Quarterly Report (10-q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2023 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-10093

Fuse Medical, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware		59-1224913
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
1565 N. Central Expressway, Suite 220, Richardson, TX		75080
(Address of principal executive offices)		(Zip Code)

[phone]

(Registrant's telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

 

Large accelerated filer	☐		Accelerated filer	☐
Non-accelerated filer	☒		Smaller reporting company	☒
Emerging growth company	☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    Yes  ☐    No  ☐

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock		FZMD		OTCPink

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: As of May 12, 2023, 73,895,794 shares of the registrant’s common stock, $0.01 par value, were outstanding.

 

 

 

 

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FUSE MEDICAL, INC.

FORM 10-Q

INDEX

 

			PAGE
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements		F-1
	Condensed Consolidated Balance Sheets at March 31, 2023 (Unaudited) and December 31, 2022		F-1
	Condensed Consolidated Statements of Operations for the Three months Ended March 31, 2023 and 2022 (Unaudited)		F-2
	Condensed Consolidated Statements of Changes in Stockholders’ Equity (Accumulated Deficit) for the Three months Ended March 31, 2023 and 2022 (Unaudited)		F-3
	Condensed Consolidated Statements of Cash Flows for the Three months Ended March 31, 2023 and 2022 (Unaudited)		F-4
	Notes to Unaudited Condensed Consolidated Financial Statements		F-5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		2
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		7
Item 4.	Controls and Procedures		7
PART II. OTHER INFORMATION
Item 5.	Other Information		8
Item 6.	Exhibits		8
Signatures			10

 

 

 

1

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PART I. FINANCIAL INFORMATION 

Item 1. Condensed Consolidated Financial Statements

FUSE MEDICAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in dollars, except share data)

 

 

		March 31, 2023				December 31, 2022
		(Unaudited)
Assets
Current assets:
Cash		$	210,996			$	147,854
Accounts receivable, net of allowance of $317,636 and $290,500, respectively			2,760,524				3,996,860
Inventories, net of allowance of $1,825,298 and $1,778,173, respectively			9,153,647				9,494,506
Prepaid expenses and other current assets			116,053				126,022
Total current assets			12,241,220				13,765,242
Property and equipment, net			-				709
Long term accounts receivable, net of allowance of $4,661,949 and $4,330,883, respectively			3,060,692				2,832,764
Intangible assets, net			1,158,264				1,190,980
Goodwill			1,972,886				1,972,886
Total assets		$	18,433,062			$	19,762,581
Liabilities and Stockholders' Equity (Accumulated Deficit)
Current liabilities:
Accounts payable		$	4,551,442			$	5,700,236
Accrued expenses			4,855,810				4,540,366
Convertible notes payable - related parties			150,000				150,000
Senior secured revolving credit facility			1,729,327				1,997,135
Total current liabilities			11,286,579				12,387,737
Notes payable - related parties			200,000				200,000
Earn-out liability			7,485,698				7,485,698
Total liabilities			18,972,277				20,073,435
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, 73,895,794 shares issued and outstanding as of March 31, 2023 and December 31, 2022			738,958				738,958
Additional paid-in capital			1,468,274				1,468,274
Accumulated deficit			(2,746,447	)			(2,518,086	)
Total stockholders' equity (accumulated deficit)			(539,215	)			(310,854	)
Total liabilities and stockholders' equity (accumulated deficit)		$	18,433,062			$	19,762,581

 

See notes to interim unaudited condensed consolidated financial statements.

 

 

F-1

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FUSE MEDICAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in dollars, except share data)

 

	For the Three Months Ended March 31,
	2023				2022 Revised
Net revenues	$	3,984,455			$	4,554,338
Cost of revenues		1,168,402				1,743,309
Gross profit		2,816,053				2,811,029
Operating expenses:
Selling, general, administrative and other		1,706,327				1,709,541
Commissions		1,241,877				1,505,671
Depreciation and amortization		33,425				34,402
Total operating expenses		2,981,629				3,249,614
Operating (loss) profit		(165,576	)			(438,585	)
Other (income) expense:
Interest expense		57,193				32,958
Total other (income) expense		57,193				32,958
Net loss before income tax		(222,769	)			(471,543	)
Income tax expense		5,592				4,856
Net loss	$	(228,361	)		$	(476,399	)
Net loss per common share - basic and diluted	$	(0.00	)		$	(0.01	)
Weighted average number of common shares outstanding - basic and diluted		70,321,566				70,321,566

 

See notes to interim unaudited condensed consolidated financial statements.

 

F-2

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FUSE MEDICAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (ACCUMULATED DEFICIT)

(unaudited)

(in dollars, except share data)

 

		Common Stock								Additional Paid-In				Retained Earnings/
		Shares				Amount				Capital				(Deficit)				Total
Balance, December 31, 2022			73,895,794			$	738,958			$	1,468,274			$	(2,518,086	)		$	(310,854	)
Net loss			-				-				-				(228,361	)			(228,361	)
Balance, March 31, 2023			73,895,794				738,958				1,468,274				(2,746,447	)			(539,215	)

 

 

 

		Common Stock								Additional Paid-In				Retained Earnings/
		Shares				Amount				Capital				(Deficit) Revised				Total
Balance, December 31, 2021			72,895,793			$	728,958			$	1,455,422			$	(5,616,199	)		$	(3,431,819	)
Stock compensation expense			-				-				12,844				-				12,844
Net loss			-				-				-				(476,399	)			(476,399	)
Balance, March 31, 2022			72,895,793				728,958				1,468,266				(6,092,598	)			(3,895,374	)

 

See notes to interim unaudited condensed consolidated financial statements.

F-3

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FUSE MEDICAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

		For the Three Months Ended March 31,
		2023				2022 Revised
Cash flows from operating activities
Net loss		$	(228,361	)		$	(476,399	)
Adjustments to reconcile net loss to net cash provided by operating       activities:
Depreciation and amortization			33,425				34,402
Stock based compensation			-				12,844
Provision for bad debts and discounts			(27,136	)			147,078
Provision for long term accounts receivable			331,066				238,683
Provision for slow moving inventory			(47,125	)			(19,701	)
Changes in operating assets and liabilities:
Accounts receivable			1,263,472				1,217,800
Inventories			387,984				(508,230	)
Prepaid expenses and other current assets			9,969				(90,007	)
Long term accounts receivable			(558,994	)			(397,805	)
Accounts payable			(1,148,794	)			108,780
Accrued expenses			315,444				226,693
Net cash provided by operating activities			330,950				494,138
Cash flows from investing activities
Purchase of property and equipment			-				-
Net cash (used in) investing activities			-				-
Cash flows from financing activities
Net payments on senior secured revolving credit facility			(267,808	)			(524,841	)
Net cash (used in) financing activities			(267,808	)			(524,841	)
Net increase (decrease) in cash			63,142				(30,703	)
Cash and cash equivalents - beginning of period			147,854				553,190
Cash and cash equivalents - end of period		$	210,996			$	522,487
Supplemental disclosure of cash flow information:
Cash paid for interest		$	28,368			$	23,988

 

See notes to interim unaudited condensed consolidated financial statements.

 

 

 

F-4

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FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Nature of Operations

Overview

Fuse Medical, Inc., a Delaware corporation (the “Company”) 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 Medical Consultants, LLC (“CPM”) pursuant to the CPM Acquisition Agreement (the “CPM Acquisition”). Subsequent to the Change-in-Control Date, CPM and Company operations are consolidated. On August 1, 2018, the Company completed the acquisition of Palm Springs Partners, LLC d/b/a Maxim Surgical (“Maxim” and such transactions the “Maxim Acquisition”), pursuant to the Maxim Purchase Agreement. As of the Maxim Closing Date, Maxim and Company operations are consolidated. Maxim was subsequently dissolved and terminated on December 20, 2019 December 20, 2019.

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) spinal implants for trauma, degenerative disc disease and deformity indications; and (v) a wide array of osteo-biologics and regenerative products, which include human allografts, substitute bone materials, tendons, and regenerative tissues. 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 cleared devices.

Basis of Presentation

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

The condensed consolidated balance sheet information as of December 31, 2022, was derived from the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2022 (“2022 Annual Report”), filed with the SEC pursuant to Section 13 or 15(d)

F-5

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FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on April 14, 2023. These interim unaudited condensed consolidated financial statements should be read in conjunction with the 2022 Annual Report.

The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results to be expected for the entire fiscal year or for any other period as the Company has historically experienced seasonal trends with greater revenue and volume between the last two calendar quarters compared to the first two calendar quarters of the year.

Note 2. Significant Accounting Policies

Principles of Consolidation

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

Use of Estimates

The preparation of the interim unaudited condensed consolidated financial statements in accordance with GAAP, requires the Company to make estimates and assumptions that affect the Company’s reported amounts in the interim unaudited condensed consolidated financial statements.

Actual results could differ from those estimates. Significant estimates on the accompanying interim unaudited condensed consolidated financial statements include the allowance for doubtful accounts, valuation of inventories, the Company’s effective income tax rate, the fair value calculations of stock-based compensation, goodwill, finite lived intangibles and the earn-out (“Earn-Out”) liability.

Segment Reporting

In accordance with Accounting Standards Codification (“ASC”) No. 280, “Segment Reporting,” the Company uses the management approach for determining its reportable segments. The management approach is based upon the way that management reviews performance and allocates resources. The Company’s Chief Executive Officer serves as the Company’s chief operating decision maker, and the 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 CPM and, prior to its dissolution, Maxim. Accordingly, the Company has determined that it has one operating segment and, therefore, one reporting segment.

Long Term Accounts Receivable, net

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.

Correction of an Error

Medical instruments were reported in the quarters of 2022 as fixed assets in error. The error was corrected in the annual 2022 10-K as a component of the cost of revenues consistent with prior years. The effect of the error corrections on the prior periods has been determined to be immaterial, however, the Company has labeled the column headings for the prior periods as “revised.” For the three months ended March 31, 2022, the financial statements of the line items affected by the revision are as follows:

Consolidated Statement of Operations

Line items for Q1-2022 effected by the restatement		Previously Reported				Revised				Change
Cost of revenues		$	1,625,191			$	1,743,309			$	118,118
Gross Profit			2,929,147				2,811,029				(118,118)
Net loss			(358,281	)			(476,399	)			(118,118)

Consolidated Statement of Cash Flows

Line items for Q1-2022 effected by the restatement		Previously Reported				Revised				Change
Net loss		$	(358,281	)		$	(476,399	)		$	(118,118)
Depreciation and amortization			55,119				34,402				(20,717)
Purchase of property and equipment			(138,835	)			-				138,835

F-6

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FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

Loss Per Common Share

Loss per common share, basic is calculated by dividing the net income/(loss) attributable to common stockholders by the weighted-average number of common stock, par value $0.01 (“Common Stock”), outstanding during the period, without consideration of Common Stock equivalents. Shares of restricted stock are included in the basic weighted-average number of Common Stock outstanding from the time they vest.

Diluted 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 three months ended March 31, 2023 and 2022, the Company excluded the effects of outstanding stock options, convertible notes and, to the extent vested, restricted stock as their effects were antidilutive due to the Company’s operating loss during these periods. (See Note 9, “Stockholders’ Equity” for the terms and conditions of restricted stock).  

Fair Value Measurements

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

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

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

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

In connection with the CPM Acquisition, 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 is evaluated each reporting period and changes in its fair value are 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 up to $16,000,000 with an additional bonus payment up to $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 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) Earnings before interest, taxes, depreciation, and amortization (“EBITDA”) margins increasing from one percent (1%) to ten percent (10%) over the next four years; and (ii) revenue growth of between approximately two percent (2%) to four percent (4%) over the next five years, and between approximately two percent (2%) and four percent (4%) thereafter.

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

The Earn-Out was remeasured to fair value under the probability weighted income approach. As a result, the fair value of the Earn-Out liability was reduced by $4,108,134 from $11,593,832 to $7,485,698 in 2022 and reduced by $342,168 from $11,936,000 to $11,593,832 in 2021 and reflected as “Change in fair value of contingent purchase consideration” on our Consolidated Financial Statements.

There was no change in the Earn-Out liability for the three months ended March 31, 2023, and there were no significant changes in the Level 3 inputs from those utilized at December 31, 2022. The required earnings thresholds have not been met from inception of the agreements through March 31, 2023, and as such, there have been no payments required for either the base or bonus Earn-Out tranches.

F-7

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FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 March 31, 2023 and December 31, 2022. The Company’s cash is concentrated in one large financial institution. The amount of cash held at the 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 March 31, 2023.  As of March 31, 2023 there were deposits of $268,645 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 factors considered by the Company. The Company generally does not require collateral or other security interest to support accounts receivable. Based on trends and specific factors, the customer’s credit terms may be modified, including required payment upon delivery.

The Company performs regular on-going credit evaluations of its customers as deemed relevant. As events, trends, and circumstances warrant, the Company estimates the amounts that are more likely than not to be uncollectible. These amounts are recognized as bad debt expense and are reflected within selling, general, administrative and other expenses on the Company’s accompanying interim unaudited condensed consolidated statements of operations.

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

The Company 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 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.

Long Term Accounts Receivable, net

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.

Inventories

Inventories are stated at the lower of cost or net realizable value (first-in, first-out) which includes an allowance for slow-moving inventory, expired inventory, and inventory obsolescence. Inventories consist entirely of finished goods and include internal and external fixation products; upper and lower extremity plating and total joint reconstruction; soft tissue fixation and augmentation for sports medicine procedures; spinal implants for trauma, degenerative disc disease, and deformity indications (collectively, “Orthopedic Implants”) and osteo-biologics and regenerative tissue which include human allografts, substitute bone materials, tendons, as well as amniotic tissues (collectively, “Biologics”). The Company reviews the market value of inventories whenever

F-8

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FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

events and circumstances indicate that the carrying value of inventories may not be recoverable from the estimated future sales price less cost of disposal and normal gross profit. In cases where the market values are less than the carrying value, a write-down is recognized equal to an amount by which the carrying value exceeds the market value of inventories.

Property and Equipment

Property and equipment are recorded at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets per the following table. Expenditures for additions and improvements are capitalized, while repairs and maintenance are expensed as incurred. The Company reviews long-lived assets for impairment annually or whenever changes in circumstances indicate that the carrying amount of an asset might not be recoverable.

 

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

 

Upon the retirement or disposition of property and equipment, the related cost and accumulated depreciation is removed. A gain is recorded when consideration received is more than the disposed asset’s cost, net of depreciation, and a loss is recorded when consideration received is less than the disposed asset’s cost, net of depreciation.

Long-Lived Assets

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

Goodwill and Other Intangible Assets

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

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

 

ASC 350-30-35-18, “Intangible assets not subject to amortization,” 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 a triggering event has occurred as of March 31, 2023.

 

The Company’s intangible assets subject to amortization consist primarily of acquired non-compete agreements, funds to secure the Company’s Credit and Security Agreement (the “Credit Agreement”) with eCapital Healthcare Corp. f/k/a CNH Finance Fund I, L.P. 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 set 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

F-9

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FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 are associated with outbound freight after control over a product has transferred to a customer and are accounted for as a fulfillment cost and are included in cost of goods sold on the Company’s accompanying interim unaudited condensed consolidated statements of operations.

Revenue Differentiation

The Company measures sales volume based on medical procedures in which the Company’s products are sold and used (“Cases”). The Company considers Cases resulting from direct sales to medical facilities to be retail cases (“Retail Cases”) and Cases resulting from sales to third parties, such as non-medical facilities, distributors, or sub-distributors, to be wholesale cases (“Wholesale Cases”). Some of the Company’s sales for Wholesale Cases are on a consignment basis with a third party. When consigned, the revenue is not recorded until the device is implanted in a patient during surgery. In the Company’s industry, Retail Cases are typically sold at higher price points than Wholesale Cases, resulting in greater revenue and gross profit per Case.

 

		Three Months Ended
		March 31, 2023				March 31, 2022
Category
Retail		$	3,606,678			$	4,293,756
Wholesale			377,777				260,582
Total		$	3,984,455			$	4,554,338

 

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) inventory shrink, and (v) 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 March 31, 2023 and March 31, 2022, 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

F-10

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FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 Accounting Standard Updates (“ASU”) issued, both effective and not yet effective.

Other recent accounting pronouncements issued by the Financial Accounting Standards Board, 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 to have a material impact on the Company's present or future consolidated financial statements.

Note 3. Property and Equipment

Property and equipment consisted of the following at March 31, 2023 and December 31, 2022:

 

		March 31, 2023				December 31, 2022
Computer equipment and software		$	20,249			$	20,249
Office equipment			-				-
Property and equipment costs			20,249				20,249
Less: accumulated depreciation			(20,249	)			(19,540	)
Property and equipment, net		$	-			$	709

 

Depreciation expense for the three months ended March 31, 2023 and 2022 was $709 and $1,687, respectively.

Note 4. Goodwill and Intangible Assets

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

 

		March 31, 2023				December 31, 2022				Amortization period (years)
Intangible assets:
510(k) product technology		$	704,380			$	704,380			Indefinite
Customer relationships			555,819				555,819			11
CNH Credit Agreement			240,858				240,858			3
Total intangible assets			1,501,057				1,501,057
Less: accumulated amortization			(342,793	)			(310,077	)
Intangible assets, net			1,158,264				1,190,980
Goodwill		$	1,972,886			$	1,972,886			Indefinite

 

Amortization expense for the three months ended March 31, 2023 and 2022 was $32,716 and $32,715, respectively.

Company’s intangible assets subject to amortization consist primarily of acquired non-compete agreements, funds to secure the Credit Agreement with eCapital Healthcare Corp. f/k/a CNH Finance Fund I, L.P., and customer relationships. 

F-11

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FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 5. Senior Secured Revolving Credit Facility

On December 14, 2021, the Company entered into the Credit Agreement (the “Credit Agreement”) with eCapital Healthcare Corp. f/k/a CNH Finance Fund I, L.P., a Delaware limited partnership (the “Lender”). The Credit Agreement provides for a secured revolving credit facility maturing on January 1, 2025 (the “Facility”) with an initial maximum principal in the amount of $5,000,000. Borrowings under the Facility are subject to a borrowing base as set forth in the Credit Agreement.

The Company used borrowings under the Facility to repay in full (i) the Amended and Restated Business Loan Agreement, dated December 31, 2017, among ZB, N.A. (d/b/a Amegy Bank) and the Company and CPM (the “Borrowers”), as amended, and (ii) the U.S. Small Business Administration Loan Authorization and Agreement, dated May 12, 2020, between the Company and the U.S. Small Business Association, as amended. Borrowings under the Credit Agreement may be used for payment of fees, costs and expenses incurred in connection with the Credit Agreement and working capital for the Borrowers and their subsidiaries.

Borrowings under the Credit Agreement bear interest at a floating rate, which will be at the Prime Rate plus 1.75%. Under the Credit Agreement, certain fees are payable by the Borrowers as set forth in the Credit Agreement.

The obligations of the Borrowers with respect to the Credit Agreement are secured by a pledge of substantially all of the personal property assets of the Borrowers, including accounts receivables, deposit accounts, intellectual property, investment property, inventory, equipment and equity interests in their respective subsidiaries.  

The Credit Agreement contains customary affirmative and negative covenants, including limitations on the Company’s and its subsidiaries’ ability to incur additional debt, grant or permit additional liens, make investments and acquisitions, merge or consolidate with others, dispose of assets, pay dividends and distributions, pay subordinated indebtedness and enter into affiliate transactions. In addition, the Credit Agreement contains financial covenants requiring the Company on a consolidated basis to maintain, as of the last day of each calendar month (i) a current ratio of not less than 1.0 to 1.0, (ii) a fixed charge coverage ratio of not less than 1.0 to 1.0, (iii) a loan turnover rate of not greater than 60, and (iv) minimum liquidity of not less than $175,000, provided that if the Borrowers comply with the fixed charge coverage ratio for twelve consecutive months, the minimum liquidity covenant shall cease to be effective. The Credit Agreement also includes events of default customary for facilities of this type and upon the occurrence of any such event of default, all outstanding loans under the Facility may be accelerated and/or the Lender’s commitments terminated.

The Credit Agreement contains customary representations and warranties of the Borrowers. These representations and warranties have been made solely for the benefit of the Lender and such representations and warranties should not be relied on by any other person, including investors. In addition, such representations and warranties (i) have been qualified by disclosures made to the Lender in connection with the agreement, (ii) are subject to the materiality standards contained in the agreement which may differ from what may be viewed as material by investors and (iii) were made only as of the date of the agreement or such other date as is specified in the Credit Agreement.

On March 22, 2023, we executed the First Amendment to the Credit Agreement with eCapital Healthcare Corp. f/k/a CNH (the “First Amendment”). The First Amendment (i) waived the fixed charge coverage ratio (FCCR) under the Credit Agreement for the testing period then ending February 28, 2023, and (ii) amended the FCCR test from a trailing twelve-month test to a trailing three month test (iii) waive the minimum liquidity covenant defaults for December 31, 2022 and March 31, 2023.

The foregoing description does not constitute a complete summary of the terms of the Credit Agreement and is qualified in its entirety by reference to the full text of the Credit Agreement, which is filed as Exhibit 10.45 to our 2021 Annual Report.

Pursuant to the Credit Agreement, the Company had an outstanding balance of $1,729,327 and $1,912,429 as of March 31, 2023 and 2022, respectively. In preparation of the Credit Agreement, the Company incurred $236,358 of costs that have been allocated to intangible assets and will be amortized over the life of the Credit Agreement. Interest expense incurred on the Credit Agreement was $45,885 for the three months ended March 31, 2023 and is reflected in interest expense on the Company’s accompanying consolidated statements of operations. Accrued interest on the Credit Agreement as of March 31, 2023 was $28,051, and is reflected in accrued expenses on the Company’s accompanying consolidated balance sheets. At March 31, 2023, the effective interest rate was 9.50%.     

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 convertible promissory notes (the “Notes”) bearing ten percent (10%) interest per annum until December 31, 2016, the 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. As of March 31, 2023, the ending balance was $150,000.

F-12

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FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 Credit Agreement. On April 13, 2023, the two promissory notes were amended to extend the maturity date from May 6, 2023, to May 6, 2024. As of March 31, 2023, the ending balance was $200,000.

During the three months ended March 31, 2023 and 2022, interest expense of $6,783 and $6,783, respectively, is reflected in interest expense on the Company’s accompanying interim unaudited condensed consolidated statements of operations. As of March 31, 2023, and December 31, 2022, accrued interest was $175,289 and $168,507, respectively, which is reflected in accrued expenses on the Company’s accompanying interim unaudited condensed consolidated balance sheets.

  

Note 7. Stockholders’ Equity (Accumulated Deficit)

Stock-Based Compensation

The 2018 Amended and Restated Equity Incentive Plan of Fuse Medical, Inc. (“2018 Equity Plan”) is the Company’s stock-based compensation plan, which the Company’s Board of Directors (the “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 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 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 estimates of fair value may not be reflective of actual future values or amounts ultimately realized by recipients of these grants. The Company recognizes compensation on a straight-line basis over the requisite service period for each award.

The Company 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 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.

Non-Qualified Stock Option Awards

The Board did not grant any non-qualified stock option awards (“NQSOs”) for the three months ended March 31, 2023, and 2022. For the three months ended March 31, 2023 and 2022 the Company amortized zero and $12,844, respectively, relating to the vesting of stock options which is included in selling, general, administrative, and other expenses on the Company’s accompanying interim unaudited condensed consolidated statements of operations. The Company will recognize no expense in future periods as the stock options vest. The Company recognizes stock compensation expense on a straight-line basis over the requisite service period for each award, which are subject to a vesting schedule as set forth in individual agreements.

F-13

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FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

A summary of the Company’s stock option activity for the three months ended March 31, 2023, is presented below:

 

		No. of Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term				Aggregate Intrinsic Value
Balance outstanding at December 31, 2022			1,745,000			$	0.86				5.73			$	-
Granted			-				-				-				-
Exercised			-				-				-				-
Forfeited			-				-				-				-
Expired			-				-				-				-
Balance outstanding at March 31, 2023			1,745,000			$	0.86				5.49			$	-
Exercisable at March 31, 2023			1,745,000			$	0.86				5.49			$	-

 

Restricted Common Stock

The non-vested restricted stock awards (“RSAs”), as of March 31, 2023, 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 an RSA Agreement); or (b) listing of the Company’s Common Stock on either NYSE or NASDAQ Stock Market; and (ii) the director’s delivery to the Company a Notice of Acceleration of Vesting (as defined in an RSA Agreement), within the Acceleration Notice Period (as defined in an RSA Agreement).

As of March 31, 2023, and 2022, it was not probable that the performance conditions on the outstanding RSAs would be met, therefore, no expense has been recorded for these awards for the three months ended March 31, 2023 and 2022.

There were no RSA’s that were granted, exercised, or forfeited during the three months ended March 31, 2023.

 

	Number of Shares				Fair Value				Weighted Average Grant Date Fair Value
Non-vested, December 31, 2022		3,574,226			$	1,482,100			$	0.41
Granted		-				-				-
Vested		-				-				-
Forfeited		-				-				-
Non-vested, March 31, 2023		3,574,226			$	1,482,100			$	0.41

 

Note 8. Income Taxes

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

The components of income tax expense are as follows:

 

		For the Three Months Ended March 31, 2023				For the Three Months Ended March 31, 2022
Current:
Federal		$	-			$	-
State			5,592				4,856
			5,592				4,856
Deferred:
Federal			-				-
State			-				-
			-				-
Total income tax expense (benefit)		$	5,592			$	4,856

 

F-14

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FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

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

 

		March 31, 2023				December 31, 2022
Deferred tax assets:
Net operating loss carryover		$	1,677,011			$	1,632,301
Accounts receivable			66,704				61,005
Compensation			560,735				560,735
Inventory			366,965				369,456
Other			24,371				26,465
Total deferred tax assets			2,695,786				2,649,962
Deferred tax liabilities:
Intangibles			(188,834	)			(190,817	)
Property and equipment			-				(149	)
Total deferred tax liabilities			(188,834	)			(190,966	)
Deferred tax assets, net		$	2,506,952			$	2,458,996
Valuation allowance:
Beginning of year			(2,458,996	)			(2,246,892	)
Increase during the year			(47,956	)			(212,104	)
Ending balance			(2,506,952	)			(2,458,996	)
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 totaling $47,956 for the three months ended March 31, 2023, due to the uncertainty of realization. Management believes that based upon the history of losses that the Company has incurred to date and its projection of future taxable operating income for the foreseeable future, it is more likely than not that the Company will not be able to realize the tax benefit associated with deferred tax assets. The valuation allowance established as of March 31, 2023, was $2,506,952.

At March 31, 2023, the Company estimates it has approximately $8,330,025 of net operating loss carryforwards which $2,874,293 will expire during 2023 through 2038. Under Section 382 of the Internal Revenue Code of 1986, as amended ("IRC Section 382"), a corporation that undergoes an "ownership change", as defined therein, is subject to limitation on its use of pre-change tax attributes carryforward to offset future taxable income. The Company completed a 382 study and determined that there were changes in ownership in prior years which limited the NOL from 2013 and earlier, and 2014 through 2016. The 382 limitation mathematically precludes the use of approximately $2,963,968 of net operating loss carryforwards, therefore, the deferred net operating loss carryover asset excludes the portion of net operating loss that are mathematically excluded from future use by the Company.

The Company believes its tax positions will more likely than not be upheld upon examination. As such, the Company has not recorded a liability for unrecognized tax positions. As of March 31, 2023, all the tax years remained open to examination for three years from the tax year in which net operating losses are utilized. The Company was not subject to examination by any income taxing authority as of March 31, 2023.

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

 

		Three Months Ended
		March 31, 2023			March 31, 2022
Expected U.S. federal incomes as statutory rate		21.0%			21.0%
Gain on Payroll Protection Loan		0.0%			0.0%
Permanent differences		0.0%			0.0%
State and local income taxes, net of federal benefit		-2.0%			-1.1%
Change in deferred tax asset valuation allowance		-21.5%			-21.3%
Effective tax rate		-2.5%			-1.4%

 

Our effective income tax rates for the three months ended March 31, 2023 and March 31, 2022 were -2.5% and -1.4%, respectively. This decrease from prior period is driven by the valuation allowance allocated to the deferred tax asset for the current period.

F-15

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FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 9. Concentrations

Concentration of Revenues, Accounts Receivable and Suppliers

For the three months ended March 31, 2023 and 2022, the following significant customers had an individual percentage of total revenues equaling ten percent (10%) or greater:

 

	For the Three Months Ended
	March 31, 2023				March 31, 2022
Customer 1		11.80	%			16.25	%
Customer 2		10.04	%			9.15	%
Totals		21.84	%			25.40	%

 

At March 31, 2023 and December 31, 2022, there was one and two significant customers, respectively, that had a concentration of accounts receivable representing ten percent (10%) or greater of accounts receivable:

 

	March 31, 2023				December 31, 2022
Customer 1		12.24	%			14.67	%
Totals		12.24	%			14.67	%

 

For the three months ended March 31, 2023 and 2022, the following significant suppliers represented ten percent (10%) or greater of goods purchased:

 

	For the Three Months Ended
	March 31, 2023				March 31, 2022
Supplier 1		19.50	%			0.30	%
Supplier 2		14.30	%			10.60	%
Supplier 3		7.70	%			13.10	%
Supplier 4		7.20	%			28.80	%
Supplier 5		3.20	%			10.40	%
Totals		51.90	%			63.20	%

 

Note 10. Related Party Transactions

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 commission or 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. As of March 31, 2023, the company had accrued employee expenses to management of $107,351.

Lease with 1565 North Central Expressway, LP

For its principal executive office, the Company leases an aggregate of approximately 11,500 square-foot space at 1565 North Central Expressway, Suite 220, Richardson, Texas 75080 from 1565 North Central Expressway, LP (“NCE, LP”), a real estate investment company that is owned and controlled by Mr. Brooks. The Company’s lease arrangement includes (i) the lease acquired pursuant to the CPM Acquisition effective January 1, 2013, and (ii) a lease effective July 14, 2017 entered into to support the Company’s relocation of its Fort Worth, Texas corporate offices to CPM’s executive offices. Both leases terminated December 31, 2017, with month-to-month renewals thereafter.

For the three months ended March 31, 2023 and 2022, the Company paid approximately $42,000 and $42,000, respectively, in rent expense, which is reflected in selling, general, administrative, and other expenses in the Company’s accompanying interim unaudited condensed consolidated statements of operations.

F-16

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FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

AmBio Contract

As of January 1, 2023, the Company terminated its contract with AmBio and moved its PEO services to Nextep, Inc. (“Nextep”). Nextep is not affiliated with the Company.

The Company engaged AmBio Staffing, LLC (“AmBio”), a Texas licensed Professional Employment Organization, to provide payroll processing, employee benefit administration, and related human capital services effective January 1, 2017. Mr. Brooks owns and controls AmBio. As of December 31, 2022, AmBio operations supported approximately 35 full time equivalents (“FTE”). Of those 35 FTEs, 32 FTEs directly support the Company, and 2 FTEs support the operations of other companies, and 1 FTE is shared between the Company and other companies.

As of March 31, 2023 and December 31, 2022, the Company owed amounts to AmBio of approximately $79,759 and $173,893, respectively, which are reflected in accounts payable on the Company’s accompanying interim unaudited condensed consolidated balance sheets. For the three months ended March 31, 2023 and March 31, 2022, the Company paid approximately zero and $52,050, respectively, to AmBio in administrative fees, which are reflected in selling, general, administrative, and other expenses in the Company’s accompanying interim unaudited condensed consolidated statements of operations.  

MedUSA Group, LLC

MedUSA Group, LLC (“MedUSA”) is a sub-distributor previously owned and controlled by Messrs. Brooks and Reeg. As of October 1, 2022, Messrs. Brooks and Reeg sold their interest in MedUSA to an unaffiliated party. Per the terms of the sales agreement of MedUSA, all unpaid accrued commissions owed to MedUSA prior to its sale on October 1, 2022 would be transferred to Messrs. Brooks and Reeg. As of December 31, 2022, Messrs. Brooks and Reeg no longer held interest in MedUSA. The company assessed the company’s relationship with MedUSA and the nature of the business transactions occurring in the current financial reporting period and prior periods. MedUSA is not directly owned or directly controlled by management, and the company has determined MedUSA is not a related party as of the year ended December 31, 2022 and as of the period ended March 31, 2023 .

During the three months ended March 31, 2023 and 2022 the Company incurred approximately zero and $835,380, respectively, which are reflected in net revenues in the Company’s accompanying interim unaudited condensed consolidated statements of operations.

Texas Overlord, LLC

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

During the three months ended March 31, 2023 and 2022, the Company:

•

incurred approximately zero and $60,000, respectively, in commission costs, which are reflected in commissions in the Company’s accompanying interim unaudited condensed consolidated statements of operations.

 Texas Overlord had an ownership position in MedUSA which was sold to an unaffiliated party on October 1, 2022. Based on the terms of the Purchase Agreement, the commission balances owed to MedUSA as of October 1, 2022 was transferred to Overlord based on its percentage of ownership

As of March 31, 2023, and December 31, 2022, the Company had approximately $1,050,966 of unpaid commission costs due to Overlord, which is reflected in accrued liabilities in the Company’s accompanying consolidated balance sheets.

NBMJ, Inc.

NBMJ, Inc. d/b/a Incare Technology (“NBMJ”) is a durable medical equipment, wound care, and surgical supplies distributor owned and controlled by Mr. Brooks.

During the three months ended March 31, 2023 and 2022, the Company sold Biologics products to NBMJ in the amounts of approximately $520 and zero, respectively, which are reflected in net revenues in the Company’s accompanying interim unaudited condensed consolidated statements of operations.

As of March 31, 2023 and December 31, 2022, the Company had zero and $2,430 in outstanding balances due from NBMJ. These amounts are reflected in accounts receivable, net of allowance, in the Company’s accompanying interim unaudited condensed consolidated balance sheets.

Payment terms per the stocking and distribution agreement with NBMJ are 30 days from receipt of invoice. As of March 31, 2023, NBMJ had no past due balance.

F-17

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FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Reeg Medical Industries, Inc.

Reeg Medical Industries, Inc. (“Reeg Medical”) is an investment holding company owned and controlled by Mr. Reeg.

Reeg Medical had an ownership position in MedUSA which was sold to an unaffiliated party on October 1, 2022. Based on the terms of the Purchase Agreement, the commission balances owed to MedUSA as of October 1, 2022 was transferred to Reeg Medical based on its percentage of ownership.

As of March 31, 2023, and December 31, 2022, the Company had approximately $355,540 of unpaid commission costs due to Reeg Medical, which is reflected in accrued liabilities in the Company’s accompanying consolidated balance sheets.

Bass Bone and Spine Specialists

Bass Bone & Spine Specialists (“Bass”) operates as a sub-distributor of surgical implants and is owned and controlled by Mr. Brooks.

During the three months ended March 31, 2023 and 2022, the Company:

•

sold Orthopedic Implants and Biologics products to Bass in the amounts of approximately zero and $6,550, respectively, which are reflected in net revenues in the Company’s accompanying interim unaudited condensed consolidated statements of operations.

As of March 31, 2023 and December 31, 2022, the Company had no outstanding balances due from Bass.

Sintu, LLC

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

During the three months ended March 31, 2023 and 2022, the Company incurred approximately $14,055 and $111,138, respectively, in commission costs to Sintu, which are reflected in commissions on the Company’s accompanying interim unaudited condensed consolidated statements of operations.

As of March 31, 2023, and December 31, 2022, the Company had approximately $695,263 and $662,157, respectively, of unpaid commission costs due to Sintu, which is reflected in accrued liabilities in the Company’s accompanying interim unaudited condensed consolidated balance sheets.

Modal Manufacturing, LLC

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

During the three months ended March 31, 2023 and 2022, the Company purchased approximately $61,216 and $75,354, respectively, in Orthopedic Implants and medical instruments from Modal, which are reflected within inventories, net of allowance in the Company’s accompanying interim unaudited condensed consolidated balance sheets.

 Payment terms per the stocking and distribution agreement with Modal are 30 days from receipt of invoice. As of March 31, 2023 and December 31, 2022, the Company had a past due balance of approximately $1,181,112 and $1,169,896, respectively, owed to Modal.

 Note 11. Subsequent event:

In preparing these interim unaudited condensed consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through May 15, 2023, the date the interim unaudited condensed consolidated financial statements were available to be issued.

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

 

 

F-18

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 

Explanatory Note 

As used in this report on Form 10-Q, “we”, “us”, “our”, and the “Company” refer to Fuse Medical, Inc, a Delaware corporation. 

This discussion and analysis should be read in conjunction with the interim unaudited condensed consolidated financial statements of our Company and the related notes included in this report for the periods presented (our “Financial Statements”), the audited consolidated financial statements of our Company and the related notes thereto and the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (our “2022 Annual Report”), filed with the Securities and Exchange Commission (the “SEC”) pursuant to Section 13 or 15(d) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on April 14, 2023.

Overview

We are a manufacturer and national distributor of medical devices. We provide a broad portfolio of orthopedic implants including:

•

Foot and Ankle: internal and external fixation products;

•

Orthopedics: upper and lower extremity plating and total joint reconstruction implants;

•

Sports Medicine: soft tissue fixation and augmentation for sports medicine procedures;

•

Spine: spinal implants for trauma, degenerative disc disease, and deformity indications (collectively, we refer to these bulleted products as Orthopedic Implants).

We also provide a wide array of osteo-biologics and regenerative products, which include human allografts, tendons, synthetic skin and bone substitute materials, and regenerative tissues, which we refer to as (“Biologics”).

All of our medical devices are cleared by the U.S. Food and Drug Administration (“FDA”) for sale in the United States, and all of our Biologics suppliers are licensed tissue banks accredited by the American Association of Tissue Banks. Additionally, we are licensed by the FDA for storage and distribution of human cells, tissues and cellular and bone-based products (HCT/Ps), and we are an FDA-registered medical device specification developer and repackager/relabeler, and manufacturer of record, (a “Manufacturer”). We are seeking to grow our manufacturing operations, both by internal product development and by acquiring existing FDA approved devices and related intellectual property.

Fuse Branded Portfolio

As an emerging manufacturer of medical device implants, we are committed to expanding our Fuse branded portfolio of orthopedic implants and biologics, with the continued design, development, and commercialization of new devices.

Our Scientific Advisory Boards continue to provide internal design and development input with our engineering team, as our projects move through the pipeline towards FDA clearance. We anticipate a continued emphasis on the commercialization of these new products, as we further expand our portfolio and national distribution footprint.

National Sales Expansion

In Q4 2022 we invested in our direct sales team to include portfolio specific leadership at the national level. This strategic sales initiative focuses on the expansion of our national distribution footprint, via surgeon and independent distributor recruitment and retention.

As a result of this initiative, in Q1 2023 we added 5 new independent distributors in 5 new cities within 4 states. From our Sales Directors’ efforts, and by exhibiting at state and national conferences to gain Company and product awareness, we anticipate this trend to continue.

Impact of COVID-19 to Fuse

Currently, the future trajectory of the COVID-19 pandemic remains uncertain, both in the U.S. and in other markets. Progress has been made on therapeutic treatments and the development and distribution of vaccines, though the efficacy, timing, and adoption of various treatments and vaccines is uncertain, particularly with respect to new variants of COVID-19 which have emerged. Given these various uncertainties, it is unclear the extent to which lingering slowdowns in elective procedures could affect our business during 2023 and beyond. COVID-19 has also continued to present uncertainties and delays in the U.S. and global supply chain, for both raw materials and finished goods through increased pricing pressures and labor shortages. This disruption in our supply chain has adversely impacted lead times to manufacture products, launch product lines, and commercialize our products in the marketplace. As a result, we are continuing to source alternate suppliers to help mitigate the impact to our supply chain. Any prolonged decrease in demand for our products or disruption to our business resulting from COVID-19, or similar public health emergencies, would adversely affect our revenues and results of operations.

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Current Trends and Outlook

Seasonality

We are subject to seasonal fluctuations in sales, which cause fluctuations in quarterly results of operations. Because of the seasonality of our business, results for any quarter are not necessarily indicative of results that may be achieved in other quarters or for a full fiscal year.

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

Retail and Wholesale Cases

We believe our comprehensive selection of Orthopedic Implants and Biologics products is pivotal to our ability to acquire new customers, increase sales to existing customers and increase overall sales volume, revenues, and profitability. We continue to review and evaluate our product lines, ensuring we maintain a high-quality and cost-effective selection of Orthopedic Implants and Biologics.

We measure sales volume based on medical procedures in which our products were sold and used (each a Case). We consider Cases resulting from direct sales to hospitals and medical facilities to be Retail Cases and Cases resulting from sales to third-parties, such as distributors, or sub-distributors, to be Wholesale Cases. Some of our sales for Wholesale Cases are on a consignment basis with the third-party.

Retail. Under our retail distribution model, (“Retail Model”), we sell directly to our end customers, which consist of hospitals and medical facilities, utilizing (i) our full-time sales representatives whom we employ or engage as independent contractors and (ii) independent sales representatives who work on a non-exclusive basis. In both instances, we pay the sales representative a commission with respect to sales made by the representative. We refer to sales through our Retail Model as Retail Cases.

Wholesale. Under our wholesale distribution model, (“Wholesale Model”), we sell our products directly to independent distributors rather than to hospitals and medical facilities who are the ultimate end customer. We do not pay or receive commissions from any sales by the independent distributor to the end customer. We refer to sales through our Wholesale Model as Wholesale Cases.

Retail Cases in our industry command higher revenue price points than Wholesale Cases. Because Retail Cases involve direct sales to our end customers, we typically receive a higher gross profit margin due to the absence of any third party in the sales process. However, we may pay commissions to our full time or independent sales representatives with respect to Retail Sales increasing our commission expenses. Retail Cases generally generate substantially more gross profit than Wholesale Case transactions but are subject to commission expenses, which we do not incur with respect to Wholesale Cases.

Wholesale Cases in our industry command lower revenue price-points than Retail Cases as the third-party reseller must build in its own profit margin. Because Wholesale Cases involve sales to third parties who sell our products to end customers, our profit margins are reduced for these Cases due to the lower sales price. Consequently, our Wholesale Cases generate substantially lower gross profit than our Retail Cases, which is offset in part by the fact that we do not incur any commission costs on Wholesale Cases.

Pricing Pressures

Pricing pressure has increased in our industry due to (i) continuous consolidation among healthcare providers, (ii) trends toward managed care healthcare, (iii) increased government oversight of healthcare costs, and (iv) new laws and regulations that address healthcare reimbursement and pricing. Pricing pressure, reductions in reimbursement levels or coverage, or other cost containment measures can significantly impact our business, future operating results and financial condition.

To offset pricing pressures, we employ strategies which include locating and retaining new customers, increasing volume with existing customers, and continued emphasis on promoting sales through our Retail Model. For the three months ended March 31, 2023 and 2022, our Retail sales were approximately 91% and 94% of total revenue respectively.

To further offset the impact of pricing pressures, the Company employs strategies to reduce the cost of revenues by increasing Fuse branded product lines. For the three months ended March 31, 2023 and 2022, our average cost of revenues per Case was $1,050 and $1,403, respectively. Our strategy to increase Fuse branded products proved successful as the revenues produced by these products increased to approximately 50% of revenue for the three months ended March 31, 2023, compared to 46% increase over the same period of 2022.

 

3

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Critical Accounting Policies

The preparation of our Financial Statements and the related disclosures in conformity with GAAP, requires our management to make judgments, assumptions, and estimates that affect the amounts of revenue, expenses, income, assets, and liabilities, reported in our Financial Statements and accompanying notes. Understanding our accounting policies and the extent to which our management uses judgment, assumptions, and estimates in applying these policies is integral to understanding our Financial Statements.

We describe our most significant accounting policies in Note 2, “Significant Accounting Policies” of our accompanying interim unaudited condensed consolidated notes to our Financial Statements beginning on page F-1 and found elsewhere in this report and in our 2022 Annual Report. These policies are considered critical because they may result in fluctuations in our reported results from period to period due to the significant judgments, estimates, and assumptions about highly complex and inherently uncertain matters. In addition, the use of different judgments, assumptions, or estimates could have a material impact on our financial condition or results of operations. We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as appropriate based on changing conditions.

There have been no material changes to our critical accounting policies during the period covered by this report.

Recent Accounting Pronouncements

We describe recent accounting pronouncements in Note 2, “Significant Accounting Policies” of our accompanying interim unaudited condensed consolidated notes to our Financial Statements beginning on page F-1.

 

Results of Operations

The following table sets forth certain financial information from our interim unaudited condensed consolidated statements of operations along with a percentage of net revenue and should be read in conjunction with our Financial Statements and related notes included in this report.  

 

	For the Three Months Ended
	March 31, 2023			(% Rev)			March 31, 2022 Revised			(% Rev)
Net revenues	$	3,984,455		100%			$	4,554,338		100%
Cost of revenues		1,168,402		29%				1,743,309		38%
Gross profit		2,816,053		71%				2,811,029		62%
Operating expenses:
Selling, general, administrative and other expenses		1,706,327		43%				1,709,541		38%
Commissions		1,241,877		31%				1,505,671		33%
Depreciation and amortization		33,425		1%				34,402		1%
Total operating expenses		2,981,629		75%				3,249,614		71%
Operating (loss) profit		(165,576	)	-4%				(438,585	)	-10%
Other expense
Interest expense		57,193		1%				32,958		1%
Total other expense		57,193		1%				32,958		1%
Net (loss) income before income tax		(222,769	)	-6%				(471,543	)	-10%
Income tax expense		5,592		0%				4,856		0%
Net (loss) income	$	(228,361	)	-6%			$	(476,399	)	-10%

 

Three Months Ended March 31, 2023, Compared to Three Months Ended March 31, 2022

Net Revenues

For the three months ended March 31, 2023, net revenues were $3,984,453 compared to $4,554,338 for the three months ended March 31, 2022, which is a decrease of $569,883 or approximately 13%. This decrease was primarily attributable to lower sales price per case. Revenues per case for the three months ended 2023 were $3,880 as compared to the three months ended 2022 of $4,619.

Retail sales for the three months ended March 31, 2023 decreased 16% from the same period last year, offset by a 14% increase in Wholesale sales. This decrease was primarily attributable to lower Retail sales price per case.

As discussed above in “Current Trends and Outlook,” we believe that as our industry faces increased pricing pressures, we will need to focus on increased volume of Cases to maintain revenue and gross profit levels. For the remaining quarters of 2023, we will seek to increase our Retail Cases with our existing retail customer base and continue to add additional retail customers.  

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Cost of Revenues

For the three months ended March 31, 2023, our cost of revenues was $1,168,402 compared to $1,743,309 for the three months ended March 31, 2022, representing a decrease of $574,907, or approximately 33%. 

As a percentage of revenues, cost of revenues decreased by 9% to 29% for the three months ended March 31, 2023, compared to approximately 38% for the three months ended March 31, 2022. The 9% reduction in cost of revenues, as a percentage of revenues, is due to our increase of Fuse branded and private label sales.

Gross Profit

For the three months ended March 31, 2023, we generated a gross profit of $2,816,053 compared to $2,811,029 for the three months ended March 31, 2022, representing an increase of $5,024. As a percentage of revenues, gross profit increased by 9% to 71% for the three months ended March 31, 2023, compared to approximately 62% for the three months ended March 31, 2022. The increase in gross profit is due to the reduction in cost of revenues as discussed above.

Selling, General, Administrative, and Other Expenses

For the three months ended March 31, 2023, selling, general, administrative, and other expenses decreased to $1,706,327 from $1,709,541 for the three months ended March 31, 2022, representing a decrease of $3,214.

As a percentage of net revenues, selling, general, administrative, and other expenses accounted for approximately 43% and 38% for the three months ended March 31, 2023 and March 31, 2022, respectively. As a percentage of net revenue, the increase of approximately 5% primarily resulted from (a)(i) an approximate 4% increase in professional expenses (ii) an approximate 2% increase in leased staffing costs (iii), offset, in part, by (b)(i) an approximate 1% decline in selling expenses, comprised of marketing and travel and entertainment expenses.

Commissions

For the three months ended March 31, 2023 and March 31, 2022, commission expense was $1,241,877 and $1,505,671, respectively, representing a decrease of $263,794, or approximately 18%.

As a percentage of net revenues, commission expense accounted for approximately 31% for the three months ended March 31, 2023, and 33% for the three months ended March 31, 2022. The overall reduction of commissions expense is directly due to the reduction of average commission rates associated with total revenues.

Depreciation and amortization

For the three months ended March 31, 2023, our depreciation and amortization expense decreased slightly to $33,425 from $34,402 for the three months ended March 31, 2022, representing a decrease of $977. The decrease is due to computer equipment that has become fully depreciated.

Interest

For the three months ended March 31, 2023, interest expense increased to $57,193 from $32,958 for the three months ended March 31, 2022, which is an increase of $24,235, or approximately 74%. The increase of $24,235 was primarily driven by an increase in LIBOR market interest rates.

Income tax

For the three months ended March 31, 2023, we recorded an income tax expense of approximately $5,592, compared to $4,856, for the three months ended March 31, 2022. For additional information, please see Note 10, “Income Taxes,” of our accompanying Financial Statements, beginning on page F-1.

Net Loss

For the three months ended March 31, 2023, we had net loss of $228,361 compared to $476,399 for the three months ended March 31, 2022, respectively, representing a decrease in net loss of $248,038 or approximately 52%. The drivers for our decrease in net loss for the three months ended March 31, 2023 were (a)(i) a $574,907 reduction in cost of revenue, (ii) a $263,794 decrease in commissions, (iii) a decrease of $3,214 in SG&A and other expense (iv) a decrease of 977 in depreciation and amortization offset, in part, by (b)(i) a decrease of $569,883 in net revenue, (ii) a $24,235 increase in interest expense, and (iv) an increase in tax expense of $736.

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Liquidity and Capital Resources

Cash Flows

A summary of our cash flows is as follows:

 

		Three Months Ended March 31,
		2023				2022 Revised
Net cash provided by operating activities		$	330,950			$	494,138
Net cash used in investing activities			-				-
Net cash provided by (used in) financing activities			(267,808	)			(524,841	)
Net increase (decrease) in cash and cash equivalents		$	63,142			$	(30,703	)

 

Net Cash Provided by Operating Activities

During the three months ended March 31, 2023, net cash provided by operating activities was $330,950 compared to $494,138 for the three months ended March 31, 2022, representing a decrease of $163,188.

The decrease provided by operating activities of $163,188 primarily resulted from: (a)(i) a $124,962 increase in cash provided by the net loss adjusted for non-cash items; (a)(ii) a $88,751 increase in cash provided by accrued expenses; (a)(iii) a $896,214 increase in cash provided by inventories; (a)(iv) $99,976 increase in cash provided by prepaid expenses and other current assets; and (a)(v) $45,672 increase in cash provided by accounts receivable; offset, in part, (b)(i) a $161,189 decrease in cash used by long term accounts receivable, and (b)(ii) a $1,257,574 increase in cash used for accounts payable.

Net Cash Used in Financing Activities

For the three months ended March 31, 2023, net cash used in financing activities was $267,808, compared to $524,841 cash used in financing activities for the three months ended March 31, 2022.

The decrease of $257,033 used in financing activities was from the net activity on our credit facility.

Liquidity

Our primary sources of liquidity are cash from our operations and the Credit and Security Agreement (the “Credit Agreement”) with eCapital Healthcare Corp. f/k/a CNH Finance Fund I, L.P., a Delaware limited partnership (“eCapital”) described below. On March 31, 2023, our current assets exceeded our current liabilities by $954,641 (our “Working Capital”), which included $210,996 in cash and cash equivalents. We believe cash from our operations and net borrowings on our Credit Agreement support our Working Capital needs for 2023 and beyond. If our current resources prove insufficient, the Company will need to explore additional financing options and alternative funding sources to increase liquidity.

On December 14, 2021, we entered into the Credit Agreement with eCapital. The Credit Agreement provides for a secured revolving credit facility maturing on January 1, 2025 (the “Facility”) with an initial maximum principal in the amount of $5,000,000. Borrowings under the Facility are subject to a borrowing base as set forth in the Credit Agreement. 

We used borrowings under the Facility to repay in full (i) our Amended and Restated Business Loan Agreement, dated December 31, 2017, among ZB, N.A. (d/b/a Amegy Bank) as amended (the “RLOC”), and (ii) the U.S. Small Business Administration Loan Authorization and Agreement, dated May 12, 2020, with the U.S. Small Business Association, as amended. Borrowings under the Credit Agreement may be used for working capital and payment of fees, costs and expenses incurred in connection with the Credit Agreement.

Borrowings under the Facility bear interest at a floating rate, which will be at the Prime Rate plus 1.75%. Under the Facility, we must pay certain fees as set forth in the Credit Agreement. Our obligations with respect to the Credit Agreement are secured by a pledge of substantially all of our assets, including accounts receivables, deposit accounts, intellectual property, investment property, inventory, equipment and equity interests in our subsidiaries.  

The Credit Agreement contains customary affirmative and negative covenants, including limitations on our ability to incur additional debt, grant or permit additional liens, make investments and acquisitions, merge or consolidate with others, dispose of assets, pay dividends and distributions, pay subordinated indebtedness and enter into affiliate transactions. In addition, the Credit Agreement contains financial covenants requiring us on a consolidated basis to maintain, as of the last day of each calendar month (i) a current ratio of not less than 1.0 to 1.0, (ii) a fixed charge coverage ratio of not less than 1.0 to 1.0, (iii) a loan turnover rate of not greater than 60, and (iv) minimum liquidity of not less than $175,000, provided that if we comply with the fixed charge coverage ratio for twelve consecutive months, the minimum liquidity covenant shall cease to be effective. The Credit Agreement also includes events of default customary for facilities of this type and upon the occurrence of any such event of default, all outstanding loans under the Facility may be accelerated and/or the lenders’ commitments terminated.

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The foregoing description does not constitute a complete summary of the terms of the Credit Agreement and is qualified in its entirety by reference to the full text of the Credit Agreement, which is filed as Exhibit 10.45 to our 2022 Annual Report.

We rely on the Credit Agreement for capital expenditures and day-to-day Working Capital needs. As of March 31, 2023, we had approximately $210,996 in available cash and had reached the borrowing limit based on our borrowing base limitations. Borrowings on our Credit Agreement are repaid from cash generated from our operations.

Strategic Growth Initiative

Our strategic growth plan provides for capital investment for new product launches, private label branding, and the upgrade of our financial systems which support our infrastructure. We deem these investments essential to support our growth and expansion objectives. We estimate the range of this type of investment to be approximately $2 million to $3 million and anticipate these investments to occur primarily during the calendar year 2023. We expect sources of capital for these investments to be derived from cash from operations and utilizing the maximum limit with our new credit facility.

Capital Expenditures

For the three months ended March 31, 2023, we had no material commitments for capital expenditures.

Off-Balance Sheet Arrangements

For the three months ended March 31, 2023, we had no off-balance sheet arrangements.

Cautionary Note Regarding Forward-Looking Statements

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

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 

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

ITEM 4. CONTROLS AND PROCEDURES.

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

We conducted an evaluation (pursuant to Rule 13a-15(b) promulgated under the Exchange Act), under the supervision and with the participation of management, including our Chief Executive and Chief Financial Officers, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act) as of March 31, 2023.

Based on our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of March 31, 2023.

 

 

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PART II - OTHER INFORMATION

ITEM 5. OTHER INFORMATION. 

None.

ITEM 6. EXHIBITS.

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

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EXHIBIT INDEX

 

Exhibit No.		Description
3.1		Amended and Restated Certificate of Incorporation of Fuse Medical, Inc., incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 15, 2014.
3.2		Amended and Restated Bylaws of Fuse Medical, Inc., incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 21, 2019.
31.1*		Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**		Certification of the Chief Executive Officer and the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS *		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.
101.SCH *		Inline XBRL Taxonomy Extension Schema Document
101.CAL *		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF *		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB *		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE *		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

*	Filed herewith.

**	Furnished herewith

 

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SIGNATURES

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

 

	FUSE MEDICAL, INC.
Date: May 15, 2023	By:	/s/ Christopher C. Reeg
		Christopher C. Reeg
		Chief Executive Officer and Director (Principal Executive Officer)

 

Date: May 15, 2023	By:	/s/ Lawrence S. Yellin
		Lawrence S. Yellin
		Chief Financial Officer and Director (Principal Financial Officer)

 

 

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