Item 1. Condensed Consolidated Financial Statements
____________________________________________________________________________________________________________
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Nature of Operations
Overview
Fuse Medical, Inc., a Delaware corporation (the “Company”), is a manufacturer and national distributor of medical devices and surgical implants for the orthopedic market. The Company acquired CPM Medical Consultants, LLC (“CPM”) in December 2017 (the “CPM Acquisition”), in which the Company was the legal acquirer and CPM was deemed the accounting acquirer. In August 2018, the Company completed the acquisition of Palm Springs Partners, LLC d/b/a Maxim Surgical (“Maxim” and such transactions the “Maxim Acquisition”). CPM and Maxim survive as the Company’s wholly-owned subsidiaries and subsequent to the completion of each acquisition, CPM, Maxim and Company operations are consolidated.
Basis of Presentation
The interim unaudited condensed consolidated financial statements included herein reflect all material adjustments (consisting of normal recurring adjustments and reclassifications and non-recurring adjustments) which, in the opinion of the Company’s management, are ordinary and necessary for a fair presentation of results for the interim periods. Certain information and footnote disclosures required under generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The Company’s management believes the disclosures are adequate to make the information presented not misleading.
The condensed consolidated balance sheet information as of December 31, 2020, was derived from the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2020 (“2020 Annual Report”), filed with the SEC pursuant to Section 13 or 15(d) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on March 30, 2021. These interim unaudited condensed consolidated financial statements should be read in conjunction with the 2020 Annual Report.
The results of operations for the three and nine months ended September 30, 2021 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 during the last two calendar quarters compared to the first two calendar quarters of the year.
Note 2. Significant Accounting Policies
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, CPM and Maxim. Intercompany transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the interim unaudited condensed consolidated financial statements in accordance with GAAP, requires the Company’s management to make estimates and assumptions that affect the Company’s reported amounts in the 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, and the fair value calculations of stock-based compensation, goodwill, finite lived intangibles and the earn-out (“Earn-Out”) liability. To the extent actual results are updated and estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised.
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 his management team reviews operating results on a consolidated basis for purposes of allocating resources and evaluating the financial performance of the Company. The Company has integrated the operations of both CPM and Maxim. Accordingly, the Company has determined that it has one operating segment and, therefore, one reporting segment.
F-5
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Net Income (Loss) Per Common Share
Net income (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.
Diluted income (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 and nine months ended September 30, 2021, the Company excluded the effects of outstanding stock options, convertible notes and, to the extent in the money, restricted stock as their effects were antidilutive due to the Company’s operating loss during these periods. For the three and nine months ended September 30, 2020, the Company included the effects of outstanding stock options, convertible notes and, to the extent in the money, 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 in December 2017, the Company recorded an Earn-Out liability as part of the purchase consideration. The fair value of the Earn-Out liability is re-measured at each reporting period using Level 3 inputs with changes in fair value recorded in earnings. The Earn-Out payments are based on the financial performance of the Company between January 1, 2018, and December 31, 2034. The base amount of the Earn-Out ranges from $0.00 to $16,000,000 with an additional bonus payment of $10,000,000 subject to the Company meeting certain earnings thresholds as defined 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.
The Earn-Out liability, which represented contingent consideration associated with the CPM Acquisition, is recorded as a liability. This liability is subject to re-measurement to fair value at each reporting date until the contingency is resolved and the changes in fair value are recognized in the consolidated statements of operations at each reporting period.
The Earn-Out was remeasured to fair value under the probability weighted income approach. As a result, the fair value of the Earn-Out liability was increased by $290,635 from $11,645,365 to $11,936,000 in 2020 and reduced by $1,936,164 from $13,581,529 to $11,645,365 in 2019 and reflected as “Change in fair value of contingent purchase consideration” on our Consolidated Financial Statements on the 2020 Annual Report.
There was no change in the Earn-Out liability for the nine months ended September 30, 2021 and there were no significant changes in the Level 3 inputs from those utilized at December 31, 2020. The required earnings thresholds have not been met from inception of the agreements through September 30, 2021, and as such, there have been no payments required for either the base or bonus Earn-Out tranches.
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.
F-6
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Cash and Cash Equivalents
The Company considers highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. There were no cash equivalents at September 30, 2021 and December 31, 2020. 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 Company account at this financial institution. The Company has not experienced any financial institution losses from inception through September 30, 2021. As of September 30, 2021 and December 31, 2020, there were deposits of $1,210,294 and $761,671, respectively, greater than federally insured limits.
Accounts Receivable, Net of Allowance
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’s management. The Company generally does not require collateral or other security interest to support accounts receivable. Based on trends and specific factors, the customer’s credit terms may be modified, including required payment upon delivery.
The Company performs regular on-going credit evaluations of its customers as deemed relevant. As events, trends, and circumstances warrant, the Company’s management estimates the amounts that are more likely than not to be uncollectible. These amounts are 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’s management estimates its allowance for contractual discount pricing, by evaluating specific accounts where information indicates the customer is offered contractual pricing and discount allowances. In these arrangements, the Company’s management uses assumptions and judgement, based on the best available facts and circumstances to record a specific allowance for the amounts due from those customers. The allowance is offset by a corresponding reduction to revenue. These specific allowances are re-evaluated, analyzed, and adjusted as additional information becomes available to determine the total amount of the allowance. The Company may record additional allowances based on trends and expectations to ensure the Company’s accounts receivable portfolio is recorded at net realizable value.
Inventories, Net of Allowance
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 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.
F-7
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Property and Equipment, Net
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 Term Accounts Receivables, Net of Allowance
Long term accounts receivable reflects surgical cases where the patient has obtained a letter of protection, (“LOP”). A LOP is a contract that provides that the medical providers will be paid from any proceeds received from settlement of litigation of the underlying cause of action with respect to the event that necessitated medical goods and services. Once the medical provider receives payment, then the medical provider pays the Company’s invoice which payment is generally greater than 365 days from date of service. The LOP provides medical providers with greater certainty of full payment. This reclassification had no effect on the previously reported total assets or net loss.
The Company’s management estimates its allowance for contractual discount pricing, by evaluating specific accounts where information indicates the customer is offered contractual pricing and discount allowances. In these arrangements, the Company’s management uses assumptions and judgement, based on the best available facts and circumstances to record a specific allowance for the amounts due from those customers. The allowance is offset by a corresponding reduction to revenue. These specific allowances are re-evaluated, analyzed, and adjusted as additional information becomes available to determine the total amount of the allowance. The Company may record additional allowances based on trends and expectations to ensure the Company’s accounts receivable portfolio is recorded at net realizable value.
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, Net
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.
Accounting Standards Update (“ASU”) 350-30-35-18 indicates that an intangible asset that is not subject to amortization shall be tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that
F-8
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 September 30, 2021.
The Company’s intangible assets subject to amortization consist primarily of acquired customer relationships. Amortization expense is calculated using the straight-line method over the asset’s expected useful life.
Revenue Recognition
The Company’s revenues are generated from the sales of Orthopedic Implants and Biologics to support orthopedic surgeries. The Company obtains purchase orders from its customers for the sale of its products which sets forth the general terms and conditions including line item pricing and payment terms (generally due upon receipt). The Company recognizes revenue when its customers obtain control over the assets (generally when the title passes upon shipment or when a product is utilized in a surgery) and it is probable that the Company will collect substantially all the amounts due. Individual promised goods are the Company’s only performance obligation.
Due to the nature of its products, the Company’s product returns have been historically immaterial.
The Company includes shipping and handling fees in net revenues. Shipping and handling costs are associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold 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
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
3,930,073
|
|
|
$
|
5,092,676
|
|
|
$
|
13,069,663
|
|
|
$
|
12,826,054
|
|
Wholesale
|
|
|
320,481
|
|
|
|
645,986
|
|
|
|
1,286,665
|
|
|
|
1,559,777
|
|
Total
|
|
$
|
4,250,554
|
|
|
$
|
5,738,662
|
|
|
$
|
14,356,328
|
|
|
$
|
14,385,831
|
|
Cost of Revenues
Cost of revenues consists of (i) cost of goods sold, (ii) freight and shipping costs for items sold to customers, (iii) cost of storage, (iv) investment in medical instruments, which are expensed when acquired, (v) inventory shrink, and (vi) an estimate for slow-moving and expired inventory, and inventory obsolescence.
Stock-Based Compensation
Stock-based compensation expense is measured at the grant date fair value of the award and is expensed over the requisite service period. For employee stock-based awards, the Company calculates the fair value of the award on the date of grant using the Black-Scholes option pricing model. Determining the fair value of stock-based awards at the grant date under this model requires judgment, including estimating volatility, employee stock option exercise behaviors, and forfeiture rates. The assumptions used in calculating the fair value of stock-based awards represent the Company's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. For non-employee stock-based awards, the Company calculates the fair value of the award on the date of grant in the same manner as employee awards, however, the awards are revalued at the end of each reporting period and the pro-rata compensation expense is adjusted accordingly until such time the non-employee award is fully vested, at which time the total compensation recognized to date shall equal the fair value of the stock-based award as calculated on the measurement date, which is the date at which the award recipient’s performance is complete. The estimation of stock-based awards that will ultimately vest
F-9
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised.
Recent Accounting Pronouncements
The Company considers the applicability and impact of all ASUs issued, both effective and not yet effective.
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-02, “Leases”, which requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than twelve (12) months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. The Company adopted this guidance effective January 1, 2020. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company presently leases office space on a month to month basis as described in Note 12 “Related Party Transactions”. As such, the adoption of the standard was not material.
In January 2017, the FASB issued ASU 2017-04, “Intangibles-Goodwill and Other” (Topic 350): Simplifying the Test for Goodwill Impairment. This guidance eliminates Step 2 from the goodwill impairment test, instead requiring an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit’s fair value. The Company adopted ASU 2017-04 effective December 31, 2019, on a prospective basis.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the SEC did not or are not believed by the Company’s management to have a material impact on the Company's present or future consolidated financial statements.
Note 3. Property and Equipment
Property and equipment consisted of the following at September 30, 2021 and December 31, 2020:
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Computer equipment and software
|
|
$
|
20,249
|
|
|
$
|
49,918
|
|
Property and equipment costs
|
|
|
20,249
|
|
|
|
49,918
|
|
Less: accumulated depreciation
|
|
|
(11,311
|
)
|
|
|
(32,127
|
)
|
Property and equipment, net
|
|
$
|
8,938
|
|
|
$
|
17,791
|
|
Depreciation expense for the three months ended September 30, 2021 and 2020 was $1,861 and $8,116, respectively. Depreciation expense for the nine months ended September 30, 2021 and 2020 was $8,853 and $28,141, respectively.
Note 4. Goodwill and Intangible Assets
The following table summarizes the Company’s goodwill and other intangible assets:
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
|
Amortization period
(years)
|
510(k) product technology
|
|
|
704,380
|
|
|
|
704,380
|
|
|
Indefinite
|
Customer relationships
|
|
|
555,819
|
|
|
|
555,819
|
|
|
11
|
Total intangible assets
|
|
|
1,260,199
|
|
|
|
1,260,199
|
|
|
|
Less: accumulated amortization
|
|
|
(160,018
|
)
|
|
|
(122,119
|
)
|
|
|
Intangible assets, net
|
|
|
1,100,181
|
|
|
|
1,138,080
|
|
|
|
Goodwill
|
|
$
|
1,972,886
|
|
|
$
|
1,972,886
|
|
|
Indefinite
|
F-10
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Amortization expense for the three months ended September 30, 2021 and 2020 was $12,632 and $15,197, respectively. Amortization expense for the nine months ended September 30, 2021 and 2020, was $37,898 and $55,906, respectively.
The Company’s intangible assets subject to amortization consist primarily of acquired customer relationships.
Note 5. Senior Secured Revolving Credit Facility
On December 29, 2017, the Company became party to the Senior Secured Revolving Credit Facility (“RLOC”) with ZB, N.A., d/b/a Amegy Bank (“Amegy Bank”). The RLOC established an asset-based senior secured revolving credit facility in the amount of $5,000,000. The RLOC contains customary representation, warranties, covenants, events of default, and is collateralized by substantially all of the Company’s assets. The Company’s Chairman of the Board and President initially personally guaranteed fifty percent (50%) of the outstanding RLOC amount.
On September 21, 2018, the Company executed the First Amendment to the RLOC with Amegy Bank (the “First Amendment”). The First Amendment (i) waived the Company’s events of default under the RLOC through the fiscal quarter ended September 30, 2018, and (ii) added a covenant that the Company achieve quarterly net income of $700,000 or more for the fiscal quarter ending on September 30, 2018.
On November 19, 2018, the Company executed the Second Amendment to the RLOC with Amegy Bank (the “Second Amendment”). The Second Amendment (i) waived the Company’s events of default under the RLOC, (ii) reduced the aggregate limit of the RLOC to $4,000,000, (iii) extended the maturity date to November 4, 2019, (iv) revised the variable interest rate to the one-month LIBOR rate plus four percent (4.00%) per annum, and (v) amended the financial covenants to state that the Company will not permit: the Fixed Charge Coverage Ratio of any calendar quarter end from and after the quarter ending June 30, 2019, to be less than 1.25 to 1.00; EBITDA to be less than $700,000 for the fiscal quarter ending December 31, 2018, and $100,000 for the fiscal quarter ending March 31, 2019; modified the event of default related to consecutive quarterly losses to be applicable from and after the quarter ending June 30, 2019.
On May 9, 2019, the Company executed the Third Amendment to the RLOC with Amegy Bank (the “Third Amendment”). Pursuant to the Third Amendment, Amegy Bank (i) waived the Company’s events of default under the RLOC, (ii) reduced the aggregate limit of the RLOC to $3,500,000, (iii) reduced the limit of credit card exposure to $500,000, (iv) reduced borrowing base component of Inventory to 30%, (v) amended the financial covenants to state that the Company will not permit EBITDA to be less than $100,000 for the fiscal quarter ending June 30, 2019 and $500,000 for the fiscal quarter ending September 30, 2019, and (vi) rescinded the Loan Sweep Feature, requiring the Company to give notice of each requested loan by delivery of Advance Request to Amegy Bank.
On December 18, 2019, the Company executed the Fourth Amendment to the RLOC with Amegy Bank (the “Fourth Amendment”). Pursuant to the Fourth Amendment, Amegy Bank (i) waived the Company’s events of default under the RLOC, (ii) reduced the aggregate limit of the RLOC to $2,750,000, (iii) reduced and limited the annual salary of the Company’s Chairman of the Board and President, Mr. Brooks, to not exceed $550,000, (iv) amended the financial covenants to state that the Company will not permit EBITDA to be less than $600,000 for the fiscal quarter ending December 31, 2019 and $125,000 for the fiscal quarter ending March 31, 2020, (v) extended the termination date of the RLOC to May 4, 2020, and (vi) provides for our Chairman of the Board and President to personally guarantee one hundred percent (100%) of the outstanding RLOC amount.
On May 21, 2020, the Company executed the Fifth Amendment to the RLOC with Amegy Bank (the “Fifth Amendment”). Pursuant to the Fifth Amendment, Amegy Bank (i) waived the Company’s events of default under the RLOC, (ii) amended the financial covenants to state that the Company will not permit EBITDA to be less than $25,000 for the nine months ended September 30, 2020, and (iii) extended the termination date of the RLOC until November 4, 2020.
In conjunction with executing the Fifth Amendment to the RLOC, the Company obtained an additional $200,000 in capital in the form of subordinated debt from affiliates of Messrs. Brooks and Reeg. Specifically, on May 6, 2020, the Company borrowed $180,000 from NC 143 Family Holdings, LP, (“NC 143”), and $20,000 from Reeg Medical Industries (“RMI”), in exchange for two promissory notes which are unsecured and bear interest at 0.25% per annum until May 6, 2022, the maturity date, and 10.0% per annum after the maturity date, if not paid in full. Principal and interest are due and payable on the maturity date, provided, however, any payment of principal and interest on the loans is subordinated to payment of all indebtedness under the RLOC.
On November 12, 2020, the Company executed a Sixth Amendment to the RLOC with Amegy Bank (the “Sixth Amendment”), which extended the termination date of our RLOC to May 4, 2021.
F-11
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On May 4, 2021, the Company executed a Seventh Amendment to the RLOC with Amegy Bank (the “Seventh Amendment”), waiving the events of default for the three months ended March 31, 2021 and extending the termination date of the RLOC until November 4, 2021.
On August 5, 2021, the Company received a waiver from Amegy Bank, waiving the events of default for the minimum quarterly EBITDA requirements for the twelve months ended June 30, 2021.
The Company was not in compliance with the minimum quarterly EBITDA requirement for the twelve months ended September 30, 2021 (For more information, please see Note 13, “Subsequent Events”).
The outstanding balance of the RLOC was $913,352 at September 30, 2021 and December 31, 2020. Interest expense incurred on the RLOC was $10,717 and $11,354 for the three months ended September 30, 2021 and 2020, respectively, and is reflected in interest expense on the Company’s accompanying interim unaudited condensed consolidated statements of operations. Interest expense incurred on the RLOC was $31,940 and $50,987 for the nine months ended September 30, 2021 and 2020, respectively. Accrued interest on the RLOC at September 30, 2021 and December 31, 2020 was $2,797 and $2,947, respectively, and is reflected in accrued expenses on the Company’s accompanying interim unaudited condensed consolidated balance sheets. For the nine months ended September 30, 2021, the effective interest rate was 4.1%.
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.
On May 6, 2020, the Company borrowed $180,000 from NC 143 and $20,000 from RMI, in exchange for two promissory notes which are unsecured, and bear interest at 0.25% per annum until May 6, 2022, the maturity date, and 10.0% per annum after the maturity date, if not paid in full. Principal and interest are due and payable on the maturity date, provided, however, any payment of principal and interest on the loans is subordinated to payment of all indebtedness under the RLOC.
During the three months ended September 30, 2021 and 2020, interest expense of $6,930 and $6,930, respectively, is reflected in interest expense on the Company’s accompanying interim unaudited condensed consolidated statements of operations. During the nine months ended September 30, 2021 and 2020, interest expense of $20,570 and $20,477, respectively, is reflected in interest expense on the Company’s accompanying interim unaudited condensed consolidated statements of operations. As of September 30, 2021, and December 31, 2020, accrued interest was $134,073 and $113,503, respectively, which is reflected in accrued expenses on the Company’s accompanying interim unaudited condensed consolidated balance sheets.
Note 7 – Paycheck Protection Program
On April 11, 2020, the Company received approval from the U.S. Small Business Administration (“SBA”) to fund the Company’s request for a loan under the Paycheck Protection Program (“PPP Loan”) created as part of the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the SBA. In connection with the PPP Loan, the Company entered into a promissory note in the principal amount of $361,400. In accordance with the requirements of the CARES Act, the Company used the proceeds from the PPP Loan primarily for payroll costs. The PPP Loan was scheduled to mature on April 11, 2022, had a 1.00% interest rate, and was subject to the terms and conditions applicable to all loans made pursuant to the PPP. The Company applied for and received forgiveness for the total amount of the PPP Loan during the second quarter of 2021.
For the three months ended September 30, 2021, and 2020, the Company incurred approximately zero and $907, respectively, in interest expense related to the PPP Loan, which is reflected in interest expense on the Company’s accompanying interim unaudited condensed consolidated statements of operations. For the nine months ended September 30, 2021, and 2020, the Company incurred approximately zero and $1,810 , respectively, in interest expense related to the PPP Loan, which is reflected in interest expense on the Company’s accompanying interim unaudited condensed consolidated statements of operations. As of September 30, 2021, and December 31, 2020, accrued interest was approximately zero and $2,720, respectively, related to the PPP Loan, which is reflected in accrued expenses on the Company’s accompanying interim unaudited condensed consolidated balance sheets.
F-12
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8 – Economic Injury Disaster Loan
On May 12, 2020, the Company executed the standard loan documents (“SBA Loan Agreement” or “Original Note") required for securing a loan from the SBA under its Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact of the COVID-19 pandemic on the Company’s business (the “EIDL Loan”). Pursuant to the SBA Loan Agreement, the principal amount of the EIDL Loan was $150,000, with proceeds to be used for working capital purposes. Interest accrues at the rate of 3.75% per annum. Installment payments, including principal and interest, are due monthly beginning May 12, 2021 (twelve months from the date of the SBA Loan Agreement) in the amount of $731. The balance of principal and interest is payable thirty years from the date of the SBA Loan Agreement. The EDIL Loan is reflected in long term liabilities in the Company’s accompanying interim unaudited condensed consolidated balance sheets. In connection therewith, the Company received a $10,000 advance, which does not have to be repaid and is reflected as an offset in selling, general, administrative and other expenses in the Company’s accompanying interim unaudited condensed consolidated statements of operations.
On September 24, 2021, the Company executed the standard loan documents with the SBA for an amended and restated loan and authorization and agreement (“A&R SBA Loan Agreement”) required for securing an increase in the Company’s Original Note from the SBA EIDL Loan. Pursuant to the A&R SBA Loan Agreement, the principal amount for the EIDL Loan was increased by $350,000 to $500,000, with proceeds to be used for working capital purposes. Interest accrues at the rate of 3.75% per annum. Installment payments, including principal and interest, are due monthly beginning May 12, 2022 (twenty-four months from the date of the Original Note) in the amount of $2,515. The balance of principal and interest is payable thirty years from the date of the A&R SBA Loan Agreement. The EIDL Loan is reflected in long term liabilities in the Company’s accompanying interim unaudited condensed consolidated balance sheets.
EIDL Loan interest income for the three months and nine months ended September 30, 2021 was approximately $5,135 and $2,229, respectively, and is reflected in interest expense on the Company’s accompanying interim unaudited condensed consolidated statements of operations. EIDL Loan interest expense incurred for the three and nine months ended September 30, 2020 was approximately $1,419 and $2,359, respectively, and is reflected in interest expense on the Company’s accompanying interim unaudited condensed consolidated statements of operations. Accrued interest on the EIDL Loan as of September 30, 2021 and December 31, 2020 was $1,563 and $3,791, respectively and is reflected in accrued expenses on the Company’s accompanying interim unaudited condensed consolidated balance sheets.
Note 9. Stockholders’ Equity
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’s management estimates the fair value of stock-based compensation utilizing the Black-Scholes option pricing model. Black-Scholes option pricing is calculated using several variables, including the expected option term, expected volatility of the Company’s stock price over the expected option term, expected risk-free interest rate over the expected option term, expected dividend yield rate over the expected option term, and an estimate of expected forfeiture rates. The Company’s management believes this valuation methodology is appropriate for estimating the fair value of stock options granted to employees and directors, which are subject to ASC Topic 718 requirements. The Company’s management estimates of fair value may not be reflective of actual future values or amounts ultimately realized by recipients of these grants. The Company recognizes compensation on a straight-line basis over the requisite service period for each award.
The Company’s management utilizes the simplified method to estimate the expected life for stock options granted to employees, as the Company does not have sufficient historical data regarding stock option exercises. The risk-free interest rate is based on the U.S. Treasury yields with terms equivalent to the expected life of the related option at the time of the grant. Dividend yield is based on historical trends. While the Company’s management believes these estimates are reasonable, the compensation expense recorded would increase if the expected life was increased, a higher expected volatility was used, or if the expected dividend yield increased.
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,
F-13
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Non-Qualified Stock Option Awards
The Board did not grant any non-qualified stock option awards (“NQSOs”) for the three and nine months ended September 30, 2021, and 2020. For the three months ended September 30, 2021 and 2020 the Company amortized $35,945 and $101,817, 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. For the nine months ended September 30, 2021 and September 30, 2020 the Company amortized $221,968 and $428,915, 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 $58,797 as an expense in future periods as the stock options vest. The Company recognizes stock compensation expense on a straight-line basis over the requisite service period for each award, which are subject to a vesting schedule as set forth in individual agreements.
A summary of the Company’s stock option activity for the nine months ended September 30, 2021, is presented below:
|
|
No. of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Balance outstanding at December 31, 2020
|
|
|
2,595,000
|
|
|
$
|
0.65
|
|
|
|
5.92
|
|
|
$
|
56,000
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
50,000
|
|
|
|
0.75
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance outstanding at September 30, 2021
|
|
|
2,545,000
|
|
|
$
|
0.65
|
|
|
|
5.13
|
|
|
$
|
305,500
|
|
Exercisable at September 30, 2021
|
|
|
2,245,000
|
|
|
$
|
0.66
|
|
|
|
4.80
|
|
|
$
|
289,000
|
|
Restricted Common Stock
The non-vested restricted stock awards (“RSAs”), as of September 30, 2021, 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 September 30, 2021, and 2020, 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 and nine months ended September 30, 2021 and 2020.
There were no RSA’s that were granted, exercised, or forfeited during the nine months ended September 30, 2021.
|
Number of
Shares
|
|
|
Fair Value
|
|
|
Weighted Average Grant Date Fair Value
|
|
Non-vested, December 31, 2020
|
|
2,902,892
|
|
|
$
|
1,382,800
|
|
|
$
|
0.48
|
|
Granted
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Non-vested, September 30, 2021
|
|
2,902,892
|
|
|
$
|
1,382,800
|
|
|
$
|
0.48
|
|
F-14
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10. Income Taxes
The Company is subject to U.S. federal income taxes, in addition to state and local income taxes.
The components of income tax expense are as follows:
|
|
For the
Nine Months Ended September 30, 2021
|
|
|
For the
Nine Months Ended September 30, 2020
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
12,723
|
|
|
|
11,341
|
|
|
|
|
12,723
|
|
|
|
11,341
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
Total income tax expense (benefit)
|
|
$
|
12,723
|
|
|
$
|
11,341
|
|
Significant components of the Company's deferred income tax assets and liabilities are as follows:
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryover
|
|
$
|
1,083,617
|
|
|
$
|
786,751
|
|
Accounts receivable
|
|
|
185,568
|
|
|
|
165,431
|
|
Compensation
|
|
|
527,387
|
|
|
|
480,774
|
|
Inventory
|
|
|
544,096
|
|
|
|
588,966
|
|
Other
|
|
|
13,957
|
|
|
|
5,083
|
|
Total deferred tax assets
|
|
|
2,354,625
|
|
|
|
2,027,005
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
(200,781
|
)
|
|
|
(206,723
|
)
|
Property and equipment
|
|
|
(1,877
|
)
|
|
|
(3,736
|
)
|
Total deferred tax liabilities
|
|
|
(202,658
|
)
|
|
|
(210,459
|
)
|
Deferred tax assets, net
|
|
$
|
2,151,967
|
|
|
$
|
1,816,546
|
|
Valuation allowance:
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
(1,816,546
|
)
|
|
|
(1,529,584
|
)
|
Increase during the year
|
|
|
(335,421
|
)
|
|
|
(286,962
|
)
|
Ending balance
|
|
|
(2,151,967
|
)
|
|
|
(1,816,546
|
)
|
|
|
|
|
|
|
|
|
|
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’s management recorded a valuation allowance totaling $335,421 for the nine months ended September 30, 2021 due to the uncertainty of realization. The Company’s 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 September 30, 2021 was $2,151,967.
At September 30, 2021, the Company’s management estimates it has approximately $8,124,048 of net operating loss carryforwards, of which $3,863,299 will expire during 2021 through 2037. 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’s management 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
F-15
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
net operating loss carryover asset excludes the portion of net operating loss that are mathematically excluded from future use by the Company.
The Company’s management 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 September 30, 2021, 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 September 30, 2021.
A reconciliation of income tax computed at the U.S. statutory rate to the effective income tax rate is as follows:
|
|
Nine Months Ended
|
|
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
Expected U.S. federal incomes as statutory rate
|
|
21.0%
|
|
|
21.0%
|
|
Gain on Paycheck Protection Loan
|
|
6.2%
|
|
|
0.0%
|
|
Permanent differences
|
|
0.0%
|
|
|
0.0%
|
|
State and local income taxes, net of federal benefit
|
|
-0.8%
|
|
|
-0.6%
|
|
Change in deferred tax asset valuation allowance
|
|
-27.4%
|
|
|
-21.1%
|
|
Effective tax rate
|
|
-1.0%
|
|
|
-0.7%
|
|
Our effective income tax rates for the nine months ended September 30, 2021 and 2020 were (1.0%) and (0.7%), respectively. The decrease from the prior period was driven by the valuation allowance allocated to the deferred tax asset for the current period.
Note 11. Concentrations
Concentration of Revenues, Accounts Receivable and Suppliers
For the nine months ended September 30, 2021 and 2020, the following significant customer had an individual percentage of total revenues equaling ten percent (10%) or greater:
|
For the Nine Months Ended
|
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
Customer 1
|
|
12.18
|
%
|
|
|
13.70
|
%
|
Totals
|
|
12.18
|
%
|
|
|
13.70
|
%
|
At September 30, 2021, and December 31, 2020, the following significant customer had a concentration of accounts receivable representing ten percent (10%) or greater of accounts receivable.
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Customer 1
|
|
10.13
|
%
|
|
|
6.04
|
%
|
Totals
|
|
10.13
|
%
|
|
|
6.04
|
%
|
For the nine months ended September 30, 2021 and 2020, the following significant suppliers represented ten percent (10%) or greater of goods purchased:
|
For the Nine Months Ended
|
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
Supplier 1
|
|
22.60
|
%
|
|
|
24.40
|
%
|
Supplier 2
|
|
11.70
|
%
|
|
|
9.10
|
%
|
Totals
|
|
34.30
|
%
|
|
|
33.50
|
%
|
F-16
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12. Related Party Transactions
Lease with 1565 North Central Expressway, LP
For its principal executive office, the Company leases an aggregate of approximately 11,500 square-foot space at 1565 North Central Expressway, Suite 220, Richardson, Texas 75080 from 1565 North Central Expressway, LP (“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 nine months ended September 30, 2021 and 2020, the Company paid approximately $126,000 and $126,000, 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.
AmBio Contract
The Company engaged AmBio Staffing, LLC (“AmBio”), a Texas licensed Professional Employment Organization, to provide payroll processing, employee benefit administration, and related human capital services effective January 1, 2017. Mr. Brooks owns and controls AmBio. As of September 30, 2021, AmBio operations support approximately 43 full time equivalents (“FTE”). Of those 43 FTEs, 39 FTEs directly support the Company, and 4 FTEs support the operations of other companies.
As of September 30, 2021 and December 31, 2020, the Company owed amounts to AmBio of approximately $162,988 and $154,051, respectively, which are reflected in accounts payable on the Company’s accompanying interim unaudited condensed consolidated balance sheets. For the nine months ended September 30, 2021 and September 30, 2020, the Company paid approximately $147,005 and $131,851, 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.
Operations
Historically, the Company conducts various related-party transactions with entities that are owned by or affiliated with Mr. Brooks and Mr. Reeg. These transactions are based on wholesale contractual agreements that the Company’s management believes are on terms and conditions substantially similar to other third-party contractual agreements. As described more fully below, these transactions include: selling and purchasing of inventory on a wholesale basis, commissions earned and paid and shared-service fee arrangements.
MedUSA Group, LLC
MedUSA Group, LLC (“MedUSA”) is a sub-distributor owned and controlled by Mr. Brooks and Mr. Reeg.
During the nine months ended September 30, 2021 and 2020, the Company:
|
•
|
sold Orthopedic Implants and Biologics products to MedUSA in the amounts of approximately $1,400 and $29,822, respectively, which are reflected in net revenues in the Company’s accompanying interim unaudited condensed consolidated statements of operations; and
|
|
•
|
incurred approximately $2,591,438 and $2,110,450, respectively, in commission costs, which are reflected in commissions in the Company’s accompanying interim unaudited condensed consolidated statements of operations.
|
As of September 30, 2021 and December 31, 2020, the Company had approximately $1,236,904 and zero, respectively, of unpaid commission costs due to MedUSA, which is reflected in accrued liabilities in the Company’s accompanying interim unaudited condensed consolidated balance sheets.
As of September 30, 2021 and December 31, 2020, the Company had outstanding balances due from MedUSA of approximately $163,966 and $398,151, respectively. These amounts are reflected in accounts receivable, net of allowance in the Company’s accompanying interim unaudited condensed consolidated balance sheets.
Texas Overlord, LLC
Texas Overlord, LLC (“Overlord”) is an investment holding-company owned and controlled by Mr. Brooks.
F-17
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During the nine months ended September 30, 2021 and 2020, the Company:
|
•
|
incurred approximately $180,000 and $135,000, respectively, in commission costs, which are reflected in commissions in the Company’s accompanying interim unaudited condensed consolidated statements of operations.
|
As of September 30, 2021 and December 31, 2020, the Company had approximately $60,000 and zero of unpaid commissions costs owed to Overlord, which are reflected in accrued liabilities in the Company’s accompanying interim unaudited condensed consolidated balance sheets.
As of September 30, 2021 and December 31, 2020, the Company had no outstanding balances due from Overlord.
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 nine months ended September 30, 2021 and 2020, the Company sold Biologics products to NBMJ in the amounts of approximately $73,461, and $13,770, respectively, which are reflected in net revenues in the Company’s accompanying interim unaudited condensed consolidated statements of operations.
As of September 30, 2021 and December 31, 2020, the Company had $1,040 and zero, respectively, 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.
Bass Bone and Spine Specialists
Bass Bone & Spine Specialists (“Bass”) operates as a sub-distributor of surgical implants and is owned and controlled by Mr. Brooks.
During the nine months ended September 30, 2021 and 2020, the Company:
|
•
|
sold Orthopedic Implants and Biologics products to Bass in the amounts of approximately $23,227 and $55,897, respectively, which are reflected in net revenues in the Company’s accompanying interim unaudited condensed consolidated statements of operations; and
|
|
•
|
incurred approximately zero and $16,885, respectively, in commission costs to Bass, which is reflected in commissions in the Company’s accompanying interim unaudited condensed consolidated statements of operations.
|
As of September 30, 2021 and December 31, 2020, the Company had outstanding balances due from Bass of approximately zero and $20,117, respectively. 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 Bass are 30 days from receipt of invoice.
Sintu, LLC
Sintu, LLC (“Sintu”) operates as a sub-distributor of surgical implants and is owned and controlled by Mr. Brooks.
During the nine months ended September 30, 2021 and 2020, the Company incurred approximately $314,894 and $482,308, 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 September 30, 2021, and December 31, 2020, the Company had approximately $374,827 and zero, 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.
Tiger Orthopedics, LLC
Tiger Orthopedics, LLC (“Tiger”) operates as a sub-distributor of surgical implants and is owned and controlled by Mr. Brooks.
During the nine months ended September 30, 2021 and September 30, 2020, the Company sold Orthopedic Implants and Biologics products to Tiger in the amounts of approximately $502 and $39,992, respectively, which are reflected in net revenues in the Company’s accompanying interim unaudited condensed consolidated statements of operations.
F-18
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Payment terms per the stocking and distribution agreement with Tiger are 30 days from receipt of invoice.
Modal Manufacturing, LLC
Modal Manufacturing, LLC (“Modal”) is a manufacturer of medical devices owned and controlled by Mr. Brooks.
During the nine months ended September 30, 2021 and 2020, the Company purchased approximately $599,628 and $355,274, 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.
As of September 30, 2021 and December 31, 2020, the Company had outstanding balances owed to Modal of approximately $925,686 and $417,897, respectively. These amounts are reflected in accounts payable 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.
Note 13. Subsequent Events
In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through November 10, 2021.
On November 8, 2021 the Company received a waiver from Amegy Bank, waiving the events of default for minimum quarterly EBITDA requirement for the twelve months ended September 30, 2021 and extending the termination date of the RLOC to February 4, 2022. (See Note 5, “Senior Secured Revolving Credit Facility”)
The Company’s Management concluded there are no other material events or transactions for potential recognition or disclosure.
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