FUSE MEDICAL, INC., 10-Q filed on 14 Nov 19
v3.19.3
Document and Entity Information - shares
9 Months Ended
Sep. 30, 2019
Nov. 01, 2019
Cover [Abstract]    
Entity Registrant Name Fuse Medical, Inc.  
Entity Central Index Key 0000319016  
Document Type 10-Q  
Document Period End Date Sep. 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 Q3  
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 59-1224913  
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  
Document Quarterly Report true  
Document Transition Report false  
Entity Incorporation, State or Country Code DE  
Entity Interactive Data Current Yes  
Title of 12(b) Security Common Stock  
v3.19.3
CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)
Sep. 30, 2019
Dec. 31, 2018
Current assets:    
Cash and cash equivalents $ 1,031,270 $ 844,314
Accounts receivable, net of allowance of $1,747,600 and $667,963, respectively 4,759,131 5,225,999
Inventories, net of allowance of $4,416,483 and $1,711,871, respectively 8,189,621 11,075,889
Prepaid expenses and other current assets 17,365 29,553
Total current assets 13,997,387 17,175,755
Property and equipment, net 27,123 42,974
Deferred tax asset   760,993
Intangible assets, net 1,226,975 1,288,040
Goodwill 2,905,089 2,905,089
Total assets 18,156,574 22,172,851
Current liabilities:    
Accounts payable 2,526,096 2,712,919
Accrued expenses 2,909,729 2,784,271
Notes payable - related parties 150,000 150,000
Senior secured revolving credit facility 1,752,501 1,477,448
Total current liabilities 7,338,326 7,124,638
Earn-out liability 13,581,529 13,581,529
Total liabilities 20,919,855 20,706,167
Commitments and contingencies
Stockholders' (deficit) 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 70,221,566 shares outstanding as of September 30, 2019, and 74,600,181 shares issued and 70,221,566 shares outstanding as of December 31, 2018. 714,891 714,891
Additional paid-in capital 487,524  
Retained earnings (Accumulated deficit) (3,965,696) 751,793
Total stockholders' (deficit) equity (2,763,281) 1,466,684
Total liabilities and stockholders' (deficit) equity $ 18,156,574 $ 22,172,851
v3.19.3
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)
Sep. 30, 2019
Dec. 31, 2018
Statement Of Financial Position [Abstract]    
Net of allowance, accounts receivable $ 1,747,600 $ 667,963
Net of allowance, inventories $ 4,416,483 $ 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 70,221,566 70,221,566
v3.19.3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($)
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Income Statement [Abstract]        
Net revenues $ 5,716,344 $ 6,784,304 $ 15,562,928 $ 18,506,810
Cost of revenues 4,787,939 3,047,373 8,987,196 9,941,271
Gross profit 928,405 3,736,931 6,575,732 8,565,539
Operating expenses:        
Selling, general, administrative and other 2,263,964 1,932,991 6,604,066 6,432,798
Commissions 1,741,770 1,405,024 3,752,295 4,599,080
Depreciation and amortization 25,596 4,829 76,916 10,650
Total operating expenses 4,031,330 3,342,844 10,433,277 11,042,528
Operating loss (income) (3,102,925) 394,087 (3,857,545) (2,476,989)
Other expense:        
Interest expense (34,900) (25,920) (88,362) (101,835)
Total other expense (34,900) (25,920) (88,362) (101,835)
Operating income (loss) before tax (3,137,825) 368,167 (3,945,907) (2,578,824)
Income tax expense (benefit) 926,517 90,985 771,582 (505,742)
Net income (loss) $ (4,064,342) $ 277,182 $ (4,717,489) $ (2,073,082)
Net income (loss) per common share - basic $ (0.06) $ 0.00 $ (0.07) $ (0.03)
Weighted average number of common shares outstanding - basic 70,221,566 68,658,304 70,221,566 66,816,698
v3.19.3
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 income (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 income (loss) (2,073,082)      
Ending Balance, Amount at Sep. 30, 2018 (5,007,404) $ 713,688 (3,648,010) (2,073,082)
Ending Balance, Shares at Sep. 30, 2018   73,368,835    
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 income (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    
Restricted stock awards granted 52,722   52,722  
Stock options granted 259,639   259,639  
Purchase of Maxim Surgical 3,200,000 $ 42,105 3,157,895  
Purchase of Maxim Surgical, Shares   4,210,527    
Net income (loss) 277,182     277,182
Ending Balance, Amount at Sep. 30, 2018 (5,007,404) $ 713,688 (3,648,010) (2,073,082)
Ending Balance, Shares at Sep. 30, 2018   73,368,835    
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 income (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 income (loss) (4,717,489)      
Ending Balance, Amount at Sep. 30, 2019 (2,763,281) $ 714,891 487,524 (3,965,696)
Ending Balance, Shares at Sep. 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 income (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    
Stock options granted (11,583)   (11,583)  
Net income (loss) (4,064,342)     (4,064,342)
Ending Balance, Amount at Sep. 30, 2019 $ (2,763,281) $ 714,891 $ 487,524 $ (3,965,696)
Ending Balance, Shares at Sep. 30, 2019   74,600,181    
v3.19.3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($)
9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Cash flows from operating activities    
Net loss $ (4,717,489) $ (2,073,082)
Adjustments to reconcile net loss to net cash provided by operating activities:    
Depreciation and amortization 76,916 10,650
Share-based compensation 487,524 696,843
Provision for bad debts and discounts 1,079,637 187,755
Provision for slow moving and obsolete inventory 2,704,612 711,828
Deferred taxes, net of valuation allowance 760,993 (533,639)
Changes in operating assets and liabilities:    
Accounts receivable (612,769) 2,598,303
Inventories 181,656 1,201,714
Prepaid expenses and other current assets 12,188 10,396
Accounts payable (186,823) (440,540)
Accrued expenses 125,458 568,280
Net cash (used in) provided by operating activities (88,097) 2,938,508
Cash flows from investing activities    
Purchase of property and equipment   (35,984)
Acquisition of Maxim Surgical, net of cash acquired   (63,097)
Net cash used in investing activities   (99,081)
Cash flows from financing activities    
Payments on senior secured revolving credit facility, net 275,053 (2,651,799)
Net cash provided by (used in) financing activities 275,053 (3,049,262)
Net increase (decrease) in cash and cash equivalents 186,956 (209,835)
Cash and cash equivalents - beginning of period 844,314 804,715
Cash and cash equivalents - end of period 1,031,270 594,880
Supplemental disclosure of cash flow information:    
Cash paid for interest $ 69,257 84,872
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)
Maxim Surgical, LLC [Member]    
Non-cash investing and financing activities:    
Stock issued for Maxim Acquisition   $ 3,200,000
v3.19.3
Nature of Operations
9 Months Ended
Sep. 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 3, “CPM Acquisition”)

On August 1, 2018, (“Maxim Closing Date”) the Company completed the acquisition of Palm Springs Partners, LLC d/b/a Maxim Surgical (“Maxim”), pursuant to 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 4, “Maxim Acquisition”)

Basis of Presentation

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

The 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 nine months ended September 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.

 

Going Concern

The accompanying unaudited condensed consolidated financial statements have been prepared as if the Company will continue as a going concern. Through September 30, 2019, the Company has accumulated losses of $3,965,696 and stockholders’ deficits of $2,763,281.  

The Company’s ability to continue as a going concern for at least one year beyond the date of this filing is dependent upon the Company’s (i) successful execution of key rebranding initiatives, (ii) introduction, commercialization and sales of new proprietary products and product lines, (iii) increased sale of existing products, with strategic emphasis on selling more retail cases (“Retail Cases”) and increasing the percentage of Retail Cases sold as a percentage of all Cases sold by the Company, and (iv) continued cost reductions. Additionally, the Company will need to refinance its Senior Secured Revolving Credit Facility (“RLOC”) with ZB, N.A., d/b/a Amegy Bank (“Amegy Bank”) with a new credit facility on commercially reasonable terms, or obtain equity financing.

The Company’s management expects to fund its future business development activities and its working capital needs largely from available cash, improved future operations, and other traditional financing sources, such as a revolving line of credit facility, term notes, or private placements, until such time sufficient funds are provided by operations. There can be no assurance that the Company’s financing efforts will be successful, or if the Company’s management will be able to achieve sufficient revenue and profitability growth from operations. If the Company fails to cure the current event of default under the RLOC or another event of default occurs under the RLOC, the Company could be prohibited from borrowing for its working capital needs. If the loans are accelerated and the Company does not have sufficient cash on hand to pay all amounts due, the Company could be required to sell assets, to refinance all or a portion of its indebtedness or to obtain additional financing. Refinancing may not be possible and additional financing may not be available on commercially reasonable terms, or at all. If the Company cannot borrow under the RLOC, the Company would need to seek additional financing, if available, or curtail our operations. Additional financing may include restrictions on the Company’s operations, or, with equity financing, may result in the Company’s stockholders’ ownership being diluted.

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

v3.19.3
Significant Accounting Policies
9 Months Ended
Sep. 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.

Reclassification

The provision for slow moving and obsolete inventory for the prior period unaudited condensed consolidated statement of cash flows has been reclassified to conform to the presentation of the current period unaudited condensed consolidated financial statements. This reclassification had no effect on the previously reported unaudited condensed consolidated balance sheets, statement of operations, and changes in stockholders’ equity.

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 in 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 expectation of future taxable income and allowable deductions and the fair value calculations of stock-based compensation and earn-out liability. (See Note 3, “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 reviews operating results on a consolidated basis for purposes of allocating resources and evaluating the financial performance of the Company. The Company has integrated the operations of both CPM and Maxim. Accordingly, the Company has determined that it has one operating segment and, therefore, one reporting segment.

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 nine month periods ended September 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 September 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 nine month periods ended September 30, 2018.

 

Three Months Ended September 30, 2018

 

As Previously

Reported

 

 

As Revised

 

Weighted average number of common shares outstanding

 

 

54,118,506

 

 

 

68,658,304

 

Net loss per share - basic

 

$

(0.01

)

 

$

-

 

 

Nine Months Ended September 30, 2018

 

As Previously

Reported

 

 

As Revised

 

Weighted average number of common shares outstanding

 

 

54,118,506

 

 

 

66,816,698

 

Net loss per share - basic

 

$

(0.04

)

 

$

(0.03

)

 

The Company performed a quantitative and qualitative analysis and determined that the error was not material to the previously reported results for the three and nine month periods ended September 30, 2018.

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 $13,581,529 liability related to the earn-out (“Earn-Out”) portion of the purchase consideration. (See Note 3, “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 payments are subject to the Company meeting certain earnings thresholds as detailed in the CPM Acquisition Agreement.

The fair value of the Earn-Out liability was calculated using the Monte Carlo simulation, which was then applied to estimated Earn-Out payments 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.

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 September 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 September 30, 2019.  As of September 30, 2019, and December 31, 2018, there were deposits of $574,868 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 judgment 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 uncollectible. These amounts are recognized as bad debt expense and are 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 net realizable value of inventories.

During the three and nine months ended September 30, 2019 the Company revised its estimate for slow moving and obsolete inventory. As a result, the Company’s management increased the inventory reserve for slow moving and obsolescence by approximately $2.4 million, which is reflected in Inventory and Cost of Revenues on the Company’s unaudited condensed consolidated balance sheets and statements of operations, respectively.  

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. 

Goodwill and Other Intangible Assets

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

Goodwill is not amortized, but is tested at least annually for impairment, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount.  The Company performs its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. If the carrying value of a reporting unit exceeds its fair value, an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value.  

The Company’s intangible assets subject to amortization consist primarily of acquired non-compete agreements, product technology, and customer relationships. Amortization expense is calculated using the straight-line method over the asset’s expected useful life. (See Note 4, “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 estimable. The Company’s management reduces revenue to account for estimates of the Company’s credits and refunds.

The Company includes 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 the Company’s sales for Wholesale Cases are on a consignment basis with a third-party. In the Company’s industry, Retail Cases are typically sold at a higher price points than Wholesale Cases, resulting in greater revenue and gross profit per Case.

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2019

 

 

September 30, 2018

 

 

September 30, 2019

 

 

September 30, 2018

 

Category

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

5,050,785

 

 

$

5,227,442

 

 

$

12,425,874

 

 

$

13,661,292

 

Wholesale

 

 

665,559

 

 

 

1,556,862

 

 

 

3,137,054

 

 

 

4,845,518

 

Total

 

$

5,716,344

 

 

$

6,784,304

 

 

$

15,562,928

 

 

$

18,506,810

 

 

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 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This guidance eliminates Step 2 from the goodwill impairment test, instead requiring an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit’s fair value. The Company adopted ASU 2017-04 for the three months ended September 30, 2019 on a prospective basis.  The adoption of ASU 2017-04 had no impact on the condensed consolidated financial position, results of operations or cash flows for the period ended September 30, 2019.  The Company adopted provisions of ASU 2017-04 as it simplified the goodwill impairment testing process resulting in reductions of costs and time associated with the goodwill impairment testing.

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.

v3.19.3
CPM Acquisition
9 Months Ended
Sep. 30, 2019
CPM [Member]  
Acquisition

Note 3. 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, to NC 143, the former owner of CPM, 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 it’s common stock, par value $0.01 per share, (“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 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.

v3.19.3
Maxim Acquisition
9 Months Ended
Sep. 30, 2019
Maxim Surgical, LLC [Member]  
Acquisition

Note 4.  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, 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 September 30, 2018 is as follows:

 

 

 

Three Months Ended September 30, 2018  - Unaudited

 

 

 

Historical Fuse

Medical, Inc.

 

 

Historical Maxim

Surgical

 

 

Pro forma

Adjustments

 

 

Pro forma

Combined

 

Revenue

 

$

6,784,304

 

 

$

161,442

 

 

$

(116,577

)

 

$

6,829,169

 

Net (loss) income

 

$

277,182

 

 

$

(456,874

)

 

$

-

 

 

$

(179,692

)

Net loss per common share - basic

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

The supplemental pro forma revenue was adjusted to exclude $116,577 of intercompany transactions for the three months ended September 30, 2018. The number of shares outstanding used in calculating the net loss per common share – basic was 70,211,566 for the three months ended September 30, 2018.

Unaudited pro forma information for the nine months ended September 30, 2018 is as follows:

 

 

 

Nine Months Ended September 30, 2018 - Unaudited

 

 

 

Historical Fuse

Medical, Inc.

 

 

Historical Maxim

Surgical

 

 

Pro forma

Adjustments

 

 

Pro forma

Combined

 

Revenue

 

$

18,506,810

 

 

$

796,014

 

 

$

(459,074

)

 

$

18,843,750

 

Net loss

 

$

(2,073,082

)

 

$

(374,137

)

 

$

-

 

 

$

(2,447,219

)

Net loss per common share - basic

 

$

(0.03

)

 

$

-

 

 

$

-

 

 

$

(0.04

)

 

The supplemental pro forma revenue was adjusted to exclude $459,074 of intercompany transactions for the nine months ended September 30, 2018. The number of shares outstanding used in calculating the net loss per common share – basic was 70,211,566 for the nine months ended September 30, 2018.

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

v3.19.3
Property and Equipment
9 Months Ended
Sep. 30, 2019
Property Plant And Equipment [Abstract]  
Property and Equipment

Note 5. Property and Equipment

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

 

 

 

September 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

 

 

(36,248

)

 

 

(25,826

)

Property and equipment, net

 

$

27,123

 

 

$

42,974

 

 

Depreciation expense for the three months ended September 30, 2019 and September 30, 2018 was $5,241 and $4,829, respectively. Depreciation expense for the nine months ended September 30, 2019 and September 30, 2018 was $15,851 and $10,650, respectively.

v3.19.3
Goodwill and Intangible Assets
9 Months Ended
Sep. 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:

 

 

 

September 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

 

 

(94,990

)

 

 

(33,925

)

 

 

Intangible assets, net

 

 

1,226,975

 

 

 

1,288,040

 

 

 

Goodwill

 

$

2,905,089

 

 

$

2,905,089

 

 

Indefinite

 

Amortization expense for the three and nine months ended September 30, 2019, was $20,355 and $61,065. There was no amortization expense for the three and nine months ended September 30, 2018.

v3.19.3
Senior Secured Revolving Credit Facility
9 Months Ended
Sep. 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 the RLOC with 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 Company was not in compliance with the minimum quarterly EBITDA requirement of $500,000 for the three months ended September 30, 2019 and had requested a waiver for this event of default from Amegy Bank. (See Note 13, Subsequent Events.”)

The outstanding balance of the RLOC was $1,752,501 and $1,477,448 at September 30, 2019 and December 31, 2018, respectively. Interest expense incurred on the RLOC was $28,095 and $19,115 for the three months ended September 30, 2019 and September 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 $68,168 and $81,641 for the nine months ended September 30, 2019 and September 30, 2018, respectively. Accrued interest on the RLOC at September 30, 2019 and December 31, 2018 was $3,261 and $4,350, respectively, and is reflected in accrued expenses on the Company’s accompanying unaudited condensed consolidated balance sheets. At September 30, 2019, the effective interest rate was calculated to be 6.42%.

v3.19.3
Notes Payable - Related Parties
9 Months Ended
Sep. 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 September 30, 2019 and September 30, 2018, interest expense of $6,805 and $6,805, respectively, is reflected in interest expense on the Company’s accompanying unaudited condensed consolidated statements of operations. During the nine months ended September 30, 2019 and September 30, 2018, interest expense of $20,195 and $20,195, respectively, is reflected in interest expense on the Company’s accompanying unaudited condensed consolidated statements of operations. As of September 30, 2019, and December 31, 2018, accrued interest was $79,290 and $59,096, respectively, which is reflected in accrued expenses on the Company’s accompanying unaudited condensed consolidated balance sheets.

v3.19.3
Stockholders' Equity
9 Months Ended
Sep. 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 stock compensation expense 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 nine months ended September 30, 2019, the Board granted 150,000 and 1,350,000  Non-qualified Stock Options (“NQSO”) to the Company’s product advisory board members, certain key employees and marketing representatives. For the three months ended September 30, 2019 and September 30, 2018 the Company recognized a benefit of $11,583 and amortized $259,639 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 nine months ended September 30, 2019 and September 30, 2018 the Company amortized $487,524 and $485,955 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 $1,276,256 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 nine months ended September 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

 

 

1,350,000

 

 

 

0.69

 

 

 

-

 

 

 

-

 

Exercised

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Forfeited

 

 

(1,210,000

)

 

 

1.07

 

 

 

-

 

 

 

-

 

Expired

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Balance outstanding at September 30, 2019

 

 

4,055,000

 

 

$

0.67

 

 

 

6.6

 

 

$

222,000

 

Exercisable at September 30, 2019

 

 

1,984,999

 

 

$

0.50

 

 

 

4.0

 

 

$

222,000

 

 

The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2019 was $0.64.

Restricted Common Stock

For the three and nine months ended September 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 $52,722 and $210,888 for the three and nine months ended September 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, September 30, 2019

 

 

4,378,615

 

 

$

2,060,000

 

 

$

0.47

 

 

The non-vested RSAs, as of September 30, 2019, were granted to the Company’s Board members as compensation. These awards vest only upon: (i) the occurrence of a Change in Control or listing of the Company’s Common Stock on a national exchange, and (ii) the director’s notification to the Company of such accelerating events, within a specified period (“Triggering Events”). 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 RSA’s are now structured with uniform vesting conditions.

v3.19.3
Income Taxes
9 Months Ended
Sep. 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 Nine Months

Ended September 30, 2019

 

 

For the Nine Months

Ended September 30, 2018

 

Current:

 

 

 

 

 

 

 

 

Federal

 

$

-

 

 

$

-

 

State

 

 

10,589

 

 

 

32,121

 

 

 

 

10,589

 

 

 

32,121

 

Deferred:

 

 

 

 

 

 

 

 

Federal

 

 

760,993

 

 

 

(537,863

)

State

 

 

-

 

 

 

-

 

 

 

 

760,993

 

 

 

(537,863

)

Total income tax expense (benefit)

 

$

771,582

 

 

$

(505,742

)

 

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

 

 

 

September 30,

2019

 

 

December 31,

2018

 

Deferred tax assets:

 

 

 

 

 

 

 

 

Net operating loss carryover

 

$

191,319

 

 

$

216,793

 

Accounts receivable

 

 

366,996

 

 

 

140,272

 

Compensation

 

 

335,173

 

 

 

232,793

 

Inventory

 

 

893,231

 

 

 

383,744

 

Other

 

 

28,129

 

 

 

28,128

 

Total deferred tax assets

 

 

1,814,848

 

 

 

1,001,730

 

 

 

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Intangibles

 

 

(222,029

)

 

 

(232,835

)

Property and equipment

 

 

(4,950

)

 

 

(7,902

)

Total deferred tax liabilities

 

 

(226,979

)

 

 

(240,737

)

 

 

 

 

 

 

 

 

 

Deferred tax assets, net

 

 

1,587,869

 

 

 

760,993

 

 

 

 

 

 

 

 

 

 

Valuation allowance:

 

 

 

 

 

 

 

 

Beginning of year

 

 

-

 

 

-

 

(Increase) decrease during year

 

 

(1,587,869

)

 

-

 

Ending balance

 

 

(1,587,869

)

 

-

 

 

 

 

 

 

 

 

 

 

Net deferred tax asset

 

$

-

 

 

$

760,993

 

 

A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. The Company recorded a valuation allowance in 2019 due to the uncertainty of realization. Management believes that based upon the history of losses that the Company has incurred to date and its projection of future taxable operating income for the foreseeable future, it is more likely than not that the Company will not be able to realize the tax benefit associated with deferred tax assets. The valuation allowance established during the nine months ended September 30, 2019 was $1,587,869.

At September 30, 2019, the Company estimates it has approximately $911,042 of net operating loss carryforwards, of which $713,036 will expire from 2019 to 2037. The remaining $198,006 of net operating carryforwards is subject to the limitations of the Tax Cuts and Jobs Act of 2018. The Company’s management believes its tax positions are more likely than not of being upheld upon examination. As such, the Company has not recorded a liability for uncertain tax positions. As of September 30, 2019, 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:

 

 

 

Nine Months Ended

 

 

 

September 30, 2019

 

 

September 30, 2018

 

Expected U.S. federal incomes as statutory rate

 

21.0%

 

 

21.0%

 

Deferred tax asset valuation allowance

 

-40.2%

 

 

0.0%

 

State and local income taxes, net of federal benefit

 

-0.2%

 

 

-1.0%

 

Permanent differences

 

-0.2%

 

 

-0.4%

 

Other

 

0.0%

 

 

0.0%

 

 

 

-19.6%

 

 

19.6%

 

 

v3.19.3
Concentrations
9 Months Ended
Sep. 30, 2019
Nature Of Operations And Going Concern [Abstract]  
Concentrations

Note 11. Concentrations

Concentration of Revenues, Accounts Receivable and Suppliers

For the nine months ended September 30, 2019 and September 30, 2018, the following significant customers had an individual percentage of total revenues equaling ten percent (10%) or greater:

 

 

 

For the Nine Months Ended

 

 

 

September 30, 2019

 

 

September 30, 2018

 

Customer 1

 

 

9.77

%

 

 

18.20

%

Totals

 

 

9.77

%

 

 

18.20

%

 

At September 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:

 

 

 

September 30,

2019

 

 

December 31,

2018

 

Customer 1 - related party

 

 

11.12

%

 

 

6.71

%

Customer 2

 

 

5.12

%

 

 

15.03

%

Totals

 

 

16.24

%

 

 

21.74

%

 

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

 

 

 

For the Nine Months Ended

 

 

 

September 30, 2019

 

 

September 30, 2018

 

Supplier 1

 

 

21.90

%

 

 

11.40

%

Supplier 2 - related party

 

 

10.30

%

 

 

0.50

%

Totals

 

 

32.20

%

 

 

11.90

%

 

v3.19.3
Related Party Transactions
9 Months Ended
Sep. 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 nine months ended September 30, 2019 and September 30, 2018, the Company paid approximately $126,000 and $126,000 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 September 30, 2019, AmBio operations support approximately 59 full time equivalents (“FTE”). Of those 59 FTEs, 42 FTEs directly support the Company, 10 FTEs support the operations of other companies, and 7 FTEs are shared between the Company and other companies.

As of September 30, 2019 and December 31, 2018, the Company owed amounts to AmBio of approximately zero and $180,000, respectively, which are reflected in accounts payable on the Company’s unaudited condensed consolidated balance sheets. For the nine months ended September 30, 2019 and September 30, 2018, approximately $154,000 and $152,000 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 nine months ended September 30, 2019 and September 30, 2018, the Company:

 

sold Orthopedic Implants and Biologics products to MedUSA in the amounts of approximately $751,000 and $1,692,000, respectively, which is reflected in net revenues in the Company’s accompanying unaudited condensed consolidated statements of operations;

 

purchased approximately zero and $650,000, 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 $1,457,000 and $1,584,000, respectively, in commission costs, which are reflected in commissions in the Company’s accompanying unaudited condensed consolidated statements of operations.

As of September 30, 2019, and December 31, 2018, the Company had outstanding balances due from MedUSA of approximately $614,000 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. As of September 30, 2019 MedUSA has a past due balance of approximately $601,000.

Texas Overlord, LLC

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

During the nine months ended September 30, 2019 and September 30, 2018, the Company:

 

purchased approximately $25,000 and $545,000, 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 $590,000, respectively, in commission costs to Overlord, which is reflected in commissions in the Company’s accompanying unaudited condensed consolidated statements of operations.

As of September 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 nine months ended September 30, 2019 and September 30, 2018, the Company sold Biologics products to NBMJ in the amounts of approximately $412,000, and $197,000, respectively, which are reflected in net revenues in the Company’s accompanying unaudited condensed consolidated statements of operations.

As of September 30, 2019, and December 31, 2018 the Company had outstanding balances due from NBMJ of approximately $275,000 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. As of September 30, 2019 NBMJ has a past due balance of approximately $258,000.

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 nine months ended September 30, 2019 and September 30, 2018, the Company:

 

sold Orthopedic Implants and Biologics products to Bass in the amounts of approximately $106,000 and $558,000, respectively, which is reflected in net revenues in the Company’s accompanying unaudited condensed consolidated statements of operations;

 

incurred approximately $16,000 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 September 30, 2019, and December 31, 2018, the Company had outstanding balances due from Bass of approximately $5,000 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 nine months ended September 30, 2019 and September 30, 2018, the Company incurred approximately $269,000 and $581,000, 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 nine months ended September 30, 2019 and September 30, 2018, the Company sold Orthopedic Implants and Biologics products to Tiger in the amounts of approximately $189,000 and $109,000, respectively, which is reflected in net revenues in the Company’s accompanying unaudited condensed consolidated statements of operations.

As of September 30, 2019, and December 31, 2018, the Company had outstanding balances due from Tiger of approximately $32,000 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. As of September 30, 2019 Tiger has a past due balance of approximately $5,000.

Modal Manufacturing, LLC

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

During the nine months ended September 30, 2019 and September 30, 2018, the Company purchased approximately $624,000 and $46,000, 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 September 30, 2019, and December 31, 2018, the Company had outstanding balances owed to Modal of approximately $142,000 and zero, 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. As of September 30, 2019 the Company owes a past due balance of approximately $95,000.  

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 nine months ended September 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 nine months ended September 30, 2019.

During the nine months ended September 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.

v3.19.3
Subsequent Events
9 Months Ended
Sep. 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 November 14, 2019.

On November 13, 2019, the Company’s management obtained a waiver from Amegy Bank with respect to the event of default for the three months ended September 30, 2019. The Company’s management expects to execute a Fourth Amendment to the RLOC with Amegy Bank during the fourth quarter of 2019. (See Note 7, “Senior Secured Revolving Credit Facility.”)

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

v3.19.3
Significant Accounting Policies (Policies)
9 Months Ended
Sep. 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.

Reclassification

Reclassification

The provision for slow moving and obsolete inventory for the prior period unaudited condensed consolidated statement of cash flows has been reclassified to conform to the presentation of the current period unaudited condensed consolidated financial statements. This reclassification had no effect on the previously reported unaudited condensed consolidated balance sheets, statement of operations, and changes in stockholders’ equity.

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 in 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 expectation of future taxable income and allowable deductions and the fair value calculations of stock-based compensation and earn-out liability. (See Note 3, “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 reviews operating results on a consolidated basis for purposes of allocating resources and evaluating the financial performance of the Company. The Company has integrated the operations of both CPM and Maxim. Accordingly, the Company has determined that it has one operating segment and, therefore, one reporting segment.

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 nine month periods ended September 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 September 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 nine month periods ended September 30, 2018.

 

Three Months Ended September 30, 2018

 

As Previously

Reported

 

 

As Revised

 

Weighted average number of common shares outstanding

 

 

54,118,506

 

 

 

68,658,304

 

Net loss per share - basic

 

$

(0.01

)

 

$

-

 

 

Nine Months Ended September 30, 2018

 

As Previously

Reported

 

 

As Revised

 

Weighted average number of common shares outstanding

 

 

54,118,506

 

 

 

66,816,698

 

Net loss per share - basic

 

$

(0.04

)

 

$

(0.03

)

 

The Company performed a quantitative and qualitative analysis and determined that the error was not material to the previously reported results for the three and nine month periods ended September 30, 2018.

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 $13,581,529 liability related to the earn-out (“Earn-Out”) portion of the purchase consideration. (See Note 3, “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 payments are subject to the Company meeting certain earnings thresholds as detailed in the CPM Acquisition Agreement.

The fair value of the Earn-Out liability was calculated using the Monte Carlo simulation, which was then applied to estimated Earn-Out payments 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.

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 September 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 September 30, 2019.  As of September 30, 2019, and December 31, 2018, there were deposits of $574,868 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 judgment 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 uncollectible. These amounts are recognized as bad debt expense and are 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 net realizable value of inventories.

During the three and nine months ended September 30, 2019 the Company revised its estimate for slow moving and obsolete inventory. As a result, the Company’s management increased the inventory reserve for slow moving and obsolescence by approximately $2.4 million, which is reflected in Inventory and Cost of Revenues on the Company’s unaudited condensed consolidated balance sheets and statements of operations, respectively.  

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. 

Goodwill and Other Intangible Assets

Goodwill and Other Intangible Assets

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

Goodwill is not amortized, but is tested at least annually for impairment, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount.  The Company performs its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. If the carrying value of a reporting unit exceeds its fair value, an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value.  

The Company’s intangible assets subject to amortization consist primarily of acquired non-compete agreements, product technology, and customer relationships. Amortization expense is calculated using the straight-line method over the asset’s expected useful life. (See Note 4, “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 estimable. The Company’s management reduces revenue to account for estimates of the Company’s credits and refunds.

The Company includes 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 the Company’s sales for Wholesale Cases are on a consignment basis with a third-party. In the Company’s industry, Retail Cases are typically sold at a higher price points than Wholesale Cases, resulting in greater revenue and gross profit per Case.

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2019

 

 

September 30, 2018

 

 

September 30, 2019

 

 

September 30, 2018

 

Category

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

5,050,785

 

 

$

5,227,442

 

 

$

12,425,874

 

 

$

13,661,292

 

Wholesale

 

 

665,559

 

 

 

1,556,862

 

 

 

3,137,054

 

 

 

4,845,518

 

Total

 

$

5,716,344

 

 

$

6,784,304

 

 

$

15,562,928

 

 

$

18,506,810

 

 

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 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This guidance eliminates Step 2 from the goodwill impairment test, instead requiring an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit’s fair value. The Company adopted ASU 2017-04 for the three months ended September 30, 2019 on a prospective basis.  The adoption of ASU 2017-04 had no impact on the condensed consolidated financial position, results of operations or cash flows for the period ended September 30, 2019.  The Company adopted provisions of ASU 2017-04 as it simplified the goodwill impairment testing process resulting in reductions of costs and time associated with the goodwill impairment testing.

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.