UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended: September 30, 20172022 

Commission File Number: 000-10093

Fuse Medical, Inc.

(Exact name of registrant as specified in its charter)

(469) 862-3030

(Registrant's telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically 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 (§232.405 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and ��emerging“emerging growth company” in Rule 12b-2 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  ☒

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

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

Indicate the number of shares outstanding of each of the registrant’s classes of Common Stock,common stock, as of the latest practicable date: As of November 6, 2017, 18,215,8085, 2022, 72,895,793 shares of the registrant’s Common Stockcommon stock, $0.01 par value, were outstanding.

FUSE MEDICAL, INC.

FORM 10-Q

INDEX

2

PART I. FINANCIALFINANCIAL INFORMATION 

ITEMItem 1. FINANCIAL STATEMENTSCondensed Consolidated Financial Statements

FUSE MEDICAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in dollars, except share data)

The accompanyingSee notes are an integral part of theseto interim unaudited condensed consolidated financial statements.

F-1

FUSE MEDICAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)(unaudited)

(in dollars, except share data)

The accompanyingSee notes are an integral part of theseto interim unaudited condensed consolidated financial statements.

F-2

FUSE MEDICAL, INC.

CONDENSED STATEMENTCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'STOCKHOLDERS’ EQUITY

(Unaudited)(unaudited)

(in dollars, except share data)

The accompanying notes are an integral part of these condensed financial statements.

F-3

See notes to interim unaudited condensed consolidated financial statements.

FUSE MEDICAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)(unaudited)

The accompanyingSee notes are an integral part of theseto interim unaudited condensed consolidated financial statements.

F-4

FUSE MEDICAL, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE-MONTHS ENDED SEPTEMBER 30, 2017
(Unaudited)

Note 1. Nature of Operations

Overview

The Company was initially incorporated in 1968 as Golf Rounds.com,Fuse Medical, Inc., a Delaware corporation.  Effective May 28, 2014,corporation (the “Company”), is a manufacturer and national distributor of medical devices and surgical implants for the orthopedic market. The Company acquired CPM Medical Consultants, LLC (“CPM”) in December 2017 (the “CPM Acquisition”), in which the Company amended its certificate of incorporation to change its name from “GolfRounds.com, Inc.” to “Fuse Medical, Inc.” (the “Company”).  Then, also on May 28, 2014, the Company merged with and into Fuse Medical, LLC, with Fuse Medical, LLC surviving as a wholly owned subsidiary of Fuse Medical, Inc (“Legacy Fuse”).  The transaction was accounted for as a reverse merger with Fuse Medical, Inc. deemed the legal acquirer and Fuse Medical, LLCCPM 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 “Closing Date”),In August 2018, the Company entered into completed the acquisition of Palm Springs Partners, LLC d/b/a definitive Stock Purchase Agreement (the “Purchase Agreement”) byMaxim Surgical (“Maxim” and amongsuch transactions the Company, NC 143 Family Holdings, LP, a family limited partnership controlled by Mark W. Brooks (“NC 143”“Maxim Acquisition”),. CPM and, Reeg Medical Industries, Inc., an investment holding company owned and controlled by Christopher C. Reeg (“RMI” and, together with NC 143, the “Investors”), pursuant to which NC 143 acquired 5,000,000 shares ofuntil its dissolution, Maxim survived as the Company’s common stock for a purchase pricewholly-owned subsidiaries and subsequent to the completion of $400,000each acquisition, CPM, Maxim and RMI acquired 4,000,000 sharesCompany operations are consolidated. Maxim was subsequently dissolved and terminated on December 20, 2019.

Nature of the Company’s common stock for a purchase price of $320,000, effective as of the Closing Date.  As direct offering costs amounted to $64,609, net proceeds from the sale of these shares were $655,391.  The closing of the Purchase Agreement resulted in a change in control of the Company whereby the Investors acquired a majority interest in the Company. Effective as of the Closing Date, Mark W. Brooks became the Chairman of the Board of Directors and Christopher C. Reeg became the Chief Executive Officer of the Company.Business

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

The Company also supports itsCompany’s broad portfolio of Orthopedic Implants with human allografts, substitute bone materials and tendons, as well as regenerative tissues and fluids (“Biologics”). The Company’s principal supplier is CPM Medical Consultants, LLC (“CPM”) a company owned and controlled by the Company’s Chairman of the Board of Directors. The Company strives toBiologics provide cost savings and qualityhigh-quality products to assist surgeons with positive patient outcomes and cost-effective solutions for its customers, which include hospitals, medical facilities, and medical facilities.sub-distributors. The Company operates under exclusive and non-exclusive agreements with certain vendors and supply partners in the geographic territories the Company serves.

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

Basis of Presentation

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

The condensed consolidated balance sheet information as of December 31, 2016,2021, was derived from the Company’s Annual Reportannual report on Form 10-K for the fiscal year ended December 31, 2016, as2021 (“2021 Annual Report”), filed with the SEC pursuant to Section 13 or 15(d) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on March 20, 2017 (“2016 Annual Report”).31, 2022. These interim unaudited condensed consolidated financial statements should be read in conjunction with the 20162021 Annual Report.

The results of operations for the three and nine-monthsnine months ended September 30, 20172022 are not necessarily indicative of the results to be expected for the entire fiscal year or for any other period.period as the Company has historically experienced seasonal trends with greater revenue and volume between the last two calendar quarters compared to the first two calendar quarters of the year.

F-5

FUSE MEDICAL, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE-MONTHS ENDED SEPTEMBER 30, 2017
(Unaudited)

Going Concern

The accompanying condensed financial statements have been prepared as if the Company will continue as a going concern. For the nine-month period ended September 30, 2017, the Company used cash in operations of $195,529, of which $92,476 represented a net loss. The Company’s ability to continue as a going concern is dependent upon the ability of the Company’s management to successfully execute its restructuring and rebranding strategies while increasing revenue growth and profitability. As a result, the Company’s independent registered public accounting firm, in its report on the Company’s 2016 audited financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.

The Company’s management expects to fund its future business development activities and its working capital needs largely from improved future operations and other traditional financing sources, such as a revolving line of credit facility, term notes, or additional private placements until such time sufficient funds are provided by operations. There can be no assurance the Company’s financing efforts will be successful, or if the Company’s management will be able to achieve sufficient revenue and profitability growth from operations. Additional financing, may include restrictions on the Company’s operations, or with equity financing may result in the Company’s stockholders’ ownership being diluted.

The financial statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.

Note 2. Significant Accounting Policies

Principles of Consolidation

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

Use of Estimates

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

Actual results could differ from those estimates. Significant estimates inon the accompanying interim unaudited condensed consolidated financial statements may include the allowance for doubtful accounts, valuation of inventories, the estimates of fixed assets useful lives, the valuation of property and equipment, the valuation allowance on deferredCompany’s effective income tax assets, andrate, the fair value calculationcalculations of stock-based awards.compensation, goodwill, finite lived intangibles and the earn-out (“Earn-Out”) liability.

Segment Reporting

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

Reclassification

Medical instrument depreciation was previously reported as a component of cost of revenues in the Company’s accompanying consolidated statements of operations. Medical instruments are orthopedic devices that are utilized in all cases where our Orthopedic Implants are implanted. Subsequent to December 31, 2021, the Company began depreciating these medical instruments over 3 years and have now reclassed this depreciation expense to depreciation and amortization in the accompanying consolidated statements of operations.

Net Income (Loss)Loss Per Common Share

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

Diluted net income (loss)loss per common share is computed by dividing net income income/(loss) attributable to common stockholders by the weighted-average number of common shareCommon Stock equivalents outstanding for the period determined using the treasury stock method. As ofFor the nine months ended September 30, 2016, 604,7882022 and 2021, the Company excluded the effects of outstanding common stock equivalents have been excluded from diluted netoptions, convertible notes and, to the extent vested, restricted stock as their effects were antidilutive due to the Company’s operating loss per common share because their inclusion would be anti-dilutive.during these periods. (See Note 9, “Stockholders’ Equity” for the terms and conditions of restricted stock).  

F-6

FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Fair Value Measurements

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

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

markets;

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

F-6

FUSE MEDICAL, INC.

NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS

FOR THE THREE AND NINE-MONTHS ENDED SEPTEMBER 30, 2017
(Unaudited)

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

In connection with the CPM Acquisition, the Company initially recorded a $19,244,543 liability related to the Earn-Out portion of the purchase consideration. The Company has classified the Earn-Out liability as a Level 3 liability and the fair value of the Earn-Out liability is evaluated each reporting period and changes in its fair value are included in the Company’s earnings. The Earn-Out payments are based on the financial performance of the Company between the period of January 1, 2018, and December 31, 2034.  The base amount of the Earn-Out is up to $16,000,000 with an additional bonus payment up to $10,000,000. The payments of the base and bonus Earn-Out amounts are subject to the Company meeting certain earnings thresholds as detailed in the CPM Acquisition Agreement.

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

The Earn-Out was remeasured to fair value under the probability weighted income approach. As a result, the fair value of the Earn-Out liability was reduced by $342,168 from $11,936,000 to $11,593,832 in 2021 and increased by $290,635 from $11,645,365 to $11,936,000 in 2020 and reflected as “Change in fair value of contingent purchase consideration” on our Consolidated Financial Statements.

There was no change in the Earn-Out liability for the nine months ended September 30, 2022, and there were no significant changes in the Level 3 inputs from those utilized at December 31, 2021. The required earnings thresholds have not been met from inception of the agreements through September 30, 2022, and as such, there have been no payments required for either the base or bonus Earn-Out tranches.

Financial Instruments

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

Reclassifications

Certain amounts in the accompanying condensed financial statements as of September 30, 2016, and for the three-months and nine-months then ended, have been reclassified to conform to the presentation of September 30, 2017 condensed financial statements for the three-months and nine-months then ended. These include deferred rent and depreciation expense, previously reported as a component of accrued expenses and general, administrative and other expenses, respectively.

Cash and Cash Equivalents

The Company considers highly liquid investments with maturities of three-monthsthree months or less at the time of purchase to be cash equivalents.  There were no cash equivalents at September 30, 20172022 and 2016.December 31, 2021.  The Company maintains itsCompany’s cash is concentrated in aone large financial institution. The amount of cash held at the financial institution demand deposit account thatmay at times may exceed federally insured limits of $250,000 per financial institution. The Company has not experienced any financial institution losses in such accounts from inception through September 30, 2017.2022.  As of September 30, 2017,2022 and December 31, 2016,2021, there were deposits of $231,498$294,225 and $421,636$594,536, respectively,, which were greater than federally insured limits.

Accounts Receivable and Allowance for Doubtful Accounts ReceivableAllowances

Accounts receivablesreceivable are non-interest bearing and are stated at gross invoice amounts less an allowance for doubtful accounts receivable.receivable and an allowance for contractual discount pricing. Credit is extended to customers based on an evaluation of their financial condition, industry reputation, and other factors considered by the Company. The Company estimates its allowance for doubtfulgenerally does not require collateral or

F-7

FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

other security interest to support accounts by evaluating specific accounts where information indicates the customers may have an inability to meet financial obligations. Paymentreceivable. Based on trends and receivablespecific factors, the customer’s credit terms may be modified, including required payment upon delivery.

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

When accounts are deemed uncollectible, they are often referred to the Company’s outside legal firm for an extended period beyond contractual terms are examples of these indicators.litigation. Accounts deemed uncollectible are written offwritten-off in the period when the Company has exhausted its efforts to collect overdue and unpaid receivables or otherwise has evaluated other circumstances that indicate that the Company should abandon such efforts. TheAccounts deemed uncollectible are removed from the Company’s Management has determined that noaccounts receivable portfolio, with a corresponding offset to the allowance for doubtful accounts was necessaryreceivable. The Company may record additional allowances for doubtful accounts based on known trends and expectations to ensure the Company’s accounts receivable portfolio is recorded at September 30, 2017net realizable value. Specific allowances are re-evaluated and December 31, 2016.adjusted as additional facts and information become available. Previously written-off accounts receivable subsequently collected are recognized as a reduction of bad debt expense when funds are received.

The Company estimates its allowance for contractual discount pricing, by evaluating specific accounts where information indicates the customer is offered contractual pricing and discount allowances. In these arrangements, the Company uses assumptions and judgement, based on the best available facts and circumstances to record a specific allowance for the amounts due from those customers. The allowance is offset by a corresponding reduction to revenue. These specific allowances are re-evaluated, analyzed, and adjusted as additional information becomes available to determine the total amount of the allowance. The Company may record additional allowances based on trends and expectations to ensure the Company’s accounts receivable portfolio is recorded at net realizable value.

Inventories

Inventories are stated at the lower of cost or net realizable value (first-in, first-out) or market.which includes an allowance for slow-moving inventory, expired inventory, and inventory obsolescence. Inventories consist entirely of finished goods and include Orthopedic Implantsinternal and Biologics.external fixation products; upper and lower extremity plating and total joint reconstruction; soft tissue fixation and augmentation for sports medicine procedures; spinal implants for trauma, degenerative disc disease, and deformity indications (collectively, “Orthopedic Implants”) and osteo-biologics and regenerative tissue which include human allografts, substitute bone materials, tendons, as well as amniotic tissues (collectively, “Biologics”). The Company reviews the market value of inventories whenever events and circumstances indicate that the carrying value of inventories may not be recoverable from the estimated future sales price less cost of disposal and normal gross profit.

Income Taxes

The Company uses In cases where the asset and liability method to compute the differences between the tax basis of assets and liabilities and the related financial amounts.  Valuation allowancesmarket values are established, when necessary, to reduce deferred tax assets to the amount that more likelyless than not will be realized.  The Company has deferred tax assets and liabilities that reflect the net tax effects of temporary differences between the carrying amountsvalue, a write-down is recognized equal to an amount by which the carrying value exceeds the market value of assetsinventories.

Property and liabilities for financial reporting purposesEquipment

Property and equipment are recorded at cost, less accumulated depreciation. Depreciation is computed using the amounts used for income tax purposes.  Deferred tax assets are subject to periodic recoverability assessments.  Realization ofstraight-line method over the deferred tax assets, net of deferred tax liabilities, is principally dependent upon achievement of projected future taxable income.

The Company records a liability for uncertain tax positions when it is probable that a loss has been incurred and the amount can be reasonably estimated.  As of September 30, 2017, the Company had no liabilities for uncertain tax positions.  The Company's policy is to recognize interest and penalties related to income tax matters as a component of income tax expense.  The Company continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings.

Revenue Recognition

F-7

FUSE MEDICAL, INC.

NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS

FOR THE THREE AND NINE-MONTHS ENDED SEPTEMBER 30, 2017
(Unaudited)

The Company recognizes revenue when: (i) persuasive evidence of an arrangement exists, (ii) the fees are fixed or determinable, (iii) no significant Company obligations remain, and (iv) collectionestimated useful lives of the related receivable is reasonably assured.assets per the following table. Expenditures for additions and improvements are capitalized, while repairs and maintenance are expensed as incurred. The Company reports revenuesreviews long-lived assets for transactions in which it is the primary obligor on a gross basis and revenues in which it acts as an agent (earning a fixed percentage of the sale) on a net basis, (net of related costs).

Stock-Based Compensation

The Company periodically issues stock options, warrants and restricted stock to employees and non-employees for services, in capital raising transactions, and for financing costs. The Company accounts for share-based payments under the guidance as set forth in the Share-Based Payment Topic 718 of the FASB Accounting Standards Codification, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, officers, directors, and consultants, including employee stock options, based on estimated fair values. The Company estimates the fair value of stock option and warrant awards to employees and directors on the date of grant using an option-pricing model, and the value of the portion of the award that is ultimately expected to vest is recognized as expense over the required service period in the Company’s Statement of Operations. The Company estimates the fair value of restricted stock awards (“RSA”) to employees and directors using the market price of the Company’s common stock on the date of grant, and the value of the portion of the award that is ultimately expected to vest is recognized as expense over the required service period in the Company’s Statements of Operations. The Company accounts for share-based payments to non-employees in accordance with Topic 505 of the FASB Accounting Standards Codification, whereby the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached,impairment annually or b) the date at which the necessary performance to earn the equity instruments is complete. Stock-based compensation is based on awards ultimately expected to vest and is reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, as necessary, in subsequent periods if actual forfeitures differ from those estimates.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle-based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments andwhenever changes in judgmentscircumstances indicate that the carrying amount of an asset might not be recoverable.

Upon the retirement or disposition of property and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09equipment, the related cost and accumulated depreciation is effective for interim and annual periods beginning after December 15, 2017. Early adoptionremoved. A gain is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be able to transition torecorded when consideration received is more than the standard either retrospectively or as a cumulative-effect adjustment asdisposed asset’s cost, net of the date of adoption. The Company is in the process of evaluating the impact of ASU 2014-09 on the Company's financial statements and disclosures.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases”, which requires a lessee to record a right of use assetdepreciation, and a corresponding lease liability onloss is recorded when consideration received is less than the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered after, the beginningdisposed asset’s cost, net of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of the adoption of ASU 2016-02 on the Company's financial statements and disclosures.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash payments.” The update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This ASU is effective for the public business entities for fiscal years beginning after December 15, 2017 and for interim periods within those fiscal years. The amendments in this update may be applied retrospectively or prospectively and early adoption is permitted. The Company’s management do not believe that this guidance will have a material impact on its financial statements and disclosures. 

All other ASUs issued and not yet effective for the nine-months ended September 30, 2017, and through the date of this report, were assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s financial position of results of operations.depreciation.

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FUSE MEDICAL, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE-MONTHS ENDED SEPTEMBER(Unaudited)

Long-Lived Assets

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

Goodwill and Other Intangible Assets

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

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

ASC 350-30-35-18, “Intangible assets not subject to amortization,” indicates that an intangible asset that is not subject to amortization shall be tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired.  The Company’s 510(k) intangible asset has an indefinite life. The Company does not believe that a triggering event has occurred as of September 30, 2017
2022.

The Company’s intangible assets subject to amortization consist primarily of acquired non-compete agreements, funds to secure the Company’s Credit and Security Agreement (the “Credit Agreement”) with CNH Finance Fund I, L.P., and customer relationships. Amortization expense is calculated using the straight-line method over the asset’s expected useful life.

Revenue Recognition

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

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

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

F-9

FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Revenue Differentiation

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

Cost of Revenues

Cost of revenues consists of (i) cost of goods sold, (ii) freight and shipping costs for items sold to customers, (iii) cost of storage, (iv) inventory shrink, and (v) an estimate for slow-moving inventory, expired inventory, and inventory obsolescence.

Stock-Based Compensation

Stock-based compensation expense is measured at the grant date fair value of the award and is expensed over the requisite service period. For employee stock-based awards, the Company calculates the fair value of the award on the date of grant using the Black-Scholes option pricing model. Determining the fair value of stock-based awards at the grant date under this model requires judgment, including estimating volatility, employee stock option exercise behaviors, and forfeiture rates. The assumptions used in calculating the fair value of stock-based awards represent the Company's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. For non-employee stock-based awards, the Company calculates the fair value of the award on the date of grant in the same manner as employee awards, however, the awards are revalued at the end of each reporting period and the pro-rata compensation expense is adjusted accordingly until such time the non-employee award is fully vested, at which time the total compensation recognized to date shall equal the fair value of the stock-based award as calculated on the measurement date, which is the date at which the award recipient’s performance is complete. The estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised.

Recent Accounting Pronouncements

The Company considers the applicability and impact of all Accounting Standard Updates (“ASU”) issued, both effective and not yet effective.

Other recent accounting pronouncements issued by the Financial Accounting Standards Board, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the SEC did not or are not believed by the Company to have a material impact on the Company's present or future consolidated financial statements.

F-10

FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3. Property and Equipment

Property and equipment consisted of the following at September 30, 20172022 and December 31, 2016:2021:

Depreciation expense for the three-monthsthree months ended September 30, 20172022 and 20162021 was $384$49,484 and $3,501,$1,861, respectively. Depreciation expense for the nine-monthsnine months ended September 30, 20172022 and 20162021 was $3,237$128,097 and $10,666,$8,853, respectively. During

Note 4. Goodwill and Intangible Assets

The following table summarizes the nine-monthsCompany’s goodwill and other intangible assets:

Amortization expense for the three months ended September 30, 2022 and 2021 was $32,715 and $12,632, respectively. Amortization expense for the nine months ended September 30, 2022 and 2021, was $98,146 and $37,898.

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

Note 5. Senior Secured Revolving Credit Facility

On December 29, 2017, the Company disposedbecame party to the Senior Secured Revolving Credit Facility (“RLOC”) with ZB, N.A., d/b/a Amegy Bank (“Amegy Bank”). The RLOC established an asset-based senior secured revolving credit facility in the amount of furniture$5,000,000.  The RLOC contained customary representation, warranties, covenants, events of default, and fixtureswas collateralized by substantially all of the Company’s assets. The Company’s Chairman of the Board and President initially personally guaranteed fifty percent (50%) of the outstanding RLOC amount.

On September 21, 2018, the Company executed the First Amendment to the RLOC with Amegy Bank (the “First Amendment”). The First Amendment (i) waived the Company’s events of default under the RLOC through the fiscal quarter ended September 30, 2018, and (ii) added a covenant that the Company achieve quarterly net book valueincome of $3,665$700,000 or more for proceedsthe fiscal quarter ending on September 30, 2018.

On November 19, 2018, the Company executed the Second Amendment to the RLOC with Amegy Bank (the “Second Amendment”). The Second Amendment (i) waived the Company’s events of $300, resultingdefault under the RLOC, (ii)reduced the aggregate limit of the RLOC to $4,000,000, (iii)extended the maturity date to

F-11

FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

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

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

In conjunction with executing the Fifth Amendment to the RLOC, the Company obtained an additional $200,000 in capital in the form of subordinated debt from affiliates of Messrs. Brooks and Reeg. Specifically, on May 6, 2020, the Company borrowed $180,000 from NC 143 Family Holdings, LP, (“NC 143”), and $20,000 from Reeg Medical Industries (“RMI”), in exchange for two promissory notes which are unsecured and bear interest at 0.25% per annum until May 6, 2022, (subsequently extended to May 6, 2023), the maturity date, and 10.0% per annum after the maturity date, if not paid in full.  Principal and interest are due and payable on the maturity date, provided, however, any payment of principal and interest on the loans is subordinated to payment of all indebtedness under the RLOC.

On November 12, 2020, the Company executed a lossSixth Amendment to the RLOC with Amegy Bank (the “Sixth Amendment”), which extended the termination date of $3,365our RLOC to May 4, 2021.

On May 4, 2021, the Company executed a Seventh Amendment to the RLOC with Amegy Bank (the “Seventh Amendment”), waiving the events of default for the three months ended March 31, 2021 and extending the termination date of the RLOC until November 4, 2021.

On August 5, 2021, the Company received a waiver from Amegy Bank, waiving the events of default for the minimum quarterly EBITDA requirements for the twelve months ended June 30, 2021.

The Company was not in compliance with the minimum quarterly EBITDA requirement for the twelve months ended September 30, 2021.

On November 4, 2021, the Company executed the Eighth Amendment to the RLOC with Amegy bank (the “Eighth Amendment”). Pursuant to the Eighth Amendment, Amegy Bank (i) waived the events of default for the Company not meeting the minimum quarterly EBITDA for the twelve months ended September 30, 2021, (ii) reduced the aggregate limit of the loans offered pursuant to the Loan Agreement to $2,550,000, and (iii) extended the termination date of the loan to February 4, 2022.

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

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

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

F-12

FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

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

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

Pursuant to the Credit Agreement, the Company had an outstanding balance of $2,044,606 as of September 30, 2022 and had reached the borrowing limit based on the Company’s borrowing base limitations. In preparation of the Credit Agreement, the Company incurred $240,858 of costs that have been allocated to intangible assets and will be amortized over the life of the Credit Agreement. Interest expense incurred on the Credit Agreement was $95,905 for the year ended September 30, 2022 and is reflected in interest expense on the Company’s accompanying consolidated statements of operations. Accrued interest on the Credit Agreement as of September 30, 2022 was $31,940, and is reflected in accrued expenses on the Company’s accompanying consolidated balance sheets. At September 30, 2022, the effective interest rate was 6.15%.         

Note 4.6. Notes Payable – Related Parties

During July 2016 through October 2016, the Company obtained three short-termworking capital loans from the InvestorsNC 143 and RMI in the aggregate amount of $150,000 in exchange for convertible promissory notes (the “Notes”) bearing 10%ten percent (10%) interest per annum until December 31, 2016, the maturity date, and 18%eighteen percent (18%) interest per annum after December 31, 2016, whichfor periods subsequent to the maturity date. The Notes remain outstanding and principal shall beand interest are 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. Notwithstanding, on or after January 16, 2017,and at the holder’s sole discretion, the holder hasdiscretion. The Notes’ holders have the right to convert all or any portion of the then unpaid principal and interest balance into shares of the Company’s common stockCommon Stock at a conversion price of $0.08 per share. This resulted

On May 6, 2020, the Company borrowed $180,000 from NC 143 and $20,000 from RMI, in a beneficial conversion feature in the aggregate amount of $117,500, which was treated as a discount to each of theexchange for two promissory notes which are unsecured, and amortized overbear interest at 0.25% per annum until May 6, 2022, the termmaturity date, and 10.0% per annum after the maturity date, if not paid in full.  Principal and interest are due and payable on the maturity date, provided, however, any payment of each respectiveprincipal and interest on the loans is subordinated to payment of all indebtedness under the Credit Agreement. On March 25, 2022, the two promissory note, maturing on December 31, 2016,notes were amended to extend the maturity date in which the beneficial conversion feature was fully amortized.

from May 6, 2022, to May 6, 2023

During the three-monthsthree months ended September 30, 20172022 and 2016,2021, interest expense of $6,806$6,930 and $1,750,$ 6,930, respectively, was recognized on outstanding notes payable – related parties and areis reflected withinin interest expense on the Company’s accompanying interim unaudited condensed consolidated statements of operations. During the nine-monthsnine months ended September 30, 20172022 and 2016,2021, interest expense of $20,194$20,570 and $5,250,$20,570, respectively, was recognized on outstanding notes payable – related parties and areis reflected withinin interest expense on the Company’s accompanying interim unaudited condensed consolidated statements of operations. As of September 30, 2017,2022, and December 31, 2016,2021, accrued interest payable was $25,290$116,476 and $5,096,$141,004, respectively, which is includedreflected in accrued expenses on the Company’s accompanying interim unaudited condensed consolidated balance sheets.

Note 5. Commitments and Contingencies

Legal Matters7 – Payroll Protection Program

On January 27, 2014, M. Richard CutlerApril 11, 2020, the Company received approval from the U.S. Small Business Administration (“SBA”) to fund the Company’s request for a loan under the Payroll Protection Program (“PPP Loan”) created as part of the recently enacted Coronavirus Aid, Relief, and Cutler Law Group, P.C. (the “Plaintiffs”Economic Security Act (“CARES Act”) filedadministered by the SBA. In connection with the PPP Loan, the Company entered into a complaintpromissory note in the District Courtprincipal amount 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,$361,400. In accordance with 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 the Company’s 2016 Annual Report, which is herein incorporated by reference. During April 2017, onerequirements of the named individuals inCARES Act, the complaint filedCompany used the proceeds from the PPP Loan primarily for bankruptcy protection. There is currently no trial date set.payroll costs. The PPP Loan was scheduled to mature on April 11, 2022, had a 1.00% interest rate, and was subject to the terms and conditions applicable to all loans made pursuant to the PPP. The Company applied for and received forgiveness for the total amount of the PPP Loan during the second quarter of 2021.

The Company’s management continues to believe that the lawsuit is completely without merit and will vigorously contest it and protect the Company’s interests.

F-9F-13

FUSE MEDICAL, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE-MONTHS ENDED SEPTEMBER 30, 2017
(Unaudited)

Accounts PayableNote 8 – Economic Injury Disaster Loan

DuringOn May 12, 2020, the nine-monthsCompany executed the standard loan documents (“SBA Loan Agreement”) required for securing a loan from the SBA under its Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact of the COVID-19 pandemic on the Company’s business (the “EIDL Loan”). Pursuant to the SBA Loan Agreement, the principal amount of the EIDL Loan was $150,000, with proceeds to be used for working capital purposes. Interest accrued at the rate of 3.75% per annum. Installment payments, including principal and interest, were due monthly beginning May 12, 2021 (twelve months from the date of the SBA Loan Agreement) in the amount of $731. The balance of principal and interest was payable thirty years from the date of the SBA Loan Agreement.  

EIDL Loan interest expense incurred for the three months ended September 30, 2017,2022 was approximately zero while recording interest income of approximately $5,135 for the Company recorded a gain of $43,308 on extinguishment of long-aged outstanding payables owed to a former law firm for $32,052 and liabilities aggregating $11,256 owed to the Company’s beneficial owners for services provided to the Companythree months ended September 30, 2021, and is reflected within extinguishment of debtin interest expense on the Company’s accompanying interim unaudited condensed consolidated statements of operations. EIDL Loan interest expense incurred for the nine months ended September 30, 2022 was approximately zero while recording interest income of approximately $2,229 for the nine months ended September 30, 2021, and is reflected in interest expense on the Company’s accompanying interim unaudited condensed consolidated statements of operations.

On September 24, 2021, the Company executed the standard loan documents with the SBA for an amended and restated loan and authorization and agreement (“A&R SBA Loan Agreement”) required for securing an increase in the Company’s Original Note from the SBA EIDL Loan. Pursuant to the A&R SBA Loan Agreement, the principal amount for the EIDL Loan was increased by $350,000 to $500,000. Interest accrued at the rate of 3.75% per annum.

The Company’s management believes if these items were contested,Company used borrowings under the probable outcome would be favorable primarily dueCredit Agreement, as discussed in Note 5, to statute of limitations.repay in full (i) the Amended and Restated Business Loan Agreement, dated December 31, 2017, among ZB, N.A. (d/b/a Amegy Bank) and the Borrowers as amended, and (ii) EIDL Loan.

Note 6. Stockholders'9. Stockholders’ Equity

Stock Incentive PlansStock-Based Compensation

The Company has a2018 Amended and Restated Equity Incentive Plan of Fuse Medical, Inc. (“2018 Equity Plan”) is the Company’s stock-based compensation plan, which the Company’s Board of Directors (the “Board”) adopted on April 5, 2017, and subsequently amended and restated on December 13, 2018. The 2018 Equity Plan provides for the granting of equity awards, including qualified incentive and non-qualified stock options, stock appreciation awards, and restricted stock awards to employees, directors, consultants, and advisors;advisors. Awards granted pursuant to the 20172018 Equity Incentive Plan are subject to a vesting schedule set forth in individual agreements.

The Company estimates the fair value of Fuse Medical, Inc. (the “2017 Plan”), which was adopted bystock-based compensation utilizing the Black-Scholes option pricing model. Black-Scholes option pricing is calculated using several variables, including the expected option term, expected volatility of the Company’s stock price over the expected option term, expected risk-free interest rate over the expected option term, expected dividend yield rate over the expected option term, and an estimate of expected forfeiture rates. The Company believes this valuation methodology is appropriate for estimating the fair value of stock options granted to employees and directors, which are subject to ASC Topic 718 requirements. The Company estimates of fair value may not be reflective of actual future values or amounts ultimately realized by recipients of these grants. The Company recognizes compensation on a straight-line basis over the requisite service period for each award.

The Company utilizes the simplified method to estimate the expected life for stock options granted to employees, as the Company does not have sufficient historical data regarding stock option exercises. The risk-free interest rate is based on the U.S. Treasury yields with terms equivalent to the expected life of the related option at the time of the grant. Dividend yield is based on historical trends. While the Company believes these estimates are reasonable, the compensation expense recorded would increase if the expected life was increased, a higher expected volatility was used, or if the expected dividend yield increased.

The Company made an accounting policy election to account for forfeitures when they occur, versus estimating the number of awards that are expected to vest, in accordance with ASU 2016-09.

F-14

FUSE MEDICAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Non-Qualified Stock Option Awards

The Board did not grant any non-qualified stock option awards (“NQSOs”) for the three and nine months ended September 30, 2022, and 2021. For the three months ended September 30, 2022 and 2021 the Company amortized $4,148 and $35,945, respectively, relating to the vesting of Directors (the “Board”)stock options which is included in selling, general, administrative, and other expenses on April 5, 2017.the Company’s accompanying interim unaudited condensed consolidated statements of operations. For the nine months ended September 30, 2022 and September 30, 2021 the Company amortized $21,094 and $221,968, respectively, relating to the vesting of stock options which is included in selling, general, administrative, and other expenses on the Company’s accompanying interim unaudited condensed consolidated statements of operations.  The awardsCompany will recognize $1,758 as an expense in future periods as the stock options vest. The Company recognizes stock compensation expense on a straight-line basis over the requisite service period for each award, which are subject to a vesting schedule as set forth in individual agreements.

On September 21, 2017,A summary of the Board approved an amendment to the 2017 Plan to increase the number of shares of common stock authorized for issuance under the Plan from 1,500,000 shares of common stock to 2,500,000 shares of common stock.  

The following summary reflects equity awards granted prior to the 2017 Plan and theCompany’s stock option activity duringfor the nine-monthsnine months ended September 30, 20172022, is presented below:

Restricted Common Stock

OnThe non-vested restricted stock awards (“RSAs”), as of September 21, 2017,30, 2022, were granted to the Company’s Board voted to award an aggregatemembers as compensation. These awards vest only upon: (i) the occurrence of 325,000 shares of common stockone of the Company, par value $0.01 per share, through the granting of RSAs pursuant to the 2017 Plan, to the membersAccelerating Events: (a) a Change in Control (as defined in an RSA Agreement); or (b) listing of the Board as annual compensation for services renderedCompany’s Common Stock on either NYSE or NASDAQ Stock Market; and (ii) the director’s delivery to the Company as Board members. Each membera Notice of the Board was grantedAcceleration of Vesting (as defined in an RSA constituting 65,000 shares of common stock. The common stockAgreement), within eachthe Acceleration Notice Period (as defined in an RSA had an aggregate fair market value of $0.78 per share on the date of grant ($253,500 in the aggregate) and each RSA will fully vest upon the one year anniversary of the date of grant or September 21, 2018. Agreement).

As of September 30, 2017,2022, and 2021, it was not probable that the Company had amortized $21,124 relating to the vesting of these shares which is included in general and administrative expenses, and $232,376 which will be recognized as an expense in future periods as the shares vest.

Also on September 21, 2017, the Board awarded an aggregate of 2,000,000 shares of common stock through the granting of RSAs pursuant to the 2017 Plan to the Company’s independent Board of Directors (“Independent Members”) as special services compensation. The Independent Members were each granted an RSA constituting 1,000,000 shares of common stock. The common stock within each RSA had a fair market value of $0.78performance conditions on the date of grant, ($1,560,000 inoutstanding RSAs would be met, therefore, no expense has been recorded for these awards for the aggregate)three and each RSA will fully vest upon the earlier of a change in control of the Company or the Company’s listing on a national securities exchange. As ofnine months ended September 30, 2017,2022 and 2021.

There were no RSA’s that were granted, exercised, or forfeited during the Company had not amortized any amounts relating to the vesting of these shares due to the uncertainty of meeting these milestones.nine months ended September 30, 2022.

The following table summarizes restricted common stock activity:

F-10F-15

FUSE MEDICAL, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE-MONTHS ENDED SEPTEMBER 30, 2017
(Unaudited)

Note 10. Income Taxes

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

The components of income tax expense are as follows: