FUSE MEDICAL, INC., 10-K filed on 30 Mar 20
v3.20.1
Document and Entity Information - USD ($)
12 Months Ended
Dec. 31, 2019
Mar. 12, 2020
Jun. 30, 2019
Cover [Abstract]      
Entity Registrant Name Fuse Medical, Inc.    
Entity Central Index Key 0000319016    
Document Type 10-K    
Document Annual Report true    
Document Transition Report false    
Document Period End Date Dec. 31, 2019    
Document Fiscal Year Focus 2019    
Amendment Flag false    
Current Fiscal Year End Date --12-31    
Is Entity a Well-known Seasoned Issuer No    
Is Entity a Voluntary Filer No    
Is Entity's Reporting Status Current Yes    
Entity Interactive Data Current Yes    
Entity Filer Category Non-accelerated Filer    
Entity Public Float     $ 3,734,944
Entity Common Stock, Shares Outstanding   73,124,458  
Document Fiscal Period Focus FY    
Entity Small Business true    
Entity Shell Company false    
Entity Emerging Growth Company false    
Entity Tax Identification Number 59-1224913    
Entity File Number 000-10093    
Entity Incorporation, State or Country Code DE    
Entity Address, Address Line One 1565 N. Central Expressway    
Entity Address, Address Line Two Suite 220    
Entity Address, City or Town Richardson    
Entity Address, State or Province TX    
Entity Address, Postal Zip Code 75080    
City Area Code 469    
Local Phone Number 862-3030    
Title of 12(b) Security Common Stock    
Trading Symbol FZMD    
v3.20.1
CONSOLIDATED BALANCE SHEETS - USD ($)
Dec. 31, 2019
Dec. 31, 2018
Current assets:    
Cash and cash equivalents $ 1,099,310 $ 844,314
Accounts receivable, net of allowance of $1,343,278 and $667,963, respectively 6,174,299 5,225,999
Inventories, net of allowance of $3,805,730 and $1,711,871, respectively 7,855,887 11,075,889
Prepaid expenses and other current assets 39,850 29,553
Total current assets 15,169,346 17,175,755
Property and equipment, net 32,639 42,974
Deferred taxes, net   760,993
Intangible assets, net 1,206,620 1,288,040
Goodwill 1,972,886 2,905,089
Total assets 18,381,491 22,172,851
Current liabilities:    
Accounts payable 2,752,854 2,712,919
Accrued expenses 3,302,904 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 7,958,259 7,124,638
Earn-out liability 11,645,365 13,581,529
Total liabilities 19,603,624 20,706,167
Commitments and contingencies
Stockholders’ equity (Accumulated deficit):    
Preferred stock, $0.01 par value; 20,000,000 shares authorized; no shares issued and outstanding
Common stock, $0.01 par value; 100,000,000 shares authorized; 73,124,458 shares issued and outstanding as of December 31, 2019 and 74,600,181 shares issued and outstanding as of December 31, 2018 731,245 746,002
Additional paid-in capital 642,435  
Retained earnings (Accumulated deficit) (2,595,813) 720,682
Total stockholders’ equity (Accumulated deficit) (1,222,133) 1,466,684
Total liabilities and stockholders’ equity (Accumulated deficit) $ 18,381,491 $ 22,172,851
v3.20.1
CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)
Dec. 31, 2019
Dec. 31, 2018
Statement Of Financial Position [Abstract]    
Net of allowance, accounts receivable $ 1,343,278 $ 667,963
Net of allowance, inventories $ 3,805,730 $ 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 73,124,458 74,600,181
Common Stock Shares Outstanding 73,124,458 74,600,181
v3.20.1
CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Income Statement [Abstract]    
Net revenues $ 22,900,277 $ 26,342,038
Cost of revenues 11,762,790 13,352,558
Gross profit 11,137,487 12,989,480
Operating expenses    
Selling, general, administrative and other 8,466,077 8,466,128
Commissions 5,982,075 6,431,967
Depreciation and amortization 107,073 49,685
Goodwill impairment 932,203 0
Total operating expenses 15,487,428 14,947,780
Operating loss (4,349,941) (1,958,300)
Other income (expense):    
Change in fair value of contingent purchase consideration 1,936,164 5,663,014
Interest expense (121,633) (133,944)
Total other income (expense) 1,814,531 5,529,070
Operating income (loss) before income tax (2,535,410) 3,570,770
Income tax expense (benefit) 781,085 (386,784)
Net income (loss) $ (3,316,495) $ 3,957,554
Earnings (loss) per common share - basic $ (0.05) $ 0.06
Earnings (loss) per common share - diluted $ (0.05) $ 0.05
Weighted average number of common shares outstanding - basic 70,221,566 67,669,615
Weighted average number of common shares outstanding - diluted 70,221,566 73,926,296
v3.20.1
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - USD ($)
Total
Common Stock [Member]
Additional Paid-In Capital [Member]
Retained Earnings (Accumulated Deficit) [Member]
Beginning Balance, Amount at Dec. 31, 2017 $ (7,981,509) $ 691,583 $ (8,673,092)  
Beginning Balance, Shares at Dec. 31, 2017   69,158,308    
Restricted stock awards granted 210,888 $ 11,111 199,777  
Restricted stock awards granted, Shares   1,111,115    
Stock based compensation 624,041   624,041  
CPM working capital purchase price adjustment (397,463)   (397,463)  
Inventory contributed by stockholder 1,547,807   1,547,807  
Purchase of Maxim Surgical 3,281,757 $ 43,308 3,238,449  
Purchase of Maxim Surgical, Shares   4,330,758    
Adjustment to CPM purchase price accounting 223,609   223,609  
Net income (loss) 3,957,554   3,236,872 $ 720,682
Ending Balance, Amount at Dec. 31, 2018 1,466,684 $ 746,002   720,682
Ending Balance, Shares at Dec. 31, 2018   74,600,181    
Stock based compensation 627,678   627,678  
Restricted stock forfeiture   $ (14,757) 14,757  
Restricted stock forfeiture, Shares   (1,475,723)    
Net income (loss) (3,316,495)     (3,316,495)
Ending Balance, Amount at Dec. 31, 2019 $ (1,222,133) $ 731,245 $ 642,435 $ (2,595,813)
Ending Balance, Shares at Dec. 31, 2019   73,124,458    
v3.20.1
CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Cash flows from operating activities:    
Net income (loss) $ (3,316,495) $ 3,957,554
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:    
Depreciation and amortization 107,073 49,685
Change in fair value of contingent purchase consideration (1,936,164) (5,663,014)
Impairment of goodwill 932,203 0
Stock based compensation 627,678 834,929
Provision of bad debts and discounts 675,315 168,864
Provision for slow moving and obsolete inventory 2,093,858 601,129
Deferred income tax expense (benefit) 760,993 (431,272)
Changes in operating assets and liabilities:    
Accounts receivable (1,623,615) 917,689
Inventories, net of slow-moving and obsolescence reserves 1,126,144 1,280,427
Prepaid expenses and other current assets (10,297) 2,913
Accounts payable 39,935 (82,824)
Accrued expenses 518,633 843,820
Net cash provided by/(used in) operating activities (4,739) 2,479,900
Cash flows from investing activities:    
Purchases of property and equipment (15,318) (41,838)
Acquisition of Maxim Surgical, net of cash acquired   (63,097)
Net cash used in investing activities (15,318) (104,935)
Cash flows from financing activities:    
Net proceeds from senior secured revolving credit facility 275,053 (1,937,903)
Net cash provided by/(used in) financing activities 275,053 (2,335,366)
Net increase in cash and cash equivalents 254,996 39,599
Cash and cash equivalents - beginning of year 844,314 804,715
Cash and cash equivalents - end of year 1,099,310 844,314
Supplemental disclosure of cash flow information:    
Cash paid for interest $ 94,545 107,521
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   $ 3,281,757
v3.20.1
Nature of Operations
12 Months Ended
Dec. 31, 2019
Organization Consolidation And Presentation Of Financial Statements [Abstract]  
Nature of Operations

Note 1. Nature of Operations

Overview

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 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 which is controlled by Mr. Brooks, the Company’s Chairman of the Board and President; and RMI, which is owned and controlled by Mr. Reeg, the Company’s Chief Executive Officer and Secretary. The closing of the Stock Purchase Agreement resulted in a change-in-control of the Company whereby the Mr. Brooks and Mr. Reeg beneficially acquired approximately 61.4% of the Company’s issued and outstanding shares of Common Stock, immediately after the Change-in-Control Date.

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

On August 1, 2018, the Maxim Closing Date, the Company completed the acquisition of Maxim Surgical, pursuant to the Maxim Purchase Agreement. As of the Maxim Closing Date, Maxim and Company operations are consolidated. (See Note 4, “Maxim Acquisition”),

Nature of Business

The Company is a manufacturer, distributor, and wholesaler of medical device implants, offering a broad portfolio of Orthopedic Implants including: (i) internal and external fixation products; (ii) upper and lower extremity plating and total joint reconstruction implants; (iii) soft tissue fixation and augmentation for sports medicine procedures; (iv) full spinal implants for trauma, degenerative disc disease and deformity indications; and (v) a wide array of osteo-biologics, regenerative tissues and amniotic tissue, which include human allografts, substitute bone materials, and tendons and regenerative tissues and fluids. All of the Company’s medical devices are approved by the FDA for sale in the United States, and all of the Company’s Biologics suppliers are licensed tissue banks accredited by the American Association of Tissue Banks.

The Company’s broad portfolio of Orthopedic Implants and Biologics provide high-quality products to assist surgeons with positive patient outcomes and cost-effective solutions for its customers, which include hospitals, medical facilities, and sub-distributors. The Company operates under exclusive and non-exclusive agreements with certain vendors and supply partners in the geographic territories the Company serves.

The Company continuously reviews and expands its product lines to ensure that they offer a comprehensive, high-quality and cost-effective selection of Orthopedic Implants and Biologics so that the Company can be more relevant to its customer needs while continuing to grow its existing customer base. Additionally, the Company continues to grow its manufacturing operations, both by internal product development as well as the acquisition of existing FDA approved devices.

 

Going Concern

 

The accompanying audited consolidated financial statements have been prepared as if the Company will continue as a going concern. Through December 31, 2019, the Company has accumulated losses of $2,595,813 and a stockholders’ deficit of $1,222,133.  Revenue declined by $3,441,761 in 2019 as the result of competitive pressures.  The Company was out of compliance with its loan covenants at various times during the years ended December 31, 2019 and 2018 and obtained waivers from the lender to cure the violations, but had reductions of the credit facility amount as a result of the covenant violations.  The Company’s management has determined that these conditions and events raise substantial doubt about the ability of the Company to continue as a going concern.

 

The Company’s ability to continue as a going concern for at least one year beyond the date of this filing is dependent upon the 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 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 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.

v3.20.1
Significant Accounting Policies
12 Months Ended
Dec. 31, 2019
Accounting Policies [Abstract]  
Significant Accounting Policies

Note 2. Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, CPM, and Maxim, the Company’s wholly-owned subsidiaries of which the operations have been integrated with the Company. Intercompany transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (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 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.

Reclassification

 

Upon further review the Company determined that its restricted shares should be considered legally outstanding but excluded from basic EPS and included in diluted EPS as the performance conditions have not been met.  Additionally, prior year common stock and additional paid in capital amounts have been reclassified by $31,111.  The impact to the financial statements was considered insignificant.

Earnings (loss) Per Common Share

Earnings (loss) per common share, basic is calculated by dividing the net income 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 earnings (loss) per common share is computed by dividing net loss by the weighted-average number of common share equivalents outstanding for the period determined using the treasury stock method. For the years ended December 31, 2019, the Company excluded the effects of outstanding stock options as their effects were antidilutive due to the Company’s operating loss during these periods.  

For the year ended December 31, 2019, restricted common stock shares and common stock equivalents of 6,771,779 have been excluded from diluted earnings per share because to include them would have been antidilutive (see Note 10, for the terms and conditions of restricted stock).

The Company identified an error in the weighted average number of shares outstanding used in its calculation of earnings per share for the year ended December 31, 2018. The comparative financial statements have been adjusted to reflect this immaterial correction.   The Company performed a quantitative and qualitative analysis and determined that the error was not material to the previously reported results for the year ended December 31, 2018.

 

 

 

As Previously

 

 

 

 

 

 

 

Reported

 

 

As Revised

 

Weighted average number of common shares outstanding - basic

 

 

68,020,348

 

 

 

67,669,615

 

Weighted average number of common shares outstanding - diluted

 

 

70,945,602

 

 

 

73,926,296

 

Net income (loss) per share - basic

 

$

(0.06

)

 

$

0.06

 

Net income (loss) per share - diluted

 

$

(0.06

)

 

$

0.05

 

 

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 initially recorded a $19,244,543 liability related to the 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 Earn-Out payments are based on the financial performance of the Company between the period of January 1, 2018, and December 31, 2034. The base amount of the Earn-Out is $16,000,000 with an additional bonus payment of $10,000,000. The payments of the base and bonus Earn-Out amounts are subject to the Company meeting certain earnings thresholds as detailed in the CPM Acquisition Agreement. The Earn-Out payments during the Earn-Out period specified above, ranges from $0 to $26,000,000.

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

The Earn-Out liability, which represented contingent consideration associated with the CPM Acquisition, is recorded as a liability. This liability is subject to re-measurement to fair value at each reporting date until the contingency is resolved and the changes in fair value are recognized in the consolidated statements of operations at each reporting period.

For the year ended December 31, 2019 and 2018, the Company has determined the earnings threshold as detailed in the CPM Acquisition Agreement was not met and therefore no payments for either the base or bonus Earn-Out tranches would be achieved, based on the Company’s 2019 and 2018 financial performance.

The Earn-Out was remeasured to fair value under the probability weighted income approach. As a result, the fair value of the Earn-Out liability was reduced by $1,936,164 from $13,581,529 to $11,645,365 in 2019 and reduced by $5,663,014 from $19,244,543 to $13,581,529 in 2018 and reflected as “Change in fair value of contingent purchase consideration” on our Consolidated Financial Statements.

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 December 31, 2019, and December 31, 2018. The Company’s cash is concentrated in two large financial institutions that at times may exceed federally insured limits of $250,000 per financial institution. The Company has not experienced any financial institution losses from inception through December 31, 2019. As of December 31, 2019 and 2018, there were deposits of $599,309 and $322,693, respectively, which were greater than federally insured limits.

Accounts Receivable and Allowances

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

The Company performs regular on-going credit evaluations of its customers as deemed relevant. As events, trends, and circumstance, warrant, the Company’s management estimates the amounts that are more likely than not to be uncollectible. These amounts are recognized as bad debt expense and are reflected within selling, general, administrative and other expenses on the Company’s accompanying audited consolidated statement 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 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 $2,093,859, which is reflected in inventory and cost of revenues on the Company’s audited 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.   The Company reviews long-lived assets for impairment annually or whenever changes in circumstances indicate that the carrying amount of an asset might not be recoverable. 

 

Category

 

Amortization

Period

Computer equipment

 

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.

 

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 performs the annual assessment of the recoverability of goodwill during the fourth quarter of each fiscal year, and in 2019, an impairment charge of $932,203 was recognized.   No goodwill impairment was recognized during 2018.

The Company’s intangible assets subject to amortization consist primarily of acquired non-compete agreements and customer relationships. Amortization expense is calculated using the straight-line method over the asset’s expected useful life. (See Note 6, “Goodwill and Intangible Assets” 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 and Cases resulting from sales to third-parties, such as non-medical facilities, distributors, or sub-distributors, to be Wholesale Cases. Some of the Company’s sales for Wholesale Cases are on a consignment basis with a third-party. When consigned, the revenue is not recorded until the device is implanted in a patient during surgery.  In the Company’s industry, Retail Cases are typically sold at higher price points than Wholesale Cases, resulting in greater revenue and gross profit per Case.

 

 

 

Year Ended

 

 

 

December 31, 2019

 

 

December 31, 2018

 

Category

 

 

 

 

 

 

 

 

Retail

 

$

19,082,561

 

 

$

20,332,962

 

Wholesale

 

 

3,817,716

 

 

 

6,009,076

 

Total

 

$

22,900,277

 

 

$

26,342,038

 

 

Cost of Revenues

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

Income Taxes

As a result of the CPM Acquisition, the Company became the sole managing member of CPM and as a result, began consolidating the financial results of CPM. CPM is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, CPM is not subject to U.S. federal and most applicable state and local income tax purposes. Any taxable income or loss generated by CPM is passed through to and included in the taxable income or loss of the Company. As a result of the Maxim Acquisition, the Company and Maxim will elect to file a consolidated tax return for the period after acquisition.

The Company uses the asset and liability method to compute the differences between the tax basis of assets and liabilities and the related financial amounts. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized. The Company has deferred tax assets and liabilities that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets are subject to periodic recoverability assessments. Realization of the deferred tax assets, net of deferred tax liabilities, is principally dependent upon achievement of projected future taxable income.

The Company records a liability for uncertain tax positions when it is probable that a loss has been incurred and the amount can be reasonably estimated. As of December 31, 2019 and 2018, the Company had no liabilities for uncertain tax positions. The Company's policy is to recognize interest and penalties related to income tax matters as a component of income tax expense. The Company continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law, and new authoritative rulings.

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. The Company adopted this guidance effective January 1, 2019. 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. The Company presently leases office space on a month to month basis as described in Note 12.  As such, the adoption of the standard was 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 effective December 31, 2019, on a prospective basis.  Upon adoption, the Company recorded a goodwill impairment of $932,203.

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.

v3.20.1
CPM Acquisition
12 Months Ended
Dec. 31, 2019
CPM [Member]  
Acquisition

Note 3. CPM Acquisition

On December 29, 2017, the Company completed the previously-announced CPM Acquisition, pursuant to the CPM Acquisition Agreement. The Company issued 50 million shares of its Common Stock, par value $0.01 per share, in exchange for one hundred percent (100%) of the outstanding membership interests of CPM, at an agreed-upon value of $0.20 per share of Common Stock, equaling a value of $10,000,000. The remaining $26,000,000 of the purchase price consideration 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 effective date of the CPM Acquisition was December 31, 2017 (the “CPM Effective Date”).

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

As of December 31, 2019, the Earn-Out was remeasured to fair value under the probability weighted income approach. As a result, the fair value of the Earn-Out liability was reduced by $1,936,164 from $13,581,529 to $11,645,365. For the year ended December 31, 2018, the Earn-Out was re-measured to fair value under the probability weighted income approach. As a result, the initial fair value of the Earn-Out liability was reduced by $5,663,014 from $19,244,543 to $13,581,529.  The Company’s management will evaluate the estimated fair value of the Earn-Out liability annually. See “Note 2 Fair Value Measurements.”

The CPM Acquisition Agreement provides 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 consolidated balance sheets.

v3.20.1
Maxim Acquisition
12 Months Ended
Dec. 31, 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, the Sellers and Tahernia as the representative of the Sellers. 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 provides 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 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 year ended December 31, 2018 is as follows:

 

 

Year Ended December 31, 2018 - Unaudited

 

 

Historical

Fuse Medical, Inc.

 

 

Historical

Maxim Surgical

 

 

Pro forma

Adjustments

 

 

Pro forma

Combined

 

Revenue

$

26,342,038

 

 

$

796,014

 

 

$

(459,074

)

 

$

26,678,978

 

Net income (loss)

$

3,957,554

 

 

$

(374,137

)

 

$

-

 

 

$

3,583,417

 

Net income per common share - basic

$

0.06

 

 

$

-

 

 

$

-

 

 

$

0.05

 

 

The supplemental pro forma revenue was adjusted to exclude $459,074 of intercompany transactions for the year ended December 31, 2018. The number of shares outstanding used in calculating the net loss per common share – basic was 68,020,348 for the year ended December 31, 2018.

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

v3.20.1
Property and Equipment
12 Months Ended
Dec. 31, 2019
Property Plant And Equipment [Abstract]  
Property and Equipment

Note 5. Property and Equipment

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

 

 

 

December 31, 2019

 

 

December 31, 2018

 

Computer equipment and software

 

$

51,303

 

 

$

41,840

 

Furniture and fixtures

 

 

-

 

 

 

5,047

 

Office equipment

 

 

20,333

 

 

 

21,913

 

Property and equipment costs

 

 

71,636

 

 

 

68,800

 

Less: accumulated depreciation

 

 

(38,997

)

 

 

(25,826

)

Property and equipment, net

 

$

32,639

 

 

$

42,974

 

 

Depreciation expense for the year ended December 31, 2019 and 2018 was $25,653 and $15,760 respectively. Additionally, $12,482 of fully depreciated assets were retired during 2019

v3.20.1
Goodwill and Intangible Assets
12 Months Ended
Dec. 31, 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:

 

 

 

December 31,

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

 

 

(115,345

)

 

 

(33,925

)

 

 

Intangible assets, net

 

 

1,206,620

 

 

 

1,288,040

 

 

 

Goodwill

 

$

1,972,886

 

 

$

2,905,089

 

 

Indefinite

 

Amortization expense for the years ended December 31, 2019 and 2018 was $81,420 and $33,925 respectively.

 

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

 

The following is a schedule by year of the Company’s future amortization expense related to the finite-live intangible assets as of December 31, 2019:

 

Year Ended December 31,

 

 

 

 

2020

 

$

68,544

 

2021

 

 

50,529

 

2022

 

 

50,529

 

2023

 

 

50,529

 

2024

 

 

50,529

 

Beyond

 

 

231,580

 

 

 

$

502,240

 

 

The Company performed its annual goodwill impairment test by comparing the fair value of the reporting units with its carrying amount. The fair value of the reporting units was determined utilizing both a discounted cash flow and merger and acquisitions methodology in the conclusion of value. The carrying value exceeded its fair value and a goodwill impairment charge of $932,203 was recognized. There was no goodwill impairment during 2018.  

v3.20.1
Revolving Line of Credit
12 Months Ended
Dec. 31, 2019
Debt Disclosure [Abstract]  
Revolving Line of Credit

Note 7. Revolving Line of Credit

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

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

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

The outstanding balance of the RLOC was $1,752,501 and $1,477,488 at December 31, 2019 and 2018, respectively. Interest expense incurred on the RLOC was $121,633 and $106,943 for the year ended December 31, 2019 and 2018, respectively, and is reflected in interest expense on the Company’s accompanying consolidated statements of operations. Accrued interest on the RLOC at December 31, 2019 and 2018 was $4,437 and $4,350, respectively, and is reflected in accrued expenses on the Company’s accompanying consolidated balance sheets. At December 31, 2019, the effective interest rate was calculated to be 6.26%.

v3.20.1
Notes Payable - Related Parties
12 Months Ended
Dec. 31, 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 aggregate amount of $150,000 in exchange for Notes bearing ten percent (10%) interest per annum until December 31, 2016 (“Maturity Date”) and eighteen percent (18%) interest per annum for periods subsequent to the Maturity Date. The Notes remain outstanding and principal and interest are due and payable upon demand of the payee and at the holder’s sole discretion. The Notes’ holders have the right to convert all or any portion of the then unpaid principal and interest balance into shares of the Company’s Common Stock at a conversion price of $0.08 per share.

During the years ended December 31, 2019 and 2018, interest expense of $27,000 and $27,000, respectively, is reflected in interest expense on the Company’s accompanying consolidated statements of operations. As of December 31, 2019, and 2018, accrued interest was $86,096 and $59,096, respectively, which is reflected in accrued expenses on the Company’s accompanying consolidated balance sheets.

v3.20.1
Commitments and Contingencies
12 Months Ended
Dec. 31, 2019
Commitments And Contingencies Disclosure [Abstract]  
Commitments and Contingencies

Note 9. Commitments and Contingencies

Operating Leases

The Company leases office space under a noncancelable operating lease agreement, from a real estate investments company that is owned and controlled by the Company’s Chairman of the Board and President. This lease terminated December 31, 2017 with month-to-month renewals. The lease requires monthly payments of $14,000. Annual rent expense was approximately $168,000 and $168,000 for the years ended December 31, 2019 and 2018, and is included in selling, general, administrative and other expenses on the Company’s accompanying consolidated statement of operations.

The Company leases office equipment under two noncancelable operating lease agreements which expire March 2021 and March 2024. In aggregate, these office equipment leases require monthly payments of approximately $849. Rent expense for the equipment leases totaled approximately $10,000 and $11,000 for the years ended December 31, 2019 and 2018, respectively, and is included in selling, general, administrative and other expenses on the Company’s accompanying consolidated statement of operations.

The following is a schedule by years of future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2019:

 

Year Ended December 31,

 

 

 

 

2020

 

$

10,184

 

2021

 

 

7,749

 

2022

 

 

7,261

 

2023

 

 

7,261

 

2024

 

 

1,210

 

 

 

$

33,665

 

 

v3.20.1
Stockholders' Equity
12 Months Ended
Dec. 31, 2019
Stockholders Equity Deficit [Abstract]  
Stockholders' Equity

Note 10. Stockholders’ Equity

The 2018 Equity Plan is the Company’s stock-based compensation plan. 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.  The Company made an accounting policy election to account for forfeitures when they occur, versus estimating the number of awards that are expected to vest, in accordance with ASU 2016-09.

The following table summarizes the assumptions the Company utilized to record compensation expense for stock options granted to the Company’s product advisory board members, certain key employees, and marketing representatives during:

 

Assumptions

 

For the

Year Ended December 31, 2019

 

 

For the

Year Ended December 31, 2018

 

Expected term (years)

 

 

10.0

 

 

 

10.0

 

Expected volatility

 

105.35 - 118.52%

 

 

 

107.22

%

Weighted-average volatility

 

 

108.52

%

 

 

107.22

%

Risk-free interest rate

 

 

2.670

%

 

 

2.785

%

Dividend yield

 

 

0.0

%

 

 

0.0

%

Expected forfeiture rate

 

n/a

 

 

n/a

 

 

For the years ended December 31, 2019 and 2018, the Board granted 1,650,000 and 3,930,000, respectively, of non-qualified stock option awards (“NQSO”) to the Company’s Scientific Advisory Board members, certain key employees and marketing representatives. For the year ended December 31, 2019 and December 31, 2018, the Company amortized $627,678 and $624,041 relating to the vesting of NQSOs, which is included in selling, general, administrative, and other expenses on the Company’s accompanying consolidated statement of operations. The Company will recognize $1,127,547 as an expense in future periods as the NQSOs vest. The Company recognizes stock compensation expense on a straight-line basis over the requisite service period for each award, which are subject to a vesting schedule as set forth in individual agreements.

A summary of the Company’s stock option activity during the year ended December 31, 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

 

 

 

7.00

 

 

$

443,000

 

Granted

 

 

1,650,000

 

 

 

0.58

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(1,616,667

)

 

 

1.06

 

 

 

 

 

 

 

 

 

Expired

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Balance outstanding at December 31, 2019

 

 

3,948,333

 

 

$

0.61

 

 

 

6.08

 

 

$

157,000

 

Exercisable at December 31, 2019

 

 

1,734,999

 

 

$

0.50

 

 

 

3.71

 

 

$

-

 

 

The weighted-average grant-date fair value of options granted during the year ended December 31, 2019 was $.58.

 

Restricted Common Stock

 

The non-vested RSAs, as of December 31, 2019, were granted to the Company’s Board members as compensation. These awards vest only upon: (i) the occurrence of one of the Accelerating Events: (a) a Change in Control (as defined in RSA Agreement); or (b) listing of the Company’s Common Stock on either NYSE or NASDAQ Stock Market; and (ii) the director’s delivery to the Company of a Notice of Acceleration of Vesting (as defined in RSA Agreement), within the Acceleration Notice Period.

 

As of December 31, 2019, it was not probable that the performance conditions on the outstanding options would be met, therefore, no expense has been recorded for the year ended December 31, 2019. The Company amortized $210,888 relating to the vesting of RSAs, prior to the reissuance of the units with performance conditions, for the year ended December 31, 2018, which is included in selling, general, administrative, and other expenses, on the accompanying consolidated statement of operations.

 

The following table summarizes the RSAs activity for the year ended December 31, 2019:

 

 

Number of

Shares

 

 

Fair Value

 

 

Weighted

Average

Grant

Date

Fair

Value

 

Non-vested, December 31, 2018

 

4,378,615

 

 

$

2,313,500

 

 

$

0.53

 

Granted

 

-

 

 

 

-

 

 

 

-

 

Vested

 

-

 

 

 

-

 

 

 

-

 

Forfeited

 

(1,475,723

)

 

 

(930,700

)

 

$

0.63

 

Non-vested, December 31, 2019

 

2,902,892

 

 

$

1,382,800

 

 

$

0.48

 

 

v3.20.1
Income Taxes
12 Months Ended
Dec. 31, 2019
Income Tax Disclosure [Abstract]  
Income Taxes

Note 11. Income Taxes

The Company began consolidating the financial results of CPM effective January 1, 2016, when the Company became the sole managing member of CPM. CPM is treated as a partnership for U.S. federal and most applicable state and local income taxes. As a partnership, CPM is not subject to U.S. federal and certain state and local income taxes. Beginning January 1, 2018, taxable income or loss generated by CPM is passed through to the Company and is included in its taxable income or loss.

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

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

 

 

 

For the

Year Ended December 31, 2019

 

 

For the

Year Ended December 31, 2018

 

Current:

 

 

 

 

 

 

 

 

Federal

 

$

-

 

 

$

-

 

State

 

 

20,092

 

 

 

48,711

 

 

 

 

20,092

 

 

 

48,711

 

Deferred:

 

 

 

 

 

 

 

 

Federal

 

 

760,993

 

 

 

(435,495

)

State

 

 

-

 

 

 

-

 

 

 

 

760,993

 

 

 

(435,495

)

Total Income tax expense (benefit)

 

$

781,085

 

 

$

(386,784

)

 

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

 

 

 

December 31, 2019

 

 

December 31, 2018

 

Deferred tax assets:

 

 

 

 

 

 

 

 

Net operating loss carryforward

 

$

373,033

 

 

$

216,793

 

Accounts receivable

 

 

282,088

 

 

 

140,272

 

Compensation

 

 

364,605

 

 

 

232,793

 

Inventory

 

 

734,524

 

 

 

383,744

 

Other

 

 

-

 

 

 

28,128

 

Total deferred tax assets

 

 

1,754,250

 

 

 

1,001,730

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Intangibles

 

 

(218,427

)

 

 

(232,835

)

Property and equipment

 

 

(6,239

)

 

 

(7,902

)

Total deferred tax liabilities

 

 

(224,666

)

 

 

(240,737

)

Deferred tax assets, net

 

 

1,529,584

 

 

 

760,993

 

Valuation allowance:

 

 

 

 

 

 

 

 

Beginning of year

 

 

-

 

 

 

-

 

Increase during year

 

 

(1,529,584

)

 

 

-

 

Ending balance

 

 

(1,529,584

)

 

 

-

 

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 the deferred tax assets.  The valuation allowance established during the year ended December 31, 2019 was $1,529,584. 

At December 31, 2019, the Company estimates it has approximately $1,776,327 of net operating loss carryforwards of which $899,331 which will expire during 2020 through 2037. The Company’s management believes its tax positions are more likely than not of being upheld upon examination. As such, the Company has not recorded a liability for unrecognized tax positions. As of December 31, 2019, the Company’s tax years 2016 through 2018 remain open for 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:

 

 

 

For the

Year Ended December 31, 2019

 

 

For the

Year Ended December 31, 2018

 

Statutory U.S. federal income tax rate

 

 

21.0

%

 

 

21.0

%

State income taxes, net of federal tax benefit

 

 

-0.6

%

 

 

1.1

%

Deferred tax asset valuation allowance

 

 

-60.3

%

 

 

0.0

%

Permanent differences

 

 

8.2

%

 

 

-32.8

%

Other reconciling items

 

 

0.9

%

 

 

-0.1

%

Effective income tax rate

 

 

-30.8

%

 

 

-10.8

%

 

Our effective income tax rates for the years ended December 31, 2019 and 2018 were -30.8% and -10.8%, respectively. The decrease between years is driven by the valuation allowance allocated to the deferred tax asset for the current period.  

 

v3.20.1
Concentrations
12 Months Ended
Dec. 31, 2019
Nature Of Operations And Going Concern [Abstract]  
Concentrations

Note 12. Concentrations

Concentration of Revenues, Accounts Receivable and Suppliers

For the years ended December 31, 2019 and 2018, the following significant customers had an individual percentage of total revenue of approximately ten percent (10%) or greater:

 

 

 

For the

Year Ended December 31, 2019

 

 

For the

Year Ended December 31, 2018

 

Customer 1

 

 

9.91

%

 

 

19.78

%

Totals

 

 

9.91

%

 

 

19.78

%

 

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

 

 

 

December 31, 2019

 

December 31, 2018

 

Customer 1

 

(a)

 

 

15.03

%

Totals

 

(a)

 

 

15.03

%

 

 

(a)

There were no customers with a concentration of accounts receivable over 10% as of December 31, 2019.  

 

For the years ended December 31, 2019 and 2018, the following significant suppliers represented ten percent (10%) or greater of goods purchased:

 

 

 

For the

Year Ended December 31, 2019

 

 

For the

Year Ended December 31, 2018

 

Supplier 1

 

 

21.60

%

 

 

13.20

%

Supplier 2

 

 

4.30

%

 

 

10.50

%

Supplier 3

 

 

12.80

%

 

 

0.90

%

Totals

 

 

38.70

%

 

 

24.60

%

 

 

v3.20.1
Related Party Transactions
12 Months Ended
Dec. 31, 2019
Related Party Transactions [Abstract]  
Related Party Transactions

Note 13. 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 NCE, LP, a real estate investment company that is owned and controlled by Mr. Brooks. The Company’s lease arrangement includes (1) the lease acquired pursuant to the CPM Acquisition effective January 1, 2013 and (2) a lease effective July 14, 2017 entered-into to support the Company’s relocation of its Fort Worth, Texas corporate offices to CPM’s executive offices. Both leases terminated December 31, 2017, with month-to-month renewals. For the year ended December 31, 2019 and 2018, the Company paid approximately $168,000 and $168,000 in rent expense, which is reflected in selling, general, administrative, and other expenses in the Company’s accompanying consolidated statements of operations.

AmBio Contract

The Company engaged AmBio, 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 December 31, 2019, AmBio operations support approximately 59 FTEs. Of those 59 FTEs, 43 FTEs directly support the Company, 9 FTEs support the operations of other companies and the Company shares 7 FTEs with other companies.

As of December 31, 2019, and December 31, 2018, the Company owed amounts to AmBio of approximately $169,944 and $180,000, respectively, which is reflected in the accounts payable on the Company’s consolidated balance sheets. For the year ended December 31, 2019, and 2018, the Company paid approximately $ 212,045 and $ 224,000, respectively, to AmBio in administrative fees, which is reflected in selling, general, administrative, and other expenses in the Company’s accompanying 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, and shared-service fee arrangements.

MedUSA Group, LLC

MedUSA is a sub-distributor owned and controlled by Mr. Brooks and Mr. Reeg.

During the years ended December 31, 2019 and 2018, the Company:

 

sold Orthopedic Implants and Biologics products to MedUSA in the amounts of approximately $796,430 and $2,069,000, respectively, which is reflected in net revenues in the Company’s accompanying consolidated statements of operations;

 

 

purchased approximately $31 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 consolidated balance sheets; and

 

 

incurred approximately $2,462,783 and $2,139,000, respectively, in commission costs, which are reflected in commissions in the Company’s accompanying consolidated statements of operations.

As of December 31, 2019, and December 31, 2018, the Company had outstanding balances due from MedUSA of approximately $555,421 and $389,000, respectively. These amounts are reflected in accounts receivable, net of allowance in the Company’s accompanying consolidated balance sheets.

As of December 31, 2019, the Company had no outstanding balances owed to MedUSA. As of December 31, 2018, the Company owed $8,000 to MedUSA, which was reflected in accounts payable in the Company’s accompanying consolidated balance sheets.

Payment terms per our stocking and distribution agreement with MedUSA are 30 days from receipt of invoice. As of December 31, 2019, MedUSA has a past due balance of approximately $534,137.

Texas Overlord, LLC

Overlord is an investment holding-company owned and controlled by Mr. Brooks.

During the years ended December 31, 2019 and 2018, the Company:

 

purchased approximately $24,967 and $547,000, respectively, of Orthopedic Implants, medical instruments, and Biologics from Overlord, which is reflected in inventories, net of allowance on the Company’s accompanying consolidated balance sheets; and

 

 

incurred approximately $165,000 and $635,000, respectively, in commission costs to Overlord, which is reflected in commissions in the Company’s accompanying consolidated statements of operations.

As of December 31, 2019, and December 31, 2018, the Company has no outstanding balances due from Overlord.    

As of December 31, 2019, and December 31, 2018, the Company has outstanding balances owed to Overlord of zero and $2,000, respectively. These amounts are reflected in accounts payable in the Company’s accompanying consolidated balance sheet.

N.B.M.J., Inc.

NBMJ is a durable medical equipment, wound care, and surgical supplies distributor owned and controlled by Mr. Brooks.

During the years ended December 31, 2019 and 2018, the Company sold Biologics products to NBMJ in the amounts of approximately $443,056 and $373,000, respectively, which is reflected in net revenues in the Company’s accompanying consolidated statements of operations;

As of December 31, 2019, and December 31, 2018, the Company has outstanding balances due from NBMJ of zero and approximately $155,000, respectively. These amounts are reflected in accounts receivable in the Company’s accompanying consolidated balance sheets.

Bass Bone and Spine Specialists

Bass operates as a sub-distributor of surgical implants and is owned and controlled by Mr. Brooks.

During the years ended December 31, 2019 and 2018, the Company:

 

sold Orthopedic Implants and Biologics products to Bass in the amounts of approximately $113,473 and $763,000, respectively, which is reflected in net revenues in the Company’s accompanying consolidated statements of operations;

 

 

incurred approximately $80,272 and $8,000, respectively, in commission costs to Bass, which is reflected in commissions in the Company’s accompanying consolidated statements of operations.

As of December 31, 2019, and December 31, 2018, the Company has outstanding balances due from Bass of approximately $7,149 and $179,000, respectively. These amounts are reflected in accounts receivable, net of allowance in the Company’s accompanying consolidated balance sheets.

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

Sintu, LLC

Sintu operates as a sub-distributor of surgical implants and is owned and controlled by Mr. Brooks.

During the years ended December 31, 2019 and 2018, the Company: incurred approximately $467,195 and $860,000, respectively, in commission costs to Sintu, which is reflected in commissions in the Company’s accompanying consolidated statements of operations.

Recon Orthopedics, LLC

Recon operates as a sub-distributor of surgical implants and is owned and controlled by Mr. Brooks.

During the years ended December 31, 2019 and 2018, the Company incurred approximately $0 and $209,000, respectively, in commission costs to Recon, which is reflected in commissions in the Company’s accompanying consolidated statements of operations.

During the year ended December 31, 2019 and 2018, the Company earned approximately $0 and $4,000, respectively, pursuant to the Company’s shared-services agreement with Recon, which is reflected in selling, general, administrative, and other expenses in the Company’s accompanying consolidated statements of operations. The Company terminated the shared services agreement effective April 30, 2018.

Tiger Orthopedics, LLC

Tiger operates as a sub-distributor of surgical implants and is owned and controlled by Mr. Brooks.

During the years ended December 31, 2019 and 2018, the Company sold Orthopedic Implants and Biologics products to Tiger in the amounts of approximately $283,435 and $154,000, respectively, which is reflected in net revenues in the Company’s accompanying consolidated statements of operations.

As of December 31, 2019, and December 31, 2018, the Company has outstanding balances due from Tiger of approximately $30,525 and $5,000, respectively. These amounts are reflected in accounts receivable, net of allowance in the Company’s accompanying consolidated balance sheets.

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

Modal Manufacturing, LLC

Modal is a manufacturer of medical devices owned and controlled by Mr. Brooks.

During the year ended December 31, 2019, we sold Modal products in the amount of approximately $40,700, which is reflect in the statement of operations in our financial statements.

During the years ended December 31, 2019 and 2018, the Company purchased approximately $1,082,643 and zero respectively, in Orthopedic Implants and medical instruments from Modal, which is reflected within inventories, net of allowance on the Company’s accompanying unaudited consolidated balance sheets.

As of December 31, 2019, and 2018, the Company had outstanding balances due from Modal of approximately $40,700 and zero, respectively. This is reflected in accounts payable in the Company’s accompanying audited consolidated balance sheets.

Payment terms per the stocking and distribution agreement are 30 days from receipt of invoice. As of December 31, 2019, the Company owes a balance of $53,854.

v3.20.1
Subsequent Events
12 Months Ended
Dec. 31, 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 March 27, 2020, the date the financial statements were available to be issued.

 

In December 2019, a novel strain of coronavirus was reported in Wuhan, Hubei province, China. In the first several months of 2020, the virus, SARS-CoV-2, and resulting disease, COVID-19, spread to the United States, including to geographic locations in which the Company operates. As of the date above, the Company’s evaluation of the effects of the continuing outbreak of COVID-19 is ongoing.

 

A significant percentage of the Company’s products are utilized in elective surgeries or procedures. In March 2020, many city, state and local governments began issuing orders temporarily halting the performance of elective surgeries in order to better allocate medical supplies, resources and facilities to treatment of COVID-19 patients. These governmental jurisdictions include cities, counties and states in areas we serve.  As a result of these government orders, we have started to experience a reduction in demand for our products.  We anticipate that when these temporary orders are lifted, those patients, surgeons and hospital that had deferred elective procedures will then proceed with the deferred elective procedures in addition to performing elective procedures which will arise in the ordinary course after the temporary orders are lifted.  However, the Company cannot reasonably estimate the length or severity of this pandemic or how long the government orders will be in effect. Any extended prohibitions on elective procedures and subsequent decrease in demand for our products resulting from the COVID-19 outbreak would adversely affect our revenues and results of operation during that temporary prohibition period. We believe, however, that product demand will return to normal levels after the temporary orders are lifted and our end customers begin to address the backlog of elective surgeries in addition to ordinary course demand. The related financial impact of the COVID-19 outbreak, however, cannot be reasonably estimated at this time.

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

v3.20.1
Significant Accounting Policies (Policies)
12 Months Ended
Dec. 31, 2019
Accounting Policies [Abstract]  
Principles of Consolidation

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, CPM, and Maxim, the Company’s wholly-owned subsidiaries of which the operations have been integrated with the Company. Intercompany transactions have been eliminated in consolidation.

Use of Estimates

Use of Estimates

The preparation of the consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (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 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.

Reclassification

Reclassification

 

Upon further review the Company determined that its restricted shares should be considered legally outstanding but excluded from basic EPS and included in diluted EPS as the performance conditions have not been met.  Additionally, prior year common stock and additional paid in capital amounts have been reclassified by $31,111.  The impact to the financial statements was considered insignificant.

Earnings (loss) Per Common Share

Earnings (loss) Per Common Share

Earnings (loss) per common share, basic is calculated by dividing the net income 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 earnings (loss) per common share is computed by dividing net loss by the weighted-average number of common share equivalents outstanding for the period determined using the treasury stock method. For the years ended December 31, 2019, the Company excluded the effects of outstanding stock options as their effects were antidilutive due to the Company’s operating loss during these periods.  

For the year ended December 31, 2019, restricted common stock shares and common stock equivalents of 6,771,779 have been excluded from diluted earnings per share because to include them would have been antidilutive (see Note 10, for the terms and conditions of restricted stock).

The Company identified an error in the weighted average number of shares outstanding used in its calculation of earnings per share for the year ended December 31, 2018. The comparative financial statements have been adjusted to reflect this immaterial correction.   The Company performed a quantitative and qualitative analysis and determined that the error was not material to the previously reported results for the year ended December 31, 2018.

 

 

 

As Previously

 

 

 

 

 

 

 

Reported

 

 

As Revised

 

Weighted average number of common shares outstanding - basic

 

 

68,020,348

 

 

 

67,669,615

 

Weighted average number of common shares outstanding - diluted

 

 

70,945,602

 

 

 

73,926,296

 

Net income (loss) per share - basic

 

$

(0.06

)

 

$

0.06

 

Net income (loss) per share - diluted

 

$

(0.06

)

 

$

0.05

 

 

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 initially recorded a $19,244,543 liability related to the 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 Earn-Out payments are based on the financial performance of the Company between the period of January 1, 2018, and December 31, 2034. The base amount of the Earn-Out is $16,000,000 with an additional bonus payment of $10,000,000. The payments of the base and bonus Earn-Out amounts are subject to the Company meeting certain earnings thresholds as detailed in the CPM Acquisition Agreement. The Earn-Out payments during the Earn-Out period specified above, ranges from $0 to $26,000,000.

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

The Earn-Out liability, which represented contingent consideration associated with the CPM Acquisition, is recorded as a liability. This liability is subject to re-measurement to fair value at each reporting date until the contingency is resolved and the changes in fair value are recognized in the consolidated statements of operations at each reporting period.

For the year ended December 31, 2019 and 2018, the Company has determined the earnings threshold as detailed in the CPM Acquisition Agreement was not met and therefore no payments for either the base or bonus Earn-Out tranches would be achieved, based on the Company’s 2019 and 2018 financial performance.

The Earn-Out was remeasured to fair value under the probability weighted income approach. As a result, the fair value of the Earn-Out liability was reduced by $1,936,164 from $13,581,529 to $11,645,365 in 2019 and reduced by $5,663,014 from $19,244,543 to $13,581,529 in 2018 and reflected as “Change in fair value of contingent purchase consideration” on our Consolidated Financial Statements.

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 December 31, 2019, and December 31, 2018. The Company’s cash is concentrated in two large financial institutions that at times may exceed federally insured limits of $250,000 per financial institution. The Company has not experienced any financial institution losses from inception through December 31, 2019. As of December 31, 2019 and 2018, there were deposits of $599,309 and $322,693, respectively, which were greater than federally insured limits.

Accounts Receivable and Allowances

Accounts Receivable and Allowances

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

The Company performs regular on-going credit evaluations of its customers as deemed relevant. As events, trends, and circumstance, warrant, the Company’s management estimates the amounts that are more likely than not to be uncollectible. These amounts are recognized as bad debt expense and are reflected within selling, general, administrative and other expenses on the Company’s accompanying audited consolidated statement 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 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 $2,093,859, which is reflected in inventory and cost of revenues on the Company’s audited 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.   The Company reviews long-lived assets for impairment annually or whenever changes in circumstances indicate that the carrying amount of an asset might not be recoverable. 

 

Category

 

Amortization

Period

Computer equipment

 

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.

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 performs the annual assessment of the recoverability of goodwill during the fourth quarter of each fiscal year, and in 2019, an impairment charge of $932,203 was recognized.   No goodwill impairment was recognized during 2018.

The Company’s intangible assets subject to amortization consist primarily of acquired non-compete agreements and customer relationships. Amortization expense is calculated using the straight-line method over the asset’s expected useful life. (See Note 6, “Goodwill and Intangible Assets” 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 and Cases resulting from sales to third-parties, such as non-medical facilities, distributors, or sub-distributors, to be Wholesale Cases. Some of the Company’s sales for Wholesale Cases are on a consignment basis with a third-party. When consigned, the revenue is not recorded until the device is implanted in a patient during surgery.  In the Company’s industry, Retail Cases are typically sold at higher price points than Wholesale Cases, resulting in greater revenue and gross profit per Case.

 

 

 

Year Ended

 

 

 

December 31, 2019

 

 

December 31, 2018

 

Category

 

 

 

 

 

 

 

 

Retail

 

$

19,082,561

 

 

$

20,332,962

 

Wholesale

 

 

3,817,716

 

 

 

6,009,076

 

Total

 

$

22,900,277

 

 

$

26,342,038

 

 

Cost of Revenues

Cost of Revenues

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

Income Taxes

Income Taxes

As a result of the CPM Acquisition, the Company became the sole managing member of CPM and as a result, began consolidating the financial results of CPM. CPM is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, CPM is not subject to U.S. federal and most applicable state and local income tax purposes. Any taxable income or loss generated by CPM is passed through to and included in the taxable income or loss of the Company. As a result of the Maxim Acquisition, the Company and Maxim will elect to file a consolidated tax return for the period after acquisition.

The Company uses the asset and liability method to compute the differences between the tax basis of assets and liabilities and the related financial amounts. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized. The Company has deferred tax assets and liabilities that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets are subject to periodic recoverability assessments. Realization of the deferred tax assets, net of deferred tax liabilities, is principally dependent upon achievement of projected future taxable income.

The Company records a liability for uncertain tax positions when it is probable that a loss has been incurred and the amount can be reasonably estimated. As of December 31, 2019 and 2018, the Company had no liabilities for uncertain tax positions. The Company's policy is to recognize interest and penalties related to income tax matters as a component of income tax expense. The Company continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law, and new authoritative rulings.

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. The Company adopted this guidance effective January 1, 2019. 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. The Company presently leases office space on a month to month basis as described in Note 12.  As such, the adoption of the standard was 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 effective December 31, 2019, on a prospective basis.  Upon adoption, the Company recorded a goodwill impairment of $932,203.

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.