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

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

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

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

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

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: As of ~~November 1~~August 5, ~~2019, 74,600,181~~2020, 73,124,458 shares of the registrant’s common stock, $0.01 par value, were outstanding.

	September 30, 2019			December 31, 2018		June 30, 2020			December 31, 2019
	(Unaudited)					(Unaudited)
ASSETS
Assets
Current assets:
Cash and cash equivalents	$	1,031,270		$	844,314
Accounts receivable, net of allowance of $1,747,600 and $667,963, respectively		4,759,131			5,225,999
Inventories, net of allowance of $4,416,483 and $1,711,871, respectively		8,189,621			11,075,889
Cash						$	1,167,275		$	1,099,310
Accounts receivable, net of allowance of $801,637 and $615,278, respectively							2,986,921			5,249,653
Inventories, net of allowance of $3,184,126 and $3,805,730, respectively							7,051,891			7,855,887
Prepaid expenses and other current assets		17,365			29,553		87,752			39,850
Total current assets		13,997,387			17,175,755		11,293,839			14,244,700
Property and equipment, net		27,123			42,974		33,371			32,639
Deferred tax asset		-			760,993
Long term accounts receivable, net of allowance of $1,332,194 and $728,000, respectively							1,830,938			924,646
Intangible assets, net		1,226,975			1,288,040		1,165,910			1,206,620
Goodwill		2,905,089			2,905,089		1,972,886			1,972,886
Total assets	$	18,156,574		$	22,172,851	$	16,296,944		$	18,381,491
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Liabilities and Stockholders' Equity (Accumulated Deficit)
Current liabilities:
Accounts payable	$	2,526,096		$	2,712,919	$	2,239,586		$	2,752,854
Accrued expenses		2,909,729			2,784,271		3,064,706			3,302,904
Notes payable - related parties		150,000			150,000
Convertible notes payable - related parties							150,000			150,000
Paycheck Protection Program loan							361,400			—
Senior secured revolving credit facility		1,752,501			1,477,448		1,088,352			1,752,501
Total current liabilities		7,338,326			7,124,638		6,904,044			7,958,259
Notes payable - related parties							200,000			—
Economic Injury Disaster Loan							150,000			—
Earn-out liability		13,581,529			13,581,529		11,645,365			11,645,365
Total liabilities		20,919,855			20,706,167		18,899,409			19,603,624
Commitments and contingencies		-			-		—			—
Stockholders' (deficit) equity:
Stockholders' equity (Accumulated deficit)
Preferred stock, $0.01 par value; 20,000,000 shares authorized, no shares issued and outstanding		-			-		—			—
Common stock, $0.01 par value; 100,000,000 shares authorized, 74,600,181 shares issued and 70,221,566 shares outstanding as of September 30, 2019, and 74,600,181 shares issued and 70,221,566 shares outstanding as of December 31, 2018.		714,891			714,891
Common stock, $0.01 par value; 100,000,000 shares authorized, 73,124,458 shares issued and outstanding as of June 30, 2020 and December 31, 2019.							731,245			731,245
Additional paid-in capital		487,524			-		969,533			642,435
Retained earnings (Accumulated deficit)		(3,965,696	)		751,793
Total stockholders' (deficit) equity		(2,763,281	)		1,466,684
Total liabilities and stockholders' (deficit) equity	$	18,156,574		$	22,172,851
Accumulated deficit							(4,303,243	)		(2,595,813	)
Total stockholders' equity							(2,602,465	)		(1,222,133	)
Total liabilities and stockholders' equity						$	16,296,944		$	18,381,491

													For the Three Months Ended June 30,						For the Six Months Ended June 30,
	For the Three Months Ended September 30,						For the Nine Months Ended September 30,						2020			2019			2020			2019
	2019			2018			2019			2018
Net revenues	$	5,716,344		$	6,784,304		$	15,562,928		$	18,506,810		$	4,010,666		$	5,075,925		$	8,647,169		$	9,846,584
Cost of revenues		4,787,939			3,047,373			8,987,196			9,941,271			1,796,663			2,223,912			3,779,559			4,199,257
Gross profit		928,405			3,736,931			6,575,732			8,565,539			2,214,003			2,852,013			4,867,610			5,647,327
Operating expenses:
Selling, general, administrative and other		2,263,964			1,932,991			6,604,066			6,432,798			1,161,476			1,975,934			3,642,247			4,340,102
Commissions		1,741,770			1,405,024			3,752,295			4,599,080			1,420,239			1,004,994			2,811,356			2,010,525
Depreciation and amortization		25,596			4,829			76,916			10,650			30,752			25,596			60,735			51,320
Total operating expenses		4,031,330			3,342,844			10,433,277			11,042,528			2,612,467			3,006,524			6,514,338			6,401,947
Operating loss (income)		(3,102,925	)		394,087			(3,857,545	)		(2,476,989	)
Operating loss														(398,464	)		(154,511	)		(1,646,728	)		(754,620	)
Other expense:
Interest expense		(34,900	)		(25,920	)		(88,362	)		(101,835	)		24,021			28,027			55,022			53,462
Total other expense		(34,900	)		(25,920	)		(88,362	)		(101,835	)		24,021			28,027			55,022			53,462
Operating income (loss) before tax		(3,137,825	)		368,167			(3,945,907	)		(2,578,824	)
Income tax expense (benefit)		926,517			90,985			771,582			(505,742	)
Net income (loss)	$	(4,064,342	)	$	277,182		$	(4,717,489	)	$	(2,073,082	)
Net income (loss) per common share - basic	$	(0.06	)	$	0.00		$	(0.07	)	$	(0.03	)
Net loss before tax														(422,485	)		(182,538	)		(1,701,750	)		(808,082	)
Income tax benefit														946			(40,389	)		5,680			(154,935	)
Net loss													$	(423,431	)	$	(142,149	)	$	(1,707,430	)	$	(653,147	)
Net loss per common share - basic													$	(0.01	)	$	(0.00	)	$	(0.02	)	$	(0.01	)
Weighted average number of common shares outstanding - basic		70,221,566			68,658,304			70,221,566			66,816,698			70,221,566			70,221,566			70,221,566			70,221,566

Common Stock

Additional
Paid-In

Retained
Earnings/

Shares

Amount

Capital

(Deficit)

Total

Balance, December 31, 2018

74,600,181

$
714,891

$
-

$
751,793

$
1,466,684

Stock options granted

-

-

244,407

-

244,407

Net loss

-

-

-

(510,998
)

(510,998
)
Balance, March 31, 2019

74,600,181

714,891

244,407

240,795

1,200,093

Stock options granted

-

-

254,700

-

254,700

Net loss

-

-

-

(142,149
)

(142,149
)
Balance, June 30, 2019

74,600,181

714,891

499,107

98,646

1,312,644

Stock options granted

-

-

(11,583
)

-

(11,583
)
Net loss

-

-

-

(4,064,342
)

(4,064,342
)
Balance, September 30, 2019

74,600,181

$
714,891

$
487,524

$
(3,965,696
)

$
(2,763,281
)

	Common Stock				Additional Paid-In		Retained Earnings/
	Shares		Amount		Capital		(Deficit)			Total
Balance, December 31, 2019		73,124,458	$	731,245	$	642,435	$	(2,595,813	)	$	(1,222,133	)
Stock compensation expense		-		-		327,098		-			327,098
Net loss		-		-		-		(1,707,430	)		(1,707,430	)
Balance, June 30, 2020		73,124,458	$	731,245	$	969,533	$	(4,303,243	)	$	(2,602,465	)

Common Stock

Additional
Paid-In

Retained
Earnings/

Shares

Amount

Capital

(Deficit)

Total

Balance, December 31, 2017

69,158,308

$
671,583

$
(8,653,092
)

$
-

$
(7,981,509
)
Restricted stock awards granted

-

-

79,083

-

79,083

Stock options granted

-

-

59,003

-

59,003

Net loss

-

-

-

(734,967
)

(734,967
)
Balance, March 31, 2018

69,158,308

671,583

(8,515,006
)

(734,967
)

(8,578,390
)
Restricted stock awards granted

-

-

79,083

-

79,083

Stock options granted

-

-

167,313

-

167,313

CPM working capital purchase price adjustment

-

-

(397,463
)

-

(397,463
)
Inventory capital transaction

-

-

1,547,807

-

1,547,807

Net loss
��

-

-

-

(1,615,297
)

(1,615,297
)
Balance, June 30, 2018

69,158,308

671,583

(7,118,266
)

(2,350,264
)

(8,796,947
)
Restricted stock awards granted

-

-

52,722

-

52,722

Stock options granted

-

-

259,639

-

259,639

Purchase of Maxim Surgical

4,210,527

42,105

3,157,895

-

3,200,000

Net income

-

-

-

277,182

277,182

Balance, September 30, 2018

73,368,835

$
713,688

$
(3,648,010
)

$
(2,073,082
)

$
(5,007,404
)

	Common Stock				Additional Paid-In		Retained Earnings/
	Shares		Amount		Capital		(Deficit)			Total
Balance, December 31, 2018		74,600,181	$	746,002	$	-	$	720,682		$	1,466,684
Stock compensation expense		-		-		499,107		-			499,107
Net loss		-		-		-		(653,147	)		(653,147	)
Balance, June 30, 2019		74,600,181	$	746,002	$	499,107	$	67,535		$	1,312,644

	For the Nine Months Ended September 30,						For the Six Months Ended June 30,
	2019			2018			2020			2019
Cash flows from operating activities
Net loss	$	(4,717,489	)	$	(2,073,082	)	$	(1,707,430	)	$	(653,147	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		76,916			10,650			60,735			51,320
Share-based compensation		487,524			696,843
Stock based compensation								327,098			499,107
Provision for bad debts and discounts		1,079,637			187,755			186,359			255,238
Provision for slow moving and obsolete inventory		2,704,612			711,828
Deferred taxes, net of valuation allowance		760,993			(533,639	)
Provision for long term accounts receivable								604,194			60,101
Provision for slow moving inventory								(621,604	)		24,813
Benefits for deferred taxes								-			(168,573	)
Changes in operating assets and liabilities:
Accounts receivable		(612,769	)		2,598,303			2,076,373			982,357
Inventories		181,656			1,201,714			1,425,600			285,215
Prepaid expenses and other current assets		12,188			10,396			(47,902	)		11,051
Long term accounts receivable								(1,510,486	)		17,100
Accounts payable		(186,823	)		(440,540	)		(513,268	)		(318,379	)
Accrued expenses		125,458			568,280			(238,198	)		(823,729	)
Net cash (used in) provided by operating activities		(88,097	)		2,938,508
Net cash provided by operating activities								41,471			222,474
Cash flows from investing activities
Purchase of property and equipment		-			(35,984	)		(20,757	)		—
Acquisition of Maxim Surgical, net of cash acquired		-			(63,097	)
Net cash used in investing activities		-			(99,081	)		(20,757	)		-
Cash flows from financing activities
Payments on senior secured revolving credit facility, net		275,053			(2,651,799	)		(664,149	)		(224,947	)
Purchase price adjustment - CPM acquisition		-			(397,463	)
Proceeds from Paycheck Protection Program								361,400			—
Proceeds from Economic Injury Disaster Loan								150,000		-
Proceeds from related party promissory notes								200,000			—
Net cash provided by (used in) financing activities		275,053			(3,049,262	)		47,251			(224,947	)
Net increase (decrease) in cash and cash equivalents		186,956			(209,835	)
Cash and cash equivalents - beginning of period		844,314			804,715
Cash and cash equivalents - end of period	$	1,031,270		$	594,880
Net increase (decrease) in cash								67,965			(2,473	)
Cash - beginning of period								1,099,310			844,314
Cash - end of period							$	1,167,275		$	841,841
Supplemental disclosure of cash flow information:
Cash paid for interest	$	69,257		$	84,872		$	40,018		$	42,409
Non-cash investing and financing activities:
Inventory contributed by stockholder	$	-		$	2,063,742
Stock issued for Maxim Acquisition	$	-		$	3,200,000

Fuse Medical, Inc., a Delaware corporation (the “Company”), ~~was initially incorporated in 1968 as American Metals Service, Inc.,~~is a ~~Florida corporation. In July 1999, American Metals Service, Inc. changed its name to GolfRounds, Inc.~~manufacturer and ~~was redomiciled to Delaware~~ ~~through a merger.~~ ~~Effective May 28, 2014, GolfRounds.com, Inc. amended its certificate~~national distributor of ~~incorporation to change its name to Fuse Medical, Inc.,~~medical devices and Fuse Medical, LLC, an unrelated entity, merged with and into a wholly-owned subsidiary of Fuse Medical, Inc., with Fuse Medical, LLC surviving as a wholly-owned subsidiary of Fuse Medical, Inc. The transaction was accountedsurgical implants for ~~as a reverse merger.~~the orthopedic market. The Company ~~was the legal acquirer, and Fuse Medical, LLC was deemed the accounting acquirer. During 2015, certificates of termination were filed for Fuse Medical, LLC and its two subsidiaries.~~

~~On December 19, 2016 (the “Change-in-Control Date”), the Company entered into a Stock Purchase Agreement by and between the Company, NC 143 Family Holdings, LP, a Texas limited partnership (“NC 143”), which is controlled by Mark W. Brooks (“Mr. Brooks”), the Company’s Chairman of the Board of Directors (“Board”) and President, and Reeg Medical Industries, Inc., a Texas corporation (“RMI”), which is owned and controlled by Christopher C. Reeg (“Mr. Reeg”), the Company’s Chief Executive Officer and Secretary, which resulted in a change in-control of the Company.~~

~~On December 31, 2017, the Company completed the acquisition of~~acquired CPM Medical Consultants, LLC (“CPM”) ~~pursuant to that certain purchase agreement dated~~in December ~~15,~~ 2017 (“~~CPM Acquisition Agreement” and such transaction the~~(the “CPM Acquisition”)~~. Subsequent to~~, in which the ~~Change-in-Control Date,~~Company was the legal acquirer and CPM ~~and Company operations are consolidated. (See Note 3, “CPM Acquisition”)~~

Onwas deemed the accounting acquirer. In August 1, 2018, (“~~Maxim Closing Date~~”) the Company completed the acquisition of Palm Springs Partners, LLC d/b/a Maxim Surgical (“Maxim”~~), pursuant to that certain securities purchase agreement (the “Maxim Purchase Agreement~~” and such ~~transaction~~transactions the “Maxim Acquisition”). AsCPM and Maxim survive as the Company’s wholly-owned subsidiaries and subsequent to the completion of ~~the Maxim Closing Date,~~each acquisition, CPM, Maxim and Company operations are consolidated. ~~(See Note 4, “Maxim Acquisition”)~~

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

The ~~audited~~ condensed consolidated balance sheet information as of December 31, ~~2018,~~2019, was derived from the Company’s annual report on Form 10-K for the fiscal year ended December 31, ~~2018~~2019 (“~~2018~~2019 Annual Report”), filed with the SEC pursuant to Section 13 or 15(d) ~~and 15(e)~~ under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on March ~~21, 2019.~~30, 2020. These interim unaudited condensed consolidated financial statements should be read in conjunction with the ~~2018~~2019 Annual Report.

The results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 are not necessarily indicative of the results to be expected for the entire fiscal year or for any other period as the Company has historically experienced seasonal trends with greater revenue and volume between the last two calendar quarters compared to the first two calendar quarters of the year.

The accompanying interim unaudited condensed consolidated financial statements have been prepared as if the Company will continue as a going concern. Through ~~September~~June 30, ~~2019,~~2020, the Company has accumulated losses of ~~$3,965,696~~$4,303,243 and a stockholders’ ~~deficits~~deficit of ~~$2,763,281.~~$2,602,465. Revenue declined by $1,065,259 in the second quarter of 2020 compared to the same quarter in 2019, as the Company has been impacted by restrictions as a result of the novel coronavirus SARS-CoV-2 global pandemic (“COVID-19”). At various times during the years ended December 31, 2018 and 2019 and in the first quarter ended March 31, 2020, the Company was out of compliance with one or more covenants contained in its Amended and Restated Business Loan Agreement (“RLOC”) with ZB, N.A., d/b/a Amegy Bank (“Amegy Bank”), but obtained waivers from Amegy Bank to cure the violations, resulting in reductions in the Company’s aggregate contractual borrowing limits under the RLOC. The RLOC functions as a senior secured revolving loan facility. The Company’s management has determined that these conditions and events raise substantial doubt about the ability of the Company to continue as a going concern.

The Company’s ability to continue as a going concern for at least one year beyond the date of this filing is dependent upon the easing of restrictions imposed on elective surgeries by governmental authorities as a result of COVID-19, as well as the Company’s, (i) successful execution of key ~~rebranding~~branding initiatives, (ii) introduction, commercialization and sales of new proprietary products and product lines, (iii) increased ~~sale~~sales of existing products, with strategic emphasis on ~~selling more retail cases~~direct sales to medical facilities (“Retail Cases”), and increasing the percentage of Retail Cases sold as a percentage of all ~~Cases~~cases sold by the Company (sales volume based on medical procedures in which the Company’s products are sold and used “Cases”), and (iv) continued cost reductions. Additionally, the Company will need to refinance its ~~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.

The Company’s management expects to fund its future business development activities and its 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 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. If the Company fails to cure the current event of default under the RLOC or another event of default occurs under the RLOC, the Company could be prohibited from borrowing for its working capital needs. If the loans are accelerated and the Company does not have sufficient cash on hand to pay all amounts due, the Company could be required to sell assets, to refinance all or a portion of its 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 the Company cannot borrow under the RLOC, the Company would need to seek additional financing, if available, or curtail our 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~~interim unaudited condensed consolidated 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.~~concern.

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

The provision for slow moving and obsolete inventory for the prior period unaudited condensed consolidated statement of cash flows has been reclassified to conform to the presentation of the current period unaudited condensed consolidated financial statements. This reclassification had no effect on the previously reported unaudited condensed consolidated balance sheets, statement of operations, and changes in stockholders’ equity.

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

Actual results could differ from those estimates. Significant estimates inon the accompanying interim unaudited condensed consolidated financial statements include the allowance for doubtful accounts, valuation of inventories, the Company’s effective income tax rate, and the recoverability of deferred tax assets, which are based upon the ~~Company’s~~Company management’s expectation of future taxable income and allowable deductions and the fair value calculations of stock-based compensation, goodwill, finite lived intangibles and the earn-out liability. ~~(See Note 3, “CPM Acquisition”~~

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

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

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

Diluted ~~net loss~~earnings (loss) per common share is computed by dividing net ~~loss attributable to common stockholders~~income/(loss) by the weighted-average number of ~~common share~~Common Stock equivalents outstanding for the period determined using the treasury stock method. For the ~~three~~six months ended June 30, 2020 and ~~nine month periods ended September 30,~~ 2019, ~~and 2018,~~ the Company excluded the effects of outstanding stock options, convertible notes and, to the extent in the money, restricted stock as their effects were antidilutive due to the Company’s ~~net~~operating loss during these periods.

~~During~~For the ~~preparation~~six months ended June 30, 2020, restricted stock and Common Stock equivalents of ~~the unaudited condensed consolidated financial statements for the quarter ended September 30, 2019, the Company identified an error in the weighted average number of shares used in its calculation of~~4,777,892 have been excluded from diluted earnings per share because to include them would have been antidilutive. (see Note 9, “Stockholders’ Equity” for the ~~three~~terms and ~~nine month periods ended September 30, 2018.~~

The Company performed a quantitative and qualitative analysis and determined that the error was not material to the previously reported results for the three and nine month periods ended September 30, 2018.conditions of restricted stock)

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The Company classifies assets and liabilities recorded at fair value under the fair value hierarchy based upon the observability of inputs used in valuation

techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. The fair value measurements are classified under the following hierarchy:

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

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

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

In connection with the CPM Acquisition in December 2017, the Company recorded ~~a $13,581,529~~an earn-out liability ~~related to the earn-out (“Earn-Out”) portion~~as part of the purchase consideration. ~~(See Note 3, “CPM Acquisition,” for further discussion of the Earn-Out liability.)~~ The ~~Company has classified the Earn-Out liability as a Level 3 liability and the~~ fair value of the ~~Earn-Out~~earn-out liability ~~will be evaluated~~is re-measured at each reporting period ~~and~~using Level 3 inputs with changes in ~~its~~ fair value ~~will be included~~recorded in ~~the Company’s~~ earnings. The earn-out payments are based on the financial performance of the Company between January 1, 2018, and December 31, 2034. The base amount of the earn-out ranges from $0.00 to $16,000,000 with an additional bonus payment of $10,000,000 subject to the Company meeting certain earnings thresholds as ~~detailed~~defined in the CPM Acquisition Agreement.

The fair value of the ~~Earn-Out~~earn-out liability was calculated using the Monte Carlo simulation, which was then applied to estimated ~~Earn-Out payments with a discount rate of four percent (4%). To determine~~earn-out payments. There was no change in the ~~fair value~~earn-out liability for the six months ended June 30, 2020 and there were no significant changes in the Level 3 inputs from those utilized at December 31, 2019. The required earnings thresholds have not been met from inception of the Earn-Out liability, the Company’s management evaluates assumptions that require significant judgement. Significant assumptions used for estimating the Earn-Out liability included gross margins of approximately forty-eight percent (48%), net income margins averaging nine percent (9%) per year, revenue growth of approximately five percent (5%) over a forecast horizon period of 11 years.

~~For the year ended December 31, 2018, the Company determined the earnings threshold~~agreements through June 30, 2020, and as ~~detailed in the CPM Acquisition Agreement were not met and therefore~~such, there have been no payments required for either the base or bonus Earn-Out tranches were achieved, based on the Company’s 2018 financial performance. The Earn-Out was re-measured to fair value under the probability weighted income approach. As a result, the initial fair value of the Earn-Out liability was reduced by $5,663,014 from $19,244,543 to $13,581,529, with the offset reflected as “Change in fair value of contingent purchase consideration” on the Company’s 2018 Annual Report.earn-out tranches.

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

The Company considers highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. There were no cash equivalents at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~2019. The Company’s cash is concentrated in large financial institutions that at times may exceed federally insured limits of $250,000 per financial institution. The Company has not experienced any financial institution losses from ~~the Change-in-Control Date~~inception through ~~September~~June 30, ~~2019.~~2020. As of ~~September~~June 30, ~~2019,~~2020 and December 31, ~~2018,~~2019, there were deposits of ~~$574,868~~$861,703 and ~~$322,693~~$599,309, respectively, greater than federally insured limits.

Accounts receivable are non-interest bearing and are stated at gross invoice amounts less an allowance for doubtful accounts receivable and an allowance for contractual discount pricing. Credit is extended to customers based on an evaluation of their financial condition, industry reputation, and other ~~judgment~~ factors considered by the Company’s management. The Company generally does not require collateral or other security interest to support accounts receivable. Based on trends and specific factors, the customer’s credit terms may be modified, including required payment upon delivery.

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

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

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

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

During the three and nine months ended September 30, 2019 the Company revised its estimate for slow moving and obsolete inventory. As a result, the Company’s management increased the inventory reserve for slow moving and obsolescence by approximately $2.4 million, which is reflected in Inventory and Cost of Revenues on the Company’s unaudited condensed consolidated balance sheets and statements of operations, respectively.

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

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

The Company reviews other long-lived assets ~~quarterly~~for indicators of impairment whenever events or ~~whenever~~ changes in circumstances indicate that the carrying amount of an asset ~~might~~may not be recoverable. ~~Assets are grouped and evaluated for impairment~~The evaluation is performed at the lowest level ~~for which there are~~of identifiable cash flows, ~~that are largely independent of~~which is at the ~~cash flows of other groups of assets, which generally represents furniture and fixtures. Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is~~individual asset level or the ~~consolidated cash flow measure monitored for indicators of impairment. As the cash flow measure reaches levels to indicate potential impairment, the Company estimates the future~~asset group level. The undiscounted cash flows expected to be generated ~~from~~by the ~~use of the asset and its eventual disposal.~~related assets are estimated over their useful life based on updated projections. If the ~~sum of undiscounted future cash flows is less than~~evaluation indicates that the carrying amount of the ~~asset, an~~assets may not be recoverable, any potential impairment ~~loss is recognized. The impairment loss~~ is measured ~~by comparing~~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 ~~its carrying amount.~~ sell.

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 ~~at least annually~~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. As of June 30, 2020, the Company evaluated certain qualitative factors

including, (i) macroeconomic factors resulting from the COVID-19 pandemic, (ii) the Company’s operating loss and overall financial performance, (iii) the Company’s stock price, and (iv) specific cost-saving actions taken by the Company in response to the COVID-19 pandemic in concluding that the reported amount of goodwill was not more likely than not impaired.

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

The Company’s intangible assets subject to amortization consist primarily of acquired non-compete agreements ~~product technology,~~ and customer relationships. Amortization expense is calculated using the straight-line method over the asset’s expected useful life. ~~(See Note 4, “Maxim Acquisition” for Goodwill and Other Intangibles for additional related disclosures.)~~

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

~~Products that~~Due to the nature of its products, the Company’s product returns have been sold are not subject to returns unless the product is deemed defective. Credits or refunds are recognized when they are probable and reasonably estimable. The Company’s management reduces revenue to account for estimates of the Company’s credits and refunds.historically immaterial.

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

sold on the Company’s accompanying interim unaudited condensed consolidated statements of operations.

The Company measures sales volume based on medical procedures in which the Company’s products are sold and used (“~~Cases~~”)(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,~~third parties, such as non-medical facilities, distributors, or sub-distributors, to be wholesale ~~Cases~~cases (“Wholesale Cases”). Some of the Company’s sales for Wholesale Cases are on a consignment basis with a ~~third-party.~~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 a higher price points than Wholesale Cases, resulting in greater revenue and gross profit per Case.

	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018		June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019
Category
Retail	$	5,050,785	$	5,227,442	$	12,425,874	$	13,661,292	$	3,604,578	$	3,722,777	$	7,732,441	$	7,375,088
Wholesale		665,559		1,556,862		3,137,054		4,845,518		406,088		1,353,148		914,728		2,471,496
Total	$	5,716,344	$	6,784,304	$	15,562,928	$	18,506,810	$	4,010,666	$	5,075,925	$	8,647,169	$	9,846,584

Cost of revenues consists of (i) cost of goods sold, (ii) freight and shipping costs for items sold to customers, (iii) cost of storage, (iv) investment in medical instruments, which are expensed when acquired, (v) inventory shrink, and (vi) an estimate for slow-moving and expired inventory, and inventory obsolescence.

Stock-based compensation 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.

~~The Company considers the applicability and impact of all ASUs~~Accounting pronouncements issued ~~both~~or effective ~~and not yet effective.~~

~~In February 2016,~~in 2020 by the Financial Accounting Standards Board (the “FASB”) ~~issued ASU No. 2016-02, “Leases”~~, which requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than twelve (12) months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. Although the Company presently leases office space on a month to month basis as described in Note 12, management has analyzed the implied lease term considering entity factors, asset factors, and market factors and determined that the amounts to be recognized as a right to use assets and lease obligation upon adoption were not material.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This guidance eliminates Step 2 from the goodwill impairment test, instead requiring an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit’s fair value. The Company adopted ASU 2017-04 for the three months ended September 30, 2019 on a prospective basis. The adoption of ASU 2017-04 had no impact on the condensed consolidated financial position, results of operations or cash flows for the period ended September 30, 2019. The Company adopted provisions of ASU 2017-04 as it simplified the goodwill impairment testing process resulting in reductions of costs and time associated with the goodwill impairment testing.

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

~~On December 31, 2017 (the “CPM Effective Date~~”), the Company completed the CPM Acquisition pursuant to the CPM Acquisition Agreement. The Company was the legal acquirer, and, for accounting purposes, CPM was deemed to have acquired the Company in the CPM Acquisition. CPM is the successor entity and becomes the reporting entity which combines the Company with CPM as of the Change-in-Control Date, with the assets and liabilities of both companies combined at historical cost. Subsequent to the Change-in-Control Date, CPM and the Company operations are consolidated. (See Note 1, “Nature of Operations – Overview”)

Pursuant to the CPM Acquisition Agreement the Company issued 50 million shares of its Common Stock, to NC 143, the former owner of CPM, in exchange for one-hundred percent (100%) of the outstanding membership interests of CPM, at an agreed-upon value of $0.20 per share of it’s common stock, ~~par value $0.01 per share,~~ (“~~Common Stock~~”), equaling a value of $10,000,000. The remaining $26,000,000 of the purchase price consideration will be paid by the Company to NC 143 in the form of contingent Earn-Out payments based on the Company achieving certain future profitability targets for years after 2017.

~~The Company’s management engaged an independent third-party valuation specialist to calculate the fair value of the Earn-Out liability.~~ ~~The Company recorded $19,244,543 as a contingent liability related to the fair value of the $26,000,000 Earn-Out liability~~ as of the CPM Effective Date, with a corresponding offset to additional paid-in capital on the Company’s accompanying unaudited condensed consolidated balance sheets. For the year ended December 31, 2018, the Company determined the earnings threshold as detailed in the CPM Acquisition Agreement were not met and therefore no payments for either the base or bonus Earn-Out tranches would be achieved, based on the Company’s 2018 financial performance.

As of December 31, 2018, the Earn-Out was re-measured to fair value under the probability weighted income approach. As a result, the initial fair value of the Earn-Out liability was reduced from $19,244,543 to $13,581,529. The Earn-Out liability was reduced by $5,663,014, with the offset reflected as “Change in fair value of contingent purchase consideration” on the Company’s 2018 Annual Report. ~~The Company’s management will evaluate the estimated fair value of the Earn-Out liability each reporting period. (See Note 2, “Fair Value Measurements”)~~

~~The CPM Acquisition Agreement provided for a working capital post-closing adjustment (“CPM Post-Closing Adjustment~~”) for certain changes in CPM’s current assets and current liabilities pursuant to the CPM Acquisition Agreement. The CPM Post-Closing Adjustment was calculated to be $397,463 and was paid in cash on June 27, 2018, to NC 143, with a corresponding offset to additional paid-in capital on the Company’s accompanying unaudited condensed consolidated balance sheets.

~~On August 1, 2018, the Company, completed the Maxim Acquisition pursuant to the Maxim Purchase Agreement between the Company, Maxim, RMI, Mr. Amir David Tahernia, an individual (“Tahernia”, together with RMI, the “Sellers”), and Tahernia in his capacity as the representative of the Sellers, dated July 30, 2018, in which the Company agreed to purchase all of the outstanding equity securities of Maxim (“Maxim Interests~~”) from the Sellers for aggregate consideration of approximately $3,400,000. Before the Maxim Acquisition, Mr. Reeg served as Maxim’s President. (See Note 1, “Nature of Operations – Overview”)

The Company issued 4,210,526 restricted shares of its Common Stock, to the Sellers in exchange for one-hundred percent (100%) of the outstanding Maxim Interests, at an agreed-upon value of $0.76 per share of Common Stock, which was equal to the 30-day volume-weighted average price (“~~VWAP”) of the Common Stock as of three (3) business days prior to the Maxim Closing Date.~~

The Company accounted for the Maxim Acquisition as a business combination and recorded the assets acquired and liabilities assumed at their respective estimated fair values as of the Maxim Closing Date. The assets acquired and liabilities assumed were recorded as of the Maxim Closing Date at their respective fair values and consolidated with those of the Company.

~~The Maxim Purchase Agreement provided for a working capital post-closing adjustment (“Maxim Post-Closing Adjustment~~”) based on the Maxim Closing date balance sheet for certain changes in Maxim’s current assets and current liabilities pursuant to the Maxim Purchase Agreement. The Maxim Post-Closing Adjustment was calculated to be $81,757.

To finalize the Maxim Post-Closing Adjustment, the Company issued an aggregate of 120,231 restricted shares of Common Stock to the Sellers on October 4, 2018 at an agreed-upon value of $0.68 per share of Common Stock, which was equal to the 30-day VWAP of the Company’s Common Stock as of October 1, 2018.

The Company recorded the excess of the aggregate purchase price over the estimated fair values of the identifiable assets acquired as goodwill, which is not deductible for tax purposes. Goodwill is primarily attributable to the benefits the Company expects to realize by expanding its product offerings and addressable markets, thereby contributing to an expanded revenue base. The results of Maxim operations are included in the Company’s unaudited condensed consolidated statements of operations subsequent to the Maxim Closing Date.

The following unaudited pro forma summary financial information presents the consolidated results of operations for the Company as if the Maxim Acquisition had occurred on January 1, 2018. The pro forma results are shown for illustrative purposes only and do not purport to be indicative of the results that would have been reported if the Maxim Acquisition had occurred on the date indicated or indicative of the results that may occur in the future.

~~Unaudited pro forma information for the three months ended September 30, 2018 is as follows:~~

The supplemental pro forma revenue was adjusted to exclude $116,577 of intercompany transactions for the three months ended September 30, 2018. The number of shares outstanding used in calculating the net loss per common share – basic was 70,211,566 for the three months ended September 30, 2018.

~~Unaudited pro forma information for the nine months ended September 30, 2018 is as follows:~~

The supplemental pro forma revenue was adjusted to exclude $459,074 of intercompany transactions for the nine months ended September 30, 2018. The number of shares outstanding used in calculating the net loss per common share – basic was 70,211,566 for the nine months ended September 30, 2018.

~~The Company is managed and operates in one operating and reporting segment, as Maxim Surgical integrated into the Company’s existing operations.~~

Property and equipment consisted of the following at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018:~~2019:

	September 30, 2019			December 31, 2018			June 30, 2020			December 31, 2019
Computer equipment and software	$	41,840		$	41,840		$	65,744		$	51,303
Furniture and fixtures		1,198			5,047
Office equipment		20,333			21,913			-			20,333
Property and equipment costs		63,371			68,800			65,744			71,636
Less: accumulated depreciation		(36,248	)		(25,826	)		(32,373	)		(38,997	)
Property and equipment, net	$	27,123		$	42,974		$	33,371		$	32,639

Depreciation expense for the three months ended ~~September~~June 30, 2020 and 2019 was $10,397 and ~~September 30, 2018 was~~ $5,241, ~~and $4,829,~~ respectively. Depreciation expense for the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 was $20,025 and ~~September 30, 2018 was $15,851 and $10,650,~~$10,610, respectively.

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

	September 30, 2019			December 31, 2018			Amortization period (years)	June 30, 2020			December 31, 2019			Amortization period (years)
Intangible assets:
Non-compete agreements	$	61,766		$	61,766		2	$	61,766		$	61,766		2
510k product technology		704,380			704,380		Indefinite
510(k) product technology									704,380			704,380		Indefinite
Customer relationships		555,819			555,819		11		555,819			555,819		11
Total intangible assets		1,321,965			1,321,965				1,321,965			1,321,965
Less: accumulated amortization		(94,990	)		(33,925	)			(156,055	)		(115,345	)
Intangible assets, net		1,226,975			1,288,040				1,165,910			1,206,620
Goodwill	$	2,905,089		$	2,905,089		Indefinite	$	1,972,886		$	1,972,886		Indefinite

Amortization expense for the three ~~and nine~~ months ended ~~September~~June 30, 2020 and 2019 was $20,355 and ~~$61,065. There was no amortization~~$20,355, respectively. Amortization expense for the ~~three and nine~~six months ended ~~September~~June 30, ~~2018.~~2020 and 2019, was $40,710 and $40,710.

The Company’s intangible assets subject to amortization consist primarily of acquired non-compete agreements, and customer relationships.

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

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

On November 19, 2018, the Company executed the Second Amendment to the RLOC with Amegy Bank (the “Second Amendment”). The Second Amendment (i) waived the Company’s events of default under the RLOC, (ii) reduced the aggregate limit of the RLOC to $4,000,000, (iii) extended the maturity date to November 4, 2019, (iv) revised the variable interest rate to the one-month LIBOR rate plus four percent (4.00%) per annum, and (v) amended the financial covenants to state that the Company will not ~~permit:~~permit the Fixed Charge Coverage Ratio of any calendar quarter end from and after the quarter ending June 30, 2019, to be less than 1.25 to 1.00; EBITDA to be less than $700,000 for the fiscal quarter ending December 31, 2018, and $100,000 for the fiscal quarter ending March 31, 2019; modified the event of default related to consecutive quarterly losses to be applicable from and after the quarter ending June 30, 2019.

On May 9, 2019, the Company executed the Third Amendment to the RLOC with Amegy Bank (the “Third Amendment”). Pursuant to the Third Amendment Amegy Bank (i) waived the Company’s events of default under the RLOC, (ii) reduced the aggregate limit of the RLOC to $3,500,000, (iii) reduced the limit of credit card exposure to $500,000, (iv) reduced borrowing base component of ~~Inventory~~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.

~~The~~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, Mark W. Brooks (“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 six months ended September 30, 2020, and (iii) extended the termination date of the RLOC until November 4, 2020.

In conjunction with executing the Fifth Amendment to the RLOC, the Company obtained an additional $200,000 in capital in the form of subordinated debt from affiliates of Messrs. Brooks and Reeg. Specifically, on May 6, 2020, the Company borrowed $180,000 from NC 143 Family Holdings, LP (“NC 143”), a limited partnership controlled by Mr. Brooks, the Company’s President and Chairman of the Board, and $20,000 from Reeg Medical Industries, Inc. (“RMI”), a company owned and controlled by Christopher C. Reeg (“Mr. Reeg”), the Company’s Chief Executive Officer and Secretary, in exchange for two promissory notes which are unsecured, bear interest at 0.25% per annum until May 6, 2022, the maturity date, and 10.0% per annum after the maturity date, if not paid in full. Principal and interest are due and payable on the maturity date, provided, however, any payment of principal and interest on the loans is subordinated to payment of all indebtedness under the RLOC.

For the three months ended June 30, 2020, the Company was ~~not~~ in compliance with the ~~minimum quarterly EBITDA requirement~~covenants of ~~$500,000 for the three months ended September 30, 2019 and had requested a waiver for this event of default from~~its RLOC with Amegy Bank. ~~(See Note 13, Subsequent Events.”)~~

The outstanding balance of the RLOC was $1,088,352 and $1,752,501 ~~and $1,477,448~~ at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. Interest expense incurred on the RLOC was ~~$28,095~~$15,363 and ~~$19,115~~$21,295 for the three months ended ~~September~~June 30, ~~2019~~2020 and ~~September 30, 2018,~~2019, respectively, and is reflected in interest expense on the Company’s accompanying unaudited condensed consolidated statements of operations. Interest expense incurred on the RLOC was ~~$68,168~~$39,633 and ~~$81,641~~$40,073 for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~September 30, 2018,~~2019, respectively. Accrued interest on the RLOC at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 was ~~$3,261~~$4,053 and ~~$4,350,~~$4,437, respectively, and is reflected in accrued expenses on the Company’s accompanying interim unaudited condensed consolidated balance sheets. At ~~September~~June 30, ~~2019,~~2020, the effective interest rate was ~~calculated to be 6.42%~~5.1%.

During July 2016 through October 2016, the Company obtained three working capital loans from NC 143 and RMI in the form of convertible promissory notes (“Notes”) in the aggregate amount of $150,000 bearing ten percent (10%) interest per annum until December 31, 2016 (“Maturity Date”), and eighteen percent (18%) interest per annum for periods subsequent to the Maturity Date. The Notes remain outstanding and principal and interest are due and payable upon demand of the payee and at the holder’s sole discretion. The Notes’ holders have the right to convert all or any portion of the then unpaid principal and interest balance into shares of the Company’s Common Stock at a conversion price of $0.08 per share. On May 6, 2020, the Company borrowed $180,000 from NC 143 and $20,000 from RMI, in exchange for two promissory notes which are unsecured, bear interest at 0.25% per annum until May 6, 2022, the maturity date, and 10.0% per annum after the maturity date, if not paid in full. Principal and interest are due and payable on the maturity date, provided, however, any payment of principal and interest on the loans is subordinated to payment of all indebtedness under the RLOC.

During the three months ended ~~September~~June 30, ~~2019~~2020 and ~~September 30, 2018,~~2019, interest expense of ~~$6,805~~$6,732 and ~~$6,805,~~$ 6,732, respectively, is reflected in interest expense on the Company’s accompanying unaudited condensed consolidated statements of operations. During the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~September 30, 2018,~~2019, interest expense of ~~$20,195~~$13,463 and ~~$20,195,~~$13,389, respectively, is reflected in interest expense on the Company’s accompanying unaudited condensed consolidated statements of operations. As of ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, accrued

interest was ~~$79,290~~$99,559 and ~~$59,096,~~$86,096, respectively, which is reflected in accrued expenses on the Company’s accompanying unaudited condensed consolidated balance sheets.

On April 11, 2020, the Company received approval from the U.S. Small Business Administration (“SBA”) to fund the Company’s request for a loan under the Paycheck Protection Program (“PPP Loan”) created as part of the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the SBA. In connection with the PPP Loan, the Company has entered into a promissory note in the principal amount of $361,400. In accordance with the requirements of the CARES Act, the Company intends to use the proceeds from the PPP Loan primarily for payroll costs. The PPP Loan is scheduled to mature on April 11, 2022, has a 1.00% interest rate, and is subject to the terms and conditions applicable to all loans made pursuant to the Paycheck Protection Program as administered by the SBA under the CARES Act. The PPP Loan is reflected in short term liabilities in the Company’s accompanying interim unaudited condensed consolidated balance sheets as the Company expects the PPP Loan will be forgiven during 2020.

As of June 30, 2020, the Company incurred approximately $900 in accrued interest related to the PPP Loan, which is reflected in accrued expenses on the Company’s accompanying interim unaudited condensed consolidated balance sheets. The Company did not incur accrued interest expense on the PPP Loan as of June 30, 2019. For the three months and six months ended June 30, 2020, the Company incurred approximately $900 in interest expense related to the PPP Loan, which is reflected in interest expense on the Company’s statements of operations. The Company did not incur interest expense related to the PPP Loan for the three and six months ended June 30, 2019.

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

As of June 30, 2020, the Company incurred approximately $940 in accrued interest related to the EIDL Loan, which is reflected in accrued expenses on the Company’s accompanying interim unaudited condensed consolidated balance sheets. The Company did not incur accrued interest expense on the EIDL Loan as of June 30, 2019. For the three months and six months ended June 30, 2020, the Company incurred approximately $940 in interest expense related to the EIDL Loan, which is reflected in interest expense on the Company’s statements of operations. The Company did not incur interest expense related to the EIDL Loan for the three and six months ended June 30, 2019.

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

The Company’s management estimates the fair value of stock-based compensation utilizing the Black-Scholes option pricing model. Black-Scholes option pricing is calculated using several variables, including the expected option term, expected volatility of the Company’s stock price over the expected option term, expected risk-free interest rate over the expected option term, expected dividend yield rate over the expected option term, and an estimate of expected forfeiture rates. The Company’s management believes

this valuation methodology is appropriate for estimating the fair value of stock options granted to employees and directors, which are subject to ASC Topic 718 requirements. The Company’s management estimates of fair value may not be reflective of actual future values or amounts ultimately realized by recipients of these grants. The Company recognizes ~~stock~~ compensation ~~expense~~ on a straight-line basis over the requisite service period for each award.

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

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

For the three and ~~nine~~six months ended ~~September~~June 30, 2019 the Board granted ~~150,000~~300,000 and ~~1,350,000~~1,200,000 Non-qualified Stock ~~Options~~Option (“NQSO”) to the Company’s product advisory board members, certain key employees and marketing representatives. For the three and six months ended ~~September~~June 30, 2020, the Board did not grant any NQSOs. For the three months ended June 30, 2020 and June 30, 2019 ~~and September 30, 2018~~ the Company ~~recognized a benefit of $11,583~~amortized $164,443 and ~~amortized $259,639~~$254,699 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 statement of operations. For the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~September~~June 30, ~~2018~~2019 the Company amortized ~~$487,524~~$327,098 and ~~$485,955~~$499,107 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 ~~statement~~statements of operations. The Company will recognize ~~$1,276,256~~$798,661 as an expense in future periods as the stock options vest. The Company recognizes stock compensation expense on a straight-line basis over the requisite service period for each award, which are subject to a vesting schedule as set forth in individual agreements.

A summary of the Company’s stock option activity for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, is presented below:

	No. of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value		No. of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Balance outstanding at December 31, 2018		3,915,000		$	0.78		7.0	$	443,000
Balance outstanding at December 31, 2019											3,948,333		$	0.61		6.08	$	157,000
Granted		1,350,000			0.69		-		-		-			-		-		-
Exercised		-			-		-		-		-			-		-		-
Forfeited		(1,210,000	)		1.07		-		-		(3,333	)		1.00		8.00		-
Expired		-			-		-		-		-			-		-		-
Balance outstanding at September 30, 2019		4,055,000		$	0.67		6.6	$	222,000
Exercisable at September 30, 2019		1,984,999		$	0.50		4.0	$	222,000
Balance outstanding at June 30, 2020											3,945,000		$	0.61		5.87	$	-
Exercisable at June 30, 2020											1,963,333		$	0.41		3.30	$	-

~~The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2019 was $0.64.~~

~~For the three and nine months ended September 30, 2019, the Company did not have~~

The non-vested restricted stock awards (“~~RSAs~~RSA”~~) to amortize. The Company amortized an expense relating to the vesting of RSAs of $52,722 and $210,888 for the three and nine months ended September 30, 2018.~~

~~The non-vested RSAs,~~s), as of ~~September~~June 30, ~~2019,~~2020, were granted to the Company’s Board members as compensation. These awards vest only upon: (i) the occurrence of one of the Accelerating Events: (a) a Change in Control (as defined in RSA Agreement); or (b) listing of the Company’s Common Stock on ~~a national exchange,~~either NYSE or NASDAQ Stock Market; and (ii) the director’s ~~notification~~delivery to the Company a Notice of ~~such accelerating events,~~Acceleration of Vesting (as defined in RSA Agreement), within ~~a specified period (“Triggering Events~~”)the Acceleration Notice Period (as defined in RSA Agreement). ~~On August 7,~~

As of June 30, 2020, and 2019, ~~to reflect its original intent,~~it was not probable that the ~~Company’s board modified certain award agreements to remove~~performance conditions on the ~~director’s termination of continuous service as a Triggering Event. Thereby all non-vested~~outstanding RSAs would be met, therefore, no expense has been recorded for these awards for the three and six months ended June 30, 2020 and 2019.

There were no RSA’s ~~are now structured with uniform vesting conditions.~~that were granted, exercised, or forfeited during the six months ended June 30, 2020.

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

	For the Nine Months Ended September 30, 2019		For the Nine Months Ended September 30, 2018			For the Six Months Ended June 30, 2020		For the Six Months Ended June 30, 2019
Current:
Federal	$	-	$	-		$	-	$	-
State		10,589		32,121			5,680		13,638
		10,589		32,121			5,680		13,638
Deferred:
Federal		760,993		(537,863	)		-		(168,573	)
State		-		-			-		-
		760,993		(537,863	)		-		(168,573	)
Total income tax expense (benefit)	$	771,582	$	(505,742	)	$	5,680	$	(154,935	)

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

	September 30, 2019			December 31, 2018			June 30, 2020			June 30, 2019
Deferred tax assets:
Net operating loss carryover	$	191,319		$	216,793		$	833,090		$	191,679
Accounts receivable		366,996			140,272			168,344			206,493
Compensation		335,173			232,793			433,296			337,606
Inventory		893,231			383,744			650,837			388,074
Other		28,129			28,128			18,428			28,129
Total deferred tax assets		1,814,848			1,001,730			2,103,995			1,151,981

Deferred tax liabilities:
Intangibles		(222,029	)		(232,835	)		(211,222	)		(218,427	)
Property and equipment		(4,950	)		(7,902	)		(4,828	)		(3,988	)
Total deferred tax liabilities		(226,979	)		(240,737	)		(216,050	)		(222,415	)

Deferred tax assets, net		1,587,869			760,993		$	1,887,945		$	929,566

Valuation allowance:
Beginning of year		-		-				(1,529,584	)		-
(Increase) decrease during year		(1,587,869	)	-
Increase during the year								(358,361	)		-
Ending balance		(1,587,869	)	-				(1,887,945	)		-

Net deferred tax asset	$	-		$	760,993		$	-		$	929,566

A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. The Company recorded a valuation allowance in 2019 due to the uncertainty of realization. Management believes that based upon the history of losses that the Company has incurred to date and its projection of future taxable operating income for the foreseeable future, it is more likely than not that the Company will not be able to realize the tax benefit associated with deferred tax assets. The valuation allowance established during the nine months ended September 30, 2019 was $1,587,869.

At September 30, 2019, the Company estimates it has approximately $911,042 of net operating loss carryforwards, of which $713,036 will expire from 2019 to 2037. The remaining $198,006 of net operating carryforwards is subject to the limitations of the Tax Cuts and Jobs Act of 2018. The Company’s management believes its tax positions are more likely than not of being upheld upon examination. As such, the Company has not recorded a liability for uncertain tax positions. As of September 30, 2019, tax years 2016 through 2018 remain open for Internal Revenue Service (“~~IRS”) audit. The Company has not received a notice of audit from the IRS for any of the open tax years.~~

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

Our effective income tax rates for the six months ended June 30, 2020 and 2019 were (0.4%) and 19.2%, respectively. The decrease from the prior period was driven by the valuation allowance allocated to the deferred tax asset for the current period.

For the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~September 30, 2018,~~2019, the following significant customers had an individual percentage of total revenues equaling ten percent (10%) or greater:

	For the Nine Months Ended						For the Six Months Ended
	September 30, 2019			September 30, 2018			June 30, 2020			June 30, 2019
Customer 1		9.77	%		18.20	%		16.58	%		0.00	%
Customer 2								7.97	%		11.86	%
Totals		9.77	%		18.20	%		24.55	%		11.86	%

At ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the following significant customers had a concentration of accounts receivable representing ten percent (10%) or greater of accounts receivable:

	September 30, 2019			December 31, 2018			June 30, 2020			December 31, 2019
Customer 1 - related party		11.12	%		6.71	%		15.45	%		9.47	%
Customer 2		5.12	%		15.03	%
Totals		16.24	%		21.74	%		15.45	%		9.47	%

For the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~September 30, 2018,~~2019, the following significant suppliers represented ten percent (10%) or greater of goods purchased:

	For the Nine Months Ended						For the Six Months Ended
	September 30, 2019			September 30, 2018			June 30, 2020			June 30, 2019
Supplier 1		21.90	%		11.40	%		22.00	%		22.00	%
Supplier 2 - related party		10.30	%		0.50	%
Supplier 2								12.10	%		3.50	%
Supplier 3 - related party								11.30	%		12.50	%
Totals		32.20	%		11.90	%		45.40	%		38.00	%

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

For the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~September 30, 2018,~~2019, the Company paid approximately ~~$126,000~~$84,000 and ~~$126,000~~$84,000, respectively, in rent expense, which is reflected in selling, general, administrative, and other expenses in the Company’s accompanying interim unaudited condensed consolidated statements of operations.

The Company engaged AmBio Staffing, LLC (“AmBio”), a Texas licensed Professional Employment Organization, to provide payroll processing, employee benefit administration, and related human capital services effective January 1, 2017. Mr. Brooks owns and controls AmBio. As of ~~September~~June 30, ~~2019,~~2020, AmBio operations support approximately 5941 full time equivalents (“FTE”). Of those 5941 FTEs, 4234 FTEs directly support the Company, 107 FTEs support the operations of other companies, and 7no FTEs are shared between the Company and other companies.

As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company owed amounts to AmBio of approximately ~~zero~~$130,000 and ~~$180,000,~~$170,000, respectively, which are reflected in accounts payable on the Company’s unaudited condensed consolidated balance sheets. For the ~~nine~~six months ended ~~September~~June 30, 2020 and June 30, 2019, the Company paid approximately $89,000 and ~~September 30, 2018, approximately $154,000 and $152,000 of~~$105,000, respectively, to AmBio in administrative fees, ~~were paid to AmBio, respectively, and~~which are reflected in selling, general, administrative, and other expenses in the Company’s accompanying unaudited condensed consolidated statements of operations.

Historically, the Company conducts various related-party transactions with entities that are owned by or affiliated with Mr. Brooks and Mr. Reeg. These transactions are based on wholesale contractual agreements that the Company’s management believes are on terms and conditions substantially similar to other third-party contractual agreements. As described more fully below, these transactions include: selling and purchasing of inventory on a wholesale basis, commissions earned and ~~paid.~~paid and shared-service fee arrangements.

MedUSA Group, LLC (“MedUSA”) is a sub-distributor owned and controlled by Mr. Brooks and Mr. Reeg.

During the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~September 30, 2018,~~2019, the Company:

As of ~~September~~June 30, ~~2019,~~2020 and December 31, ~~2018,~~2019, the Company had outstanding balances due from MedUSA of approximately ~~$614,000~~$585,000 and ~~$389,000,~~$555,000, respectively. These amounts are reflected in accounts receivable, net of allowance in the Company’s accompanying ~~unaudited~~ condensed consolidated balance sheets.

As filed with the 2018 Annual Report on March 21, 2019 as Exhibit 10.48, payment terms per the stocking and distribution agreement are 30 days from receipt of invoice. As of September 30, 2019 MedUSA has a past due balance of approximately $601,000.

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

During the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~September 30, 2018,~~2019, the Company:

As of ~~September~~June 30, ~~2019,~~2020 and December 31, ~~2018,~~2019, the Company had ~~outstanding balances~~approximately $30,000 and $15,000 of unpaid commissions costs owed to Overlord, ~~of approximately zero and $2,000, respectively. These amounts~~which are reflected in ~~accounts payable~~accrued liabilities in the Company’s accompanying ~~unaudited~~ condensed consolidated balance sheets.

As of June 30, 2020 and December 31, 2019, the Company had no outstanding balances due from Overlord.

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

During the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~September 30, 2018,~~2019, the Company sold Biologics products to NBMJ in the amounts of approximately ~~$412,000,~~$12,000, and ~~$197,000,~~$364,000, respectively, which are reflected in net revenues in the Company’s accompanying interim unaudited condensed consolidated statements of operations.

As of ~~September~~June 30, ~~2019,~~2020 and December 31, ~~2018~~2019, the Company had no outstanding balances due from NBMJ of approximately $275,000 and $155,000, respectively. These amounts are reflected in accounts receivable, net of allowance in the Company’s accompanying unaudited condensed consolidated balance sheets.NBMJ.

~~As filed with the 2018 Annual Report on March 21, 2019 as Exhibit 10.52, payment~~Payment terms per the stocking and distribution agreement with NBMJ are 30 days from receipt of invoice. ~~As of September 30, 2019 NBMJ has a past due balance of approximately $258,000.~~

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

During the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~September 30, 2018,~~2019, the Company:

As of ~~September~~June 30, ~~2019,~~2020 and December 31, ~~2018,~~2019, the Company had outstanding balances due from Bass of approximately ~~$5,000~~$26,000 and ~~$179,000,~~$7,000, respectively. These amounts are reflected in accounts receivable, net of allowance, in the Company’s accompanying ~~unaudited~~ condensed consolidated balance sheets.

~~As filed with the 2018 Annual Report on March 21, 2019 as Exhibit 10.56, payment~~Payment terms per the stocking and distribution agreement with Bass are 30 days from receipt of invoice.

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

During the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~September 30, 2018,~~2019, the Company incurred approximately ~~$269,000~~$279,000 and ~~$581,000,~~$174,000, respectively, in commission costs to Sintu, which isare reflected in commissions on the Company’s accompanying interim unaudited condensed consolidated statements of operations.

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

During the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~September~~June 30, ~~2018,~~2019, the Company sold Orthopedic Implants and Biologics products to Tiger in the amounts of approximately ~~$189,000~~$39,000 and ~~$109,000,~~$132,000, respectively, which isare reflected in net revenues in the Company’s accompanying interim unaudited condensed consolidated statements of operations.

As of ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, the Company had outstanding balances due from Tiger of approximately ~~$32,000~~$5,000 and ~~$5,000,~~$30,000, respectively. These amounts are reflected in accounts receivable, net of allowance, in the Company’s accompanying ~~unaudited~~ condensed consolidated balance sheets.

~~As filed with the 2018 Annual Report on March 21, 2019 as Exhibit 10.57, payment~~Payment terms per the stocking and distribution agreement with Tiger are 30 days from receipt of invoice. ~~As of September 30, 2019 Tiger has a past due balance of approximately $5,000.~~

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

During the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~September 30, 2018,~~2019, the Company purchased approximately ~~$624,000~~$318,000 and ~~$46,000,~~$481,000, respectively, in Orthopedic Implants and medical instruments from Modal, which isare reflected within inventories, net of allowance onin the Company’s accompanying interim unaudited condensed consolidated balance sheets.

As of ~~September~~June 30, ~~2019,~~2020 and December 31, ~~2018,~~2019, the Company had outstanding balances owed to Modal of approximately ~~$142,000~~$277,000 and ~~zero,~~$0, respectively. These amounts are reflected in accounts payable in the Company’s accompanying ~~unaudited~~ condensed consolidated balance sheets.

As ~~filed with~~of June 30, 2020 and December 31, 2019, the ~~2018 Annual Report on March 21, 2019 as Exhibit 10.64, payment~~Company had outstanding balances due from Modal of approximately $0 and $40,700, respectively. These are reflected in accounts receivable, net of allowance, in the Company’s accompanying condensed consolidated balance sheets.

Payment terms per the stocking and distribution agreement with Modal are 30 days from receipt of invoice. ~~As of September 30, 2019 the Company owes a past due balance of approximately $95,000.~~

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

During the nine months ended September 30, 2018, the Company incurred commissions costs of approximately $209,000, which are reflected in commissions expense on the Company’s accompanying condensed consolidated statements of operations. The Company had no such commission costs for the nine months ended September 30, 2019.

During the nine months ended September 30, 2019 and 2018, the Company earned approximately zero and $4,000, respectively, pursuant to the Company’s shared services agreement which are reflected in selling, general, administrative, and other expenses in the Company’s accompanying condensed consolidated statements of operations.

In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through ~~November 14, 2019.~~

On November 13, 2019, the Company’s management obtained a waiver from Amegy Bank with respect to the event of default for the three months ended September 30, 2019. The Company’s management expects to execute a Fourth Amendment to the RLOC with Amegy Bank during the fourth quarter of 2019. (See NoteAugust 7, ~~“Senior Secured Revolving Credit Facility.”)~~2020.

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

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

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

This discussion and analysis should be read in conjunction with ~~the~~our interim unaudited condensed consolidated financial statements ~~of our Company~~ and the related notes included in this report for the periods presented (our “Financial Statements”), ~~the~~our audited consolidated financial statements ~~on our Company~~ and the related notes thereto and the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our ~~Company’s 2018~~2019 Annual Report.

We are a manufacturer and ~~integrated~~national distributor of medical ~~device implants, offering~~devices. We provide a broad portfolio of ~~Orthopedic Implants~~orthopedic implants including: ~~(i)~~

We also provide a wide array of osteo-biologics and regenerative tissues, ~~and amniotic tissue,~~ which include human allografts, substitute bone materials, ~~and~~ tendons, and ~~regenerative~~amniotic tissues and ~~fluids.~~ 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 ~~continue~~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 ~~as well as the acquisition of~~and by acquiring existing FDA approved devices.

The novel coronavirus SARS CoV-2 (“COVID-19”) global pandemic presents significant risks to our business plan. During our first quarter 2020 and as a response to COVID-19, the Governor of Texas declared a state of disaster and issued an executive order effective March 19, 2020 requiring hospitals to defer all elective surgeries. The order was effective March 19, 2020 through April 22, 2020.

On April 17, 2020, the Governor of Texas issued an additional executive order permitting hospital facilities to begin elective surgeries effective April 22, 2020 with certain restrictions, including maintaining a percentage of available beds for potential COVID-19 related patients. The disaster declaration in Texas, and other governmental jurisdictions, specifically the temporary deferral of all elective surgeries, has adversely impacted our results of operations for the second quarter 2020, in particular, the periods prior to April 22, 2020.

Our products support patient conditions which are degenerative in nature. While most of our Cases are currently ~~the master distributor~~considered elective, they are typically necessary for a patient to restore mobility, reduce pain and increase quality of ~~a next generation total-knee joint replacement product line (the “Sterizo Total-Knee Replacement System”) manufactured in the U.S. by Modal.~~life. We continue to ~~expand~~believe our ~~customer base~~annual revenues for 2020 will fall within a range of 4% to 6% lower compared to 2019. Although our revenues during our second quarter were significantly lower due to the restrictions on elective surgeries in place prior to April 22, 2020, we anticipate a steady increase in revenues throughout the third and the traditionally highest, fourth quarter of the Sterizo Total-Knee Replacement System by increasing new hospital and surgeon acceptance. During the third quarter of 2019, 13 hospitals and 10 surgeons were approved and utilizing our Sterizo Total-Knee Replacement System. For the three and nine months ended September 30, 2019, we generated approximately $270,000 and $820,000, respectively, in revenues for the Sterizo Total-Knee Replacement System.year.

During the third quarter, we also launched our new Fuse suture anchors for our sports medicine product line, the Galen Medial and Galen XT Suture Anchors, the Kopis Knotless Anchor, and the Vida Interference Screws (“~~Fuse Suture Anchors~~”). The Fuse Suture Anchors are manufactured in the United States from PEEK and Titanium materials and are intended for use in the fixation of ligament, tendon, bone, or soft tissue to bone in knee, shoulder, foot/ankle, elbow, and hand/wrist procedures.

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

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

~~We believe our~~Subsequent to the government-imposed shelter-in-place mandates and prohibitions on elective surgeries, revenues for the ~~third~~second quarter of ~~2019~~2020 were consistent with our historical seasonality trends.

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

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

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

Retail Cases in our industry ~~Retail Cases are typically sold at a~~command higher revenue price points than Wholesale ~~Cases, resulting in greater revenue per Case. Our~~Cases. Because Retail Cases involve direct sales to ~~medical facilities, which means that~~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 ~~direct~~full time or ~~contracted~~independent sales ~~representative or sub-distributor. Our Wholesale Cases involve sales to third parties who resell our products to end users.~~representative. As a result, ~~sales of our~~ Retail Cases generally generate substantially more gross profit than Wholesale Case transactions. ~~However,~~

In the quarter ended June 30, 2020, our ~~sales of~~ average revenue per Retail Case increased by approximately 17% and our average revenue per Wholesale Case increased by approximately 37% compared to the quarter ended June 30, 2019.

Wholesale Cases in our industry command lower revenue price-points than Retail Cases. Because Wholesale Cases involve sales to third parties who in turn 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 commissions. Our Wholesale Case business is highly dependent on minimum volume sales levels to achieve appropriate profitability.

InDuring the ~~quarter~~six months ended ~~September~~June 30, ~~2019,~~2020, our average revenue per Retail Case increased by approximately ~~fifteen percent (15%), primarily driven by an increase in Cases where the patient has obtained a letter of protection, (“LOP”). A LOP i~~s a contract that provides that the medical providers will be paid from any proceeds received from settlement of litigation with respect to the necessitated medical goods and services. We believe revenue derived from LOP related Cases commands higher price points as the LOP provides the medical providers with greater certainty of full payment. Our average revenue per Wholesale Case decreased by approximately fourteen percent (14%) compared to the quarter ended September 30, 2018, which is primarily driven by our strategy to concentrate on volume of Retail Cases over Wholesale Cases and by variation in Wholesale customer concentration.

~~During the nine months ended September 30, 2019, our average revenue per Retail Case was flat~~17% and our average revenue per Wholesale Case decreased by approximately ~~sixteen percent (16%)~~37% compared to the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019.

Pricing pressure has increased in our industry due to ~~(a)~~(i) continuous consolidation among healthcare providers, ~~(b)~~(ii) trends toward ~~increased~~ managed care, ~~healthcare, (c)~~(iii) increased government oversight of healthcare costs, and ~~(d)~~(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, operating results and financial condition.

To ~~mitigate~~offset pricing pressure, we employ strategies to maximize revenue per Case. For the six months ended June 30, 2020 and 2019, our average revenues per Case were $5,123 and $3,691, respectively. The approximate 39% increase in average revenue per Case was primarily due to (a)(i) a shift to focus on retail cases, and (ii) an increase in revenue derived from commission agreements, offset, in part, by (b) continued pricing pressures, as described above.

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

We describe our most significant accounting policies in Note 2, “Significant Accounting Policies” of our unaudited condensed consolidated notes to our Financial Statements beginning on page F-1 and found elsewhere in this report and in our ~~2018~~2019 Annual Report. These policies are considered critical because they may result in fluctuations in our reported results from period to period due to the significant judgments, estimates, and assumptions about highly complex and inherently uncertain matters. In addition, the use of different judgments, assumptions, or estimates could have a material impact on our financial condition or results of operations. We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as appropriate based on changing conditions.

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

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

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

	For the Three Months Ended
	June 30, 2020			(% Rev)	June 30, 2019			(% Rev)
Net revenues	$	4,010,666		100%	$	5,075,925		100%
Cost of revenues		1,796,663		45%		2,223,912		44%
Gross profit		2,214,003		55%		2,852,013		56%
Operating expenses:
Selling, general, administrative and other expenses		1,161,476		29%		1,975,934		39%
Commissions		1,420,239		36%		1,004,994		20%
Depreciation and amortization		30,752		0%		25,596		1%
Total operating expenses		2,612,467		65%		3,006,524		59%
Operating loss		(398,464	)	-10%		(154,511	)	-3%
Other expense
Interest expense		24,021		1%		28,027		1%
Total other expense		24,021		1%		28,027		1%
Operating (loss) before tax		(422,485	)	-10%		(182,538	)	-4%
Income tax benefit (expense)		946		0%		(40,389	)	-1%
Net loss	$	(423,431	)	-10%	$	(142,149	)	-3%

For the three months ended June 30, 2020, net revenues were $4,010,666 compared to $5,075,925 for the three months ended June 30, 2019, which is a decrease of $1,065,259, or approximately 21%.

For the three months ended June 30, 2020, Retail Cases decreased by 19% compared to the three months ended June 30, 2019. Accordingly, revenues from Retail Cases for the three months ended June 30, 2020, decreased by 6% compared to revenues from Retail Cases for the three months ended June 30, 2019. We believe this 6% decrease in revenues from Retail Cases is primarily driven by a reduction in Retail Case volume.

Our Wholesale Cases declined by 76% for the three months ended June 30, 2020, compared to Wholesale Cases during the three months ended June 30, 2019. Accordingly, revenues from Wholesale Cases for the three months ended June 30, 2020, declined by 67% compared to revenues from Wholesale Cases for the period ended June 30, 2019.

As discussed above in “Current Trends and Outlook,” we believe that as our industry faces increased pricing pressures, we will need to focus on increased volume of Cases to maintain gross profit levels. For the two remaining quarters of 2020, we will seek to increase our volume of Retail Case Sales to our existing retail customer base and add new retail customers.

For the three months ended June 30, 2020, our cost of revenues was $1,796,663, compared to $2,223,912 for the three months ended June 30, 2019, representing a decrease of $427,249, or approximately 19%.

As a percentage of revenues, cost of revenues increased approximately one percentage point to approximately 45% for the three months ended June 30, 2020, compared to approximately 44% for the three months ended June 30, 2019. The increase as a percentage of net revenues resulted from (a)(i) an approximate 10% increase in inventory shrink and inventory loss provision, (a)(ii) an approximate 2% increase in medical instrument expense, offset, in part, by (b) an approximate 10% reduction in cost of goods sold.

For the three months ended June 30, 2020, we generated a gross profit of $2,214,003, compared to $2,852,013 for the three months ended June 30, 2019, representing a decrease of $638,010, or approximately 22%.

As a percentage of net revenue, gross profit declined approximately one percentage point to 55% for the three months ended June 30, 2020, compared to 56% for the three months ended June 30, 2019. This reduction in gross profit as a percentage of revenues was primarily caused by the increase in cost of revenues as a percentage of net revenues, as discussed above.

For the three months ended June 30, 2020, selling, general, administrative, and other expenses decreased to $1,161,476 from $1,975,934 for the three months ended June 30, 2019, representing a decrease of $814,458, or approximately 41%.

As a percentage of net revenues, selling, general, administrative and other expenses accounted for approximately 29% and 39% for the three months ended June 30, 2020 and June 30, 2019, respectively. As a percentage of net revenue, the decrease of approximately 10 percentage points primarily resulted from (a)(i) an approximate 6 percentage-point decline in provision for bad debt, (a)(ii) an approximate 4 percentage point decline in leased staffing costs, and (a)(iii) an approximate one percentage point decline in stock-based compensation, offset, in part by, (b) an approximate one percentage-point increase in professional expense. Reflected in professional fees and stock-based compensation was approximately $345,673 in compensation to members of our scientific advisory boards (“SABs”), of which approximately $200,000 was in the form of cash expense and approximately $145,673 was non-cash stock-based compensation. The three months ended June 30, 2020, reflected an approximate $175,947 decrease in professional fees related to the SABs as compared to the three months ended June 30, 2019.

For the three months ended June 30, 2020 and June 30, 2019, commission expense was $1,420,239 and $1,004,994, respectively, representing an increase of $415,245, or approximately 41%.

As a percentage of net revenues, commission expense accounted for approximately 36% for the three months ended June 30, 2020, and 20% for the three months ended June 30, 2019. This approximate 16 percentage-point increase primarily resulted from an approximate 2% increase of revenues eligible for commissions and an approximate 14% increase in average commissions rates.

For the three months ended June 30, 2020, our depreciation and amortization expense increased to $30,752 from $25,596 for the three months ended June 30, 2019, representing an increase of $5,156. This increase was primarily the result of approximately $20,757 investments in new office workstations and in our equity incentive plan administrative and tracking software during the three months ended March 31, 2020. We had incurred no investments during the three months ended June 30, 2020.

For the three months ended June 30, 2020, interest expense declined to $24,021 from $28,027 for the three months ended June 30, 2019, which is a reduction of $4,006, or approximately 14%. The decline of $4,006 was primarily driven by (a)(i) an approximate $7,874 reduction in interest costs caused by a decline in LIBOR market interest rates, offset, in part, by (b)(i) an approximate $1,942 increase in interest related to increased borrowings on our RLOC, (b)(ii) an approximate $939 increase related to accrued interest on our EIDL Loan, (b)(iii) an approximate $904 increase related to accrued interest on our PPP Loan, and (b)(iv) an approximate $83 increase of accrued interest on our Subordinated Notes.

For the three months ended June 30, 2020, we recorded an income tax expense of approximately $946, compared to an income tax benefit of approximately $40,389, for the three months ended June 30, 2019. For additional information, please see Note 10, “Income Taxes,” of our accompanying Financial Statements, beginning on page F-1.

For the three months ended June 30, 2020, we had a net loss of $423,431 compared to a net loss of $142,149 for the three months ended June 30, 2019, respectively, representing a decrease in net loss of $281,282 or approximately 198%.

As a percentage of revenue, net loss represented approximately 11% and 3% for the three months ended June 30, 2020 and June 30, 2019, respectively.

The approximate 8 percentage point increase in net loss as a percentage of revenue was primarily attributable to (a)(i) an approximate 16 percentage point increase in commissions, (a)(ii) an approximate one percentage point increase in income tax expense, and (a)(iii) an approximate one percentage point increase in depreciation and amortization, offset, in part, by (b) an approximate 10 percentage point decrease in selling, general, administrative, and other expenses.

	For the Three Months Ended								For the Six Months Ended
	September 30, 2019			(% Rev)	September 30, 2018			(% Rev)	June 30, 2020			(% Rev)	June 30, 2019			(% Rev)
Net revenues	$	5,716,344		100%	$	6,784,304		100%	$	8,647,169		100%	$	9,846,584		100%
Cost of revenues		4,787,939		84%		3,047,373		45%		3,779,559		44%		4,199,257		43%
Gross profit		928,405		16%		3,736,931		55%		4,867,610		56%		5,647,327		57%
Operating expenses:										-		0%		-		0%
Selling, general, administrative and other		2,263,964		40%		1,932,991		28%
Selling, general, administrative and other expenses										3,642,247		42%		4,340,102		44%
Commissions		1,741,770		30%		1,405,024		21%		2,811,356		32%		2,010,525		20%
Depreciation and amortization		25,596		0%		4,829		0%		60,735		1%		51,320		1%
Total operating expenses		4,031,330		71%		3,342,844		49%		6,514,338		75%		6,401,947		65%
Operating (loss) income		(3,102,925	)	-54%		394,087		6%
Operating loss										(1,646,728	)	-19%		(754,620	)	-8%
Other expense										-		0%		-		0%
Interest expense		(34,900	)	-1%		(25,920	)	0%		55,022		1%		53,462		1%
Total other income (expense)		(34,900	)	-1%		(25,920	)	0%
Operating income (loss) before tax		(3,137,825	)	-55%		368,167		5%
Income tax expense		926,517		16%		90,985		1%
Net income (loss)	$	(4,064,342	)	-71%	$	277,182		4%
Total other expense										55,022		1%		53,462		1%
Operating (loss) before tax										(1,701,750	)	-20%		(808,082	)	-8%
Income tax benefit (expense)										5,680		0%		(154,935	)	-2%
Net loss									$	(1,707,430	)	-20%	$	(653,147	)	-7%

~~Three Months Ended September 30, 2019, Compared to Three Months Ended September 30, 2018~~

For the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, net revenues were ~~$5,716,344~~$8,647,169 compared to ~~$6,784,304~~$9,846,584 for the ~~three~~six months ended ~~September~~June 30, ~~2018, which is~~2019, a decrease of ~~$1,067,960~~$1,199,415 or approximately ~~sixteen percent (16%)~~12%.

For the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, Retail Cases decreased by ~~sixteen percent (16%)~~13% compared to the ~~three~~six months ended ~~September~~June 30, ~~2018. Accordingly, revenues~~2019. Revenues from Retail Cases for the ~~three~~six months ended ~~September~~June 30, ~~2019, decreased~~2020, increased by ~~three percent (3%)~~2% compared to revenues from Retail Cases for the ~~three~~six months ended ~~September~~June 30, ~~2018. We believe this three percent (3%) decrease~~2019. This 2% increase in revenues from Retail Cases is primarily driven by ~~a reduction~~greater concentration in ~~Retail Case volume, and to a letter extent, pricing pressure.~~new medical facilities.

Our Wholesale Cases declined by ~~thirty-one percent (31%)~~70% for the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to Wholesale Cases during the ~~three~~six months ended ~~September~~June 30, ~~2018.~~2019. Accordingly, revenues from Wholesale Cases for the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, declined by ~~fifty-seven percent (57%)~~50% compared to revenues from Wholesale Cases for the period ended ~~September~~June 30, ~~2018.~~

To increase revenues, we believe we will need to focus on increasing volume of Cases sold. For the last quarter of 2019, we will seek to increase our volume of Retail Case Sales to our existing retail customer base and add new retail customers to increase revenues and gross profits.2019.

For the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, our cost of revenues was ~~$4,787,939,~~$3,779,559, compared to ~~$3,047,373~~$4,199,257 for the ~~three~~six months ended ~~September~~June 30, ~~2018,~~2019, representing ~~an increase~~a decrease of ~~$1,740,566,~~$419,698, or approximately ~~fifty-seven percent (57%)~~10%.

As a percentage of revenues, cost of revenues increased ~~thirty-nine (39)~~approximately one percentage ~~points~~point to approximately ~~eighty-four percent (84%)~~44% for the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to approximately ~~forty-five percent (45%)~~43% for the ~~three~~six months ended ~~September~~June 30, ~~2018.~~2019. The increase as a percentage of net revenues resulted from (a)(i) an approximate ~~three (3)~~8 percentage-point increase in inventory shrink and inventory loss provision, (a)(ii) an approximate 2 percentage point increase in medical instrument expense, offset, in part, by (b) an approximate 9 percentage point reduction in cost of products sold, (b) an approximate six (6) percentage-point reduction in medical instrument expense, offset by, (c) an approximately forty-eight (48) percentage-point increase in slow moving and obsolete inventory. For the three months ended September 30, 2019, we increased our estimate of the slow moving and obsolete inventory reserve by approximately $2.4 million primarily due to excess inventory relating to our former knee and hip supplier in which the contract terminated during the three (3) months ended March 2018 as well as other discontinued product-lines of active suppliers.sold.

For the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, we generated a gross profit of ~~$928,405,~~$4,867,610, compared to ~~$3,736,931~~$5,647,327 for the ~~three~~six months ended ~~September~~June 30, ~~2018,~~2019, representing ~~a decrease~~an increase of ~~$2,808,526,~~$779,717, or approximately ~~seventy-five percent (75%)~~14%.

As a percentage of net revenue, gross profit decreased by approximately ~~thirty-nine (39)~~one percentage points to ~~sixteen percent (16%)~~56% for the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~fifty-five percent (55%)~~57% for the ~~three~~six months ended ~~September~~June 30, ~~2018.~~2019. This decrease in gross profit as a percentage of revenues was primarily caused by the increase in cost of revenues as a percentage of net revenues, as discussed above.

For the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, selling, general, administrative, and other expenses ~~increased~~decreased to ~~$2,263,964~~$3,642,247 from ~~$1,932,991~~$4,340,102 for the ~~three~~six months ended ~~September~~June 30, ~~2018,~~2019, representing ~~an increase~~a decrease of ~~$330,973,~~$697,855, or approximately ~~seventeen percent (17%)~~16%.

As a percentage of net revenues, selling, general, administrative and other expenses accounted for approximately ~~forty percent (40%)~~42% and ~~twenty-eight percent (28%)~~44% for the ~~three~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~September~~June 30, ~~2018,~~2019, respectively. As a percentage of net revenue, the ~~increase~~decrease of approximately ~~twelve (12)~~2 percentage points primarily resulted from (a)(i) an approximate ~~five (5)~~one percentage-point ~~decrease~~decline provision for bad debt, (a)(ii) an approximate 1 percentage point decline in ~~stock-based~~leased staffing costs, and (a)(iii) an approximate one percentage point decline in stock based compensation, offset, in part, by (b) an approximate ~~twelve (12) percentage-point increase in bad debt expense, (c) an approximate two (2) percentage-point increase in leased staffing costs, (d) an approximate two (2) percentage—~~one percentage point increase in ~~travel and expense reimbursement costs, and (e) an approximate one (1) percentage-point increase in~~ professional ~~fees.~~expense. Reflected in ~~the~~ professional fees and stock-based compensation is approximately ~~$232,000~~$689,559 in ~~payments~~compensation to members of our ~~scientific advisory boards,~~SABs, of which approximately ~~$263,000 is~~$400,000 was in the form of cash expense and approximately ~~$31,000 is~~$289,559 was non-cash stock-based ~~compensation benefit.~~compensation. The ~~approximate $670,000 increase in bad debt expense for the three~~six months ended ~~September~~June 30, ~~2019~~2020, reflected an approximate reduction of approximately $319,740 in professional fees related to the SABs as compared to ~~September 30, 2018 is primarily~~ the ~~result of approximately $320,000 and $110,000 of past-due wholesale and retail accounts, respectively. Further, for the three~~six months ended ~~September~~June 30, ~~2018 approximately $240,000 of accounts receivable were recovered that were previously reserved as uncollectible.~~2019.

For the ~~three~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~September~~June 30, ~~2018,~~2019, commissions expense was ~~$1,741,770~~$2,811,356 and ~~$1,405,024,~~$2,010,525, respectively, representing an increase of ~~$336,746,~~$800,831, or approximately ~~twenty-four percent (24%)~~40%.

As a percentage of net revenues, commissions expenses accounted for approximately ~~thirty percent (30%)~~32% for the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, and ~~twenty-one percent (21%)~~20% for the ~~three~~six months ended ~~September~~June 30, ~~2018.~~2019. This ~~nine (9)~~approximate 12 percentage-point increase primarily resulted from ~~(a)(i) the~~an approximate ~~twenty-one (21) percentage point~~4% increase inof revenues eligible for commissions and ~~(ii)~~approximately an ~~approximate ten (10) percentage point~~8% increase in average commission rates ~~offset, in part by (b)(i) an approximate twenty-two (22) percentage point reduction in 3~~^rd ~~party contracted salesforce receiving commissions.~~

as well as the realignment and restructuring of the commission agreement for our largest commission-based representative.

For the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, our depreciation expense increased to ~~$25,596~~$60,735 from ~~$4,829~~$51,320 for the ~~three~~six months ended ~~September~~June 30, ~~2018,~~2019, representing an increase of ~~$20,767.~~$9,415. This increase iswas primarily the result of approximately $20,355 in amortization of intangible assets, such as noncompete agreements and customer relationships, acquired pursuant to our acquisition of Maxim Surgical effective August 1, 2018, and an ~~approximately $412~~ investment to upgrade our supply-chain inventory management system and new office ~~workstations.~~workstations in prior periods.

For the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, interest expense increased to ~~$34,900~~$55,022 from ~~$25,920~~$53,462 for the ~~three~~six months ended ~~September~~June 30, ~~2018,~~2019, which is an increase of ~~$8,980,~~$1,560, or approximately ~~thirty-five percent (35%)~~3%. The increase isof $1,560 was primarily ~~due to~~driven by (a)(i) an approximate ~~$1,961~~$11,028 increase in interest related to increased borrowings on our RLOC, ~~with Amegy Bank, and~~(a)(ii) an approximate ~~$7,019~~$939 increase related to accrued interest on our EIDL Loan, (a)(iii) an approximate $904 increase related to accrued interest on our PPP Loan, and (a)(iv) an approximate $83 accrued interest on our Subordinated Notes, offset, in part, by (b) an approximate $11,393 reduction in interest costs caused by an ~~increase~~declines in the LIBOR market interest rates and a one percent (1%) increase in cost of borrowings on the RLOC pursuant to the Second Amendment of the RLOC executed on November 19, 2018, and disclosed on our Current Report on Form 8-K filed with the SEC on November 21, 2018.rates.

For the ~~three~~six months ended ~~September~~June 30, ~~2019~~2020, we recorded an income tax expense of approximately $926,517. For the three months ended September 30, 2019 we established a valuation allowance for 100% of our deferred tax assets. For the three months ended September 30, 2018 we recorded an income tax expense of approximately, $90,985. For additional information, please see Note 10, “Income Taxes,” on our accompanying Financial Statements, beginning on page F-1.

~~For the three months ended September 30, 2019, we had a net loss of $4,064,342~~$5,680 compared to ~~a net income of $277,182 for the three months ended September 30, 2018, representing a decrease in net income of $4,341,524.~~

As a percentage of revenue, net loss represented approximately seventy-one percent (71%) and net income represented approximately four percent (4%) for the three months ended September 30, 2019 and September 30, 2018, respectively.

The approximate seventy-five (75) percentage point increase in net loss as a percentage of revenue is primarily attributable to (a)(i) an increase of approximately fifteen (15) percentage points in our income tax expense, (ii) a decrease of approximately thirty-nine (39) percentage-points in gross profit, (iii) an increase of approximately ten (10) percentage points in commissions expense, and (iv) an increase in selling, general, administrative, and other expenses of approximately eleven (11) percentage points.

For the Nine Months Ended

September 30,
2019

(% Rev)

September 30,
2018

(% Rev)

Net revenues

$
15,562,928

100%

$
18,506,810

100%

Cost of revenues

8,987,196

58%

9,941,271

54%

Gross profit

6,575,732

42%

8,565,539

46%

Operating expenses:

Selling, general, administrative and other

6,604,066

42%

6,432,798

35%

Commissions

3,752,295

24%

4,599,080

25%

Depreciation and amortization

76,916

0%

10,650

0%

Total operating expenses

10,433,277

67%

11,042,528

60%

Operating loss

(3,857,545
)
-25%

(2,476,989
)
-13%

Other expense

Interest expense

(88,362
)
-1%

(101,835
)
-1%

Total other income (expense)

(88,362
)
-1%

(101,835
)
-1%

Operating loss before tax

(3,945,907
)
-25%

(2,578,824
)
-14%

Income tax expense (benefit)

771,582

5%

(505,742
)
-3%

Net loss

$
(4,717,489
)
-30%

$
(2,073,082
)
-11%

~~Nine Months Ended September 30, 2019, Compared to Nine Months Ended September 30, 2018~~

For the nine months ended September 30, 2019, net revenues were $15,562,928 compared to $18,506,810 for the nine months ended September 30, 2018, a decrease of $2,943,882 or approximately sixteen percent (16%).

For the nine months ended September 30, 2019, Retail Cases decreased by eleven percent (11%) compared to the nine months ended September 30, 2018. Accordingly, revenues from Retail Cases for the nine months ended September 30, 2019, decreased by nine percent (9%) compared to revenues from Retail Cases for the nine months ended September 30, 2018. We believe this nine percent (9%) decrease in revenues from Retail Cases is primarily driven by a reduction in Retail Case volume.

Our Wholesale Cases declined by twenty-two percent (22%) for the nine months ended September 30, 2019, compared to Wholesale Cases during the nine months ended September 30, 2018. Accordingly, revenues from Wholesale Cases for the nine months ended September 30, 2019, declined by thirty-five percent (35%) compared to revenues from Wholesale Cases for the period ended September 30, 2018, which is primarily driven by our strategy to concentrate on volume of Retail Cases over Wholesale Cases.

For the nine months ended September 30, 2019, our cost of revenues was $8,987,196, compared to $9,941,271 for the nine months ended September 30, 2018, representing a decrease of $954,075, or approximately ten percent (10%).

As a percentage of revenues, cost of revenues increased four (4) percentage points to approximately fifty-eight percent (58%) for the nine months ended September 30, 2019, compared to approximately fifty-four percent (54%) for the nine months ended September 30, 2018. The increase as a percentage of net revenues resulted from (a) an approximate three (3) percentage-point reduction in cost of products sold, (b) an approximate six (6) percentage-point reduction in medical instrument expense, offset, in part, by (c) an approximate thirteen (13) percentage-point increase in slow moving and obsolete inventory. During the nine months ended September 30, 2019, we increased our estimate of the slow moving and obsolete inventory reserve by approximately $2.7 million primarily due excess inventory relating to our former knee and hip supplier in which the contract terminated during the three (3) months ended March 2018 as well as other discontinued product-lines of active suppliers.

For the nine months ended September 30, 2019, we generated a gross profit of $6,575,732, compared to $8,565,539 for the nine months ended September 30, 2018, representing a decrease of $1,989,807, or approximately twenty-three percent (23%).

As a percentage of net revenue, gross profit decreased by approximately four (4) percentage points to forty-two percent (42%) for the nine months ended September 30, 2019, compared to forty-six percent (46%) for the nine months ended September 30, 2018. This decrease in gross profit as a percentage of revenues was primarily caused by the increase in cost of revenues as a percentage of net revenues, as discussed above.

For the nine months ended September 30, 2019, selling, general, administrative, and other expenses increased to $6,604,066 from $6,432,798 for the nine months ended September 30, 2018, representing an increase of $171,268 or approximately three percent (3%).

As a percentage of net revenues, selling, general, administrative and other expenses accounted for approximately forty-two percent (42%) and thirty-five percent (35%) for the nine months ended September 30, 2019 and September 30, 2018, respectively. As a percentage of net revenue, the increase of approximately seven (7) percentage points primarily resulted from (a) an approximate four (4) percentage-point increase in bad debt expense, (b) an approximate two (2) percentage-point increase in leased staffing costs primarily for operations and sales representatives, (c) an approximate one (1) percentage-point increase in professional fees, (d) an approximate one (1) percentage-point increase in travel and expense reimbursement costs, offset, in part by, (e) an approximate one (1) percentage-point decrease in stock-based compensation. Reflected in the professional fees and stock-based compensation increase is approximately $1,218,000 in payments to members of our scientific advisory boards, of which approximately $800,000 is in the form of cash expense and approximately $418,000 is non-cash stock-based compensation. The approximate $613,000 increase in bad debt expense for the nine months ended September 30, 2019 compared to September 30, 2018 is primarily the result of approximately $622,000 and $161,000 of past-due wholesale and retail accounts, respectively. Further, for the nine months ended September 30, 2018 approximately $170,000 of accounts receivable were recorded as uncollectable.

For the nine months ended September 30, 2019 and September 30, 2018, commissions expense was $3,752,295 and $4,599,080, respectively, representing a decrease of $846,785, or approximately eighteen percent (18%).

As a percentage of net revenues, commissions expenses accounted for approximately twenty-four percent (24%) for the nine months ended September 30, 2019, and twenty-five percent (25%) for the nine months ended September 30, 2018. This one (1) percentage-point decrease primarily resulted from (a)(i) the approximate thirteen (13) percentage point increase in revenues eligible for commissions, offset, in part by (b)(i) an approximate one (1) percentage point decline in average commission rates, and (ii) an approximate eleven (11) percentage point reduction in 3^rd ~~party contracted salesforce receiving commissions.~~

For the nine months ended September 30, 2019, our depreciation expense increased to $76,916 from $10,650 for the nine months ended September 30, 2018, representing an increase of $66,266. This increase is primarily the result of approximately $61,065 in amortization of intangible assets, such as noncompete agreements and customer relationships, acquired pursuant to our acquisition of Maxim Surgical effective August 1, 2018, and an approximately $5,201 investment to upgrade our supply-chain inventory management system and new office workstations.

For the nine months ended September 30, 2019, interest expense declined to $88,362 from $101,835 for the nine months ended September 30, 2018, which is a reduction of $13,473, or approximately thirteen percent (13%). The decline is primarily due to an approximate $21,803 reduction in interest related to borrowings on our RLOC with Amegy Bank, offset, in part, by an approximately $8,330 increase in interest costs caused by an increase in the LIBOR market interest rates and a one percent (1%) increase in cost of borrowings on the RLOC pursuant to the Second Amendment of the RLOC executed on November 19, 2018, and disclosed on our Current Report on Form 8-K filed with the SEC on November 21, 2018.

For the nine months ended September 30, 2019, we recorded an income tax expense of approximately $771,582. For the nine months ended September 30, 2019 we established a valuation allowance for 100% of our deferred tax assets. For the nine months ended September 30, 2018, we recorded an income tax benefit of ~~$505,742, due to pretax loss.~~approximately $154,935, for the six months ended June 30, 2019. For additional information, please see Note 10, “Income Taxes,” of our accompanying Financial Statements, beginning on page F-1.

For the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, we had a net loss of ~~$4,717,489~~$1,707,430 compared to a net loss ~~$2,073,082~~$653,147 for the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, respectively, representing an increase in net loss of ~~$2,644,407,~~$1,054,283, or approximately ~~one-hundred twenty-eight percent (128%)~~161%.

As a percentage of revenue, net loss represented approximately ~~thirty percent (30%)~~20% and ~~eleven percent (11%)~~7% for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~September~~June 30, ~~2018,~~2019, respectively.

The approximate ~~nineteen (19)~~13 percentage point increase in net loss as a percentage of revenue iswas primarily attributable to (a)(i) an approximate 12 percentage point increase ~~of approximately eight (8)~~commissions, (a)(ii) an approximate 2 percentage ~~points~~point increase in ~~our~~ income tax expense, ~~(ii) a decrease of approximately four (4) percentage-points related to~~and (a)(iii) an approximate 1 percentage point decline in gross profit, ~~and (iii)~~offset in part, by (b) an ~~increase~~approximate 2 percentage point decrease in selling, general, administrative, and other ~~expenses of approximately eight (8) percentage points offset, in part, by (b)(i) a decrease of approximately one (1) percentage point in commissions expense.~~expenses.

During the ~~nine~~six months ended ~~September~~June 30, ~~2019, net cash used in operating activities was $88,097 compared to~~2020, net cash provided by operating activities ~~of $2,938,508~~was $41,471 compared to $222,474 for the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, representing a decrease of ~~$3,026,605.~~$181,003.

For the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, our net cash ~~used in~~provided by operating activities resulted primarily from: (a)(i) a ~~$612,769 increase~~$2,076,373 decrease in accounts receivable, and (ii) a ~~$186,823~~$1,425,600 reduction in ~~accounts payable, net,~~inventories, offset, in part, by (b)(i) ~~$392,193~~an increase of $1,510,486 of long term accounts receivable, (b)(ii) $1,150,648 of net ~~income~~loss adjusted for non-cash items, ~~(ii) a $181,656 decrease in inventories,~~ (b)(iii) a ~~$125,458~~$513,268 reduction in accounts payable, (b)(iv) a $238,198 reduction in accrued expensed and (b)(v) a $47,902 increase in ~~accrued liabilities,~~prepaid expenses and ~~(iv) a $12,188 decrease in prepaid expenses.~~other current assets.

For the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, our net cash provided by operating activities resulted primarily from; (a)(i) a ~~$ 2,598,303~~$823,729 reduction in ~~accounts receivable, net,~~ accrued expensed, and (a)(ii) a ~~$1,201,714~~ reduction of $318,379 in ~~inventories, net, (iii) a $568,280 increase in accrued expenses, and (iv) a $10,396 reduction in prepaid expenses;~~accounts payable, offset, in part, by (b)(i) a ~~$999,645~~$982,357 reduction in accounts receivable, (b)(ii) a $285,215 reduction in inventories, (b)(iii) $68,860 of net loss adjusted for non-cash items, (b)(iv) a $17,100 decrease in long term accounts receivable, and ~~(ii) a $440,540~~(b)(vi) an $11,051 reduction in ~~accounts payable.~~prepaid expenses and other current assets.

During the six months ended June 30, 2020, net cash used in investing activities was approximately $20,757 net cash provided by operating activities was $41,471 for our investments in (i) new office workstations and (ii) equity incentive plan administrative and tracking software.

For the ~~nine~~six months ended ~~September~~June 30, 2019, there was no net cash used in investing activities.

For the nine months ended September 30, 2018, our net cash used in investing activities was $99,081, which resulted from; (i) a $63,097 for Maxim Acquisition, net of cash acquired and (ii) $35,984 purchase of fixed assets.

For the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, net cash provided by financing activities was ~~$275,053,~~$47,251, compared to ~~$3,049,262 net cash~~$224,947 used in financing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019.

The ~~$275,053~~$47,251 in net cash provided by financing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 primarily resulted from ~~borrowings~~(a)(i) $361,400 in proceeds from our PPP Loan, (a)(ii) $200,000 in proceeds from our Subordinated Notes; and (a)(iii) $150,000 in proceed from our EIDL Loan, offset, in part, by (b)(i) $664,149 in net repayments on our RLOC.

The ~~$3,049,262~~$224,947 in net cash used in financing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 resulted from ~~(a) the $2,651,799 of net payments~~repayments on our ~~RLOC and (b) a $397,463 purchase price adjustment – CPM acquisition.~~RLOC.

Our primary sources of liquidity are cash from our operations and our RLOC with Amegy Bank. As of ~~September~~June 30, ~~2019,~~2020, our current assets exceeded our current liabilities by ~~$6,659,061~~$4,189,795 (our “Working Capital”), which includes ~~$1,031,270~~$1,167,275 in cash and cash equivalents. ~~Our~~We believe cash from our operations ~~support the funding of~~and net borrowings on our ~~payments for commissions, payroll and human capital, and professional fees.~~RLOC supports our Working Capital needs.

OnEffective December ~~29,~~31, 2017, we became party to athe RLOC with Amegy Bank. The RLOC established an asset-based senior secured revolving credit facility ~~in the amount~~with contractual aggregate limit of $5,000,000. The RLOC contains customary representation, warranties, covenants, events of default, and is collateralized by substantially all of our ~~assets. Our~~assets and provides that our Chairman of the Board of Directors (“Board”) and President ~~personally guarantees fifty percent (50%)~~provides a personal guarantee for a portion of the outstanding RLOC amount.

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

On November 19, 2018, we executed the Second Amendment to the RLOC with Amegy Bank (the “Second Amendment”). The Second Amendment (i) waived our events of default under the RLOC, (ii) reduced the aggregate contractual 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:~~permit (i) 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; (ii) 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; and (iii) 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 contractual 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,~~loan sweep feature, requiring us to give notice of each requested loan by delivery of ~~Advance Request~~advance request to Amegy Bank.

~~We were not in compliance with the minimum quarterly EBITDA requirement of $500,000 for the three months ended September 30, 2019.~~

On ~~November 13,~~December 18, 2019, we ~~obtained a waiver from Amegy Bank with respect to~~executed the ~~event of default for the three months ended September 30, 2019. Our management expects to execute a~~ Fourth Amendment to the RLOC with Amegy Bank ~~during~~(the “Fourth Amendment”). Pursuant to the ~~fourth~~Fourth Amendment, Amegy Bank (i) waived our events of default under the RLOC, (ii) reduced the aggregate contractual 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 ~~2019.~~the RLOC to May 4, 2020, and (vi) provided that our Chairman of the Board and President provides a personal guarantee for one-hundred percent (100%) of the outstanding RLOC amount.

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

In conjunction with obtaining the Fifth Amendment, we 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, we borrowed $180,000 from NC 143, a limited partnership controlled by Mr. Brooks, and $20,000 from RMI, a company owned and controlled by Mr. Reeg, in exchange for two promissory notes which are unsecured, bear interest at 0.25% per annum until May 6, 2022, the maturity date, and 10.0% per annum after the maturity date. 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.

For the three months ended June 30, 2020, the Company was in compliance with the covenants of its RLOC with Amegy Bank. (See Note 7,5, “Senior Secured Revolving Credit Facility” ~~and Note 13, Subsequent Events” on~~of our accompanying unaudited condensed consolidated notes to our Financial Statements, beginning on page ~~F-1.)~~F-1).

We rely on ~~the~~our RLOC for capital expenditures and other day-to-day Working Capital needs. As of ~~November 1, 2019,~~August 5, 2020, we had approximately ~~$1,098,000~~$909,000 in available ~~cash.~~cash, and $290,000 available on our RLOC for borrowing (subject to certain borrowing base limitations). Borrowings on our RLOC are repaid from cash generated from our operations. ~~Mr. Brooks continues~~

On April 11, 2020, we received approval from the SBA to ~~personally guarantee fifty percent (50%)~~fund our request for a PPP Loan created as part of the ~~outstanding RLOC amount.~~recently enacted CARES Act administered by the SBA. In connection with the PPP Loan, we entered into a promissory note in the principal amount of $361,400. In accordance with the requirements of the CARES Act, we intend to use the proceeds from the PPP Loan primarily for payroll costs. The PPP Loan is reflected in short term liabilities in our accompanying interim unaudited condensed consolidated balance sheets on F-1 as we expect the PPP Loan will be forgiven during 2020.Economic Injury Disaster Loan

~~Our strategic growth plan provides~~On May 12, 2020, we executed the standard loan documents required for securing a EIDL Loan from the SBA in light of the impact of the COVID-19 pandemic on our business. Pursuant to that certain Loan Authorization and Agreement (the “SBA Loan Agreement”), the principal amount of the EIDL Loan was $150,000, with proceeds to be used for working capital ~~investment~~purposes. In connection therewith, we received a $10,000 advance, which does not have to ~~upgrade~~be repaid and is reflected as an offset in Selling, General, Administrative and Other Expenses in our ~~financial systems, support our infrastructure, and elevate the skills~~accompanying interim unaudited condensed consolidated statements of operations.

(See Note 8, “Economic Injury Disaster Loan” of our ~~support staff. We deem these investments essential~~accompanying unaudited condensed consolidated notes to ~~support~~ our ~~growth and expansion objectives. We estimate the range of this type of investment to be approximately $150,000 and anticipate the investment to occur in the last quarter of calendar year 2019.~~

Our projections for calendar years 2019, 2020, and 2021 include expansion opportunities based on carefully evaluated expected return on investments. We expect to replace the AmBio Contract (See Note 12, “Related Party Transactions – AmBio Contract” on our accompanying Financial Statements, beginning on page F-1) through a competitive request for proposal process during the 2020. We believe this will support our efforts to reduce human capital and related costs, while enhancing benefit offerings and coverage for our associates..

The accompanying interim unaudited condensed consolidated financial statements have been prepared as if we will continue as a going concern. Through ~~September~~June 30, ~~2019,~~2020, we ~~have~~had accumulated losses of ~~$3,965,696~~$4,303,243 and a stockholders’ ~~deficits~~deficit of ~~$2,763,281.~~$2,602,465. Revenue declined by $1,065,259 in the second quarter of 2020 versus the same quarter in 2019, as we have been impacted by restrictions as a result of the COVID-19 pandemic. At various times during 2018 and 2019, and for the first quarter ended March 31, 2020, we were out of compliance with one or more covenants contained in our RLOC, but obtained waivers from Amegy Bank to cure the violations, along with reductions in our aggregate contractual borrowing limits under our RLOC. 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 for at least one year beyond the date of this filing is dependent upon the easing of restrictions imposed on elective surgeries by civil authority as a result of COVID-19, as well as our (i) successful execution of key ~~rebranding~~branding initiatives, (ii) introduction, commercialization and sales of new proprietary products and product lines, (iii) increased ~~sale~~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 ~~our~~ Cases ~~sold,~~we sell, and (iv) continued cost reductions. Additionally, we will need to ~~execute a forbearance agreement with respect to the event of default under the~~refinance our RLOC with Amegy Bank, ~~refinance the RLOC facility~~which is set to expire on November 4, 2020, with a new credit facility on commercially reasonable terms or obtain equity financing.

Our management expects 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 our management will be able to achieve sufficient revenue and profitability growth from operations. If we fail to cure the current event of default under the RLOC or another event of default occurs under the RLOC, we could be prohibited from borrowing for its working capital needs. 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 RLOC, 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.

~~Our~~accompanying interim unaudited condensed consolidated financial statements 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 we be unable to continue as a going ~~concern.~~

~~The information set forth in “Part I – Item 1. Note 7, Senior Secured Revolving Credit Facility” of this Form 10-Q regarding our RLOC is incorporated herein by reference.~~ concern.

For the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, we had no material commitments for capital expenditures.

For the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, we had no off-balance sheet arrangements.

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

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

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

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

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

We conducted an evaluation (pursuant to Rule 13a-15(b) promulgated under the Exchange Act), under the supervision and with the participation of management, including our Chief Executive ~~Officer~~ and Chief Financial ~~Officer,~~Officers, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) ~~and 15d-15(e)~~ promulgated under the Exchange Act) as of ~~September~~June 30, ~~2019.~~2020.

Based on our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of ~~September~~June 30, ~~2019.~~

No changes in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended September 30, 2019, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.2020.

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

Delaware		59-1224913
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1565 N. Central Expressway, Suite 220, Richardson, TX		75080
(Address of principal executive offices)		(Zip Code)

		PAGE
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	F-1
	Condensed Consolidated Balance Sheets at ~~September~~June 30, ~~2019~~2020 (Unaudited) and December 31, ~~2018~~2019	F-1
	Condensed Consolidated Statements of Operations for the Three months and ~~Nine~~Six months Ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 (Unaudited)	F-2
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three months and ~~Nine~~Six months Ended ~~September~~June 30, 2020 and 2019 ~~and 2018~~ (Unaudited)	F-3
	Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Six months Ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 (Unaudited)	F-4
	Notes to Unaudited Condensed Consolidated Financial Statements	F-5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	3
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	1213
Item 4.	Controls and Procedures	1213
PART II. OTHER INFORMATION
Item 5.	Other Information	1314
Item 6.	Exhibits	1314
Signatures		1516

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

	Three Months Ended September 30, 2018 - Unaudited
	Historical Fuse Medical, Inc.		Historical Maxim Surgical			Pro forma Adjustments			Pro forma Combined
Revenue	$	6,784,304	$	161,442		$	(116,577	)	$	6,829,169
Net (loss) income	$	277,182	$	(456,874	)	$	-		$	(179,692	)
Net loss per common share - basic	$	-	$	-		$	-		$	-

	Nine Months Ended September 30, 2018 - Unaudited
	Historical Fuse Medical, Inc.			Historical Maxim Surgical			Pro forma Adjustments			Pro forma Combined
Revenue	$	18,506,810		$	796,014		$	(459,074	)	$	18,843,750
Net loss	$	(2,073,082	)	$	(374,137	)	$	-		$	(2,447,219	)
Net loss per common share - basic	$	(0.03	)	$	-		$	-		$	(0.04	)

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

	Number of Shares		Fair Value		Weighted Average Grant Date Fair Value
Non-vested, December 31, 2018		4,378,615	$	2,060,000	$	0.47
Granted		-		-		-
Vested		-		-		-
Forfeited		-		-		-
Non-vested, September 30, 2019		4,378,615	$	2,060,000	$	0.47

	Number of Shares		Fair Value		Weighted Average Grant Date Fair Value
Non-vested, December 31, 2019		2,902,892	$	1,382,800	$	0.48
Granted		-		-		-
Vested		-		-		-
Forfeited		-		-		-
Non-vested, June 30, 2020		2,902,892	$	1,382,800	$	0.48

	Nine Months Ended September 30,
	2019			2018
Net cash (used in) provided by operating activities	$	(88,097	)	$	2,938,508
Net cash used in investing activities		-			(99,081	)
Net cash provided by (used in) financing activities		275,053			(3,049,262	)
Net increase (decrease) in cash and cash equivalents	$	186,956		$	(209,835	)

	Six Months Ended June 30,
	2020			2019
Net cash provided by operating activities	$	41,471		$	222,474
Net cash used in investing activities		(20,757	)		-
Net cash used in financing activities		47,251			(224,947	)
Net decrease in cash and cash equivalents	$	67,965		$	(2,473	)

Exhibit No.		Description


3.1		Amended and Restated Certificate of Incorporation of Fuse Medical, Inc., incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 15, 2014.

3.2		Amended and Restated Bylaws of Fuse Medical, Inc., incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 21, 2019.

10.1*10.1		~~Waiver Agreement~~Paycheck Protection Program Promissory Note dated ~~November 13, 2019,~~April 15, 2020, by and between Zions Bancorporation, N.A. ~~dba~~(dba Amegy ~~Bank~~Bank) and Fuse Medical, Inc. incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 22, 2020.

10.2*		Economic Injury Disaster Loan Agreement dated May 12, 2020, by and ~~CPM~~between Small Business Administration and Fuse Medical, ~~Consultants, LLC.~~Inc.

10.3*		Promissory Note dated May 6, 2020, by and between NC 143 Holdings, LP and Fuse Medical, Inc.

10.4*		Promissory Note dated May 6, 2020, by and between Reeg Medical Industries, Inc. and Fuse Medical, Inc.

31.1*		Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


31.2*		Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


32.1**		Certification of the Chief Executive Officer and the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


101.INS *		XBRL Instance Document

101.SCH *		XBRL Taxonomy Extension Schema Document


101.CAL *		XBRL Taxonomy Extension Calculation Linkbase Document


101.DEF *		XBRL Taxonomy Extension Definition Linkbase Document


101.LAB *		XBRL Taxonomy Extension Label Linkbase Document


101.PRE *		XBRL Taxonomy Extension Presentation Linkbase Document

	FUSE MEDICAL, INC.

Date: ~~November 14, 2019~~August 7, 2020	By:	/s/ Christopher C. Reeg
		Christopher C. Reeg
		Chief Executive Officer and Director (Principal Executive Officer)