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 orof 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 ~~August 5~~May 6, ~~2020,~~2021, 73,124,458 shares of the registrant’s common stock, $0.01 par value, were outstanding.

	June 30, 2020			December 31, 2019			March 31, 2021			December 31, 2020
	(Unaudited)						(Unaudited)
Assets
Current assets:
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
Cash and cash equivalents							$	1,417,793		$	1,187,458
Accounts receivable, net of allowance of $618,771 and $787,766, respectively								3,487,710			4,427,896
Inventories, net of allowance of $3,315,541 and $3,077,728, respectively								7,594,969			6,981,413
Prepaid expenses and other current assets		87,752			39,850			94,536			24,203
Total current assets		11,293,839			14,244,700			12,595,008			12,620,970
Property and equipment, net		33,371			32,639			13,630			17,791
Long term accounts receivable, net of allowance of $1,332,194 and $728,000, respectively		1,830,938			924,646
Long term accounts receivable, net of allowance of $2,707,228 and $2,615,834, respectively								1,750,478			1,669,510
Intangible assets, net		1,165,910			1,206,620			1,125,447			1,138,080
Goodwill		1,972,886			1,972,886			1,972,886			1,972,886
Total assets	$	16,296,944		$	18,381,491		$	17,457,449		$	17,419,237
Liabilities and Stockholders' Equity (Accumulated Deficit)
Current liabilities:
Accounts payable	$	2,239,586		$	2,752,854		$	3,325,107		$	3,236,592
Accrued expenses		3,064,706			3,302,904			2,696,806			2,584,734
Convertible notes payable - related parties		150,000			150,000			150,000			150,000
Paycheck Protection Program loan		361,400			—
Payroll Protection Program Loan								361,400			361,400
Economic Injury Disaster Loan - short term portion								3,004			2,241
Senior secured revolving credit facility		1,088,352			1,752,501			1,088,352			913,352
Total current liabilities		6,904,044			7,958,259			7,624,669			7,248,319
Notes payable - related parties		200,000			—			200,000			200,000
Economic Injury Disaster Loan		150,000			—
Economic Injury Disaster Loan - long term portion								146,996			147,759
Earn-out liability		11,645,365			11,645,365			11,936,000			11,936,000
Total liabilities		18,899,409			19,603,624			19,907,665			19,532,078
Commitments and contingencies		—			—			-			-
Stockholders' equity (Accumulated deficit)
Stockholders' equity (accumulated deficit):
Preferred stock, $0.01 par value; 20,000,000 shares authorized, no shares issued and outstanding		—			—			-			-
Common stock, $0.01 par value; 100,000,000 shares authorized, 73,124,458 shares issued and outstanding as of June 30, 2020 and December 31, 2019.		731,245			731,245
Common stock, $0.01 par value; 100,000,000 shares authorized, 73,124,458 shares issued and outstanding as of March 31, 2021 and December 31, 2020								731,245			731,245
Additional paid-in capital		969,533			642,435			1,300,170			1,184,222
Accumulated deficit		(4,303,243	)		(2,595,813	)		(4,481,631	)		(4,028,308	)
Total stockholders' equity		(2,602,465	)		(1,222,133	)
Total liabilities and stockholders' equity	$	16,296,944		$	18,381,491
Total stockholders' deficit								(2,450,216	)		(2,112,841	)
Total liabilities and stockholders' equity (accumulated deficit)							$	17,457,449		$	17,419,237

	For the Three Months Ended June 30,						For the Six Months Ended June 30,						For the Three Months Ended March 31,
	2020			2019			2020			2019			2021			2020

Net revenues	$	4,010,666		$	5,075,925		$	8,647,169		$	9,846,584		$	4,440,759		$	4,636,503
Cost of revenues		1,796,663			2,223,912			3,779,559			4,199,257			1,853,865			1,982,896
Gross profit		2,214,003			2,852,013			4,867,610			5,647,327			2,586,894			2,653,607
Operating expenses:
Selling, general, administrative and other		1,161,476			1,975,934			3,642,247			4,340,102
Selling, general, administrative, and other														1,435,310			2,480,771
Commissions		1,420,239			1,004,994			2,811,356			2,010,525			1,564,753			1,391,117
Depreciation and amortization		30,752			25,596			60,735			51,320			16,794			29,983
Total operating expenses		2,612,467			3,006,524			6,514,338			6,401,947			3,016,857			3,901,871
Operating loss		(398,464	)		(154,511	)		(1,646,728	)		(754,620	)		(429,963	)		(1,248,264	)
Other expense:
Interest expense		24,021			28,027			55,022			53,462			19,000			31,001
Total other expense		24,021			28,027			55,022			53,462			19,000			31,001
Net loss before tax		(422,485	)		(182,538	)		(1,701,750	)		(808,082	)
Income tax benefit		946			(40,389	)		5,680			(154,935	)
Operating loss before tax														(448,963	)		(1,279,265	)
Income tax expense														4,360			4,734
Net loss	$	(423,431	)	$	(142,149	)	$	(1,707,430	)	$	(653,147	)	$	(453,323	)	$	(1,283,999	)
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			70,221,566			70,221,566			70,221,566
Net loss per common share - basic and diluted													$	(0.01	)	$	(0.02	)
Weighted average number of Common Stock outstanding - basic and diluted														70,221,566			70,221,566

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, 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

	Common Stock				Additional Paid-In		Accumulated
	Shares		Amount		Capital		Deficit			Total
Balance, December 31, 2020		73,124,458	$	731,245	$	1,184,222	$	(4,028,308	)	$	(2,112,841	)
Stock based compensation		-		-		115,948		-			115,948
Net loss		-		-		-		(453,323	)		(453,323	)
Balance, March 31, 2021		73,124,458	$	731,245	$	1,300,170	$	(4,481,631	)	$	(2,450,216	)


	Common Stock				Additional Paid-In		Accumulated
	Shares		Amount		Capital		Deficit			Total
Balance, December 31, 2019		73,124,458	$	731,245	$	642,435	$	(2,595,813	)	$	(1,222,133	)
Stock based compensation		-		-		162,656		-			162,656
Net loss		-		-		-		(1,283,999	)		(1,283,999	)
Balance, March 31, 2020		73,124,458	$	731,245	$	805,091	$	(3,879,812	)	$	(2,343,476	)

	For the Six Months Ended June 30,						For the Three Months Ended March 31,
	2020			2019			2021			2020
Cash flows from operating activities
Net loss	$	(1,707,430	)	$	(653,147	)	$	(453,323	)	$	(1,283,999	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		60,735			51,320			16,794			29,983
Stock based compensation		327,098			499,107
Share-based compensation								115,948			162,656
Provision for bad debts and discounts		186,359			255,238			-			417,219
Provision for long term accounts receivable		604,194			60,101			91,394			198,124
Provision for slow moving inventory		(621,604	)		24,813			237,813			81,190
Benefits for deferred taxes		-			(168,573	)
Changes in operating assets and liabilities:
Accounts receivable		2,076,373			982,357			940,186			1,639,955
Inventories		1,425,600			285,215			(851,369	)		(27,267	)
Prepaid expenses and other current assets		(47,902	)		11,051			(70,333	)		(77,520	)
Long term accounts receivable		(1,510,486	)		17,100			(172,362	)		(495,310	)
Accounts payable		(513,268	)		(318,379	)		88,515			(181,162	)
Accrued expenses		(238,198	)		(823,729	)		112,072			(539,973	)
Net cash provided by operating activities		41,471			222,474
Net cash provided by (used in) operating activities								55,335			(76,104	)

Cash flows from investing activities
Purchase of property and equipment		(20,757	)		—			-			(20,757	)
Net cash used in investing activities		(20,757	)		-
Net cash (used in) investing activities								-			(20,757	)

Cash flows from financing activities
Payments on senior secured revolving credit facility, net		(664,149	)		(224,947	)
Proceeds from Paycheck Protection Program		361,400			—
Proceeds from Economic Injury Disaster Loan		150,000		-
Proceeds from related party promissory notes		200,000			—
Net payments/proceeds on senior secured revolving credit facility								175,000			(249,181	)
Net cash provided by (used in) financing activities		47,251			(224,947	)		175,000			(249,181	)

Net increase (decrease) in cash		67,965			(2,473	)		230,335			(346,042	)
Cash - beginning of period		1,099,310			844,314
Cash - end of period	$	1,167,275		$	841,841
Cash and cash equivalents - beginning of period								1,187,458			1,099,310
Cash and cash equivalents - end of period							$	1,417,793		$	753,268
Supplemental disclosure of cash flow information:
Cash paid for interest	$	40,018		$	42,409		$	10,000		$	21,788

Fuse Medical, Inc., a Delaware corporation (the “~~Company~~”“Company”), iswas initially incorporated in 1968 as American Metals Service, Inc., a ~~manufacturer~~Florida corporation. In July 1999, American Metals Service, Inc. changed its name to GolfRounds, Inc. and ~~national distributor~~was redomiciled to Delaware through a merger. Effective May 28, 2014, Golf Rounds amended its certificate of ~~medical devices~~incorporation to change its name to Fuse Medical, Inc., and ~~surgical implants~~Fuse Medical, LLC, an unrelated entity, merged with and into a wholly owned subsidiary of Fuse Medical, Inc., with Fuse Medical, LLC surviving as a wholly owned subsidiary of Fuse Medical, Inc. The transaction was accounted for ~~the orthopedic market.~~as a reverse merger. The ~~Company acquired CPM Medical Consultants, LLC (“CPM”) in December 2017 (the “CPM Acquisition”), in which the~~ Company was the legal acquirer, and ~~CPM~~Fuse Medical, LLC was deemed the accounting acquirer. InDuring 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 CPM Medical Consultants, LLC (“CPM”) pursuant to the securities purchase agreement dated December 15, 2017 (“CPM Acquisition Agreement”). Subsequent to the Change-in-Control Date, CPM and Company operations are consolidated.

On August 1, 2018 (“Maxim Closing Date”), the Company completed the acquisition of Palm Springs Partners, LLC d/b/a Maxim Surgical (“~~Maxim” and such transactions the “Maxim Acquisition~~”Maxim”)~~. CPM and Maxim survive as the Company’s wholly-owned subsidiaries and subsequent~~, pursuant to the ~~completion~~securities purchase agreement (“Maxim Purchase Agreement”). As of ~~each acquisition, CPM,~~the Maxim Closing Date, Maxim and Company operations are consolidated.

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~~”GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “~~SEC~~”“SEC”). The Company’s management believes the disclosures are adequate to make the information presented not misleading.

The condensed consolidated balance sheet information as of December 31, ~~2019,~~2020, was derived from the Company’s annual report on Form 10-K for the fiscal year ended December 31, ~~2019~~2020 (“~~2019~~2020 Annual ~~Report~~”Report”), ~~filed~~Filed with the SEC pursuant to Section 13 orof 15(d) under the Securities Exchange Act of 1934, as amended (the “~~Exchange Act~~”“Exchange Act”), on March 30, ~~2020.~~2021. These interim unaudited condensed consolidated financial statements should be read in conjunction with the ~~2019~~2020 Annual Report.

The results of operations for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021, are not necessarily indicative of the results to be expected for the entire fiscal year or for any other period as the Company has historically experienced seasonal trends with greater revenue and volume 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 June 30, 2020, the Company has accumulated losses of $4,303,243 and a stockholders’ deficit of $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 branding initiatives, (ii) introduction, commercialization and sales of new proprietary products and product lines, (iii) increased sales of existing products, with strategic emphasis on direct sales to medical facilities (“~~Retail Cases~~”), and increasing the percentage of Retail Cases sold as a percentage of all 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 RLOC with Amegy Bank with a new credit facility on commercially reasonable terms, or obtain financing.~~

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.

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

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

Actual results could differ from those estimates. Significant estimates on the accompanying interim unaudited condensed consolidated financial statements include the allowance for doubtful accounts, valuation of inventories, the Company’s effective income tax rate, and the ~~recoverability of deferred tax assets, which are based upon the 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 (“Earn-Out”) liability.

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

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~~sales based on medical procedures in which the Company’s products are sold and used (“Cases”) where the patient has obtained a letter of protection, (“~~LOP~~”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~~the Company’s invoice which payment is generally greater than 365 ~~day~~days from date of service. The LOP provides medical providers with greater certainty of full payment. This reclassification had no effect on the previously reported total assets or net loss.

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

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

Diluted ~~earnings (loss)~~loss per common share is computed by dividing net income/(loss) by the weighted-average number of Common Stock equivalents outstanding for the period determined using the treasury stock method. For the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ the Company excluded the effects of outstanding stock options, convertible notes and, to the extent in the money, restricted stock as their effects were antidilutive due to the Company’s operating loss during these periods. (See Note 9, “Stockholders’ Equity” for the terms and conditions of restricted stock).

For the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, restricted ~~stock~~Common Stock shares and Common Stock equivalents of ~~4,777,892 have been~~4,070,723 at exercise prices of $0.11 and $1.21 were excluded from diluted earnings per share because to include them would have been antidilutive. ~~(see~~(See Note 9, “Stockholders’ Equity” for the terms and 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 initially recorded ~~an earn-out~~a $19,244,543 liability ~~as part~~related to the Earn-Out portion of the purchase consideration. The Company has classified the Earn-Out liability as a Level 3 liability and the fair value of the ~~earn-out~~Earn-Out liability ~~is re-measured at~~will be evaluated each reporting period ~~using Level 3 inputs with~~and changes in its fair value ~~recorded~~will be included in the Company’s earnings. The ~~earn-out~~Earn-Out payments are based on the financial performance of the Company between the period of January 1, 2018, and December 31, 2034. The base amount of the ~~earn-out ranges from $0.00 to~~Earn-Out is $16,000,000 with an additional bonus payment of $10,000,000 . The payments of the base and bonus Earn-Out amounts are subject to the Company meeting certain earnings thresholds as ~~defined~~detailed in the CPM Acquisition Agreement. The Earn-Out payments during the Earn-Out period specified above, ranges from $0 to $26,000,000.

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.~~ Earn-Out payments with a discount rate of three percent (3%). To determine the fair value of the Earn-Out liability, the Company’s management evaluates assumptions that require significant judgement. Significant assumptions used for estimating the Earn-Out liability included: (i) EBITDA margins increasing from one percent (1%) to ten percent (10%) over the next four years; and (ii) revenue growth of approximately five percent (5%) over the next five years, and approximately two percent (2%) thereafter.

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

The Earn-Out was remeasured to fair value under the probability weighted income approach. As a result, the fair value of the Earn-Out liability was increased by $290,635 from $11,645,365 to $11,936,000 in 2020 and reduced by $1,936,164 from $13,581,529 to $11,645,365 in 2019 and reflected as “Change in fair value of contingent purchase consideration” on our Consolidated Financial Statements.

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.

There was no change in the earn-out liability for the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 and there were no significant changes in the Level 3 inputs from those utilized at December 31, ~~2019.~~2020. The required earnings thresholds have not been met from inception of the ~~agreements~~agreement through ~~June 30, 2020,~~March 31, 2021, and as such, there have been no payments required for either the base or bonus earn-out tranches.

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 ~~June 30, 2020~~March 31, 2021, and December 31, ~~2019.~~2020. The Company’s cash is concentrated in one large financial ~~institutions that~~institution. The amount of cash held at the financial institution may at times ~~may~~ exceed federally insured limits of $250,000 per financial institution. The Company has not experienced any financial institution losses from inception through ~~June 30, 2020.~~March 31, 2021. As of ~~June 30, 2020~~March 31, 2021, and December 31, ~~2019,~~2020, there were deposits of ~~$861,703~~$1,053,368 and ~~$599,309~~$761,671, respectively, which were 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 judgmental 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) ~~which includes~~less 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~~”“Orthopedic Implants”) and osteo-biologics and regenerative tissue which include human allografts, substitute bone materials, tendons, ~~and~~as well as amniotic tissues and fluids (collectively, “~~Biologics~~”“Biologics”). The Company reviews the market value of inventories whenever events and circumstances indicate that the carrying value of inventories may not be recoverable from the estimated future sales price less cost of disposal and normal gross profit. In cases where the market values are less than the carrying value, a write-down is recognized equal to an amount by which the carrying value exceeds the ~~market~~net realizable value of inventories.

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

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

Goodwill is not amortized but is tested in the fourth quarter each year for impairment, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. The Company performs its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. If the carrying value of a reporting unit exceeds its fair value, an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. ~~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~~Codification (“~~ASU~~”ASC”) 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~~a triggering event has occurred as of ~~June 30, 2020.~~March 31, 2021.

The Company’s intangible assets subject to amortization consist primarily of acquired non-compete agreements and customer relationships. Amortization expense is calculated using the straight-line method over the asset’s expected useful life.

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~~line-item pricing and payment terms (generally due upon receipt). The Company recognizes revenue when its customers obtain control over the assets (generally when the title passes upon shipment or when a product is utilized in a surgery) and it is probable that the Company will collect substantially all the amounts due. Individual promised goods are the Company’s only performance obligation.

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

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

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

	Three Months Ended				Six Months Ended
	June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019		Three Months Ended
Category									March 31, 2021		March 31, 2020

Retail	$	3,604,578	$	3,722,777	$	7,732,441	$	7,375,088	$	3,984,024	$	4,126,923
Wholesale		406,088		1,353,148		914,728		2,471,496		456,735		509,580
Total	$	4,010,666	$	5,075,925	$	8,647,169	$	9,846,584	$	4,440,759	$	4,636,503

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~~inventory, 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.

~~Accounting pronouncements~~The Company considers the applicability and impact of all ASUs issued, orboth effective ~~in 2020 by~~and not yet effective.

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-02, “~~FASB~~Leases”), which requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than twelve (12) months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. The Company adopted this guidance effective January 1, 2020. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company presently leases office space on a month-to-month basis as described in Note 12. As such, the adoption of the standard was not material.

In January 2017, the FASB issued ASU 2017-04, “Intangibles-Goodwill and Other” (Topic 350): Simplifying the Test for Goodwill Impairment. This guidance eliminates Step 2 from the goodwill impairment test, instead requiring an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit’s fair value. The Company adopted ASU 2017-04 effective December 31, 2019, on a prospective basis.

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

Property and equipment consisted of the following at ~~June 30, 2020~~March 31, 2021, and December 31, ~~2019:~~2020:

	June 30, 2020			December 31, 2019			March 31, 2021			December 31, 2020
Computer equipment and software	$	65,744		$	51,303		$	37,970		$	49,918
Office equipment		-			20,333			-			-
Property and equipment costs		65,744			71,636			37,970			49,918
Less: accumulated depreciation		(32,373	)		(38,997	)		(24,340	)		(32,127	)
Property and equipment, net	$	33,371		$	32,639		$	13,630		$	17,791

Depreciation expense for the three months ended ~~June 30,~~March 31, 2021, and 2020 was $4,161 and ~~2019 was $10,397 and $5,241,~~$9,628, respectively. ~~Depreciation expense for~~During the ~~six months ended June 30, 2020 and 2019 was $20,025 and $10,610, respectively.~~first quarter of 2021, the Company disposed of $11,948 of fully depreciated assets.

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

	June 30, 2020			December 31, 2019			Amortization period (years)	March 31, 2021			December 31, 2020			Amortization period (years)
Intangible assets:
Non-compete agreements	$	61,766		$	61,766		2	-			-			2
510(k) product technology		704,380			704,380		Indefinite		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				1,260,199			1,260,199
Less: accumulated amortization		(156,055	)		(115,345	)			(134,752	)		(122,119	)
Intangible assets, net		1,165,910			1,206,620				1,125,447			1,138,080
Goodwill	$	1,972,886		$	1,972,886		Indefinite	$	1,972,886		$	1,972,886		Indefinite

Amortization expense for the three months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ was ~~$20,355~~$12,633 and $20,355, respectively. ~~Amortization expense for the six months ended June 30, 2020 and 2019, was $40,710 and $40,710.~~

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

~~Effective~~On December 29, 2017, the Company became party to ~~its~~the Senior Secured Revolving Credit Facility (“RLOC”) with ZB, N.A., d/b/a Amegy Bank (“Amegy Bank”). The RLOC ~~with Amegy Bank.~~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 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~~”“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~~”“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~~”“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.

On December 18, 2019, the Company executed the Fourth Amendment to the RLOC with Amegy Bank (the “~~Fourth Amendment~~”“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~~provides for our Chairman of the Board and President to personally guarantee one hundred percent (100%) of the outstanding RLOC amount.

On May 21, 2020, the Company executed the Fifth Amendment to the RLOC with Amegy Bank ~~(“the~~ ~~Fifth Amendment~~”(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 and bear interest at 0.25% per annum until May 6, 2022, the maturity date, and 10.0% per annum after the maturity date, if not paid in full. Principal and interest are due and payable on the maturity date, provided, however, any payment of principal and interest on the loans is subordinated to payment of all indebtedness under the RLOC.

~~For~~ On November 12, 2020, the ~~three months ended June 30, 2020,~~Company executed a Sixth Amendment to the RLOC with Amegy Bank (the “Sixth Amendment”), which extended the termination date of our RLOC to May 4, 2021. The Company was in compliance with all RLOC covenants as of December 31, 2020.

The Company was not in compliance with the ~~covenants of its RLOC with Amegy Bank.~~minimum quarterly EBITDA requirement for the twelve months ended March 31, 2021. (See Note 13, “Subsequent Events”)

The outstanding balance of the RLOC was $1,088,352 and ~~$1,752,501~~$913,352 at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively. Interest expense incurred on the RLOC was ~~$15,363~~$9,861 and ~~$21,295~~$24,270 for the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively, and is reflected in interest expense on the Company’s accompanying interim unaudited condensed consolidated statements of operations. ~~Interest expense incurred on the RLOC was $39,633 and $40,073 for the six months ended June 30, 2020 and 2019, respectively.~~ Accrued interest on the RLOC at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 was ~~$4,053~~$2,808 and ~~$4,437,~~$2,947, respectively, and is reflected in accrued expenses on the Company’s accompanying interim unaudited condensed consolidated balance sheets. At ~~June 30, 2020,~~March 31, 2021, the effective interest rate was ~~5.1%~~4.1%.

During July 2016 through October 2016, the Company obtained three working capital loans from NC 143 and RMI in the ~~form~~aggregate amount of $150,000 in exchange for convertible promissory notes (“~~Notes~~”Notes”) ~~in the aggregate amount of $150,000~~ bearing ten percent (10%) interest per annum until December 31, 2016 (“Maturity ~~Date~~”Date”), and eighteen percent (18%) interest per annum for periods subsequent to the Maturity Date. The Notes remain outstanding, and principal and interest are due and payable, upon demand of the payee and at the holder’s sole discretion. The Notes’ holders have the right to convert all or any portion of the then unpaid principal and interest balance into shares of the Company’s Common Stock at a conversion price of $0.08 per share.

On May 6, 2020, the Company borrowed $180,000 from NC 143 and $20,000 from RMI, in exchange for two promissory notes which are unsecured and bear interest at 0.25% per annum until May 6, 2022, the maturity date, and 10.0% per annum after the maturity date, if not paid in full. Principal and interest are due and payable on the maturity date, provided, however, any payment of principal and interest on the loans is subordinated to payment of all indebtedness under the RLOC.

During the three months ended ~~June 30,~~March 31, 2021, and 2020, ~~and 2019,~~ interest expense of ~~$6,732~~$6,783 and ~~$ 6,732,~~$6,732, respectively, is reflected in interest expense on the Company’s accompanying unaudited condensed consolidated statements of operations. During the six months ended June 30, 2020 and 2019, interest expense of $13,463 and $13,389, respectively, is reflected in interest expense on the Company’s accompanyinginterim unaudited condensed consolidated statements of operations. As of ~~June 30, 2020, and December~~March 31, ~~2019, accrued~~2021,

and December 31, 2020, accrued interest was ~~$99,559~~$120,286 and ~~$86,096,~~$113,503, respectively, which is reflected in accrued expenses on the Company’s accompanying interim unaudited condensed consolidated balance sheets.

On April 11, 2020, the Company received approval from the U.S. Small Business Administration (“~~SBA~~”SBA”) to fund the Company’s request for a ~~loan under the~~ Paycheck Protection Program Loan (“PPP ~~Loan~~”Loan”) created as part of the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES ~~Act~~”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.~~PPP. 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.~~2021.

~~As of June 30, 2020,~~For the three months ended March 31, 2021, the Company incurred approximately ~~$900~~$911 in interest expense related to the PPP Loan, which is reflected in interest expense on the Company’s accompanying interim unaudited condensed consolidated statements of operations. The Company did not incur interest expense related to the PPP Loan for the three months ended March 31, 2020. As of March 31, 2021, and December 31, 2020, accrued interest was approximately $3,630 and $2,720, respectively, related to the PPP Loan, which is reflected in accrued expenses on the Company’s accompanying interim unaudited condensed consolidated balance sheets. 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 (“EIDL”) assistance program ~~(the “EIDL Loan~~”) in light of the impact of the COVID-19 pandemic on the Company’s ~~business.~~business (“EIDL Loan”). 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~~EIDL 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.

AsEIDL Loan interest expense incurred was approximately $1,446 and zero for the three months ended March 31, 2021 and 2020, respectively, and is reflected in interest expense on the Company’s accompanying interim unaudited condensed consolidated statements of ~~June 30, 2020, the Company incurred approximately $940 in accrued~~operations. Accrued interest ~~related to~~on the EIDL Loan ~~which~~at March 31, 2021 and December 31, 2020 was $5,237 and $3,791, respectively, and 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~~”Plan”), is the Company’s stock-based compensation plan, which the Company’s Board adopted on April 5, 2017, and subsequently amended and restated on December 13, 2018. The 2018 Equity Plan provides for the granting of equity awards, including qualified incentive and non-qualified stock options, stock appreciation awards, and restricted stock awards to employees, directors, consultants, and advisors. Awards granted pursuant to the 2018 Equity Plan are subject to a vesting schedule as 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~~such as the expected option term, expected volatility of the Company’s stock price over the expected option term, expected risk-free interest rate over the expected option term, expected dividend yield rate over the expected option term, and an estimate of expected forfeiture rates. The Company’s management believes

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

The Company’s management utilizes the simplified method to estimate the expected life for stock options granted to employees, as the Company does not have sufficient historical data regarding stock option exercises. The risk-free interest rate is based on the U.S. Treasury yields with terms equivalent to the expected life of the related option at the time of the grant. Dividend yield is based on

historical trends. While the Company’s management believes these estimates are reasonable, the compensation expense recorded would increase if the expected life was increased, a higher expected volatility was used, or if the expected dividend ~~yield~~yields 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.”~~2016-09.

~~For the three and six months ended June 30, 2019 the Board granted 300,000 and 1,200,000 Non-qualified Stock Option (“NQSO”) to the Company’s product advisory board members, certain key employees and marketing representatives. For the three and six months ended June 30, 2020, the~~The Board did not grant any ~~NQSOs.~~non-qualified stock option awards (“NQSOs”) for the three months ended March 31, 2021 and 2020. For the three months ended ~~June 30,~~March 31, 2021, and 2020, ~~and June 30, 2019~~ the Company amortized ~~$164,443~~$115,948 and ~~$254,699~~$162,656, respectively, relating to the vesting of stock options which is included in selling, general, administrative, and other expenses on the Company’s accompanying interim unaudited condensed consolidated statement of operations. For the six months ended June 30, 2020 and June 30, 2019 the Company amortized $327,098 and $499,107 relating to the vesting of stock optionsNQSOs, which is included in selling, general, administrative, and other expenses on the Company’s accompanying interim unaudited condensed consolidated statements of operations. The Company will recognize ~~$798,661 as an~~approximately $199,217 in expense in future periods as the ~~stock options~~NQSOs 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 following reflected the ~~Company’s stock option activity for~~NQSO’s that were granted, exercised, forfeited, or expired during the ~~six~~three months ended ~~June 30, 2020, is presented below:~~March 31, 2021.

	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, 2019		3,948,333		$	0.61		6.08	$	157,000
Balance outstanding at December 31, 2020											2,595,000	$	0.65		5.92	$	56,000
Granted		-			-		-		-		-		-		-		-
Exercised		-			-		-		-		-		-		-		-
Forfeited		(3,333	)		1.00		8.00		-		-		-		-		-
Expired		-			-		-		-		-		-		-		-
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	$	-
Balance outstanding at March 31, 2021											2,595,000	$	0.65		5.68	$	-
Exercisable at March 31, 2021											1,963,333	$	0.61		5.04	$	-

The non-vested restricted stock awards (“~~RSA~~”RSA”s), as of ~~June 30, 2020,~~March 31, 2021, were granted to the Company’s Board members as compensation. These awards vest only upon: (i) the occurrence of one of the Accelerating Events: (a) a Change in Control (as defined in RSA Agreement); or (b) listing of the Company’s Common Stock on either NYSE or NASDAQ Stock Market; and (ii) the director’s delivery to the Company of a Notice of Acceleration of Vesting (as defined in RSA Agreement), within the Acceleration Notice Period (as defined in RSA Agreement).

As of ~~June 30,~~March 31, 2021, and 2020, ~~and 2019,~~ it was not probable that the performance conditions on the outstanding ~~RSAs~~options would be met, therefore, no expense has been recorded for these awards for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019.~~2020.

There ~~were~~was no RSA’s that were granted, exercised, or forfeited during the ~~six~~three months ended ~~June 30, 2020.~~March 31, 2021.

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

	For the Six Months Ended June 30, 2020		For the Six Months Ended June 30, 2019			For the Three Months Ended March 31, 2021		For the Three Months Ended March 31, 2020
Current:
Federal	$	-	$	-		$	-	$	-
State		5,680		13,638			4,360		4,734
		5,680		13,638
Income tax expense							4,360		4,734
Deferred:
Federal		-		(168,573	)		-		-
State		-		-			-		-
		-		(168,573	)
Total income tax expense (benefit)	$	5,680	$	(154,935	)
Income tax benefit							-		-
Total income tax expense (benefit), net						$	4,360	$	4,734

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

	March 31, 2021			December 31, 2020
Deferred tax assets:
Net operating loss carryover	$	881,171		$	786,751
Accounts receivable		129,942			165,431
Compensation		505,124			480,774
Inventory		583,241			588,966
Other		19,871			5,083
Total deferred tax assets		2,119,349			2,027,005
Deferred tax liabilities:
Intangibles		(204,742	)		(206,723	)
Property and equipment		(2,862	)		(3,736	)
Total deferred tax liabilities		(207,604	)		(210,459	)
Deferred tax assets, net		1,911,745			1,816,546
Valuation allowance:
Beginning of year		(1,816,546	)		(1,529,584	)
Increase during the year		(95,199	)		(286,962	)
Ending balance		(1,911,745	)		(1,816,546	)

Net deferred tax asset	$	-		$	-

June 30, 2020

June 30, 2019

Deferred tax assets:

Net operating loss carryover

$
833,090

$
191,679

Accounts receivable

168,344

206,493

Compensation

433,296

337,606

Inventory

650,837

388,074

Other

18,428

28,129

Total deferred tax assets

2,103,995

1,151,981

Deferred tax liabilities:

Intangibles

(211,222
)

(218,427
)
Property and equipment

(4,828
)

(3,988
)
Total deferred tax liabilities

(216,050
)

(222,415
)

Deferred tax assets, net

$
1,887,945

$
929,566

Valuation allowance:

Beginning of year

(1,529,584
)

-

Increase during the year

(358,361
)

-

Ending balance

(1,887,945
)

-

Net deferred tax asset

$
-

$
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 totaling $95,199 for the three months ended March 31, 2021 due to the uncertainty of realization. Management believes that based upon the history of losses that the Company has incurred to date and its projection of future taxable operating income for the foreseeable future, it is more likely than not that the Company will not be able to realize the tax benefit associated with deferred tax assets. The valuation allowance established as of March 31, 2021 was $1,911,745.

At March 31, 2021, the Company estimates it has approximately $7,160,019 of net operating loss carryforwards, of which $3,863,299 will expire in 2021 through 2037. Under Section 382 of the Internal Revenue Code of 1986, as amended (“IRC Section 382”), a corporation that undergoes an “ownership change”, as defined therein, is subject to limitation on its use of pre-change tax attributes carryforward to offset future taxable income. The Company completed a 382 study and determined that there were changes in ownership in prior years which limited the NOL from 2013 and earlier, and 2014 through 2016. The 382 limitation mathematically precludes the use of approximately $2,963,968 of net operating loss carryforwards. Therefore, the deferred net operating loss carryover asset excludes the portion of net operating losses that are mathematically excluded from future use by the Company.

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~~three months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ were ~~(0.4%~~(1.0%) and ~~19.2%~~(0.4%), respectively. The decrease from the prior period ~~was~~is driven by the valuation allowance allocated to the deferred tax asset for the current period.

For the ~~six~~three months ended ~~June 30,~~March 31, 2021, and 2020, ~~and 2019,~~ the following significant customers had an individual percentage of total revenues equaling ten percent (10%) or greater:

	For the Six Months Ended						For the Three Months Ended
	June 30, 2020			June 30, 2019			March 31, 2021			March 31, 2020
Customer 1		16.58	%		0.00	%		14.8	%		11.0	%
Customer 2		7.97	%		11.86	%		4.9	%		11.5	%
Totals		24.55	%		11.86	%		19.7	%		22.5	%

At ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019, the following~~2020, there were no significant customers that had a concentration of accounts receivable representing ten percent (10%) or greater of accounts receivable:

For the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ the following significant suppliers represented ten percent (10%) or greater of goods purchased:

	For the Six Months Ended						For the Three Months Ended
	June 30, 2020			June 30, 2019			March 31, 2021			March 31, 2020
Supplier 1		22.00	%		22.00	%		18.2	%		0.0	%
Supplier 2		12.10	%		3.50	%		17.6	%		20.1	%
Supplier 3 - related party		11.30	%		12.50	%
Supplier 3								6.6	%		16.9	%
Supplier 4 (Related party)								4.1	%		12.9	%
Totals		45.40	%		38.00	%		46.5	%		49.9	%

For its principal executive office, the Company leases an aggregate of approximately 11,500 square-foot space at 1565 North Central Expressway, Suite 220, Richardson, Texas 75080 from 1565 ~~North Central Expressway, LP (“~~NCE, LP,~~”),~~ a real estate investment company that is owned and controlled by Mr. Brooks. The Company’s lease arrangement includes ~~(i)~~(1) the lease acquired pursuant to the CPM Acquisition effective January 1, 2013 and ~~(ii)~~(2) a lease effective July 14, 2017 entered into to support the Company’s relocation of its Fort Worth, Texas corporate offices to CPM’s executive offices. Both leases terminated December 31, 2017, with month-to-month ~~renewals thereafter.~~

renewals. For the ~~six~~three months ended ~~June 30,~~March 31, 2021, and 2020, ~~and 2019,~~ the Company paid approximately ~~$84,000~~$42,000 and ~~$84,000, respectively,~~$42,000 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~~”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 ~~June 30, 2020,~~March 31, 2021, AmBio operations support approximately 4144 full time equivalents (“~~FTE~~”FTE”). Of those 4144 FTEs, 3436 FTEs directly support the Company, 7 FTEs support the operations of other companies, and ~~no FTEs are~~1 FTE is shared between the Company and other companies.

As of ~~June 30, 2020~~March 31, 2021, and December 31, ~~2019,~~2020, the Company owed amounts to AmBio of approximately ~~$130,000~~zero and ~~$170,000,~~$154,051, respectively, which ~~are~~is reflected in the accounts payable on the Company’s accompanying interim unaudited condensed consolidated balance sheets. For the ~~six~~three months ended ~~June 30,~~March 31, 2021, and 2020, ~~and June 30, 2019,~~ the Company paid approximately ~~$89,000~~$41,611 and ~~$105,000,~~$50,869, respectively, to AmBio in administrative fees, which ~~are~~is reflected in selling, general, administrative, and other expenses in the Company’s accompanying interim 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.~~arrangements. As described more fully below, these transactions include: selling and purchasing of inventory on a wholesale basis, commissions earned and paid, and shared-service fee arrangements.

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

During the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ the Company:

As of June 30, 2020 and December 31, 2019, the Company had approximately $470,000 and $598,000, respectively, of unpaid commission costs due to MedUSA, which is reflected in accrued liabilities in the Company’s accompanying condensed consolidated balance sheets.

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

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

As of ~~June 30, 2020~~March 31, 2021, and December 31, ~~2019,~~2020, the Company had approximately ~~$30,000~~$1,039,444 and ~~$15,000~~$960,932, respectively, of unpaid ~~commissions~~commission costs ~~owed~~due to ~~Overlord, which~~MedUSA.

As of March 31, 2021, and December 31, 2020, the Company had outstanding balances due from MedUSA of approximately $323,496 and $398,151, respectively. These amounts are reflected in ~~accrued liabilities~~accounts receivable in the Company’s accompanying interim unaudited condensed consolidated balance sheets.

As of ~~June 30, 2020~~March 31, 2021, and December 31, ~~2019,~~2020, the Company had no outstanding balances owed to MedUSA.

Payment terms per our stocking and distribution agreement with MedUSA are 30 days from receipt of invoice. As of March 31, 2021, MedUSA has a past due balance of approximately $323,496.

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

As of March 31, 2021, and December 31, 2020, the Company had approximately $60,000 and $20,000, respectively, of unpaid commission costs due to Overlord.

As of March 31, 2021, and December 31, 2020, the Company had no outstanding balances due from Overlord.

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

During the ~~six~~three months ended ~~June 30,~~March 31, 2021, and 2020, ~~and 2019,~~ the Company sold Biologics products to NBMJ in the amounts of approximately ~~$12,000,~~$13,327, and ~~$364,000,~~$978, respectively, which are reflected in net revenues in the Company’s accompanying interim unaudited condensed consolidated statements of operations.

As of ~~June 30, 2020~~March 31, 2021, and December 31, ~~2019,~~2020, the Company ~~had no~~has outstanding balances due from ~~NBMJ.~~NBMJ of approximately $13,327 and zero, respectively. These amounts are reflected in accounts receivable in the Company’s accompanying interim unaudited condensed consolidated balance sheets.

Payment terms per the stocking and distribution agreement ~~with NBMJ~~ are 30 days from receipt of invoice. As of March 31, 2021, NBMJ has a past due balance of approximately $4,250.

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

As of March 31, 2021, and December 31, 2020, the Company has outstanding balances due from Bass of approximately $8,729

and $20,117, respectively. These amounts are reflected in accounts receivable in the Company’s accompanying interim unaudited condensed consolidated balance sheets.

Payment terms per the stocking and distribution agreement are 30 days from receipt of invoice. As of March 31, 2021, Bass has a past due balance of approximately $8,729.

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

During the ~~six~~three months ended ~~June 30,~~March 31, 2021, and 2020, the Company incurred approximately $75,927 and ~~2019, the Company:~~

As of ~~June 30, 2020~~March 31, 2021, and December 31, ~~2019,~~2020, the Company had ~~outstanding balances~~approximately $219,491 and $163,567, respectively, of unpaid commission costs due from Bass of approximately $26,000 and $7,000, respectively. These amounts are reflected in accounts receivable, net of allowance, in the Company’s accompanying condensed consolidated balance sheets.to Sintu.

~~Payment terms per the stocking and distribution agreement with Bass are 30 days from receipt of invoice.~~

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

During the six months ended June 30, 2020 and 2019, the Company incurred approximately $279,000 and $174,000, respectively, in commission costs to Sintu, which are 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 ~~six~~three months ended ~~June 30,~~March 31, 2021, and 2020, ~~and June 30, 2019,~~ the Company sold Orthopedic Implants and Biologics products to Tiger in the amounts of approximately ~~$39,000~~$502 and ~~$132,000,~~$32,600, respectively, which ~~are~~is reflected in net revenues in the Company’s accompanying interim unaudited condensed consolidated statements of ~~operations.~~operations;

As of ~~June 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, the Company ~~had~~has outstanding balances due from Tiger of approximately ~~$5,000~~$502 and ~~$30,000,~~zero, respectively. These amounts are reflected in accounts receivable ~~net of allowance,~~ in the Company’s accompanying interim unaudited condensed consolidated balance sheets.

Payment terms per the stocking and distribution agreement ~~with Tiger~~ are 30 days from receipt of invoice. As of March 31, 2021, there is no past due balance.

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

During the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ the Company purchased approximately ~~$318,000~~$180,397 and ~~$481,000,~~$220,919 respectively, in Orthopedic Implants and medical instruments from Modal, which ~~are~~is reflected within inventories, net of allowance inon the Company’s accompanying interim unaudited condensed consolidated balance sheets.

As of ~~June 30, 2020~~March 31, 2021, and December 31, ~~2019,~~2020, the Company had outstanding balances owed to Modal of approximately ~~$277,000~~$598,293 and ~~$0,~~$417,897, respectively. ~~These amounts are~~This is reflected in accounts ~~payable~~receivable in the Company’s accompanying condensed consolidated balance sheets.

As of June 30, 2020 and December 31, 2019, the 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 March 31, 2021, the Company had a past due balance of approximately $426,030 owed to Modal.

In preparing these interim unaudited condensed consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through ~~August 7, 2020.~~May 12, 2021, the date the interim unaudited condensed consolidated financial statements were available to be issued.

On April 30, 2021, the Company’s management obtained a waiver from Amegy Bank with respect to the event of default for the three months ended March 31, 2021. On May 4, 2021, the Company and Amegy Bank executed the Seventh Amendment to the RLOC, extending the termination date of the RLOC until November 4, 2021. (See Note 5, “Senior Secured Revolving Credit Facility.”)

The Company’s ~~Management~~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 ~~our~~the interim unaudited condensed consolidated financial statements of our Company and the related notes included in this report for the periods presented (our “~~Financial Statements~~”“Financial Statements”), ~~our~~the audited consolidated financial statements of our Company and the related notes thereto and the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our ~~2019~~Company’s Annual ~~Report.~~Report on Form 10-K for the fiscal year ended December 31, 2020 (our “2020 Annual Report”), filed with the Securities and Exchange Commission (the “SEC”) pursuant to Section 13 or 15(d) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on March 30, 2021.

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

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

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

During the first quarter of 2021, we expanded internationally into Australia with sales of our Fuse TyPEEK™ Titanium coated spinal interbodies, which are used in spinal fusion surgical procedures. We view the Australian market as the ideal opportunity to begin our global expansion. In addition to our spinal implants, we have internal fixation implants for extremities that are currently cleared for the Australian marketplace as well. We are evaluating additional CE marked products in our portfolio for Australia, as well as European markets.

~~Impact~~During the first quarter of 2020, the novel coronavirus SARS-CoV-2 global pandemic ("COVID-19") significantly impacted the global economy. The impact has been profound, has continued in April 2021 and is likely to ~~Fuse~~persist for months to come.

~~The novel coronavirus SARS CoV-2 (“COVID-19”) global pandemic presents significant risks to our business plan. During our~~Since the first quarter of 2020, ~~and as a~~in response to COVID-19, the Governor of Texas has declared aseveral executive orders limiting elective surgeries based on hospital facility capacity. During January 2021, certain of our hospital facility customers temporarily restricted elective surgeries. Generally, these surgical cases were deferred and rescheduled to subsequent months.

During February 2021, the state of ~~disaster~~Texas experienced record-breaking winter weather which resulted in dangerous road conditions, widespread power outages, water outages and ~~issued an~~contamination of the water supply, causing significant disruptions through-out Texas, including our corporate office and distribution center for several days.

In response to the dangerous weather conditions, our 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,~~management team immediately focused on 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,health 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~~wellbeing of our employees, allowing employees to work from home to avoid driving to our offices. Our management also worked to minimize the impact on our customers by rescheduling and coordinating new surgery dates. We resumed full operations on March 1, 2021 and have worked to address the surgical caseload, sales support, and administrative functions backlog. Generally, surgical Cases are currently considered elective, they are typically necessary for a patient to restore mobility, reduce pain and increase quality of life. We continue to believe our 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 lowercanceled due to the ~~restrictions on elective surgeries in place prior~~severe weather have been rescheduled to ~~April 22, 2020, we anticipate a steady increase in revenues throughout the third and the traditionally highest, fourth quarter of the year.~~

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

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

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

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

Retail. Under our retail distribution model, (“Retail~~Retail Model~~”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”).~~Cases..

Wholesale. Under our wholesale distribution model, (“Wholesale ~~Model~~”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 “~~Cases..~~Wholesale Cases”).~~

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

~~In the quarter ended June 30, 2020, our average revenue per Retail Case increased by approximately 17% and our average revenue per~~transactions but are subject to commission expenses which we do not incur with respect to Wholesale ~~Case increased by approximately 37% compared to the quarter ended June 30, 2019.~~Cases.

Wholesale Cases in our industry command lower revenue price-points than Retail ~~Cases.~~Cases as the third-party reseller must build in its own profit margin. 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,~~Cases due to the lower sales price. Consequently, 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.~~Cases. Our Wholesale Case business is highly dependent on minimum volume sales levels to generate revenues in excess of our fixed costs of revenues in order to achieve appropriate profitability.

During the six months ended June 30, 2020, our average revenue per Retail Case increased by approximately 17% and our average revenue per Wholesale Case decreased by approximately 37% compared to the six months ended June 30, 2019.

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

To offset pricing pressure, we employ strategies to maximize revenue per Case. For the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ our average revenues per Case were ~~$5,123~~$5,041 and ~~$3,691,~~$4,980, respectively. ~~The approximate 39% increase in average revenue per Case was primarily due~~Our strategy 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,~~emphasize our Retail Model proved successful as ~~described above.~~

Retail Cases represented approximately 90% of revenue for the first quarter of 2021, or an approximate 1% increase over the same quarter of 2020.

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

We describe our most significant accounting policies in Note 2, “Significant Accounting Policies” of our accompanying interim unaudited condensed consolidated notes to our Financial Statements beginning on page F-1 and found elsewhere in this report and in our ~~2019~~2020 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”~~Policies,” of our accompanying interim unaudited condensed consolidated notes to our Financial Statements beginning on page F-1.

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

	For the Three Months Ended								For the Three Months Ended
	June 30, 2020			(% Rev)	June 30, 2019			(% Rev)	March 31, 2021			(% Rev)	March 31, 2020			(% Rev)
Net revenues	$	4,010,666		100%	$	5,075,925		100%	$	4,440,759		100%	$	4,636,503		100%
Cost of revenues		1,796,663		45%		2,223,912		44%		1,853,865		42%		1,982,896		43%
Gross profit		2,214,003		55%		2,852,013		56%		2,586,894		58%		2,653,607		57%
Operating expenses:
Selling, general, administrative and other expenses		1,161,476		29%		1,975,934		39%
Selling, general, administrative, and other										1,435,310		32%		2,480,771		54%
Commissions		1,420,239		36%		1,004,994		20%		1,564,753		35%		1,391,117		30%
Depreciation and amortization		30,752		0%		25,596		1%		16,794		0%		29,983		1%
Total operating expenses		2,612,467		65%		3,006,524		59%		3,016,857		68%		3,901,871		84%
Operating loss		(398,464	)	-10%		(154,511	)	-3%		(429,963	)	-10%		(1,248,264	)	-27%
Other expense
Interest expense		24,021		1%		28,027		1%		19,000		0%		31,001		1%
Total other expense		24,021		1%		28,027		1%		19,000		0%		31,001		1%
Operating (loss) before tax		(422,485	)	-10%		(182,538	)	-4%
Income tax benefit (expense)		946		0%		(40,389	)	-1%
Operating loss before tax										(448,963	)	-10%		(1,279,265	)	-28%
Income tax expense										4,360		0%		4,734		0%
Net loss	$	(423,431	)	-10%	$	(142,149	)	-3%	$	(453,323	)	-10%	$	(1,283,999	)	-28%

Three Months Ended ~~June 30, 2020,~~March 31, 2021, Compared to Three Months Ended ~~June 30, 2019~~March 31, 2020

For the three months ended ~~June 30, 2020,~~March 31, 2021, net revenues were ~~$4,010,666~~$4,440,759 compared to ~~$5,075,925~~$4,636,503 for the three months ended ~~June 30, 2019, which is~~March 31, 2020, a decrease of ~~$1,065,259,~~$195,744 or approximately ~~21%~~4.2%.

For the three months ended ~~June 30, 2020,~~March 31, 2021, Retail Cases decreased by ~~19%~~approximately 6% compared to the three months ended ~~June 30, 2019. Accordingly,~~March 31, 2020, and revenues from Retail Cases ~~for the three months ended June 30, 2020,~~ decreased by 6%approximately 3% compared to revenues from Retail Cases for the three months ended ~~June 30, 2019. We believe this 6% decrease in revenues~~March 31, 2020. Revenues from Retail Cases ~~is primarily driven by~~as a ~~reduction in Retail Case volume.~~

~~Our Wholesale Cases declined by 76%~~percentage of total revenues increased to 90% of revenues for the three months ended ~~June 30, 2020, compared to Wholesale Cases during the three months ended June 30, 2019. Accordingly,~~March 31, 2021, from 89% of revenues ~~from Wholesale Cases~~ for the three months ended ~~June 30, 2020, declined by 67% compared~~March 31, 2020. We believe the increase in revenue from Retail Cases as a percent of total revenues reflects the execution of our strategies to shift more of our business to higher margin Retail Cases through improvement of our supply chain management. Therefore, wholesale revenue as a percent of total revenue has decreased.

Additionally, as discussed above in “Severe Weather Conditions”, we believe the severe weather conditions that we experienced in February 2021 had a material impact on our first quarter revenues ~~from Wholesale~~for 2021, as approximately 80 Cases ~~for the period ended June 30, 2019.~~had to be deferred as a result of severe weather conditions.

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~~We intend to increase our ~~volume of~~ Retail Case ~~Sales to~~volume by increasing sales volumes with our existing retail customer base as well as on-boarding new surgeons, distributors, and ~~add new~~ retail customers.

For the three months ended ~~June 30, 2020,~~March 31, 2021, our cost of revenues was ~~$1,796,663,~~$1,853,865, compared to ~~$2,223,912~~$1,982,896 for the three months ended ~~June 30, 2019,~~March 31, 2020, representing a decrease of ~~$427,249,~~$129,031, or approximately ~~19%~~6.5%.

As a percentage of revenues, cost of revenues ~~increased approximately one~~decreased 1% percentage ~~point~~points to approximately ~~45%~~42% for the three months ended ~~June 30, 2020,~~March 31, 2021, compared to approximately ~~44%~~43% for the three months ended ~~June 30, 2019. The increase as~~March 31, 2020. As a percentage of net revenues, the decrease of approximately 1% primarily resulted from (a)(i) ~~an approximate 10% increase~~a decrease of 6.4% in inventory shrink, ~~and inventory loss provision, (a)~~(ii) ~~an approximate 2% increase~~a 0.3% reduction in ~~medical instrument expense,~~cost of revenues product mix; offset, in part, by (b)(i) an ~~approximate 10% reduction~~increase of 3.6% in ~~cost~~the inventory loss provision for slow-moving and obsolescence, (ii) an increase of ~~goods sold.~~1.8% for medical instruments purchased based on new product development and (iii) an increase of approximately 0.3% of purchase price variance and shipping costs, net.

For the three months ended ~~June 30, 2020,~~March 31, 2021, we generated a gross profit of ~~$2,214,003,~~$2,586,894, compared to ~~$2,852,013~~$2,653,607 for the three months ended ~~June 30, 2019,~~March 31, 2020, representing a decrease of ~~$638,010,~~$66,713, or approximately ~~22%~~2.5%.

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.

As a percentage of revenues, gross profit increased approximately 1% for the three months ended March 31, 2021 compared to 2020. The components of gross profit varied and included primarily, (a)(i) an increase of 3.6% in the inventory loss provision for slow-moving and obsolescence, (ii) an increase of 1.8% for medical instruments purchased based on new product development, (iii) an increase of approximately 0.3% of purchase price variance and shipping costs, net, offset, in part, by (b)(i) a decrease of 6.4% in inventory shrink and (ii) a 0.3% reduction in cost of revenues product mix.

For the three months ended ~~June 30, 2020,~~March 31, 2021, selling, general, administrative, and other expenses (“SG&A”) decreased to ~~$1,161,476~~$1,435,310 from ~~$1,975,934~~$2,480,771 for the three months ended ~~June 30, 2019,~~March 31, 2020, representing a decrease of ~~$814,458,~~$1,045,461 or approximately ~~41%~~42.1%.

As a percentage of net revenues, ~~selling, general, administrative and other expenses~~SG&A accounted for approximately ~~29% and 39%~~32% for the three months ended ~~June 30, 2020~~March 31, 2021, and ~~June 30, 2019, respectively.~~54% for the three months ended March 31, 2020. As a percentage of net ~~revenue,~~revenues, the decrease of approximately ~~10 percentage points~~22% primarily resulted from (a)(i) ~~an approximate 6 percentage-point decline~~a decrease of 12.8% in ~~provision for~~ bad debt ~~(a)~~expense; (ii) ~~an approximate 4 percentage point decline~~a 4.2% decrease in leased staffing ~~costs, and (a)~~costs; (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~~a 2.4% reduction in professional fees relating to audit, legal and ~~stock-based compensation was approximately $345,673~~consulting expenses; (iv) a decrease of 1.2% for employee expense reimbursements related to business development and travel costs; and (v) a 0.9% reduction 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,~~March 31, 2021, and 2020, ~~and June 30, 2019,~~ commission expense was ~~$1,420,239~~$1,564,753 and ~~$1,004,994,~~$1,391,117, respectively, representing an increase of ~~$415,245,~~$173,636, or approximately ~~41%~~12.5%.

As a percentage of net revenues, commission expense accounted for approximately ~~36%~~35% for the three months ended ~~June 30, 2020,~~March 31, 2021, and ~~20%~~approximately 30% for the three months ended ~~June 30, 2019.~~March 31, 2020. This approximate ~~16 percentage-point~~5% increase primarily resulted from (a)(i) an approximate 2%9% increase ofin average commission rates; offset, in part, by (b)(i) the approximate 4% decrease in revenues eligible for ~~commissions and an approximate 14% increase in average commissions rates.~~commissions.

For the three months ended ~~June 30, 2020,~~March 31, 2021, our depreciation ~~and amortization~~ expense ~~increased~~decreased to ~~$30,752~~$16,794 from ~~$25,596~~$29,983 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~~2020, representing a decrease of $13,189. This decrease is the ~~three months ended June 30, 2020.~~result of (i) an approximate $7,722 reduction in amortization of intangible assets, and (ii) an approximate $5,467 reduction in depreciation expense as relating to investment in IT infrastructure such as additional and replacement user workstations.

For the three months ended ~~June 30, 2020,~~March 31, 2021, interest expense ~~declined~~decreased to ~~$24,021~~$19,000 from ~~$28,027~~$31,001 for the three months ended ~~June 30, 2019,~~March 31, 2020, which is a ~~reduction~~decrease of ~~$4,006,~~$12,001, or approximately ~~14%~~38.7%. The ~~decline of $4,006 was~~increase is primarily ~~driven by (a)(i) an approximate $7,874~~due to a 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~~average borrowings on our RLOC ~~(b)(ii) an approximate $939 increase related to accrued~~with Amegy Bank, and a decrease in the interest rate 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.~~the RLOC.

For the three months ended ~~June 30,~~March 31, 2021, and 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.~~$4,360 and $4,734. For additional information, please see Note 10, “Income Taxes,” of our accompanying interim unaudited condensed consolidated notes to our Financial Statements, beginning on page F-1.

For the three months ended ~~June 30, 2020,~~March 31, 2021, we had a net loss of ~~$423,431~~$453,323 compared to a net loss ~~of $142,149~~$1,283,999 for the three months ended ~~June 30, 2019,~~March 31, 2020, respectively, representing a ~~decrease~~reduction in net loss of ~~$281,282~~$830,676 or a reduction of approximately ~~198%~~64.7%.

~~As a percentage of revenue,~~ The drivers for our reduction in net loss ~~represented approximately 11% and 3%~~ for the three months ended ~~June 30, 2020~~March 31, 2021 were (a)(i) a decrease of $1,045,461 in SG&A and ~~June 30, 2019, respectively.~~

~~The approximate 8 percentage point increase~~other expense, (ii) a $129,031 reduction in ~~net loss as a percentage~~cost 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~~a $13,189 reduction in depreciation and amortization (iv) a $12,001 decrease in interest expense (v) a decrease in tax expense of $374; offset, in part, by (b) ~~an approximate 10 percentage point decrease~~(i) a $195,744 reduction in ~~selling, general, administrative, and other expenses.~~

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 Six Months Ended

June 30,
2020

(% Rev)

June 30,
2019

(% Rev)

Net revenues
$
8,647,169

100%

$
9,846,584

100%

Cost of revenues

3,779,559

44%

4,199,257

43%

Gross profit

4,867,610

56%

5,647,327

57%

Operating expenses:

-

0%

-

0%

Selling, general, administrative and other expenses

3,642,247

42%

4,340,102

44%

Commissions

2,811,356

32%

2,010,525

20%

Depreciation and amortization

60,735

1%

51,320

1%

Total operating expenses

6,514,338

75%

6,401,947

65%

Operating loss

(1,646,728
)
-19%

(754,620
)
-8%

Other expense

-

0%

-

0%

Interest expense

55,022

1%

53,462

1%

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%

~~For the six months ended June 30, 2020,~~ net revenues, ~~were $8,647,169 compared to $9,846,584 for the six months ended June 30, 2019,~~and (ii) a ~~decrease of $1,199,415 or approximately 12%.~~

For the six months ended June 30, 2020, Retail Cases decreased by 13% compared to the six months ended June 30, 2019. Revenues from Retail Cases for the six months ended June 30, 2020, increased by 2% compared to revenues from Retail Cases for the six months ended June 30, 2019. This 2%$173,636 increase in ~~revenues from Retail Cases is primarily driven by greater concentration in new medical facilities.~~commissions.

Our Wholesale Cases declined by 70% for the six months ended June 30, 2020, compared to Wholesale Cases during the six months ended June 30, 2019. Accordingly, revenues from Wholesale Cases for the six months ended June 30, 2020, declined by 50% compared to revenues from Wholesale Cases for the period ended June 30, 2019.

~~For the six months ended June 30, 2020, our cost of revenues was $3,779,559, compared to $4,199,257 for the six months ended June 30, 2019, representing a decrease of $419,698, or approximately 10%.~~

As a percentage of revenues, cost of revenues increased approximately one percentage point to approximately 44% for the six months ended June 30, 2020, compared to approximately 43% for the six months ended June 30, 2019. The increase as a percentage of net revenues resulted from (a)(i) an approximate 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.

For the six months ended June 30, 2020, we generated a gross profit of $4,867,610, compared to $5,647,327 for the six months ended June 30, 2019, representing an increase of $779,717, or approximately 14%.

As a percentage of net revenue, gross profit decreased by approximately one percentage points to 56% for the six months ended June 30, 2020, compared to 57% for the six months ended June 30, 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 six months ended June 30, 2020, selling, general, administrative, and other expenses decreased to $3,642,247 from $4,340,102 for the six months ended June 30, 2019, representing a decrease of $697,855, or approximately 16%.

As a percentage of net revenues, selling, general, administrative and other expenses accounted for approximately 42% and 44% for the six months ended June 30, 2020 and June 30, 2019, respectively. As a percentage of net revenue, the decrease of approximately 2 percentage points primarily resulted from (a)(i) an approximate one percentage-point decline provision for bad debt, (a)(ii) an approximate 1 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 is approximately $689,559 in compensation to members of our SABs, of which approximately $400,000 was in the form of cash expense and approximately $289,559 was non-cash stock-based compensation. The six months ended June 30, 2020, reflected an approximate reduction of approximately $319,740 in professional fees related to the SABs as compared to the six months ended June 30, 2019.

~~For the six months ended June 30, 2020 and June 30, 2019, commissions expense was $2,811,356 and $2,010,525, respectively, representing an increase of $800,831, or approximately 40%.~~

As a percentage of net revenues, commissions expenses accounted for approximately 32% for the six months ended June 30, 2020, and 20% for the six months ended June 30, 2019. This approximate 12 percentage-point increase primarily resulted from an approximate 4% increase of revenues eligible for commissions and approximately an 8% increase in average commission rates as well as the realignment and restructuring of the commission agreement for our largest commission-based representative.

For the six months ended June 30, 2020, our depreciation expense increased to $60,735 from $51,320 for the six months ended June 30, 2019, representing an increase of $9,415. This increase was primarily the result of an investment to upgrade our supply-chain inventory management system and new office workstations in prior periods.

For the six months ended June 30, 2020, interest expense increased to $55,022 from $53,462 for the six months ended June 30, 2019, which is an increase of $1,560, or approximately 3%. The increase of $1,560 was primarily driven by (a)(i) an approximate $11,028 increase in interest related to increased borrowings on our RLOC, (a)(ii) an approximate $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 declines in the LIBOR market interest rates.

For the six months ended June 30, 2020, we recorded an income tax expense of approximately $5,680 compared to an income tax benefit of 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 six months ended June 30, 2020, we had a net loss of $1,707,430 compared to a net loss $653,147 for the six months ended June 30, 2019, respectively, representing an increase in net loss of $1,054,283, or approximately 161%.

~~As a percentage of revenue, net loss represented approximately 20% and 7% for the six months ended June 30, 2020 and June 30, 2019, respectively.~~

The approximate 13 percentage point increase in net loss as a percentage of revenue was primarily attributable to (a)(i) an approximate 12 percentage point increase commissions, (a)(ii) an approximate 2 percentage point increase in income tax expense, and (a)(iii) an approximate 1 percentage point decline in gross profit, offset in part, by (b) an approximate 2 percentage point decrease in selling, general, administrative, and other expenses.

During the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, net cash provided by operating activities was ~~$41,471~~$55,335 compared to ~~$222,474~~net cash used in operations of $76,104 for the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, representing ~~a decrease~~an increase of ~~$181,003.~~$131,439.

~~For the six months ended June 30, 2020, our net cash~~The increase provided by operating activities of $131,439 primarily resulted ~~primarily~~ from: (a)(i) a ~~$2,076,373 decrease~~$652,045 increase in ~~accounts receivable, and~~cash provided by accrued expenses; (ii) a ~~$1,425,600 reduction~~$403,453 increase in ~~inventories, offset, in part,~~cash provided by ~~(b)(i) an increase of $1,510,486 of long term accounts receivable, (b)(ii) $1,150,648 of~~the net loss adjusted for non-cash ~~items, (b)~~items; (iii) a ~~$513,268~~$322,948 reduction in cash used for long term accounts ~~payable, (b)~~receivable; (iv) a ~~$238,198~~$269,677 increase in cash provided by accounts payable; (v) a $7,187 reduction in ~~accrued expensed and (b)(v) a $47,902 increase in~~cash used for prepaid expenses and other current ~~assets.~~

For the six months ended June 30, 2019, our net cash provided by operating activities resulted primarily from; (a)(i) a $823,729 reduction in accrued expensed, and (a)(ii) a reduction of $318,379 in accounts payable,assets; offset, in part, by (b)(i) a ~~$982,357 reduction~~$824,102 increase in ~~accounts receivable, (b)~~cash used for inventories; and (ii) a ~~$285,215 reduction in inventories, (b)(iii) $68,860 of net loss adjusted for non-cash items, (b)(iv) a $17,100~~$699,769 decrease in ~~long term~~cash provided by accounts ~~receivable, and (b)(vi) an $11,051 reduction in prepaid expenses and other current assets.~~receivable.

~~During~~For the ~~six~~three months ended ~~June 30,~~March 31, 2021, net cash used in investing activities was zero. For the three months ended March 31, 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)~~primarily related to the purchase of property and equipment, such as new ~~office~~and replacement user workstations and ~~(ii)~~ equity incentive ~~plan administrative~~tracking and ~~tracking software.~~

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

For the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, net cash provided by financing activities was ~~$47,251,~~$175,000, compared to ~~$224,947~~$249,181 used in financing activities for the ~~six~~three months ended ~~June 30, 2019.~~

March 31, 2020. For both periods, the amount of net cash used in financing activities was driven by the net activity on our RLOC. The ~~$47,251~~increase in net cash provided by financing activities ~~for the six months ended June 30,~~between March 31, 2021 and 2020 was primarily ~~resulted from (a)(i) $361,400 in proceeds from our PPP Loan, (a)(ii) $200,000 in proceeds from our Subordinated Notes;~~related to increased borrowings 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 $224,947 in net cash used in financing activities for the six months ended June 30, 2019 resulted from repayments~~reduced payments on our RLOC.

Our primary sources of liquidity are cash from our operations and our RLOC with Amegy Bank. As of ~~June 30, 2020,~~March 31, 2021, our current assets exceeded our current liabilities by ~~$4,189,795~~$4,970,339 (our “~~Working Capital~~”“Working Capital”), which includes ~~$1,167,275~~$1,417,793 in cash and cash equivalents. We believe cash from our operations and net borrowings on our RLOC supports our Working Capital needs.

~~Effective~~On December ~~31,~~29, 2017, we became party to ~~the~~a RLOC with Amegy Bank. The RLOC established an asset-based senior secured revolving credit facility ~~with contractual aggregate limit~~in the amount of $5,000,000. The RLOC contains customary representation, warranties, covenants, events of default, and is collateralized by substantially all of our assets and provides that our Chairman of the Board ~~of Directors (“Board~~”) and President ~~provides a personal~~personally 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”).~~Bank. 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”).~~Bank. 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 (i)~~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; ~~(ii)~~ earnings before interest, taxes, depreciation and amortization (“~~EBITDA~~”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”).~~Bank. 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, requiring us to give notice of each requested loan by delivery of advance request to Amegy Bank.

On December 18, 2019, we executed the Fourth Amendment to the RLOC with Amegy ~~Bank (the “Fourth Amendment”).~~Bank. Pursuant to the 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 the RLOC to May 4, 2020, and (vi) ~~provided that~~provides for our Chairman of the Board and President ~~provides a personal~~to personally 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”).~~Bank. 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~~trailing six months ended 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 and 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.

On November 12, 2020 we executed a Sixth Amendment to the RLOC with Amegy Bank, which extended the termination date of our RLOC to May 4, 2021.

~~For the three months ended June 30, 2020, the Company was~~We were not in compliance with the ~~covenants~~trailing twelve months minimum quarterly EBITDA requirement of ~~its~~$600,000 as of March 31, 2021. On April 30, 2021, we obtained a waiver from Amegy Bank with respect to the event of default. On May 4, 2021, we executed the Seventh Amendment to the RLOC with Amegy ~~Bank.~~Bank, extending the termination date of the RLOC until November 4, 2021. (See Note 5, “Senior Secured Revolving Credit Facility” and Note 13, “Subsequent Events” of our accompanying interim unaudited condensed consolidated notes to our Financial Statements, beginning on page F-1).

We rely on our RLOC for capital expenditures and other day-to-day Working Capital needs. As of ~~August 5, 2020,~~May 6, 2021, we had approximately ~~$909,000~~$1,613,049 in available cash, and ~~$290,000~~$335,299 available on our RLOC for borrowing (subject to certain borrowing base limitations). Borrowings on our RLOC are repaid from cash generated from our operations.

On April ~~11,~~15, 2020, we received ~~approval from the SBA to fund our request for~~ a PPP Loan ~~created as part~~ of ~~the recently enacted CARES Act administered by the SBA. In connection with~~approximately $361,400 under 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~~Act. Proceeds from the PPP Loan ~~primarily for~~were used to cover documented payroll, ~~costs.~~mortgage interest, rent, and utility costs over a twenty-four (24) week period. The PPP Loan is ~~reflected in short term liabilities in our accompanying interim unaudited condensed consolidated balance sheets on F-1 as we~~eligible to be forgiven under the terms of the PPP Loan under certain circumstances. The PPP Loan matures April 11, 2022 with interest accruing at 1%. There are no collateral requirements or prepayment penalties associated with the PPP Loan. We have applied for forgiveness and expect the PPP Loan ~~will~~to be forgiven during ~~2020.Economic Injury Disaster~~2021

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~~the Company’s business. Pursuant to ~~that certain Loan Authorization and Agreement (the “~~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 EIDL Loan is reflected in long term liabilities in our accompanying interim unaudited condensed consolidated balance sheets. In connection therewith, we 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 our accompanying interim unaudited condensed consolidated statements of operations.

~~(See Note 8, “Economic Injury Disaster Loan”~~Our strategic growth plan provides for the capital investment in new product launches, private label branding, and the upgrade of our ~~accompanying unaudited condensed consolidated notes~~financial systems which support our infrastructure. We deem these investments essential to support our ~~Financial Statements, beginning on page F-1).~~

The accompanying interim unaudited condensed consolidated financial statements have been prepared as if we will continue as a going concern. Through June 30, 2020, we had accumulated losses of $4,303,243growth and ~~a stockholders’ deficit of $2,602,465. Revenue declined by $1,065,259 in~~expansion objectives. We estimate 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~~range of this ~~filing is dependent upon the easing~~type of ~~restrictions imposed on elective surgeries by civil authority as a result~~investment to be approximately $2 million to $3 million and anticipate these investments to occur primarily during first and second quarters of ~~COVID-19, as well as our (i) successful execution~~calendar year 2021. We expect sources of ~~key branding initiatives, (ii) introduction, commercialization~~capital for these investments to be derived from cash from operations and sales of new proprietary products and product lines, (iii) increased sales of existing products, with strategic emphasis on selling more Retail Cases and increasing the percentage of Retail Cases sold as a percentage of all Cases we sell, and (iv) continued cost reductions. Additionally, we will need to refinance our RLOC with Amegy Bank, which is set to expire on November 4, 2020, with a new credit facility on commercially reasonable terms additional debt and/or ~~obtain~~ equity financing.

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.

For the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, we had no material commitments for capital expenditures.

For the ~~six~~three months ended ~~June 30, 2020,~~March 31, 2021, 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.

ITEM 3. QUANTITATIVE AND ~~QUALITATI~~VEQUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

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

We conducted an evaluation (pursuant to Rule 13a-15(b) promulgated under the Exchange Act), under the supervision and with the participation of management, including our Chief Executive and Chief Financial Officers, of the effectiveness of our disclosure controls and procedures (as defined in Rule ~~13a-15(e)~~13a- 15(e) promulgated under the Exchange Act) as of ~~June 30, 2020.~~March 31, 2021.

Based on our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of ~~June 30, 2020.~~March 31, 2021.

We were not in compliance with the trailing twelve months minimum quarterly EBITDA requirement of $600,000 as of March 31, 2021. On April 30, 2021, we obtained a waiver from Amegy Bank with respect to the event of default. On May 4, 2021, we executed the Seventh Amendment to the RLOC with Amegy Bank, extending the termination date of the RLOC until November 4, 2021. (See Note 5, “Senior Secured Revolving Credit Facility” and Note 13, “Subsequent Events” of our accompanying interim unaudited condensed consolidated notes to our Financial Statements, beginning on page F-1).

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 ~~June 30, 2020~~March 31, 2021 (Unaudited) and December 31, ~~2019~~2020		F-1
	Condensed Consolidated Statements of Operations for the Three ~~months~~Months Ended March 31, 2021 and ~~Six months Ended June 30,~~ 2020 ~~and 2019~~(Unaudited) ~~(Unaudited)~~		F-2
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three ~~months~~Months Ended March 31, 2021 and ~~Six months Ended June 30,~~ 2020 (Unaudited) ~~and 2019 (Unaudited)~~		F-3
	Condensed Consolidated Statements of Cash Flows for the ~~Six months~~Three Months Ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ (Unaudited)		F-4
	Notes to the 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	1310
Item 4.		Controls and Procedures	1310
PART II. OTHER INFORMATION
Item 5.		Other Information	1411
Item 6.		Exhibits	1411
Signatures			1613

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

	Number of Shares		Fair Value		Weighted Average Grant Date Fair Value
Non-vested, December 31, 2020		2,902,892	$	1,382,800	$	0.48
Granted		-		-		-
Vested		-		-		-
Forfeited		-		-		-
Non-vested, March 31, 2021		2,902,892	$	1,382,800	$	0.48

	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

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

	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	)

	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	)

	Three Months Ended March 31,
	2021		2020
Net cash provided by (used in) operating activities	$	55,335	$	(76,104	)
Net cash used in investing activities		-		(20,757	)
Net cash provided by (used in) financing activities		175,000		(249,181	)
Net increase (decrease) in cash and cash equivalents	$	230,335	$	(346,042	)

Exhibit No.		Description


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

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*		~~Paycheck Protection Program Promissory Note~~Limited Waiver and Seventh Amendment to Amended and Restated Business Loan Agreement dated ~~April 15, 2020,~~May 4, 2021, by and between Zions Bancorporation, N.A. (dba Amegy 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.~~and CPM Medical Consultants, LLC.

10.2*		~~Economic Injury Disaster Loan~~Amendment to the Stocking and Subdistribution Agreement dated ~~May 12, 2020,~~April 22, 2021, by and between ~~Small Business Administration~~Texas Overlord, LLC and ~~Fuse~~CPM Medical ~~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.~~Consultants, LLC.

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: ~~August 7, 2020~~May 12, 2021	By:	/s/ Christopher C. Reeg
		Christopher C. Reeg
		Chief Executive Officer and Director (Principal Executive Officer)