FUSE MEDICAL, INC., 10-Q filed on 12 Aug 19
v3.19.2
Document and Entity Information - shares
6 Months Ended
Jun. 30, 2019
Aug. 01, 2019
Document And Entity Information [Abstract]    
Entity Registrant Name Fuse Medical, Inc.  
Entity Central Index Key 0000319016  
Document Type 10-Q  
Document Period End Date Jun. 30, 2019  
Amendment Flag false  
Current Fiscal Year End Date --12-31  
Entity Current Reporting Status Yes  
Entity Filer Category Non-accelerated Filer  
Entity Common Stock, Shares Outstanding   74,600,181
Document Fiscal Period Focus Q2  
Document Fiscal Year Focus 2019  
Trading Symbol FZMD  
Entity Small Business true  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity File Number 000-10093  
Entity Tax Identification Number 591224913  
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  
v3.19.2
CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)
Jun. 30, 2019
Dec. 31, 2018
Current assets:    
Cash and cash equivalents $ 841,841 $ 844,314
Accounts receivable, net of allowance of $983,302 and $667,963, respectively 3,911,203 5,225,999
Inventories, net of allowance of $1,775,029 and $1,711,871, respectively 10,765,861 11,075,889
Prepaid expenses and other current assets 18,502 29,553
Total current assets 15,537,407 17,175,755
Property and equipment, net 32,364 42,974
Deferred tax asset 929,566 760,993
Intangible assets, net 1,247,330 1,288,040
Goodwill 2,905,089 2,905,089
Total assets 20,651,756 22,172,851
Current liabilities:    
Accounts payable 2,394,540 2,712,919
Accrued expenses 1,960,542 2,784,271
Notes payable - related parties 150,000 150,000
Senior secured revolving credit facility 1,252,501 1,477,448
Total current liabilities 5,757,583 7,124,638
Earn-out liability 13,581,529 13,581,529
Total liabilities 19,339,112 20,706,167
Commitments and contingencies
Stockholders' equity:    
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, 74,600,181 shares issued and 71,489,066 shares outstanding as of June 30, 2019, and 74,600,181 shares issued and 71,489,066 shares outstanding as of December 31, 2018. 714,891 714,891
Additional paid-in capital 499,107  
Retained earnings 98,646 751,793
Total stockholders' equity 1,312,644 1,466,684
Total liabilities and stockholders' equity $ 20,651,756 $ 22,172,851
v3.19.2
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)
Jun. 30, 2019
Dec. 31, 2018
Statement Of Financial Position [Abstract]    
Net of allowance, accounts receivable $ 983,302 $ 667,963
Net of allowance, inventories $ 1,775,029 $ 1,711,871
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 74,600,181 74,600,181
Common Stock Shares Outstanding 71,489,066 71,489,066
v3.19.2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($)
3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Income Statement [Abstract]        
Net revenues $ 5,075,925 $ 5,718,458 $ 9,846,584 $ 11,722,506
Cost of revenues 2,223,912 3,770,396 4,199,257 6,893,898
Gross profit 2,852,013 1,948,062 5,647,327 4,828,608
Operating expenses:        
Selling, general, administrative and other 1,975,934 2,293,072 4,340,102 4,499,807
Commissions 1,004,994 1,614,870 2,010,525 3,194,056
Depreciation and amortization 25,596 3,742 51,320 5,821
Total operating expenses 3,006,524 3,911,684 6,401,947 7,699,684
Operating loss (154,511) (1,963,622) (754,620) (2,871,076)
Other expense:        
Interest expense 28,027 40,010 53,462 75,915
Total other expense 28,027 40,010 53,462 75,915
Operating loss before tax (182,538) (2,003,632) (808,082) (2,946,991)
Income tax benefit (40,389) (388,335) (154,935) (596,727)
Net loss $ (142,149) $ (1,615,297) $ (653,147) $ (2,350,264)
Net loss per common share - basic $ 0.00 $ (0.02) $ (0.01) $ (0.04)
Weighted average number of common shares outstanding - basic 70,221,566 65,890,808 70,221,566 65,890,808
v3.19.2
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, 2017 $ (7,981,509) $ 671,583 $ (8,653,092)  
Beginning Balance, Shares at Dec. 31, 2017   69,158,308    
Restricted stock awards granted 79,083   79,083  
Stock options granted 59,003   59,003  
Net loss (734,967)     $ (734,967)
Ending Balance, Amount at Mar. 31, 2018 (8,578,390) $ 671,583 (8,515,006) (734,967)
Ending Balance, Shares at Mar. 31, 2018   69,158,308    
Beginning Balance, Amount at Dec. 31, 2017 (7,981,509) $ 671,583 (8,653,092)  
Beginning Balance, Shares at Dec. 31, 2017   69,158,308    
Net loss (2,350,264)      
Ending Balance, Amount at Jun. 30, 2018 (8,796,947) $ 671,583 (7,118,266) (2,350,264)
Ending Balance, Shares at Jun. 30, 2018   69,158,308    
Beginning Balance, Amount at Mar. 31, 2018 (8,578,390) $ 671,583 (8,515,006) (734,967)
Beginning Balance, Shares at Mar. 31, 2018   69,158,308    
Restricted stock awards granted 79,083   79,083  
Stock options granted 167,313   167,313  
CPM working capital purchase price adjustment (397,463)   (397,463)  
Inventory capital transaction 1,547,807   1,547,807  
Net loss (1,615,297)     (1,615,297)
Ending Balance, Amount at Jun. 30, 2018 (8,796,947) $ 671,583 (7,118,266) (2,350,264)
Ending Balance, Shares at Jun. 30, 2018   69,158,308    
Beginning Balance, Amount at Dec. 31, 2018 1,466,684 $ 714,891   751,793
Beginning Balance, Shares at Dec. 31, 2018   74,600,181    
Stock options granted 244,407   244,407  
Net loss (510,998)     (510,998)
Ending Balance, Amount at Mar. 31, 2019 1,200,093 $ 714,891 244,407 240,795
Ending Balance, Shares at Mar. 31, 2019   74,600,181    
Beginning Balance, Amount at Dec. 31, 2018 1,466,684 $ 714,891   751,793
Beginning Balance, Shares at Dec. 31, 2018   74,600,181    
Net loss (653,147)      
Ending Balance, Amount at Jun. 30, 2019 1,312,644 $ 714,891 499,107 98,646
Ending Balance, Shares at Jun. 30, 2019   74,600,181    
Beginning Balance, Amount at Mar. 31, 2019 1,200,093 $ 714,891 244,407 240,795
Beginning Balance, Shares at Mar. 31, 2019   74,600,181    
Stock options granted 254,700   254,700  
Net loss (142,149)     (142,149)
Ending Balance, Amount at Jun. 30, 2019 $ 1,312,644 $ 714,891 $ 499,107 $ 98,646
Ending Balance, Shares at Jun. 30, 2019   74,600,181    
v3.19.2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($)
6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Cash flows from operating activities    
Net loss $ (653,147) $ (2,350,264)
Adjustments to reconcile net loss to net cash provided by operating activities:    
Depreciation and amortization 51,320 5,821
Share-based compensation 499,107 384,482
Provision for bad debts and discounts 315,339 466,440
Benefits for deferred taxes (168,573) (614,834)
Changes in operating assets and liabilities:    
Accounts receivable 999,457 2,032,123
Inventories 310,028 1,465,474
Prepaid expenses and other current assets 11,051 (3,884)
Accounts payable (318,379) 51,481
Accrued expenses (823,729) 260,805
Net cash provided by operating activities 222,474 1,697,644
Cash flows from investing activities    
Purchase of property and equipment   (24,239)
Net cash used in investing activities   (24,239)
Cash flows from financing activities    
Payments on senior secured revolving credit facility, net (224,947) (1,390,639)
Net cash used in financing activities (224,947) (1,788,102)
Net decrease in cash and cash equivalents (2,473) (114,697)
Cash and cash equivalents - beginning of period 844,314 804,715
Cash and cash equivalents - end of period 841,841 690,018
Supplemental disclosure of cash flow information:    
Cash paid for interest $ 42,409 64,194
Non-cash investing and financing activities:    
Inventory contributed by stockholder   2,063,742
CPM [Member]    
Cash flows from financing activities    
Purchase price adjustment - CPM acquisition   $ (397,463)
v3.19.2
Nature of Operations
6 Months Ended
Jun. 30, 2019
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”) was initially incorporated in 1968 as American Metals Service, Inc., a Florida corporation. In July 1999, American Metals Service, Inc. changed its name to GolfRounds, Inc. and was redomiciled to Delaware through a merger. Effective May 28, 2014, GolfRounds.com, Inc. amended its certificate of incorporation to change its name to Fuse Medical, Inc. and Fuse Medical, LLC, an unrelated entity, merged with and into a wholly-owned subsidiary of Fuse Medical, Inc., with Fuse Medical, LLC surviving as a wholly-owned subsidiary of Fuse Medical, Inc. The transaction was accounted for as a reverse merger. The Company was the legal acquirer, and Fuse Medical, LLC was deemed the accounting acquirer. During 2015, certificates of termination were filed for Fuse Medical, LLC and its two subsidiaries.  

On December 19, 2016 (the “Change-in-Control Date”), the Company entered into a Stock Purchase Agreement by and between the Company, NC 143 Family Holdings, LP, a Texas limited partnership (“NC 143”), which is controlled by Mark W. Brooks (“Mr. Brooks”), the Company’s Chairman of the Board of Directors (“Board”) and President, and Reeg Medical Industries, Inc., a Texas corporation (“RMI”), which is owned and controlled by Christopher C. Reeg (“Mr. Reeg”), the Company’s Chief Executive Officer and Secretary, which resulted in a change in-control of the Company.

On December 31, 2017, the Company completed the acquisition of CPM Medical Consultants, LLC (“CPM”) pursuant to that certain purchase agreement dated December 15, 2017 (“CPM Acquisition Agreement” and such transaction the “CPM Acquisition”). Subsequent to the Change-in-Control Date, CPM and Company operations are consolidated. (See Note 4. “CPM Acquisition”)

On August 1, 2018, (“Maxim Closing Date”) the Company completed the acquisition of Palm Springs Partners, LLC d/b/a Maxim Surgical (“Maxim”), pursuant to that certain securities purchase agreement (the “Maxim Purchase Agreement” and such transaction the “Maxim Acquisition”). As of the Maxim Closing Date, Maxim and Company operations are consolidated. (See Note 3, “Maxim Acquisition”)

Basis of Presentation

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

The audited condensed consolidated balance sheet information as of December 31, 2018, was derived from the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2018 (“2018 Annual Report”), filed with the SEC pursuant to Section 13 or 15(d) and 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on March 21, 2019. These unaudited condensed consolidated financial statements should be read in conjunction with the 2018 Annual Report.

The results of operations for the three and six months ended June 30, 2019 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.

v3.19.2
Significant Accounting Policies
6 Months Ended
Jun. 30, 2019
Accounting Policies [Abstract]  
Significant Accounting Policies

Note 2. Significant Accounting Policies

Principles of Consolidation

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

Use of Estimates

The preparation of the 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 consolidated financial statements. Actual results could differ from those estimates. Significant estimates on the accompanying unaudited condensed consolidated financial statements include the valuation of inventories, the Company’s effective income tax rate, and the recoverability of deferred tax assets, which are based upon the Company’s management expectation of future taxable income and allowable deductions and the fair value calculations of stock-based compensation and earn-out liability. (See Note 4, “CPM Acquisition”)

Segment Reporting

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

Net Loss Per Common Share

Basic net loss per common share is calculated by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Shares of restricted stock are included in the basic weighted-average number of common shares outstanding from the time they vest. Diluted net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common share equivalents outstanding for the period determined using the treasury stock method. For the three and six month periods ended June 30, 2019 and 2018, the Company excluded the effects of outstanding stock options as their effects were antidilutive due to the Company’s net loss during these periods.

During the preparation of the unaudited condensed consolidated financial statements for the quarter ended June 30, 2019, the Company identified an error in the weighted average number of shares used in its calculation of earnings per share for the three and six month periods ended June 30, 2018.

 

Three Months Ended June 30, 2018

 

As Previously

Reported

 

 

As Revised

 

Weighted average number of common shares outstanding

 

 

40,822,315

 

 

 

65,890,808

 

Net loss per share - basic

 

$

(0.04

)

 

$

(0.02

)

 

Six Months Ended June 30, 2018

 

As Previously

Reported

 

 

As Revised

 

Weighted average number of common shares outstanding

 

 

40,822,315

 

 

 

65,890,808

 

Net loss per share - basic

 

$

(0.06

)

 

$

(0.04

)

The Company performed a quantitative and qualitative analysis and determined that the error was not material to the previously reported quarterly results.

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, the Company recorded a $19,244,543 liability related to the earn-out (“Earn-Out”) portion of the purchase consideration. See Note 4, “CPM Acquisition,” for further discussion of the Earn-Out liability. The Company has classified the Earn-Out liability as a Level 3 liability and the fair value of the Earn-Out liability will be evaluated each reporting period and changes in its fair value will be included in the Company’s earnings. The Earn-Out payments are based on the financial performance of the Company between the period of January 1, 2018, and December 31, 2034. The base amount of the Earn-Out is $16,000,000 with an additional bonus payment of $10,000,000. The payments of the base and bonus Earn-Out amounts are subject to the Company meeting certain earnings thresholds as detailed in the CPM Acquisition Agreement. The Earn-Out payments during the Earn-Out period specified above, ranges from $0 to $26,000,000.

The fair value of the Earn-Out liability was calculated using the Monte Carlo simulation, which was then applied to estimated Earn-Out payments with a discount rate of four percent (4%). To determine the fair value of the Earn-Out liability, the Company’s management evaluates assumptions that require significant judgement. Significant assumptions used for estimating the Earn-Out liability included gross margins of approximately forty-eight percent (48%), net income margins averaging nine percent (9%) per year, revenue growth of approximately five percent (5%) over a forecast horizon period of 11 years.

The Earn-Out liability, which represents contingent consideration associated with the CPM Acquisition, is recorded as a liability. This liability is subject to re-measurement to fair value at each reporting date until the contingency is resolved and the changes in fair value are recognized in the statement of operations at each reporting period since the arrangement is not subject to the accounting for hedging instruments.

For the year ended December 31, 2018, the Company determined the earnings threshold as detailed in the CPM Acquisition Agreement were not met and therefore no payments for either the base or bonus Earn-Out tranches were achieved, based on the Company’s 2018 financial performance. The Earn-Out was re-measured to fair value under the probability weighted income approach. As a result, the initial fair value of the Earn-Out liability was reduced by $5,663,014 from $19,244,543 to $13,581,529, with the offset reflected as “Change in fair value of contingent purchase consideration” on the Company’s 2018 Annual Report.

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, 2019 and December 31, 2018.  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 the Change-in-Control Date through June 30, 2019.  As of June 30, 2019, and December 31, 2018, there were deposits of $382,972 and $322,693, 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 judgmental 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 included in the allowance for doubtful accounts, along with an offset to bad debt expense reflected within selling, general, administrative and other expenses on the Company’s accompanying unaudited condensed consolidated statements of operations.

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

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

Inventories

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

Property and Equipment

Property and equipment are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets per the following table. Expenditures for additions and improvements are capitalized, while repairs and maintenance are expensed as incurred.

 

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 long-lived assets quarterly or whenever changes in circumstances indicate that the carrying amount of an asset might not be recoverable. Assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets, which generally represents furniture and fixtures. Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is the consolidated cash flow measure monitored for indicators of impairment. As the cash flow measure reaches levels to indicate potential impairment, the Company estimates the future cash flows expected to be generated from the use of the asset and its eventual disposal. If the sum of undiscounted future cash flows is less than the carrying amount of the asset, an impairment loss is recognized. The impairment loss is measured by comparing the fair value of the asset to its carrying amount. Fair value is typically determined to be the value to repurchase furniture and fixtures.

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. 

Since the Company is one reporting unit, potential goodwill impairment is evaluated by comparing the fair value of the Company to its carrying value. The fair value of the Company is determined using a market approach. If the carrying value of the Company exceeds fair value, a comparison of the fair value of goodwill against the carrying value of goodwill is made to determine whether goodwill has been impaired. The Company performs the annual assessment of the recoverability of goodwill during the fourth quarter of each fiscal year, or more frequently, if an event occurs or circumstances change that would indicate that the Company’s goodwill may be impaired. 

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. See Note 3 – “Maxim Acquisition” for Goodwill and Other Intangibles for additional related disclosures.

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.

Products that have been sold are not subject to returns unless the product is deemed defective. Credits or refunds are recognized when they are probable and reasonably estimated. The Company’s management reduces revenue to account for estimates of the Company’s credits and refunds.

The Company included shipping and handling fees in net revenues. Shipping and handling costs are associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold.

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 (“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 our sales for Wholesale Cases are on a consignment basis with a third-party. In our industry, Retail Cases are typically sold at a higher price than Wholesale Cases, resulting in greater revenue and profit per Case.

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2019

 

 

June 30, 2018

 

 

June 30, 2019

 

 

June 30, 2018

 

Category

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

3,722,777

 

 

$

4,421,066

 

 

$

7,375,088

 

 

$

8,433,850

 

Wholesale

 

 

1,353,148

 

 

 

1,297,392

 

 

 

2,471,496

 

 

 

3,288,656

 

Total

 

$

5,075,925

 

 

$

5,718,458

 

 

$

9,846,584

 

 

$

11,722,506

 

 

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

The Company considers the applicability and impact of all ASUs issued, both effective and not yet effective.

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-02, “Leases”, which requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than twelve (12) months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. Although the Company presently leases office space on a month to month basis as described in Note 12, management has analyzed the implied lease term considering entity factors, asset factors, and market factors and determined that the amounts to be recognized as a right to use assets and lease obligation upon adoption were not material.

In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment”, which removes the second step of the two-step goodwill impairment test. Under ASU 2017-04 an entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 does not amend the optional qualitative assessment of goodwill impairment. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019; early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has not elected early adoption of this standard and is currently in the process of evaluating the impact of adopting ASU 2017-04 and cannot currently estimate the financial statement impact of adoption.

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the SEC did not or are not believed by the Company’s management to have a material impact on the Company's present or future consolidated financial statements.

v3.19.2
Maxim Acquisition
6 Months Ended
Jun. 30, 2019
Maxim Surgical, LLC [Member]  
Acquisition

Note 3.  Maxim Acquisition

On August 1, 2018, the Company, completed the Maxim Acquisition pursuant to the Maxim Purchase Agreement between the Company, Maxim, RMI, Mr. Amir David Tahernia, an individual (“Tahernia”, together with RMI, the “Sellers”), and Tahernia in his capacity as the representative of the Sellers, dated July 30, 2018, in which the Company agreed to purchase all of the outstanding equity securities of Maxim (“Maxim Interests”) from the Sellers for aggregate consideration of approximately $3,400,000. Before the Maxim Acquisition, Mr. Reeg served as Maxim’s President. (See Note 1, “Nature of Operations – Overview”)

The Company issued 4,210,526 restricted shares of its common stock, par value $0.01 per share (“Common Stock”), to the Sellers in exchange for one-hundred percent (100%) of the outstanding Maxim Interests, at an agreed-upon value of $0.76 per share of Common Stock, which was equal to the 30-day volume-weighted average price (“VWAP”) of the Common Stock as of three (3) business days prior to the Maxim Closing Date.

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

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

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

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

The following unaudited pro forma summary financial information presents the consolidated results of operations for the Company as if the Maxim Acquisition had occurred on January 1, 2018. The pro forma results are shown for illustrative purposes only and do not purport to be indicative of the results that would have been reported if the Maxim Acquisition had occurred on the date indicated or indicative of the results that may occur in the future.

Unaudited pro forma information for the three months ended June 30, 2018 is as follows:

 

 

Three Months Ended June 30, 2018 - Unaudited

 

 

Historical Fuse Medical, Inc.

 

 

Historical Maxim Surgical

 

 

Pro forma Adjustments

 

 

Pro forma Combined

 

Revenue

$

5,718,458

 

 

$

303,979

 

 

$

(170,890

)

 

$

5,851,547

 

Net (loss) income

$

(1,615,297

)

 

$

2,303

 

 

$

-

 

 

$

(1,612,994

)

Net loss per common share - basic

$

(0.02

)

 

$

-

 

 

$

-

 

 

$

(0.02

)

 

The supplemental pro forma earnings were adjusted to exclude $170,890 of intercompany transactions for the three months ended June 30, 2018. The number of shares outstanding used in calculating the net loss per common share – basic was 65,890,808 for the three months ended June 30, 2018.

Unaudited pro forma information for the six months ended June 30, 2018 is as follows:

 

 

Six Months Ended June 30, 2018 - Unaudited

 

 

Historical Fuse Medical, Inc.

 

 

Historical Maxim Surgical

 

 

Pro forma Adjustments

 

 

Pro forma Combined

 

Revenue

$

11,722,506

 

 

$

634,571

 

 

$

(342,498

)

 

$

12,014,579

 

Net (loss) income

$

(2,350,264

)

 

$

62,869

 

 

$

-

 

 

$

(2,287,395

)

Net loss per common share - basic

$

(0.04

)

 

$

-

 

 

$

-

 

 

$

(0.03

)

 

The supplemental pro forma earnings were adjusted to exclude $342,498 of intercompany transactions for the six months ended June 30, 2018. The number of shares outstanding used in calculating the net loss per common share – basic was 65,890,808 for the six months ended June 30, 2018.

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

v3.19.2
CPM Acquisition
6 Months Ended
Jun. 30, 2019
CPM [Member]  
Acquisition

Note 4. CPM Acquisition

On December 31, 2017 (the “CPM Effective Date”), the Company completed the CPM Acquisition pursuant to the CPM Acquisition Agreement. The Company was the legal acquirer, and, for accounting purposes, CPM was deemed to have acquired the Company in the CPM Acquisition. CPM is the successor entity and becomes the reporting entity which combines the Company with CPM as of the Change-in-Control Date, with the assets and liabilities of both companies combined at historical cost. Subsequent to the Change-in-Control Date, CPM and the Company operations are consolidated. (See Note 1, “Nature of Operations – Overview”)

Pursuant to the CPM Acquisition Agreement the Company issued 50 million shares of its Common Stock, in exchange for one-hundred percent (100%) of the outstanding membership interests of CPM, at an agreed-upon value of $0.20 per share of Common Stock, equaling a value of $10,000,000. The remaining $26,000,000 of the purchase price consideration will be paid by the Company to NC 143 in the form of contingent Earn-Out payments based on the Company achieving certain future profitability targets for years after 2017.

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

As of December 31, 2018, the Earn-Out was re-measured to fair value under the probability weighted income approach. As a result, the initial fair value of the Earn-Out liability was reduced by $5,663,014 from $19,244,543 to $13,581,529. The Earn-Out liability was reduced by $5,663,014, with the offset reflected as “Change in fair value of contingent purchase consideration” on the Company’s 2018 Annual Report. The Company’s management will evaluate the estimated fair value of the Earn-Out liability each reporting period. (See Note 2, “Fair Value Measurements”)

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

v3.19.2
Property and Equipment
6 Months Ended
Jun. 30, 2019
Property Plant And Equipment [Abstract]  
Property and Equipment

Note 5. Property and Equipment

Property and equipment consisted of the following at June 30, 2019 and December 31, 2018:

 

 

 

June 30,

2019

 

 

December 31,

2018

 

Computer equipment and software

 

$

41,840

 

 

$

41,840

 

Furniture and fixtures

 

 

1,198

 

 

 

5,047

 

Office equipment

 

 

20,333

 

 

 

21,913

 

Property and equipment costs

 

 

63,371

 

 

 

68,800

 

Less: accumulated depreciation

 

 

(31,007

)

 

 

(25,826

)

Property and equipment, net

 

$

32,364

 

 

$

42,974

 

 

Depreciation expense for the three months ended June 30, 2019 and June 30, 2018 was $5,241 and $3,742, respectively. Depreciation expense for the six months ended June 30, 2019 and June 30, 2018 was $10,610 and $5,821, respectively.

v3.19.2
Goodwill and Intangible Assets
6 Months Ended
Jun. 30, 2019
Goodwill And Intangible Assets Disclosure [Abstract]  
Goodwill and Intangible Assets

Note 6. Goodwill and Intangible Assets

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

 

 

 

June 30,

2019

 

 

December 31,

2018

 

 

Amortization period

(years)

Intangible assets:

 

 

 

 

 

 

 

 

 

 

Non-compete agreements

 

$

61,766

 

 

$

61,766

 

 

2

510k 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

 

 

(74,635

)

 

 

(33,925

)

 

 

Intangible assets, net

 

 

1,247,330

 

 

 

1,288,040

 

 

 

Goodwill

 

$

2,905,089

 

 

$

2,905,089

 

 

Indefinite

Amortization expense for the three and six months ended June 30, 2019, was $20,355 and $40,710. There was no amortization expense for the three and six months ended June 30, 2018.

v3.19.2
Senior Secured Revolving Credit Facility
6 Months Ended
Jun. 30, 2019
Debt Disclosure [Abstract]  
Senior Secured Revolving Credit Facility

Note 7. Senior Secured Revolving Credit Facility

On December 29, 2017, the Company became party to a Senior Secured Revolving Credit Facility (“RLOC”) with ZB, N.A., d/b/a Amegy Bank (“Amegy Bank”). The RLOC established an asset-based senior secured revolving credit facility in the amount of $5,000,000. The RLOC contains customary representation, warranties, covenants, events of default, and is collateralized by substantially all of the Company’s assets. The Company’s Chairman of the Board and President personally guarantees fifty percent (50%) of the outstanding RLOC amount.

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.

The outstanding balance of the RLOC was $1,252,501 and $1,477,448 at June 30, 2019 and December 31, 2018, respectively. Interest expense incurred on the RLOC was $21,295 and $33,278 for the three months ended June 30, 2019 and June 30, 2018, 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 $40,073 and $62,526 for the six months ended June 30, 2019 and June 30, 2018, respectively. Accrued interest on the RLOC at June 30, 2019 and December 31, 2018 was $2,014 and $4,350, respectively, and is reflected in accrued expenses on the Company’s accompanying unaudited condensed consolidated balance sheets. At June 30, 2019, the effective interest rate was calculated to be 6.48%.

v3.19.2
Notes Payable - Related Parties
6 Months Ended
Jun. 30, 2019
Debt Disclosure [Abstract]  
Notes Payable - Related Parties

Note 8. Notes Payable – Related Parties

During July 2016 through October 2016, the Company obtained three working capital loans from NC 143 and RMI in the 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.

During the three months ended June 30, 2019 and June 30, 2018, 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, 2019 and 2018, interest expense of $13,389 and $13,389, respectively, is reflected in interest expense on the Company’s accompanying unaudited condensed consolidated statements of operations. As of June 30, 2019, and December 31, 2018, accrued interest was $72,485 and $59,096, respectively, which is reflected in accrued expenses on the Company’s accompanying unaudited condensed consolidated balance sheets.

v3.19.2
Stockholders' Equity
6 Months Ended
Jun. 30, 2019
Stockholders Equity Deficit [Abstract]  
Stockholders' Equity

Note 9. Stockholders’ Equity

Stock Incentive Plans

The 2018 Amended and Restated Equity Incentive Plan of Fuse Medical, Inc. (“2018 Equity Plan”) is the Company’s stock-based compensation plan. The Company’s Board adopted the 2018 Equity Plan on April 5, 2017, and subsequently amended and restated the 2018 Equity Plan 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.

For the three and six months ended June 30, 2019, the Board granted 300,000 and 1,200,000 of Non-qualified Stock Options (“NQSO”) to the Company’s product advisory board members, certain key employees and marketing representatives. For the three months ended June 30, 2019 and June 30, 2018 the Company amortized $254,699 and $167,313 relating to the vesting of stock options which is included in selling, general, administrative, and other expenses on the Company’s accompanying unaudited condensed consolidated statement of operations. For the six months ended June 30, 2019 and June 30, 2018 the Company amortized $499,107 and $226,316 relating to the vesting of stock options which is included in selling, general, administrative, and other expenses on the Company’s accompanying unaudited condensed consolidated statement of operations.  The Company will recognize $2,098,814 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, 2019, is presented below:

 

 

No. of

Shares

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual

Term

 

 

Aggregate

Intrinsic

Value

 

Balance outstanding at December 31, 2018

 

 

3,915,000

 

 

$

0.78

 

 

 

7.0

 

 

$

443,000

 

Granted

 

 

1,200,000

 

 

 

0.72

 

 

 

-

 

 

 

-

 

Exercised

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Forfeited

 

 

(260,000

)

 

 

1.21

 

 

 

-

 

 

 

-

 

Expired

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Balance outstanding at June 30, 2019

 

 

4,855,000

 

 

$

0.74

 

 

 

7.2

 

 

$

489,500

 

Exercisable at June 30, 2019

 

 

2,034,999

 

 

$

0.51

 

 

 

4.3

 

 

$

482,000

 

The weighted-average grant-date fair value of options granted during the six months ended June 30, 2019 was $0.66.

Restricted Common Stock

For the three and six months ended June 30, 2019, the Company did not have restricted stock awards (“RSAs”) to amortize. The Company amortized an expense relating to the vesting of RSAs of $79,083 and $158,166 for the three and six months ended June 30, 2018.

The following table summarizes RSAs activity:

 

Number of

Shares

 

 

Fair Value

 

 

Weighted Average Grant Date Fair Value

 

Non-vested, December 31, 2018

 

4,378,615

 

 

$

2,060,000

 

 

$

0.47

 

Granted

 

-

 

 

 

-

 

 

 

-

 

Vested

 

-

 

 

 

-

 

 

 

-

 

Forfeited

 

-

 

 

 

-

 

 

 

-

 

Non-vested, June 30, 2019

 

4,378,615

 

 

$

2,060,000

 

 

$

0.47

 

 

The non-vested RSAs, as of June 30, 2019, were granted to the Company’s Board members as compensation. Certain awards vest only upon: (i) the occurrence of a Change in Control, listing of the Company’s Common Stock on a national exchange or, the director’s termination of Continuous Service, and (ii) the director’s notification to the Company of such accelerating events, within a specified period (“Triggering Events”). Certain other awards vest only upon the occurrence of a Change in Control or listing of the Company’s Common Stock on a national exchange. On August 7, 2019, to reflect its original intent, the Company’s Board modified certain award agreements to remove the director’s termination of continuous service as a Triggering Event, thereby all non-vested RSAs are now structured with uniform vesting conditions.

v3.19.2
Income Taxes
6 Months Ended
Jun. 30, 2019
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 benefit are as follows:

 

 

For the

Six Months Ended

June 30, 2019

 

 

For the

Six Months Ended

June 30, 2018

 

Current:

 

 

 

 

 

 

 

 

Federal

 

$

-

 

 

$

-

 

State

 

 

13,638

 

 

 

18,107

 

 

 

 

13,638

 

 

 

18,107

 

Deferred:

 

 

 

 

 

 

 

 

Federal

 

 

(168,573

)

 

 

(614,834

)

State

 

 

-

 

 

 

-

 

 

 

 

(168,573

)

 

 

(614,834

)

Total income tax benefit

 

$

(154,935

)

 

$

(596,727

)

 

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

 

 

 

June 30, 2019

 

 

December 31, 2018

 

Deferred tax assets:

 

 

 

 

 

 

 

 

Net operating loss carryover

 

$

191,679

 

 

$

216,793

 

Accounts receivable

 

 

206,493

 

 

 

140,272

 

Compensation

 

 

337,606

 

 

 

232,793

 

Inventory

 

 

388,074

 

 

 

383,744

 

Other

 

 

28,129

 

 

 

28,128

 

Total deferred tax assets

 

 

1,151,981

 

 

 

1,001,730

 

 

 

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Intangibles

 

 

(218,427

)

 

 

(232,835

)

Property and equipment

 

 

(3,988

)

 

 

(7,902

)

Total deferred tax liabilities

 

 

(222,415

)

 

 

(240,737

)

 

 

 

 

 

 

 

 

 

Net deferred tax asset

 

$

929,566

 

 

$

760,993

 

 

As of June 30, 2019, the Company recognized a net deferred tax asset of $929,566, or an increase of $168,573 over the amount recognized at December 31, 2018. Consistent with current business trends and expectations, the Company’s management believes the realization of its deferred tax assets is more likely than not.

At June 30, 2019, the Company estimates it has approximately $912,759 of net operating loss carryforwards which will expire during 2019 through 2037. The Company’s management believes its tax positions are highly certain of being upheld upon examination. As such, the Company has not recorded a liability for unrecognized tax benefits. As of June 30, 2019, 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.

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, 2019

 

 

June 30, 2018

 

Expected U.S. federal incomes as statutory rate

 

21.0%

 

 

21.0%

 

State and local income taxes, net of federal benefit

 

-1.3%

 

 

-0.5%

 

Permanent differences

 

-0.5%

 

 

-0.3%

 

Other

 

0.0%

 

 

0.0%

 

 

 

19.2%

 

 

20.2%

 

 

v3.19.2
Concentrations
6 Months Ended
Jun. 30, 2019
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, 2019 and June 30, 2018, the following significant customers had an individual percentage of total revenues equaling ten percent (10%) or greater:

 

 

For the Six Months Ended

 

 

June 30, 2019

 

 

June 30, 2018

 

Customer 1

 

11.86

%

 

 

17.61

%

Customer 2 - related party

 

6.70

%

 

 

11.10

%

Totals

 

18.56

%

 

 

28.71

%

 

At June 30, 2019 and December 31, 2018, the following significant customers had a concentration of accounts receivable representing ten percent (10%) or greater of accounts receivable:

 

 

June 30,

2019

 

 

December 31,

2018

 

Customer 1 - related party

 

12.08

%

 

 

6.71

%

Customer 2

 

7.50

%

 

 

15.03

%

Totals

 

19.58

%

 

 

21.74

%

 

For the six months ended June 30, 2019 and June 30, 2018, the following significant suppliers represented ten percent (10%) or greater of goods purchased:

 

 

For the Six Months Ended

 

 

June 30, 2019

 

 

June 30, 2018

 

Supplier 1

 

21.80

%

 

 

9.50

%

Supplier 2 - related party

 

12.40

%

 

 

0.30

%

Supplier 3 - related party

 

0.00

%

 

 

10.80

%

Totals

 

34.20

%

 

 

20.60

%

 

v3.19.2
Related Party Transactions
6 Months Ended
Jun. 30, 2019
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, a real estate investment company that is owned and controlled by Mr. Brooks. The Company’s lease arrangement includes (a) the lease acquired pursuant to the CPM Acquisition effective January 1, 2013 and (b) a lease effective July 14, 2017 entered-into to support the Company’s relocation of its Fort Worth, Texas corporate offices to CPM’s executive offices. Both leases terminated December 31, 2017, with month-to-month renewals.

For the six months ended June 30, 2019 and June 30, 2018, the Company paid approximately $84,000 and $84,000 in rent expense, which is reflected in selling, general, administrative, and other expenses in the Company’s accompanying unaudited condensed consolidated statements of operations.

AmBio Contract

The Company engaged AmBio Staffing, LLC (“AmBio”), a Texas licensed Professional Employment Organization, to provide payroll processing, employee benefit administration, and related human capital services effective January 1, 2017. Mr. Brooks owns and controls AmBio. As of June 30, 2019, AmBio operations support approximately 61 full time equivalents (“FTE”). Of those 61 FTEs, 42 FTEs directly support the Company, 12 FTEs support the operations of other companies, and 7 FTEs are shared between the Company and other companies.

As of June 30, 2019 and December 31, 2018, the Company owed amounts to AmBio of approximately $161,000 and $180,000, respectively, which are reflected in accounts payable on the Company’s unaudited condensed consolidated balance sheets. For the six months ended June 30, 2019 and June 30, 2018, approximately $105,000 and $110,000 of administrative fees were paid to AmBio, respectively, and 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. As described more fully below, these transactions include: selling and purchasing of inventory on wholesale basis, commissions earned and paid.

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, 2019 and June 30, 2018, the Company:

 

sold Orthopedic Implants and Biologics products to MedUSA in the amounts of approximately $643,000 and $1,330,000, respectively, which is reflected in net revenues in the Company’s accompanying unaudited condensed consolidated statements of operations;

 

purchased approximately zero and $643,000, respectively, of Orthopedic Implants, medical instruments, and Biologics from MedUSA, which is reflected in inventories, net of allowance in the Company’s accompanying unaudited condensed consolidating balance sheets; and

 

incurred approximately $946,000 and $1,058,000, respectively, in commission costs, which are reflected in commissions in the Company’s accompanying unaudited condensed consolidated statements of operations.

As of June 30, 2019, and December 31, 2018, the Company had outstanding balances due from MedUSA of approximately $568,000 and $389,000, respectively. These amounts are reflected in accounts receivable, net of allowance in the Company’s accompanying unaudited condensed consolidated balance sheets.

As filed with the 2018 Annual Report on March 21, 2019 as Exhibit 10.48, payment terms per the stocking and distribution agreement are 30 days from receipt of invoice.

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, 2019 and June 30, 2018, the Company:

 

purchased approximately $25,000 and $498,000, respectively, in Orthopedic Implants and medical instruments, and Biologics from Overlord, which are reflected within inventories, net of allowance on the Company’s accompanying unaudited condensed consolidated balance sheets; and

 

incurred approximately $90,000 and $459,000, respectively, in commission costs to Overlord, which is reflected in commissions in the Company’s accompanying unaudited condensed consolidated statements of operations.

As of June 30, 2019, and December 31, 2018, the Company had outstanding balances owed to Overlord of approximately zero and $2,000, respectively. These amounts are reflected in accounts payable in the Company’s accompanying unaudited condensed consolidated balance sheets.

NBMJ, Inc. d/b/a Incare Technology

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, 2019 and June 30, 2018, the Company sold Biologics products to NBMJ in the amounts of approximately $364,000, and $90,000, respectively, which are reflected in net revenues in the Company’s accompanying unaudited condensed consolidated statements of operations.

As of June 30, 2019, and December 31, 2018 the Company had outstanding balances due from NBMJ of approximately $350,000 and $155,000, respectively. These amounts are reflected in accounts receivable, net of allowance in the Company’s accompanying unaudited condensed consolidated balance sheets.

As filed with the 2018 Annual Report on March 21, 2019 as Exhibit 10.52, payment terms per the stocking and distribution agreement 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, 2019 and June 30, 2018, the Company:

 

sold Orthopedic Implants and Biologics products to Bass in the amounts of approximately $97,000 and $289,000, respectively, which is reflected in net revenues in the Company’s accompanying unaudited condensed consolidated statements of operations;

 

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

As of June 30, 2019, and December 31, 2018, the Company had outstanding balances due from Bass of approximately $6,000 and $179,000, respectively. These amounts are reflected in accounts receivable, net of allowance in the Company’s accompanying unaudited condensed consolidated balance sheets.

As filed with the 2018 Annual Report on March 21, 2019 as Exhibit 10.56, payment terms per the stocking and distribution agreement are 30 days from receipt of invoice.

Sintu, LLC

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

During the six months ended June 30, 2019 and June 30, 2018, the Company incurred approximately $174,000 and $352,000, respectively, in commission costs to Sintu, which is reflected in commissions on the Company’s accompanying 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, 2019 and June 30, 2018, the Company sold Orthopedic Implants and Biologics products to Tiger in the amounts of approximately $132,000 and $109,000, respectively, which is reflected in net revenues in the Company’s accompanying unaudited condensed consolidated statements of operations.

As of June 30, 2019, and December 31, 2018, the Company had outstanding balances due from Tiger of approximately $35,000 and $5,000, respectively. These amounts are reflected in accounts receivable, net of allowance in the Company’s accompanying unaudited condensed consolidated balance sheets.

As filed with the 2018 Annual Report on March 21, 2019 as Exhibit 10.57, payment terms per the stocking and distribution agreement are 30 days from receipt of invoice.

Modal Manufacturing, LLC

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

During the six months ended June 30, 2019 and June 30, 2018, the Company purchased approximately $481,000 and $16,000, respectively, in Orthopedic Implants and medical instruments from Modal, which is reflected within inventories, net of allowance on the Company’s accompanying unaudited condensed consolidated balance sheets.

As of June 30, 2019, and December 31, 2018, the Company had outstanding balances owed to Modal of approximately $173,000 and $0.00, respectively. These amounts are reflected in accounts payable in the Company’s accompanying unaudited condensed consolidated balance sheets.

As filed with the 2018 Annual Report on March 21, 2019 as Exhibit 10.64, payment terms per the stocking and distribution agreement are 30 days from receipt of invoice.  

Recon Orthopedics, LLC

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

During the six months ended June 30, 2018, the Company incurred commissions costs of approximately $209,000, which are reflected in commissions expense on the Company’s accompanying condensed consolidated statements of operations. The Company had no such commission costs for the six months ended June 30, 2019.

During the six months ended June 30, 2019 and 2018, the Company earned approximately zero and $4,000, respectively, pursuant to the Company’s shared services agreement which are reflected in selling, general, administrative, and other expenses in the Company’s accompanying condensed consolidated statements of operations.

v3.19.2
Subsequent Events
6 Months Ended
Jun. 30, 2019
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 12, 2019.

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

v3.19.2
Significant Accounting Policies (Policies)
6 Months Ended
Jun. 30, 2019
Accounting Policies [Abstract]  
Principles of Consolidation

Principles of Consolidation

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

Use of Estimates

Use of Estimates

The preparation of the 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 consolidated financial statements. Actual results could differ from those estimates. Significant estimates on the accompanying unaudited condensed consolidated financial statements include the valuation of inventories, the Company’s effective income tax rate, and the recoverability of deferred tax assets, which are based upon the Company’s management expectation of future taxable income and allowable deductions and the fair value calculations of stock-based compensation and earn-out liability. (See Note 4, “CPM Acquisition”)

Segment Reporting

Segment Reporting

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

Net Loss Per Common Share

Net Loss Per Common Share

Basic net loss per common share is calculated by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Shares of restricted stock are included in the basic weighted-average number of common shares outstanding from the time they vest. Diluted net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common share equivalents outstanding for the period determined using the treasury stock method. For the three and six month periods ended June 30, 2019 and 2018, the Company excluded the effects of outstanding stock options as their effects were antidilutive due to the Company’s net loss during these periods.

During the preparation of the unaudited condensed consolidated financial statements for the quarter ended June 30, 2019, the Company identified an error in the weighted average number of shares used in its calculation of earnings per share for the three and six month periods ended June 30, 2018.

 

Three Months Ended June 30, 2018

 

As Previously

Reported

 

 

As Revised

 

Weighted average number of common shares outstanding

 

 

40,822,315

 

 

 

65,890,808

 

Net loss per share - basic

 

$

(0.04

)

 

$

(0.02

)

 

Six Months Ended June 30, 2018

 

As Previously

Reported

 

 

As Revised

 

Weighted average number of common shares outstanding

 

 

40,822,315

 

 

 

65,890,808

 

Net loss per share - basic

 

$

(0.06

)

 

$

(0.04

)

The Company performed a quantitative and qualitative analysis and determined that the error was not material to the previously reported quarterly results.

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, the Company recorded a $19,244,543 liability related to the earn-out (“Earn-Out”) portion of the purchase consideration. See Note 4, “CPM Acquisition,” for further discussion of the Earn-Out liability. The Company has classified the Earn-Out liability as a Level 3 liability and the fair value of the Earn-Out liability will be evaluated each reporting period and changes in its fair value will be included in the Company’s earnings. The Earn-Out payments are based on the financial performance of the Company between the period of January 1, 2018, and December 31, 2034. The base amount of the Earn-Out is $16,000,000 with an additional bonus payment of $10,000,000. The payments of the base and bonus Earn-Out amounts are subject to the Company meeting certain earnings thresholds as detailed in the CPM Acquisition Agreement. The Earn-Out payments during the Earn-Out period specified above, ranges from $0 to $26,000,000.

The fair value of the Earn-Out liability was calculated using the Monte Carlo simulation, which was then applied to estimated Earn-Out payments with a discount rate of four percent (4%). To determine the fair value of the Earn-Out liability, the Company’s management evaluates assumptions that require significant judgement. Significant assumptions used for estimating the Earn-Out liability included gross margins of approximately forty-eight percent (48%), net income margins averaging nine percent (9%) per year, revenue growth of approximately five percent (5%) over a forecast horizon period of 11 years.

The Earn-Out liability, which represents contingent consideration associated with the CPM Acquisition, is recorded as a liability. This liability is subject to re-measurement to fair value at each reporting date until the contingency is resolved and the changes in fair value are recognized in the statement of operations at each reporting period since the arrangement is not subject to the accounting for hedging instruments.

For the year ended December 31, 2018, the Company determined the earnings threshold as detailed in the CPM Acquisition Agreement were not met and therefore no payments for either the base or bonus Earn-Out tranches were achieved, based on the Company’s 2018 financial performance. The Earn-Out was re-measured to fair value under the probability weighted income approach. As a result, the initial fair value of the Earn-Out liability was reduced by $5,663,014 from $19,244,543 to $13,581,529, with the offset reflected as “Change in fair value of contingent purchase consideration” on the Company’s 2018 Annual Report.

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, 2019 and December 31, 2018.  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 the Change-in-Control Date through June 30, 2019.  As of June 30, 2019, and December 31, 2018, there were deposits of $382,972 and $322,693, 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 judgmental 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 included in the allowance for doubtful accounts, along with an offset to bad debt expense reflected within selling, general, administrative and other expenses on the Company’s accompanying 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) less an allowance for slow-moving inventory, expired inventory, and inventory obsolescence. Inventories consist entirely of finished goods and include internal and external fixation products; upper and lower extremity plating and total joint reconstruction; soft tissue fixation and augmentation for sports medicine procedures; spinal implants for trauma, degenerative disc disease, and deformity indications (collectively, “Orthopedic Implants”) and osteo-biologics and regenerative tissue which include human allografts, substitute bone materials and tendons, as well as regenerative tissues and fluids (collectively, “Biologics”). The Company reviews the market value of inventories whenever events and circumstances indicate that the carrying value of inventories may not be recoverable from the estimated future sales price less cost of disposal and normal gross profit. In cases where the market values are less than the carrying value, a write-down is recognized equal to an amount by which the carrying value exceeds the market value of inventories.

Property and Equipment

Property and Equipment

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.

 

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 long-lived assets quarterly or whenever changes in circumstances indicate that the carrying amount of an asset might not be recoverable. Assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets, which generally represents furniture and fixtures. Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is the consolidated cash flow measure monitored for indicators of impairment. As the cash flow measure reaches levels to indicate potential impairment, the Company estimates the future cash flows expected to be generated from the use of the asset and its eventual disposal. If the sum of undiscounted future cash flows is less than the carrying amount of the asset, an impairment loss is recognized. The impairment loss is measured by comparing the fair value of the asset to its carrying amount. Fair value is typically determined to be the value to repurchase furniture and fixtures.

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. 

Since the Company is one reporting unit, potential goodwill impairment is evaluated by comparing the fair value of the Company to its carrying value. The fair value of the Company is determined using a market approach. If the carrying value of the Company exceeds fair value, a comparison of the fair value of goodwill against the carrying value of goodwill is made to determine whether goodwill has been impaired. The Company performs the annual assessment of the recoverability of goodwill during the fourth quarter of each fiscal year, or more frequently, if an event occurs or circumstances change that would indicate that the Company’s goodwill may be impaired. 

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. See Note 3 – “Maxim Acquisition” for Goodwill and Other Intangibles for additional related disclosures.

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.

Products that have been sold are not subject to returns unless the product is deemed defective. Credits or refunds are recognized when they are probable and reasonably estimated. The Company’s management reduces revenue to account for estimates of the Company’s credits and refunds.

The Company included shipping and handling fees in net revenues. Shipping and handling costs are associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold.

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 (“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 our sales for Wholesale Cases are on a consignment basis with a third-party. In our industry, Retail Cases are typically sold at a higher price than Wholesale Cases, resulting in greater revenue and profit per Case.

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2019

 

 

June 30, 2018

 

 

June 30, 2019

 

 

June 30, 2018

 

Category

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

3,722,777

 

 

$

4,421,066

 

 

$

7,375,088

 

 

$

8,433,850

 

Wholesale

 

 

1,353,148

 

 

 

1,297,392

 

 

 

2,471,496

 

 

 

3,288,656

 

Total

 

$

5,075,925

 

 

$

5,718,458

 

 

$

9,846,584

 

 

$

11,722,506

 

 

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

The Company considers the applicability and impact of all ASUs issued, both effective and not yet effective.

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-02, “Leases”, which requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than twelve (12) months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. Although the Company presently leases office space on a month to month basis as described in Note 12, management has analyzed the implied lease term considering entity factors, asset factors, and market factors and determined that the amounts to be recognized as a right to use assets and lease obligation upon adoption were not material.

In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment”, which removes the second step of the two-step goodwill impairment test. Under ASU 2017-04 an entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 does not amend the optional qualitative assessment of goodwill impairment. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019; early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has not elected early adoption of this standard and is currently in the process of evaluating the impact of adopting ASU 2017-04 and cannot currently estimate the financial statement impact of adoption.

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the SEC did not or are not believed by the Company’s management to have a material impact on the Company's present or future consolidated financial statements.

v3.19.2
Significant Accounting Policies (Tables)
6 Months Ended
Jun. 30, 2019
Accounting Policies [Abstract]  
Error Identified in Weighted Average Number of Shares Used in Calculation of Earnings per Share

During the preparation of the unaudited condensed consolidated financial statements for the quarter ended June 30, 2019, the Company identified an error in the weighted average number of shares used in its calculation of earnings per share for the three and six month periods ended June 30, 2018.

 

Three Months Ended June 30, 2018

 

As Previously

Reported

 

 

As Revised

 

Weighted average number of common shares outstanding

 

 

40,822,315

 

 

 

65,890,808

 

Net loss per share - basic

 

$

(0.04

)

 

$

(0.02

)

 

Six Months Ended June 30, 2018

 

As Previously

Reported

 

 

As Revised

 

Weighted average number of common shares outstanding

 

 

40,822,315

 

 

 

65,890,808

 

Net loss per share - basic

 

$

(0.06

)

 

$

(0.04

)

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 (“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 our sales for Wholesale Cases are on a consignment basis with a third-party. In our industry, Retail Cases are typically sold at a higher price than Wholesale Cases, resulting in greater revenue and profit per Case.

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2019

 

 

June 30, 2018

 

 

June 30, 2019

 

 

June 30, 2018

 

Category

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

3,722,777

 

 

$

4,421,066

 

 

$

7,375,088

 

 

$

8,433,850

 

Wholesale

 

 

1,353,148

 

 

 

1,297,392

 

 

 

2,471,496

 

 

 

3,288,656

 

Total

 

$

5,075,925

 

 

$

5,718,458