FUSE MEDICAL, INC., 10-K filed on 31 Mar 21
v3.21.1
Document and Entity Information - USD ($)
12 Months Ended
Dec. 31, 2020
Mar. 08, 2021
Jun. 30, 2020
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, 2020    
Document Fiscal Year Focus 2020    
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     $ 611,173
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    
ICFR Auditor Attestation Flag false    
Title of 12(b) Security Common Stock    
Trading Symbol FZMD    
v3.21.1
CONSOLIDATED BALANCE SHEETS - USD ($)
Dec. 31, 2020
Dec. 31, 2019
Current assets:    
Cash and cash equivalents $ 1,187,458 $ 1,099,310
Accounts receivable, net of allowance of $787,766 and $615,278, respectively 4,427,896 5,249,653
Inventories, net of allowance of $3,077,728 and $3,805,730, respectively 6,981,413 7,855,887
Prepaid expenses and other current assets 24,203 39,850
Total current assets 12,620,970 14,244,700
Property and equipment, net 17,791 32,639
Long term accounts receivable, net of allowance of $2,615,834 and $728,000, respectively 1,669,510 924,646
Intangible assets, net 1,138,080 1,206,620
Goodwill 1,972,886 1,972,886
Total assets 17,419,237 18,381,491
Current liabilities:    
Accounts payable 3,236,592 2,752,854
Accrued expenses 2,584,734 3,302,904
Convertible notes payable - related parties 150,000 150,000
Payroll Protection Program loan 361,400  
Economic Injury Disaster Loan - short term portion 2,241  
Senior secured revolving credit facility 913,352 1,752,501
Total current liabilities 7,248,319 7,958,259
Notes payable - related parties 200,000  
Economic Injury Disaster Loan - long term portion 147,759  
Earn-out liability 11,936,000 11,645,365
Total liabilities 19,532,078 19,603,624
Commitments and contingencies
Stockholders’ equity (accumulated deficit):    
Preferred stock, $0.01 par value; 20,000,000 shares authorized; no shares issued and outstanding
Common stock, $0.01 par value; 100,000,000 shares authorized; 73,124,458 shares issued and outstanding as of December 31, 2020 and 2019 731,245 731,245
Additional paid-in capital 1,184,222 642,435
Accumulated deficit (4,028,308) (2,595,813)
Total stockholders’ equity (accumulated deficit) (2,112,841) (1,222,133)
Total liabilities and stockholders’ equity (accumulated deficit) $ 17,419,237 $ 18,381,491
v3.21.1
CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)
Dec. 31, 2020
Dec. 31, 2019
Statement Of Financial Position [Abstract]    
Net of allowance, accounts receivable $ 787,766 $ 615,278
Net of allowance, inventories 3,077,728 3,805,730
Net of allowance, long term receivable $ 2,615,834 $ 728,000
Preferred Stock Par Value $ 0.01 $ 0.01
Preferred Stock Shares Authorized 20,000,000 20,000,000
Preferred Stock Shares Issued 0 0
Preferred Stock Shares Outstanding 0 0
Common Stock Par Value $ 0.01 $ 0.01
Common Stock Shares Authorized 100,000,000 100,000,000
Common Stock Shares Issued 73,124,458 73,124,458
Common Stock Shares Outstanding 73,124,458 73,124,458
v3.21.1
CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)
12 Months Ended
Dec. 31, 2020
Dec. 31, 2019
Income Statement [Abstract]    
Net revenues $ 21,398,936 $ 22,900,277
Cost of revenues 8,694,713 11,762,790
Gross profit 12,704,223 11,137,487
Operating expenses    
Selling, general, administrative and other 6,541,659 8,466,077
Commissions 7,086,335 5,982,075
Depreciation and amortization 104,143 107,073
Goodwill impairment 0 932,203
Total operating expenses 13,732,137 15,487,428
Operating loss (1,027,914) (4,349,941)
Other income (expense):    
Change in fair value of contingent purchase consideration (290,635) 1,936,164
Interest expense (94,953) (121,633)
Total other income (expense) (385,588) 1,814,531
Operating loss before income tax (1,413,502) (2,535,410)
Income tax expense 18,993 781,085
Net loss $ (1,432,495) $ (3,316,495)
Loss per common share - basic $ (0.02) $ (0.05)
Loss per common share - diluted $ (0.02) $ (0.05)
Weighted average number of common shares outstanding - basic 70,221,566 70,221,566
Weighted average number of common shares outstanding - diluted 70,221,566 70,221,566
v3.21.1
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - USD ($)
Total
Common Stock [Member]
Additional Paid-In Capital [Member]
Accumulated Deficit [Member]
Beginning Balance, Amount at Dec. 31, 2018 $ 1,466,684 $ 746,002   $ 720,682
Beginning Balance, Shares at Dec. 31, 2018   74,600,181    
Stock 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    
Stock based compensation 541,787   541,787  
Net income (loss) (1,432,495)     (1,432,495)
Ending Balance, Amount at Dec. 31, 2020 $ (2,112,841) $ 731,245 $ 1,184,222 $ (4,028,308)
Ending Balance, Shares at Dec. 31, 2020   73,124,458    
v3.21.1
CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
12 Months Ended
Dec. 31, 2020
Dec. 31, 2019
Cash flows from operating activities:    
Net loss $ (1,432,495) $ (3,316,495)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:    
Depreciation and amortization 104,143 107,073
Change in fair value of contingent purchase consideration 290,635 (1,936,164)
Goodwill impairment 0 932,203
Stock based compensation 553,184 627,678
Provision for discounts on long term accounts receivable 1,887,836 645,046
Provision for bad debts and discounts 172,488 30,269
Provision for slow moving and obsolete inventory (728,002) 2,093,858
Deferred income tax expense   760,993
Changes in operating assets and liabilities:    
Accounts receivable 649,269 (178,354)
Inventories 1,602,476 1,126,144
Prepaid expenses and other current assets 15,647 (10,297)
Long term accounts receivable (2,632,698) (1,445,261)
Accounts payable 483,738 39,935
Accrued expenses (729,567) 518,633
Net cash provided by/(used in) operating activities 236,654 (4,739)
Cash flows from investing activities:    
Purchases of property and equipment (20,757) (15,318)
Net cash used in investing activities (20,757) (15,318)
Cash flows from financing activities:    
Net payments/proceeds from senior secured revolving credit facility (839,149) 275,053
Proceeds from related party notes payable 200,000  
Net cash provided by/(used in) financing activities (127,749) 275,053
Net increase in cash and cash equivalents 88,148 254,996
Cash and cash equivalents - beginning of year 1,099,310 844,314
Cash and cash equivalents - end of year 1,187,458 1,099,310
Supplemental disclosure of cash flow information:    
Cash paid for interest 62,866 $ 94,545
Payrolll Protection Program [Member]    
Cash flows from financing activities:    
Payroll protection program proceeds 361,400  
Economic Injury Disaster Loan Assistance Program [Member]    
Cash flows from financing activities:    
Economic injury disaster loan proceeds $ 150,000  
v3.21.1
Nature of Operations
12 Months Ended
Dec. 31, 2020
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.com, Inc. and was redomiciled to Delaware through a merger. Effective May 28, 2014, GolfRounds.com, Inc. amended its certificate of incorporation to change its name to Fuse Medical, Inc., and Fuse Medical, LLC, an unrelated entity, merged with and into a wholly-owned subsidiary of Fuse Medical, Inc., with Fuse Medical, LLC surviving as a wholly-owned subsidiary of Fuse Medical, Inc. The transaction was accounted for as a reverse merger. The Company was the legal acquirer, and Fuse Medical, LLC was deemed the accounting acquirer. During 2015, certificates of termination were filed for Fuse Medical, LLC and its two subsidiaries.  

On December 19, 2016, the Change-in-Control Date, the Company entered into a Stock Purchase Agreement by and between the Company, NC 143 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 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. On August 1, 2018, 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.

Nature of Business

The Company is a Manufacturer, distributor, and wholesaler of medical device implants, offering a broad portfolio of Orthopedic Implants and Biologics 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

For the years ended December 31, 2020 and 2019 the Company had accumulated losses of $4,028,308 and $2,595,813, respectively, and a stockholders’ deficit of $2,112,841 and $1,222,133, respectively. Revenues declined by $1,501,341 and $3,441,761 in 2020 and 2019, respectively, as a result of competitive pressures. The Company was out of compliance with its loan covenants at various times during the year ended December 31, 2019 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. At December 31, 2019 the Company’s management determined that these conditions and events raised substantial doubt about the ability of the Company to continue as a going concern.

 

As of and for the year ended December 31, 2020, the Company’s management noted that its gross profit was $12,704,223 compared to $11,137,487 for the year ended December 31, 2019, representing an increase of $1,566,736, or approximately 14%. Additionally, the Company’s selling, general, administrative, and other expenses (“SG&A”) were $6,541,659 compared to SG&A of $8,466,077 for the year ended December 31, 2019, representing a decrease of $1,924,418 or approximately 23%.  These changes in the Company’s operating results produced in a net loss of $1,432,495 for the year ended December 31, 2020, compared to net loss of $3,316,495 for the year ended December 31, 2019, reflecting a decrease in the Company’s net loss of $1,884,000, or approximately 57%. 

 

The Company’s primary sources of liquidity are cash from operations and its RLOC with Amegy Bank. At December 31, 2020, the Company’s current assets exceeded its current liabilities by $5,372,651 (“Working Capital”), which included $1,187,458 in cash and cash equivalents.  Cash from the Company’s operations and net borrowings on its RLOC supports the Company’s Working Capital needs.  As of December 31, 2020, the Company had sufficient collateral, had approximately $1.3 million in borrowing compacity and was in compliance with the RLOC debt covenants. The Company expects to renew its RLOC maturing May 4, 2021.

Further, the Company’s management expects to (i) continue successful execution of new product and licensing deal rollouts and key rebranding initiatives, (ii) expand new retail sales channel opportunities, and (iii) additional strategic cost reductions will continue.

 

Based on these operating results, key initiatives, and the Company’s liquidity position as of December 31, 2020, the Company’s management has determined that these conditions and events supported the Company’s ability to continue as a going concern

 

 

v3.21.1
Significant Accounting Policies
12 Months Ended
Dec. 31, 2020
Accounting Policies [Abstract]  
Significant Accounting Policies

Note 2. Significant Accounting Policies

Principles of Consolidation

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

Use of Estimates

The preparation of the 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 on the accompanying consolidated financial statements include the allowances for doubtful accounts, valuation of inventories, the Company’s effective income tax rate and the fair value calculations of stock-based compensation, goodwill, finite lived intangibles and the earn-out liability.

 

Segment Reporting

In accordance with Accounting Standards Update (“ASU”) No. 280, “Segment Reporting,” the Company uses the management approach for determining its reportable segments. The management approach is based upon the way that management reviews performance and allocates resources. The Company’s Chief Executive Officer serves as the Company’s chief operating decision maker, and 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

 

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

Loss Per Common Share

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

Diluted loss per common share is computed by dividing net income/(loss) by the weighted-average number of Common Stock equivalents outstanding for the period determined using the treasury stock method. For the years ended December 31, 2020 and 2019, the Company excluded the effects of outstanding stock options, convertible notes and, to the extent in the money, restricted stock as their effects were antidilutive due to the Company’s operating loss during these periods. (See Note 10, “Stockholders’ Equity” for the terms and conditions of restricted stock).

For the year ended December 31, 2020, restricted common stock shares and common stock equivalents of 2,245,762 have been excluded from diluted earnings per share because to include them would have been antidilutive (See Note 10, “Stockholders Equity” for the terms and conditions of restricted stock). 

Fair Value Measurements

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

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

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

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

In connection with the CPM Acquisition, the Company initially recorded a $19,244,543 liability related to the Earn-Out portion of the purchase consideration. 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 three percent (3%). 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: (i) EBITDA margins increasing from one percent (1%) to ten percent (10%) over the next four years; and (ii) revenue growth of approximately five percent (5%) over the next five years, and approximately two percent (2%) thereafter.

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, 2020 and 2019, 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 2020 and 2019 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 increased by $290,635 from $11,645,365 to $11,936,000 in 2020 and reduced by $1,936,164 from $13,581,529 to $11,645,365 in 2019 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.

 

Financial Instruments

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

 

Cash and Cash Equivalents

The Company considers highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. There were no cash equivalents at December 31, 2020, and December 31, 2019. The Company’s cash is concentrated in one large financial institution. The amount of cash held at that financial institution may at times exceed federally insured limits of $250,000 per financial institution. The Company has not experienced any financial institution losses from inception through December 31, 2020. As of December 31, 2020 and 2019, there were deposits of $761,671 and $599,309, 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 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. In 2020 based on sales activity for the year and inventory on hand at the end of the year, the Company decreased the reserve $728,002, which is reflected in inventory and cost of revenues on the Company’s 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.

 Long-Lived Assets

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

 

Goodwill and Other Intangible Assets

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

Goodwill is not amortized, but is tested in the fourth quarter each year for impairment, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount.  The Company performs its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. If the carrying value of a reporting unit exceeds its fair value, an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. For the years ended December 31, 2020 and 2019 an impairment charge of zero and $932,203 was recognized, respectively.

 

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

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

Revenue Recognition

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

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

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

Revenue Differentiation

The Company measures sales volume based on medical procedures in which the Company’s products are sold and used (Cases). The Company considers Cases resulting from direct sales to medical facilities to be Retail Cases and Cases resulting from sales to third-parties, such as non-medical facilities, distributors, or sub-distributors, to be Wholesale Cases. 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, 2020

 

 

December 31, 2019

 

Category

 

 

 

 

 

 

 

 

Retail

 

$

19,092,800

 

 

$

19,082,561

 

Wholesale

 

 

2,306,136

 

 

 

3,817,716

 

Total

 

$

21,398,936

 

 

$

22,900,277

 

Cost of Revenues

Cost of revenues consists of (i) cost of goods sold, (ii) freight and shipping costs for items sold to customers, (iii) cost of storage, (iv) investment in medical instruments, which are expensed when acquired, (v) inventory shrink, and (vi) an estimate for slow-moving inventory, 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 disregarded entity for U.S. federal and most applicable state and local income tax purposes. As a disregarded entity, 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 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, 2020 and 2019, 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, 2020. 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 9.  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.  

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.

v3.21.1
Property and Equipment
12 Months Ended
Dec. 31, 2020
Property Plant And Equipment [Abstract]  
Property and Equipment

Note 3. Property and Equipment

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

 

 

 

December 31, 2020

 

 

December 31, 2019

 

Computer equipment and software

 

$

49,918

 

 

$

51,303

 

Office equipment

 

 

-

 

 

 

20,333

 

Property and equipment costs

 

 

49,918

 

 

 

71,636

 

Less: accumulated depreciation

 

 

(32,127

)

 

 

(38,997

)

Property and equipment, net

 

$

17,791

 

 

$

32,639

 

 

Depreciation expense for the year ended December 31, 2020 and 2019 was $35,605 and $25,653 respectively. Additionally, $42,476 of fully depreciated assets were retired during 2020.

v3.21.1
Goodwill and Intangible Assets
12 Months Ended
Dec. 31, 2020
Goodwill And Intangible Assets Disclosure [Abstract]  
Goodwill and Intangible Assets

Note 4. Goodwill and Intangible Assets

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

 

 

 

December 31,

2020

 

 

December 31,

2019

 

 

Amortization period

(years)

Intangible assets:

 

 

 

 

 

 

 

 

 

 

Non-compete agreements

 

$

-

 

 

$

61,766

 

 

2

510k product technology

 

 

704,380

 

 

 

704,380

 

 

Indefinite

Customer relationships

 

 

555,819

 

 

 

555,819

 

 

11

Total intangible assets

 

 

1,260,199

 

 

 

1,321,965

 

 

 

Less: accumulated amortization

 

 

(122,119

)

 

 

(115,345

)

 

 

Intangible assets, net

 

 

1,138,080

 

 

 

1,206,620

 

 

 

Goodwill

 

$

1,972,886

 

 

$

1,972,886

 

 

Indefinite

Amortization expense for the years ended December 31, 2020 and 2019 was $68,538 and $81,420 respectively.

 

The Company’s intangible assets subject to amortization consist primarily of acquired non-compete agreements, 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, 2020:

 

Year Ended December 31,

 

 

 

 

2021

 

$

50,532

 

2022

 

 

50,532

 

2023

 

 

50,532

 

2024

 

 

50,532

 

2025

 

 

50,532

 

Beyond

 

 

181,040

 

 

 

$

433,700

 

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 fair value exceeded its carrying value for 2020. The carrying value exceeded its fair value and a goodwill impairment charge of $932,203 was recognized for 2019.   

v3.21.1
Senior Secured Revolving Credit Facility
12 Months Ended
Dec. 31, 2020
Debt Disclosure [Abstract]  
Senior Secured Revolving Credit Facility

Note 5. Senior Secured Revolving Credit Facility

On December 29, 2017, the Company became party to the RLOC with Amegy Bank. The RLOC established an asset-based senior secured revolving credit facility in the amount of $5,000,000.  The RLOC contains customary representation, warranties, covenants, events of default, and is collateralized by substantially all of the Company’s assets. The Company’s Chairman of the Board and President initially personally guaranteed fifty percent (50%) of the outstanding RLOC amount.

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

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

 

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

 

In conjunction with executing the Fifth Amendment to the RLOC, the Company obtained an additional $200,000 in capital in the form of subordinated debt from affiliates of Messrs. Brooks and Reeg. Specifically, on May 6, 2020, the Company borrowed $180,000 NC 143, and $20,000 from RMI, in exchange for two promissory notes which are unsecured and bear interest at 0.25% per annum until May 6, 2022, the maturity date, and 10.0% per annum after the maturity date, if not paid in full.  Principal and interest are due and payable on the maturity date, provided, however, any payment of principal and interest on the loans is subordinated to payment of all indebtedness under the RLOC.

 On November 12, 2020 the Company executed a Sixth Amendment to the RLOC with Amegy Bank, which extended the termination date of our RLOC to May 4, 2021. The Company was in compliance with all RLOC covenants as of December 31, 2020.

The outstanding balance of the RLOC was $913,352 and $1,752,501 at December 31, 2020 and 2019, respectively. Interest expense incurred on the RLOC was $61,036 and $94,633 for the year ended December 31, 2020 and 2019, respectively, and is reflected in interest expense on the Company’s accompanying consolidated statements of operations. Accrued interest on the RLOC at December 31, 2020 and 2019 was $2,947 and $4,437, respectively, and is reflected in accrued expenses on the Company’s accompanying consolidated balance sheets. At December 31, 2020, the effective interest rate was calculated to be 4.60%.

v3.21.1
Notes Payable - Related Parties
12 Months Ended
Dec. 31, 2020
Debt Disclosure [Abstract]  
Notes Payable - Related Parties

Note 6. Notes Payable – Related Parties

During July 2016 through October 2016, the Company obtained three working capital loans from NC 143 and RMI in the 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. On May 6, 2020, the Company borrowed $180,000 from NC 143 and $20,000 from RMI, in exchange for two promissory notes which are unsecured and bear interest at 0.25% per annum until May 6, 2022, the maturity date, and 10.0% per annum after the maturity date, if not paid in full.  Principal and interest are due and payable on the maturity date, provided, however, any payment of principal and interest on the loans is subordinated to payment of all indebtedness under the RLOC.

During the years ended December 31, 2020 and 2019, interest expense of $27,407 and $27,000, respectively, is reflected in interest expense on the Company’s accompanying consolidated statements of operations. As of December 31, 2020, and 2019, accrued interest was $113,503 and $86,096, respectively, which is reflected in accrued expenses on the Company’s accompanying consolidated balance sheets.

v3.21.1
Paycheck Protection Program Loan
12 Months Ended
Dec. 31, 2020
Debt Disclosure [Abstract]  
Paycheck Protection Program Loan

Note 7. Paycheck Protection Program Loan

On April 11, 2020, the Company received approval from the SBA to fund the Company’s request for a PPP Loan created as part of the recently enacted CARES Act administered by the SBA. In connection with the PPP Loan, the Company has entered into a promissory note in the principal amount of $361,400. In accordance with the requirements of the CARES Act, the Company intends to use the proceeds from the PPP Loan primarily for payroll costs. The PPP Loan is scheduled to mature on April 11, 2022, has a 1.00% interest rate, and is subject to the terms and conditions applicable to all loans made pursuant to the PPP. The PPP Loan is reflected in short term liabilities in the Company’s accompanying consolidated balance sheets as the Company expects the PPP Loan will be forgiven effective during 2020.

As of December 31, 2020, the Company incurred approximately $2,720 in accrued interest related to the PPP Loan, which is reflected in accrued expenses on the Company’s accompanying consolidated balance sheets.  For the year ended December 31, 2020, the Company incurred approximately $2,720 in interest expense related to the PPP Loan, which is reflected in interest expense on the Company’s accompanying consolidated statements of operations. The Company did not incur interest expense related to the PPP Loan for the year ended December 31, 2019.

v3.21.1
Economic Injury Disaster Loan
12 Months Ended
Dec. 31, 2020
Debt Disclosure [Abstract]  
Economic Injury Disaster Loan

Note 8. Economic Injury Disaster Loan

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

EIDL Loan interest expense incurred was approximately $3,791 and zero for the years ended December 31, 2020 and 2019, respectively, and is reflected in interest expense on the Company’s accompanying consolidated statements of operations. Accrued interest on the EIDL Loan at December 31, 2020 and 2019 was $3,791 and zero, respectively, and is reflected in accrued expenses on the Company’s accompanying consolidated balance sheets.

v3.21.1
Commitments and Contingencies
12 Months Ended
Dec. 31, 2020
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, 2020 and 2019, 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 $10,000 for the years ended December 31, 2020 and 2019, 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, 2020:

 

Year Ended December 31,

 

 

 

 

2021

 

$

7,749

 

2022

 

 

7,261

 

2023

 

 

7,261

 

2024

 

 

1,210

 

2025

 

 

-

 

 

 

$

23,481

 

 

v3.21.1
Stockholders' Equity
12 Months Ended
Dec. 31, 2020
Stockholders Equity Deficit [Abstract]  
Stockholders' Equity

Note 10. Stockholders’ Equity

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

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

 

Assumptions

 

For the

Year Ended December 31, 2020

 

 

For the

Year Ended December 31, 2019

 

Expected term (years)

 

 

-

 

 

 

10.0

 

Expected volatility

 

 

0.00

%

 

105.35 - 118.52%

 

Weighted-average volatility

 

 

0.00

%

 

 

108.52

%

Risk-free interest rate

 

 

0.000

%

 

 

2.670

%

Dividend yield

 

 

0.0

%

 

 

0.0

%

Expected forfeiture rate

 

n/a

 

 

n/a

 

Non-Qualified Stock Option Awards

For the years ended December 31, 2020 and 2019, the Board granted zero and 1,650,000, 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, 2020 and December 31, 2019, the Company amortized $553,184 and $627,678 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 $315,165 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, 2020 is presented below:

 

 

No. of

Shares

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual

Term

 

 

Aggregate

Intrinsic

Value

 

Balance outstanding at December 31, 2019

 

 

3,948,333

 

 

$

0.61

 

 

 

6.08

 

 

$

157,000

 

Granted

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(753,333

)

 

 

 

 

 

 

 

 

 

 

 

Expired

 

 

(600,000

)

 

 

 

 

 

 

 

 

 

 

 

Balance outstanding at December 31, 2020

 

 

2,595,000

 

 

$

0.65

 

 

 

5.92

 

 

$

56,000

 

Exercisable at December 31, 2020

 

 

1,663,333

 

 

$

0.58

 

 

 

4.81

 

 

$

56,000

 

 

Restricted Common Stock

 

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

 

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

 

The following table summarizes the RSAs activity for the year ended December 31, 2020:

 

 

Number of

Shares

 

 

Fair Value

 

 

Weighted

Average

Grant

Date

Fair

Value

 

Non-vested, December 31, 2019

 

2,902,892

 

 

$

1,382,800

 

 

$

0.48

 

Granted

 

-

 

 

 

-

 

 

 

-

 

Vested

 

-

 

 

 

-

 

 

 

-

 

Forfeited

 

-

 

 

 

-

 

 

 

-

 

Non-vested, December 31, 2020

 

2,902,892

 

 

$

1,382,800

 

 

$

0.48

 

 

v3.21.1
Income Taxes
12 Months Ended
Dec. 31, 2020
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 disregarded entity for U.S. federal and most applicable state and local income taxes. As a disregarded entity, CPM is not subject to U.S. federal and certain state and local income taxes. Beginning January 1, 2019, taxable income or loss generated by CPM is included in its taxable income or loss of the Company.

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, 2020

 

 

For the

Year Ended December 31, 2019

 

Current:

 

 

 

 

 

 

 

 

Federal

 

$

-

 

 

$

-

 

State

 

 

18,993

 

 

 

20,092

 

 

 

 

18,993

 

 

 

20,092

 

Deferred:

 

 

 

 

 

 

 

 

Federal

 

 

-

 

 

 

760,993

 

State

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

760,993

 

Total Income tax expense

 

$

18,993

 

 

$

781,085

 

 

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

 

 

 

 

December 31, 2020

 

 

December 31, 2019

 

Deferred tax assets:

 

 

 

 

 

 

 

 

Net operating loss carryforward

 

$

786,751

 

 

$

373,033

 

Accounts receivable

 

 

165,431

 

 

 

282,088

 

Compensation

 

 

480,774

 

 

 

364,605

 

Inventory

 

 

588,966

 

 

 

734,524

 

Other

 

 

5,083

 

 

 

-

 

Total deferred tax assets

 

 

2,027,005

 

 

 

1,754,250

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Intangibles

 

 

(206,723

)

 

 

(218,427

)

Property and equipment

 

 

(3,736

)

 

 

(6,239

)

Total deferred tax liabilities

 

 

(210,459

)

 

 

(224,666

)

Deferred tax assets, net

 

 

1,816,546

 

 

 

1,529,584

 

Valuation allowance:

 

 

 

 

 

 

 

 

Beginning of year

 

 

(1,529,584

)

 

 

-

 

Increase during year

 

 

(286,962

)

 

 

(1,529,584

)

Ending balance

 

 

(1,816,546

)

 

 

(1,529,584

)

Net deferred tax asset

 

$

-

 

 

$

-

 

A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized.  The Company recorded a valuation allowance in 2020 due to the uncertainty of realization.  Management believes that based upon the history of losses that the Company has incurred to date and its projection of future taxable operating income for the foreseeable future, it is more likely than not that the Company will not be able to realize the tax benefit associated with the deferred tax assets.  The valuation allowance established during the year ended December 31, 2020 was $1,816,546 

At December 31, 2020, the Company estimates it has approximately $3,746,433 of net operating loss carryforwards of which $899,331 will expire during 2021 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, 2020, the Company’s tax years 2017 through 2019 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, 2020

 

 

For the

Year Ended December 31, 2019

 

Statutory U.S. federal income tax rate

 

 

21.0

%

 

 

21.0

%

Other reconciling items

 

 

4.2

%

 

 

0.9

%

Permanent differences

 

 

0.0

%

 

 

8.2

%

State income taxes, net of federal tax benefit

 

 

-1.3

%

 

 

-0.6

%

Deferred tax asset valuation allowace

 

 

-25.6

%

 

 

-60.3

%

Effective income tax rate

 

 

-1.7

%

 

 

-30.8

%

Our effective income tax rates for the years ended December 31, 2020 and 2019 were -1.7% and -30.8%, respectively. The decrease between years is driven by the valuation allowance allocated to the deferred tax asset for the current period.  

 

v3.21.1
Concentrations
12 Months Ended
Dec. 31, 2020
Nature Of Operations And Going Concern [Abstract]  
Concentrations

Note 12. Concentrations

Concentration of Revenues, Accounts Receivable and Suppliers

For the years ended December 31, 2020 and 2019, the following significant customers had an individual percentage of total revenue of approximately ten percent (10%) or greater:

 

 

 

For the

Year Ended December 31, 2020

 

 

For the

Year Ended December 31, 2019

 

Top customer

 

 

12.63

%

 

 

6.08

%

Totals

 

 

12.63

%

 

 

6.08

%

 

There were no customers with a concentration of accounts receivable over 10% as of December 31, 2020 or 2019.  

 

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

 

 

For the

Year Ended December 31, 2020

 

 

For the

Year Ended December 31, 2019

 

Supplier 1

 

 

25.60

%

 

 

21.60

%

Supplier 2 (Related party)

 

 

6.90

%

 

 

12.80

%

Totals

 

 

32.50

%

 

 

34.40

%

 

v3.21.1
Related Party Transactions
12 Months Ended
Dec. 31, 2020
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 thereafter. For the year ended December 31, 2020 and 2019, 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, a Texas licensed PEO, 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, 2020, AmBio operations support approximately 44 FTEs. Of those 44 FTEs, 37 FTEs directly support the Company, 6 FTEs support the operations of other companies and the Company shares 1 FTE with other companies.

As of December 31, 2020, and December 31, 2019, the Company owed amounts to AmBio of approximately $154,051 and $169,944, respectively, which is reflected in the accounts payable on the Company’s accompanying consolidated balance sheets. For the year ended December 31, 2020, and 2019, the Company paid approximately $172,221 and $212,045, 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. These transactions are based on wholesale contractual agreements that the Company’s management believes are on terms and conditions substantially similar to other third-party contractual agreements. As described more fully below, these transactions include: selling and purchasing of inventory on 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, 2020 and 2019, the Company:

 

sold Orthopedic Implants and Biologics products to MedUSA in the amounts of approximately $29,822 and $796,430, respectively, which is reflected in net revenues in the Company’s accompanying consolidated statements of operations;

 

 

purchased approximately zero and $31, 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 $3,527,783 and $2,462,783, respectively, in commission costs, which are reflected in commissions in the Company’s accompanying consolidated statements of operations.

As of December 31, 2020, and December 31, 2019, the Company had outstanding balances due from MedUSA of approximately $398,151 and $555,421, respectively. These amounts are reflected in accounts receivable, net of allowance in the Company’s accompanying consolidated balance sheets.

As of December 31, 2020, the Company had no outstanding balances owed to MedUSA. As of December 31, 2019, the Company had no outstanding balances owed to MedUSA, which was reflected in accounts payable in the Company’s accompanying consolidated balance sheets.

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

Texas Overlord, LLC

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

During the years ended December 31, 2020 and 2019, the Company:

 

purchased approximately zero and $24,967, 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 $190,000 and $165,000, respectively, in commission costs to Overlord, which is reflected in commissions in the Company’s accompanying consolidated statements of operations.

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

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

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, 2020 and 2019, the Company sold Biologics products to NBMJ in the amounts of approximately $24,708 and $443,056, respectively, which is reflected in net revenues in the Company’s accompanying consolidated statements of operations;

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

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, 2020 and 2019, the Company:

 

sold Orthopedic Implants and Biologics products to Bass in the amounts of approximately $81,350 and $113,473, respectively, which is reflected in net revenues in the Company’s accompanying consolidated statements of operations;

 

 

incurred approximately $16,885 and $80,272, respectively, in commission costs to Bass, which is reflected in commissions in the Company’s accompanying consolidated statements of operations.

As of December 31, 2020, and December 31, 2019, the Company has outstanding balances due from Bass of approximately $20,117 and $7,149, 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, 2020 and 2019, the Company: incurred approximately $575,918 and $467,195, respectively, in commission costs to Sintu, which is reflected in commissions in the Company’s accompanying consolidated statements of operations.

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, 2020 and 2019, the Company sold Orthopedic Implants and Biologics products to Tiger in the amounts of approximately $39,922 and $283,435, respectively, which is reflected in net revenues in the Company’s accompanying consolidated statements of operations.

As of December 31, 2020, and December 31, 2019, the Company has outstanding balances due from Tiger of approximately zero and $30,525, 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 years ended December 31, 2020 and 2019, the Company purchased approximately $508,597 and $1,082,643 respectively, in Orthopedic Implants and medical instruments from Modal, which is reflected within inventories, net of allowance on the Company’s accompanying consolidated balance sheets.

As of December 31, 2020, and 2019, the Company had outstanding balances due from Modal of approximately zero and $40,700, respectively. This is reflected in accounts receivable 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, 2020, the Company owes Modal a balance of $417,897.

v3.21.1
Subsequent Events
12 Months Ended
Dec. 31, 2020
Subsequent Events [Abstract]  
Subsequent Events

Note 13. Subsequent Events

In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through March 25, 2020, the date the financial statements were available to be issued.

 

Severe Weather Conditions. During February 2021, the state of Texas experienced record-breaking winter weather which resulted in dangerous road conditions, widespread power outages, water outages and contamination of the water supply, which caused significant disruptions through-out Texas, including the Company’s corporate office and distribution center for several days.

The Company’s executive management team immediately focused on the health and wellbeing of the Company’s employees, while also working to minimize the impact on its customers. The Company resumed full operations on March 1, 2021 and are currently working to address the Cases, sales support, and administrative functions backlog. Generally, surgical cases have been rescheduled to subsequent weeks. (For more information, see Item 1A. “Risk Factors—Risks Related to Our Business and Industry”).

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

v3.21.1
Significant Accounting Policies (Policies)
12 Months Ended
Dec. 31, 2020
Accounting Policies [Abstract]  
Principles of Consolidation

Principles of Consolidation

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

Use of Estimates

Use of Estimates

The preparation of the 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 on the accompanying consolidated financial statements include the allowances for doubtful accounts, valuation of inventories, the Company’s effective income tax rate and the fair value calculations of stock-based compensation, goodwill, finite lived intangibles and the earn-out liability.

 

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

 

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

Loss Per Common Share

Loss Per Common Share

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

Diluted loss per common share is computed by dividing net income/(loss) by the weighted-average number of Common Stock equivalents outstanding for the period determined using the treasury stock method. For the years ended December 31, 2020 and 2019, the Company excluded the effects of outstanding stock options, convertible notes and, to the extent in the money, restricted stock as their effects were antidilutive due to the Company’s operating loss during these periods. (See Note 10, “Stockholders’ Equity” for the terms and conditions of restricted stock).

For the year ended December 31, 2020, restricted common stock shares and common stock equivalents of 2,245,762 have been excluded from diluted earnings per share because to include them would have been antidilutive (See Note 10, “Stockholders Equity” for the terms and conditions of restricted stock). 

Fair Value Measurements

Fair Value Measurements

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

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

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

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

In connection with the CPM Acquisition, the Company initially recorded a $19,244,543 liability related to the Earn-Out portion of the purchase consideration. 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 three percent (3%). 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: (i) EBITDA margins increasing from one percent (1%) to ten percent (10%) over the next four years; and (ii) revenue growth of approximately five percent (5%) over the next five years, and approximately two percent (2%) thereafter.

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, 2020 and 2019, 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 2020 and 2019 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 increased by $290,635 from $11,645,365 to $11,936,000 in 2020 and reduced by $1,936,164 from $13,581,529 to $11,645,365 in 2019 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.

Financial Instruments

Financial Instruments

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

Cash and Cash Equivalents

Cash and Cash Equivalents

The Company considers highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. There were no cash equivalents at December 31, 2020, and December 31, 2019. The Company’s cash is concentrated in one large financial institution. The amount of cash held at that financial institution may at times exceed federally insured limits of $250,000 per financial institution. The Company has not experienced any financial institution losses from inception through December 31, 2020. As of December 31, 2020 and 2019, there were deposits of $761,671 and $599,309, 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 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. In 2020 based on sales activity for the year and inventory on hand at the end of the year, the Company decreased the reserve $728,002, which is reflected in inventory and cost of revenues on the Company’s 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.

Long-Lived Assets

 Long-Lived Assets

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

 

Goodwill and Other Intangible Assets

Goodwill and Other Intangible Assets

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

Goodwill is not amortized, but is tested in the fourth quarter each year for impairment, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount.  The Company performs its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. If the carrying value of a reporting unit exceeds its fair value, an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. For the years ended December 31, 2020 and 2019 an impairment charge of zero and $932,203 was recognized, respectively.

 

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

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

Revenue Recognition

Revenue Recognition

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

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

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

Revenue Differentiation

The Company measures sales volume based on medical procedures in which the Company’s products are sold and used (Cases). The Company considers Cases resulting from direct sales to medical facilities to be Retail Cases and Cases resulting from sales to third-parties, such as non-medical facilities, distributors, or sub-distributors, to be Wholesale Cases. 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, 2020

 

 

December 31, 2019

 

Category

 

 

 

 

 

 

 

 

Retail

 

$

19,092,800

 

 

$

19,082,561

 

Wholesale

 

 

2,306,136

 

 

 

3,817,716

 

Total

 

$

21,398,936

 

 

$

22,900,277

 

Cost of Revenues

Cost of Revenues

Cost of revenues consists of (i) cost of goods sold, (ii) freight and shipping costs for items sold to customers, (iii) cost of storage, (iv) investment in medical instruments, which are expensed when acquired, (v) inventory shrink, and (vi) an estimate for slow-moving inventory, 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 disregarded entity for U.S. federal and most applicable state and local income tax purposes. As a disregarded entity, 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 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, 2020 and 2019, 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, 2020. 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 9.  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.  

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.

v3.21.1
Significant Accounting Policies (Tables)
12 Months Ended
Dec. 31, 2020
Accounting Policies [Abstract]  
Estimated Useful Lives of Assets

 

 

Category

 

Amortization

Period

Computer equipment

 

3 years

Furniture and fixtures

 

3 years

Office equipment

 

3 years

Software

 

3 years

Schedule of Revenue Differentiation

The Company measures sales volume based on medical procedures in which the Company’s products are sold and used (Cases). The Company considers Cases resulting from direct sales to medical facilities to be Retail Cases and Cases resulting from sales to third-parties, such as non-medical facilities, distributors, or sub-distributors, to be Wholesale Cases. 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, 2020