which are herein referred to as “Retail Cases”).

Wholesale. Under our wholesale distribution model, (“Wholesale Model”), we sell our products directly to independent distributors rather than to hospitals and medical facilities who are the ultimate end customer. We do not pay or receive commissions from any sales by the independent distributor to the end customer. We refer to our sales through our Wholesale Model as Wholesale Cases, (which are herein referred to as “Wholesale Cases”).

 

Retail Cases in our industry command higher revenue price points than Wholesale Cases. Because Retail Cases involve direct sales to our end customers, we receive a higher profit margin due to the absence of any third party in the sales process, before we pay any potential commissions to a full time or independent sales representative. As a result, Retail Cases generally generate substantially more gross profit than Wholesale Case transactions.

Wholesale Cases in our industry command lower revenue price-points than Retail Cases. Because Wholesale Cases involve sales to third parties who in turn sell our products to end customers, our profit margins are reduced for these Cases. Thus, our Wholesale Cases generate substantially lower gross profit than our Retail Cases, but are not subject to additional overhead support costs, such as case coverage and commissions. Our Wholesale Case business is highly dependent on minimum volume sales levels to achieve appropriate profitability.

Pricing Pressures

Pricing pressure has increased in our industry due to (i) continuous consolidation among healthcare providers, (ii) trends toward managed care, (iii) increased government oversight of healthcare costs, and (iv) new laws and regulations that address healthcare reimbursement and pricing. Pricing pressure, reductions in reimbursement levels or coverage, or other cost containment measures can significantly impact our business, future operating results and financial condition.

To offset pricing pressure, we employ strategies to maximize revenue per Case. For the three months ended March 31, 2020 and 2019, our average revenues per Case were $4,980 and $3,499, respectively. The approximate 42% increase in average revenue per Case was primarily due to (a) a shift to focus on retail cases b) an increase in revenue derived from commission agreements and, offset by (c) continued pricing pressures, as described above.

Critical Accounting Policies

The preparation of our Financial Statements and the related disclosures in conformity with GAAP, requires our management to make judgments, assumptions, and estimates that affect the amounts of revenue, expenses, income, assets, and liabilities, reported in our Financial Statements and accompanying notes. Understanding our accounting policies and the extent to which our management uses judgment, assumptions, and estimates in applying these policies is integral to understanding our Financial Statements.

We describe our most significant accounting policies in Note 2, “Significant Accounting Policies” of our unaudited condensed consolidated notes to our Financial Statements beginning on page F-1 and found elsewhere in this report and in our 2019 Annual Report. These policies are considered critical because they may result in fluctuations in our reported results from period to period due to the significant judgments, estimates, and assumptions about highly complex and inherently uncertain matters. In addition, the use of different judgments, assumptions, or estimates could have a material impact on our financial condition or results of operations. We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as appropriate based on changing conditions.

There have been no material changes to our critical accounting policies during the period covered by this report.

Recent Accounting Pronouncements

We describe recent accounting pronouncements in Note 2, “Significant Accounting Policies,” of our accompanying unaudited condensed consolidated notes to our Financial Statements beginning on page F-1.


5


 

Results of Operations

The following table sets forth certain financial information from our unaudited condensed consolidated statements of operations, along with a percentage of net revenues. 

 

For the Three Months Ended

 

 

March 31,

2020

 

(% Rev)

 

March 31,

2019

 

(% Rev)

 

Net revenues

$

4,636,503

 

100%

 

$

4,770,659

 

100%

 

Cost of revenues

 

1,982,896

 

43%

 

 

1,975,345

 

41%

 

Gross profit

 

2,653,607

 

57%

 

 

2,795,314

 

59%

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general, administrative and other

 

2,480,771

 

54%

 

 

2,364,168

 

50%

 

Commissions

 

1,391,117

 

30%

 

 

1,005,531

 

21%

 

Depreciation and amortization

 

29,983

 

1%

 

 

25,724

 

1%

 

Total operating expenses

 

3,901,871

 

84%

 

 

3,395,423

 

71%

 

Operating loss

 

(1,248,264

)

-27%

 

 

(600,109

)

-13%

 

Other expense