10-Q

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: June 30, 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 or 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 August 5, 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 June 30, 2020 (Unaudited) and December 31, 2019	F-1
	Condensed Consolidated Statements of Operations for the Three months and Six months Ended June 30, 2020 and 2019 (Unaudited)	F-2
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three months and Six months Ended June 30, 2020 and 2019 (Unaudited)	F-3
	Condensed Consolidated Statements of Cash Flows for the Six months Ended June 30, 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	13
Item 4.	Controls and Procedures	13
PART II. OTHER INFORMATION
Item 5.	Other Information	14
Item 6.	Exhibits	14
Signatures		16

2

PART I. FINANCIAL INFORMATION 

Item 1. Condensed Consolidated Financial Statements

FUSE MEDICAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in dollars, except share data)

	June 30, 2020			December 31, 2019
	(Unaudited)
Assets
Current assets:
Cash	$	1,167,275		$	1,099,310
Accounts receivable, net of allowance of $801,637 and $615,278, respectively		2,986,921			5,249,653
Inventories, net of allowance of $3,184,126 and $3,805,730, respectively		7,051,891			7,855,887
Prepaid expenses and other current assets		87,752			39,850
Total current assets		11,293,839			14,244,700
Property and equipment, net		33,371			32,639
Long term accounts receivable, net of allowance of $1,332,194 and $728,000, respectively		1,830,938			924,646
Intangible assets, net		1,165,910			1,206,620
Goodwill		1,972,886			1,972,886
Total assets	$	16,296,944		$	18,381,491
Liabilities and Stockholders' Equity (Accumulated Deficit)
Current liabilities:
Accounts payable	$	2,239,586		$	2,752,854
Accrued expenses		3,064,706			3,302,904
Convertible notes payable - related parties		150,000			150,000
Paycheck Protection Program loan		361,400			—
Senior secured revolving credit facility		1,088,352			1,752,501
Total current liabilities		6,904,044			7,958,259
Notes payable - related parties		200,000			—
Economic Injury Disaster Loan		150,000			—
Earn-out liability		11,645,365			11,645,365
Total liabilities		18,899,409			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 June 30, 2020 and December 31, 2019.		731,245			731,245
Additional paid-in capital		969,533			642,435
Accumulated deficit		(4,303,243	)		(2,595,813	)
Total stockholders' equity		(2,602,465	)		(1,222,133	)
Total liabilities and stockholders' equity	$	16,296,944		$	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 share data)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2020			2019			2020			2019
Net revenues	$	4,010,666		$	5,075,925		$	8,647,169		$	9,846,584
Cost of revenues		1,796,663			2,223,912			3,779,559			4,199,257
Gross profit		2,214,003			2,852,013			4,867,610			5,647,327
Operating expenses:
Selling, general, administrative and other		1,161,476			1,975,934			3,642,247			4,340,102
Commissions		1,420,239			1,004,994			2,811,356			2,010,525
Depreciation and amortization		30,752			25,596			60,735			51,320
Total operating expenses		2,612,467			3,006,524			6,514,338			6,401,947
Operating loss		(398,464	)		(154,511	)		(1,646,728	)		(754,620	)
Other expense:
Interest expense		24,021			28,027			55,022			53,462
Total other expense		24,021			28,027			55,022			53,462
Net loss before tax		(422,485	)		(182,538	)		(1,701,750	)		(808,082	)
Income tax benefit		946			(40,389	)		5,680			(154,935	)
Net loss	$	(423,431	)	$	(142,149	)	$	(1,707,430	)	$	(653,147	)
Net loss per common share - basic	$	(0.01	)	$	(0.00	)	$	(0.02	)	$	(0.01	)
Weighted average number of common shares outstanding - basic		70,221,566			70,221,566			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		Retained Earnings/
	Shares		Amount		Capital		(Deficit)			Total
Balance, December 31, 2019		73,124,458	$	731,245	$	642,435	$	(2,595,813	)	$	(1,222,133	)
Stock compensation expense		-		-		327,098		-			327,098
Net loss		-		-		-		(1,707,430	)		(1,707,430	)
Balance, June 30, 2020		73,124,458	$	731,245	$	969,533	$	(4,303,243	)	$	(2,602,465	)

____________________________________________________________________________________________________________

	Common Stock				Additional Paid-In		Retained Earnings/
	Shares		Amount		Capital		(Deficit)			Total
Balance, December 31, 2018		74,600,181	$	746,002	$	-	$	720,682		$	1,466,684
Stock compensation expense		-		-		499,107		-			499,107
Net loss		-		-		-		(653,147	)		(653,147	)
Balance, June 30, 2019		74,600,181	$	746,002	$	499,107	$	67,535		$	1,312,644

See notes to unaudited condensed consolidated financial statements.

F-3

FUSE MEDICAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	For the Six Months Ended June 30,
	2020			2019
Cash flows from operating activities
Net loss	$	(1,707,430	)	$	(653,147	)
Adjustments to reconcile net loss to net cash provided by operating       activities:
Depreciation and amortization		60,735			51,320
Stock based compensation		327,098			499,107
Provision for bad debts and discounts		186,359			255,238
Provision for long term accounts receivable		604,194			60,101
Provision for slow moving inventory		(621,604	)		24,813
Benefits for deferred taxes		-			(168,573	)
Changes in operating assets and liabilities:
Accounts receivable		2,076,373			982,357
Inventories		1,425,600			285,215
Prepaid expenses and other current assets		(47,902	)		11,051
Long term accounts receivable		(1,510,486	)		17,100
Accounts payable		(513,268	)		(318,379	)
Accrued expenses		(238,198	)		(823,729	)
Net cash provided by operating activities		41,471			222,474
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		(664,149	)		(224,947	)
Proceeds from Paycheck Protection Program		361,400			—
Proceeds from Economic Injury Disaster Loan		150,000		-
Proceeds from related party promissory notes		200,000			—
Net cash provided by (used in) financing activities		47,251			(224,947	)
Net increase (decrease) in cash		67,965			(2,473	)
Cash - beginning of period		1,099,310			844,314
Cash - end of period	$	1,167,275		$	841,841
Supplemental disclosure of cash flow information:
Cash paid for interest	$	40,018		$	42,409

See notes to unaudited condensed consolidated financial statements.

F-4

FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Nature of Operations

Overview

Fuse Medical, Inc., a Delaware corporation (the “Company”), is a manufacturer and national distributor of medical devices and surgical implants for the orthopedic market. The Company acquired CPM Medical Consultants, LLC (“CPM”) in December 2017 (the “CPM Acquisition”), in which the Company was the legal acquirer and CPM was deemed the accounting acquirer. In August 2018, the Company completed the acquisition of Palm Springs Partners, LLC d/b/a Maxim Surgical (“Maxim” and such transactions the “Maxim Acquisition”). CPM and Maxim survive as the Company’s wholly-owned subsidiaries and subsequent to the completion of each acquisition, CPM, Maxim and Company operations are consolidated.

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 or 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 and six months ended June 30, 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 June 30, 2020, the Company has accumulated losses of $4,303,243 and a stockholders’ deficit of $2,602,465. Revenue declined by $1,065,259 in the second quarter of 2020 compared to 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”). At various times during the years ended December 31, 2018 and 2019 and in the first quarter ended March 31, 2020, the Company was out of compliance with one or more covenants contained in its Amended and Restated Business Loan Agreement (“RLOC”) with ZB, N.A., d/b/a Amegy Bank (“Amegy Bank”), but obtained waivers from Amegy Bank to cure the violations, resulting in reductions in the Company’s aggregate contractual borrowing limits under the RLOC. The RLOC functions as a senior secured revolving loan facility. 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 governmental 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 on 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 RLOC with Amegy Bank with a new credit facility on commercially reasonable terms, or obtain financing.

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.

F-5

FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 management’s 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 liability.

Reclassifications

Long term accounts receivable, net of allowance was previously reported as a component of current assets as accounts receivable, net of allowance in the Company’s accompanying interim unaudited condensed consolidated balance sheets. Long term accounts receivable reflects Cases where the patient has obtained a letter of protection, (“LOP”). A LOP is a contract that provides that the medical providers will be paid from any proceeds received from settlement of litigation of the underlying cause of action with respect to the event that necessitated medical goods and services. Once the medical provider receives payment, then the medical provider pays our invoice which payment is generally greater than 365 day from date of service. The LOP provides medical providers with greater certainty of full payment. This reclassification had no effect on the previously reported total assets or net loss.  

Segment Reporting

In accordance with Accounting Standards Codification (“ASC”) 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 his management team reviews 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, par value $0.01, (“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.

Diluted earnings (loss) per common share is computed by dividing net income/(loss) by the weighted-average number of Common Stock equivalents outstanding for the period determined using the treasury stock method. For the six months ended June 30, 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 six months ended June 30, 2020, restricted stock and Common Stock equivalents of 4,777,892 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

F-6

FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 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 $0.00 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 estimated earn-out payments. There was no change in the earn-out liability for the six months ended June 30, 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 agreements through June 30, 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.

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 June 30, 2020 and December 31, 2019.  The Company’s cash is concentrated in 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 June 30, 2020.  As of June 30, 2020 and December 31, 2019, there were deposits of $861,703 and $599,309, respectively, greater than federally insured limits.

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.

F-7

FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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) which includes 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, tendons, and amniotic 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

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 of an asset 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 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 June 30, 2020, the Company evaluated certain qualitative factors

F-8

FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 Update (“ASU”) 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 an important triggering event has occurred as of June 30, 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 costs, 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 statements of operations.

Revenue Differentiation

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				Six Months Ended
	June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019
Category
Retail	$	3,604,578	$	3,722,777	$	7,732,441	$	7,375,088
Wholesale		406,088		1,353,148		914,728		2,471,496
Total	$	4,010,666	$	5,075,925	$	8,647,169	$	9,846,584

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 and 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

F-9

FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

fair value of stock-based awards represent the Company's best estimates, but these estimates involve inherent uncertainties and theapplication of management judgment. For non-employee stock-based awards, the Company calculates the fair value of the award onthe date of grant in the same manner as employee awards, however, the awards are revalued at the end of each reporting period and thepro-rata compensation expense is adjusted accordingly until such time the non-employee award is fully vested, at which time the totalcompensation recognized to date shall equal the fair value of the stock-based award as calculated on the measurement date, which isthe date at which the award recipient’s performance is complete. The estimation of stock-based awards that will ultimately vestrequires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as acumulative 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. Property and Equipment

Property and equipment consisted of the following at June 30, 2020 and December 31, 2019:

	June 30, 2020			December 31, 2019
Computer equipment and software	$	65,744		$	51,303
Office equipment		-			20,333
Property and equipment costs		65,744			71,636
Less: accumulated depreciation		(32,373	)		(38,997	)
Property and equipment, net	$	33,371		$	32,639

Depreciation expense for the three months ended June 30, 2020 and 2019 was $10,397 and $5,241, respectively. Depreciation expense for the six months ended June 30, 2020 and 2019 was $20,025 and $10,610, respectively.

Note 4. Goodwill and Intangible Assets

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

	June 30, 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		(156,055	)		(115,345	)
Intangible assets, net		1,165,910			1,206,620
Goodwill	$	1,972,886		$	1,972,886		Indefinite

F-10

FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Amortization expense for the three months ended June 30, 2020 and 2019 was $20,355 and $20,355, respectively. Amortization expense for the six months ended June 30, 2020 and 2019, was $40,710 and $40,710.

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

Note 5. Senior Secured Revolving Credit Facility

Effective December 29, 2017, the Company became party to its 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 of Directors (“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.

F-11

FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On May 9, 2019, the Company executed the Third Amendment to the RLOC with Amegy Bank (the “Third Amendment”). 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 (the “Fourth Amendment”). 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, Mark W. Brooks (“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) provided for our Chairman of the Board and President to personally guarantee one hundred percent (100%) of the outstanding RLOC amount.

On May 21, 2020, the Company executed the Fifth Amendment to the RLOC with Amegy Bank (“the Fifth Amendment”). Pursuant to the Fifth Amendment, Amegy Bank (i) waived the Company’s events of default under the RLOC, (ii) amended the financial covenants to state that the Company will not permit EBITDA to be less than $25,000 for the six months ended September 30, 2020, and (iii) extended the termination date of the RLOC until November 4, 2020.

In conjunction with executing the Fifth Amendment to 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 Family Holdings, LP (“NC 143”), a limited partnership controlled by Mr. Brooks, the Company’s President and Chairman of the Board, and $20,000 from Reeg Medical Industries, Inc. (“RMI”), a company owned and controlled by Christopher C. Reeg (“Mr. Reeg”), the Company’s Chief Executive Officer and Secretary, 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, if not paid in full.  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.

For the three months ended June 30, 2020, the Company was in compliance with the covenants of its RLOC with Amegy Bank.

The outstanding balance of the RLOC was $1,088,352 and $1,752,501 at June 30, 2020 and December 31, 2019, respectively. Interest expense incurred on the RLOC was $15,363 and $21,295 for the three months ended June 30, 2020 and 2019, respectively, and is reflected in interest expense on the Company’s accompanying unaudited condensed consolidated statements of operations. Interest expense incurred on the RLOC was $39,633 and $40,073 for the six months ended June 30, 2020 and 2019, respectively. Accrued interest on the RLOC at June 30, 2020 and December 31, 2019 was $4,053 and $4,437, respectively, and is reflected in accrued expenses on the Company’s accompanying interim unaudited condensed consolidated balance sheets. At June 30, 2020, the effective interest rate was 5.1%.

Note 6. Notes Payable – Related Parties

During July 2016 through October 2016, the Company obtained three working capital loans from NC 143 and RMI in the form of convertible promissory notes (“Notes”) in the aggregate amount of $150,000 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.  On May 6, 2020, the Company borrowed $180,000 from NC 143 and $20,000 from RMI, 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, if not paid in full.  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.

During the three months ended June 30, 2020 and 2019, interest expense of $6,732 and $ 6,732, respectively, is reflected in interest expense on the Company’s accompanying unaudited condensed consolidated statements of operations. During the six months ended June 30, 2020 and 2019, interest expense of $13,463 and $13,389, respectively, is reflected in interest expense on the Company’s accompanying unaudited condensed consolidated statements of operations. As of June 30, 2020, and December 31, 2019, accrued

F-12

FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

interest was $99,559 and $86,096, respectively, which is reflected in accrued expenses on the Company’s accompanying unaudited condensed consolidated balance sheets.

Note 7 – Paycheck Protection Program

On April 11, 2020, the Company received approval from the U.S. Small Business Administration (“SBA”) to fund the Company’s request for a loan under the Paycheck Protection Program (“PPP Loan”) created as part of the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the SBA. In connection with the PPP Loan, the Company has entered into a promissory note in the principal amount of $361,400. 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. The PPP Loan is reflected in short term liabilities in the Company’s accompanying interim unaudited condensed consolidated balance sheets as the Company expects the PPP Loan will be forgiven during 2020.

As of June 30, 2020, the Company incurred approximately $900 in accrued interest related to the PPP Loan, which is reflected in accrued expenses on the Company’s accompanying interim unaudited condensed consolidated balance sheets. The Company did not incur accrued interest expense on the PPP Loan as of June 30, 2019. For the three months and six months ended June 30, 2020, the Company incurred approximately $900 in interest expense related to the PPP Loan, which is reflected in interest expense on the Company’s statements of operations. The Company did not incur interest expense related to the PPP Loan for the three and six months ended June 30, 2019.

Note 8 – Economic Injury Disaster Loan

On May 12, 2020, the Company executed the standard loan documents required for securing a loan from the SBA under its Economic Injury Disaster Loan assistance program (the “EIDL Loan”) in light of the impact of the COVID-19 pandemic on the Company’s business. Pursuant to the Loan Authorization and Agreement (the “SBA Loan Agreement”), the principal amount of the EIDL Loan was $150,000, with proceeds to be used for working capital purposes. Interest accrues at the rate of 3.75% per annum. Installment payments, including principal and interest, are due monthly beginning May 12, 2021 (twelve months from the date of the SBA Loan Agreement) in the amount of $731. The balance of principal and interest is payable thirty years from the date of the SBA Loan Agreement. The EDIL Loan is reflected in long term liabilities in the Company’s accompanying interim unaudited condensed consolidated balance sheets. In connection therewith, the Company received a $10,000 advance, which does not have to be repaid and is reflected as an offset in Selling, General, Administrative and Other Expenses in the Company’s accompanying interim unaudited condensed consolidated statements of operations.

As of June 30, 2020, the Company incurred approximately $940 in accrued interest related to the EIDL Loan, which is reflected in accrued expenses on the Company’s accompanying interim unaudited condensed consolidated balance sheets. The Company did not incur accrued interest expense on the EIDL Loan as of June 30, 2019. For the three months and six months ended June 30, 2020, the Company incurred approximately $940 in interest expense related to the EIDL Loan, which is reflected in interest expense on the Company’s statements of operations. The Company did not incur interest expense related to the EIDL Loan for the three and six months ended June 30, 2019.

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 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, including 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

F-13

FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, “Improvements to Employee Share-Based Payment Accounting.”

Non-Qualified Stock Option Awards

For the three and six months ended June 30, 2019 the Board granted 300,000 and 1,200,000 Non-qualified Stock Option (“NQSO”) to the Company’s product advisory board members, certain key employees and marketing representatives. For the three and six months ended June 30, 2020, the Board did not grant any NQSOs. For the three months ended June 30, 2020 and June 30, 2019 the Company amortized $164,443 and $254,699 relating to the vesting of stock options which is included in selling, general, administrative, and other expenses on the Company’s accompanying interim unaudited condensed consolidated statement of operations. For the six months ended June 30, 2020 and June 30, 2019 the Company amortized $327,098 and $499,107 relating to the vesting of stock options 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 $798,661 as an expense in future periods as the stock options 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.

A summary of the Company’s stock option activity for the six months ended June 30, 2020, is presented below:

	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		6.08	$	157,000
Granted		-			-		-		-
Exercised		-			-		-		-
Forfeited		(3,333	)		1.00		8.00		-
Expired		-			-		-		-
Balance outstanding at June 30, 2020		3,945,000		$	0.61		5.87	$	-
Exercisable at June 30, 2020		1,963,333		$	0.41		3.30	$	-

 Restricted Common Stock

The non-vested restricted stock awards (“RSA”s), as of June 30, 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 a Notice of Acceleration of Vesting (as defined in RSA Agreement), within the Acceleration Notice Period (as defined in RSA Agreement).

As of June 30, 2020, and 2019, it was not probable that the performance conditions on the outstanding RSAs would be met, therefore, no expense has been recorded for these awards for the three and six months ended June 30, 2020 and 2019.

There were no RSA’s that were granted, exercised, or forfeited during the six months ended June 30, 2020.

F-14

FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	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, June 30, 2020		2,902,892	$	1,382,800	$	0.48

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 Six Months Ended June 30, 2020		For the Six Months Ended June 30, 2019
Current:
Federal	$	-	$	-
State		5,680		13,638
		5,680		13,638
Deferred:
Federal		-		(168,573	)
State		-		-
		-		(168,573	)
Total income tax expense (benefit)	$	5,680	$	(154,935	)

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

	June 30, 2020			June 30, 2019
Deferred tax assets:
Net operating loss carryover	$	833,090		$	191,679
Accounts receivable		168,344			206,493
Compensation		433,296			337,606
Inventory		650,837			388,074
Other		18,428			28,129
Total deferred tax assets		2,103,995			1,151,981
Deferred tax liabilities:
Intangibles		(211,222	)		(218,427	)
Property and equipment		(4,828	)		(3,988	)
Total deferred tax liabilities		(216,050	)		(222,415	)
Deferred tax assets, net	$	1,887,945		$	929,566
Valuation allowance:
Beginning of year		(1,529,584	)		-
Increase during the year		(358,361	)		-
Ending balance		(1,887,945	)		-
Net deferred tax asset	$	-		$	929,566

F-15

FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

At June 30, 2020, the Company estimates it had approximately $3,967,098 of net operating loss carryforwards which $899,331 will expire during 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 uncertain tax positions. As of June 30, 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.    

On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company is currently evaluating the impact of the CARES Act, but at present does not expect that the NOL carryback provision of the CARES Act to result in a material impact to the Company.

O

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

	Six Months Ended
	June 30, 2020	June 30, 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%	-0.5%
Other	0.0%	0.0%
Effective tax rate	-0.4%	19.2%

Our effective income tax rates for the six months ended June 30, 2020 and 2019 were (0.4%) and 19.2%, respectively. The decrease from the prior period was 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 six months ended June 30, 2020 and 2019, the following significant customers had an individual percentage of total revenues equaling ten percent (10%) or greater:

	For the Six Months Ended
	June 30, 2020			June 30, 2019
Customer 1		16.58	%		0.00	%
Customer 2		7.97	%		11.86	%
Totals		24.55	%		11.86	%

At June 30, 2020 and December 31, 2019, the following significant customers had a concentration of accounts receivable representing ten percent (10%) or greater of accounts receivable:

	June 30, 2020			December 31, 2019
Customer 1 - related party		15.45	%		9.47	%
Totals		15.45	%		9.47	%

F-16

FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the six months ended June 30, 2020 and 2019, the following significant suppliers represented ten percent (10%) or greater of goods purchased:

	For the Six Months Ended
	June 30, 2020			June 30, 2019
Supplier 1		22.00	%		22.00	%
Supplier 2		12.10	%		3.50	%
Supplier 3 - related party		11.30	%		12.50	%
Totals		45.40	%		38.00	%

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 North Central Expressway, LP (“NCE, LP”), a real estate investment company that is owned and controlled by Mr. Brooks. The Company’s lease arrangement includes (i) the lease acquired pursuant to the CPM Acquisition effective January 1, 2013, and (ii) 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 thereafter.

For the six months ended June 30, 2020 and 2019, the Company paid approximately $84,000 and $84,000, respectively, in rent expense, which is reflected in selling, general, administrative, and other expenses in the Company’s accompanying interim 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 June 30, 2020, AmBio operations support approximately 41 full time equivalents (“FTE”). Of those 41 FTEs, 34 FTEs directly support the Company, 7 FTEs support the operations of other companies, and no FTEs are shared between the Company and other companies.

As of June 30, 2020 and December 31, 2019, the Company owed amounts to AmBio of approximately $130,000 and $170,000, respectively, which are reflected in accounts payable on the Company’s unaudited condensed consolidated balance sheets. For the six months ended June 30, 2020 and June 30, 2019, the Company paid approximately $89,000  and $105,000, respectively, to AmBio in administrative fees, which are 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 agreements. As described more fully below, these transactions include: selling and purchasing of inventory on a 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 six months ended June 30, 2020 and 2019, the Company:

• sold Orthopedic Implants and Biologics products to MedUSA in the amounts of approximately $30,000 and $643,000, respectively, which are reflected in net revenues in the Company’s accompanying interim unaudited condensed consolidated statements of operations; and

F-17

FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

• incurred approximately $1,318,000 and $946,000, respectively, in commission costs, which are reflected in commissions in the Company’s accompanying interim unaudited condensed consolidated statements of operations.

As of June 30, 2020 and December 31, 2019, the Company had approximately $470,000 and $598,000, respectively, of unpaid commission costs due to MedUSA, which is reflected in accrued liabilities in the Company’s accompanying condensed consolidated balance sheets.

As of June 30, 2020 and December 31, 2019, the Company had outstanding balances due from MedUSA of approximately $585,000 and $555,000, respectively. These amounts are reflected in accounts receivable, net of allowance in the Company’s accompanying condensed consolidated balance sheets.

Texas Overlord, LLC

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

During the six months ended June 30, 2020 and 2019, the Company:

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

• incurred approximately $75,000 and $90,000, respectively, in commission costs, which are reflected in commissions in the Company’s accompanying interim unaudited condensed consolidated statements of operations.

As of June 30, 2020 and December 31, 2019, the Company had approximately $30,000 and $15,000 of unpaid commissions costs owed to Overlord, which are reflected in accrued liabilities in the Company’s accompanying condensed consolidated balance sheets.

As of June 30, 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 six months ended June 30, 2020 and 2019, the Company sold Biologics products to NBMJ in the amounts of approximately $12,000, and $364,000, respectively, which are reflected in net revenues in the Company’s accompanying interim unaudited condensed consolidated statements of operations.

As of June 30, 2020 and December 31, 2019, the Company had no outstanding balances due from NBMJ.

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

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 six months ended June 30, 2020 and 2019, the Company:

• sold Orthopedic Implants and Biologics products to Bass in the amounts of approximately $44,000 and $97,000, respectively, which are reflected in net revenues in the Company’s accompanying interim unaudited condensed consolidated statements of operations; and

• incurred approximately $16,000 and $14,000, respectively, in commission costs to Bass, which is reflected in commissions in the Company’s accompanying interim unaudited condensed consolidated statements of operations.

As of June 30, 2020 and December 31, 2019, the Company had outstanding balances due from Bass of approximately $26,000 and $7,000, respectively. These amounts are reflected in accounts receivable, net of allowance, in the Company’s accompanying condensed consolidated balance sheets.

Payment terms per the stocking and distribution agreement with Bass 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.

F-18

FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

During the six months ended June 30, 2020 and 2019, the Company incurred approximately $279,000 and $174,000, respectively, in commission costs to Sintu, which are reflected in commissions on the Company’s accompanying interim unaudited condensed consolidated statements 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 six months ended June 30, 2020 and June 30, 2019, the Company sold Orthopedic Implants and Biologics products to Tiger in the amounts of approximately $39,000 and $132,000, respectively, which are reflected in net revenues in the Company’s accompanying interim unaudited condensed consolidated statements of operations.

As of June 30, 2020, and December 31, 2019, the Company had outstanding balances due from Tiger of approximately $5,000 and $30,000, respectively. These amounts are reflected in accounts receivable, net of allowance, in the Company’s accompanying condensed consolidated balance sheets.

Payment terms per the stocking and distribution agreement with Tiger 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 six months ended June 30, 2020 and 2019, the Company purchased approximately $318,000 and $481,000, respectively, in Orthopedic Implants and medical instruments from Modal, which are reflected within inventories, net of allowance in the Company’s accompanying interim unaudited condensed consolidated balance sheets.

As of June 30, 2020 and December 31, 2019, the Company had outstanding balances owed to Modal of approximately $277,000 and $0, respectively. These amounts are reflected in accounts payable in the Company’s accompanying condensed consolidated balance sheets.

As of June 30, 2020 and December 31, 2019, the Company had outstanding balances due from Modal of approximately $0 and $40,700, respectively. These are reflected in accounts receivable, net of allowance, in the Company’s accompanying condensed consolidated balance sheets.

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

Note 13. Subsequent Events

In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through August 7, 2020.

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

F-19

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 our interim unaudited condensed consolidated financial statements and the related notes included in this report for the periods presented (our “Financial Statements”), our audited consolidated financial statements and the related notes thereto and the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2019 Annual Report.

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 COVID-19

Impact to Fuse

The novel coronavirus SARS CoV-2 (“COVID-19”) global pandemic 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. The order was effective March 19, 2020 through April 22, 2020.

On April 17, 2020, the Governor of Texas issued an additional executive order permitting hospital facilities to begin elective surgeries effective April 22, 2020 with certain restrictions, including maintaining a percentage of available beds for potential COVID-19 related patients. The disaster declaration in Texas, and other governmental jurisdictions, specifically the temporary deferral of all elective surgeries, has adversely impacted our results of operations for the second quarter 2020, in particular, the periods prior to April 22, 2020.

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. We continue to believe our annual revenues for 2020 will fall within a range of 4% to 6% lower compared to 2019. Although our revenues during our second quarter were significantly lower due to the restrictions on elective surgeries in place prior to April 22, 2020, we anticipate a steady increase in revenues throughout the third and the traditionally highest, fourth quarter of the year.

Current Trends and Outlook

Seasonality

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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 have experienced greater revenue and greater sales volume, as a percentage of revenue, during the last two calendar quarters of our fiscal year compared to the first two calendar quarters of the year. We believe this revenue trend is primarily due to the increase in elective surgeries during the last two quarters of the calendar year, which are partially satisfied by patient annual healthcare deductibles being met in those two quarters. We use this seasonality trend to assist us in enterprise-wide resource planning, such as purchasing and product inventory logistics.

Subsequent to the government-imposed shelter-in-place mandates and prohibitions on elective surgeries, revenues for the second 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.

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.

In the quarter ended June 30, 2020, our average revenue per Retail Case increased by approximately 17% and our average revenue per Wholesale Case increased by approximately 37% compared to the quarter ended June 30, 2019.

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.

During the six months ended June 30, 2020, our average revenue per Retail Case increased by approximately 17% and our average revenue per Wholesale Case decreased by approximately 37% compared to the six months ended June 30, 2019.

Pricing Pressure

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, operating results and financial condition.

To offset pricing pressure, we employ strategies to maximize revenue per Case. For the six months ended June 30, 2020 and 2019, our average revenues per Case were $5,123 and $3,691, respectively. The approximate 39% increase in average revenue per Case was primarily due to (a)(i) a shift to focus on retail cases, and (ii) an increase in revenue derived from commission agreements, offset, in part, by (b) continued pricing pressures, as described above.

4

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 revenue and should be read in conjunction with our Financial Statements and related notes included in this report.  

	For the Three Months Ended
	June 30, 2020			(% Rev)	June 30, 2019			(% Rev)
Net revenues	$	4,010,666		100%	$	5,075,925		100%
Cost of revenues		1,796,663		45%		2,223,912		44%
Gross profit		2,214,003		55%		2,852,013		56%
Operating expenses:
Selling, general, administrative and other expenses		1,161,476		29%		1,975,934		39%
Commissions		1,420,239		36%		1,004,994		20%
Depreciation and amortization		30,752		0%		25,596		1%
Total operating expenses		2,612,467		65%		3,006,524		59%
Operating loss		(398,464	)	-10%		(154,511	)	-3%
Other expense
Interest expense		24,021		1%		28,027		1%
Total other expense		24,021		1%		28,027		1%
Operating (loss) before tax		(422,485	)	-10%		(182,538	)	-4%
Income tax benefit (expense)		946		0%		(40,389	)	-1%
Net loss	$	(423,431	)	-10%	$	(142,149	)	-3%

Three Months Ended June 30, 2020, Compared to Three Months Ended June 30, 2019

Net Revenues

For the three months ended June 30, 2020, net revenues were $4,010,666 compared to $5,075,925 for the three months ended June 30, 2019, which is a decrease of $1,065,259, or approximately 21%.

For the three months ended June 30, 2020, Retail Cases decreased by 19% compared to the three months ended June 30, 2019. Accordingly, revenues from Retail Cases for the three months ended June 30, 2020, decreased by 6% compared to revenues from Retail Cases for the three months ended June 30, 2019. We believe this 6% decrease in revenues from Retail Cases is primarily driven by a reduction in Retail Case volume.

Our Wholesale Cases declined by 76% for the three months ended June 30, 2020, compared to Wholesale Cases during the three months ended June 30, 2019. Accordingly, revenues from Wholesale Cases for the three months ended June 30, 2020, declined by 67% compared to revenues from Wholesale Cases for the period ended June 30, 2019.

As discussed above in “Current Trends and Outlook,” we believe that as our industry faces increased pricing pressures, we will need to focus on increased volume of Cases to maintain gross profit levels. For the two remaining quarters of 2020, we will seek to increase our volume of Retail Case Sales to our existing retail customer base and add new retail customers.

Cost of Revenues

For the three months ended June 30, 2020, our cost of revenues was $1,796,663, compared to $2,223,912 for the three months ended June 30, 2019, representing a decrease of $427,249, or approximately 19%. 

As a percentage of revenues, cost of revenues increased approximately one percentage point to approximately 45% for the three months ended June 30, 2020, compared to approximately 44% for the three months ended June 30, 2019. The increase as a percentage of net revenues resulted from (a)(i) an approximate 10% increase in inventory shrink and inventory loss provision, (a)(ii) an approximate 2% increase in medical instrument expense, offset, in part, by (b) an approximate 10% reduction in cost of goods sold.  

Gross Profit

For the three months ended June 30, 2020, we generated a gross profit of $2,214,003, compared to $2,852,013 for the three months ended June 30, 2019, representing a decrease of $638,010, or approximately 22%.

As a percentage of net revenue, gross profit declined approximately one percentage point to 55% for the three months ended June 30, 2020, compared to 56% for the three months ended June 30, 2019. This reduction in gross profit as a percentage of revenues was primarily caused by the increase in cost of revenues as a percentage of net revenues, as discussed above.

6

Selling, General, Administrative, and Other Expenses

For the three months ended June 30, 2020, selling, general, administrative, and other expenses decreased to $1,161,476 from $1,975,934 for the three months ended June 30, 2019, representing a decrease of $814,458, or approximately 41%.

As a percentage of net revenues, selling, general, administrative and other expenses accounted for approximately 29% and 39% for the three months ended June 30, 2020 and June 30, 2019, respectively. As a percentage of net revenue, the decrease of approximately 10 percentage points primarily resulted from (a)(i) an approximate 6 percentage-point decline in provision for bad debt, (a)(ii) an approximate 4 percentage point decline in leased staffing costs, and (a)(iii) an approximate one percentage point decline in stock-based compensation, offset, in part by, (b) an approximate one percentage-point increase in professional expense. Reflected in professional fees and stock-based compensation was approximately $345,673 in compensation to members of our scientific advisory boards (“SABs”), of which approximately $200,000 was in the form of cash expense and approximately $145,673 was non-cash stock-based compensation. The three months ended June 30, 2020, reflected an approximate $175,947 decrease in professional fees related to the SABs as compared to the three months ended June 30, 2019.   

Commissions

For the three months ended June 30, 2020 and June 30, 2019, commission expense was $1,420,239 and $1,004,994, respectively, representing an increase of $415,245, or approximately 41%.

As a percentage of net revenues, commission expense accounted for approximately 36% for the three months ended June 30, 2020, and 20% for the three months ended June 30, 2019. This approximate 16 percentage-point increase primarily resulted from an approximate 2% increase of revenues eligible for commissions and an approximate 14% increase in average commissions rates.

Depreciation and amortization

For the three months ended June 30, 2020, our depreciation and amortization expense increased to $30,752 from $25,596 for the three months ended June 30, 2019, representing an increase of $5,156. This increase was primarily the result of approximately $20,757 investments in new office workstations and in our equity incentive plan administrative and tracking software during the three months ended March 31, 2020. We had incurred no investments during the three months ended June 30, 2020.

Interest

For the three months ended June 30, 2020, interest expense declined to $24,021 from $28,027 for the three months ended June 30, 2019, which is a reduction of $4,006, or approximately 14%. The decline of $4,006 was primarily driven by (a)(i) an approximate $7,874 reduction in interest costs caused by a decline in LIBOR market interest rates, offset, in part, by (b)(i) an approximate $1,942 increase in interest related to increased borrowings on our RLOC, (b)(ii) an approximate $939 increase related to accrued interest on our EIDL Loan, (b)(iii) an approximate $904 increase related to accrued interest on our PPP Loan, and (b)(iv) an approximate $83 increase of accrued interest on our Subordinated Notes.

Income tax

For the three months ended June 30, 2020, we recorded an income tax expense of approximately $946, compared to an income tax benefit of approximately $40,389, for the three months ended June 30, 2019. For additional information, please see Note 10, “Income Taxes,” of our accompanying Financial Statements, beginning on page F-1.

7

Net Loss

For the three months ended June 30, 2020, we had a net loss of $423,431 compared to a net loss of $142,149 for the three months ended June 30, 2019, respectively, representing a decrease in net loss of $281,282 or approximately 198%.

As a percentage of revenue, net loss represented approximately 11% and 3% for the three months ended June 30, 2020 and June 30, 2019, respectively.

The approximate 8 percentage point increase in net loss as a percentage of revenue was primarily attributable to (a)(i) an approximate 16 percentage point increase in commissions, (a)(ii) an approximate one percentage point increase in income tax expense, and (a)(iii) an approximate one percentage point increase in depreciation and amortization, offset, in part, by (b) an approximate 10 percentage point decrease in selling, general, administrative, and other expenses.

Six Months Ended June 30, 2020, Compared to Six Months Ended June 30, 2019

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 revenue and should be read in conjunction with our Financial Statements and related notes included in this report.  

	For the Six Months Ended
	June 30, 2020			(% Rev)	June 30, 2019			(% Rev)
Net revenues	$	8,647,169		100%	$	9,846,584		100%
Cost of revenues		3,779,559		44%		4,199,257		43%
Gross profit		4,867,610		56%		5,647,327		57%
Operating expenses:		-		0%		-		0%
Selling, general, administrative and other expenses		3,642,247		42%		4,340,102		44%
Commissions		2,811,356		32%		2,010,525		20%
Depreciation and amortization		60,735		1%		51,320		1%
Total operating expenses		6,514,338		75%		6,401,947		65%
Operating loss		(1,646,728	)	-19%		(754,620	)	-8%
Other expense		-		0%		-		0%
Interest expense		55,022		1%		53,462		1%
Total other expense		55,022		1%		53,462		1%
Operating (loss) before tax		(1,701,750	)	-20%		(808,082	)	-8%
Income tax benefit (expense)		5,680		0%		(154,935	)	-2%
Net loss	$	(1,707,430	)	-20%	$	(653,147	)	-7%

Net Revenues

For the six months ended June 30, 2020, net revenues were $8,647,169 compared to $9,846,584 for the six months ended June 30, 2019, a decrease of $1,199,415 or approximately 12%.

For the six months ended June 30, 2020, Retail Cases decreased by 13% compared to the six months ended June 30, 2019. Revenues from Retail Cases for the six months ended June 30, 2020, increased by 2% compared to revenues from Retail Cases for the six months ended June 30, 2019. This 2% increase in revenues from Retail Cases is primarily driven by greater concentration in new medical facilities.

Our Wholesale Cases declined by 70% for the six months ended June 30, 2020, compared to Wholesale Cases during the six months ended June 30, 2019. Accordingly, revenues from Wholesale Cases for the six months ended June 30, 2020, declined by 50% compared to revenues from Wholesale Cases for the period ended June 30, 2019.

Cost of Revenues

For the six months ended June 30, 2020, our cost of revenues was $3,779,559, compared to $4,199,257 for the six months ended June 30, 2019, representing a decrease of $419,698, or approximately 10%. 

As a percentage of revenues, cost of revenues increased approximately one percentage point to approximately 44% for the six months ended June 30, 2020, compared to approximately 43% for the six months ended June 30, 2019. The increase as a percentage of net revenues resulted from (a)(i) an approximate 8 percentage-point increase in inventory shrink and inventory loss provision, (a)(ii) an approximate 2 percentage point increase in medical instrument expense, offset, in part, by (b) an approximate 9 percentage point reduction in cost of products sold.  

8

Gross Profit

For the six months ended June 30, 2020, we generated a gross profit of $4,867,610, compared to $5,647,327 for the six months ended June 30, 2019, representing an increase of $779,717, or approximately 14%.

As a percentage of net revenue, gross profit decreased by approximately one percentage points to 56% for the six months ended June 30, 2020, compared to 57% for the six months ended June 30, 2019. This decrease in gross profit as a percentage of revenues was primarily caused by the increase in cost of revenues as a percentage of net revenues, as discussed above.

Selling, General, Administrative, and Other Expenses

For the six months ended June 30, 2020, selling, general, administrative, and other expenses decreased to $3,642,247 from $4,340,102 for the six months ended June 30, 2019, representing a decrease of $697,855, or approximately 16%.

As a percentage of net revenues, selling, general, administrative and other expenses accounted for approximately 42% and 44% for the six months ended June 30, 2020 and June 30, 2019, respectively. As a percentage of net revenue, the decrease of approximately 2 percentage points primarily resulted from (a)(i) an approximate one percentage-point decline provision for bad debt, (a)(ii) an approximate 1 percentage point decline in leased staffing costs, and (a)(iii) an  approximate one percentage point decline in stock based compensation, offset, in part, by (b) an approximate one percentage point increase in professional expense. Reflected in professional fees and stock-based compensation is approximately $689,559 in compensation to members of our SABs, of which approximately $400,000 was in the form of cash expense and approximately $289,559 was non-cash stock-based compensation. The six months ended June 30, 2020, reflected an approximate reduction of approximately $319,740 in professional fees related to the SABs as compared to the six months ended June 30, 2019.   

Commissions

For the six months ended June 30, 2020 and June 30, 2019, commissions expense was $2,811,356 and $2,010,525, respectively, representing an increase of $800,831, or approximately 40%.

As a percentage of net revenues, commissions expenses accounted for approximately 32% for the six months ended June 30, 2020, and 20% for the six months ended June 30, 2019. This approximate 12 percentage-point increase primarily resulted from an approximate 4% increase of revenues eligible for commissions and approximately an 8% increase in average commission rates as well as the realignment and restructuring of the commission agreement for our largest commission-based representative.

Depreciation and amortization

For the six months ended June 30, 2020, our depreciation expense increased to $60,735 from $51,320 for the six months ended June 30, 2019, representing an increase of $9,415. This increase was primarily the result of an investment to upgrade our supply-chain inventory management system and new office workstations in prior periods.

Interest

For the six months ended June 30, 2020, interest expense increased to $55,022 from $53,462 for the six months ended June 30, 2019, which is an increase of $1,560, or approximately 3%. The increase of $1,560 was primarily driven by (a)(i) an approximate $11,028 increase in interest related to increased borrowings on our RLOC, (a)(ii) an approximate $939 increase related to accrued interest on our EIDL Loan, (a)(iii) an approximate $904 increase related to accrued interest on our PPP Loan, and (a)(iv) an approximate $83 accrued interest on our Subordinated Notes, offset, in part, by (b) an approximate $11,393 reduction in interest costs caused by an declines in the LIBOR market interest rates.

Income tax

For the six months ended June 30, 2020, we recorded an income tax expense of approximately $5,680 compared to an income tax benefit of approximately $154,935, for the six months ended June 30, 2019. For additional information, please see Note 10, “Income Taxes,” of our accompanying Financial Statements, beginning on page F-1.

9

Net Loss

For the six months ended June 30, 2020, we had a net loss of $1,707,430 compared to a net loss $653,147 for the six months ended June 30, 2019, respectively, representing an increase in net loss of $1,054,283, or approximately 161%.

As a percentage of revenue, net loss represented approximately 20% and 7% for the six months ended June 30, 2020 and June 30, 2019, respectively.

The approximate 13 percentage point increase in net loss as a percentage of revenue was primarily attributable to (a)(i) an approximate 12 percentage point increase commissions, (a)(ii) an approximate 2 percentage point increase in income tax expense, and (a)(iii) an approximate 1 percentage point decline in gross profit, offset in part, by (b) an approximate 2 percentage point decrease in selling, general, administrative, and other expenses.  

Liquidity and Capital Resources

Cash Flows

A summary of our cash flows is as follows:

	Six Months Ended June 30,
	2020			2019
Net cash provided by operating activities	$	41,471		$	222,474
Net cash used in investing activities		(20,757	)		-
Net cash used in financing activities		47,251			(224,947	)
Net decrease in cash and cash equivalents	$	67,965		$	(2,473	)

Net Cash Provided by Operating Activities

During the six months ended June 30, 2020, net cash provided by operating activities was $41,471 compared to $222,474 for the six months ended June 30, 2019, representing a decrease of $181,003.

For the six months ended June 30, 2020, our net cash provided by operating activities resulted primarily from: (a)(i) a $2,076,373 decrease in accounts receivable, and (ii) a $1,425,600 reduction in inventories, offset, in part, by (b)(i) an increase of $1,510,486 of long term accounts receivable, (b)(ii) $1,150,648 of net loss adjusted for non-cash items, (b)(iii) a $513,268 reduction in accounts payable, (b)(iv) a $238,198 reduction in accrued expensed and (b)(v) a $47,902 increase in prepaid expenses and other current assets.

For the six months ended June 30, 2019, our net cash provided by operating activities resulted primarily from; (a)(i) a $823,729 reduction in accrued expensed, and (a)(ii) a reduction of $318,379 in accounts payable, offset, in part, by (b)(i) a $982,357 reduction in accounts receivable, (b)(ii) a $285,215 reduction in inventories, (b)(iii) $68,860 of net loss adjusted for non-cash items, (b)(iv) a $17,100 decrease in long term accounts receivable, and (b)(vi) an $11,051 reduction in prepaid expenses and other current assets.

Net Cash Used in Investing Activities

During the six months ended June 30, 2020, net cash used in investing activities was approximately $20,757 net cash provided by operating activities was $41,471 for our investments in (i) new office workstations and (ii) equity incentive plan administrative and tracking software.

For the six months ended June 30, 2019, there was no net cash used in investing activities.

Net Cash Used in Financing Activities

For the six months ended June 30, 2020, net cash provided by financing activities was $47,251, compared to $224,947 used in financing activities for the six months ended June 30, 2019.

The $47,251 in net cash provided by financing activities for the six months ended June 30, 2020 primarily resulted from (a)(i) $361,400 in proceeds from our PPP Loan, (a)(ii) $200,000 in proceeds from our Subordinated Notes; and (a)(iii) $150,000 in proceed from our EIDL Loan, offset, in part, by (b)(i) $664,149 in net repayments on our RLOC.

The $224,947 in net cash used in financing activities for the six months ended June 30, 2019 resulted from repayments on our RLOC.

Liquidity

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Our primary sources of liquidity are cash from our operations and our RLOC with Amegy Bank. As of June 30, 2020, our current assets exceeded our current liabilities by $4,189,795(our “Working Capital”), which includes $1,167,275in cash and cash equivalents. We believe cash from our operations and net borrowings on our RLOC supports our Working Capital needs.

Effective December 31, 2017, we became party to the RLOC with Amegy Bank. The RLOC established an asset-based senior secured revolving credit facility with contractual aggregate limit of $5,000,000. The RLOC contains customary representation, warranties, covenants, events of default, and is collateralized by substantially all of our assets and provides that our Chairman of the Board of Directors (“Board”) and President provides a personal guarantee for a portion of the outstanding RLOC amount.

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

On November 19, 2018, we executed the Second Amendment to the RLOC with Amegy Bank (the “Second Amendment”). The Second Amendment (i) waived our events of default under the RLOC, (ii)reduced the aggregate contractual 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 we will not permit (i) 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; (ii) earnings before interest, taxes, depreciation and amortization (“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;and (iii) 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, we executed the Third Amendment to the RLOC with Amegy Bank (the “Third Amendment”). Pursuant to the Third Amendment, Amegy Bank (i) waived our events of default under the RLOC, (ii) reduced the aggregate contractual limit of the RLOC to $3,500,000, (iii) reduced the limit of credit card exposure to $500,000, (iv) reduced the borrowing base component of Inventory to 30%, (v) amended the financial covenants to state that we 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 us to give notice of each requested loan by delivery of advance request to Amegy Bank.

On December 18, 2019, we executed the Fourth Amendment to the RLOC with Amegy Bank (the “Fourth Amendment”). Pursuant to the Fourth Amendment, Amegy Bank (i) waived our events of default under the RLOC, (ii) reduced the aggregate contractual limit of the RLOC to $2,750,000, (iii) reduced and limited the annual salary of our Chairman of the Board and President, Mr. Brooks, to not exceed $550,000, (iv) amended the financial covenants to state that we 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) provided that our Chairman of the Board and President provides a personal guarantee for one-hundred percent (100%) of the outstanding RLOC amount.    

On May 21, 2020, we executed the Fifth Amendment to our RLOC with Amegy Bank (the “Fifth Amendment”). Pursuant to the Fifth Amendment, Amegy Bank (i) waived our events of default under the RLOC, (ii) amended the financial covenants to state that we will not permit EBITDA to be less than $25,000 for the fiscal quarters ending June 30, 2020 and September 30, 2020, and (iii) extended the termination date of our RLOC until November 4, 2020.

In conjunction with obtaining the Fifth Amendment, we 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, we 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.  

For the three months ended June 30, 2020, the Company was in compliance with the covenants of its RLOC with Amegy Bank. (See Note 5, “Senior Secured Revolving Credit Facility” of our accompanying unaudited condensed consolidated notes to our Financial Statements, beginning on page F-1).

We rely on our RLOC for capital expenditures and other day-to-day Working Capital needs. As of August 5, 2020, we had approximately $909,000 in available cash, and $290,000 available on our RLOC for borrowing (subject to certain borrowing base limitations). Borrowings on our RLOC are repaid from cash generated from our operations.

Payroll Protection Program

11

On April 11, 2020, we received approval from the SBA to fund our request for a PPP Loan created as part of the recently enacted CARES Act administered by the SBA. In connection with the PPP Loan, we entered into a promissory note in the principal amount of $361,400. In accordance with the requirements of the CARES Act, we intend to use the proceeds from the PPP Loan primarily for payroll costs. The PPP Loan is reflected in short term liabilities in our accompanying interim unaudited condensed consolidated balance sheets on F-1 as we expect the PPP Loan will be forgiven during 2020.Economic Injury Disaster Loan

On May 12, 2020, we executed the standard loan documents required for securing a EIDL Loan from the SBA in light of the impact of the COVID-19 pandemic on our business. Pursuant to that certain Loan Authorization and Agreement (the “SBA Loan Agreement”), the principal amount of the EIDL Loan was $150,000, with proceeds to be used for working capital purposes. In connection therewith, we received a $10,000 advance, which does not have to be repaid and is reflected as an offset in Selling, General, Administrative and Other Expenses in our accompanying interim unaudited condensed consolidated statements of operations.

(See Note 8, “Economic Injury Disaster Loan” of our accompanying unaudited condensed consolidated notes to our Financial Statements, beginning on page F-1).

Going Concern

The accompanying interim unaudited condensed consolidated financial statements have been prepared as if we will continue as a going concern. Through June 30, 2020, we had accumulated losses of $4,303,243 and a stockholders’ deficit of $2,602,465. Revenue declined by $1,065,259 in the second quarter of 2020 versus the same quarter in 2019, as we have been impacted by restrictions as a result of the COVID-19 pandemic. At various times during 2018 and 2019, and for the first quarter ended March 31, 2020, we were out of compliance with one or more covenants contained in our RLOC, but obtained waivers from Amegy Bank to cure the violations, along with reductions in our aggregate contractual borrowing limits under our RLOC. We have determined that these conditions and events raise substantial doubt about our ability to continue as a going concern.

Our 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 authority as a result of COVID-19, as well as our (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 on selling more Retail Cases and increasing the percentage of Retail Cases sold as a percentage of all Cases we sell, and (iv) continued cost reductions. Additionally, we will need to refinance our RLOC with Amegy Bank, which is set to expire on November 4, 2020, with a new credit facility on commercially reasonable terms or obtain equity financing.

Our accompanying interim unaudited condensed consolidated financial statements 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 we be unable to continue as a going concern.

Capital Expenditures

For the six months ended June 30, 2020, we had no material commitments for capital expenditures.

Off-Balance Sheet Arrangements

For the six months ended June 30, 2020, we had no off-balance sheet arrangements.

Cautionary Note Regarding Forward-Looking Statements

This report includes forward-looking statements including statements regarding liquidity.

The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “target,” “potential,” “is likely,” “will,” “expect”, and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, and financial needs.

The results anticipated by any of these forward-looking statements might not occur. Important factors that could cause actual results to differ from those in the forward-looking statements include; the conditions of the capital markets, particularly for smaller companies; the willingness of doctors and facilities to purchase the products that we sell; certain regulatory issues adversely affecting our margins; insurance companies denying reimbursement to facilities who use the products that we sell; and our ability to sell products. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events, or otherwise.

12

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 

As a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this item.

ITEM 4. CONTROLS AND PROCEDURES.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports, that are filed or submitted under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that this information is accumulated and communicated to management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

We conducted an evaluation (pursuant to Rule 13a-15(b) promulgated under the Exchange Act), under the supervision and with the participation of management, including our Chief Executive and Chief Financial Officers, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act) as of June 30, 2020.

Based on our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of June 30, 2020.

13

PART II - OTHER INFORMATION

ITEM 5. OTHER INFORMATION. 

None.

ITEM 6. EXHIBITS.

See the exhibits listed in the accompanying “Exhibit Index”.

14

EXHIBIT INDEX

Exhibit No.	Description
3.1	Amended and Restated Certificate of Incorporation of Fuse Medical, Inc., incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 15, 2014.
3.2	Amended and Restated Bylaws of Fuse Medical, Inc., incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 21, 2019.
10.1	Paycheck Protection Program Promissory Note dated April 15, 2020, by and between Zions Bancorporation, N.A. (dba Amegy Bank) and Fuse Medical, Inc. incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 22, 2020.
10.2*	Economic Injury Disaster Loan Agreement dated May 12, 2020, by and between Small Business Administration and Fuse Medical, Inc.
10.3*	Promissory Note dated May 6, 2020, by and between NC 143 Holdings, LP and Fuse Medical, Inc.
10.4*	Promissory Note dated May 6, 2020, by and between Reeg Medical Industries, Inc. and Fuse Medical, Inc.
31.1*	Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**	Certification of the Chief Executive Officer and the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS *	XBRL Instance Document
101.SCH *	XBRL Taxonomy Extension Schema Document
101.CAL *	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF *	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB *	XBRL Taxonomy Extension Label Linkbase Document
101.PRE *	XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith. 

** Furnished herewith

15

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 

	FUSE MEDICAL, INC.
Date: August 7, 2020	By:	/s/ Christopher C. Reeg
		Christopher C. Reeg
		Chief Executive Officer and Director (Principal Executive Officer)

Date: August 7, 2020	By:	/s/ William E. McLaughlin, III
		William E. McLaughlin, III
		Senior Vice President, Chief Financial Officer and Director (Principal Financial Officer)

16

EX-10.2

Doc # L-01-2676051-01

DocuSign Envelope ID: 46F60A33-FA46-47BB-B61E-D687E31EBC0D

SBA Loan #5146047404

Application #3304117588

 

LOAN AUTHORIZATION AND AGREEMENT (LA&A)

A PROPERLY SIGNED DOCUMENT IS REQUIRED PRIOR TO ANY DISBURSEMENT

CAREFULLY READ THE LA&A:

This document describes the terms and conditions of your loan. It is your responsibility to comply with ALL the terms and conditions of your loan.

SIGNING THE LA&A:

All borrowers must sign the LA&A.

• Sign your name exactlyas it appears on the LA&A. If typed incorrectly, you should sign with the correct spelling.

• If your middle initial appears on the signature line, sign with your middle initial.

• If a suffix appears on the signature line, such as Sr. or Jr., sign with your suffix.

• Corporate Signatories: Authorized representatives should sign the signature page.

Your signature represents your agreement to comply

with the terms and conditions of the loan.

 

Ref 50 30

 

Doc # L-01-2676051-01

DocuSign Envelope ID: 46F60A33-FA46-47BB-B61E-D687E31EBC0D

SBA Loan #5146047404

Application #3304117588

 

Economic Injury Disaster Loan

U.S. Small Business Administration

LOAN AUTHORIZATION AND AGREEMENT

Date: 05.12.2020 (Effective Date)

On the above date, this Administration (SBA) authorized (under Section 7(b) of the Small Business Act, as amended) a Loan (SBA Loan #5146047404) to FUSE MEDICAL, INC. (Borrower) of 1565 North Central Expy. Ste. 220 Richardson Texas 75080 in the amount of one hundred and fifty thousand and 00/100 Dollars ($150,000.00), upon the following conditions:

PAYMENT

• Installment payments, including principal and interest, of $731.00 Monthly, will begin Twelve (12) months from the date of the promissory Note. The balance of principal and interest will be payable Thirty (30) yearsfrom the date of the promissory Note.

INTEREST

• Interest will accrue at the rate of 3.75% per annum and will accrue only on funds actually advanced from the date(s) of each advance.

PAYMENT TERMS

• Each payment will be applied first to interest accrued to the date of receipt of each payment, and the balance, if any, will be applied toprincipal.

• Each payment will be made when due even if at that time the full amount of the Loan has not yet been advanced or the authorized amount of the Loan has been reduced.

COLLATERAL

• For loan amounts of greater than $25,000, Borrower hereby grants to SBA, the secured party hereunder, a continuing security interest in and to any and all “Collateral” as described herein to secure payment and performance of all debts, liabilities and obligations of Borrower to SBA hereunder without limitation, including but not limited to all interest, other fees and expenses (all hereinafter called “Obligations”). The Collateral includes the following property that Borrower now owns or shall acquire or create immediately upon the acquisition or creation thereof: all tangible and intangible personal property, including, but not limited to: (a) inventory, (b) equipment, (c) instruments, including promissory notes (d) chattel paper, including tangible chattel paper and electronic chattel paper, (e) documents, (f) letter of credit rights, (g) accounts, including

health-care insurance receivables and credit card receivables, (h) deposit accounts, (i) commercial tort claims, (j) general intangibles, including payment intangibles and software and (k) as-extracted collateral as such terms may from time to time be defined in the Uniform Commercial Code. The security interest Borrower grants includes all accessions, attachments, accessories, parts, supplies and replacements for the Collateral, all products, proceeds and collections thereof and all records and data relating thereto.

• For loan amounts of $25,000 or less, SBA is not taking a security interest in any collateral.

Page 2 of 11

SBA Form 1391 (5-00)

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Doc # L-01-2676051-01

DocuSign Envelope ID: 46F60A33-FA46-47BB-B61E-D687E31EBC0D

SBA Loan #5146047404

Application #3304117588

 

REQUIREMENTS RELATIVE TO COLLATERAL

• Borrower will not sell or transfer any collateral (except normal inventory turnover in the ordinary course of business) described in the "Collateral" paragraph hereof without the prior written consent of SBA.

• Borrower will neither seek nor accept future advances under any superior liens on the collateral securing this Loan without the prior written consent of SBA.

USE OF LOAN PROCEEDS

• Borrower will use all the proceeds of this Loan solely as working capital to alleviate economic injury caused by disaster occurring in the month of January 31, 2020 and continuing thereafter and to pay Uniform Commercial Code (UCC) lien filing fees and a third-party UCC handling charge of $100 which will be deducted fromthe

Loan amount stated above.

REQUIREMENTS FOR USE OF LOAN PROCEEDS AND RECEIPTS

• Borrower will obtain and itemize receipts (paid receipts, paid invoices or cancelled checks) and contracts for all Loan funds spent and retain these receipts for 3 years from the date of the final disbursement. Prior to each subsequent disbursement (if any) and whenever requested by SBA, Borrower will submit to SBA such itemization together with copies of the receipts.

• Borrower will not use, directly or indirectly, any portion of the proceeds of this Loan to relocate without the prior written permission of SBA. The law prohibits the use of any portion of the proceeds of this Loan for voluntary relocation from the business area in which the disaster occurred. To request SBA's prior written permission to relocate, Borrower will present to SBA the reasons therefore and a description or address of the relocation site. Determinations of (1) whether a relocation is voluntary or otherwise, and (2) whether any site other than the disaster-affected location is within the business area in which the disaster occurred, will be made solely by SBA.

• Borrower will, to the extent feasible, purchase only American-made equipment and products with the proceeds of this Loan.

• Borrower will make any request for a loan increase for additional disaster-related damages as soon as possible after the need for a loan increase is discovered. The SBA will not consider a request for a loan increase received more than two (2) years from the date of loan approval unless, in the sole discretion of the SBA, there are extraordinary and unforeseeable circumstances beyond the control of the borrower.

DEADLINE FOR RETURN OF LOAN CLOSING DOCUMENTS

• Borrower will sign and return the loan closing documents to SBA within 2 months of the date of this Loan Authorization and Agreement. By notifying the Borrower in writing, SBA may cancel this Loan if the Borrower fails to meet this requirement. The Borrower may submit and the SBA may, in its sole discretion, accept documents after 2 months of the date of this Loan Authorization and Agreement.

COMPENSATION FROM OTHER SOURCES

• Eligibility for this disaster Loan is limited to disaster losses that are not compensated by other sources. Other sources include but are not limited to: (1) proceeds of policies of insurance or otherindemnifications,

(2) grants or other reimbursement (including loans) from government agencies or private organizations, (3)

Page 3 of 11

SBA Form 1391 (5-00)

Ref 50 30

 

Doc # L-01-2676051-01

DocuSign Envelope ID: 46F60A33-FA46-47BB-B61E-D687E31EBC0D

SBA Loan #5146047404

Application #3304117588

 

claims for civil liability against other individuals, organizations or governmental entities, and (4) salvage (including any sale or re-use) of items of damaged property.

• Borrower will promptly notify SBA of the existence and status of any claim or application for such other compensation, and of the receipt of any such compensation, and Borrower will promptly submit the proceeds of same (not exceeding the outstanding balance of this Loan) to SBA.

• Borrower hereby assigns to SBA the proceeds of any such compensation from other sources and authorizes the payor of same to deliver said proceeds to SBA at such time and place as SBA shall designate.

• SBA will in its sole discretion determine whether any such compensation from other sources is a duplication of benefits. SBA will use the proceeds of any such duplication to reduce the outstanding balance of this Loan, and Borrower agrees that such proceeds will not be applied in lieu of scheduled payments.

DUTY TO MAINTAIN HAZARD INSURANCE

• Within 12 months from the date of this Loan Authorization and Agreement the Borrower will provide proof of an active and in effect hazard insurance policy including fire, lightning, and extended coverage on all items used to secure this loan to at least 80% of the insurable value. Borrower will not cancel such coverage and will maintain such coverage throughout the entire term of this Loan. BORROWER MAY NOT BE ELIGIBLE FOR EITHER ANY FUTURE DISASTER ASSISTANCE OR SBA FINANCIAL ASSISTANCE IF THIS INSURANCE IS NOT MAINTAINED AS STIPULATED HEREIN THROUGHOUT THE ENTIRE TERM OF THIS LOAN. Please submit proof of insurance to: U.S. Small Business Administration, Office of Disaster Assistance, 14925 Kingsport Rd, Fort Worth, TX. 76155.

BOOKS AND RECORDS

• Borrower will maintain current and proper books of account in a manner satisfactory to SBA for the most recent 5 years until 3 years after the date of maturity, including extensions, or the date this Loan is paid in full, whichever occurs first. Such books will include Borrower's financial and operating statements, insurance policies, tax returns and related filings, records of earnings distributed and dividends paid and records of compensation to officers, directors, holders of 10% or more of Borrower's capital stock, members, partners and proprietors.

• Borrower authorizes SBA to make or cause to be made, at Borrower's expense and in such a manner and at such times as SBA may require: (1) inspections and audits of any books, records and paper in the custody or control of Borrower or others relating to Borrower's financial or business conditions, including the making of copies thereof and extracts therefrom, and (2) inspections and appraisals of any of Borrower's assets.

• Borrower will furnish to SBA, not later than 3 months following the expiration of Borrower's fiscal year and in such form as SBA may require, Borrower's financial statements.

• Upon written request of SBA, Borrower will accompany such statements with an 'Accountant's Review Report' prepared by an independent public accountant at Borrower's expense.

• Borrower authorizes all Federal, State and municipal authorities to furnish reports of examination, records and other information relating to the conditions and affairs of Borrower and any desired information from such reports, returns, files, and records of such authorities upon request of SBA.

Page 4 of 11

SBA Form 1391 (5-00)

Ref 50 30

 

Doc # L-01-2676051-01

DocuSign Envelope ID: 46F60A33-FA46-47BB-B61E-D687E31EBC0D

SBA Loan #5146047404

Application #3304117588

 

LIMITS ON DISTRIBUTION OF ASSETS

• Borrower will not, without the prior written consent of SBA, make any distribution of Borrower’s assets, or give any preferential treatment, make any advance, directly or indirectly, by way of loan, gift, bonus, or otherwise, to any owner or partner or any of its employees, or to any company directly or indirectly controlling or affiliated with or controlled by Borrower, or any other company.

EQUAL OPPORTUNITY REQUIREMENT

• If Borrower has or intends to have employees, Borrower will post SBA Form 722, Equal Opportunity Poster (copy attached), in Borrower's place of business where it will be clearly visible to employees, applicants for employment, and the general public.

DISCLOSURE OF LOBBYING ACTIVITIES

•Borrower agrees to the attached Certification Regarding Lobbying Activities BORROWER’SCERTIFICATIONS

Borrower certifies that:

• There has been no substantial adverse change in Borrower's financial condition (and organization, in case of a business borrower) since the date of the application for this Loan. (Adverse changes include, but are not limited to: judgment liens, tax liens, mechanic's liens, bankruptcy, financial reverses, arrest or conviction of felony,etc.)

• No fees have been paid, directly or indirectly, to any representative (attorney, accountant, etc.) for services provided or to be provided in connection with applying for or closing this Loan, other than those reported on SBA Form 5 Business Disaster Loan Application'; SBA Form 3501 COVID-19 Economic Injury Disaster Loan Application; or SBA Form 159, 'Compensation Agreement'. All fees not approved by SBA are prohibited.

• All representations in the Borrower's Loan application (including all supplementary submissions) are true, correct and complete and are offered to induce SBA to make this Loan.

• No claim or application for any other compensation for disaster losses has been submitted to or requested of any source, and no such other compensation has been received, other than that which Borrower has fully disclosed to SBA.

• Neither the Borrower nor, if the Borrower is a business, any principal who owns at least 50% of theBorrower, is delinquent more than 60 days under the terms of any: (a) administrative order; (b) court order; or (c) repayment agreement that requires payment of child support.

• Borrower certifies that no fees have been paid, directly or indirectly, to any representative (attorney, accountant, etc.) for services provided or to be provided in connection with applying for or closing this Loan, other than those reported on the Loan Application. All fees not approved by SBA areprohibited.

If an Applicant chooses to employ an Agent, the compensation an Agent charges to and that is paid by

the Applicant must bear a necessary and reasonable relationship to the services actually performed and must be comparable to those charged by other Agents in the geographical area. Compensation cannot be contingent on loan approval. In addition, compensation must not include any expenses which are deemed by SBA to be unreasonable for services actually performed or expenses actually incurred. Compensation must not include

Page 5 of 11

SBA Form 1391 (5-00)

Ref 50 30

 

Doc # L-01-2676051-01

DocuSign Envelope ID: 46F60A33-FA46-47BB-B61E-D687E31EBC0D

SBA Loan #5146047404

Application #3304117588

 

charges prohibited in 13 CFR 103 or SOP 50-30, Appendix 1. If the compensation exceeds $500 for a disaster home loan or $2,500 for a disaster business loan, Borrower must fill out the Compensation Agreement Form 159D which will be provided for Borrower upon request or can be found on the SBA website.

• Borrower certifies, to the best of its, his or her knowledge and belief, that the certifications and representations in the attached Certification Regarding Lobbying are true, correct and complete and are offered to induce SBA to make this Loan.

CIVIL AND CRIMINAL PENALTIES

• Whoever wrongfully misapplies the proceeds of an SBA disaster loan shall be civilly liable to the Administrator in an amount equal to one-and-one half times the original principal amount of the loan under 15 U.S.C. 636(b). In addition, any false statement or misrepresentation to SBA may result in criminal, civil or administrative sanctions including, but not limited to: 1) fines, imprisonment or both, under 15 U.S.C. 645, 18 U.S.C. 1001, 18

U.S.C. 1014, 18 U.S.C. 1040, 18 U.S.C. 3571, and any other applicable laws; 2) treble damages and civil penalties under the False Claims Act, 31 U.S.C. 3729; 3) double damages and civil penalties under the Program Fraud Civil Remedies Act, 31 U.S.C. 3802; and 4) suspension and/or debarment from all Federal procurement and non-procurement transactions. Statutory fines may increase if amended by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015.

RESULT OF VIOLATION OF THIS LOAN AUTHORIZATION AND AGREEMENT

• If Borrower violates any of the terms or conditions of this Loan Authorization and Agreement, the Loan will be in default and SBA may declare all or any part of the indebtedness immediately due and payable. SBA's failure to exercise its rights under this paragraph will not constitute a waiver.

• A default (or any violation of any of the terms and conditions) of any SBA Loan(s) to Borrower and/or its affiliates will be considered a default of all such Loan(s).

DISBURSEMENT OF THE LOAN

• Disbursements will be made by and at the discretion of SBA Counsel, in accordance with this Loan Authorization and Agreement and the general requirements of SBA.

• Disbursements may be made in increments as needed.

• Other conditions may be imposed by SBA pursuant to general requirements of SBA.

• Disbursement may be withheld if, in SBA's sole discretion, there has been an adverse change in Borrower's financial condition or in any other material fact represented in the Loan application, or if Borrower fails to meet any of the terms or conditions of this Loan Authorization and Agreement.

• NO DISBURSEMENT WILL BE MADE LATER THAN 6 MONTHS FROM THE DATE OF THIS LOAN AUTHORIZATION AND AGREEMENT UNLESS SBA, IN ITS SOLE DISCRETION, EXTENDS THIS DISBURSEMENT PERIOD.

Page 6 of 11

SBA Form 1391 (5-00)

Ref 50 30

 

Doc # L-01-2676051-01

DocuSign Envelope ID: 46F60A33-FA46-47BB-B61E-D687E31EBC0D

SBA Loan #5146047404

Application #3304117588

 

PARTIES AFFECTED

• This Loan Authorization and Agreement will be binding upon Borrower and Borrower's successors and assigns and will inure to the benefit of SBA and its successors and assigns.

RESOLUTION OF BOARD OF DIRECTORS

• Borrower shall, within 180 days of receiving any disbursement of this Loan, submit the appropriate SBA Certificate and/or Resolution to the U.S. Small Business Administration, Office of Disaster Assistance, 14925 Kingsport Rd, Fort Worth, TX. 76155.

ENFORCEABILITY

• This Loan Authorization and Agreement is legally binding, enforceable and approved upon Borrower’s signature, the SBA’s approval and the Loan Proceeds being issued to Borrower by a government issued check or by electronic debit of the Loan Proceeds to Borrower’ banking account provided by Borrower in application for this Loan.

James E. Rivera Associate Administrator

U.S. Small Business Administration

The undersigned agree(s) to be bound by the terms and conditions herein during the term of this Loan, and further agree(s) that no provision stated herein will be waived without prior written consent of SBA. Under penalty of perjury of the United States of America, I hereby certify that I am authorized to apply for and obtain a disaster loan on behalf of Borrower, in connection with the effects of the COVID-19 emergency.

{{0_SH}}

FUSE MEDICAL, INC.

Date:05.12.2020

Mark Brooks, Owner/Officer

Note: Corporate Borrowers must execute Loan Authorization and Agreement in corporate name, by a duly authorized officer. Partnership Borrowers must execute in firm name, together with signature of a general partner. Limited Liability entities must execute in the entity name by the signature of the authorized managing person.

Page 7 of 11

SBA Form 1391 (5-00)

Ref 50 30

 

Doc # L-01-2676051-01

DocuSign Envelope ID: 46F60A33-FA46-47BB-B61E-D687E31EBC0D

SBA Loan #5146047404

Application #3304117588

 

CERTIFICATION REGARDING LOBBYING

For loans over $150,000, Congress requires recipients to agree to the following:

1. Appropriated funds may NOT be used for lobbying.

2. Payment of non-federal funds for lobbying must be reported on Form SF-LLL.

3. Language of this certification must be incorporated into all contracts and subcontracts exceeding $100,000.

4. All contractors and subcontractors with contracts exceeding

$100,000 are required to certify and disclose accordingly.

Page 8 of 11

SBA Form 1391 (5-00)

 

Doc # L-01-2676051-01

DocuSign Envelope ID: 46F60A33-FA46-47BB-B61E-D687E31EBC0D

SBA Loan #5146047404

Application #3304117588

 

CERTIFICATION REGARDING LOBBYING

Certification for Contracts, Grants, Loans, and Cooperative Agreements

Borrower and all Guarantors (if any) certify, to the best of its, his or her knowledge and belief, that:

(1)No Federal appropriated funds have been paid or will be paid, by or on behalf of the undersigned, to any person for influencing or attempting to influence an officer or employee of any agency, a Member of Congress, an officer or employee of Congress, or an employee of a Member of Congress in connection with awarding of any Federal contract, the making of any Federal grant, the making of any Federal loan, the entering into of any cooperative agreement, and the extension, continuation, renewal, or modification of any Federal contract, grant, loan, or cooperative agreement.

(2)If any funds other than Federal appropriated funds have been paid or will be paid to any person for influencing or attempting to influence an officer or employee of any agency, a Member of Congress, an officer or employee of Congress, or an employee of a Member of Congress in connection with this Federal loan, the undersigned shall complete and submit Standard Form LLL, "Disclosure Form to Report Lobbying," in accordance with its instructions.

(3)The undersigned shall require that the language of this certification be included in the award documents for all sub-awards at all tiers (including subcontracts, sub-grants, and contracts under grants, loans, and co-operative agreements) and that all sub-recipients shall certify and disclose accordingly.

This certification is a material representation of fact upon which reliance was placed when this transaction was made or entered into. Submission of this certification is a prerequisite for making or entering into this transaction imposed by Section 1352, Title 31, U.S. Code. Any person who fails to file the required certification shall be subject to a civil penalty of not less than $10,000.00 and not more than $100,000.00 for each such failure.

Page 9 of 11

SBA Form 1391 (5-00)

 

Doc # L-01-2676051-01

DocuSign Envelope ID: 46F60A33-FA46-47BB-B61E-D687E31EBC0D

 

This Statement of Policy is Posted In Accordance with Regulations of the

Small Business Administration

This Organization Practices

Equal Employment Opportunity

We do not discriminate on the ground of race, color, religion, sex, age, disability or national origin in the hiring, retention, or promotion of employees; nor in determining their rank, or the compensation or fringe benefits paid them.

This Organization Practices

Equal Treatment of Clients

We do not discriminate on the basis of race, color, religion, sex, marital status, disability, age or national origin in services or accommodations offered or provided to our employees, clients or guests.

These policies and this notice comply with regulations of the

United States Government.

Please report violations of this policy to:

Administrator

Small Business Administration Washington, D.C. 20416

In order for the public and your employees to know their rights under 13 C.F.R Parts 112, 113, and 117, Small Business Administration Regulations, and to conform with the directions of the Administrator of SBA, this poster must be displayed where it is clearly visible to employees, applicants for employment, and the public.

Failure to display the poster as required in accordance with SBA Regulations may be considered evidence of

noncompliance and subject you to the penalties contained in those Regulations.

Page 10 of 11

SBA FORM 722 (10-02) REF: SOP 9030 PREVIOUS EDITIONS ARE OBSOLETE

This form was electronically produced by Elite Federal Inc.

U.S. GOVERNMENT PRINTING OFFICE: 1994 0- 153-346

Doc # L-01-2676051-01

DocuSign Envelope ID: 46F60A33-FA46-47BB-B61E-D687E31EBC0D

 

Esta Declaración De Principios Se Publica

De Acuerdo Con Los Reglamentos De La

Agencia Federal Para el Desarrollo de la Pequeña Empresa

Esta Organización Practica

Igual Oportunidad De Empleo

No discriminamos por razón de raza, color, religión, sexo, edad, discapacidado

nacionalidad en el empleo, retención o ascenso de personal ni en la determinación

de sus posiciones, salarios o beneficios marginales.

Esta Organización Practica

Igualdad En El Trato A Su Clientela

No discriminamos por razón de raza, color, religión, sexo, estado civil,

edad, discapacidad o nacionalidad en los servicios o facilidades provistos para nuestros empleados, clientes o visitantes.

Estos principios y este aviso cumplen con los reglamentos del Gobierno de los Estados Unidos de América.

Favor de informar violaciones a lo aquí indicado a:

Administrador

Agencia Federal Para el Desarrollo de la Pequeña Empresa

Washington, D.C. 20416

A fin de que el público y sus empleados conozcan sus derechos según lo expresado en las Secciones 112, 113 y 117 del Código de Regulaciaones Federales No. 13,  de los  Reglamentos de la Agencja Federal Para el Desarrollo de la Pequeña Empresa y de acuerdo con las instrucciones del Administrador de dicha agencia,

esta notificación debe fijarse en un lugar claramente visible para los empleados, solicitantes de empleo y público en general. No fijar esta notificación según lo requerido por los reglamentos de la Agencia Federal

Para el Desarrollo de la Pequeña Empresa, puede ser interpretado como evidencia de falta de cumplimiento de los mismos y conllevará la ejecución de los castigos impuestos en estos reglamentos.

Page 11 of 11

SBA FORM 722 (10-02) REF: SOP 9030 PREVIOUS EDITIONS ARE OBSOLETE

This form was electronically produced by Elite Federal Inc.

U.S. GOVERNMENT PRINTING OFFICE: 1994 0- 153-346

Doc # L-01-2676051-01

DocuSign Envelope ID: 46F60A33-FA46-47BB-B61E-D687E31EBC0D

SBA Loan #5146047404

Application #3304117588

 

NOTE

A PROPERLY SIGNED NOTE IS REQUIRED PRIOR TO ANY DISBURSEMENT

CAREFULLY READ THE NOTE: It is your promise to repay the loan.

• The Note is pre-dated. DO NOT CHANGE THE DATE OF THE NOTE.

• LOAN PAYMENTSwill be due as stated in the Note.

• ANY CORRECTIONS OR UNAUTHORIZED MARKS MAY VOID THIS DOCUMENT.

 

SIGNING THE NOTE: All borrowers must sign the Note.

• Sign your name exactlyas it appears on the Note. If typed incorrectly, you should sign with the correct spelling.

• If your middle initial appears on the signature line, sign with your middle initial.

• If a suffix appears on the signature line, such as Sr. or Jr., sign with your suffix.

• Corporate Signatories: Authorized representatives should sign the signature page.

 

Doc # L-01-2676051-01

DocuSign Envelope ID: 46F60A33-FA46-47BB-B61E-D687E31EBC0D

SBA Loan #5146047404

Application #3304117588

 

	U.S. Small Business Administration NOTE (SECURED DISASTER LOANS)	Date: 05.12.2020
		Loan Amount: $150,000.00
		Annual Interest Rate: 3.75%

SBA Loan # 5146047404Application #3304117588

1. PROMISE TO PAY: In return for a loan, Borrower promises to pay to the order of SBA the amount of one hundred and fifty thousand and 00/100 Dollars ($150,000.00), interest on the unpaid principal balance, and all other amounts required by this Note.

2. DEFINITIONS: A) “Collateral” means any property taken as security for payment of this Note or any guarantee of this Note. B) “Guarantor” means each person or entity that signs a guarantee of payment of this Note. C) “Loan Documents” means the documents related to this loan signed by Borrower, any Guarantor, or anyone who pledges collateral.

3. PAYMENT TERMS: Borrower must make all payments at the place SBA designates. Borrower may prepay this Note in part or in full at any time, without notice or penalty. Borrower must pay principal and interest payments of

$731.00 every month beginning Twelve (12) months from the date of the Note. SBA will apply each installment payment first to pay interest accrued to the day SBA receives the payment and will then apply any remaining balance to reduce principal. All remaining principal and accrued interest is due and payable Thirty (30) years from the date of the Note.

4. DEFAULT: Borrower is in default under this Note if Borrower does not make a payment when due under this Note, or if Borrower: A) Fails to comply with any provision of this Note, the Loan Authorization and Agreement, or other Loan Documents; B) Defaults on any other SBA loan; C) Sells or otherwise transfers, or does not preserve or account to SBA’s satisfaction for, any of the Collateral or its proceeds; D) Does not disclose, or anyone acting on their behalf does not disclose, any material fact to SBA; E) Makes, or anyone acting on their behalf makes, a materially false or misleading representation to SBA; F) Defaults on any loan or agreement with another creditor, if SBA believes the default may materially affect Borrower’s ability to pay this Note; G) Fails to pay any taxes when due; H) Becomes the subject of a proceeding under any bankruptcy or insolvency law; I) Has a receiver or liquidator appointed for any part of their business or property; J) Makes an assignment for the benefit of creditors; K) Has any adverse change in financial condition or business operation that SBA believes may materially affect Borrower’s ability to pay this Note; L) Dies; M) Reorganizes, merges, consolidates, or otherwise changes ownership or business structure without SBA’s prior written consent; or, N) Becomes the subject of a civil or criminal action that SBA believes may materially affect Borrower’s ability to pay thisNote.

5. SBA’S RIGHTS IF THERE IS A DEFAULT: Without notice or demand and without giving up any of its rights, SBA may: A) Require immediate payment of all amounts owing under this Note; B) Have recourse to collect all amounts owing from any Borrower or Guarantor (if any); C) File suit and obtain judgment; D) Take possession of any Collateral; or E) Sell, lease, or otherwise dispose of, any Collateral at public or private sale, with or without advertisement.

6. SBA’S GENERAL POWERS: Without notice and without Borrower’s consent, SBA may: A) Bid on or buy the Collateral at its sale or the sale of another lienholder, at any price it chooses; B) Collect amounts due under this Note, enforce the terms of this Note or any other Loan Document, and preserve or dispose of the Collateral. Among other things, the expenses may include payments for property taxes, prior liens, insurance, appraisals, environmental remediation costs, and reasonable attorney’s fees and costs. If SBA incurs such expenses, it may demand immediate reimbursement from Borrower or add the expenses to the principal balance; C) Release anyone obligated to pay this Note; D) Compromise, release, renew, extend or substitute any of the Collateral; and E) Take any action necessary to protect the Collateral or collect amounts owing on this Note.

Page 2 of 3

SBA FORM 147 B (5-00)

 

Doc # L-01-2676051-01

DocuSign Envelope ID: 46F60A33-FA46-47BB-B61E-D687E31EBC0D

SBA Loan #5146047404

Application #3304117588

 

7. FEDERAL LAW APPLIES: When SBA is the holder, this Note will be interpreted and enforced under federal law, including SBA regulations. SBA may use state or local procedures for filing papers, recording documents, giving notice, foreclosing liens, and other purposes. By using such procedures, SBA does not waive any federal immunity from state or local control, penalty, tax, or liability. As to this Note, Borrower may not claim or assert against SBA any local or state law to deny any obligation, defeat any claim of SBA, or preempt federal law.

8. GENERAL PROVISIONS: A) All individuals and entities signing this Note are jointly and severally liable. B) Borrower waives all suretyship defenses. C) Borrower must sign all documents required at any time to comply with the Loan Documents and to enable SBA to acquire, perfect, or maintain SBA’s liens on Collateral. D) SBA may exercise any of its rights separately or together, as many times and in any order it chooses. SBA may delay or forgo enforcing any of its rights without giving up any of them. E) Borrower may not use an oral statement of SBA to contradict or alter the written terms of this Note. F) If any part of this Note is unenforceable, all other parts remain in effect. G) To the extent allowed by law, Borrower waives all demands and notices in connection with this Note, including presentment, demand, protest, and notice of dishonor. Borrower also waives any defenses based upon any claim that SBA did not obtain any guarantee; did not obtain, perfect, or maintain a lien upon Collateral; impaired Collateral; or did not obtain the fair market value of Collateral at a sale. H) SBA may sell or otherwise transfer this Note.

9. MISUSE OF LOAN FUNDS: Anyone who wrongfully misapplies any proceeds of the loan will be civilly liable to SBA for one and one- half times the proceeds disbursed, in addition to other remedies allowed by law.

10. BORROWER’S NAME(S) AND SIGNATURE(S): By signing below, each individual or entity acknowledges and accepts personal obligation and full liability under the Note as Borrower.

{{0_SH}}

FUSE MEDICAL, INC.

Mark Brooks, Owner/Officer

Page 3 of 3

SBA FORM 147 B (5-00)

 

Doc # L-01-2676051-01

DocuSign Envelope ID: 46F60A33-FA46-47BB-B61E-D687E31EBC0D

SBA Loan #5146047404

Application #3304117588

 

SECURITY AGREEMENT

Read this document carefully. It grants the SBA a security interest (lien) in all the property described in paragraph 4.

This document is predated. DO NOT CHANGE THE DATE ON THIS DOCUMENT.

Doc # L-01-2676051-01

DocuSign Envelope ID: 46F60A33-FA46-47BB-B61E-D687E31EBC0D

SBA Loan #5146047404

Application #3304117588

 

SBA Loan #:

5146047404

Borrower:

FUSE MEDICAL, INC.

Secured Party:

The Small Business Administration, an Agency of the U.S. Government

Date:

05.12.2020

Note Amount:

$150,000.00

DEFINITIONS.

U.S. Small Business Administration

SECURITYAGREEMENT

Unless otherwise specified, all terms used in this Agreement will have the meanings ascribed to them under the Official Text of the Uniform Commercial Code, as it may be amended from time to time, (“UCC”). “SBA” means the Small Business Administration, an Agency of the U.S. Government.

2. GRANT OF SECURITY INTEREST.

For value received, the Borrower grants to the Secured Party a security interest in the property described below in paragraph 4 (the “Collateral”).

3. OBLIGATIONS SECURED.

This Agreement secures the payment and performance of: (a) all obligations under a Note dated 05.12.2020, made by FUSE MEDICAL, INC. , made payable to Secured Lender, in the amount of $150,000.00 (“Note”), including all costs and expenses (including reasonable attorney’s fees), incurred by Secured Party in the disbursement, administration and collection of the loan evidenced by the Note; (b) all costs and expenses (including reasonable attorney’s fees), incurred by Secured Party in the protection, maintenance and enforcement of the security interest hereby granted; (c) all obligations of the Borrower in any other agreement relating to the Note; and (d) any modifications, renewals, refinancings, or extensions of the foregoing obligations.

4. COLLATERAL DESCRIPTION.

The Collateral in which this security interest is granted includes the following property that Borrower now owns or shall acquire or create immediately upon the acquisition or creation thereof: all tangible

Page 2 of 5

SBA Form 1059 (09-19) Previous Editions are obsolete.

 

Doc # L-01-2676051-01

DocuSign Envelope ID: 46F60A33-FA46-47BB-B61E-D687E31EBC0D

SBA Loan #5146047404

Application #3304117588

 

and intangible personal property, including, but not limited to: (a) inventory, (b) equipment, (c) instruments, including promissory notes (d) chattel paper, including tangible chattel paper and electronic chattel paper, (e) documents, (f) letter of credit rights, (g) accounts, including health-care insurance receivables and credit card receivables, (h) deposit accounts, (i) commercial tort claims, (j) general intangibles, including payment intangibles and software and (k) as-extracted collateral as such terms may from time to time be defined in the Uniform Commercial Code. The security interest Borrower grants includes all accessions, attachments, accessories,

parts, supplies and replacements for the Collateral, all products, proceeds and collections thereof and all records and data relating thereto.

5. RESTRICTIONS ON COLLATERAL TRANSFER.

Borrower will not sell, lease, license or otherwise transfer (including by granting security interests, liens, or other encumbrances in) all or any part of the Collateral or Borrower’s interest in the Collateral without Secured Party’s written or electronically communicated approval, except that Borrower may sell inventory in the ordinary course of business on customary terms. Borrower may collect and use amounts due on accounts and other rights to payment arising or created in the ordinary course of business, until notified otherwise by Secured Party in writing or by electronic communication.

6. MAINTENANCE AND LOCATION OF COLLATERAL; INSPECTION; INSURANCE.

Borrower must promptly notify Secured Party by written or electronic communication of any change in location of the Collateral, specifying the new location. Borrower hereby grants to Secured Party the right to inspect the Collateral at all reasonable times and upon reasonable notice. Borrower must: (a) maintain the Collateral in good condition; (b) pay promptly all taxes, judgments, or charges of any kind levied or assessed thereon; (c) keep current all rent or mortgage payments due, if any, on premises where the Collateral is located; and (d) maintain hazard insurance on the Collateral, with an insurance company and in an amount approved by Secured Party (but in no event less than the replacement cost of that Collateral), and including such terms as Secured Party may require including a Lender’s Loss Payable Clause in favor of Secured Party. Borrower hereby assigns to Secured Party any proceeds of such policies and all unearned premiums thereon and authorizes and empowers Secured Party to collect such sums and to execute and endorse in Borrower’s name all proofs of loss, drafts, checks and any other documents necessary for Secured Party to obtain such payments.

7. CHANGES TO BORROWER’S LEGAL STRUCTURE, PLACE OF BUSINESS, JURISDICTION OF ORGANIZATION, OR NAME.

Borrower must notify Secured Party by written or electronic communication not less than 30 days before taking any of the following actions: (a) changing or reorganizing the type of organization or form under which it does business; (b) moving, changing its place of business or adding a place of business; (c) changing its jurisdiction of organization; or (d) changing its name. Borrower will pay for the preparation and filing of all documents Secured Party deems necessary to maintain, perfect and continue the perfection of Secured Party’s security interest in the event of any such change.

8. PERFECTION OF SECURITY INTEREST.

Borrower consents, without further notice, to Secured Party’s filing or recording of any documents necessary to perfect, continue, amend or terminate its security interest. Upon request of Secured Party, Borrower must sign or otherwise authenticate all documents that Secured Party deems necessary at any time to allow Secured Party to acquire, perfect, continue or amend its security interest in the Collateral. Borrower will pay the filing and recording costs of any documents relating to Secured Party’s security interest. Borrower ratifies all previous filings and recordings, including financing statements and

Page 3 of 5

SBA Form 1059 (09-19) Previous Editions are obsolete.

 

Doc # L-01-2676051-01

DocuSign Envelope ID: 46F60A33-FA46-47BB-B61E-D687E31EBC0D

SBA Loan #5146047404

Application #3304117588

 

notations on certificates of title. Borrower will cooperate with Secured Party in obtaining a Control Agreement satisfactory to Secured Party with respect to any Deposit Accounts or Investment Property, or in otherwise obtaining control or possession of that or any other Collateral.

9. DEFAULT.

Borrower is in default under this Agreement if: (a) Borrower fails to pay, perform or otherwise comply with any provision of this Agreement; (b) Borrower makes any materially false representation, warranty or certification in, or in connection with, this Agreement, the Note, or any other agreement related to the Note or this Agreement; (c) another secured party or judgment creditor exercises its rights against the Collateral; or (d) an event defined as a “default” under the Obligations occurs. In the event of default and if Secured Party requests, Borrower must assemble and make available all Collateral at a place and time designated by Secured Party.

Upon default and at any time thereafter, Secured Party may declare all Obligations secured hereby immediately due and payable, and, in its sole discretion, may proceed to enforce payment of same and exercise any of the rights and remedies available to a secured party by law including those available to it under Article 9 of the UCC that is in effect in the jurisdiction where Borrower or the Collateral is located. Unless otherwise required under applicable law, Secured Party has no obligation to clean or otherwise prepare the Collateral for sale or other disposition and Borrower waives any right it may have to require Secured Party to enforce the security interest or payment or performance of the Obligations against any other person.

10. FEDERAL RIGHTS.

When SBA is the holder of the Note, this Agreement will be construed and enforced under federal law, including SBA regulations. Secured Party or SBA may use state or local procedures for filing papers, recording documents, giving notice, enforcing security interests or liens, and for any other purposes. By using such procedures, SBA does not waive any federal immunity from state or local control, penalty, tax or liability. As to this Agreement, Borrower may not claim or assert any local or state law against SBA to deny any obligation, defeat any claim of SBA, or preempt federal law.

11. GOVERNING LAW.

Unless SBA is the holder of the Note, in which case federal law will govern, Borrower and Secured Party agree that this Agreement will be governed by the laws of the jurisdiction where the Borrower is located, including the UCC as in effect in such jurisdiction and without reference to its conflicts of laws principles.

12. SECURED PARTY RIGHTS.

All rights conferred in this Agreement on Secured Party are in addition to those granted to it by law, and all rights are cumulative and may be exercised simultaneously. Failure of Secured Party to enforce any rights or remedies will not constitute an estoppel or waiver of Secured Party’s ability to exercise such rights or remedies. Unless otherwise required under applicable law, Secured Party is not liable for any loss or damage to Collateral in its possession or under its control, nor will such loss or damage reduce or discharge the Obligations that are due, even if Secured Party’s actions or inactions caused or in any way contributed to such loss or damage.

13. SEVERABILITY.

If any provision of this Agreement is unenforceable, all other provisions remain in effect.

Page 4 of 5

SBA Form 1059 (09-19) Previous Editions are obsolete.

 

Doc # L-01-2676051-01

DocuSign Envelope ID: 46F60A33-FA46-47BB-B61E-D687E31EBC0D

SBA Loan #5146047404

Application #3304117588

 

14. BORROWER CERTIFICATIONS.

Borrower certifies that: (a) its Name (or Names) as stated above is correct; (b) all Collateral is owned or titled in the Borrower’s name and not in the name of any other organization or individual; (c) Borrower has the legal authority to grant the security interest in the Collateral; (d) Borrower’s ownership in or title to the Collateral is free of all adverse claims, liens, or security interests (unless expressly permitted by Secured Party); (e) none of the Obligations are or will be primarily for personal, family or household purposes; (f) none of the Collateral is or will be used, or has been or will be bought primarily for personal, family or household purposes; (g) Borrower has read and understands the meaning and effect of all terms of this Agreement.

15. BORROWER NAME(S) AND SIGNATURE(S).

By signing or otherwise authenticating below, each individual and each organization becomes jointly and severally obligated as a Borrower under this Agreement.

FUSE MEDICAL, INC.

{{0_SH}}

05.12.2020

  Date:

Mark Brooks, Owner/Officer

Page 5 of 5

SBA Form 1059 (09-19) Previous Editions are obsolete.

 

EX-10.3

PROMISSORY NOTE

$180,000.00 May 6, 2020

FOR VALUE RECEIVED, FUSE MEDICAL, INC., a Delaware corporation ("Borrower"), whose address is 1565 North Central Expressway, Suite 220, Richardson, Texas 75080, promises to pay to the order of NC 143 FAMILY HOLDING, LP, a Texas limited partnership ("Lender"), at 1565 North Central Expressway, 2^nd Floor, Richardson, TX 75080 c/o Mark W. Brooks, Fuse Medical, Inc. Chairman of the Board or Directors and President, or at such other address as the holder hereof may from time to time designate in writing, in lawful currency of the United States of America, the principal sum of ONE HUNDRED EIGHTY THOUSAND AND NO/100 DOLLARS ($180,000.00) together with interest from the date the proceeds of the loan (the "Loan") evidenced by this Promissory Note (this "Note") are initially disbursed until maturity on the principal balance from time to time remaining unpaid hereon at the rate of 0.25% per annum (computed on the basis of a 360‑day year of twelve (12) consecutive thirty (30)‑day months).  Interest on the Loan shall be capitalized annually on May 5 each year and added to the principal amount of this Note, which additional amount shall bear interest and otherwise be payable in accordance with the terms and conditions of this Note.  The outstanding principal balance and all accrued and unpaid interest therein shall be due and payable in a single balloon payment on May 5, 2022 (the "Maturity Date"), or the earlier acceleration thereof.  

Borrower shall have the right to prepay all, but not less than all, of the outstanding balance of this Note at any time, without any prepayment fee or premium.

Failure of Borrower to make any payment of principal, interest, or other amount under this Note when due shall constitute an Event of Default hereunder.

All past due principal, if any, and matured unpaid interest, at Lender's option, shall bear interest at the Default Rate (as defined below), whether or not the maturity of the indebtedness evidenced by this Note has been accelerated.  Upon the occurrence of any Event of Default, Lender shall have the option to declare the entire amount of principal and interest due under this Note immediately due and payable without notice or demand, and Lender may exercise any of its rights under this Note and applicable laws.  If the entire unpaid principal balance of this Note is not paid on the Maturity Date, whether the Maturity Date occurs by acceleration as described in the immediately preceding sentence or otherwise, the outstanding principal balance of this Note shall thereafter bear interest at the lesser of (a) the rate of ten percent (10.00%) per annum, or (b) the maximum interest rate permitted by law (the "Default Rate").

If this Note is placed in the hands of an attorney for collection, Borrower agrees to pay reasonable attorneys' fees and court costs incurred by Lender in connection therewith.

This Note shall be governed and construed in accordance with the laws of the State of Texas applicable to contracts made and to be performed therein (excluding choice‑of‑law principles).  Borrower hereby irrevocably submits to the jurisdiction of any state or federal court sitting in Texas in any action or proceeding brought to enforce or otherwise arising out of or relating to this Note, and hereby waives any objection to venue in any such court and any claim that such forum is an inconvenient forum.

This Note is given in a commercial transaction for business purposes.

Borrower and all sureties, endorsers, guarantors and other parties now or hereafter liable for the payment of this Note, in whole or in part, hereby severally (i) waive demand, notice of demand, presentment for payment, notice of nonpayment, protest, notice of protest, notice of intent to accelerate, notice of acceleration and all other notices, and further waive diligence in collecting this Note or in enforcing any of the security for this Note, if any; (ii) agree to any substitution, subordination, exchange or release of any security for this Note or the release of any party primarily or secondarily liable for the payment of this Note; (iii) agree that Lender shall not be required to first institute suit or exhaust its remedies hereon against Borrower or others liable or to become liable for the payment of this Note or to enforce its rights against any security, if any, for the payment of this Note; and (iv) consent to any extension of time for the payment of this Note, or any installment hereof, made by agreement by Lender with any person now or hereafter liable for the payment of this Note, even if Borrower is not a party to such agreement.

All agreements between Borrower and Lender, whether now existing or hereafter arising and whether written or oral, are hereby limited so that in no contingency, whether by reason of demand or acceleration of the Maturity Date of this Note or otherwise, shall the interest contracted for, charged, received, paid or agreed to be paid to Lender exceed the maximum amount permissible under the applicable law.  If, from any circumstance whatsoever, interest would otherwise be payable to Lender in excess of the maximum amount permissible under applicable law, the interest payable to Lender shall be reduced to the maximum amount permissible under applicable law; and if from any circumstance Lender shall ever receive anything of value deemed interest by applicable law in excess of the maximum amount permissible under applicable law, an amount equal to the excessive interest shall be applied to the reduction of the principal of this Note and not to the payment of interest, or if such excessive amount of interest exceeds the unpaid balance of principal of this Note, such excess shall be refunded to Borrower.  All interest paid or agreed to be paid to Lender shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full period (including any renewal or extension) until payment in full of the principal so that the interest accruing under this Note for such full period shall not exceed the maximum amount permissible under applicable law.  Lender expressly disavows any intent to contract for, charge or receive interest in an amount which exceeds the maximum amount permissible under applicable law.  For the purpose of determining the highest lawful rate per annum permitted by the applicable laws of the State of Texas, the “weekly ceiling” from time to time in effect as provided in §303 of the Texas Finance Code, as amended, shall be the ceiling applicable to this transaction; however, if permitted by law, Lender may implement any ceiling under that law used to compute the rate of interest hereunder by notice to Borrower as provided in such article.  Notwithstanding the foregoing sentence, if the Depository Institutions and Deregulation and Monetary Control Act of 1980, 12 U.S.C. Sections 1235f-7 and 1735f-7a, as amended, permits a higher maximum rate than the Texas Finance Code, such higher maximum rate shall apply to this Note.  In determining the highest lawful rate, all fees and other charges contracted for, charged or received by Lender in connection with the Loan which are either deemed interest by applicable law or required by applicable law to be deducted from the principal balance of this Note to determine the rate of interest hereon shall be taken into account.   This paragraph shall control all agreements between Borrower and Lender.

- Page 2 Promissory Note

Notices or communications to be given under this Note shall be given to the respective parties in writing at their respective addresses set forth above.

Time is of the essence for this Note.

This Note may not be changed or terminated orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, termination or discharge is sought.

This Note and all the covenants, promises and agreements contained herein shall be binding upon Borrower's successors, assigns, heirs and personal representatives and inure to the benefit of Lender's successors and assigns.

If more than one party is identified as the Borrower hereunder, the liability of each such party shall be joint and several.

If any provision of this Note or the application thereof to any person or circumstance shall, for any reason and to any extent, be invalid or unenforceable, then neither the remainder of this Note nor the application of such provision to other persons or circumstances nor the other instruments referred to herein shall be affected thereby, but rather shall be enforced to the greatest extent permitted by applicable law.

WAIVER OF JURY TRIAL. BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTELLIGENTLY WAIVES ANY AND ALL RIGHTS THAT IT MAY NOW OR HEREAFTER HAVE UNDER THE LAWS OF THE UNITED STATES OF AMERICA OR THE STATE OF TEXAS TO A TRIAL BY JURY OF ANY AND ALL ISSUES ARISING DIRECTLY OR INDIRECTLY IN ANY ACTION OR PROCEEDING RELATING TO THIS NOTE OR ANY TRANSACTIONS CONTEMPLATED THEREBY OR RELATED THERETO.  IT IS INTENDED THAT THIS WAIVER SHALL APPLY TO ANY AND ALL DEFENSES, RIGHTS, CLAIMS AND/OR COUNTERCLAIMS IN ANY SUCH ACTION OR PROCEEDING. BORROWER UNDERSTANDS THAT THIS WAIVER IS A WAIVER OF A CONSTITUTIONAL SAFEGUARD, AND BORROWER BELIEVES THAT THERE ARE SUFFICIENT ALTERNATE PROCEDURAL AND SUBSTANTIVE SAFEGUARDS, INCLUDING, A TRIAL BY AN IMPARTIAL JUDGE, THAT ADEQUATELY OFFSET THE WAIVER CONTAINED HEREIN.

IMPORTANT:  READ BEFORE SIGNING.  THE TERMS OF THIS AGREEMENT SHOULD BE READ CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE.  NO OTHER TERMS OR ORAL PROMISES NOT CONTAINED IN THIS WRITTEN CONTRACT MAY BE LEGALLY ENFORCED.  YOU MAY

- Page 3 Promissory Note

CHANGE THE TERMS OF THIS AGREEMENT ONLY BY ANOTHER WRITTEN AGREEMENT.

BORROWER:

FUSE MEDICAL, INC.,

a Delaware corporation

By:/s/ William E. McLaughlin, III

Print:William E. McLaughlin, III

Its:Chief Financial Officer & Director

- Page 4 Promissory Note

EX-10.4

PROMISSORY NOTE

$20,000.00 May 6, 2020

FOR VALUE RECEIVED, FUSE MEDICAL, INC., a Delaware corporation ("Borrower"), whose address is 1565 North Central Expressway, Suite 220, Richardson, Texas 75080, promises to pay to the order of REEG MEDICAL INDUSTRIES, INC., a Texas corporation ("Lender"), at 3024 Westminster Avenue, Dallas, Texas 75205 c/o Christopher C. Reeg, Fuse Medical, Inc. Chief Executive Officer and Director, or at such other address as the holder hereof may from time to time designate in writing, in lawful currency of the United States of America, the principal sum of TWENTY THOUSAND AND NO/100 DOLLARS ($20,000.00) together with interest from the date the proceeds of the loan (the "Loan") evidenced by this Promissory Note (this "Note") are initially disbursed until maturity on the principal balance from time to time remaining unpaid hereon at the rate of 0.25% per annum (computed on the basis of a 360‑day year of twelve (12) consecutive thirty (30)‑day months).  Interest on the Loan shall be capitalized annually on May 5 each year and added to the principal amount of this Note, which additional amount shall bear interest and otherwise be payable in accordance with the terms and conditions of this Note.  The outstanding principal balance and all accrued and unpaid interest therein shall be due and payable in a single balloon payment on May 5, 2022 (the "Maturity Date"), or the earlier acceleration thereof.

Borrower shall have the right to prepay all, but not less than all, of the outstanding balance of this Note at any time, without any prepayment fee or premium.

Failure of Borrower to make any payment of principal, interest, or other amount under this Note when due shall constitute an Event of Default hereunder.

All past due principal, if any, and matured unpaid interest, at Lender's option, shall bear interest at the Default Rate (as defined below), whether or not the maturity of the indebtedness evidenced by this Note has been accelerated.  Upon the occurrence of any Event of Default, Lender shall have the option to declare the entire amount of principal and interest due under this Note immediately due and payable without notice or demand, and Lender may exercise any of its rights under this Note and applicable laws.  If the entire unpaid principal balance of this Note is not paid on the Maturity Date, whether the Maturity Date occurs by acceleration as described in the immediately preceding sentence or otherwise, the outstanding principal balance of this Note shall thereafter bear interest at the lesser of (a) the rate of ten percent (10.00%) per annum, or (b) the maximum interest rate permitted by law (the "Default Rate").

If this Note is placed in the hands of an attorney for collection, Borrower agrees to pay reasonable attorneys' fees and court costs incurred by Lender in connection therewith.

This Note shall be governed and construed in accordance with the laws of the State of Texas applicable to contracts made and to be performed therein (excluding choice‑of‑law principles).  Borrower hereby irrevocably submits to the jurisdiction of any state or federal court sitting in Texas in any action or proceeding brought to enforce or otherwise arising out of or relating to this Note, and hereby waives any objection to venue in any such court and any claim that such forum is an inconvenient forum.

This Note is given in a commercial transaction for business purposes.

Borrower and all sureties, endorsers, guarantors and other parties now or hereafter liable for the payment of this Note, in whole or in part, hereby severally (i) waive demand, notice of demand, presentment for payment, notice of nonpayment, protest, notice of protest, notice of intent to accelerate, notice of acceleration and all other notices, and further waive diligence in collecting this Note or in enforcing any of the security for this Note, if any; (ii) agree to any substitution, subordination, exchange or release of any security for this Note or the release of any party primarily or secondarily liable for the payment of this Note; (iii) agree that Lender shall not be required to first institute suit or exhaust its remedies hereon against Borrower or others liable or to become liable for the payment of this Note or to enforce its rights against any security, if any, for the payment of this Note; and (iv) consent to any extension of time for the payment of this Note, or any installment hereof, made by agreement by Lender with any person now or hereafter liable for the payment of this Note, even if Borrower is not a party to such agreement.

All agreements between Borrower and Lender, whether now existing or hereafter arising and whether written or oral, are hereby limited so that in no contingency, whether by reason of demand or acceleration of the Maturity Date of this Note or otherwise, shall the interest contracted for, charged, received, paid or agreed to be paid to Lender exceed the maximum amount permissible under the applicable law.  If, from any circumstance whatsoever, interest would otherwise be payable to Lender in excess of the maximum amount permissible under applicable law, the interest payable to Lender shall be reduced to the maximum amount permissible under applicable law; and if from any circumstance Lender shall ever receive anything of value deemed interest by applicable law in excess of the maximum amount permissible under applicable law, an amount equal to the excessive interest shall be applied to the reduction of the principal of this Note and not to the payment of interest, or if such excessive amount of interest exceeds the unpaid balance of principal of this Note, such excess shall be refunded to Borrower.  All interest paid or agreed to be paid to Lender shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full period (including any renewal or extension) until payment in full of the principal so that the interest accruing under this Note for such full period shall not exceed the maximum amount permissible under applicable law.  Lender expressly disavows any intent to contract for, charge or receive interest in an amount which exceeds the maximum amount permissible under applicable law.  For the purpose of determining the highest lawful rate per annum permitted by the applicable laws of the State of Texas, the “weekly ceiling” from time to time in effect as provided in §303 of the Texas Finance Code, as amended, shall be the ceiling applicable to this transaction; however, if permitted by law, Lender may implement any ceiling under that law used to compute the rate of interest hereunder by notice to Borrower as provided in such article.  Notwithstanding the foregoing sentence, if the Depository Institutions and Deregulation and Monetary Control Act of 1980, 12 U.S.C. Sections 1235f-7 and 1735f-7a, as amended, permits a higher maximum rate than the Texas Finance Code, such higher maximum rate shall apply to this Note.  In determining the highest lawful rate, all fees and other charges contracted for, charged or received by Lender in connection with the Loan which are either deemed interest by applicable law or required by applicable law to be deducted from the principal balance of this Note to determine the rate of interest hereon shall be taken into account.   This paragraph shall control all agreements between Borrower and Lender.

- Page 2 Promissory Note

Notices or communications to be given under this Note shall be given to the respective parties in writing at their respective addresses set forth above.

Time is of the essence for this Note.

This Note may not be changed or terminated orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, termination or discharge is sought.

This Note and all the covenants, promises and agreements contained herein shall be binding upon Borrower's successors, assigns, heirs and personal representatives and inure to the benefit of Lender's successors and assigns.

If more than one party is identified as the Borrower hereunder, the liability of each such party shall be joint and several.

If any provision of this Note or the application thereof to any person or circumstance shall, for any reason and to any extent, be invalid or unenforceable, then neither the remainder of this Note nor the application of such provision to other persons or circumstances nor the other instruments referred to herein shall be affected thereby, but rather shall be enforced to the greatest extent permitted by applicable law.

WAIVER OF JURY TRIAL. BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTELLIGENTLY WAIVES ANY AND ALL RIGHTS THAT IT MAY NOW OR HEREAFTER HAVE UNDER THE LAWS OF THE UNITED STATES OF AMERICA OR THE STATE OF TEXAS TO A TRIAL BY JURY OF ANY AND ALL ISSUES ARISING DIRECTLY OR INDIRECTLY IN ANY ACTION OR PROCEEDING RELATING TO THIS NOTE OR ANY TRANSACTIONS CONTEMPLATED THEREBY OR RELATED THERETO.  IT IS INTENDED THAT THIS WAIVER SHALL APPLY TO ANY AND ALL DEFENSES, RIGHTS, CLAIMS AND/OR COUNTERCLAIMS IN ANY SUCH ACTION OR PROCEEDING. BORROWER UNDERSTANDS THAT THIS WAIVER IS A WAIVER OF A CONSTITUTIONAL SAFEGUARD, AND BORROWER BELIEVES THAT THERE ARE SUFFICIENT ALTERNATE PROCEDURAL AND SUBSTANTIVE SAFEGUARDS, INCLUDING, A TRIAL BY AN IMPARTIAL JUDGE, THAT ADEQUATELY OFFSET THE WAIVER CONTAINED HEREIN.

IMPORTANT:  READ BEFORE SIGNING.  THE TERMS OF THIS AGREEMENT SHOULD BE READ CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE.  NO OTHER TERMS OR ORAL PROMISES NOT CONTAINED IN THIS WRITTEN CONTRACT MAY BE LEGALLY ENFORCED.  YOU MAY

- Page 3 Promissory Note

CHANGE THE TERMS OF THIS AGREEMENT ONLY BY ANOTHER WRITTEN AGREEMENT.

BORROWER:

FUSE MEDICAL, INC.,

a Delaware corporation

By:/s/ William E. McLaughlin, III

Print:William E. McLaughlin, III

Its:Chief Financial Officer & Director

- Page 4 Promissory Note

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Christopher C. Reeg, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Fuse Medical, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 7, 2020	By:	/s/ Christopher C. Reeg
		Christopher C. Reeg
		Chief Executive Officer (Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, William E. McLaughlin, III, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Fuse Medical, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 7, 2020	By:	/s/ William E. McLaughlin, III
		William E. McLaughlin, III
		Senior Vice President, Chief Financial Officer (Principal Financial Officer)

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Fuse Medical, Inc. (the "Company") on Form 10-Q for the quarter ended June 30, 2020, as filed with the Securities and Exchange Commission on the date hereof, I, Christopher C. Reeg, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

1. The quarterly report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and

2. The information contained in the quarterly report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 7, 2020	By:	/s/ Christopher C. Reeg
		Christopher C. Reeg
		Chief Executive Officer (Principal Executive Officer)

In connection with the quarterly report of Fuse Medical, Inc. (the "Company") on Form 10-Q for the quarter ended June 30, 2020, as filed with the Securities and Exchange Commission on the date hereof, I, William E. McLaughlin, III, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

1. The quarterly report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and

2. The information contained in the quarterly report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 7, 2020	By:	/s/ William E. McLaughlin, III
		William E. McLaughlin, III
		Senior Vice President, Chief Financial Officer (Principal Financial Officer)

XML

Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2020	Aug. 05, 2020
Cover [Abstract]
Entity Registrant Name	Fuse Medical, Inc.
Entity Central Index Key	0000319016
Document Type	10-Q
Document Quarterly Report	true
Document Transition Report	false
Document Period End Date	Jun. 30, 2020
Document Fiscal Year Focus	2020
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity's Reporting Status Current	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Non-accelerated Filer
Entity Common Stock, Shares Outstanding		73,124,458
Document Fiscal Period Focus	Q2
Entity Small Business	true
Entity Shell Company	false
Entity Emerging Growth Company	false
Entity Tax Identification Number	59-1224913
Entity File Number	000-10093
Entity Incorporation, State or Country Code	DE
Entity Address, Address Line One	1565 N. Central Expressway
Entity Address, Address Line Two	Suite 220
Entity Address, City or Town	Richardson
Entity Address, State or Province	TX
Entity Address, Postal Zip Code	75080
City Area Code	469
Local Phone Number	862-3030
Title of 12(b) Security	Common Stock
Trading Symbol	FZMD

XML

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)	Jun. 30, 2020	Dec. 31, 2019
Current assets:
Cash	$ 1,167,275	$ 1,099,310
Accounts receivable, net of allowance of $801,637 and $615,278, respectively	2,986,921	5,249,653
Inventories, net of allowance of $3,184,126 and $3,805,730, respectively	7,051,891	7,855,887
Prepaid expenses and other current assets	87,752	39,850
Total current assets	11,293,839	14,244,700
Property and equipment, net	33,371	32,639
Long term accounts receivable, net of allowance of $1,332,194 and $728,000, respectively	1,830,938	924,646
Intangible assets, net	1,165,910	1,206,620
Goodwill	1,972,886	1,972,886
Total assets	16,296,944	18,381,491
Current liabilities:
Accounts payable	2,239,586	2,752,854
Accrued expenses	3,064,706	3,302,904
Convertible notes payable - related parties	150,000	150,000
Paycheck Protection Program loan	361,400
Senior secured revolving credit facility	1,088,352	1,752,501
Total current liabilities	6,904,044	7,958,259
Notes payable - related parties	200,000
Economic Injury Disaster Loan	150,000
Earn-out liability	11,645,365	11,645,365
Total liabilities	18,899,409	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 June 30, 2020 and December 31, 2019.	731,245	731,245
Additional paid-in capital	969,533	642,435
Accumulated deficit	(4,303,243)	(2,595,813)
Total stockholders' equity	(2,602,465)	(1,222,133)
Total liabilities and stockholders' equity	$ 16,296,944	$ 18,381,491

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)	Jun. 30, 2020	Dec. 31, 2019
Statement Of Financial Position [Abstract]
Net of allowance, accounts receivable	$ 801,637	$ 615,278
Net of allowance, inventories	3,184,126	3,805,730
Net of allowance, long term receivable	$ 1,332,194	$ 728,000
Preferred Stock Par Value	$ 0.01	$ 0.01
Preferred Stock Shares Authorized	20,000,000	20,000,000
Preferred Stock Shares Issued	0	0
Preferred Stock Shares Outstanding	0	0
Common Stock Par Value	$ 0.01	$ 0.01
Common Stock Shares Authorized	100,000,000	100,000,000
Common Stock Shares Issued	73,124,458	73,124,458
Common Stock Shares Outstanding	73,124,458	73,124,458

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Income Statement [Abstract]
Net revenues	$ 4,010,666	$ 5,075,925	$ 8,647,169	$ 9,846,584
Cost of revenues	1,796,663	2,223,912	3,779,559	4,199,257
Gross profit	2,214,003	2,852,013	4,867,610	5,647,327
Operating expenses:
Selling, general, administrative and other	1,161,476	1,975,934	3,642,247	4,340,102
Commissions	1,420,239	1,004,994	2,811,356	2,010,525
Depreciation and amortization	30,752	25,596	60,735	51,320
Total operating expenses	2,612,467	3,006,524	6,514,338	6,401,947
Operating loss	(398,464)	(154,511)	(1,646,728)	(754,620)
Other expense:
Interest expense	24,021	28,027	55,022	53,462
Total other expense	24,021	28,027	55,022	53,462
Net loss before tax	(422,485)	(182,538)	(1,701,750)	(808,082)
Income tax benefit	946	(40,389)	5,680	(154,935)
Net loss	$ (423,431)	$ (142,149)	$ (1,707,430)	$ (653,147)
Net loss per common share - basic	$ (0.01)	$ 0.00	$ (0.02)	$ (0.01)
Weighted average number of common shares outstanding - basic	70,221,566	70,221,566	70,221,566	70,221,566

XML

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) - USD ($)	Total	Common Stock [Member]	Additional Paid-In Capital [Member]	Retained Earnings/ (Deficit) [Member]
Beginning Balance, Amount at Dec. 31, 2018	$ 1,466,684	$ 746,002		$ 720,682
Beginning Balance, Shares at Dec. 31, 2018		74,600,181
Stock compensation expense	499,107		$ 499,107
Net loss	(653,147)			(653,147)
Ending Balance, Amount at Jun. 30, 2019	1,312,644	$ 746,002	499,107	67,535
Ending Balance, Shares at Jun. 30, 2019		74,600,181
Beginning Balance, Amount at Dec. 31, 2019	(1,222,133)	$ 731,245	642,435	(2,595,813)
Beginning Balance, Shares at Dec. 31, 2019		73,124,458
Stock compensation expense	327,098		327,098
Net loss	(1,707,430)			(1,707,430)
Ending Balance, Amount at Jun. 30, 2020	$ (2,602,465)	$ 731,245	$ 969,533	$ (4,303,243)
Ending Balance, Shares at Jun. 30, 2020		73,124,458

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($)	6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Cash flows from operating activities
Net loss	$ (1,707,430)	$ (653,147)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	60,735	51,320
Stock based compensation	327,098	499,107
Provision for bad debts and discounts	186,359	255,238
Provision for long term accounts receivable	604,194	60,101
Provision for slow moving inventory	(621,604)	24,813
Benefits for deferred taxes		(168,573)
Changes in operating assets and liabilities:
Accounts receivable	2,076,373	982,357
Inventories	1,425,600	285,215
Prepaid expenses and other current assets	(47,902)	11,051
Long term accounts receivable	(1,510,486)	17,100
Accounts payable	(513,268)	(318,379)
Accrued expenses	(238,198)	(823,729)
Net cash provided by operating activities	41,471	222,474
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	(664,149)	(224,947)
Proceeds from related party promissory notes	200,000
Net cash provided by (used in) financing activities	47,251	(224,947)
Net increase (decrease) in cash	67,965	(2,473)
Cash - beginning of period	1,099,310	844,314
Cash - end of period	1,167,275	841,841
Supplemental disclosure of cash flow information:
Cash paid for interest	40,018	$ 42,409
Paycheck Protection Program [Member]
Cash flows from financing activities
Proceeds from Paycheck Protection Program	361,400
Economic Injury Disaster Loan Assistance Program [Member]
Cash flows from financing activities
Proceeds from Economic Injury Disaster Loan	$ 150,000

XML

Nature of Operations

6 Months Ended

Jun. 30, 2020

Organization Consolidation And Presentation Of Financial Statements [Abstract]

Nature of Operations

Note 1. Nature of Operations

Overview

Fuse Medical, Inc., a Delaware corporation (the “Company”), is a manufacturer and national distributor of medical devices and surgical implants for the orthopedic market. The Company acquired CPM Medical Consultants, LLC (“CPM”) in December 2017 (the “CPM Acquisition”), in which the Company was the legal acquirer and CPM was deemed the accounting acquirer. In August 2018, the Company completed the acquisition of Palm Springs Partners, LLC d/b/a Maxim Surgical (“Maxim” and such transactions the “Maxim Acquisition”). CPM and Maxim survive as the Company’s wholly-owned subsidiaries and subsequent to the completion of each acquisition, CPM, Maxim and Company operations are consolidated.

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 or 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 and six months ended June 30, 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 June 30, 2020, the Company has accumulated losses of $4,303,243 and a stockholders’ deficit of $2,602,465. Revenue declined by $1,065,259 in the second quarter of 2020 compared to 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”). At various times during the years ended December 31, 2018 and 2019 and in the first quarter ended March 31, 2020, the Company was out of compliance with one or more covenants contained in its Amended and Restated Business Loan Agreement (“RLOC”) with ZB, N.A., d/b/a Amegy Bank (“Amegy Bank”), but obtained waivers from Amegy Bank to cure the violations, resulting in reductions in the Company’s aggregate contractual borrowing limits under the RLOC. The RLOC functions as a senior secured revolving loan facility. 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 governmental 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 on 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 RLOC with Amegy Bank with a new credit facility on commercially reasonable terms, or obtain financing.

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.

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Significant Accounting Policies

6 Months Ended

Jun. 30, 2020

Accounting Policies [Abstract]

Significant Accounting Policies

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 management’s 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 liability.

Reclassifications

Long term accounts receivable, net of allowance was previously reported as a component of current assets as accounts receivable, net of allowance in the Company’s accompanying interim unaudited condensed consolidated balance sheets. Long term accounts receivable reflects Cases where the patient has obtained a letter of protection, (“LOP”). A LOP is a contract that provides that the medical providers will be paid from any proceeds received from settlement of litigation of the underlying cause of action with respect to the event that necessitated medical goods and services. Once the medical provider receives payment, then the medical provider pays our invoice which payment is generally greater than 365 day from date of service. The LOP provides medical providers with greater certainty of full payment. This reclassification had no effect on the previously reported total assets or net loss.  

Segment Reporting

In accordance with Accounting Standards Codification (“ASC”) 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 his management team reviews 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, par value $0.01, (“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.

Diluted earnings (loss) per common share is computed by dividing net income/(loss) by the weighted-average number of Common Stock equivalents outstanding for the period determined using the treasury stock method. For the six months ended June 30, 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 six months ended June 30, 2020, restricted stock and Common Stock equivalents of 4,777,892 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 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 $0.00 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 estimated earn-out payments. There was no change in the earn-out liability for the six months ended June 30, 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 agreements through June 30, 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.

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 June 30, 2020 and December 31, 2019.  The Company’s cash is concentrated in 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 June 30, 2020.  As of June 30, 2020 and December 31, 2019, there were deposits of $861,703 and $599,309, respectively, greater than federally insured limits.

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) which includes 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, tendons, and amniotic 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

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 of an asset 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 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 June 30, 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 Update (“ASU”) 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 an important triggering event has occurred as of June 30, 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 costs, 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 statements of operations.

Revenue Differentiation

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				Six Months Ended
	June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019
Category
Retail	$	3,604,578	$	3,722,777	$	7,732,441	$	7,375,088
Wholesale		406,088		1,353,148		914,728		2,471,496
Total	$	4,010,666	$	5,075,925	$	8,647,169	$	9,846,584

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 and 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.

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Property and Equipment

6 Months Ended

Jun. 30, 2020

Property Plant And Equipment [Abstract]

Property and Equipment

Note 3. Property and Equipment

Property and equipment consisted of the following at June 30, 2020 and December 31, 2019:

	June 30, 2020			December 31, 2019
Computer equipment and software	$	65,744		$	51,303
Office equipment		-			20,333
Property and equipment costs		65,744			71,636
Less: accumulated depreciation		(32,373	)		(38,997	)
Property and equipment, net	$	33,371		$	32,639

Depreciation expense for the three months ended June 30, 2020 and 2019 was $10,397 and $5,241, respectively. Depreciation expense for the six months ended June 30, 2020 and 2019 was $20,025 and $10,610, respectively.

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Goodwill and Intangible Assets

6 Months Ended

Jun. 30, 2020

Goodwill And Intangible Assets Disclosure [Abstract]

Goodwill and Intangible Assets

Note 4. Goodwill and Intangible Assets

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

	June 30, 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		(156,055	)		(115,345	)
Intangible assets, net		1,165,910			1,206,620
Goodwill	$	1,972,886		$	1,972,886		Indefinite

Amortization expense for the three months ended June 30, 2020 and 2019 was $20,355 and $20,355, respectively. Amortization expense for the six months ended June 30, 2020 and 2019, was $40,710 and $40,710.

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

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Senior Secured Revolving Credit Facility

6 Months Ended

Jun. 30, 2020

Debt Disclosure [Abstract]

Senior Secured Revolving Credit Facility

Note 5. Senior Secured Revolving Credit Facility

Effective December 29, 2017, the Company became party to its 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 of Directors (“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 (the “Third Amendment”). 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 (the “Fourth Amendment”). 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, Mark W. Brooks (“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) provided for our Chairman of the Board and President to personally guarantee one hundred percent (100%) of the outstanding RLOC amount.

On May 21, 2020, the Company executed the Fifth Amendment to the RLOC with Amegy Bank (“the Fifth Amendment”). Pursuant to the Fifth Amendment, Amegy Bank (i) waived the Company’s events of default under the RLOC, (ii) amended the financial covenants to state that the Company will not permit EBITDA to be less than $25,000 for the six months ended September 30, 2020, and (iii) extended the termination date of the RLOC until November 4, 2020.

In conjunction with executing the Fifth Amendment to 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 Family Holdings, LP (“NC 143”), a limited partnership controlled by Mr. Brooks, the Company’s President and Chairman of the Board, and $20,000 from Reeg Medical Industries, Inc. (“RMI”), a company owned and controlled by Christopher C. Reeg (“Mr. Reeg”), the Company’s Chief Executive Officer and Secretary, 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, if not paid in full.  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.

For the three months ended June 30, 2020, the Company was in compliance with the covenants of its RLOC with Amegy Bank.

The outstanding balance of the RLOC was $1,088,352 and $1,752,501 at June 30, 2020 and December 31, 2019, respectively. Interest expense incurred on the RLOC was $15,363 and $21,295 for the three months ended June 30, 2020 and 2019, respectively, and is reflected in interest expense on the Company’s accompanying unaudited condensed consolidated statements of operations. Interest expense incurred on the RLOC was $39,633 and $40,073 for the six months ended June 30, 2020 and 2019, respectively. Accrued interest on the RLOC at June 30, 2020 and December 31, 2019 was $4,053 and $4,437, respectively, and is reflected in accrued expenses on the Company’s accompanying interim unaudited condensed consolidated balance sheets. At June 30, 2020, the effective interest rate was 5.1%.

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Notes Payable - Related Parties

6 Months Ended

Jun. 30, 2020

Debt Disclosure [Abstract]

Notes Payable - Related Parties

Note 6. Notes Payable – Related Parties

During July 2016 through October 2016, the Company obtained three working capital loans from NC 143 and RMI in the form of convertible promissory notes (“Notes”) in the aggregate amount of $150,000 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.  On May 6, 2020, the Company borrowed $180,000 from NC 143 and $20,000 from RMI, 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, if not paid in full.  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.

During the three months ended June 30, 2020 and 2019, interest expense of $6,732 and $ 6,732, respectively, is reflected in interest expense on the Company’s accompanying unaudited condensed consolidated statements of operations. During the six months ended June 30, 2020 and 2019, interest expense of $13,463 and $13,389, respectively, is reflected in interest expense on the Company’s accompanying unaudited condensed consolidated statements of operations. As of June 30, 2020, and December 31, 2019, accrued interest was $99,559 and $86,096, respectively, which is reflected in accrued expenses on the Company’s accompanying unaudited condensed consolidated balance sheets.

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Paycheck Protection Program

6 Months Ended

Jun. 30, 2020

Debt Disclosure [Abstract]

Paycheck Protection Program

Note 7 – Paycheck Protection Program

On April 11, 2020, the Company received approval from the U.S. Small Business Administration (“SBA”) to fund the Company’s request for a loan under the Paycheck Protection Program (“PPP Loan”) created as part of the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the SBA. In connection with the PPP Loan, the Company has entered into a promissory note in the principal amount of $361,400. 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. The PPP Loan is reflected in short term liabilities in the Company’s accompanying interim unaudited condensed consolidated balance sheets as the Company expects the PPP Loan will be forgiven during 2020.

As of June 30, 2020, the Company incurred approximately $900 in accrued interest related to the PPP Loan, which is reflected in accrued expenses on the Company’s accompanying interim unaudited condensed consolidated balance sheets. The Company did not incur accrued interest expense on the PPP Loan as of June 30, 2019. For the three months and six months ended June 30, 2020, the Company incurred approximately $900 in interest expense related to the PPP Loan, which is reflected in interest expense on the Company’s statements of operations. The Company did not incur interest expense related to the PPP Loan for the three and six months ended June 30, 2019.

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Economic Disaster Injury Loan

6 Months Ended

Jun. 30, 2020

Debt Disclosure [Abstract]

Economic Disaster Injury Loan

Note 8 – Economic Injury Disaster Loan

On May 12, 2020, the Company executed the standard loan documents required for securing a loan from the SBA under its Economic Injury Disaster Loan assistance program (the “EIDL Loan”) in light of the impact of the COVID-19 pandemic on the Company’s business. Pursuant to the Loan Authorization and Agreement (the “SBA Loan Agreement”), the principal amount of the EIDL Loan was $150,000, with proceeds to be used for working capital purposes. Interest accrues at the rate of 3.75% per annum. Installment payments, including principal and interest, are due monthly beginning May 12, 2021 (twelve months from the date of the SBA Loan Agreement) in the amount of $731. The balance of principal and interest is payable thirty years from the date of the SBA Loan Agreement. The EDIL Loan is reflected in long term liabilities in the Company’s accompanying interim unaudited condensed consolidated balance sheets. In connection therewith, the Company received a $10,000 advance, which does not have to be repaid and is reflected as an offset in Selling, General, Administrative and Other Expenses in the Company’s accompanying interim unaudited condensed consolidated statements of operations.

As of June 30, 2020, the Company incurred approximately $940 in accrued interest related to the EIDL Loan, which is reflected in accrued expenses on the Company’s accompanying interim unaudited condensed consolidated balance sheets. The Company did not incur accrued interest expense on the EIDL Loan as of June 30, 2019. For the three months and six months ended June 30, 2020, the Company incurred approximately $940 in interest expense related to the EIDL Loan, which is reflected in interest expense on the Company’s statements of operations. The Company did not incur interest expense related to the EIDL Loan for the three and six months ended June 30, 2019.

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Stockholders' Equity

6 Months Ended

Jun. 30, 2020

Stockholders Equity Deficit [Abstract]

Stockholders' Equity

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 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, including 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, “Improvements to Employee Share-Based Payment Accounting.”

Non-Qualified Stock Option Awards

For the three and six months ended June 30, 2019 the Board granted 300,000 and 1,200,000 Non-qualified Stock Option (“NQSO”) to the Company’s product advisory board members, certain key employees and marketing representatives. For the three and six months ended June 30, 2020, the Board did not grant any NQSOs. For the three months ended June 30, 2020 and June 30, 2019 the Company amortized $164,443 and $254,699 relating to the vesting of stock options which is included in selling, general, administrative, and other expenses on the Company’s accompanying interim unaudited condensed consolidated statement of operations. For the six months ended June 30, 2020 and June 30, 2019 the Company amortized $327,098 and $499,107 relating to the vesting of stock options 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 $798,661 as an expense in future periods as the stock options 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.

A summary of the Company’s stock option activity for the six months ended June 30, 2020, is presented below:

	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		6.08	$	157,000
Granted		-			-		-		-
Exercised		-			-		-		-
Forfeited		(3,333	)		1.00		8.00		-
Expired		-			-		-		-
Balance outstanding at June 30, 2020		3,945,000		$	0.61		5.87	$	-
Exercisable at June 30, 2020		1,963,333		$	0.41		3.30	$	-

 Restricted Common Stock

The non-vested restricted stock awards (“RSA”s), as of June 30, 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 a Notice of Acceleration of Vesting (as defined in RSA Agreement), within the Acceleration Notice Period (as defined in RSA Agreement).

As of June 30, 2020, and 2019, it was not probable that the performance conditions on the outstanding RSAs would be met, therefore, no expense has been recorded for these awards for the three and six months ended June 30, 2020 and 2019.

There were no RSA’s that were granted, exercised, or forfeited during the six months ended June 30, 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, June 30, 2020		2,902,892	$	1,382,800	$	0.48

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Income Taxes

6 Months Ended

Jun. 30, 2020

Income Tax Disclosure [Abstract]

Income Taxes

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 Six Months Ended June 30, 2020		For the Six Months Ended June 30, 2019
Current:
Federal	$	-	$	-
State		5,680		13,638
		5,680		13,638
Deferred:
Federal		-		(168,573	)
State		-		-
		-		(168,573	)
Total income tax expense (benefit)	$	5,680	$	(154,935	)

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

	June 30, 2020			June 30, 2019
Deferred tax assets:
Net operating loss carryover	$	833,090		$	191,679
Accounts receivable		168,344			206,493
Compensation		433,296			337,606
Inventory		650,837			388,074
Other		18,428			28,129
Total deferred tax assets		2,103,995			1,151,981
Deferred tax liabilities:
Intangibles		(211,222	)		(218,427	)
Property and equipment		(4,828	)		(3,988	)
Total deferred tax liabilities		(216,050	)		(222,415	)
Deferred tax assets, net	$	1,887,945		$	929,566
Valuation allowance:
Beginning of year		(1,529,584	)		-
Increase during the year		(358,361	)		-
Ending balance		(1,887,945	)		-
Net deferred tax asset	$	-		$	929,566

At June 30, 2020, the Company estimates it had approximately $3,967,098 of net operating loss carryforwards which $899,331 will expire during 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 uncertain tax positions. As of June 30, 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.    

On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company is currently evaluating the impact of the CARES Act, but at present does not expect that the NOL carryback provision of the CARES Act to result in a material impact to the Company.

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

	Six Months Ended
	June 30, 2020	June 30, 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%	-0.5%
Other	0.0%	0.0%
Effective tax rate	-0.4%	19.2%

Our effective income tax rates for the six months ended June 30, 2020 and 2019 were (0.4%) and 19.2%, respectively. The decrease from the prior period was driven by the valuation allowance allocated to the deferred tax asset for the current period.

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Concentrations

6 Months Ended

Jun. 30, 2020

Nature Of Operations And Going Concern [Abstract]

Concentrations

Note 11. Concentrations

Concentration of Revenues, Accounts Receivable and Suppliers

For the six months ended June 30, 2020 and 2019, the following significant customers had an individual percentage of total revenues equaling ten percent (10%) or greater:

	For the Six Months Ended
	June 30, 2020			June 30, 2019
Customer 1		16.58	%		0.00	%
Customer 2		7.97	%		11.86	%
Totals		24.55	%		11.86	%

At June 30, 2020 and December 31, 2019, the following significant customers had a concentration of accounts receivable representing ten percent (10%) or greater of accounts receivable:

	June 30, 2020			December 31, 2019
Customer 1 - related party		15.45	%		9.47	%
Totals		15.45	%		9.47	%

For the six months ended June 30, 2020 and 2019, the following significant suppliers represented ten percent (10%) or greater of goods purchased:

	For the Six Months Ended
	June 30, 2020			June 30, 2019
Supplier 1		22.00	%		22.00	%
Supplier 2		12.10	%		3.50	%
Supplier 3 - related party		11.30	%		12.50	%
Totals		45.40	%		38.00	%

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Related Party Transactions

6 Months Ended

Jun. 30, 2020

Related Party Transactions [Abstract]

Related Party Transactions

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 North Central Expressway, LP (“NCE, LP”), a real estate investment company that is owned and controlled by Mr. Brooks. The Company’s lease arrangement includes (i) the lease acquired pursuant to the CPM Acquisition effective January 1, 2013, and (ii) 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 thereafter.

For the six months ended June 30, 2020 and 2019, the Company paid approximately $84,000 and $84,000, respectively, in rent expense, which is reflected in selling, general, administrative, and other expenses in the Company’s accompanying interim 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 June 30, 2020, AmBio operations support approximately 41 full time equivalents (“FTE”). Of those 41 FTEs, 34 FTEs directly support the Company, 7 FTEs support the operations of other companies, and no FTEs are shared between the Company and other companies.

As of June 30, 2020 and December 31, 2019, the Company owed amounts to AmBio of approximately $130,000 and $170,000, respectively, which are reflected in accounts payable on the Company’s unaudited condensed consolidated balance sheets. For the six months ended June 30, 2020 and June 30, 2019, the Company paid approximately $89,000  and $105,000, respectively, to AmBio in administrative fees, which are 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 agreements. As described more fully below, these transactions include: selling and purchasing of inventory on a 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 six months ended June 30, 2020 and 2019, the Company:

• sold Orthopedic Implants and Biologics products to MedUSA in the amounts of approximately $30,000 and $643,000, respectively, which are reflected in net revenues in the Company’s accompanying interim unaudited condensed consolidated statements of operations; and

• incurred approximately $1,318,000 and $946,000, respectively, in commission costs, which are reflected in commissions in the Company’s accompanying interim unaudited condensed consolidated statements of operations.

As of June 30, 2020 and December 31, 2019, the Company had approximately $470,000 and $598,000, respectively, of unpaid commission costs due to MedUSA, which is reflected in accrued liabilities in the Company’s accompanying condensed consolidated balance sheets.

As of June 30, 2020 and December 31, 2019, the Company had outstanding balances due from MedUSA of approximately $585,000 and $555,000, respectively. These amounts are reflected in accounts receivable, net of allowance in the Company’s accompanying condensed consolidated balance sheets.

Texas Overlord, LLC

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

During the six months ended June 30, 2020 and 2019, the Company:

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

• incurred approximately $75,000 and $90,000, respectively, in commission costs, which are reflected in commissions in the Company’s accompanying interim unaudited condensed consolidated statements of operations.

As of June 30, 2020 and December 31, 2019, the Company had approximately $30,000 and $15,000 of unpaid commissions costs owed to Overlord, which are reflected in accrued liabilities in the Company’s accompanying condensed consolidated balance sheets.

As of June 30, 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 six months ended June 30, 2020 and 2019, the Company sold Biologics products to NBMJ in the amounts of approximately $12,000, and $364,000, respectively, which are reflected in net revenues in the Company’s accompanying interim unaudited condensed consolidated statements of operations.

As of June 30, 2020 and December 31, 2019, the Company had no outstanding balances due from NBMJ.

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

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 six months ended June 30, 2020 and 2019, the Company:

• sold Orthopedic Implants and Biologics products to Bass in the amounts of approximately $44,000 and $97,000, respectively, which are reflected in net revenues in the Company’s accompanying interim unaudited condensed consolidated statements of operations; and

• incurred approximately $16,000 and $14,000, respectively, in commission costs to Bass, which is reflected in commissions in the Company’s accompanying interim unaudited condensed consolidated statements of operations.

As of June 30, 2020 and December 31, 2019, the Company had outstanding balances due from Bass of approximately $26,000 and $7,000, respectively. These amounts are reflected in accounts receivable, net of allowance, in the Company’s accompanying condensed consolidated balance sheets.

Payment terms per the stocking and distribution agreement with Bass 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 six months ended June 30, 2020 and 2019, the Company incurred approximately $279,000 and $174,000, respectively, in commission costs to Sintu, which are reflected in commissions on the Company’s accompanying interim unaudited condensed consolidated statements 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 six months ended June 30, 2020 and June 30, 2019, the Company sold Orthopedic Implants and Biologics products to Tiger in the amounts of approximately $39,000 and $132,000, respectively, which are reflected in net revenues in the Company’s accompanying interim unaudited condensed consolidated statements of operations.

As of June 30, 2020, and December 31, 2019, the Company had outstanding balances due from Tiger of approximately $5,000 and $30,000, respectively. These amounts are reflected in accounts receivable, net of allowance, in the Company’s accompanying condensed consolidated balance sheets.

Payment terms per the stocking and distribution agreement with Tiger 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 six months ended June 30, 2020 and 2019, the Company purchased approximately $318,000 and $481,000, respectively, in Orthopedic Implants and medical instruments from Modal, which are reflected within inventories, net of allowance in the Company’s accompanying interim unaudited condensed consolidated balance sheets.

As of June 30, 2020 and December 31, 2019, the Company had outstanding balances owed to Modal of approximately $277,000 and $0, respectively. These amounts are reflected in accounts payable in the Company’s accompanying condensed consolidated balance sheets.

As of June 30, 2020 and December 31, 2019, the Company had outstanding balances due from Modal of approximately $0 and $40,700, respectively. These are reflected in accounts receivable, net of allowance, in the Company’s accompanying condensed consolidated balance sheets.

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

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Subsequent Events

6 Months Ended

Jun. 30, 2020

Subsequent Events [Abstract]

Subsequent Events

Note 13. Subsequent Events

In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through August 7, 2020.

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

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Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2020

Accounting Policies [Abstract]

Principles of Consolidation

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

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 management’s 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 liability.

Reclassifications

Reclassifications

Long term accounts receivable, net of allowance was previously reported as a component of current assets as accounts receivable, net of allowance in the Company’s accompanying interim unaudited condensed consolidated balance sheets. Long term accounts receivable reflects Cases where the patient has obtained a letter of protection, (“LOP”). A LOP is a contract that provides that the medical providers will be paid from any proceeds received from settlement of litigation of the underlying cause of action with respect to the event that necessitated medical goods and services. Once the medical provider receives payment, then the medical provider pays our invoice which payment is generally greater than 365 day from date of service. The LOP provides medical providers with greater certainty of full payment. This reclassification had no effect on the previously reported total assets or net loss.  

Segment Reporting

Segment Reporting

In accordance with Accounting Standards Codification (“ASC”) 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 his management team reviews 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

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, par value $0.01, (“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.

Diluted earnings (loss) per common share is computed by dividing net income/(loss) by the weighted-average number of Common Stock equivalents outstanding for the period determined using the treasury stock method. For the six months ended June 30, 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 six months ended June 30, 2020, restricted stock and Common Stock equivalents of 4,777,892 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 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 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 $0.00 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 estimated earn-out payments. There was no change in the earn-out liability for the six months ended June 30, 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 agreements through June 30, 2020, and as such, there have been no payments required for either the base or bonus earn-out tranches.

Financial Instruments

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.

Cash and Cash Equivalents

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 June 30, 2020 and December 31, 2019.  The Company’s cash is concentrated in 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 June 30, 2020.  As of June 30, 2020 and December 31, 2019, there were deposits of $861,703 and $599,309, respectively, greater than federally insured limits.

Accounts Receivable and Allowances

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

Inventories are stated at the lower of cost or net realizable value (first-in, first-out) which includes 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, tendons, and amniotic 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

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

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

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 of an asset 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 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 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 June 30, 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 Update (“ASU”) 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 an important triggering event has occurred as of June 30, 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

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 costs, 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 statements of operations.

Revenue Differentiation

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				Six Months Ended
	June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019
Category
Retail	$	3,604,578	$	3,722,777	$	7,732,441	$	7,375,088
Wholesale		406,088		1,353,148		914,728		2,471,496
Total	$	4,010,666	$	5,075,925	$	8,647,169	$	9,846,584

Cost of Revenues

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 and expired inventory, and inventory obsolescence.

Stock-Based Compensation

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

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.

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Significant Accounting Policies (Tables)

6 Months Ended

Jun. 30, 2020

Accounting Policies [Abstract]

Estimated Useful Lives of Assets

Category	Useful Life
Computer equipment and software	3 years
Furniture and fixtures	3 years
Office equipment	3 years
Software	3 years

Schedule of Revenue Differentiation

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				Six Months Ended
	June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019
Category
Retail	$	3,604,578	$	3,722,777	$	7,732,441	$	7,375,088
Wholesale		406,088		1,353,148		914,728		2,471,496
Total	$	4,010,666	$	5,075,925	$	8,647,169	$	9,846,584

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Property and Equipment (Tables)

6 Months Ended

Jun. 30, 2020

Property Plant And Equipment [Abstract]

Summary of Property and Equipment

Property and equipment consisted of the following at June 30, 2020 and December 31, 2019:

	June 30, 2020			December 31, 2019
Computer equipment and software	$	65,744		$	51,303
Office equipment		-			20,333
Property and equipment costs		65,744			71,636
Less: accumulated depreciation		(32,373	)		(38,997	)
Property and equipment, net	$	33,371		$	32,639

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Goodwill and Intangible Assets (Tables)

6 Months Ended

Jun. 30, 2020

Goodwill And Intangible Assets Disclosure [Abstract]

Schedule of Goodwill and Other Intangible Assets

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

	June 30, 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		(156,055	)		(115,345	)
Intangible assets, net		1,165,910			1,206,620
Goodwill	$	1,972,886		$	1,972,886		Indefinite

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Stockholders' Equity (Tables)

6 Months Ended

Jun. 30, 2020

Stockholders Equity Deficit Tables [Abstract]

Summary of Stock Option Activity

A summary of the Company’s stock option activity for the six months ended June 30, 2020, is presented below:

	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		6.08	$	157,000
Granted		-			-		-		-
Exercised		-			-		-		-
Forfeited		(3,333	)		1.00		8.00		-
Expired		-			-		-		-
Balance outstanding at June 30, 2020		3,945,000		$	0.61		5.87	$	-
Exercisable at June 30, 2020		1,963,333		$	0.41		3.30	$	-

Summary of Restricted Stock Awards Activity

There were no RSA’s that were granted, exercised, or forfeited during the six months ended June 30, 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, June 30, 2020		2,902,892	$	1,382,800	$	0.48

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Income Taxes (Tables)

6 Months Ended

Jun. 30, 2020

Income Tax Disclosure [Abstract]

Components of Income Tax Expense (Benefit)

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

	For the Six Months Ended June 30, 2020		For the Six Months Ended June 30, 2019
Current:
Federal	$	-	$	-
State		5,680		13,638
		5,680		13,638
Deferred:
Federal		-		(168,573	)
State		-		-
		-		(168,573	)
Total income tax expense (benefit)	$	5,680	$	(154,935	)

Significant Components of Deferred Income Tax Assets and Liabilities

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

	June 30, 2020			June 30, 2019
Deferred tax assets:
Net operating loss carryover	$	833,090		$	191,679
Accounts receivable		168,344			206,493
Compensation		433,296			337,606
Inventory		650,837			388,074
Other		18,428			28,129
Total deferred tax assets		2,103,995			1,151,981
Deferred tax liabilities:
Intangibles		(211,222	)		(218,427	)
Property and equipment		(4,828	)		(3,988	)
Total deferred tax liabilities		(216,050	)		(222,415	)
Deferred tax assets, net	$	1,887,945		$	929,566
Valuation allowance:
Beginning of year		(1,529,584	)		-
Increase during the year		(358,361	)		-
Ending balance		(1,887,945	)		-
Net deferred tax asset	$	-		$	929,566

Reconciliation of Income Tax Computed at U.S. Statutory Rate to Effective Income Tax Rate

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

	Six Months Ended
	June 30, 2020	June 30, 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%	-0.5%
Other	0.0%	0.0%
Effective tax rate	-0.4%	19.2%

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Concentrations (Tables)

6 Months Ended

Jun. 30, 2020

Revenues [Member]

Concentration Risk [Line Items]

Concentration of Revenues, Accounts Receivable and Suppliers

For the six months ended June 30, 2020 and 2019, the following significant customers had an individual percentage of total revenues equaling ten percent (10%) or greater:

	For the Six Months Ended
	June 30, 2020			June 30, 2019
Customer 1		16.58	%		0.00	%
Customer 2		7.97	%		11.86	%
Totals		24.55	%		11.86	%

Accounts Receivable [Member]

Concentration Risk [Line Items]

Concentration of Revenues, Accounts Receivable and Suppliers

At June 30, 2020 and December 31, 2019, the following significant customers had a concentration of accounts receivable representing ten percent (10%) or greater of accounts receivable:

	June 30, 2020			December 31, 2019
Customer 1 - related party		15.45	%		9.47	%
Totals		15.45	%		9.47	%

Goods Purchased [Member]

Concentration Risk [Line Items]

Concentration of Revenues, Accounts Receivable and Suppliers

For the six months ended June 30, 2020 and 2019, the following significant suppliers represented ten percent (10%) or greater of goods purchased:

	For the Six Months Ended
	June 30, 2020			June 30, 2019
Supplier 1		22.00	%		22.00	%
Supplier 2		12.10	%		3.50	%
Supplier 3 - related party		11.30	%		12.50	%
Totals		45.40	%		38.00	%

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Nature of Operations (Details Narrative) - USD ($)		3 Months Ended
	Aug. 01, 2018	Jun. 30, 2020	Dec. 31, 2019	Jun. 30, 2019	Dec. 31, 2018
Nature Of Operations And Going Concern [Line Items]
Accumulated losses		$ 4,303,243	$ 2,595,813
Stockholders’ deficits		2,602,465	$ 1,222,133	$ (1,312,644)	$ (1,466,684)
Revenue declined as the result of competitive pressures		$ 1,065,259
Maxim Surgical, LLC [Member]
Nature Of Operations And Going Concern [Line Items]
Acquisition agreement month and year	2018-08

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Significant Accounting Policies (Details Narrative)	6 Months Ended
	Jun. 30, 2020 USD ($) Segment $ / shares shares	Dec. 31, 2019 USD ($) $ / shares
Significant Accounting Policies [Line Items]
Number of operating segments | Segment	1
Number of reportable segments | Segment	1
Common Stock Par Value | $ / shares	$ 0.01	$ 0.01
Earn-out liability	$ 11,645,365	$ 11,645,365
Cash equivalents	0	0
FDIC insurance limit	250,000
Deposits greater than federally insured limit	$ 861,703	$ 599,309
CPM [Member]
Significant Accounting Policies [Line Items]
Earn-out payment start date	Jan. 01, 2018
Earn-out payment end date	Dec. 31, 2034
Earn-out payment additional bonus amount	$ 10,000,000
Earn-out liability	0
CPM [Member] | Minimum [Member]
Significant Accounting Policies [Line Items]
Earn-out payment base amount	0.00
CPM [Member] | Maximum [Member]
Significant Accounting Policies [Line Items]
Earn-out payment base amount	$ 16,000,000
Restricted Stock and Common Stock Equivalents [Member]
Significant Accounting Policies [Line Items]
Shares excluded from diluted earnings per share | shares	4,777,892

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Significant Accounting Policies - Estimated Useful Lives of Assets (Details)	6 Months Ended
	Jun. 30, 2020
Computer Equipment and Software [Member]
Property Plant And Equipment [Line Items]
Estimated useful lives of the assets	3 years
Furniture and fixtures [Member]
Property Plant And Equipment [Line Items]
Estimated useful lives of the assets	3 years
Office equipment [Member]
Property Plant And Equipment [Line Items]
Estimated useful lives of the assets	3 years
Software [Member]
Property Plant And Equipment [Line Items]
Estimated useful lives of the assets	3 years

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Significant Accounting Policies - Schedule of Revenue Differentiation (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Disaggregation Of Revenue [Line Items]
Net revenues	$ 4,010,666	$ 5,075,925	$ 8,647,169	$ 9,846,584
Retail [Member]
Disaggregation Of Revenue [Line Items]
Net revenues	3,604,578	3,722,777	7,732,441	7,375,088
Wholesale [Member]
Disaggregation Of Revenue [Line Items]
Net revenues	$ 406,088	$ 1,353,148	$ 914,728	$ 2,471,496

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Property and Equipment - Summary of Property and Equipment (Details) - USD ($)	Jun. 30, 2020	Dec. 31, 2019
Property Plant And Equipment [Line Items]
Property and equipment costs	$ 65,744	$ 71,636
Less: accumulated depreciation	(32,373)	(38,997)
Property and equipment, net	33,371	32,639
Computer Equipment and Software [Member]
Property Plant And Equipment [Line Items]
Property and equipment costs	$ 65,744	51,303
Office equipment [Member]
Property Plant And Equipment [Line Items]
Property and equipment costs		$ 20,333

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Property and Equipment (Details Narrative) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Property Plant And Equipment [Abstract]
Depreciation expense	$ 10,397	$ 5,241	$ 20,025	$ 10,610

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Goodwill and Intangible Assets - Schedule of Goodwill and Other Intangible Assets (Details) - USD ($)	6 Months Ended
	Jun. 30, 2020	Dec. 31, 2019
Intangible assets:
Total intangible assets	$ 1,321,965	$ 1,321,965
Less: accumulated amortization	(156,055)	(115,345)
Intangible assets, net	1,165,910	1,206,620
Goodwill	1,972,886	1,972,886
510(k) Product Technology [Member]
Intangible assets:
Indefinite lived intangible assets	$ 704,380	704,380
Intangible assets, amortization period	Indefinite
Goodwill [Member]
Intangible assets:
Intangible assets, amortization period	Indefinite
Non-Compete Agreements [Member]
Intangible assets:
Finite lived intangible assets	$ 61,766	61,766
Intangible assets, amortization period	2 years
Customer Relationships [Member]
Intangible assets:
Finite lived intangible assets	$ 555,819	$ 555,819
Intangible assets, amortization period	11 years

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Goodwill and Intangible Assets - (Details Narrative) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Goodwill And Intangible Assets Disclosure [Abstract]
Amortization expense	$ 20,355	$ 20,355	$ 40,710	$ 40,710

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Senior Secured Revolving Credit Facility (Details Narrative) - USD ($)							3 Months Ended								6 Months Ended
	May 21, 2020	May 06, 2020	Dec. 18, 2019	May 09, 2019	Nov. 19, 2018	Dec. 29, 2017	Jun. 30, 2020	Mar. 31, 2020	Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Sep. 30, 2020	Jun. 30, 2020	Jun. 30, 2019
RLOC [Member] | 0.25% Promissory Notes [Member]
Debt Instrument [Line Items]
Subordinated debt from affiliates		$ 200,000
Maturity date		May 06, 2022
Interest rate percentage		0.25%
Interest rate per annum after maturity date		10.00%
RLOC [Member] | 0.25% Promissory Notes [Member] | NC 143 [Member]
Debt Instrument [Line Items]
Borrowed from related parties		$ 180,000
RLOC [Member] | 0.25% Promissory Notes [Member] | RMI [Member]
Debt Instrument [Line Items]
Borrowed from related parties		$ 20,000
RLOC [Member] | ZB, N.A. (d/b/a Amegy Bank) [Member] | Fifth Amendment [Member]
Debt Instrument [Line Items]
Line of credit facility, expiration date	Nov. 04, 2020
Description of financial covenants																amended the financial covenants to state that the Company will not permit EBITDA to be less than $25,000 for the six months ended September 30, 2020
RLOC [Member] | ZB, N.A. (d/b/a Amegy Bank) [Member] | Fifth Amendment [Member] | Scenario Forecast [Member]
Debt Instrument [Line Items]
Minimum net profit required for compliance															$ 25,000
CPM [Member] | RLOC [Member] | ZB, N.A. (d/b/a Amegy Bank) [Member]
Debt Instrument [Line Items]
Date of acquisition agreement						Dec. 29, 2017
Percentage of guarantees of outstanding loan amount						50.00%
Line of credit outstanding balance amount							$ 1,088,352		$ 1,752,501							$ 1,088,352
Interest expense							15,363				$ 21,295					39,633	$ 40,073
Accrued interest							$ 4,053		4,437							$ 4,053
Effective interest rate							5.10%									5.10%
CPM [Member] | RLOC [Member] | ZB, N.A. (d/b/a Amegy Bank) [Member] | First Amendment [Member]
Debt Instrument [Line Items]
Minimum net income to achieve														$ 700,000
CPM [Member] | RLOC [Member] | ZB, N.A. (d/b/a Amegy Bank) [Member] | Second Amendment [Member]
Debt Instrument [Line Items]
Line of credit facility, expiration date					Nov. 04, 2019
Line of credit maximum borrowing capacity					$ 4,000,000
Variable rate, description																the one-month LIBOR rate plus four percent
Variable rate					4.00%
Minimum fixed charge coverage ratio					1.25%
Description of financial covenants																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
Minimum net profit required for compliance												$ 100,000	$ 700,000
CPM [Member] | RLOC [Member] | ZB, N.A. (d/b/a Amegy Bank) [Member] | Third Amendment [Member]
Debt Instrument [Line Items]
Line of credit facility, expiration date				May 09, 2019
Line of credit maximum borrowing capacity				$ 3,500,000
Description of financial covenants																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
Minimum net profit required for compliance										$ 500,000	$ 100,000
Line of credit component of inventory percentage				30.00%
CPM [Member] | RLOC [Member] | ZB, N.A. (d/b/a Amegy Bank) [Member] | Fourth Amendment [Member]
Debt Instrument [Line Items]
Percentage of guarantees of outstanding loan amount			100.00%
Line of credit facility, expiration date			May 04, 2020
Line of credit maximum borrowing capacity			$ 2,750,000
Description of financial covenants																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
Minimum net profit required for compliance								$ 125,000	$ 600,000
CPM [Member] | RLOC [Member] | ZB, N.A. (d/b/a Amegy Bank) [Member] | Fourth Amendment [Member] | Mr. Brooks [Member]
Debt Instrument [Line Items]
Maximum annual salary of chairman of board and president			$ 550,000
CPM [Member] | Credit Card Exposure [Member] | ZB, N.A. (d/b/a Amegy Bank) [Member] | Third Amendment [Member]
Debt Instrument [Line Items]
Line of credit maximum borrowing capacity				$ 500,000

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Notes Payable - Related Parties (Details Narrative) - USD ($)		3 Months Ended		4 Months Ended	6 Months Ended		12 Months Ended
	May 06, 2020	Jun. 30, 2020	Jun. 30, 2019	Oct. 31, 2016	Jun. 30, 2020	Jun. 30, 2019	Dec. 31, 2017	Dec. 31, 2019
Debt Instrument [Line Items]
Interest expense on notes payable		$ 6,732	$ 6,732		$ 13,463	$ 13,389
Accrued expenses [Member]
Debt Instrument [Line Items]
Accrued interest		$ 99,559			$ 99,559			$ 86,096
10% Promissory Notes [Member] | NC 143 Family Holdings, LP and RMI [Member]
Debt Instrument [Line Items]
Convertible notes payable - related parties				$ 150,000
Interest rate of promissory notes				10.00%			18.00%
Debt Instrument, description						principal and interest balance into shares of the Company’s Common Stock at a conversion price of $0.08 per share.
Conversion price of common stock				$ 0.08
RLOC [Member] | 0.25% Promissory Notes [Member]
Debt Instrument [Line Items]
Interest rate percentage	0.25%
Maturity date	May 06, 2022
Interest rate per annum after maturity date	10.00%
RLOC [Member] | 0.25% Promissory Notes [Member] | NC 143 [Member]
Debt Instrument [Line Items]
Borrowed from related parties	$ 180,000
RLOC [Member] | 0.25% Promissory Notes [Member] | RMI [Member]
Debt Instrument [Line Items]
Borrowed from related parties	$ 20,000

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Paycheck Protection Program (Details Narrative) - USD ($)		3 Months Ended		6 Months Ended
	Apr. 11, 2020	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019	Dec. 31, 2019
Accrued expenses [Member]
Debt Instrument [Line Items]
Accrued interest		$ 99,559		$ 99,559		$ 86,096
Paycheck Protection Program [Member]
Debt Instrument [Line Items]
Interest expense		900	$ 0	900	$ 0
Paycheck Protection Program [Member] | Accrued expenses [Member]
Debt Instrument [Line Items]
Accrued interest		$ 900	$ 0	$ 900	$ 0
CARES Act [Member] | Paycheck Protection Program [Member]
Debt Instrument [Line Items]
Promissory note principal amount	$ 361,400
Maturity date	Apr. 11, 2022
Interest rate percentage	1.00%

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Economic Disaster Injury Loan (Details Narrative) - USD ($)		3 Months Ended		6 Months Ended
	May 12, 2020	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019	Dec. 31, 2019
Accrued expenses [Member]
Debt Instrument [Line Items]
Accrued interest		$ 99,559		$ 99,559		$ 86,096
Economic Injury Disaster Loan Assistance Program [Member]
Debt Instrument [Line Items]
Interest expense		940	$ 0	940	$ 0
Economic Injury Disaster Loan Assistance Program [Member] | Accrued expenses [Member]
Debt Instrument [Line Items]
Accrued interest		$ 940	$ 0	$ 940	$ 0
CARES Act [Member] | Economic Injury Disaster Loan Assistance Program [Member]
Debt Instrument [Line Items]
Loan principal amount	$ 150,000
Interest rate percentage	3.75%
Debt instrument frequency of periodic payment				monthly
Debt instrument date of first required payment	May 12, 2021
Installment payments including principal and interest	$ 731
Loan principal and interest payable term	30 years
CARES Act [Member] | Economic Injury Disaster Loan Assistance Program [Member] | Selling, General, Administrative and Other Expenses [Member]
Debt Instrument [Line Items]
Advance extinguished reflected offset in expenses	$ 10,000

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Stockholders' Equity (Details Narrative) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Non-Qualified Stock Option Awards [Member]
Class Of Stock [Line Items]
Stock options, granted	0	300,000	0	1,200,000
Unrecognized compensation expenses on stock options	$ 798,661		$ 798,661
Non-Qualified Stock Option Awards [Member] | Selling, General, Administrative and Other Expenses [Member]
Class Of Stock [Line Items]
Share-based compensation expense	164,443	$ 254,699	327,098	$ 499,107
Restricted Common Stock [Member]
Class Of Stock [Line Items]
Share-based compensation expense	$ 0	$ 0	$ 0	$ 0
Number of shares granted			0
Number of shares, exercised			0
Number of shares forfeited			0

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Stockholders' Equity - Summary of Stock Option Activity (Details)	6 Months Ended	12 Months Ended
	Jun. 30, 2020 $ / shares shares	Dec. 31, 2019 USD ($) $ / shares shares
No. of Shares, Abstract
No. of Shares, Beginning Balance | shares	3,948,333
Forfeited, No. of Shares | shares	(3,333)
No. of Shares, Ending Balance | shares	3,945,000	3,948,333
Exercisable, No. of Shares | shares	1,963,333
Weighted Average Exercise Price, Abstract
Weighted Average Exercise Price, Beginning Balance | $ / shares	$ 0.61
Forfeited, Weighted Average Exercise Price | $ / shares	1.00
Weighted Average Exercise Price, Ending Balance | $ / shares	0.61	$ 0.61
Exercisable, Weighted Average Exercise Price | $ / shares	$ 0.41
Weighted Average Remaining Contractual Term, Abstract
Weighted Average Remaining Contractual Term, Balance outstanding	5 years 10 months 13 days	6 years 29 days
Weighted Average Remaining Contractual Term, Forfeited	8 years
Weighted Average Remaining Contractual Term, Exercisable	3 years 3 months 18 days
Aggregate Intrinsic Value, Abstract
Aggregate Intrinsic Value, Balance outstanding | $		$ 157,000

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Stockholders' Equity - Summary of Restricted Stock Awards Activity (Details) - Restricted Stock Award [Member]	6 Months Ended
	Jun. 30, 2020 USD ($) $ / shares shares
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Number of Shares [Roll Forward]
Number of Shares, Non-vested, December 31, 2019	2,902,892
Number of Shares, Granted	0
Number of Shares, Vested	0
Number of Shares, Forfeited	0
Number of Shares, Non-vested, June 30, 2020	2,902,892
Share-based Compensation Arrangement by Share Based Payment Award, Equity Instruments Other than Options, Nonvested, Fair Value [Abstract]
Fair Value, Non-vested, December 31, 2019 | $	$ 1,382,800
Fair Value, Non-vested, June 30, 2020 | $	$ 1,382,800
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Weighted Average Grant Date Fair Value [Abstract]
Weighted Average Grant Date Fair Value, Non-vested, December 31, 2019 | $ / shares	$ 0.48
Weighted Average Grant Date Fair Value, Non-vested, June 30, 2020 | $ / shares	$ 0.48

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Income Taxes - Components of Income Tax Expense (Benefit) (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Current:
Federal			$ 0	$ 0
State			5,680	13,638
Total			5,680	13,638
Deferred:
Federal			0	(168,573)
State			0	0
Total			0	(168,573)
Total income tax expense (benefit)	$ 946	$ (40,389)	$ 5,680	$ (154,935)

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Income Taxes - Significant Components of Deferred Income Tax Assets and Liabilities (Details) - USD ($)	6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Deferred tax assets:
Net operating loss carryover	$ 833,090	$ 191,679
Accounts receivable	168,344	206,493
Compensation	433,296	337,606
Inventory	650,837	388,074
Other	18,428	28,129
Total deferred tax assets	2,103,995	1,151,981
Deferred tax liabilities:
Intangibles	(211,222)	(218,427)
Property and equipment	(4,828)	(3,988)
Total deferred tax liabilities	(216,050)	(222,415)
Deferred tax assets, net	1,887,945	929,566
Valuation allowance:
Beginning of year	(1,529,584)	0
Increase during the year	(358,361)	0
Ending balance	(1,887,945)	0
Net deferred tax asset	$ 0	$ 929,566

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Income Taxes (Details Narrative) - USD ($)	6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Operating Loss Carryforwards [Line Items]
Net operating loss carryforwards	$ 3,967,098
Net operating loss carryforwards earliest expiration year	2020
Net operating loss carryforwards latest expiration year	2037
Open tax year	2016 2017 2018
Effective income tax rates	(0.40%)	19.20%
CARES Act [Member]
Operating Loss Carryforwards [Line Items]
NOL carryovers and carrybacks to offset percentage of taxable income	100.00%
Net operating loss incurred in 2018, 2019 and 2020 carried back period for each preceding taxable years	5 years
Operating Carryforwards Expiration Date from 2020 to 2037 [Member]
Operating Loss Carryforwards [Line Items]
Net operating loss carryforwards	$ 899,331

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Income Taxes - Reconciliation of Income Tax Computed at U.S. Statutory Rate to Effective Income Tax Rate (Details)	6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Income Tax Disclosure [Abstract]
Expected U.S. federal incomes as statutory rate	21.00%	21.00%
Change in deferred tax asset valuation allowance	(21.10%)	0.00%
State and local income taxes, net of federal benefit	(0.30%)	(1.30%)
Permanent differences	0.00%	(0.50%)
Other	0.00%	0.00%
Effective tax rate	(0.40%)	19.20%

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Concentrations - Significant Customers with Individual Percentage of Total Revenues Equaling Ten Percent (10%) or Greater (Details) - Revenues [Member] - Customer Concentration Risk [Member]	6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Concentration Risk [Line Items]
Concentration risk, percentage	24.55%	11.86%
Customer 1 [Member]
Concentration Risk [Line Items]
Concentration risk, percentage	16.58%	0.00%
Customer 2 [Member]
Concentration Risk [Line Items]
Concentration risk, percentage	7.97%	11.86%

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Concentrations - Significant Customers with Concentration of Accounts Receivable Representing Ten Percent (10%) or Greater of Accounts Receivable (Details) - Accounts Receivable [Member] - Customer Concentration Risk [Member]	6 Months Ended	12 Months Ended
	Jun. 30, 2020	Dec. 31, 2019
Concentration Risk [Line Items]
Concentration risk, percentage	15.45%	9.47%
Customer 1 - Related Party [Member]
Concentration Risk [Line Items]
Concentration risk, percentage	15.45%	9.47%

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Concentrations - Significant Suppliers Represented Ten Percent (10%) or Greater of Goods Purchased (Details) - Goods Purchased [Member] - Supplier Concentration Risk [Member]	6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Concentration Risk [Line Items]
Concentration risk, percentage	45.40%	38.00%
Supplier 1 [Member]
Concentration Risk [Line Items]
Concentration risk, percentage	22.00%	22.00%
Supplier 2 [Member]
Concentration Risk [Line Items]
Concentration risk, percentage	12.10%	3.50%
Supplier 3 - Related Party [Member]
Concentration Risk [Line Items]
Concentration risk, percentage	11.30%	12.50%

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Related Party Transactions (Details Narrative)	6 Months Ended
	Jun. 30, 2020 USD ($) ft² FullTimeEquivalent	Jun. 30, 2019 USD ($)	Dec. 31, 2019 USD ($)
1565 North Central Expressway, LP [Member]
Related Party Transaction [Line Items]
Area of leased property | ft²	11,500
Lease termination date	Dec. 31, 2017
1565 North Central Expressway, LP [Member] | Selling, General, Administrative and Other Expenses [Member]
Related Party Transaction [Line Items]
Rent expense	$ 84,000	$ 84,000
AmBio {Member}
Related Party Transaction [Line Items]
Number of full time equivalents | FullTimeEquivalent	41
Number of full time equivalents directly support company | FullTimeEquivalent	34
Number of full time equivalents support operations of other companies | FullTimeEquivalent	7
Number of full time equivalents shared between company and other companies | FullTimeEquivalent	0
Due to related parties	$ 130,000		$ 170,000
AmBio {Member} | Selling, General, Administrative and Other Expenses [Member]
Related Party Transaction [Line Items]
Administrative fees	89,000	105,000
MedUSA Group, LLC [Member]
Related Party Transaction [Line Items]
Net revenues to related parties	30,000	643,000
Due from related parties	585,000		555,000
MedUSA Group, LLC [Member] | Accrued expenses [Member]
Related Party Transaction [Line Items]
Due to related parties	470,000		598,000
MedUSA Group, LLC [Member] | Commission [Member]
Related Party Transaction [Line Items]
Expense incurred on behalf of related parties	1,318,000	946,000
Texas Overlord, LLC [Member]
Related Party Transaction [Line Items]
Due from related parties	0		0
Texas Overlord, LLC [Member] | Inventory [Member]
Related Party Transaction [Line Items]
Purchases from related parties	0	25,000
Texas Overlord, LLC [Member] | Commission [Member]
Related Party Transaction [Line Items]
Due to related parties	30,000		15,000
Expense incurred on behalf of related parties	75,000	90,000
N.B.M.J., Inc. [Member]
Related Party Transaction [Line Items]
Net revenues to related parties	12,000	364,000
N.B.M.J., Inc. [Member] | Account Receivables [Member]
Related Party Transaction [Line Items]
Due from related parties	0		0
Bass Bone And Spine Specialists [Member]
Related Party Transaction [Line Items]
Net revenues to related parties	44,000	97,000
Bass Bone And Spine Specialists [Member] | Account Receivables [Member]
Related Party Transaction [Line Items]
Due from related parties	26,000		7,000
Bass Bone And Spine Specialists [Member] | Commission [Member]
Related Party Transaction [Line Items]
Expense incurred on behalf of related parties	16,000	14,000
Sintu L L C | Commission [Member]
Related Party Transaction [Line Items]
Expense incurred on behalf of related parties	279,000	174,000
Tiger Orthopedics, LLC [Member]
Related Party Transaction [Line Items]
Net revenues to related parties	39,000	132,000
Tiger Orthopedics, LLC [Member] | Account Receivables [Member]
Related Party Transaction [Line Items]
Due from related parties	5,000		30,000
Modal Manufacturing, LLC [Member] | Inventory [Member]
Related Party Transaction [Line Items]
Purchases from related parties	318,000	$ 481,000
Modal Manufacturing, LLC [Member] | Account Receivables [Member]
Related Party Transaction [Line Items]
Due from related parties	0		40,700
Modal Manufacturing, LLC [Member] | Account Payables [Member]
Related Party Transaction [Line Items]
Due to related parties	$ 277,000		$ 0