UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 20162019

or

For the Transition Period from                to                

Commission File Number: 000-10093

FUSE MEDICAL, INC.

Fuse Medical, Inc.

(Exact name of registrant as specified in its charter)

(817) 439-7025(469) 862-3030

Registrant'sRegistrant’s telephone number, including area code

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

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

Common Stock, $0.01 par value

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes    ☒ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes    ☒ No

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 past 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes    ☐ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K ☐

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

If an emerging growth company, indicate by check mark if the registrant has selected 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.  ☐

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $147,604$3,734,944.

Indicate the number of shares outstanding of each of the registrant’s classes of Common Stock, as of the latest practicable date: As of March 1712, 2017, 15,890,8082020, 73,124,458 shares of the registrant’s Common Stock were outstanding.

INDEX

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EXPLANATORY NOTE

Fuse Medical, Inc. (the “Company”In this Annual Report on Form 10-K (“Annual Report”) is, the latest successor company to GolfRounds, Inc. which was incorporated in 1968 as a Florida corporation.  During July 1999, GolfRounds, Inc. was re-domesticated to Delaware through a merger into its wholly-owned subsidiary GolfRounds.com, Inc.  Effective May 28, 2014 GolfRounds.com, Inc. amended its certificate of incorporation to change its name toterms “we,” “us,” “our” and “Fuse” mean Fuse Medical, Inc. and merged with and into Fuse Medial, LLC and surviving as a wholly-owned subsidiary of Fuse Medical, Inc.  During 2015, certificates of termination were filed for Fuse medical, LLC and its twoour subsidiaries.

During July 2016 through October 2016, we obtained three short-term loansCAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report and in particular, the descriptions of our “Business” set forth in “Item 1. Business,” “Item 1A. Risk Factors,” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” contain or incorporate a number of forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933, as amended, the (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, the (“Exchange Act”), including statements regarding:

Terms such as “may,” “might,” “would,” “should,” “could,” “project,” “estimate,” “pro-forma,” “predict,” “potential,” “strategy,” “anticipate,” “attempt,” “develop,” “plan,” “help,” “believe,” “continue,” “intend,” “expect,” “future,” and terms of similar import (including the negative of any of the foregoing) may be intended to identify forward-looking statements. However, not all forward-looking statements may contain one or more of these identifying terms.

Forward-looking statements are not meant to predict or guarantee actual results, performance, events, or circumstances and may not be realized because they are based upon our current projections, plans, objectives, beliefs, expectations, estimates, and assumptions and are subject to a number of risks, uncertainties and other influences, many of which we have no control over. Actual results and the timing of certain events and circumstances may differ materially from those described by the forward-looking statements as a result of these risks and uncertainties. Factors that may influence or contribute to the inaccuracy of the forward-looking statements or cause actual results to differ materially from expected or desired results may include, without limitation: (i) our inability to obtain adequate financing; (ii) the duration of, and government response to, the COVID-19 pandemic; (iii) the significant length of time and resources associated with the development of our products and related insufficient cash flows and resulting illiquidity; (iv) our inability to expand our business; (v) significant government regulation of our business and the healthcare industry; (vi) lack of product diversification; (vii) existing or increased competition; (viii) results of arbitration and litigation; (ix) stock volatility and illiquidity; and (x) our failure to implement our business plans or strategies. Descriptions of some of the risks and uncertainties that could cause our actual results to differ materially from those described by the forward-looking statements in this Annual Report appear in “Item 1A, Risk Factors” (“Risk Factors”) and elsewhere in this 2019 Annual Report.

Readers are cautioned not to place undue reliance on forward-looking statements because of the risks and uncertainties related to them and to the Risk Factors. We disclaim any obligation to update the forward-looking statements contained in this Annual Report to reflect any new information, future events or circumstances, or otherwise.

Readers should read this Annual Report in conjunction with (i) the discussion under the caption Risk Factors, (ii) our audited consolidated financial statements as of the Closing Date.

The closing of the Purchase Agreement resulted in a change in control of the Company whereby the Investors acquired a majority of our issuedDecember 31, 2019, and outstanding equity securities, Mark W. Brooks became our Chairman of the Board and Christopher C. Reeg became our Chief Executive Officer, as described in the Company’s Current Report on Form 8-K, filed on December 23, 2016 (the “Purchase Agreement 8-K”), which is herein incorporated by reference.

During June 2016, we transferred inventory having a net book value of $8,467 to CPM Medical Consultants, LLC (“CPM”), which is one of our suppliers and is majority owned and controlled by our Chairman of the Board (who is also one of the Investors), in exchange for cash proceeds of $100,000. As the transfer of inventory was completed pursuant to a letter of intent between us2018, and the Investors,related notes therein included in this Annual Report, beginning on page F-1 (“Financial Statements”), and (iii) other documents which we may file from time to time with the profit of $91,533, which had been deferred in the prior two quarters, was, on December 19, 2016 considered a contribution of capital by the Investors.SEC.

Explanatory Note

We are a “smaller reporting company” as that term is defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).Act. Accordingly, this Annual Report will reflect the reporting requirements of smaller reporting companies as set forth in Regulation S-K, promulgated under the Exchange Act.

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PART I

ITEM 1. BUSINESS.

Historical Company Information

Golf Rounds, Inc. was incorporated in 1968 as a Florida corporation.

On May 28, 2014, and through a series of related, subsequent transactions (the “Merger” and such agreement effectuating the Merger, the “Merger Agreement”), we merged with Fuse Medical, LLC, a Delaware limited liability company (“Legacy Fuse”). As a result of the Merger, we acquired Legacy Fuse and the business of Legacy Fuse became our business. For more information on the Merger, see the Company’s Form 8-K/A filed on August 29, 2014, which is herein incorporated by reference.

On the Closing Date, we entered into the Purchase Agreement, as described in the section of this Annual Report above entitled “Explanatory Note,” which is incorporated herein by reference.

Overview

Historically our business has been to market, distribute and sell orthopedic and foot and ankle surgical implants, osteobiologics, regenerative amniotic tissues, and other related surgical products for use during surgical procedures conducted at medical facilities (ambulatory surgical centers and hospitals) where orthopedic surgeons treat patients and perform operations. We market, distribute and sell a variety of existing FDA-approved and/or state licensed products and services manufactured or produced by other organizations where we are considered a distributor and/or a stocking distributor. Currently, these products consist of plates and screws for internal fixation of small bone fractures, human allografts of bone chips and tendons, and regenerative amniotic tissues and fluids. The amniotic products are derived from the inner layer of the human placenta or harvested from amniotic fluid. The tissues are then processed by accredited tissue banks resulting in FDA-approved allografts, which are indicated to decrease inflammation and scarring in surgical procedures. Amniotic products have historically made up over 50% of our revenues.

We have recently expanded our productare a manufacturer and national distributor of medical devices. We provide a broad portfolio of surgicalorthopedic implants to now include multiple manufacturers’ offerings of not only footincluding:

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

All of our medical devices are approved 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 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.

Products

We believe that by expanding our broad portfolio of Orthopedic Implants and Biologics provide high-quality products to assist surgeons with positive patient outcomes and cost-effective solutions for our customers.

Currently Marketed Products – Orthopedic Implants

Currently Marketed Products – Biologics

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Customers and Product Distribution Channels

Retail. Under our retail distribution model, (“RetailModel”), 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 (which are herein referred to as “Retail Cases”). For the years ended December 31, 2019 and 2018, our Retail Cases generated, in aggregate, approximately 83% and 77%, respectively, of our revenues..

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 our sales through our Wholesale Model as Wholesale Cases, (which are herein referred to as “Wholesale Cases”). For the years ended December 31, 2019 and 2018, our Wholesale Cases generated, in aggregate, approximately 17% and 23%, respectively, of our revenues.

For the year ended December 31, 2019, our largest customer, a hospital, represented approximately 9.9% of our consolidated net revenues. We continue to develop and expand our customer portfolio through building relationships with key medical professionals in the expanding geographic areas we serve. We provide on-going product training and support to our sales representatives, independent contractors and independent distributors along with product manufacturer marketing materials to ensure customer satisfaction with the products we offer. We believe focusing on these key areas is essential to growing our customer base and revenues.

Manufacture and Supply

We rely on third-party suppliers for the manufacturing of all our products. Outsourcing product manufacturing reduces our need for capital investment and reduces operational expense. Additionally, outsourcing provides expertise and capacity necessary to scale up or down based on demand for our products. We select our suppliers to ensure that all of our products are safe, effective, adhere to all applicable regulations, are of the highest quality, and meet our supply needs. We employ a rigorous supplier assessment, qualification, and selection process targeted to suppliers that meet the requirements of the FDA, and International Organization for Standardizations, (“ISO”), and quality standards supported by internal policies and procedures. Our quality assurance process monitors and maintains supplier performance through qualification and periodic supplier reviews and audits.

Our suppliers consist of:

Manufacturers. We purchase product directly from the manufacturer on a wholesale basis and serve as a stocking distributor for the manufacturer with respect to the product. We then sell the product utilizing our Retail and Wholesale Models and determine the sales price to the end customer.

Our primary supplier of Biologics is Vivex Biomedical, Inc. a biomedical company focused on cellular therapies that treat orthopedic, spine, wound, and soft tissue indications. With respect to Orthopedic Implants, our significant suppliers are OrthoSolutions Group Ltd., Inc. for lower extremities, FH Orthopedics, Inc. for shoulder replacement systems, and Precision Spine for medical devices used in spine surgeries.

Private label manufacturers. We purchase product directly from the manufacturer on an exclusive basis. We then sell the products under one of our own proprietary brands utilizing our Retail Model or our Wholesale Model. With respect to private label products, the manufacturer owns the applicable FDA clearance of a premarket notification requesting permission for commercial distribution under Section 510(k) of the FDCA (“510(k)”).

We contract with Tyber Medical, LLC and Maruho Medical, two manufacturers of Orthopedic Implants, to develop and expand our private label initiatives, including our foot and ankle, and spine and sports medicine products. During 2019, we expanded our private label products through key relationships and suppliers. Our private label portfolio consists of:

Beginning in 2019, we began distributing the Sterizo Total Knee Replacement System (“Sterizo Total Knee System”) on a private label basis.  During 2019, we secured a master distributorship with Modal Manufacturing, LLC (“Modal”), providing us exclusive distribution rights in the United States for Modal’s total knee and total hip replacement system. We launched the Sterizo Total Knee System in the first half of 2019 and successfully grew distribution by gaining acceptance into 20 hospitals and use by 15 surgeons. We

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are also evaluating the opportunity to license certain manufacturers’ technology for our own branding opportunities that would allow us the right to expand our branded product portfolio offerings.

Contract manufacturers. For products for which we are the manufacturer of record on the applicable 510(k), we outsource our manufacturing and machining needs to contract manufacturers. Our approved contract manufacturers machine and produce our products to our specifications. All finished products go through quality and final inspection at our facility. We then sell the products under one of our own proprietary brands utilizing our Retail and Wholesale Models.  Our FDA cleared products for which we are the manufacturer of record are:

Product Development

To further our business objectives, we use our knowledge of the healthcare industry and leverage our relationships with key suppliers, manufacturers, facility materials management, and distribution channels. In 2019, we continued to furtherutilize our business objectives. We believe all sales are made in complianceScientific Advisory Boards, (“SABs”), to assist with bothour product development and design input. Members of our SABs include the Stark Law and the federal Anti-Kickback Statute, as further discussed below.

Product Distribution Channels and Customer Base

We utilize multiple distribution models including representative networks and independent contractors. Our largest customers are hospitals and surgical facilities. We distribute some products on behalf of manufacturers and, in some cases, receive a commission related to sales numbers. In most cases, we purchase products directly from manufacturers or authorized distributors and resell the products from existing inventory. We are attempting to build a network of specialists in select clinical specialties, many of whom we believe are leaders in their field, and anticipate they will clinically utilize the Company’s products. These network specialists may include heads of teaching hospitals and universities, clinical residency programs, and clinical resident and fellowship programs at some of the most respected institutes in the nation.

For products we sell on a commission basis, we receive payment from the manufacturer or distributor. For products sold from our inventory, we receive payment directly from our customers. In the year ended December 31, 2016, 87% of our revenues were derived from two customers. Amniotic products have historically made up the largest portion of our business. We recognize that the diversification and growth of our customer base will be instrumental to our long-term strategic and financial success.

Our principal supplier for our amniotic products is CPM, which is majority owned and controlled by our Chairman of the Board. We entered into a distributor agreement with CPM effective August 2, 2012, pursuant to which we act as a non-exclusive distributor of certain amniotic membrane products. The term of the agreement is one year and renews on each annual anniversary date for successive one-year terms unless it is terminated in writing by either party. During December 2015 through May 2016, we purchased certain amniotic membrane products from SLR Medical Consulting, LLC (“SLR”) under a December 15, 2015 distributor agreement

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with SLR pursuant to which we act as a non-exclusive distributor. The term of the agreement is one year and renews on each annual anniversary date for successive one-year terms unless it is terminated in writing by either party. During 2016 and 2015, we generated revenues of approximately $383,000 and $1,202,000, respectively, from the CPM and SLR distributor agreements.

On July 17, 2014, we entered into an Independent Representative Agreement with Vilex, Inc. (“Vilex”) pursuant to which we were appointed as a representative of Vilex to promote and sell Vilex productsinstitutions in the United States. The VilexOur SABs have provided valuable insight for both our products include certain plates, screws,coming to market as well as the design and related equipment. Underdevelopment of new products in our pipeline. We continuously review our product lines, both internally and with our SABs, proactively evaluating product trends to ensure we offer a comprehensive, high-quality, and cost-effective selection of Orthopedic Implants. We believe these efforts will enable us to become leaders in our industry and to expand our existing customer base.

Sales and Marketing

We pride ourselves on developing collaborative supplier relationships resulting in a strong and diverse supplier network. Currently we maintain distribution agreements with approximately 56 different suppliers, with our top five suppliers representing approximately 47% of our consolidated cost of revenue and our top ten suppliers representing approximately 69% of our consolidated cost of revenues.

Public Recognition

Our strategic acquisitions of CPM Medical Consultants, LLC (“CPM”) and Palms Springs Partners, LLC d/b/a Maxim Surgical (“Maxim”) significantly expanded our product lines, operations, and competitive reach. For the termssecond year in a row, Fuse was named and ranked on Deloitte’s 2019 Technology Fast 500TM, an annual ranking of the agreement with Vilex, wefastest growing North American companies in the technology, media, telecommunications, life sciences and energy technology sectors. We were also named and ranked for the second year in a non-exclusive representative of Vilex, except for certain specified customers. The agreement with Vilex was for a term of five years and it would have automatically renewed for additional one-year periods at the expirationrow one as of the original term unless terminated as provided therein. We were paid a commission based on net sales. During 2016 and 2015, we generated approximately $22,000 and $46,000, respectively, from Vilex for commissions under this agreement. On November 15, 2016, due to low sales volume resulting from Vilex being excluded from a hospital purchasing contract, Vilex terminated this agreement.

On January 8, 2015, we entered into a distribution and supply agreement with BioDlogics, LLC (“BioD”), pursuant to which we were appointed as a non-exclusive distributor of certain products of BioD and granted the right to promote and sell such productstop 150 largest public company by revenue in the United States. The term ofDallas-Fort Worth metropolitan area, by the agreement with BioD is from January 8, 2015, through December 31, 2016, unless earlier terminatedDallas Morning News in accordance with the agreement. The BioD agreement set forth a quota for the purchase of the products by us from BioD for the first year of the agreement, which the Company exceeded. During 2016 and 2015, we generated approximately $153,000 and $420,000, respectively, of revenues from this agreement.  We have not been provided notice from BioD as to whether BioD intends to renew this agreement.

For each of our suppliers, we are dependent upon their ability to obtain raw materials to manufacture the products that they supply to us to market, distribute and sell.May 2019.

Competition

With respect to salesAs a manufacturer, distributor, and wholesaler of medical devices, we primarily compete with other distributors, as well as large, vertically-integrated medical device manufacturers that enjoy well-established distribution of most of the products we offer, we have numerous vertically integrated competitors, several of which are publicly traded, that not only manufacture and produce their own products but also have established distribution andchannels, national sales networks, direct sales models, and participateparticipation in large group purchasing organizations. Mostorganizations contracted with major hospitals and surgery centers.

We believe that our ability to offer a diverse selection of products across five different product categories, sets us apart from other distributors and gives us a competitive advantage against distributors who are not able to manufacture their own products, as well as manufacturers who are limited to distributing their own products within a specific product category.

Generally, we view Stryker Corporation, Smith & Nephew plc, and Orthofix Medical Inc., as examples of our large vertically-integrated competitors. We believe those competitors, and companies like them, only distribute products they manufacture and have significant costs related to new product research and development and organizational support. Conversely, we sell a broad portfolio of specialized third-party manufacturers’ products and have significantly lower costs related to research and development for such third-party products, as well as significantly lower costs for organizational support since we are not vertically-integrated. Thus, we believe our competitive advantage lies primarily with our single-source fulfillment sales model, allowing us to offer a broader assortment of several manufacturers’ products. We believe we generally have higher gross margins than pure distributors due to the lower product costs associated with being a manufacturer and private labeler.

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We contract primarily with small- and medium-sized manufacturers of Orthopedic Implants that are subject to FDA compliance and approval standards. We believe these manufacturers are highly innovative and cost effective because of their streamlined sales infrastructures and substantially lower research and development costs. Because of our organizational structure, large distribution footprint, and sales model, we tend to align well with our specialized suppliers’ competitive strategies, which we believe results in more partnerships with such suppliers than our competitors.

We believe the competition in our industry is primarily driven by continued mergers and acquisitions of smaller manufacturers and distributors by larger, vertically-integrated companies that produce, market and distribute medical devices, Orthopedic Implants, and Biologics. Our vertically-integrated competitors have linked physiciansbenefit from their ability to their entities by engaging select physiciancontrol costs for the devices they manufacture and surgical specialists through consulting agreements, clinical trials remunerationdistribute. Moreover, we believe the market in which we operate is sensitive to changes in third-party and other compensation models. In addition, there aregovernment reimbursements and, competitive discount pricing. We believe that our industry will continue to see increased mergers and acquisitions because the market is significantly fragmented with numerous independent medical distributorships primarily focused on limited geographic marketsdevice manufacturers, distributors, and products located acrossspecialized suppliers offering similar product portfolios throughout the United States.

Intellectual Property

We hold no registered intellectual property, patents or trademarks.

Regulatory Issues

There are both federalmaintain stocking distribution agreements providing for exclusive distribution rights in certain geographic areas and state regulations that may impact our ability to fully implement our strategic plan.

FDA Regulations

The manufacturersuse of associated trademarks, service marks, and supplierstradenames for the sale and promotion of the products we marketoffer, which generally have durations of one (1) to three (3) years, subject to renewal terms. Furthermore, we require employees, independent contractors, consultants, and advisors to execute agreements, with varying terms of one (1) to three (3) years, that assign to us the intellectual property existing and generated from their work.

Government Regulation

Our products are subject to extensive regulation by the FDA and other U.S. federal and state regulatory bodies. Our products are subject to regulation under the Federal Food, Drug, and Cosmetic Act, (“FDCA”), and in the case of our tissue products, also under the Public Health Service Act, (“PHSA”). To ensure that our products are safe and effective for their intended use, the FDA regulates, among other things, the following activities that we or our partners perform and will continue to perform:

Government Regulation – Medical Devices

FDA’s Premarket Clearance and Approval Requirements. Unless an exemption applies, each medical device we seek to commercially distribute in the United States requires either FDA clearance of a premarket notification requesting permission for commercial distribution under Section 510(k) of the FDCA (“510(k) Clearance”), or approval of a premarket approval application (“PMA”). The information that must be submitted to the FDA in order to obtain clearance or approval to market a new medical device varies depending on how the medical device is classified by the FDA. Under the FDCA medical devices are classified as Class I, Class II, or Class III depending on the degree of risk associated with the use of the device and the extent of manufacturer and regulatory controls deemed to be necessary by the FDA to reasonably ensure their safety and effectiveness.

Class I devices are those with the lowest risk to the patient for which safety and effectiveness can be reasonably assured by adherence to a set of regulations, referred to as General Controls, which require compliance with the applicable portions of the FDA’s Quality System Regulation (“QSR”), facility registration and product listing, reporting of adverse events and malfunctions, and appropriate, truthful and non-misleading labeling and promotional materials. Some Class I devices also require 510(k) Clearance by the FDA, though most Class I devices are exempt from the premarket notification requirements. Class II devices are those that are subject to the General Controls, as well as Special Controls, which can include performance standards, product-specific guidance documents and post-market surveillance. Manufacturers of most Class II devices are required to submit to the FDA a premarket notification under

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Section 510(k) of the FDCA. Class III devices include devices deemed by the FDA to pose the greatest risk such as life-supporting or life-sustaining devices, or implantable devices, in addition to those deemed not substantially equivalent following the 510(k) process. The safety and effectiveness of Class III devices cannot be reasonably assured solely by compliance with the General Controls and Special Controls described above. Therefore, these devices must be the subject of an approved PMA. Both 510(k)s and PMAs are subject to the payment of user fees at the time of submission for FDA review.

If the FDA determines that the device is not “substantially equivalent” to a predicate device following submission and review of a 510(k) premarket notification, or if the manufacturer is unable to identify an appropriate predicate device and the new device or new use of the device presents a moderate or low risk, the device sponsor may either pursue a PMA approval or seek reclassification of the device through the de novo process. The products we currently market in the U.S. are Class I and Class II devices marketed under FDA 510(k) clearance.

510(k) Clearance Pathway. To obtain 510(k) Clearance, we must submit a 510(k) premarket notification demonstrating that the proposed device is substantially equivalent to a device legally marketed in the United States. A predicate device is a legally marketed device that is not subject to premarket approval, i.e., a device that was legally marketed prior to May 28, 1976 (pre-amendments device) and for which a PMA is not required, a device that has been reclassified from Class III to Class II or I, or a device that was found substantially equivalent through the 510(k) clearance process. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Clinical data is sometimes required to support substantial equivalence.

The FDA’s goal is to review and act on each 510(k) premarket notification within 90 days of submission, but the process usually takes from nine to twelve months, and it may take longer if the FDA requests additional information. Most 510(k) premarket clearances do not require supporting data from clinical trials, but the FDA may request such data. If the FDA agrees that the device is substantially equivalent, it will grant clearance to commercially market the device.

After a device receives 510(k) Clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a new or major change in its intended use, will require a new 510(k) Clearance or, depending on the modification, require premarket approval. The FDA requires each manufacturer to determine whether the proposed change requires the submission of a 510(k) premarket notification or PMA, but the FDA can review any such decision and can disagree with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s determination, the FDA can require the manufacturer to cease marketing and/or recall the modified device until 510(k) Clearance or PMA is obtained. If the FDA requires us to seek a new 510(k) Clearance or PMA for any modifications to a previously cleared product, we may be required to cease marketing or recall the modified device until we obtain this clearance or approval. Also, in these circumstances, we may be subject to significant fines or penalties. We have made and plan to continue to make enhancements to our products for which we have not submitted 510(k)s premarket notifications or PMAs, and we will consider on a case-by-case basis whether a new 510(k) premarket notification or PMA is necessary.

The FDA began to consider proposals to reform its 510(k) Clearance process in 2011, and such proposals could include increased requirements for clinical data and a longer review period. Specifically, in response to industry and healthcare provider concerns regarding the predictability, consistency and rigor of the 510(k) regulatory pathway, the FDA initiated an evaluation of the 510(k) program, and as part of the Food and Drug Administration Safety and Innovation Act (“FDA”FDASIA”), Congress reauthorized the Medical Device User Fee Amendments with various FDA performance goal commitments and enacted several “Medical Device Regulatory Improvements” and miscellaneous reforms, which are further intended to clarify and improve medical device regulation both pre- and post-clearance and approval. Further, in December 2016, the 21st Century Cures Act (“Cures Act”), was signed into law. The Cures Act, among other things, is intended to modernize the regulation of devices and spur innovation, but its ultimate implementation is unclear.

Pervasive and Continuing FDA Regulation. After a device is placed on the market, numerous FDA and other regulatory requirements continue to apply. These include:

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Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following:

Our facilities, records and manufacturing processes are subject to periodic announced and unannounced inspections by the FDA to evaluate compliance with applicable regulatory requirements.

Regulation of Human Cells, Tissues, and Cellular and Tissue-based Products. Certain of our products are regulated as human cells, tissues, and cellular and tissue-based products (“HCT/Ps”). Section 361 of the PHSA authorizes the FDA to issue regulations to prevent the introduction, transmission or spread of communicable disease. HCT/Ps regulated as “361” HCT/Ps are subject to requirements relating to registering facilities and listing products with the FDA, screening and testing for tissue donor eligibility, or Good Tissue Practice, when processing, storing, labeling, and distributing HCT/Ps, including required labeling information, stringent record keeping, and adverse event reporting, among other applicable requirements and laws. If the HCT/P is minimally manipulated, is intended for homologous use only and meets other requirements, the HCT/P will not require 510(k) Clearance, PMA approval, a Biologics license application, or other premarket authorization from the FDA before marketing.

Environmental Matters

Our facilities and operations are subject to extensive federal, governmental agenciesstate, and by state authorities.local environmental and occupational health and safety laws and regulations. These laws and regulations govern, among other things, air emissions; wastewater discharges; the approvalgeneration, storage, handling, use and transportation of clearancehazardous materials; the handling and disposal of hazardous wastes; the cleanup of contamination; and the health and safety of our employees. Under such laws and regulations, we are required to obtain permits from governmental authorities for some of our operations. If we violate or licensefail to commercialize medical devices, biological productscomply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators. We could also be held responsible for costs and human cellulardamages arising from any contamination at our past or present facilities or at third-party waste disposal sites. We cannot completely eliminate the risk of contamination or injury resulting from hazardous materials, and tissue products; including compliancewe may incur material liability as a result of any contamination or injury.

Compliance with the standards and requirements related to the design, testing, manufacture, labeling, promotion and sales of the products, record keeping requirements, tracking of devices, reporting of potential product defects and adverse events, conduct of corrections and recalls, and other matters. As a distributor and marketer of such FDA-regulated products, weCertain Applicable Statutes

We are subject to independent requirements to register and list certain products, we may be required to obtain state licensure or certifications and we may be subject to inspections, in addition to complying with requirements applicable to the manufacturers of the products we market. Failure to comply with applicable requirements could result in a wide variety of enforcement actions ranging from warning letters to more severe sanctions such as: fines and civil penalties, operating restrictions, injunctions and criminal prosecutions.

Fraud, Abuse and False Claims

We are directly and indirectly subject to certainvarious federal and state laws governing relationships with healthcare providers and pertaining to healthcare fraud and abuse. The federal Anti-Kickback Statute (the “AKS”) is aabuse, including anti-kickback laws, false claims laws, criminal statute that prohibitshealth care fraud laws, physician payment transparency laws, data privacy and security laws and foreign corrupt practice laws. Violations of these laws are punishable by criminal and/or civil sanctions, including, in some instances, fines, imprisonment and, within the knowingUnited States, exclusion from participation in government healthcare programs, including Medicare, Medicaid and willful offer, payment, solicitation or receiptVeterans Administration health programs. These laws are administered by, among others, the U.S. Department of remuneration, in cash or otherwise, in return for referralsJustice, the Office of federal healthcare beneficiaries. TheInspector General of the Department of Health and Human Services (“DHHS”) has promulgated certain safe harbors that offer protectionand state attorneys general. Many of these agencies have increased their enforcement activities with respect to medical device manufacturers in recent years.

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The federal Anti-Kickback Statute, prohibits persons from liability under the AKS for arrangements that fall within very specific parameters. The Company intends to utilize the “small investment interest safe harbor” in the AKS as a business model.

The Stark Law prohibits a provider of designated health services (“DHS”) from billing Medicare for any DHS that a physician refers to the provider if the physicianknowingly and willfully soliciting, offering, receiving or an immediate family member has a financial relationship (either via a compensation arrangement or ownership interest)providing remuneration, directly or indirectly, within exchange for or to induce either the referral of an individual, or the furnishing, arranging for or recommending a good or service, for which payment may be made in whole or part under federal healthcare programs, such as the

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Medicare and Medicaid programs. The Anti-Kickback Statute is broad and prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. For example, the definition of “remuneration” has been broadly interpreted to include anything of value, including gifts, discounts, the furnishing of supplies or equipment, credit arrangements, payments of cash, waivers of payments, ownership interests and providing anything at less than its fair market value. In addition, the Patient Protection and Affordable Health Care Act, which, as amended by the Health Care and Education Reconciliation Act (collectively referred to as “ACA”). ACA, among other things, amends the intent requirement of the federal Anti-Kickback Statute. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, ACA provides that the government may assert that a claim including items or services resulting from a violation of the Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act.

In implementing the Anti-Kickback Statute, the Department of Health and Human Services Office of Inspector General (“OIG”), has issued a series of regulations, known as the safe harbors, which began in July 1991. These safe harbors set forth provisions that, in circumstances where all the applicable requirements are met, will assure healthcare providers and other parties that they will not be prosecuted under the Anti-Kickback Statute. The failure of a transaction or arrangement to fit precisely within one or more safe harbors does not necessarily mean that it is illegal or that prosecution will be pursued. However, conduct and business arrangements that do not fully satisfy all requirements of an applicable safe harbor may result in increased scrutiny by government enforcement authorities such as the OIG. Penalties for violations of the Anti-Kickback Statute include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. Many states have anti- kickback laws that are similar to the federal law, some of which apply to the referral of patients for healthcare items or services reimbursed by any source, and may also result in penalties, fines, sanctions for violations, and exclusions from state or commercial programs.

The federal False Claims Act prohibits persons from knowingly filing or causing to be filed a false or fraudulent claim to, or the knowing use of false statements to obtain payment from, the federal government. Private suits filed under the False Claims Act, known as qui tam actions, can be brought by individuals on behalf of the government. These individuals, sometimes known as “relators” or, more commonly, as “whistleblowers,” may share in any amounts paid by the entity to the government in fines or settlement. The number of filings of qui tam actions has increased significantly in recent years, causing more healthcare companies to have to defend a False Claim Act action. If an entity is determined to have violated the federal False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties of between $10,000 to $22,000 for each separate false claim and may be subject to exclusion from Medicare, Medicaid and other federal healthcare programs. Various states have also enacted similar laws modeled after the federal False Claims Act which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor.

The Health Insurance Portability and Accountability Act (“HIPAA”), created two new federal crimes: healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payors. The ACA changed the intent requirement of the healthcare fraud statute to such that provider.a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. A violation of this statute is a felony and may result in fines, imprisonment or possible exclusion from Medicare, Medicaid and other federal healthcare programs. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. A violation of this statute is a felony and may result in similar sanctions.

ACA also includes various provisions designed to significantly strengthen fraud and abuse enforcement in addition to those changes discussed above. Among these additional provisions include increased funding for enforcement efforts and new “sunshine” provisions to require us to report and disclose to the Centers for Medicare and Medicaid Services (“CMS”), any payment or “transfer of value” made or distributed to physicians or teaching hospitals. These sunshine provisions also require certain group purchasing organizations (“GPOs”), including physician-owned distributors, to disclose physician ownership information to CMS. We and other device manufacturers are required to collect and annually report specific data on payments and other transfers of value to physicians and teaching hospitals. There are various state laws and initiatives that require device manufacturers to disclose to the appropriate regulatory agency certain payments or other transfers of value made to physicians, and in certain cases prohibit some forms of these payments, with the risk of fines for any violation of such requirements.

HIPAA also includes privacy and security provisions designed to regulate the use and disclosure of “protected health information”, (“PHI”), which is health information that identifies a patient and that is held by a health care provider, a health plan or health care clearinghouse. We are not directly regulated by HIPAA, but our ability to access PHI for purposes such as marketing, product development, clinical research or other uses is controlled by HIPAA and restrictions placed on health care providers and other covered entities. HIPAA was amended in 2009 by the Health Information Technology for Economic and Clinical Health Act (“HITECH”), which strengthened the rule, increased penalties for violations and added a providerrequirement for the disclosure of DHSbreaches to affected individuals, the government and thereforein some cases the media. We must carefully structure any transaction involving PHI to avoid violation of HIPAA and HITECH requirements.

Almost all states have adopted data security laws protecting personal information including social security numbers, state issued identification numbers, credit card or financial account information coupled with individuals’ names or initials. We must comply with

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all applicable state data security laws, even though they vary extensively, and must ensure that any breaches or accidental disclosures of personal information are promptly reported to affected individuals and responsible government entities. We must also ensure that we maintain compliant, written information security programs or run the risk of civil or even criminal sanctions for non-compliance as well as reputational harm for publicly reported breaches or violations.

If any of our operations are found to have violated or be in violation of any of the laws described above and other applicable state and federal fraud and abuse laws, we may be subject to penalties, among them being civil and criminal penalties, damages, fines, exclusion from government healthcare programs, and the curtailment or restructuring of our operations.

Third-Party Reimbursement

In the United States, healthcare providers generally rely on third-party payors, principally private insurers and governmental payors such as Medicare and Medicaid, to cover and pay for all or part of the cost of a surgery in which our medical devices are used. We expect that sales volumes and prices of our products will depend in large part on the continued availability of reimbursement from such third-party payors. These third-party payors may deny reimbursement if they determine that a device used in a procedure was not medically necessary in accordance with cost-effective treatment methods, as determined by the third-party payor, or was used for an unapproved indication. Particularly in the United States, third-party payors continue to carefully review, and increasingly challenge, the prices charged for procedures and medical products. Medicare coverage and reimbursement policies are developed by CMS, the federal agency responsible for administering the Medicare program, and its contractors. CMS establishes these Medicare policies for medical products and procedures and such policies are periodically reviewed and updated. While private payors vary in their coverage and payment policies, the Medicare program is viewed as a benchmark. Medicare payment rates for the same or similar procedures vary due to geographic location, nature of the facility in which the procedure is performed (i.e., teaching or community hospital) and other factors. We cannot assure you that government or private third-party payors will cover and provide adequate payment for the procedures in which our products are used. ACA and other reform proposals contain significant changes regarding Medicare, Medicaid and other third-party payors.

Among these changes was the imposition of a 2.3% excise tax on domestic sales of medical devices that went into effect on January 1, 2013. This tax has resulted in a significant increase in the tax burden on our industry. In December 2015, the U.S. Congress adopted, and President Obama signed into law, the Consolidated Appropriations Act of 2016. Among other things, this legislation put in place a two-year moratorium on the device tax through the end of 2017. The moratorium was extended to an additional two years beginning January 1, 2018 and ending December 31, 2019. Other elements of the ACA include numerous provisions to limit Medicare spending through reductions in various fee schedule payments and by instituting more sweeping payment reforms, such as bundled payments for episodes of care, the establishment of “accountable care organizations” under which hospitals and physicians will be able to share savings that result from cost control efforts, comparative effectiveness research, value-based purchasing, and the establishment of an independent payment advisory board.

We believe that the Stark Law does not applyoverall escalating cost of medical products and services has led to, us.and will continue to lead to, increased pressures on the healthcare industry to reduce the costs of products and services. We cannot assure you that government or private third-party payors will cover and provide adequate payment for the procedures using our products. In addition, it is possible that future legislation, regulation, or reimbursement policies of third-party payors will adversely affect the demand for procedures using our products or our ability to sell our products on a profitable basis. The unavailability or inadequacy of third-party payor coverage or reimbursement could have a significant adverse effect on our business, operating results and financial condition.

Compliance Training

We maintain a company-wide compliance program for all employees, vendors, and contractors, which is managed by our Compliance Officer who is responsible for developing compliance programs, reviewing our policies, overseeing adherence to those policies, and advising management on possible risks. Our compliance policies include general ethical business practices as well as specific operating policies and training to ensure compliance with relevant and applicable healthcare laws and regulations, including the laws referenced.

Employees

We engage AmBio Staffing, LLC (“AmBio”) a Texas licensed professional employment organization, to provide us with payroll processing, employee benefit administration, and related human capital services. As of March 20,12, 2020, AmBio supported approximately 54 full time equivalents (“FTE”). Of those 54 FTEs, 44 FTEs directly support us, nine FTEs support the operations of other companies, and we share one FTE with other related companies.

Corporate and Available Information

We are a Delaware corporation. We were initially incorporated in 1968 as American Metals Service, Inc., a Florida corporation. In July 1999, American Metals Service, Inc. changed its name to GolfRounds, Inc. and was redomiciled to Delaware through a merger.

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Effective May 28, 2014, GolfRounds amended its certificate of incorporation to change its name to Fuse Medical, Inc., Fuse Medical, LLC, an unrelated entity, then 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. Fuse Medical, Inc. 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”), we entered into a stock purchase agreement (the “Stock Purchase Agreement”) by and between NC 143 Family Holdings, LP, a Texas limited partnership (“NC 143”) which is controlled by Mark W. Brooks (“Mr. Brooks”), the Chairman of our Board of Directors (“Board”) and our President; and Reeg Medical Industries, Inc., a Texas corporation, (“RMI”), which is owned and controlled by Christopher C. Reeg, (“Mr. Reeg”) our Chief Executive Officer and Secretary. The closing of the Stock Purchase Agreement resulted in a change-in-control of Fuse whereby Messrs. Brooks and Reeg beneficially acquired, immediately after the Change-In-Control Date, approximately 61.4% of our issued and outstanding shares of common stock, par value $0.01 per share (“Common Stock”).

On December 31, 2017 we completed the Company had two employeesacquisition of CPM in which we purchased all outstanding membership units of CPM the (“CPM Acquisition”). In the CPM Acquisition, Fuse was the legal acquirer, and one independent contractor.for accounting purposes, CPM was deemed to have acquired Fuse. As a result, CPM is consolidated with Fuse effective on the Change-in-Control Date.

On August 1, 2018, (“Maxim Closing Date”) we completed the acquisition of Maxim, the (“Maxim Acquisition”) for aggregate consideration of approximately $3,400,000. As of the Maxim Closing Date, Maxim and Fuse’s operations are consolidated.

Our principal executive office is located at 1565 N. Central Expressway, Suite 220, Richardson, Texas 75080. Our Internet address is www.fusemedical.com. We are not including information contained on our website as part of, or incorporated by reference into, this Annual Report. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, are available to you free of charge through the Investor Relations section of our website as soon as reasonable practicable after such materials have been electronically filed with, or furnished to, the SEC.

ITEM 1A. RISK FACTORS.

Our business and an investment in our securities are subject to a variety of risks. The following risk factors describe some of the most significant events, facts, orand circumstances that could have a material adverse effect upon our business, financial condition, results of operations, ability to implement our strategies and business planplans, and the market price for our securities. Many of these events are outside of our control. If any of these risks actuallyevents occur, our business, financial condition, or results of operations may be materially adversely affected. In such case,affected, the trading price of our Common Stock could decline and investors in our Common Stock could lose all or part of their investment.investments. We believe our Common Stock continues to be low volume traded and therefore, subject to significant volatility and liquidity.

Risks Related to Our BusinessesFinancial Results, Credit and IndustriesCertain Financial Obligations and Need for Financing

Although our financial statements have been prepared on a going concern basis, we must raise additional capital before May 4, 2020 to fund our operations in order to continue as a going concern.

At December 31, 2019, our principal sources of liquidity consisted of cash of $1.1 million, accounts receivable, net of $6.2 million and available borrowings under our revolving line of credit. Our ability to continue as a going concern for at least one year beyond the date of this filing is dependent upon our (i) successful execution of key rebranding initiatives, (ii) introduction, commercialization and sales of new proprietary products and product lines, (iii) ability to increase sales of existing products, with strategic emphasis on selling more Retail Cases and increasing the percentage of Retail Cases sold as a percentage of all Cases we sell, and (iv) continued cost reductions. Additionally, we will need to refinance our Senior Secured Revolving Credit Facility (“RLOC”) with ZB, N.A., d/b/a Amegy Bank (“Amegy Bank”) with a new credit facility on commercially reasonable terms, or obtain equity financing. If we are unable accomplish any or all of these objectives, we may not be able to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result if we are unable to continue as a going concern and, therefore, be required to realize our assets and discharge our liabilities other than in the normal course of business which could cause investors to suffer the loss of all or a substantial portion of their investment.

We anticipate that our principal sources of liquidity will only be sufficient to fund our activities and debt service needs through May 4, 2020. In order to have sufficient cash to fund our operations beyond May 4, 2020, we will need to raise additional equity or debt capital by May 4, 2020 in order to continue as a going concern. We cannot provide any assurance that we will be successful in doing so.

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We may not be able to refinance, extend or repay our indebtedness owed to our secured lender, which would have a material adverse effect on our financial condition and ability to continue as a going concern.

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

We may not be able to obtain waivers of potential defaults in the future from our lender and our borrowing capacity may be further reduced or restricted if we do not meet the covenants associated with our line of credit.

We executed amendments with our secured lender on November 19, 2018, May 9, 2019 and December 18, 2019 related to our non-compliance with certain required debt covenants. We cannot provide any assurance that our lender would provide us with a waiver should we not be in compliance in the future. A failure to maintain compliance along with our lender not agreeing to a waiver for the non-compliance would cause the outstanding borrowings to be in default and payable on demand which would have a material adverse effect on us and our ability to continue as a going concern.

Risks Related to Our Business and Industry

The COVID-19 outbreak may decrease demand for our products and disrupt our supply chain, and any decrease in demand or supply chain disruption resulting from COVID-19 would adversely affect our revenues and results of operations.

The recent outbreak of the coronavirus 2019 (“COVID-19”) is creating uncertainty in the healthcare, financial and commercial markets, our operations, our supply chain and the general public.  The duration, scope or impact of the outbreak cannot be predicted.  A broad, sustained outbreak of COVID-19 would negatively impact our results if: (i) our supply of our products or product components or ability to distribute our products, is materially reduced despite our efforts to manage potential supply-chain disruption; (ii) an outbreak materially impacts our headquarters or manufacturing operations for a sustained period of time; (iii) hospitals are required to allocate resources to care of patients with COVID-19 and defer treatment of procedures utilizing our products; and/or (iv) patients elect to defer treatment for procedures utilizing our products due to real or perceived concerns about the potential spread of coronavirus in hospital settings.  A significant percentage of our products are utilized in elective surgeries or procedures, which may be deferred or avoided altogether due to COVID-19 outbreak.  The related financial impact of the COVID-19 outbreak, however, cannot be reasonably estimated at this time. Any decrease in demand for our products or disruption to our business resulting from the COVID-19 outbreak would adversely affect our revenues and results of operation.

We have significant concentration in and dependence on a small number of customers.

In 2019, our top customer represented approximately 9.9% of our consolidated net revenues. If an existing contract with one of our few top customers expires without being replaced or the customer terminates the contract prior to its expiration, we could lose that customer relationship, which would adversely impact our business, future operating results, and financial condition.

We are exposed to risks of obsolete and slow-moving inventory which may adversely impact our cash flow and liquidity.

Maintaining an optimal level of inventories is important to our business.  If we over-stock our inventories, our required working capital will increase. Conversely, if we under-stock our inventories, we may be unable to meet customers’ demand and consequently our results of operations may be adversely affected.  For the years ended December 31, 2018 and 2019, the total amount of our inventories, net of allowance for slow-moving and obsolete inventory, were approximately $11,075,889 million and $8,058,244 million, respectively, and accounted for approximately 49.9% and 43.4% of our total assets for the same years, respectively. For the years ended December 31, 2018 and 2019, we recorded a reserve for slow moving and obsolete inventory of $1,711,871 and $3,603,372, respectively. Any increase in inventory may adversely affect our working capital.  If we cannot manage our inventory level efficiently in the future, our liquidity and cash flow may be adversely affected. Further, if we fail to stock appropriate medical devices and instruments to suit customer demand in the future, the volume of our obsolete and slow moving inventory may increase, and we may need to either sell off such inventory at a lower price or write off such inventory, in the event of which our business, financial condition, results of operation and cash flows will be adversely affected.

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To grow revenues and profitability from certain products, we must expand our relationships with hospital systems, third-party distributors and independent sales representatives, whom we do not control.

We derive significant revenues through our relationships with hospital systems, distributors and independent sales representatives. If such a relationship terminated or otherwise was negatively impacted for any reason, it could materially and adversely affect our ability to generate revenues and profits. Because independent distributors often control the customer relationships within their territory, there is a risk that if our relationship with a distributor ends, we could lose our relationship with our ultimate customer.

Our success partially depends on our ability to retain and motivate our distributors and independent sales representatives to sell our products in certain territories. However, such parties may not be successful in implementing our strategies and marketing plans. Many of our independent distributors also market and sell the products of our competitors, and those competitors may have the ability to influence the products that our independent distributors choose to market and sell. Our competitors may be able, by offering higher commission payments or otherwise, to convince our independent distributors to terminate their relationships with us, carry fewer of our products or reduce their sales and marketing efforts of our products. We also may not be able to find additional distributors and independent sales representatives who will agree to market or distribute our products on commercially reasonable terms, if at all. If we are unable to establish new distribution and independent sales representative relationships or renew current distribution and sales agreements on commercially acceptable terms, our business, financial condition and results of operations could be materially and adversely affected.

Our revenue growth and profitability will depend in large part upon the effectiveness of our marketing strategies and investments.

Our future revenue growth and profitability will partially depend on the effectiveness of our marketing efforts and maintenance of appropriate cost structure, including our ability to:

Ineffective sales representatives, promotional efforts, and management of working capital could adversely affect our future results of operations and financial condition.

Our revenues will depend on our customers’ continued receipt of adequate reimbursement from private insurers and government sponsored healthcare programs.

Political, economic, and regulatory influences continue to change the healthcare industry in the United States. The ability of hospitals and medical facilities to pay fees for our products partially depends on the extent to which reimbursement for the costs of such materials and related treatments will continue to be available from private health coverage insurers and other similar organizations. We may have difficulty gaining market acceptance for the products we sell if third-party payors do not provide adequate coverage and reimbursement to hospitals and medical facilities.

Major third-party payors of hospitals and medical facilities, such as private healthcare insurers, periodically revise their payment methodologies based, in part, upon changes in government sponsored healthcare programs. We cannot predict these periodic revisions with certainty, and such revisions may result in stricter standards for reimbursement of hospital charges for certain specified products, potentially adversely impacting our business, results of operations, and financial conditions.

If pricing pressures cause us to decrease prices for our products and we are unable to compensate for such reductions through changes in our product mix or reductions to our expenses, our results of operations will suffer.

We have experienced and may continue to experience decreasing prices for the products we offer due to pricing pressure exerted by our customers in response to increased cost containment efforts from managed care organizations and other third-party payors and increased market power of our customers as the medical device industry consolidates. If we are unable to offset such price reductions through changes in our product mix or reductions in our expenses, our business, financial condition, results of operations and cash flows will be adversely affected.

Consolidation in the healthcare industry could lead to demands for price concessions or to the exclusion of some suppliers from certain of our markets, which could have an adverse effect on our business, financial condition or results of operations.

Because healthcare costs have risen significantly over the past decade, numerous initiatives and reforms initiated by legislators, regulators and third-party payors to curb these costs have resulted in a consolidation trend in the healthcare industry to create new companies with greater market power, including hospitals. As the healthcare industry consolidates, competition to provide products and services to industry participants has become and will continue to become more intense. This in turn has resulted and will likely

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continue to result in greater pricing pressures and the exclusion of certain suppliers from important market segments as GPOs, independent delivery networks and large single accounts continue to use their market power to consolidate purchasing decisions for some of our customers. We expect that market demand, government regulation, third-party reimbursement policies and societal pressures will continue to change the worldwide healthcare industry, resulting in further business consolidations and alliances among our customers, which may reduce competition, exert further downward pressure on the prices of our products and may adversely impact our business, financial condition and results of operations.

Our operating earnings are dependent on certain significant suppliers.

We distribute products from nearly 56 suppliers and are dependent on these suppliers for the continuing supply of products. In 2019, purchases of products from our largest supplier accounted for approximately 22% of consolidated cost of revenues. We rely on suppliers to provide agreeable purchasing and delivery terms and performance incentives. Our ability to sustain adequate operating earnings has been, and will continue to be, dependent upon our ability to obtain favorable terms and incentives from suppliers, as well as suppliers’ continuing use of third-party distributors to sell and deliver their products. An unforeseen delay in raw material supplies, a change in terms by a significant supplier, or a decision of such a supplier to distribute its products directly to healthcare providers rather than through third-party distributors could have a material adverse effect on our results of operations and financial condition.

Interruption of manufacturing operations could adversely affect our business.

Our suppliers have manufacturing facilities for certain product lines that may be concentrated in one or more plants. Damage to these facilities or issues in our manufacturing arising from a failure to follow specific internal protocols and procedures, compliance concerns relating to quality systems regulations, equipment breakdown or malfunction, among other factors, could adversely affect the availability of our products. In the event of an interruption in manufacturing of certain products, we may be unable to quickly shift to alternate means of production to meet customer demand. In the event of a significant interruption, we may experience lengthy delays in resuming production of affected products due to the need for regulatory approvals. We may experience loss of market share, additional expense, or harm to our reputation.

Additionally, we contract with only one supplier for the raw materials (polymers) that we use to produce our own FDA cleared products. While we have not experienced a shortage of polymers in the past and believe that it is unlikely that there will be one in the future, if there were a shortage of polymers, it could either increase the cost of production for or prevent us from being able to produce some of our products, which could adversely affect our future results of operations and financial condition.

If we or our suppliers fail to comply with the FDA’s quality system and good tissue practice regulations, the manufacturing of our products could be delayed.

We and our suppliers are required to comply with the FDA’s QSR, which covers, among other things, the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, record keeping, storage and shipping of our products. In addition, suppliers and processors of products derived from HCT must comply with the FDA’s current good tissue practice requirements, or cGTPs, which govern the methods used in and the facilities and controls used for the manufacture of HCT/Ps, record keeping and the establishment of a quality program. The FDA audits compliance with the QSR and cGTPs through inspections of manufacturing and other facilities. If we or our suppliers have significant non-compliance issues or if any corrective action plan is not sufficient, we or our suppliers could be forced to halt the manufacturing of our products until such problems are corrected to the FDA’s satisfaction, which could have a material adverse effect on our business, financial condition and results of operations. Further, our products could be subject to recall if the FDA determines, for any reason, that our products are not safe or effective. Any recall or FDA requirement demanding that we seek additional approvals or clearances could result in delays, costs associated with modification of a product, loss of revenue and potential operating restrictions imposed by the FDA, all of which could have a material adverse effect on our business, financial condition and results of operations.

Future business combinations or acquisitions may be difficult to integrate, which could cause us to shift our attention away from our primary business and its operations.

We may pursue future business combinations with other companies or strategic acquisitions of complementary businesses, product lines, or technologies. There can be no assurance that such acquisitions will be available at all, or on terms acceptable to us. These transactions may require additional capital, which may increase our indebtedness or outstanding shares, resulting in a dilution to our stockholders or a reduction in working capital. The inability to obtain such future capital may inhibit our growth and operating results. Integration of acquisitions or additional products can be costly, time-consuming, and complicated which could significantly impact operating results. Furthermore, the integration of any acquisition may disproportionally divert our executive team’s time and resources from our primary business and its operations. We may sell some or all of our product lines to other companies or we may agree to merge with another company. There can be no assurance that future transactions will ultimately benefit our Company. If we face difficulty integrating future acquisitions or if our executive team’s attention is diverted, our future results of operations may negatively impact our business, results of operations, and financial condition.

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If the statutes and regulations in our industry change, our business could be adversely affected.

The U.S. healthcare industry has undergone significant changes designed to improve patient safety, improve clinical outcomes, and increase access to medical care. These changes include enactments and repeals of various healthcare related laws and regulation. Our operations and economic viability may be adversely affected by the changes in such regulations, including: (i) federal and state fraud and abuse laws; (ii) federal and state anti-kickback statutes; (iii) federal and state false claims laws; (iv) federal and state self-referral laws; (v) state restrictions on fee splitting; (vi) laws regarding the privacy and confidentiality of patient information; and (vii) other laws and government regulations.

If there are changes in laws, regulations, or administrative or judicial interpretations, we may have to change our business practices, or our existing business practices could be challenged as unlawful, which could have a material adverse effect on our business, financial condition, and results of operations.

U.S. federal and state governmental regulation could restrict our ability to sell the products.

The AKSOur business is a criminal statutesubject to highly complex and evolving regulatory and licensing requirements that prohibits the payment or receipt of remuneration, in cash or otherwise, in exchange for referrals of services or goods paid under federal healthcare insurance programs. DHHS has promulgated certain safe harbors that offer protection from liability under the AKS for arrangements that fall within very specific parameters.

Many states also include laws similarare subject to the AKS or the Stark Law to which we may be subject. If it is determined that our business arrangements failuncertainty, rapid change, differing interpretations, and rigorous regulatory enforcement. Failure to comply with the AKS, the Stark Law or similar state laws, we could face significantsuch regulatory requirements may result in civil and/or criminal penalties.

The scope and enforcementpenalties, including the loss of these laws is uncertain and subject to rapid change, especiallylicenses or the exclusion from future participation in light of the lack of applicable precedent.government healthcare programs. There can be no assurance that federal or state regulatory or enforcement authorities will not investigate or challenge our current or future activities under these laws. Any investigation or challenge could have a material adverse effect on our business, financial condition and results of operations. Any state or federal regulatory or enforcement review of us, regardless of the outcome, would be costly and time consuming. Additionally, we cannot predict the impact of any changes in these laws, whether these changes are retroactive or will have effectaffect us on a going-forward basis only.

If there are any changes to the statutes and regulations placed on our industry, the changes may have an adverse effect on our business and your investment.

The ability of the Company to operate legally and at a profit may be adversely affected by the changes in governmental regulations, including federal and state fraud and abuse laws, federal and state anti-kickback statutes, the federal and state False Claims Acts, federal and state self-referral laws, state restrictions on fee splitting, the federal Health Insurance Portability and Accountability Act of 1996, as amended, and other laws and government regulations. Changes to these laws and regulations may adversely affect the economic viability of the Company.

There is ongoing scrutiny of arrangements between health care providers and potential referral sources (e.g., physicians) by Congress, state legislatures, government agencies and the courts in order to ensure such arrangements are not designed as a mechanism to exchange remuneration for patient care referrals and opportunities. While it is the Company’s intent to ensure it is in compliance with federal and state laws, failure to do so could result in liability for the Company. Government authorities have demonstrated a willingness to look behind the formalities to determine the underlying purpose of payments between health care providers and potential referral sources. No assurance can be given that the Company will not be reviewed and challenged by enforcement authorities, and if so challenged, no assurance can be given that the Company will prevail. If there is a change in law, regulation, Any investigation or administrative or judicial interpretations, we may have to change our business practices; otherwise our existing business practices could be challenged as unlawful, whichchallenge could have a material adverse effect on our reputation, business, financial condition, and results of operations.

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We have not been historically or currently profitableThe FDA regulates the manufacturers and suppliers of the products that we may needsell, market, manufacture, and distribute, and regulatory compliance is costly and could contribute to raise additional fundsdelays in the futureavailability of our products.

Under FDA regulations, we are subject to the same FDA regulation as the manufacturers and suppliers to whom we distribute. These regulations govern (i) the manufacturing and processing of cellular and tissue products; (ii) the introduction of new medical devices; (iii) the observance of certain standards with respect to the design, manufacturing, testing, labeling, promotion, and sales of the devices; (iv) the maintenance of certain records; (v) the ability to track devices; (vi) the reporting of potential product defects; (vii) the importing and exporting of devices; and (viii) various other matters. Furthermore, manufacturers that create the products we market face an increasing amount of scrutiny and compliance costs as more states implement regulations governing medical devices and Biologics. In addition, we are subject to ongoing compliance concerning our products with 510(k) Clearance, as well as potential onsite inspections by the FDA. Being found in violation and failing to correct an FDA compliance issue, could potentially result in product recall, product seizure, or become profitable; however, additional funds may not be available on acceptable terms, or we may not be successful in executing our business strategies.

We have historically incurred substantial operating expenses associated with the sales and marketingwithdrawal of the 510(k) Clearance. These types of FDA regulations could affect many of the products we sell and administrative costs incurred. These expenses primarily include wages and travel costs. We anticipate funding sales, marketing expenses, and administrative costs from operating cash flows or, if necessary, from working capital. We have no assurances that we will have sufficient access to liquidity or cash flow to meet our operating expenses and other obligations. If we do not increasemarket, impacting our revenues and profitability, or reduce our expenses, we will need to raise additional capital, which would result in dilution to our stockholders, or seek additional borrowings. The incurrenceresults of indebtedness would result in increased debt service obligationsoperations, and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. If adequate funds are not otherwise available, we would be forced to curtail operations significantly, including reducing our sales and marketing expenses and administrative costs which could negatively impact product sales and we could even be forced to cease operations, liquidate our assets and possibly even seek bankruptcy protection.

Many competitive products exist and more will be developed, and we may not be able to successfully compete because we are smaller and have fewer financial and human capital resources.

Our business is in a very competitive and evolving field. Rapid new developments in this field have occurred over the past few years, and are expected to continue to occur. Other companies already have competing products available or may develop products to compete with ours. Many of these products have short regulatory timeframes and our competitors, many with more substantial development resources, may be able to develop competing products that are equal to or better than the ones we market. This may make the products we market obsolete or undesirable by comparison and reduce our revenues and profitability.

Product pricing is subject to regulatory control.

The pricing and profitability of the products we sell may become subject to control by third-party payors. The continuing efforts of governmental and other third-party payors to contain or reduce the cost of healthcare through various means may adversely affect our ability to successfully commercialize our products. We expect that there will continue to be federal and state proposals to implement similar governmental control though it is unclear which proposals will ultimately become law, if any. Changes in prices, including any mandated pricing, could impact our revenues and profitability and financial performance.working capital.

Future regulatory action remains uncertain.

We operate in a highly-regulated and evolving environment and anywith rigorous regulatory enforcement. Any legal or regulatory action could be time-consuming and costly. If we or the manufacturers or distributors that supply usor distribute our products fail to comply with all applicable laws, standards, and regulations, action by the FDA or other regulatory agencies could result in significant restrictions, including restrictions on the marketing or use of the products we sell or the withdrawal of the products we sell from the market. Any such restrictions or withdrawals could materially affect our reputation, business and operations.

Our revenues will depend upon our customers receiving prompt and adequate reimbursement from private insurers and national health systems.

Political, economic and regulatory influences are fundamentally changing the healthcare industryIf we fail to obtain, or experience significant delays in the United States. The ability of hospitals to pay feesobtaining, FDA clearances or approvals for our future products depends in part on the extentor modifications to which reimbursement for the costs of such materials and related treatments will continue to be available from private health coverage insurers and other organizations. We may have difficulty gaining market acceptance for theour products, we sell if third-party payors do not provide adequate coverage and reimbursement to hospitals.

Major third-party payors of hospital services and hospital outpatient services, such as private healthcare insurers, annually revise their payment methodologies. These annual revisions can result in stricter standards for reimbursement of hospital charges for certain medical procedures or the elimination of reimbursement. Further, private healthcare insurer cutbacks could create downward price pressure on our products.

Pricing pressure and cost containment measures could have a negative impact on our future operating results.

Pricing pressure has increased in our industry due to continued consolidation among healthcare providers, trends toward managed care, the recent shift towards government becoming the primary payer of healthcare expenses, and government laws and regulations relating to reimbursement and pricing generally. Pricing pressure, reductions in reimbursement levels or coverage or other cost containment measures could unfavorably affect our future operating results and financial condition.

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Our ability to continue as a going concern is dependent on obtaining adequate new debt or equity financing and achieving sufficient sales and profitability.

We incurred net losses of approximately $586,000 in 2016 and $802,000 in 2015. We anticipate these losses will continue for the foreseeable future. We have not reached a profitable level of operations, which raises substantial doubt about our ability to continue as a going concern. We believe our current cash balance provides us with enough working capital to sustain operations for 12 to 24 months. Our continued existence is dependent upon our achieving sufficient salescommercially distribute and profitability ofmarket our products could suffer.

Our medical devices are subject to extensive regulation by the FDA and sustaining adequate working capital. If we are unsuccessful in generating sufficient salesnumerous other federal and profitabilitystate governmental authorities. The process of obtaining regulatory clearances or raising adequate capital, we will haveapprovals to significantly reduce administrative costs or cease our operations and your investment may be lost.

Our growth and profitability will depend in large part uponmarket a medical device, particularly from the effectiveness of our marketing strategies and expenditures.

Our future growth and profitability will depend in large part upon our marketing performance and appropriate cost structure, including our ability to:

Ineffective sales representatives and/or our promotional efforts and management of working capital will adversely affect our future results of operations and financial condition.

There may be fluctuations in our operating results, which will impact our stock price.

Our volume of revenues, the timing of new product or service announcements, releases by us and our competitors in the marketplace of new products or services, seasonality, general economic conditions, and other factors, may cause significant annual and quarterly fluctuations in our results of operations. ThereFDA, can be no assurance that the level of revenuescostly and profitability achieved by us in any particular reporting period will not be significantly lower than in other comparable reporting periods. For example, our January sales are ordinarily significantly less than those of the fourth quarter months. Our expense levels are based, in part, on our expectations as to future revenuestime consuming, and profitability. If future revenues and profitability are below expectations, this may disproportionately affect our results from operations as any corresponding reduction in expenses may not be proportionate to the reduction in revenues and profitability.

Future business combinations or acquisitions may be difficult to integrate and cause our attention to be diverted.

We may pursue various business combinations with other companies or strategic acquisitions of complementary businesses, product lines or technologies. Therethere can be no assurance that such acquisitionsclearances or approvals will be availablegranted on a timely basis, if at all,all. In particular, the FDA permits commercial distribution of most new medical devices only after the devices have received clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act, or on terms acceptable510(k), or are the subject of an approved premarket approval application, or a PMA. The 510(k) process generally takes three to us. These transactions maynine months, but can take significantly longer, especially if the FDA requires a clinical trial to support the 510(k) application. Currently, we do not know whether the FDA will require additional capital which mayclinical data in support of any 510(k)s that we intend to submit for other products in our pipeline. In addition, the FDA continues to re-examine its 510(k) Clearance process for medical devices and published several draft guidance documents that could change that process. Any changes that make the process more restrictive could increase our indebtedness or outstanding shares, resulting in dilution to stockholders or reduction in working capital. The inabilitythe time it takes for us to obtain clearances or could make the 510(k) process unavailable for certain of our products. A PMA must be submitted to the FDA if the device cannot be cleared through the

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510(k) process or is not exempt from premarket review by the FDA. A PMA must be supported by extensive data, including results of preclinical studies and clinical trials, manufacturing and control data and proposed labeling, to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device for its intended use. The PMA process is more costly and uncertain than the 510(k) Clearance process, and generally takes between one and three years, if not longer. In addition, any modification to a 510(k)-cleared device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, design or manufacture, requires a new 510(k) Clearance or, possibly, a PMA.

Intellectual property litigation and infringement claims could cause us to incur significant expenses or prevent us from selling certain of our products.

The medical device industry is characterized by extensive intellectual property litigation and, from time to time, we may become the subject of claims of infringement or misappropriation. Regardless of outcome, such future capital may inhibit our growthclaims are expensive to defend and divert management and operating results. Integrationpersonnel from other business issues. A successful claim or claims of acquisitionspatent or additional products can be time consuming, difficult and expensive and may significantlyother intellectual property infringement against us could result in payment of significant monetary damages and/or royalty payments or negatively impact operating results. Furthermore, the integration of any acquisition may disproportionally divert management’s time and resources from our core business. We may sell some or all of our product lines to other companies or may agree to combine with another company. Selling some of our product lines without appropriate cost structures may inhibit our ability to generate positivesell current or future products in the affected category.

We operate our business in regions subject to natural disasters and other catastrophic events, and any disruption to our business resulting from natural disasters would adversely affect our revenue and results of operations.

We operate our business in regions subject to severe weather and natural disasters including tornadoes, hurricanes, floods, fires, earthquakes, and other catastrophic events. Any natural disaster could adversely affect our ability to conduct business and provide products and services to our customers, and the insurance we maintain may not be adequate to cover our losses resulting from any business interruption resulting from a natural disaster or other catastrophic event.

A cyber security incident could cause a violation of HIPAA, breach of customer and patient privacy, or other negative impacts.

We rely extensively on our information technology (“IT”), systems to manage scheduling and financial data, communicate with customers and their patients, vendors, and other third parties and summarize and analyze operating results. In addition, we have made significant investments in technology, including the engagement of a third-party IT provider. A cyber-attack that bypasses our IT security systems could cause an IT security breach, a loss of protected health information, or other data subject to privacy laws, a loss of proprietary business information, or a material disruption of our IT business systems. This in turn could have a material adverse impact on our business and result of operations. In addition, our future results going forward.of operations, as well as our reputation, could be adversely impacted by theft, destruction, loss, or misappropriation of public health information, other confidential data or proprietary business information.

8Computer malware, viruses, and hacking and phishing attacks by third parties have become more prevalent in our industry, have occurred on our systems in the past, and may occur on our systems in the future. Because techniques used to obtain unauthorized access to or sabotage systems change frequently and generally are not recognized until successfully launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. As cyber-security threats develop and grow, it may be necessary to make significant further investments to protect data and infrastructure. If an actual or perceived breach of our security occurs, (i) we could suffer severe reputational damage adversely affecting customer or investor confidence, (ii) the market perception of the effectiveness of our security measures could be harmed, (iii) we could lose potential sales and existing customers, our ability to deliver our products or operate our business may be impaired, (iv) we may be subject to litigation or regulatory investigations or orders, and (v) we may incur significant liabilities. Our insurance coverage may not be adequate to cover the potentially significant losses that may result from security breaches. Additionally, while we currently do not have cybersecurity coverage, we plan to evaluate options for this type of coverage in 2020.

We depend on the knowledge and skills of our executives and other key employees, and if we are unable to retain and motivate them or recruit additional qualified personnel, our business may suffer.

Our executive management team, includingWe benefit substantially from the leadership and performance of our Chief Executive Officer, may dedicate less timeexecutives and attention to the company.

Memberscertain key employees. For example, key members of our executive management team including Mr. Reeg,have experience with successfully scaling an early stage medical device company to achieve profitability. Our success will depend on our Chief Executive Officer, are alsoability to retain our current executives and key employees, and to attract and retain qualified personnel in management positions with other companies. Each of these individualsthe future. Competition for executives and key employees in our industry is intense and we cannot guarantee that we will be able to retain our personnel nor attract new, qualified personnel. This uncertainty may allocate their time between the affairsbe especially true during periods in which we face challenges such as financial difficulties or a reduced stock price. The loss of the Company and the affairsservices of other companies. This situation presents the potential for conflicts of interest in determining the respective percentages of the time they devote to the affairs of the Company and the affairs of other companies. In addition, if the affairs of these other companies requirecertain members of our management teamexecutives or key employees could prevent or delay the implementation and completion of our strategic objectives or divert management’s attention to devote more substantial amounts of their time to the affairsseeking qualified replacements. Each member of the other companies inexecutive team and our key employees may terminate employment without notice and without cause or good reason. The members of our executive team are not subject to non-competition

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or employment agreements. Accordingly, the future, itadverse effect resulting from the loss of certain members of the executive team could limit their abilitybe compounded by our inability to devote sufficient time to our affairs and could have a negative impact on our business.prevent them from competing with us.

We may be adversely affected by product liability claims, unfavorable court decisions or legal settlements.

We are exposed to potential product liability risks inherent in the design, manufacturing, and marketing of medical devices, many of which are implanted in the human body for long periods of time or indefinitely. These matters are subject to future product liability litigation that couldmany uncertainties and outcomes are not predictable. In addition, we may incur significant legal expenses regardless of whether we are found to be expensive, andliable.

While we do not carrymaintain product liability insurance, coverage.

there can be no assurance that such coverage is sufficient to cover all product liabilities that we may incur. We are not currently subject to any product liability proceedings, and we have no reserves for product liability disbursements. However, we may incur material liabilities relating to product liability claims in the future, including product liability claims arising out of the usage and delivery of our products. Should we incur product-related liabilities exceeding our insurance coverage, we would be required to use available cash or raise additional cash to cover such liabilities.

Uncertainty in future changes to tax legislation, regulatory reform, or policies could have a material adverse effect on our business.

Tax laws, regulations, and policies in various jurisdictions may be subject to significant change due to economic, political and other conditions. The recently enacted U.S. tax reform legislation referred to as the Tax Cuts and Jobs Act of 2017 (“U.S. Tax Reform Law”), significantly changes how the U.S. taxes corporations, and many of those changes went into effect for the first time for the 2018 tax year. The U.S. Treasury Department, the Internal Revenue Service (“IRS”), and other standard-setting bodies could interpret or issue guidance on how provisions of the U.S. Tax Reform Law will be applied or otherwise administered that is different from our interpretation. As we complete our analysis of the U.S. Tax Reform Law, collect and prepare necessary data, and interpret any additional guidance, we may adjust the provisional amounts that we have recorded, which may materially impact our provision for income taxes in the period in which the adjustments are made. In addition, state or local jurisdictions may enact tax laws in response to the U.S. Tax Reform Law that could result in further changes to taxation and materially affect our financial position and results of operations.

We do not currently carry product liability insurance. Our insurance coveragebusiness with companies that are owned or controlled by our Chief Executive Officer and any reservesChairman of the Board and President, which could create actual or potential conflicts of interest.

Members of our executive team, including Messrs. Reeg and Brooks, have economic interests in other companies with which we may maintain in the future for productdo business. These relationships could create, or appear to create, potential conflicts of interest. Such a conflict of interest could potentially cause a member of our executive team to seek to advance his economic interests above ours. Moreover, transactions with related liabilitiesparties may not be adequateon terms as favorable to us as they would have been if they had been negotiated among unrelated parties.

While we have policies and procedures in place to prevent conflicts of interest resulting in a transaction that is unfavorable to our businessCompany, there can be no assurance that our policies and procedures will prevent us from entering into a transaction that is not in our best interests or the best interests of our stockholders. If we do enter into an agreement with a related party with terms less favorable to us than we could sufferhave negotiated with an unrelated party, it could have a material adverse consequences as a result.

The FDA regulates manufacturers and suppliers of the products we purchase and market to continuing regulatory compliance is costly and likely contributes to delays in the commercialization of the products.

The manufacturers and suppliers of the products we market are subject to FDA regulation. These regulations govern manufacturing of cellular and tissue products as well as the introduction of new medical devices, the observance of certain standards with respect to the design, manufacturing, testing, labeling, promotion and sales of the devices, the maintenance of certain records, the ability to track devices, the reporting of potential product defects, the importing and exporting of devices and other matters. Further, the manufacturers that create the products we market are facing an increasing amount of scrutiny and compliance costs as more states are implementing regulations governing medical devices, pharmaceuticals and/or biologics and these regulations could affect many of the products we market, which could impacteffect on our revenues and profitability, results of operations and working capital.financial condition.

As a distributor,Some members of our executive team may dedicate inadequate time and attention to our Company.

Our Chief Executive Officer and Chairman of the FDABoard and similar state authorities require usPresident, may become distracted by other matters, reducing the amount of time they allocate to listthe affairs of our Company. For example, Mr. Reeg and register certain products.

As a distributorMr. Brooks both own other companies, and marketerthey may allocate more of such FDA-regulated products, we are subjecttheir time to independent requirementsthe operations of those companies. If members of our executive team devote more substantial amounts of their time to register and list certain products,those matters in the future, their ability to devote sufficient time to our operations may be required to obtain state licensure or certificationslimited and may be subject to inspections, in addition to complying with derivative requirements applicable to the manufacturers of the products we market. Failure to comply with applicable requirements could result in a wide variety of enforcement actions ranging from warning letters to more severe sanctions such as significant costly fines and civil penalties, operating restrictions, injunctions and criminal prosecutions, all of which could adverselynegatively impact our business.

General economic conditions may adversely affect demand for our products and services.

WePoor or deteriorating economic conditions in the U.S. could adversely affect the demand for healthcare services and consequently, the demand for our products. Poor economic conditions also could lead our suppliers to offer less favorable terms of purchase, which would negatively affect our cash flows and profitability. These and other possible consequences of financial and economic decline could have no established internal sales staff and marketing structure.

Our future success depends, in part,material adverse effect on our ability to generate new revenuesbusiness, results of operations, and profitability. Because our growth strategy depends on independent contractors to generate new revenues and profitability, we do not anticipate that we will hire sales staff. Consequently, in the event that our independent contractor strategy is not effective, the lack of sales staff means we may have limited ability to increase our revenues and profitability, which could adversely impact our business.

financial condition.

Risks Related to Ownership of Our Common Stock

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We are subject to significant corporate regulation as a public company and failure to comply with all applicable regulations could subject us to liability or negatively affect our stock price.

As a publicly-traded company, we are subject to a significant body of regulation, including the Sarbanes-Oxley Act of 2002. While we have developed and instituted a corporate compliance program based on what we believe are the current best practices in corporate governance and continue to update this program in response to newly implemented or changing regulatory requirements, we cannot provide assurance that we are or will be in compliance with all potentially applicable corporate regulations.

For example, we cannot provide assurance that, in the future, our executive team will not find a material weakness in connection with its periodic review of our internal controls and processes over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We also cannot provide assurance that we could correct any such weakness to allow our executive team to assess the effectiveness of our internal controls over financial reporting as of the end of our fiscal year with enough time to state that such assessment will have been fairly stated in our Annual Report, or state that we have maintained effective internal controls over financial reporting as of the end of our fiscal year. If we fail to comply with any of these regulations, we could be subject to a range of regulatory actions, fines or other sanctions or litigation. If we disclose any material weakness in our internal controls over financial reporting, our stock price could decline.

Because the market for our Common Stock is limited, persons who purchase our Common Stock may not be able to resell their shares at or above the purchase price paid by them.they paid.

Our Common Stock trades on the Over-the-Counter markets (“OTC Markets, Inc. (the “OTC Markets”), which are not highly liquid securities markets, and is not a liquid market.designated as OTC Pink, Current Information Tier. With some limited exceptions, there has not been an active public market for our Common Stock. We cannot assure youprovide an assurance that an active public market for our Common Stock will develop or be sustained in the future. If an active market for our Common Stock does not develop or is not sustained, the price may decline, and youour stockholders may lose yourtheir investment in our Common Stock.

TheHistorically, the market price for our securities historicallyCommon Stock has been highly volatile and the market fromtrades at low volumes. From time to time, the market has experienced significant price and volume fluctuations, thatwhich we believe are unrelated to theour operating performance of our company.performance. Fluctuations in the trading price or liquidity of our Common Stock may reduce the value of youran investment in our Common Stock.

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Factors that may have a significant impact on the market price and marketability of our securitiesCommon Stock include:

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has oftenfrequently been instituted. These lawsuits often seek unspecified damages, and as with any litigation proceeding, onewe cannot predict with certainty the eventual outcome of pending litigation. Furthermore, we may have to incur substantial expenses in connection withrelated to any suchsecurities class action lawsuits and our management’sexecutive team’s attention and resources could be divertedshift away from operating our business as we respondto responding to any such litigation. We maintain certain levels of insurance to cover these types of risks for us andour Company, our directors, and our officers.

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Our insurance coverage and policies are subject to high deductibles in order to reduce premium expense,expenses, and there is no guarantee that theour insurance will cover any specific claim that we currently face or may face in the future, or that itour insurance will be adequate to cover all potential liabilities and damages or that we will have sufficient working capital or funds.

Our current managementexecutive team can exert significant influence over usour Company and make decisions that are not in the best interests of all stockholders.

Our executive officersAs a group, our executives and directors beneficially own as a group approximately 72%92.35% of our outstanding shares of Common Stock. As a result,Because of this ownership, these stockholders will be able tocan assert significant influence over all matters requiring stockholder approval, including the election and removal of directors and any change in control. Thischange-in-control. Such concentration of ownership of our outstanding shares of Common Stock could have the effect of delayingdelay or preventingprevent a change in control,change-in-control, or otherwise discouragingdiscourage or preventingprevent a potential acquirer from attempting to obtain control. This, in turn, could have a negative effect oncontrol of our Company, possibly negatively affecting the market price of our Common Stock. ItThis significant ownership could also prevent our stockholders from realizing a premium over the market prices for their shares of Common Stock. Moreover, the interests of the owners of this concentration of ownershipexecutives and directors may not always coincide with the interests of our interestsCompany or the interests of other stockholders and, accordingly, could causecausing us to enter into transactions or agreements that we would not otherwise consider.

Due to recent changes in management, weWe cannot be certain that our internal controls over financial reporting and procedures are sufficient. Although we are taking significant remedial measures (as explained elsewherewill be sufficient in this Annual Report), ourthe future. This uncertainty could have a material adverse effect on our investors’ confidence in our reported financial information. There is no guarantee that our internal controls over financial reporting and procedures will not fail in the future.

\

Effective internal controls over financial reporting and disclosure controls and procedures are necessary for us to provideproviding reliable financial reports and to detect and prevent fraud. In the past, our internal controlsOur significant assessment and procedures may notremediation measures we have been adequate. The remedial measures being taken by us may not be sufficient to maintain theinvestors’ confidence, of investors or any loss ofand a damage to our reputation which couldmay result in turn affectan adverse impact to our financesfinancial position and results of operations. Our disclosure controls and internal controls over financial reporting may not prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, notas opposed to absolute, assuranceassurances that the objectives of the control system’s objectivessystem will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent

10

limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our business have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. ControlsIndividual acts can also be circumvented by the individual acts of some persons, bycircumvent these controls through collusion of two or more people or by managementthrough our executive’s override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may have occurred and may not have been detected. A failure in any of our internal controls and procedures may result in (i) enforcement actions by the SEC or other government andgovernmental or regulatory bodies, litigation,bodies; (ii) litigation; (iii) loss of reputation,reputation; (iv) loss of investor confidence,confidence; (v) inability to acquire capital, andcapital; or (vi) other material adverse effects on theour Company.

We do not anticipate paying dividends in the foreseeable future; you should not buyUnder our stock if you expect dividends.

We currently intend to retain our future earnings to support operationscharter documents and to invest in our expansion strategies, therefore,Delaware law, we do not anticipate paying cash dividends on our Common Stock.

Because we are subject to the “penny stock” rules, brokers cannot generally solicit the purchase of our Common Stock which adversely affects its liquidity and market price.

The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. The market price of our Common Stock on the OTC Markets has been substantially less than $5.00 per share and, therefore, we are currently considered a “penny stock” according to SEC rules. This designation requires any broker-dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules limit the ability of broker- dealers to solicit purchases of our Common Stock and, therefore, reduces the liquidity of the public market for our shares.

Moreover, because of apparent regulatory pressure from the SEC and the Financial Industry Regulatory Authority, a growing number of broker-dealers decline to permit investors to re-sell shares of penny stocks like the Company. This may have had and may continue to have a depressive effect upon our Common Stock price.

We could issue “blank check” preferred stock without stockholder approval, with the effect of dilutingwhich would dilute our then current stockholderstockholders’ interests and impairing theirimpair such stockholders’ voting rights, based on our charter documents and Delaware law which could discouragediscouraging a takeover that our stockholders may consider favorable.

Our certificate of incorporation provides for the authorization tothat we may authorize and issue up to 20,000,000 shares of “blank check” preferred stock with designations, rights, and preferences as may be determined from time to time by our Board. Our Board is empowered, without stockholder approval, to issue one or more series of preferred stock with dividend, liquidation, conversion, voting, or other rights, which could dilute the interest of or impair the voting power of our holders of Common Stock holders.Stock. The issuance of a series of preferred stock could be used as a method of discouraging, delaying, or preventing a change in control. For example, it would be possible for our Board to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of our company. In addition, advanced notice is required prior to stockholder proposals, which might further delay a change of control.Company.

If our Common Stock becomes subject to a “chill” or a “freeze” imposed by the Depository Trust Company or “DTC”, your(“DTC”) our stockholders’ ability to sell your shares may be limited.

The DTC acts as a depository or nominee for street name shares or stock that investors deposit with their brokers. Although through DTC our Common Stock is eligible for electronic settlement, rather than delivery of paper certificates,historically DTC in the last several years has imposed a chill or freeze on the deposit, withdrawal, and transfer of Common Stockcommon stock of issuers whose Common Stockcommon stock trades on the OTC Markets. Depending on the type of restriction, it can prevent our stockholders from buying or selling our shares of Common Stock and prevent us from raising money. A chill or freeze may remain imposed on a security for a few days or an extended period (in at least one instance a number of years).period. While we have no reason to believe a chill or freeze will be imposed against our Common Stock, if it were yourDTC did so, our stockholders’ ability to sell yourtheir shares would be limited.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

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ITEM 2. PR1B. UNRESOLVEOPERTIES.D STAFF COMMENTS.

None.

ITEM 2. PROPERTIES.

Our only facility is our 2,016-sq. ft. leased principal executive office is approximately 11,500 square feet and is located at 1300 Summit Avenue,1565 North Central Expressway, Suite 670, Fort Worth,220, Richardson, Texas, 76102. Our75080. We lease forour executive office space pursuant to two separate leases with 1565 North Central Expressway, LP (“NCE, LP”). The lease between CPM and NCE, LP (“CPM Lease”) was effective January 1, 2013, and the facility terminates on September 30, 2018.second lease between Fuse and NCE, LP (“Fuse Lease”) was effective July 14, 2017. Both the CPM Lease and Fuse Lease terminated December 31, 2017, with month-to-month renewals. We believe that our present business property is adequate and suitable to meetsupport our current needs. If we were requiredmid-term strategies and initiatives for growth. We have currently decided to move, we believe that there iscontinue on a large supplymonth-to-month lease with the option of commercial property availablerenegotiating a long-term lease renewal or relocation in the general area which we could lease at comparable prices.future.

Our leased property does not have material costs of complying with environmental laws.

ITEM 3. LEGAL PROCEEDINGS.

On January 27, 2014, M. Richard Cutler and Cutler Law Group, P.C. (the “Plaintiffs”) filed a complaint in the District Court of Harris County, Texas, 2014-03355, against Legacy Fuse, Alan Meeker, Rusty Shelton, Jonathan Brown, Robert H. Donehew and GolfRounds.com, Inc. (the “Defendants”). On April 21, 2014, the complaint was dismissed for “want of prosecution.” On September 18, 2015, Plaintiffs refiled a complaint in the District Court of Harris County, Texas, Cause No. 2015-55652 and added PH Squared, LLC as an additional Plaintiff, as more fully described in “Legal Matters” included in Note 6 in our audited financial statements contained in this Annual Report, which is herein incorporated by reference. We anticipate incurring approximately $70,000 of additional legal fees regarding this matter. The trial date for the above matter has been moved to July 24, 2017 in order to allow for additional discovery.None.

The parties are currently conducting discovery to determine the viability of the Plaintiffs’ claims, although we continue to believe that the lawsuit is completely without merit and will vigorously contest it and protect our interests. However, the outcome of this legal action cannot be predicted.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Our Common Stock trades on the Over-The-Counter (“OTC”) market and is quoted on the OTC Markets designated as OTC Pink, Current Information Tier, under the trading symbol OTCPINK: FZMD. TheThere is no established public trading market for our Common Stock, as the trading market for our Common Stock has been extremely limited and sporadic.

Below is a table indicating the range of high and low bid information for our Common Stock as reported by the OTC Bulletin BoardMarkets interdealer quotation system for the periods listed. Bid prices represent interdealer prices between broker-dealers and do not include retail mark-ups, andretail mark-downs, or any commission to broker-dealers.a broker-dealer. In addition, these prices domay not necessarily reflect actual transactions.

Holders of Record

As of March 17, 2017,12, 2020, there were 340357 account holders of record of our Common Stock.Stock listed with our transfer agent, American Stock Transfer and Trust Company, LLC.

Dividends

We have not paid or declared any dividends on our Common Stock during the past two (2) fiscal years and we do not intend to pay any dividends on our Common Stock.

Recent Sales of Unregistered Securities

On December 19, 2016, we sold an aggregate of 9,000,000 shares of our Common Stock for gross proceeds of $720,000, or $0.08 per share, to two entities owned and controlled by the Investors pursuant to the Purchase Agreement, as more fully described in this Annual Report above entitled “Explanatory Note,” which discussion is herein incorporated by reference and in the Purchase Agreement 8-K.foreseeable future.

Issuer Purchases of Equity Securities

We did not make any purchases of equity securities.

ITEM 6. SELECTED FINANCIAL INFORMATION.

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

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ITEM 7. MANAGEMENT’SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion highlights our results of operations and the principal factors that have affected our consolidated financial condition, as well as our liquidity and our capital resources for the periods described, anddescribed. The discussion also provides information that our management believes is relevant for an assessment and understanding of our consolidated financial condition and results of operations presented herein. The following discussion and analysis are based on our audited financial statementsFinancial Statements contained in this Annual Report, which have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). You should read theThe discussion and analysis togethershould be read in conjunction with such financial statementsour Financial Statements and the related notes thereto.therein.

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Explanatory Note

As described in “Item 1. Business, Corporate and Available Information,” and elsewhere in this Annual Report, effective on the Maxim Closing Date, we completed the Maxim Acquisition and integrated its operations for periods after the Maxim Closing Date. Our Financial Statements include the accounts of Maxim as of and for the five (5) months ended December 31, 2018. Intercompany transactions have been eliminated in consolidation.

Overview

We are a manufacturer, distributor, and wholesaler of medical devices offering a broad portfolio of Orthopedic Implants, Biologics, and other medical devices. A more detailed description of our business operation can be found in “Item 1. Business” within this Annual Report.

We believe 2019 proved pivotal for our growth as a manufacturer and innovative product developer. Our revenuesfocus to shift our business model from a sole distributor to an integrated manufacturer and profitabilitydistributor has seen successful results in 2019, with continued growth and success leading into 2020. Highlights of our 2019 strategic milestones include the following:

Current Trends and Outlook

Seasonality

We are subject to seasonal fluctuations in sales, which cause fluctuations in quarterly results of operations. Because of our seasonality, 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 typically lowestexperience greater revenue and greater sales volume, as a percentage of revenue, during the last two (2) calendar quarters compared to the first quarter of the year and are highest during the fourth quartertwo (2) calendar quarters of the year. This increase is primarily due to more patient annual healthcare deductibles being met during the last two (2) quarters of the calendar year compared to the first two (2) quarters of the calendar year, which is partially satisfied by elective surgeries. For the years ended December 31, 2019 and 2018, approximately $13.1 million (57%) and $14.6 million (55%) of revenues were generated during the third and fourth quarters of 2019 and 2018, respectively. We believeuse this seasonality is primarily attributedtrend to the reset of annual healthcare insurance deductibles. Many health insurance plans require an insured beneficiary to pay a certain amount (the annual deductible) before insurance pays. The deductibles are generally reset annually on January 1^st. We believe individuals sometimes choose to forgo or delay non- emergency medical procedures until their respective annual deductibles are met.assist us in enterprise-wide resource planning such as purchasing and product inventory logistics.

During 2016, we experienced increased competition23

Retail and pricing pressures for biologics sold in larger order quantities and, accordingly, we were forced to decrease our pricing for these products. Our revenues from biologics sold at the retail level also declined. Accordingly, we attempted to increase our revenues from biologics by consigning a limited quantity of biologic units to each of several new facilities allowing them to utilize the products on a trial basis. Generally, several facilities were unable to obtain adequate reimbursement from third party payors. This negatively affected our revenues and profitability while this strategy was in place, which we have since discontinued.Wholesale Cases

During 2016, our revenues from commissions received from the sale of internal fixation products also declined and in November our products were excluded from a hospital’s newly implemented system-wide exclusive contract. As a result, one of our distribution agreements was terminated in November 2016.

In late 2016, as a new product category offering, we began selling sports medicine soft tissue fixation products which were obtained from CPM.

During the first quarter of 2017, we experienced a continued decline in revenues and profitability from the sale of biologics after our largest customer utilizing these products encountered less than anticipated reimbursement from third party payors.

In addition, we have added volume users of both soft tissue fixation products and extremity trauma plating, as well as primary and revision total knee replacement implants. We feel this trend will continue as we engage more surgeons within our growing network of contacts and independent contractors.

On February 10, 2017, our Vice President of Sales resigned. While we are currently evaluating this position, we do not believe that lack of doing so, in the short-term, will affect our revenues and profitability in a negative manner. We believe our newly expanded product portfoliocomprehensive selection of Orthopedic Implants and extensive network of independent contractor relationships that the new management team has brought with them will become a greater assetBiologics products is pivotal to the Company and will be realized with additional new surgeon utilizers of our implants and biologics.

We believe the decline in our revenues and profitability is primarily attributable to biologic sales and reduced reimbursement at the hospital level. The overall seasonality of our industry, and loss of a supplier of internal fixation products, there can be no assurance revenues and profitability shall increase an adequate amount to cover the cost of operations. However, as our biologics revenues and profitability have decreased, our revenues and profitability from other surgical implant product categories have increased. Our new leadership team has added multiple new suppliers of internal and external fixation products for upper and lower extremities, as well as product offerings in all specialties of orthopedics, sports medicine and spine. We believe our expanded product offerings will prove instrumental in our ability to acquire new customers and increase sales volume, revenues, and profitability. We continue to utilizereview and evaluate our products.product lines, ensuring we maintain a high-quality and cost-effective selection of Orthopedic Implants and Biologics.

ResultsWe measure sales volume based on medical procedures in which our products were sold and used (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 Operationsour sales for Wholesale Cases are on a consignment basis with the third-party.

Retail Cases in our industry command higher revenue price points than Wholesale Cases. Because Retail Cases involve direct sales to our end customers, we receive a higher profit margin due to the absence of any third party in the sales process, before we pay any potential commissions to a full time or independent sales representative. As a result, Retail Cases generally generate substantially more gross profit than Wholesale Case transactions.

RevenuesWholesale Cases in our industry command lower revenue price-points than Retail Cases. Because Wholesale Cases involve sales to third parties who sell our products to end customers, our profit margins are reduced for these Cases. Thus, our Wholesale Cases generate substantially lower gross profit than our Retail Cases, but are not subject to additional overhead support costs, such as case coverage and profitability have declined during 2016 comparedcommissions. Our Wholesale Case business is highly dependent on minimum volume sales levels to 2015. achieve appropriate profitability.

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 pressure, we employ strategies to optimize revenue per Case. During 2019, we believe we were successful in minimizing the impact of pricing pressures as reflected with average revenue per Case of $4,228 for 2019 and $4,328 for 2018. During 2019, our strategy to emphasize our Retail Model proved successful as Retail Cases represented approximately 83% of revenue, or, an approximate 6% increase over 2018.

Compensation Initiatives

We anticipate that we will be ableexpect to reverse this trend during 2017 by leveragingcontinue to offer compensation and other valuable long-term incentives, such as equity incentives, to key distributors, executives, and employees as a means to expand our newly expanded product portfoliostrategic partnerships and extensive network ofindustry relationships. During 2019, our Board granted equity incentives to our Scientific Advisory Board members (SABs), key distributors, independent contractor relationships possessed by our new leadership team.contractors and employees. (See “Item 1. Business” for additional information).

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Results of Operations

Year Ended December 31, 20162019 Compared to Year Ended December 31, 20152018

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

Net Revenues

For the year ended December 31, 2016,2019, our net revenues were $567,607,$22,900,277 compared to $1,676,609$26,342,038 for the year ended December 31, 2015,2018, a decrease of $1,109,002,$3,441,761, or 66.1%approximately 13%.

For the year ended December 31, 2019, Retail Cases decreased by approximately 7% compared to the year ended December 31, 2018, and revenues from Retail Cases increased by approximately 6% compared to revenues from Retail Cases for the year ended December 31, 2018. Revenues from Retail Cases as a percentage of total revenues increased to 83% of revenues for the year ended December 31, 2019, from 77% of revenues for the year ended December 31, 2018. We believe the increase in revenue from Retail Cases as a percent of total revenues reflects the execution of our strategies to shift more of our business to higher margin Retail Cases through improvement of our supply chain management.  Therefore, wholesale revenue as a percent of total revenue has decreased.

As discussed above in “Current Trends and Outlook”, largely resulting from decreased prices duewe believe that as our industry faces increased pricing pressures, we will need to a competitive marketplace. Commencing in the second quarterfocus on increased volume of 2015, we focused our efforts on increasing revenues and profitability derived from the sale of biologics, especially those products sold at the retail level in orderCases to increase the amount ofmaintain gross profits from operations. During 2016, we experienced decreased revenues and profitability because our largest customers had difficulties getting reimbursed from third party payors. Also, our revenues and profitability from biologics sold at the retail level declined because we lost a major customer. Accordingly, we attemptedprofit levels. We intend to increase our revenuesRetail Case volume by increasing sales volumes with our existing retail customer base as well as on-boarding new surgeons, distributors, and profitability from biologics by consigning a limited quantity of biologic units to each of several new facilities allowing them to utilize the products and only required the facilities to pay for the products provided they were able to get reimbursed by insurance. In many cases, the facilities experienced lower reimbursement than expected, negatively affecting our revenues and profitability while this strategy was in place. On November 15, 2016, due to low sales volume resulting from Vilex being excluded from a hospital purchasing contract, the agreement with Vilex was terminated.retail customers.

Cost of Revenues

For the year ended December 31, 2016,2019, our cost of revenues was $204,044,$11,762,790 compared to $664,266$13,352,558 for the year ended December 31, 2015, representing2018, which is a decrease of $460,222,$1,589,768, or 69.3%. Duringapproximately 13%

As a percentage of revenues, cost of revenues was approximately 51% for the yearyears ended December 31, 2016, we did not alter our allowance for inventory obsolescence compared to $35,985 for2019 and 2018.   While remaining stable, the year ended December 31, 2015. Thecomponents making up the cost were variable and consisted of the following:   (i)(a) an approximate 5% decrease in medical instruments purchased based on lower demand, (b) an approximate 3% reduction in cost of revenues is commensurate with the decreaseprimarily driven by a reduction in net revenues. CommencingCase volume product mix; offset, in July 2015, our largest supplier of amniotics increased our pricing for amnioticspart, by approximately 10%. This(ii) an approximate 7% increase in the cost of revenues during the second half of 2015 was partially offset by a greater amount of revenues derived from biologics sold at the retail level. From December 2015 through May 2016, we switched to another supplierinventory loss provision for amniotics with pricing that matched the earlier pricing from the first half of 2015. In June 2016, we switched back to our former supplier upon their agreeing to revert back to their previously lower pricing. Excluding the changes in our allowance for inventory obsolescence, the percentage decrease in costs of revenues was consistent with the percentage decrease in the number of units sold. Cost of revenues includes costs to purchase goodsslow-moving and freight and shipping costs for items sold to customers.obsolescence.

Gross Profit

For the year ended December 31, 2016, we generated a gross profit of $363,563, compared to $1,012,343 for the year ended December 31, 2015, a decrease of $648,780, or 64.1%. The decrease in profitability was primarily due to decreased revenues derived from the sale of biologics from both the wholesale and retail sales level as well as decreased commissions from the sale of internal fixation products. Our profitability will vary depending upon the product mix between wholesale versus retail amniotic revenues.

General, Administrative and Other Expenses

For the year ended December 31, 2016, general, administrative and other operating expenses decreased to $854,050 from $1,804,371 for the year ended December 31, 2015, representing a decrease of $950,321, or 52.7%. This decrease is primarily attributable to the decrease in personnel that occurred in June 2015. In particular, salaries and wages (including independent contractors) and related costs decreased by $634,183, stock-based compensation decreased by $105,000, travel expenses decreased by $72,235 and legal and professional fees decreased by $51,872. Further, this decrease is attributable to the Company’s cost-cutting measures implemented to conserve working capital used to fund operations. General, administrative and other operating expenses during the year ended December 31, 2016 consisted primarily of salaries and wages and related costs, legal and professional fees, stock-based compensation, rent and insurance.

Interest Expense

For the year ended December 31, 2016, interest expense increased to $129,385 from $7,112 for the year ended December 31, 2015, representing an increase of $122,273, primarily due to the three short-term loans in the aggregate amount of $150,000 during 2016 bearing interest at 10% per annum as more fully described previously in the “Explanatory Note.” The resulting beneficial conversion feature in the aggregate amount of $117,500 was treated as a discount to each of the promissory notes and amortized over the term of each respective promissory note through December 31, 2016. Subsequent to the issuance of the notes, affiliates of the noteholders entered into the Purchase Agreement with the Company. The increase in interest expense was partially offset when, on December 19, 2016, an outstanding note dated January 15, 2015 made by the Company in favor of WHIG Enterprises, LLC along with all accrued and unpaid interest of $4,169 was forgiven.

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Net LossGross Profit

For the year ended December 31, 2016, we generated a net loss of $585,9352019, our gross profit was $11,137,487 compared to a net loss of $801,547$12,989,480 for the year ended December 31, 2015. The2018, representing a decrease of $1,851,993, or approximately 13%.

As a percentage of revenues, gross profit remained stable at approximately 49% for the years ended December 31, 2019 and 2018. The components of gross profit varied and included (i)(a) an approximate 5% decrease in medical instruments purchased based on lower demand, (b) an approximate 3% reduction in cost of revenues primarily driven by a reduction in Case volume product mix; offset, in part, by (ii) an approximate 7% increase in the inventory loss provision for slow-moving and obsolescence, identified during our inventory system upgrades and periodic cycle-counts.

Selling, General, Administrative and Other

For the year ended December 31, 2019, our selling, general, administrative, and other expenses (SG&A) were $8,466,077, or approximately flat when compared to SG&A of $8,466,128 for the year ended December 31, 2018.

As a percentage of net lossrevenues, SG&A accounted for approximately 37% for the year ended December 31, 2019, and 32% for the year ended December 31, 2018. As a percentage of revenues, the increase of approximately 5% primarily resulted from (i)(a) an increase of $571,832 in bad debt expense driven by an increase in aged customer accounts receivables, (b) an increase of $307,500 in SAB costs, a reflection of the first full year of SAB costs since the 2018 SAB establishment, and (c) an increase of $140,892 for employee expense reimbursements related to business development and travel costs; offset, in part, by (ii)(a) a $333,332 decrease in leased staffing costs, (b) a $253,746 reduction in legal fees, (c) a $225,946 reduction in consulting and audit costs, and (d) a $207,250 reduction in stock-based compensation expense.

Commissions

For the year ended December 31, 2019, our commissions expense decreased to $5,982,075 from $6,431,967 for the year ended December 31, 2018, a decrease of $449,892, or approximately 7%.

As a percentage of net revenues, commissions expense accounted for approximately 26% for the year ended December 31, 2019, and 24% for the year ended December 31, 2018. This increase is primarily driven by an approximate 6% increase in revenues from Retail Cases as a percentage of total revenues for the year ended December 31, 2019 compared to the year ended December 31, 2018. Please see “Current Trends and Outlook” for additional information. We do not incur commissions expense on revenues derived from Wholesale Cases.

Depreciation and Amortization

For the year ended December 31, 2019, our depreciation and amortization expense increased to $107,073 from $49,685 for the year ended December 31, 2018, an increase of $57,388. The increase is primarily the result of an approximate (i) $47,500 in amortization of intangible assets, such as noncompete agreements and customer relationships, acquired pursuant to the Maxim Acquisition as of the Maxim Closing Date, and (ii) an approximate $9,900 increase in depreciation expense as a result of investment in IT infrastructure such as additional and replacement user workstations.

Goodwill Impairment

During 2019, we assessed the recoverability of the carrying value of our goodwill as a result of (i) the continuation of adverse economic and business trends, and (ii) revisions to our anticipated future operating results. We recorded an impairment charge of $932,203 in 2019 to reduce our carrying value of goodwill to fair value.

Change in Fair Value of Contingent Purchase Consideration

For the year ended December 31, 2019, we determined that the earnings thresholds, as detailed in the CPM Acquisition Agreement, were not met for payments under the earn-out (“Earn-Out”). Therefore, based on our 2019 financial performance, we made no payments to NC 143 for either the base Earn-Out or the bonus Earn-Out.

As of December 31, 2019, the fair value of the Earn-Out liability was re-measured to fair value under the probability weighted income approach, as further explained in Note 2 of our accompanying consolidated Financial Statements, entitled “Significant Accounting Policies, Fair Value Measurements.” As a result, the current fair value of the Earn-Out liability was reduced by $1,936,164, from $13,581,529 to $11,645,365.

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Interest

For the year ended December 31, 2019, our interest expense declined to $121,633 from $133,944 for the year ended December 31, 2018, which is a reduction of by $12,311, or approximately 9%. The decline is primarily due to thean approximate $19,728 reduction in interest expense based on a decrease in operating expenses, partiallyour RLOC borrowings, offset, in part, by the decrease in profitability and thean approximately $7,417 increase in interest expense driven by changes in LIBOR market interest rates and the one percent (1%) increase in cost of borrowings on the RLOC pursuant to the Second Amendment of the RLOC executed on November 19, 2018 (“Second Amendment”).

Tax

For the year ended December 31, 2019, we recognized a tax expense of $781,085, compared to a tax benefit of $386,784 for the year ended December 31, 2018. The tax expense recognized in 2019 is a result of recognition of a valuation allowance for deferred tax assets based on management’s determination that it is more likely than not that all or a portion of the deferred tax asset will not be realized. For additional information, please see Note 11 of our accompanying consolidated Financial Statements, entitled “Income Taxes.”

Net Loss (Income)

For the year ended December 31, 2019, we had a net loss of $3,316,495, compared to net income of $3,957,554 for the year ended December 31, 2018, reflecting a reduction in our net income of $7,274,049, or approximately 184%.  The primary drivers for our reduction in net income for the year ended December 31, 2019 were (i)(a) a $3,726,850 reduction in the change in fair value of contingent purchase consideration, (b) a $3,441,761 reduction in revenues, (c) an increase of $1,167,869 in income tax expense, (d) a $932,203 goodwill impairment charge, (e) an increase of $1,476,090 in the inventory obsolescence adjustment, and (f) $57,388 increase in depreciation and amortization; offset, in part, by (ii)(a) a $1,792,125 reduction in cost of revenues, (b) a $449,891 reduction in commissions, and (c) a $12,311 reduction in interest expense.

For more information on the change in the fair value of contingent purchase consideration, please see Note 2 of our accompanying Financial Statements, entitled “Significant Accounting Policies, Fair Value Measurements.” For further information on goodwill impairment, please see Note 2 “Significant Accounting Policies, Goodwill and Other Intangible Assets.”

Liquidity and Capital Resources

Cash Flows

A summary of our cash flows is as follows:

Net Cash Used in(Used In) Provided by Operating Activities

NetFor the year ended December 31, 2019, our net cash used in operating activities duringwas $4,739, compared to net cash provided by operating activities of $2,479,900 for the year ended December 31, 2016 2018. This decrease of $2,484,639 primarily resulted primarily fromfrom: (i)(a) a reduction in net lossincome of $585,935, a decrease$7,274,049, (b) an increase of $2,541,304 in accounts payable of $128,252, partially offset byreceivable, (c) a decrease$325,187 reduction in accounts receivable of $239,946, amortization of debt discount of $117,500, stock-based compensation of $63,000 andaccrued expenses, (d) a decrease$154,283 reduction in inventories, of $55,883.

Net cash used(e) a $13,210 increase in operating activities during the year ended December 31, 2015 resulted primarily fromprepaid expenses and other current assets; offset, in part, by (ii)(a) $7,498,278 in non-cash adjustments, and (b) a net loss of $801,547 and an$122,759 increase in accounts receivable of $116,920, partially offset by stock-based compensation of $418,000 and a decrease in inventories of $50,173 (resulting primarily from an increase in the reserve for obsolescence of $35,985).payable.

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Net Cash Used in Investing Activities

NetOur net cash used in investing activities for the year ended December 31, 2016 related2019 was $15,318, compared to $300 of purchases of property and equipment.

Net cash used in investing activities$104,935 for the year ended December 31, 2015 related to $8,3082018. This decrease of purchases$89,617 was primarily driven by (i) a $26,520 reduction in the purchase of property and equipment, offset bysuch as new and replacement user workstations, and (ii) $63,097 reduction related to the acquisition of Maxim, net of cash proceeds from the disposal of property and equipment of $1,300.acquired.

Net Cash Provided by (Used in) Financing Activities

NetFor the year ended December 31, 2019, our net cash provided by financing activities duringwas $275,053, compared to net cash used in financing activities of $2,335,366 for the year ended December 31, 2016 resulted from proceeds2018. This increase of $655,391 from$2,610,419 is primarily driven by (i) a $10,788,677 reduction in payments to our RLOC, (ii) $8,575,721 reduction in our RLOC borrowings, and (iii) the sale of our Common Stock, proceeds of $150,000$397,463 reduction in aggregate from the issuance of convertible promissory notes from the Investors. Net cash provided by capital contributions of $91,533 by stockholders resulting from the transfer of inventory to CPM, as described in Item 13 “Certain Relationships And Related Transactions, And Director Independence” below and in the Purchase Agreement 8-K.

Net cash provided by financing activities during the year ended December 31, 2015 resulted primarily from proceeds of $190,000 from the sale of our Common Stock, and proceeds of $100,000 from the issuance of a promissory note to an entity that is controlled by an individual that was a former director and Chief Executive Officerpurchase price adjustment of the Company.CPM Acquisition.

Liquidity

As an emerging business, ourOur primary sources and uses of liquidity have beenare cash from the issuances of debtour operations and equity securities, and payroll and related costs, legal and professional fees, rent, and insurance, respectively.

From December 31, 2013 through June 16, 2014, we raised gross proceeds of $1,512,014 through the issuance of two-year promissory notes payable. The notes were unsecured, bore interest at 7.0% and required 18 monthly payments of interest only commencing at the beginning of month seven. Our outstanding notes payable had maturity dates commencing December 2015. On December 31, 2014, the outstanding principal balance of notes payable of $1,512,014 and accrued interest of $57,893 was converted into 1,509,528 shares of our Common Stock.

During 2015, we received proceeds of: (i) $100,000 from a loan from a significant stockholder; (ii) $100,000 from the sale of shares of our Common Stock to a related party; and (iii) $90,000 from the sale of shares of our Common Stock in private offerings.

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During 2016, we received proceeds of: (i) $720,000 from the sale of our Common Stock in private offerings; (ii) $150,000 in aggregate from the issuance of promissory notes to entities that are controlled by the Investors; and (iii) $91,533 of capital contributions resulting from the transfer of inventory to CPM, as described in Item 13 “Certain Relationships And Related Transactions, And Director Independence” below and in the Purchase Agreement 8-K.

RLOC with Amegy Bank. At December 31, 2016, we had working capital of $437,862, including $667,4752019, our current assets exceeded our current liabilities by $7,413,444 (our “Working Capital”), which included $1,099,310 in cash and cash equivalents. Cash from our operations and net borrowings on our RLOC supports our Working Capital needs.

On December 29, 2017, we became party to a RLOC with Amegy Bank. The RLOC established an asset-based senior secured revolving credit facility in the amount of $5,000,000. The RLOC contains customary representation, warranties, covenants, events of default, and is collateralized by substantially all of our assets and provides that our Chairman of the Board and President personally guarantee a portion of the outstanding RLOC amount.

On November 19, 2018, we executed the Second Amendment to the RLOC with Amegy Bank. The Second Amendment (i) waived our 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 we 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; earnings before interest, taxes, depreciation and amortization (“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, we executed the Third Amendment to the RLOC with Amegy Bank (the “Third Amendment”). Pursuant to the Third Amendment, Amegy Bank (i) waived our 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 the borrowing base component of Inventory to 30%, (v) amended the financial covenants to state that we 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 us to give notice of each requested loan by delivery of advance request to Amegy Bank.

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

We rely on the RLOC for capital expenditures and day-to-day Working Capital needs. As of March 20, 2017,12, 2020, we had approximately $500,000$952,000 in available cash. cash, and $201,000 available on our RLOC for borrowing (subject to certain borrowing base limitations). Borrowings on our RLOC are repaid from cash generated from our operations.

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 third and fourth quarters of calendar year 2020. We expect sources of capital for these investments to be derived from cash is concentrated infrom operations and additional debt financing.

Our projections for calendar years 2020, 2021, and 2022 include expansion opportunities based on carefully evaluated expected return on investments. We expect to replace the AmBio Contract (See Note 13, “Related Party Transactions – AmBio Contract” on our accompanying Financial Statements, beginning on page F-1) through a large financial institution.competitive request for proposal process during the second half

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of 2020. We believe this will support our current cash balance is enoughefforts to sustain current operationsreduce human capital and investmentrelated costs, while enhancing benefit offerings and coverage for our associates.

Going Concern

The accompanying audited consolidated financial statements have been prepared as if we will continue as a going concern. Through December 31, 2019, we had accumulated losses of $2,595,813 and a stockholders’ deficit of $1,222,133.  Revenue declined by $3,441,761 in growth strategies for approximately 18 months. For2019 as the result of competitive pressures.  We were out of compliance with our loan covenants at various times during the years ended December 31, 2019 and 2018. We obtained waivers from the lender to cure the violations, but had reductions of the credit facility amount as a more complete discussion, please seeresult of the risk factor entitled “Ourcovenant violations.  We have determined that these conditions and events raise substantial doubt about our ability to continue as a going concern.

Our ability to continue as a going concern is in doubt absent obtaining adequate new debt or equity financing and achieving sufficient sales and profitability levels.” on page 8.

Our existencefor at least one year beyond the date of this filing is dependent upon management’s ability to grow our business(i) successful execution of key rebranding initiatives, (ii) introduction, commercialization and its profitability and/or obtain additional funding. If our Board determines to raise capitalsales of new proprietary products and is unsuccessfulproduct lines, (iii) increased sale of existing products, with strategic emphasis on selling more Retail Cases and increasing the percentage of Retail Cases sold as a percentage of all Cases we are unable to increase revenuessell, and profitability, we believe that(iv) continued cost reductions. Additionally, we will need to reduce operating expensesrefinance our RLOC with Amegy Bank with a new credit facility on commercially reasonable terms, or obtain equity financing.

Our financial statements do not include any adjustments relating to the recoverability and administrative costs or cease operations. There can be no assurance that our efforts will result in profitable operationsclassification of recorded assets, or the resolutionamounts and classifications of liabilities that might be necessary should we be unable to continue as a going concern.

Off-Balance Sheet Arrangement

As of December 31, 2019, we had no off-balance sheet arrangements.

Impact of Inflation

We do not believe the effect of inflation, as measured by fluctuations in the U.S. Consumer Price Index, has had a material impact on our liquidity problems.

In their report dated March 20, 2017, our independent registered public accounting firm included an emphasis-of-matter paragraph with respect to our financial statementsFinancial Statements for the year ended December 31, 2016. This paragraph is concerning our assumption that we will continue as a going concern, which is primarily being driven from our recurring decline in revenues and losses from operations

We have primarily financed our operations from the issuance of notes payable and equity securities. As of December 31, 2016, all notes payable other than those listed below have been converted into shares of our Common Stock, repaid in full or been forgiven.

During July 2016 through October 2016, we obtained three short-term loans in the aggregate amount of $150,000 bearing interest at 10% per annum as more fully described previously in the “Explanatory Note.” The resulting beneficial conversion feature in the aggregate amount of $117,500 was treated as a discount to each of the promissory notes and amortized over the term of each respective promissory note through December 31, 2016. Subsequent to the issuance of the notes, affiliates of the noteholders entered into the Purchase Agreement with the Company. The increase in interest expense was partially offset when, on December 19, 2016, an outstanding note dated January 15, 2015 made by the Company in favor of WHIG Enterprises, LLC along with all accrued and unpaid interest of $4,169 was forgiven.

Off-balance Sheet Arrangement

We have no off-balance sheet arrangements.

Related Party Transactions

During July 2016 through October 2016, we obtained three short-term loans in the aggregate amount of $150,000 in exchange for promissory notes bearing 10% interest per annum, which principal shall be due and payable, upon demand of the payee, at any time after the earlier of: (i) December 31, 2016; or (ii) upon a change in control of the Company. The promissory notes were issued as follows: $100,000 to NC 143, a family limited partnership controlled by Mark W. Brooks, our Chairman of the Board; and $50,000 to RMI, an investment holding company owned and controlled by Christopher C. Reeg, our Chief Executive Officer. On or after January 16, 2017, at the holder’s sole discretion, the holder has the right to convert all or any portion of the then unpaid principal and interest balance of the promissory notes into shares of our Common Stock at a conversion price of $0.08 per share. On each respective date of issuance, the conversion price of each of the promissory notes was less than the market price of our Common Stock. This resulted in a beneficial conversion feature in the aggregate amount of $117,500, which was treated as a discount to each of the promissory notes and amortized over the term of each respective promissory note. Subsequent to the issuance of the notes, affiliates of the noteholders entered into the Purchase Agreement with us.

On the Closing Date, we entered into the Purchase Agreement, as described in the section of this Annual Report above entitled “Explanatory Note,” which is incorporated herein by reference.

On December 19, 2016, we sold an aggregate of 9,000,000 shares of our Common Stock for gross proceeds of $720,000, or $0.08 per share, to two entities owned and controlled by the Investors, pursuant to which NC 143 acquired 5,000,000 shares of our Common Stock for a purchase price of $400,000 and RMI acquired 4,000,000 shares of our Common Stock for a purchase price of $320,000. As detailed in the Company’s Current Report on Form 8-K, filed on December 23, 2016, these transactions resulted in a change in control of the Company whereby the Investors acquired a majority interest in us, Mark W. Brooks became our Chairman of the Board and Christopher C. Reeg became our Chief Executive Officer. Direct offering costs of the Company were $64,609 in connection with the offer and sale of the Investor Shares, and, net proceeds from the offer and sale of the Investor Shares were $655,391.

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During June 2016, we transferred inventory having a net book value of $8,467 to CPM, in exchange for cash proceeds of $100,000. As the transfer of inventory was completed pursuant to a letter of intent between us and the Investors, the profit of $91,533, which had been deferred in the prior two quarters, was, on December 19, 2016 considered a contribution of capital by the Investors.

Our principal supplier for our amniotic products is CPM. We entered into a distributor agreement with CPM effective August 2, 2012, pursuant to which we act as a non-exclusive distributor of certain amniotic membrane products. The term of the agreement is one year and renews on each annual anniversary date for successive one-year terms unless it is terminated in writing by either party. During the years ended December 31, 2016 and 2015, we purchased $103,578 and $431,102, respectively, of our products from CPM. The balances due to this supplier at December 31, 2016 and 2015 were $77,178 and $48,400, respectively. 2019.

Critical Accounting Policies and Estimates

The preparation of financial statementsour Financial Statements and the related disclosures in conformity with accounting principles generally accepted in the U.S., (or “GAAP”),GAAP, requires our management to make judgments, assumptions, and estimates that affect the amounts of revenue, expenses, income, assets, and liabilities, reported in our consolidated financial statementsFinancial 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. Financial Statements.

We describe our most significant accounting policies in Note“Note 2, “SignificantSignificant Accounting Policies” in thePolicies” of our consolidated notes to the consolidated financial statements beginning on page F-1our Financial Statements and found elsewhere herein. We have identified the following accounting policies as those that require significant judgments, assumptions and estimates and that have a significant impact on our financial condition and results of operations.in this 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 and becausematters. 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.

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

Recent Accounting Pronouncements

We recognize revenues when: (i) persuasive evidence of an arrangement exists; (ii) the fees are fixed or determinable; (iii) no significant Company obligations remain; and (iv) collection of the related receivable is reasonably assured. We report revenues for transactionsdescribe recent accounting pronouncements in which we are the primary obligor on a gross basis and revenues in which we act as an agent (earning a fixed percentage of the sale) on a net basis, net of related costs.

Revenues are sales of orthopedic, sports medicine and spinal implant products as well as osteobiologics, and regenerative amniotic tissues. For customers that purchase products as needed, we invoice the customers on the date the product is utilized. For customers that have consigned product, we invoice the customers when the products are utilized. Payment terms are net 30 days after the invoice date.

Products that have been sold are not subject to returns unless the product is deemed defective. Credits or refunds are recognized when they are determinable and estimable. Net revenues have been reduced to account for sales returns, rebates and other incentives.

Accounts Receivable and Allowance for Doubtful Accounts Receivable

Accounts receivables are non-interest bearing and are stated at gross invoice amounts less an allowance for doubtful accounts receivable. Credit is extended to customers based on an evaluation of their financial condition and other factors. We generally do not require collateral or other security to support accounts receivable. We perform ongoing credit evaluationsNote 2, “Significant Accounting Policies” of our customers and maintain an allowance for potential bad debts.

We estimateconsolidated notes to our allowance for doubtful accounts by evaluating specific accounts where information indicates the customers may have an inability to meet financial obligations, such as bankruptcy proceedings and receivable amounts outstanding for an extended period beyond contractual terms. In these cases, we use assumptions and judgment, based on the best available facts and circumstances, to record a specific allowance for those customers against amounts due to reduce the receivable to the amount expected to be collected. These specific allowances are reevaluated and adjusted as additional information is received. The amounts calculated are analyzed to determine the total amount of the allowance. We may also record a general allowance as necessary.Financial Statements.

Accounts deemed uncollectible are written off in the period when we have exhausted our efforts to collect overdue and unpaid receivables or otherwise have evaluated other circumstances that indicate that we should abandon such efforts. Previously written-off accounts receivable that are subsequently collected are recognized as an increase in allowance for doubtful accounts when funds are received.

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Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories consist entirely of finished goods and include biologics and internal fixation products. We review 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, we recognize a write-down equal to an amount by which the carrying value exceeds the market value of inventories.

Cautionary Note Regarding Forward Looking Statements

This report contains forward-looking statements including the statements regarding capital expenditures, and 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 or all of these forward-looking statements might not occur. Important factors, uncertainties and risks that may cause actual results to differ materially from these forward-looking statements are contained in Item 1A. Risk Factors above. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise. For more information regarding some of the ongoing risks and uncertainties of our business, see Item 1A. Risk Factors and our other filings with the SEC.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not required forAs a smaller reporting companies.company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this item.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The requirementsReport of our independent registered public accounting firm, our consolidated Financial Statements, the accompanying notes to our Financial Statements, that are filed as part of this Item can be found beginning on page F-1 found elsewhere herein.Annual Report are listed under “Item 15. Exhibits and Financial Statements Schedules” and are set forth in our Financial Statements, immediately following the signature pages of this Annual Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Based uponWe maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the evaluation required by Section 13a-13(b) of the Securities 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.

Under the supervision and with the participation of 1934, as amended,our Board, including our Chief Executive Officer and Chief Financial Officer, withwe conducted an evaluation (pursuant to Rule 13a-15(b) promulgated under the participationExchange Act) of our Boardthe design and operation of Directors, have not been able to conclude that our disclosure controls and procedures,, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Exchange Act, as of December 31, 2016,2019. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2019, our disclosure controls and procedures were effective.

Management’s Annual Report on Internal Control over Financial Reporting

The Company’s management isOur Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining adequate internal controlscontrol over financial reporting, of (as defined in Rule 13a-15(f) promulgated under the Company. Due to the Chief Executive Officer’s short tenure during the Reporting Period, management was unable to make a complete assessment regarding the establishment and maintenance of adequateExchange Act). Our internal controlscontrol over financial reporting is a process designed to ensure the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

Under the supervision and with the participation of our Board, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the Company usingeffectiveness of our internal control over financial reporting as of December 31, 2019. In making this assessment, our Chief Executive Officer and Chief Financial Officer used the criteria that have been set forth by the Committee of Sponsoring Organizations of the Treadway CommissionCOSO in Internal Control — – Integrated Framework (2013). Due toBased on evaluation by our Chief Executive Officer and Chief Financial Officer and under the lack of such analysis, management cannot determineCOSO criteria, our Chief Executive Officer and Chief Financial Officer concluded that theour internal controlscontrol over financial reporting were effective as of that date.  Management believes that control of certain accounting functions, including certain IT assets, may not have been adequately secured from unauthorized intrusion, which management believes may have constituted a material weakness in these internal controls.December 31, 2019 is effective.

Changes in Internal Control over Financial Reporting

Effective January 1, 2017, we movedNo change in our accountinginternal control over financial reporting (as defined in Rule 13a-15(f) and other back office functions15d-15(f) under the Exchange Act) occurred during the year ended December 31, 2019 that have materially affected, or are reasonably likely to CPM’s headquarters, which is wherematerially affect, our Chief Executive Officer is based.  Management believes this move will permit increased internal controlscontrol over reporting disclosures and procedures. Management cannot yet conclude until a thorough evaluation has been completed, which it expects to perform during 2017.financial reporting.

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ITEM 9B. OTHER INFORMATION.

None. 

On December 15, 2016, in connection with our proposed entry into the Purchase Agreement, Dr. Christopher C. Pratt, DO notified the Company of his decision to resign as our Chief Executive Officer and Chief Medical Officer and Robert H. Donehew notified us of his decision to resign as our Chief Operating Officer and Chairman of the Board, effective as of the Closing Date. The Board accepted Dr. Pratt’s resignation as our Chief Executive Officer and Chief Medical Officer and Mr. Donehew’s resignation as our Chief Operating Officer and Chairman of the Board effective as of the Closing Date. Both Dr. Pratt and Mr. Donehew will continue to serve as members of the Board.

On December 15, 2016, in connection with our proposed entry into the Purchase Agreement and the voting agreement, Rusty Shelton and Randall L. Dei notified the Company of their decision to resign as members of our Board, effective as of the Closing Date. Such resignations were not in connection with any disagreement with us or our accounting policies or procedures.

On December 19, 2016, pursuant to the Purchase Agreement, by unanimous written consent, the Board appointed Mr. Reeg as our Chief Executive Officer and Mr. Brooks as our Chairman of the Board, effective as of the Closing Date, accepted Mr. Shelton’s and Mr. Dei’s resignations from the Board and elected Mr. Brooks, Mr. Reeg, and William E. McLaughlin, III to be members of the Board, effective as of the Closing Date. See pages 23-24 for biographies on Messrs. Brooks, Reeg, and McLaughlin.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Executive Officers and Directors

The following table sets forth information regardingnames and ages of our currentdirectors and executive officers are set forth below. All directors are elected annually by the stockholders to serve until the next annual meeting of the stockholders and directors. Except with respect to the Purchase Agreement, thereuntil their successors are duly elected and qualified. The officers are appointed by our Board. There is no agreement or understanding between the Companyus and eachany director or executive officer pursuant to which he wasthey were selected as an officer or director.

Christopher C. Reeg

Mr. Reeg has served as our Chief Executive Officer of the Company and a member of itsour Board since December 19, 2016. Effective January 18, 2018, our Board appointed Mr. Reeg currently servesto the additional role of Secretary. Mr. Reeg has also served as the Chief Executive Officer of CPM since 2017 and Maxim since 2018. Mr. Reeg founded Maxim in 2011 and served as its President ofuntil we acquired Maxim Surgical, a manufacturer and distributor of spinal and orthopedic implants that he founded in 2011.August 2018. Mr. Reeg led the design, development, and successful commercialization of a spinal implant that received the approval of the FDA approval in 2013 and is currently manufactured and distributed by Maxim Surgical.Fuse. Prior to forming Maxim, Surgical, Mr. Reeg founded LMI Ortho, a distributor of spine and orthopedic implantsOrthopedic Implants purchased from domestic and international manufacturers and suppliers. While at LMI Ortho, Mr. Reeg worked with U.S. surgeons and acquired exclusive importation rights for thea total joint orthopedic portfolio,portfolio. Working with surgeons in the United States, Mr. Reeg expanded implant product lines and developed effective growth strategies based on design and market intelligence. Before entering the orthopedic industry with LMI Ortho in 1996, Mr. Reeg formed Spectramed, Inc., a multi-state home respiratory company where he served as its President until the sale of the companySpectramed, Inc., to a national healthcare company in 2001. Having founded two medical implant manufacturing and distributing companies and served as President for one medical implants manufacturing and distributing company,an executive officer in those companies, Mr. Reeg brings to our Board significant experience and knowledge regarding how to successfully navigate the medical device industry.

David A. HexterMark W. Brooks

Mr. Brooks has served as Chief Financial Officer and Treasurer of the Company since May 2014. Mr. Hexter has also served as the principal of David A. Hexter, CPA, P.A. since December 2005. Mr. Hexter comes to the Company as a result of a reverse merger with GolfRounds.com, Inc. where he was assisted with financial reporting as a consultant since 2006. Mr. Hexter has been licensed as a certified public accountant in the state of Florida since 1999.

Mark W. Brooks has served as Directorour director and Chairman of the Board of the Company since December 19, 2016. Effective January 18, 2018, our Board appointed Mr. Brooks currently servesto the additional role as President of the Company. Prior to the acquisition by our Company of all of the outstanding membership interest of CPM, Mr. Brooks served as the Chief Executive Officer of CPM, a privately-owned national distributor of medical devices and regenerative tissue. Prior to forming CPM in 2002, Mr. Brooks partnered with Mr. Reeg during the formation and growth of Home Health Equipment, Inc. (“Home Health”), a durable medical equipment provider contracting with acute home health agencies and hospitals in several states (“Home Health”).states. In 1996, Messrs. Brooks and Reeg sold Home Health to predecessor companies of Tenet Healthcare Corporation. Having successfully served as Chief Executive Officer of a national distributor of medical devices, Mr. Brooks brings considerable expertise in the strategic management and growth of medical device distributorsdistribution to our Board.

Renato V. Bosita, Jr., MD

Dr. Bosita has served as an independent member of our Board since his appointment on August 1, 2017. Dr. Bosita is a spine fellowship-trained orthopedic surgeon based in Plano, Texas. He attended Stanford University where he received a degree in biological sciences in 1992. He then attended the University of Chicago Pritzker School of Medicine and completed his residency in orthopedic surgery at Loyola University Medical Center. While a resident at Loyola University Medical Center in 2001, Dr. Bosita earned a Master of Business Administration degree from the Northwestern University J. L. Kellogg Graduate School of Management. Dr. Bosita completed his spine fellowship at University Hospitals of Cleveland in 2002. Dr. Bosita currently practices as a spine surgeon at Texas Back Institute, headquartered in Plano, Texas. Additionally, Dr. Bosita is the Chairman of the Board of Managers for Texas Health Presbyterian Hospital of Rockwall and he is also member of its finance committee. Dr. Bosita was appointed to the Board for his experience in the healthcare industry and business acumen.

William E. McLaughlin, III

Mr. McLaughlin has served as Directora member of the Companyour Board since December 19, 2016.2016, as Interim Chief Financial Officer from March 31, 2017 until January 18, 2018, when our Board appointed Mr. McLaughlin, to his current position of Chief Financial Officer and Treasurer. Mr. McLaughlin is a Certified Public Accountantcertified public accountant licensed in the State of Texas and has over 2526 years of experience in accounting and financial reporting positions for private and large public companies traded on the NYSENew York Stock Exchange (“NYSE”) and

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NASDAQ Stock Market (“NASDAQ”) in addition to “Big-Four”his work for “big-four” public accounting.accounting firms. Mr. McLaughlin has also served as Chief Financial Officer of CPM since 2014.2014 and Maxim since 2018. Mr. McLaughlin joined CPM as Vice President Finance, Controller in 2013. From 2006 until he joined CPM, Mr. McLaughlin served as Vice President Finance, Controller for Caris Life Sciences, Inc., a $180 million international, multi-location laboratory, physician practices,anatomic pathology, and molecular biotechnology emerginglaboratories and multi-state physician practices enterprise. Mr. McLaughlin will not be employed by the Company and satisfies the requirements for independent directors and audit committee financial experts, and he will lead the Company’s efforts to establish an audit committee. Having over 2526 years of experience in accounting and financial reporting for private and public companies, Mr. McLaughlin brings considerable financial expertise to our Board.

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Christopher C. Pratt, DO co-founded Legacy Fuse in 2012 and currently serves as a member of the Company’s Board of Directors. From 2012 through December 19, 2016, Dr. Pratt served as the Company’s Chief Medical Officer. The Company initially appointed Dr. Pratt to the Board upon the closing of the reverse merger with GolfRounds.com, Inc. on May 28, 2014. From April 23, 2015 through December 19, 2016, Dr. Pratt served as interim Chief Executive Officer of the Company. He was integral in development of Physicians Surgical Center in 2004, served on the board, and negotiated the transition to a Baylor USPI entity in January 2010. Dr. Pratt has served as the Chairman of the Board for the Baylor USPI surgery center in Fort Worth since 2010, and facilitated the merger with Orthopedic Surgery Pavilion. He also co-founded and developed Granbury Surgical Center in 2007, and facilitated the transition to a Baylor USPI entity in 2009.

Dr. Pratt has served as an adjunct faculty member for the University of North Texas health science Center in both family practice and pain medicine since 2008. He also served as a faculty member for UT Southwestern training the pain fellows through the Physical Medicine and Rehabilitation Division Pain Fellowship at John Peter Smith Hospital from 2007 to 2012. Since 2008, Dr. Pratt has been a member of Texas Health Care, a multi-specialty physician group based in Fort Worth, Texas. Dr. Pratt works closely with the orthopedic surgeons, spine surgeons and neurosurgeons in the Fort Worth area providing interventional spine and pain management services. Dr. Pratt received his undergraduate degree in Biology from Hendrix College in 1993 prior to earning his medical degree from the Texas College of Osteopathic Medicine University of North Texas Health Science Center in 1997.

Dr. Pratt’s appointment to our Board was provided for in the Merger Agreement. Dr. Pratt brings to our Board significant experience in the medical field, both clinical and administrative. He offers a background of strong leadership, with the highest ethical standards. His continued involvement as an active practitioner provides great value to the Board in this ever-changing healthcare environment.

Robert H. Donehew has served as member of our Board since February 2000, as President and Treasurer of the Company since November 2000 and as the Secretary of the Company since December 2005. From August 2015 through December 19, 2016, Mr. Donehew served as the Company’s Chief Operating Officer. Effective upon completion of the reverse merger with GolfRounds.com, Inc., Mr. Donehew resigned as President, Treasurer and Secretary of the Company, but remains as a member of the Board. Mr. Donehew’s appointment to our Board was provided for in the Merger Agreement. From May 2, 2015 through December 19, 2016, Mr. Donehew was our Chairman of the Board.

Since May 2008, Mr. Donehew has been the Chief Financial Officer and a member of the Board of Directors of EndogenX, Inc., a specialty pharmaceutical company. Since July 1996, Mr. Donehew has been the Chief Executive Officer of Donehew Capital, LLC, the general partner of Donehew Fund Limited Partnership, a private investment partnership specializing in the securities market. Since 1983, he has also served as Chief Financial Officer of R.D. Garwood, Inc. and Dogwood Publishing Company, Inc.

Mr. Donehew has over 35 years of financial, managerial, and general business experience. Mr. Donehew’s significant experience is extremely valuable to the Board.

Family Relationships

There are no family relationships among the Company’sour existing or incoming directors or officers.

Involvement in Certain Legal Proceedings

None of our executive officers or directors is a party in a legal proceeding adverse to us or any of our subsidiaries or has a material interest adverse to us or any of our subsidiaries. No executive officer or director has been involved in the last ten (10) years in any of the following:

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than 10%ten percent (10%) of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and the other equity securities. Officers, directors, and greater than ten percent stockholders are required by SEC rules to furnish us with copies of all Section 16(a) reports that they file.

We believe that, during 2016,2019, our directors, executive officers, and ten percent (10%) stockholders complied with all Section 16(a) filing requirements, with one exception noted below.requirements.

In making these statements, we have relied upon examination of the copies of Forms 3, 4, and 5, and amendments to these forms provided to us, and the written representations of our directors, executive officers, and ten percent (10%) stockholders.

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Corporate Governance

Board Committees

We do not believe that with the current size of our Company, it is necessary for us to have a separately-designated standing audit committee, therefore our entire Board serves as the audit committee. William E. McLaughlin III serves as our “audit committee financial expert,” as such term is defined under the rules promulgated under the Exchange Act. Mr. McLaughlin meets the requirements of serving as our “audit committee financial expert” from his extensive background in accounting and financial reporting for both private and large public companies. For more information on Mr. McLaughlin, please see “Item 10. Executive Officers and Directors” in this Annual Report.

We are not required to have and currently do not have a compensation committee. Due to the low volume of compensation matters that come before our Board, our entire Board has sufficient time to review such matters, so we do not believe it is necessary for our Board to appoint a separate compensation committee at this time.

Our entire Board participates in matters related to executive officer and director compensation. Our Board will consider the recommendations of our Chief Executive Officer when determining compensation for our other executive officers. Our Chief Executive Officer has no role in determining his own compensation. We have not paid fees to or engaged any compensation consultants.

We are also not required to have and do not have a nominating committee. Given the limited scope of our operations, our Board believes appointing a nominating committee would be premature and of little assistance until our business operations are at a more advanced level.

We have not made any material changes to the procedures to which the security holders may recommend Board candidates to our Company during the year ended December 31, 2019.

Board Leadership Structure Oversight

Our Board does not have a policy as to whether the roles of Chairman of the Board and Chief Executive Officer should be separate or combined. Currently, our Chairman of the Board is Mark W. Brooks, who is also our President, and our Chief Executive Officer is Christopher C. Reeg. Our Board has determined that this current structure, with separate roles for our Chairman of the Board and our Chief Executive Officer is in our best interests and our stockholders’ best interests at this time. Several factors support the leadership structure chosen by our Board, including, among others:

Board Assessment of Risk

Our Board’s primary function is one of oversight. Our Board has responsibility for risk oversight and reviews management’s risk assessment and risk management policies and procedures. Our Board considers and reviews, with our independent registered public accounting firm and our executive management team, the adequacy of our internal controls, including the processes for identifying significant risks and exposures, and our Board elicits recommendations for the improvements of such procedures where desirable. Members of our executive management team have the day-to-day responsibility for risk management and establishing risk management practices, and they are expected to report matters directly to our Board. The executive management team has an open line of communication to our Board and has the discretion to raise issues from time-to-time in any manner they deem appropriate. Members of our executive team regularly attend our Board meetings, and often discuss risks related to our business.

Code of Ethics

Our Board has adopted a code of ethics (the “Code of Ethics”) that applies to all our employees, including our Chief Executive Officer and Chief Financial Officer. The Code of Ethics provides written standards that we believe are reasonably designed to (i) deter

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wrongdoing and wrongdoing; (ii) promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships,relationships; (iii) encourage full, fair, accurate, timely, and understandable disclosure and compliance with laws, rules, and regulations, including insider trading, corporate opportunities, and whistle-blowing orwhistle-blowing; and (iv) facilitate the prompt

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reporting of illegal or unethical behavior. We will provide a copy of the Code of Ethics to any person without charge, upon request. The request for a copy can be made in writing to Fuse Medical, Inc., 1300 Summit Avenue,1565 North Central Expressway, Suite 670, Fort Worth, Texas, 76102,220, Richardson TX, 75080, Attention: Corporate Secretary.

Corporate Governance

The entire Board of directors serves as the audit committee. William E. McLaughlin, III serves as our “audit committee financial expert,” as such term is defined under the rules promulgated under the Exchange Act. We believe that three of our directors would be considered “independent,” applying the NASDAQ listing standards for independence for members of an audit committee.

We are not required to have and do not have a compensation committee. We do not believe it is necessary for the Board to appoint a compensation committee because the volume of compensation matters that will come before the Board for consideration permits the entire Board to give sufficient time and attention to such matters to be involved in all decision making.

The entire Board participates in matters related to executive officer and director compensation. The Board will consider the recommendations of the Chief Executive Officer when determining compensation for the other executive officers. The Chief Executive Officer has no role in determining his own compensation. We have not paid fees to or engaged any compensation consultants.

We are also not required to have and do not have a nominating committee. Given the limited scope of our operations, the Board believes appointing a nominating committee would be premature and of little assistance until our business operations are at a more advanced level.

Stockholder Communications

Although we do not have a formal policy regarding communications with our Board, our stockholders may communicate with theour Board by writing to us at Fuse Medical, Inc., 1300 Summit Ave,1565 North Central Expressway, Suite 670, Fort Worth,220, Richardson, TX 76102,75080, Attention: Corporate Secretary,Investor Relations, or, by facsimile (817) 887-1730.(469) 862-3035, or by email IR@fusemedical.com. Stockholders who would like their submission directed to a specific member of theour Board may so specify, and the communication will be forwarded, as appropriate.

ITEM 11. EXECUTIVE COMPENSATION.

Executive Compensation Discussion and Analysis

The following discussion and analysis of our compensation arrangements with our named executive officers (“Named Executive Officers”) should be read together with the compensation tables and related disclosures set forth elsewhere in this Annual Report. Our Named Executive Officers for the year ended December 31, 2019, were:

This discussion contains forward-looking statements that are based on our current plans and expectations regarding future compensation programs.

In place of having a separate compensation committee, which is not required based on the size of our Company, our Board Leadership Structure Oversightis charged with the responsibility for establishing, implementing, and monitoring adherence to our compensation philosophy and ensuring that our executives and key management personnel are effectively compensated. Our Board is also responsible for reviewing the compensation of directors.

Executive Compensation Philosophy and Objectives   

Our Board’s overall philosophy in terms of executive compensation is to attract, retain, and motivate highly-qualified individuals to achieve our business goals and link their professional performance with stockholder interests. Our compensation plans are designed to motivate and reward our employees for achievement of positive business results and to promote and enforce accountability. We also compensate our executives through our equity incentive plan, which reflects the long-term performance of our Common Stock.

Setting Executive Compensation

Our Board does not have a policy asis responsible for establishing and periodically reviewing the compensation of our executive officers and approving all equity awards, including those to our executive officers. Our Board also reviews the performance of our executive officers and determines whether the rolessalary adjustments are necessary or recommended.

Elements of ChairmanCompensation

The total compensation program for our executive officers consists of the Boardfollowing elements:

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Our Board seeks to structure each element of compensation to attract and retain the necessary executive talent, reward annual performance, and provide incentives for both long-term strategic goals and short-term performance. Our Board’s strategy for allocating between currently-paid and long-term compensation is to ensure adequate base compensation that attracts and retains personnel, while providing incentives to maximize long-term value for our stockholders.

Our Company has no formal policy for allocating compensation among the compensation elements described above.

Base Salary

We pay each of our Named Executive Officers a base salary in cash on a bi-weekly basis. This base salary is designed to compensate our executives for performance of their respective responsibilities, and it is the only component of their compensation that is fixed rather than variable. Our competitive base salary is intended to attract and retain highly qualified individuals as our executive officers.

The base salary for our Named Executive Officers for the year ending December 31, 2019, was:

(1) Pursuant to the Fourth Amendment to the RLOC with Amegy Bank, which we filed with the SEC as Exhibit 10.5 to our Current Report on Form 8-K on December 20, 2019, which is herein incorporated by reference (“December 2019 Form 8-K”), Mr. Brooks annual salary was reduced by $150,000 from $700,000 to $550,000 starting December 18, 2019.  

For the year ending December 31, 2019, our Board determined that its current structure, with separate Chairman$300,000 was an appropriate base salary for Mr. Reeg due to the amount of the Boardresponsibility and Chief Executive Officer roles is in the best interests of the Company and its stockholders at this time. A number of factors support the leadership structure chosen by the Board, including, among others:

Board Assessment of Risk

The Board’s primary function is one of oversight. The Boardbelieves correlates with Mr. Brooks position as a whole has responsibility for risk oversight and reviews management’s risk assessment and risk management policies and procedures. The Board considers and reviews with our independent public accounting firm and our executive management team the adequacyPresident of our internal controls, including the processes for identifying significant risksCompany.

Cash Incentive and exposures, and elicits recommendations for the improvements of such procedures where desirable. Members of our executive management have day-to-day responsibility for risk management and establishing risk management practices, and are expected to report matters directly to theBonus Awards

Our Board as a whole. Members of our executive management have an open line of communication to the Board and havehas the discretion to raise issues from time-to-time in any manner they deem appropriate,reward executives with cash incentive and management’s reporting on issues relatingbonus awards. We may pay cash incentive awards if we meet or exceed performance goals as determined by our Board for that year, and we generally give bonus awards to risk management typically occurs through direct communication with directors as matters requiring attention arise. Membersreward executives for short-term performance goals. We are not required to give our executives these awards, and only do so upon the recommendation and approval of our executive management regularly attend portions ofBoard.

Executive Long-Term Incentive Compensation

Our Board has the Board’s meetings, and often discuss the risks relatedauthority to provide compensation to our business. Presently,executives based on the value of and changes in the value of our largest riskCommon Stock. We grant equity compensation to reward our executives for positive business results and to retain our executives long-term for their services to our Company. At our 2019 Annual Meeting, pursuant to the Definitive Proxy Statement which we filed with the SEC on May 13, 2019, our shareholders ratified our Amended and Restated 2018 Equity Incentive Plan (“2018 Equity Plan”). Under our 2018 Equity Plan, which was adopted by our Board in December 2018, we authorize our Board to grant stock options, restricted stock, restricted stock units, stock appreciation rights, and other stock awards to our management and employees.

Medical Benefits

Medical benefits are a component of our Company’s compensation plan that is the inabilityoffered to generate sufficient revenuesattract and profitabilityretain highly-qualified individuals. Our Named Executive Officers are offered medical benefits that are generally made available to supportall employees of our operations. The Board actively interfaces with executive management on seeking solutions. Company at similar cost.

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ITEM 11. EXECUTIVE COMPENSATION.2019 Summary Compensation Table

The following information is related to the compensation paid, distributed, or accrued by usour Company for 20162019 and 20152018, to our Named Executive Officers, including our Chief Executive Officer (Principal(“Principal Executive Officer)Officer”) and the other most highly compensated executive officers serving at the end of the last fiscal year whose compensation exceeded $100,000, which we refer to as “Named Executive Officers.”

2016 Summary Compensation Table$100,000.

Provisions of Termination Provisionsor Change-in-Control

No Named Executive Officer is entitledIn the event of a change-in-control, NC 143 would receive Earn-Out payments pursuant to any severance rights.the CPM Acquisition Agreement and all equity awards pursuant to the 2018 Equity Plan would fully vest.

Other Executive Compensation Arrangements

Since October 1, 2014, Mr. David A. Hexter has been paid a salary of $180,000 per year.None.

Outstanding Awards at Fiscal Year End

None.

AsThe following information is descriptive of December 31, 2016, there were no options orof shares of Common Stock which hadthat have not vested which had beenbut we granted to our Named Executive Officers requiredas of December 31, 2019.

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Director Compensation Discussion and Analysis

The following discussion and analysis of our compensation arrangements with our directors should be read together with the compensation tables and related disclosures set forth elsewhere in this Annual Report. Please note that this disclosure excludes our other three (3) directors who also serve as Named Executive Officers of our Company. Please refer to be disclosedthe above to “Item 11. Executive Compensation - 2019 Summary Compensation Table” and the related narrative disclosure for information about the compensation those individuals received in accordance with Item 402(a)(3).their capacities as directors.  

Our independent directors (“Independent Director(s)”) for the year ended December 31, 2019 were:

(1) On December 10, 2016,October 23, 2019, Ricky Raj S. Kalra (“Dr. Kalra”) resigned from his position as an Independent Director on our Board, which we described on a Current Report on Form 8-K filed on October 28, 2019, which is herein incorporated by reference (“October 2019 Form 8-K”). In March 2020 our Board authorized payment of $16,000 to Dr. Kalra after his resignation from the Board and subsequent forfeiture of all his then-outstanding equity in the Company, awarded Christopher C. Pratt,in recognition of his past service to the Company’s former Chief Executive OfficerBoard. As of March 12, 2020, our Board has not nominated a new Independent Director to replace Dr. Kalra but are currently in discussions with potential nominees.

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Director Compensation Philosophy and Chief Medical Officer, Robert H. DonehewObjectives

Our Board receives comparative market data and recommendations regarding the Company’s former Chief Operating Officerstructure of our Independent Director compensation and Chairmanthe amounts paid through either cash-incentives or equity awards to our non-management directors. For year ending December 31, 2019, our Company did not pay Independent Directors a retainer in the form of cash compensation. Due to the size of our Company and our status as a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, our Board determined that there is currently no need to pay a retainer fee to active Board members. However, we do pay all of our directors for their services as members of the Board Dr. Randall Dei,in the form of stock awards. Additionally, directors who participate on a former Director, and Rusty Shelton, a former Director, 300,000, 300,000, 50,000 and 50,000 stock options, respectively. The stock options have an exercise price of $0.11 per share, have a term of five years from the grant date, and vested immediately.

On August 27, 2015, the Company issued Christopher C. Pratt, the Company’s former Chief Executive Officer and Chief Medical Officer, Robert H. Donehew, the Company’s former Chief Operating Officer and Chairmanspecial committee of the Board may receive a one-time cash payment, at the discretion of our Board.

Director Long-Term Equity Incentive Compensation

Our Board has the authority to provide compensation to our Independent Directors on the value of and David A. Hexter,changes in the Company’s Chief Financial Officer, 450,000, 250,000 and 150,000 fully vested restricted sharesvalue of our Common Stock respectively. The shares were grantedthrough our equity incentive plans. Please see “Item 11. Executive Compensation - Executive Long-Term Equity Incentive Compensation” for services rendered as executive officers.more information on our 2018 Equity Plan.

24Special Committee Compensation

CompensationUpon the formation of Directorsa special committee of our Board to address a specific issue, our Board determines the amount of compensation that should be paid to the members of that special committee, based upon the amount of time and effort we expect those individuals to dedicate to that special committee.

We do2019 Director Compensation

For the year ended December 31, 2019, our Board did not paygrant any payment in form of stock awards or cash compensationpayments to our directors. Additionally, there were no independent special committees in which participating directors for service on our Board. The following table details director compensation; however, anyreceived additional compensation paid to a Named Executive Officer is described induring the above Summary Compensation Table and, therefore, Named Executive Officers who were also directors have been omitted from this table.fiscal year 2019.  

Risk Assessment Regarding Compensation Policies and Practices

OurWe believe that our compensation program for employees does not create incentives for excessive risk taking byneither incentivizes our employees or involveto take excessive risks nor creates risks that are reasonably likely to have a material adverse effect on theour Company. Our compensation policy has the following risk-limiting characteristics:

objectives:

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSOWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Equity Compensation Plan Information

The following chart reflects the number of awards granted under equity compensation plans approved and not approved by stockholders and the weighted average exercise price for such plans as of December 31, 2016.2019.