UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 20182019

or

For the Transition Period from                to                

Commission File Number: 000-10093

Fuse Medical, Inc.

(Exact name of registrant as specified in its charter)

(469) 862-3030

Registrant’s telephone number, including area code

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

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

Common Stock, $0.01 par value

(Title of class)

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

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

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

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

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

If an emerging growth company, indicate by check mark if the registrant has selected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐ 

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $6,959,716$3,734,944.

Indicate the number of shares outstanding of each of the registrant’s classes of Common Stock, as of the latest practicable date: As of March 1412, 2019, 74,600,1812020, 73,124,458 shares of the registrant’s Common Stock were outstanding.

INDEX

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In this Annual Report on Form 10-K (“Annual Report”), the terms “we,” “us,” “our” and “Fuse” mean Fuse Medical, Inc. and our subsidiaries.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K forand in particular, the fiscal year ended December 31, 2018 (“2018 Annual Report”) contains forward-looking statements, including, without limitation,descriptions of our “Business” set forth in the sections captioned “Item 1. Business,” “Item 1A. Risk Factors,” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” contain or incorporate a number of forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933, as amended, the (“Securities Act”), and elsewhere. AnySection 21E of the Securities Exchange Act of 1934, as amended, the (“Exchange Act”), including statements regarding:

Terms such as “may,” “might,” “would,” “should,” “could,” “project,” “estimate,” “pro-forma,” “predict,” “potential,” “strategy,” “anticipate,” “attempt,” “develop,” “plan,” “help,” “believe,” “continue,” “intend,” “expect,” “future,” and terms of similar import (including the negative of any of the foregoing) may be intended to identify forward-looking statements. However, not all forward-looking statements may contain one or more of these identifying terms. Forward-looking statements in this 2018 Annual Report may include, without limitation, statements regarding (i) the plans and objectives of management for future operations; (ii) a projection of income (including income/loss), earnings (including earnings/loss) per share, capital expenditures, dividends, capital structure or other financial items; (iii) our future financial performance, including any such statement contained in a discussion and analysis of financial condition by management or in the results of operations included pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”); (iv) our beliefs regarding potential clinical and other health benefits of our medical products; and (v) the assumptions underlying or relating to any statement described in clauses (i), (ii), (iii), or (iv), above.

Forward-looking statements are not meant to predict or guarantee actual results, performance, events, or circumstances and may not be realized because they are based upon our current projections, plans, objectives, beliefs, expectations, estimates, and assumptions and are subject to a number of risks, uncertainties and other influences, many of which we have no control over. Actual results and the timing of certain events and circumstances may differ materially from those described by the forward-looking statements as a result of these risks and uncertainties. Factors that may influence or contribute to the inaccuracy of the forward-looking statements or cause actual results to differ materially from expected or desired results may include, without limitation: (i) our inability to obtain adequate financing; (ii) the duration of, and government response to, the COVID-19 pandemic; (iii) the significant length of time and resources associated with the development of our products and related insufficient cash flows and resulting illiquidity; (iii)(iv) our inability to expand our business; (iv)(v) significant government regulation of our business and the healthcare industry; (v)(vi) lack of product diversification; (vi)(vii) existing or increased competition; (vii)(viii) results of arbitration and litigation; (viii)(ix) stock volatility and illiquidity; and (ix)(x) our failure to implement our business plans or strategies. Descriptions of some of the risks and uncertainties that could cause our actual results to differ materially from those described by the forward-looking statements in this 2018 Annual Report appear in “Item 1A, Risk Factors” (“Risk Factors”Factors”) and elsewhere in this 20182019 Annual Report.

Readers are cautioned not to place undue reliance on forward-looking statements because of the risks and uncertainties related to them and to the Risk Factors. We disclaim any obligation to update the forward-looking statements contained in this 2018 Annual Report to reflect any new information, future events or circumstances, or otherwise.

Readers should read this 2018 Annual Report in conjunction with (i) the discussion under the caption Risk Factors, (ii) our audited consolidated financial statements as of December 31, 2018,2019, and 2017,2018, and the related notes therein included in this 2018 Annual Report, beginning on page F-1 (“Financial Statements”Statements”), and (iii) other documents which we may file from time to time with the SEC.

Explanatory Note

We are a “smaller reporting company” as that term is defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended (“Exchange Act”).Act. Accordingly, this 2018 Annual Report will reflect the reporting requirements of smaller reporting companies as set forth in Regulation S-K, promulgated under the Exchange Act.

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PART I

ITEM 1. BUSINESS.

Historical Company Information

We were initially incorporated in 1968 as GolfRounds, Inc., a Florida corporation.  During July 1999, GolfRounds, Inc. was re-domesticated to Delaware through a merger into its wholly-owned subsidiary GolfRounds.com, Inc. Effective May 28, 2014, GolfRounds.com, Inc. amended its certificate of incorporation to change its name to Fuse Medical, Inc. (“Fuse” or our “Company”) and merged with and into Fuse Medical, LLC, with Fuse Medical, LLC surviving as a wholly-owned subsidiary of Fuse.  The transaction was accounted for as a reverse merger. Fuse was the legal acquirer, and Fuse Medical, LLC was deemed the accounting acquirer.  During 2015, certificates of termination were filed for Fuse Medical, LLC and its two subsidiaries.

On December 19, 2016 (the “Change-in-Control Date”), we entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) by and between NC 143 Family Holdings, LP, a Texas limited partnership (“NC 143”) which is controlled by Mark W. Brooks (“Mr. Brooks”), our Chairman of our Board of Directors (“Board”) and President; and Reeg Medical Industries, Inc., a Texas corporation, (“RMI”, and together with NC 143, the “Investors”), which is owned and controlled by Christopher C. Reeg, our Chief Executive Officer and Secretary (“Mr. Reeg”). The closing of the Stock Purchase Agreement resulted in a change-in-control of our Company whereby the Investors beneficially acquired approximately 61.4% of our issued and outstanding shares of common stock, par value $0.01 per share (“Common Stock”), immediately after the Change-in-Control Date.

On December 31, 2017 we completed the acquisition of CPM Medical Consultants, LLC (“CPM”) in which we purchased all outstanding membership units of CPM pursuant to the securities purchase agreement (“CPM Acquisition Agreement” and such transaction the “CPM Acquisition”). In the CPM Acquisition, Fuse was the legal acquirer, and for accounting purposes, CPM was deemed to have acquired Fuse. As a result, this 2018 Annual Report reflects CPM as the reporting entity for 2017 and 2016 and is consolidated with Fuse effective on the Change-in-Control Date.

Maxim Acquisition

On July 30, 2018, we, entered into that certain securities purchase agreement (the “Maxim Purchase Agreement”), by and between , Palm Springs Partners, LLC d/b/a Maxim Surgical, a Texas limited liability company (“Maxim”), RMI, Mr. Amir David Tahernia, an individual (“Tahernia”, together with RMI, the “Sellers”), and Tahernia in his capacity as the representative of the Sellers (the “Sellers’ Representative”) dated July 30, 2018, pursuant to which we agreed to purchase all of the outstanding equity securities of Maxim (“Maxim Interests”) from the Sellers (such transaction, the “Maxim Acquisition”) for aggregate consideration of approximately $3,400,000, as reported on our Current Report on Form 8-K filed with the SEC on August 3, 2018, and amended by Current Report on Form 8-K/A, filed with the SEC on October 15, 2018, and herein incorporated by reference. Before the Maxim Acquisition, Mr. Reeg served as Maxim’s President and was a beneficial owner of more than five percent (5%) of our Common Stock as contained in this 2018 Annual Report.

On August 1, 2018 (“Maxim Closing Date”), we completed the Maxim Acquisition pursuant to the Maxim Purchase Agreement, as more fully described in “Item 13. Certain Relationships and Related Transactions and Director Independence” contained in this 2018 Annual Report.

Overview

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

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

All of our medical devices are approved 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”). We are seeking to grow our manufacturing operations, both by internal product development and by acquiring existing FDA approved devices through various transactions. For example, we acquired the Maxim X-Treme Interbody Fusion System (“Maxim X-Treme System”) through the Maxim Acquisition, which represented a significant step toward expanding our Company from a medical device distributor into an integrated medical device distributor that also operates as the FDA’s manufacturer of record (the “Manufacturer”) and as an FDA-registered medical device specification developer and repackager/relabeler.

Distributiondevices.

Products

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

Currently Marketed Products – Orthopedic Implants

Currently Marketed Products – Biologics

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Customers and Product Distribution Channels

Retail. Under our retail distribution model, (“RetailModel”), we sell directly to our end customers, which includeconsist of hospitals and medical facilities, utilizing (i) our full-time sales representatives whom we employ or engage as independent contractors and sub-distributors.(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 operate under exclusiverefer to sales through our Retail Model as Retail Cases (which are herein referred to as “Retail Cases”). For the years ended December 31, 2019 and non-exclusive agreements with2018, our vendors, contract manufacturersRetail Cases generated, in aggregate, approximately 83% and supply partners77%, respectively, of our revenues..

Wholesale. Under our wholesale distribution model, (“Wholesale Model”), we sell our products directly to independent distributors rather than to hospitals and medical facilities who are the ultimate end customer. We do not pay or receive commissions from any sales by the independent distributor to the end customer. We refer to our sales through our Wholesale Model as Wholesale Cases, (which are herein referred to as “Wholesale Cases”). For the years ended December 31, 2019 and 2018, our Wholesale Cases generated, in aggregate, approximately 17% and 23%, respectively, of our revenues.

For the geographic territories that we serve.

We pride ourselves on developing collaborative supplier relationships resulting inyear ended December 31, 2019, our largest customer, a strong and diverse supplier network. Currently we maintain distribution agreements withhospital, represented approximately 55 different suppliers, with our top five suppliers representing approximately 39%9.9% of our consolidated costnet revenues. We continue to develop and expand our customer portfolio through building relationships with key medical professionals in the expanding geographic areas we serve. We provide on-going product training and support to our sales representatives, independent contractors and independent distributors along with product manufacturer marketing materials to ensure customer satisfaction with the products we offer. We believe focusing on these key areas is essential to growing our customer base and revenues.

Manufacture and Supply

We rely on third-party suppliers for the manufacturing of revenueall our products. Outsourcing product manufacturing reduces our need for capital investment and reduces operational expense. Additionally, outsourcing provides expertise and capacity necessary to scale up or down based on demand for our top tenproducts. We select our suppliers representing more than 50%to ensure that all of our consolidated costproducts are safe, effective, adhere to all applicable regulations, are of revenues.the highest quality, and meet our supply needs. We employ a rigorous supplier assessment, qualification, and selection process targeted to suppliers that meet the requirements of the FDA, and International Organization for Standardizations, (“ISO”), and quality standards supported by internal policies and procedures. Our quality assurance process monitors and maintains supplier performance through qualification and periodic supplier reviews and audits.

OneOur suppliers consist of:

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

Our primary supplier of our significant Biologics suppliers is Vivex Biomedical, Inc., a biomedical company focused on cellular therapies that treat orthopedic, spine, wound, and soft tissue indications. With respect to Orthopedic Implants, our significant suppliers are OrthoSolutions Group Ltd., Inc. is one of our largest suppliers of Orthopedic Implants for lowerlower extremities, as well as FH Orthopedics, Inc. for shoulder replacement systems. Another supplier we have is Spinal USAsystems, and Precision Spine for medical devices used in spine surgeries. During 2016, we contracted

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

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

Beginning in 2019, we began distributing the Sterizo Total Knee Replacement System (“Sterizo Total Knee System”) on a private label basis.  During 2018,2019, we successfully entered into new stocking distribution agreementssecured a master distributorship with two (2) manufacturers for non-exclusiveModal Manufacturing, LLC (“Modal”), providing us exclusive distribution rights in the United States for theirModal’s total knee and total hip replacement systems, as our replacement suppliers for UOC USA, Inc., which terminated February 28, 2018. For more information onsystem. We launched the terminationSterizo Total Knee System in the first half of our contract with UOC USA, Inc., please see “Item 9B. Other Information” on our Annual Report on Form 10-K for the year ended December 31, 2017.2019 and successfully grew distribution by gaining acceptance into 20 hospitals and use by 15 surgeons. We

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

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

Product Development

To further our business objectives, we use our knowledge of the healthcare industry and leverage our relationships with key suppliers, manufacturers, facility materials management, and distribution channels. In 2018,2019, we establishedcontinued to utilize our Scientific Advisory Boards, (“SABs”SABs”), to assist with our product development and design input. Members of our SABs include the heads of teaching hospitals and universities, clinical residency programs, and clinical fellowship programs at some of the most respected institutions in the nation.United States. Our SABs have provided valuable insight for both our products coming to market as well as the design and development of new products in our pipeline. We continuously review our product lines, both internally and with our SABs, by proactively evaluating product trends to ensure we offer a comprehensive, high-quality, and cost-effective selection of Orthopedic Implants and Biologics.Implants. We believe these efforts will enable us to become leaders in our industry and to expand our existing customer base.

ManufacturingSales and Marketing

Due to the Maxim Acquisition,We pride ourselves on developing collaborative supplier relationships resulting in a strong and diverse supplier network. Currently we are now an FDA-registered medical device specification developermaintain distribution agreements with approximately 56 different suppliers, with our top five suppliers representing approximately 47% of our consolidated cost of revenue and repackager/relabeler and the Manufacturerour top ten suppliers representing approximately 69% of the Maxim X-Treme System. The FDA has granted 510(k) clearance (“510(k) Approval”) to our Maxim X-Treme System, authorizing us to commercially distribute the Maxim X-Treme System. The 510(k) Approval process, also known as pre-market notification, requires demonstrating that the new medical device is substantially equivalent to a legally U.S. marketed medical device. Once a device receives a 510(k) Approval, maintaining that status is based on compliance with annual requirements set by the FDA.

To produce our Maxim X-Treme System, we purchase raw materials, primarily consistingconsolidated cost of Solvay Zeniva® PEEK polymers, from our domestic supplier, Solvay, and contract directly with AR Fabricating, our contract manufacturer for the Maxim X-Treme System. We do not believe there are material risks associated with contracting with only one (1) supplier for our raw materials, as we typically obtain adequate supplies of raw materials for our products, and believe it is unlikely there would be a shortage of these raw materials in the future. As of the date of this 2018 Annual Report, we have not experienced any adverse sourcing, delays, or issues regarding our raw materials.

During 2018, we also began building on our private label products through key relationships and suppliers. Our private label portfolio consists of (i) our amniotic membrane product line that includes AmBioChoice and AmBioChoice Plus; (ii) our internal fixation product line for foot and ankle procedures, which includes small bone screws and the FuseFix Hammertoe implant; and (iii) our cervical and lumbar interbody spacer product line that features titanium-coated surfaces to promote bone in-growth during spinal fusion surgeries.revenues.

Public Recognition

Our acquisitionstrategic acquisitions of CPM Medical Consultants, LLC (“CPM”) and Palms Springs Partners, LLC d/b/a Maxim Surgical (“Maxim”) significantly expanded our product lines, operations, and competitive reach. For the second year in a row, Fuse was named and ranked fifty-sixth (56th) on the Deloitte’s 20182019 Technology Fast 500TM, an annual ranking of the fastest growing North American companies in the technology, media, telecommunications, life sciences and energy technology sectors. We were also named and ranked for the second year in a row one

hundred forty-third as of the top 150 (143rd) largest public company by revenue in the Dallas-Fort Worth metropolitan area, by the Dallas Morning News in August 2018.

Customer Base and Product Distribution Channels

We primarily resell products that we acquire either directly from medical device manufacturers or from authorized distributors. We use two (2) retail distribution models to distribute our products to hospitals and surgical facilities including (i) direct employed and contracted sales representatives, and (ii) commission-paid sub-distributors (the “Retail Model”). Further, we use a wholesale distribution model with independent sub-distributors (the “Wholesale Model”). Under our Retail Model, our representatives and commission-paid sub-distributors use their business contacts to expand and establish relationships to build our target medical facility customer base. For the years ended December 31, 2018 and 2017, our Retail Model generated, in aggregate, approximately eighty-two percent (82%) and sixty-four percent (64%), respectively, of our revenues. For the years ended December 31, 2018 and 2017, our Wholesale Model generated, in aggregate, approximately eighteen percent (18%) and thirty-six percent (36%), respectively, of our revenues.

Our largest customers are hospitals and surgical facilities, and our largest customer represents approximately twenty percent (20%) of our consolidated net revenues for the year ended December 31, 2018. We continue to develop and expand our customer portfolio through building relationships with key medical professionals in the geographic areas we serve. We provide on-going product training and support to our sales representatives and independent contractors along with product manufacturer marketing materials to ensure customer satisfaction with the products we offer. We believe focusing on these key areas is essential to growing our customer base and revenues.May 2019.

Competition

As a nationalmanufacturer, distributor, and wholesaler of medical devices, we primarily compete with other distributors, as well as large, vertically-integrated medical device manufacturers that enjoy well-established distribution channels, national sales networks, direct sales models, and participation in large group purchasing organizations contracted with major hospitals and surgery centers.

We believe that our status as the Manufacturer and distributorability to offer a diverse selection of FDA-approved Maxim X-Treme System,products across five different product categories, sets us apart from other distributors and gives us a competitive advantage against distributors who are not able to manufacture their own products.products, as well as manufacturers who are limited to distributing their own products within a specific product category.

Generally, we view Stryker Corporation, Smith & Nephew plc, and Orthofix International, N.V.Medical Inc., as examples of our large vertically-integrated competitors. We believe those competitors, and companies like them, only distribute products they manufacture and have significant costs related to new product research and development and organizational support. Conversely, we sell a broad portfolio of specialized third-party manufacturers’ products and have nosignificantly lower costs related to research and development for such third-party products, nor do we have similaras well as significantly lower costs for organizational support since we are not vertically-integrated. Thus, we believe our competitive advantage lies primarily with our single-source fulfillment sales model, allowing us to offer a broader assortment of several manufacturers’ products. Furthermore, as a manufacturer for some medical devices, we do not have significant costs associated with research and development or organizational support. Thus,We believe we generally see immediate increases in revenues because of the increasedhave higher gross margins afforded bythan pure distributors due to the lower product costs associated with being a manufacturer. Accordingly, the compensation packages we offer to our employed sales team have higher-earning potentials than the compensation packages our competitors offer, allowing us to attractmanufacturer and retain talented and experienced employees.private labeler.

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

We believe the competition in our industry is primarily causeddriven by continued mergers and acquisitions of smaller manufacturers and distributors by larger, vertically-integrated companies that produce, market and distribute medical devices, Orthopedic Implants, and Biologics. Our vertically-integrated competitors benefit from their ability to control costs for the devices they manufacture and distribute. Moreover, we believe the market in which we operate is sensitive to changes in third-party and government reimbursements and, to a lesser degree, competitive discount pricing. We believe that our industry will continue to see increased mergers and acquisitions because the market is significantly fragmented with numerous medical device manufacturers, distributors, and specialized suppliers offering similar product portfolios throughout the United States.

Intellectual Property

We pursue strategic alliances and partnerships through intellectual property (“IP”) license agreements, and secure key purchase agreements from suppliers to build upon our portfolio of IP.

We also maintain stocking distribution agreements providing for exclusive distribution rights in certain geographic areas and use of associated trademarks, service marks, and tradenames for the sale and promotion of the products we offer, which generally have durations of one (1) to three (3) years, subject to renewal terms. Furthermore, we require leased employees, independent contractors, consultants, and advisors to execute agreements, with varying terms of one (1) to three (3) years, that assign to us the IPintellectual property existing and generated from their work. We believe our IP and exclusive distribution agreements provide us with important competitive advantages by (i) increasing our brand awareness and the brand awareness of the products we distribute; and (ii) ensuring that we use the latest design and manufacturing technology for our products that are perceived to be important to our customers.

Regulatory IssuesGovernment Regulation

Our business is subject to highly complex United States federal and state regulations that may impact our ability to fully implement our strategic plans and initiatives. We are required to obtain and hold licenses and permits and to comply with the regulatory requirements of various governmental agencies. If we fail to comply with such regulatory requirements or if allegations are made that we fail to comply with such regulations, the economic viability of our Company may be adversely affected.

FDA Regulations

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

Government Regulation – Medical Devices

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

Class I devices are those with the lowest risk to the patient for which safety and effectiveness can be reasonably assured by adherence to a set of regulations, referred to as General Controls, which require compliance with the standards and requirements related to the design, testing, manufacture, labeling, promotion, and salesapplicable portions of the products, record keeping requirements, tracking of devices,FDA’s Quality System Regulation (“QSR”), facility registration and product listing, reporting of potential product defects and adverse events conduct of corrections, and recallsmalfunctions, and other matters. As a distributor, marketer,appropriate, truthful and now, an FDA-registered medical device specification developernon-misleading labeling and repackager/relabeler of such FDA-regulated products, wepromotional materials. Some Class I devices also require 510(k) Clearance by the FDA, though most Class I devices are exempt from the premarket notification requirements. Class II devices are those that are subject to independent requirementsthe General Controls, as well as Special Controls, which can include performance standards, product-specific guidance documents and post-market surveillance. Manufacturers of most Class II devices are required to registersubmit to the FDA a premarket notification under

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

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

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

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

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

The FDA began to consider proposals to reform its 510(k) Clearance process in addition2011, and such proposals could include increased requirements for clinical data and a longer review period. Specifically, in response to complyingindustry and healthcare provider concerns regarding the predictability, consistency and rigor of the 510(k) regulatory pathway, the FDA initiated an evaluation of the 510(k) program, and as part of the Food and Drug Administration Safety and Innovation Act (“FDASIA”), Congress reauthorized the Medical Device User Fee Amendments with various FDA performance goal commitments and enacted several “Medical Device Regulatory Improvements” and miscellaneous reforms, which are further intended to clarify and improve medical device regulation both pre- and post-clearance and approval. Further, in December 2016, the 21st Century Cures Act (“Cures Act”), was signed into law. The Cures Act, among other things, is intended to modernize the regulation of devices and spur innovation, but its ultimate implementation is unclear.

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

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Failure to comply with those applicable regulatory requirements couldcan result in a wide varietyenforcement action by the FDA, which may include any of enforcement actions, ranging from the following:

Our facilities, records and criminal prosecutions. To support our Biologics product lines, wemanufacturing processes are a registered establishment withsubject to periodic announced and unannounced inspections by the FDA for the storageto evaluate compliance with applicable regulatory requirements.

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

Healthcare LawsEnvironmental Matters

Our facilities and Regulations

Weoperations are subject to extensive federal, state, and local environmental and occupational health and safety laws and regulations. These laws and regulations govern, among other things, air emissions; wastewater discharges; the generation, storage, handling, use and transportation of hazardous materials; the handling and disposal of hazardous wastes; the cleanup of contamination; and the health and safety of our employees. Under such laws and regulations, we are required to comply with federal and state healthcare laws and regulations. Such healthcare fraud and abuse laws apply to the relationships thatobtain permits from governmental authorities for some of our operations. If we and our distributors have with healthcare professionals and entities, such as physicians and hospitals. U.S. federal health care laws including laws related to false claims, health care fraud and abuse, physician self-referrals, and anti-kickbacks apply when weviolate or are customers submit claims for items or services that are reimbursed under federally-funded health care programs (such as Medicare or Medicaid). In comparable fashion, state health care laws of a similar nature apply to state-funded health care programs and may also apply with private third-party payors. The requirements of these laws are complex and subject to varying interpretations. If we fail to comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators. We could also be held responsible for costs and damages arising from any contamination at our past or present facilities or at third-party waste disposal sites. We cannot completely eliminate the risk of contamination or injury resulting from hazardous materials, and we may incur material liability as a result of any contamination or injury.

Compliance with Certain Applicable Statutes

We are subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws, false claims laws, criminal health care fraud laws, physician payment transparency laws, data privacy and security laws and foreign corrupt practice laws. Violations of these laws are punishable by criminal and/or state government investigations, substantialcivil sanctions, including, in some instances, fines, imprisonment and, within the United States, exclusion from future participation in government healthcare programs, including Medicare, Medicaid and Veterans Administration health programs. These laws are administered by, among others, the U.S. Department of Justice, the Office of Inspector General of the Department of Health and Human Services and state attorneys general. Many of these agencies have increased their enforcement activities with respect to medical device manufacturers in recent years.

The federal Anti-Kickback Statute, prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing, arranging for or recommending a good or service, for which payment may be made in whole or part under federal healthcare programs, such as the

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

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

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

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

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

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

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

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

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

Third-Party Reimbursement

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

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

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

Compliance Training

We institutedmaintain a company-wide compliance program for all employees, vendors, and contractors. During 2018, we hired a compliance officercontractors, which is managed by our Compliance Officer who is responsible for developing compliance programs, reviewing our policies, overseeing adherence to those policies, and advising management on possible risks. Our compliance policies related to this realm include general ethical business practices as well as specific operating policies and training to ensure compliance with relevant and applicable healthcare laws and regulations, that includeincluding the laws referenced above in addition to other applicable laws, such as Health Insurance Portability and Accountability Act of 1996, as amended (“HIPPA”) and the Physician Payments Sunshine Act.referenced.

Employees

We engage AmBio Staffing, LLC (“AmBio”) a Texas licensed professional employment organization, to provide us with payroll processing, employee benefit administration, and related human capital services. As of March 14, 2019,12, 2020, AmBio supports

supported approximately 6954 full time equivalents (“FTE”FTE”). Of those 6954 FTEs, 4844 FTEs directly support us, 14 FTEsnine FTEs support the operationsoperations of other companies,, and we share 7 FTEsone FTE with other related companies.

Corporate and Available Information

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

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Effective May 28, 2014, GolfRounds amended its certificate of incorporation to change its name to Fuse Medical, Inc., Fuse Medical, LLC, an unrelated entity, then merged with and into a wholly-owned subsidiary of Fuse Medical, Inc., with Fuse Medical, LLC surviving as a wholly-owned subsidiary of Fuse Medical, Inc. The transaction was accounted for as a reverse merger. Fuse Medical, Inc. was the legal acquirer, and Fuse Medical, LLC was deemed the accounting acquirer. During 2015, certificates of termination were filed for Fuse Medical, LLC and its two subsidiaries.  

On December 19, 2016 (the “Change-in-Control Date”), we entered into a stock purchase agreement (the “Stock Purchase Agreement”) by and between NC 143 Family Holdings, LP, a Texas limited partnership (“NC 143”) which is controlled by Mark W. Brooks (“Mr. Brooks”), the Chairman of our Board of Directors (“Board”) and our President; and Reeg Medical Industries, Inc., a Texas corporation, (“RMI”), which is owned and controlled by Christopher C. Reeg, (“Mr. Reeg”) our Chief Executive Officer and Secretary. The closing of the Stock Purchase Agreement resulted in a change-in-control of Fuse whereby Messrs. Brooks and Reeg beneficially acquired, immediately after the Change-In-Control Date, approximately 61.4% of our issued and outstanding shares of common stock, par value $0.01 per share (“Common Stock”).

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

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

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

ITEM 1A. RISK FACTORS.

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

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

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

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

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

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

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

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

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

Risks Related to Our Business and Industry

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our operating earnings are dependent on certain significant suppliers.

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

Interruption of manufacturing operations could adversely affect our business.

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

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

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

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

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

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

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

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

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

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

Our business is subject to highly complex and evolving regulatory and licensing requirements that are subject to uncertainty, rapid change, differing interpretations, and rigorous regulatory enforcement. Failure to comply with such regulatory requirements may result in civil or criminal penalties, including the loss of licenses or the exclusion from future participation in government healthcare programs. There can be no assurance that federal or state regulatory or enforcement authorities will not investigate or challenge our current or future activities under these laws. Any state or federal regulatory or enforcement review of our Company,us, regardless of the outcome, would be costly and time consuming. Additionally, we cannot predict the impact of any changes in these laws, whether these changes are retroactive or will affect our Companyus on a going-forward basis only. Any investigation or challenge could have a material adverse effect on our reputation, business, financial condition, and results of operations.

Our operating earnings are dependent on certain significant suppliers.

We use original equipment manufacture suppliers to support our operations. We distribute products from nearly fifty-five (55) suppliers and are dependent on these suppliers for the continuing supply of products. In 2018, purchases of products from our largest supplier accounted for approximately eighteen percent (18%) of consolidated cost of revenues. We rely on suppliers to provide agreeable purchasing and delivery terms and performance incentives. Our ability to sustain adequate operating earnings has been, and will continue to be, dependent upon our ability to obtain favorable terms and incentives from suppliers, as well as suppliers’ continuing use of third-party distributors to sell and deliver their products. An unforeseen delay in raw material supplies, a change in terms by a significant supplier, or a decision of such a supplier to distribute its products directly to healthcare providers rather than through third-party distributors could have a material adverse effect on our results of operations and financial condition.

Product pricing is subject to regulatory control.

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

The FDA regulates the manufacturers and suppliers of the products that we sell, market, manufacture, and distribute, and regulatory compliance is costly and could contribute to delays in the availability of our products.

Under FDA regulations, we are subject to the same FDA regulation as the manufacturers and suppliers to whom we distribute. These regulations govern (i) the manufacturing and processing of cellular and tissue products; (ii) the introduction of new medical devices; (iii) the observance of certain standards with respect to the design, manufacturing, testing, labeling, promotion, and sales of the devices; (iv) the maintenance of certain records; (v) the ability to track devices; (vi) the reporting of potential product defects; (vii) the importing and exporting of devices; and (viii) various other matters. Furthermore, manufacturers that create the products we market face an increasing amount of scrutiny and compliance costs as more states implement regulations governing medical devices and Biologics. In addition, we are subject to ongoing compliance concerning our products with 510(k) Approvals,Clearance, as well as potential onsite inspections by the FDA. Being found in violation and failing to correct an FDA compliance issue, could potentially result in product recall, product seizure, or the de-listingwithdrawal of our products withthe 510(k) Approval.Clearance. These types of FDA regulations could affect many of the products we market, impacting our revenues and profitability, results of operations, and working capital.

Future regulatory action remains uncertain.

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

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

Political, economic, and regulatory influences continueIf we fail to change the healthcare industryobtain, or experience significant delays in the United States. The ability of hospitals to pay feesobtaining, FDA clearances or approvals for our future products partially dependsor modifications to our products, our ability to commercially distribute and market our products could suffer.

Our medical devices are subject to extensive regulation by the FDA and numerous other federal and state governmental authorities. The process of obtaining regulatory clearances or approvals to market a medical device, particularly from the FDA, can be costly and time consuming, and there can be no assurance that such clearances or approvals will be granted on a timely basis, if at all. In particular, the extentFDA permits commercial distribution of most new medical devices only after the devices have received clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act, or 510(k), or are the subject of an approved premarket approval application, or a PMA. The 510(k) process generally takes three to which reimbursement fornine months, but can take significantly longer, especially if the costs of such materials and related treatments will continueFDA requires a clinical trial to be available from private health coverage insurers and other similar organizations. We may have difficulty gaining market acceptance forsupport the products510(k) application. Currently, we sell if third-party payors do not provide adequate coverageknow whether the FDA will require clinical data in support of any 510(k)s that we intend to submit for other products in our pipeline. In addition, the FDA continues to re-examine its 510(k) Clearance process for medical devices and reimbursementpublished several draft guidance documents that could change that process. Any changes that make the process more restrictive could increase the time it takes for us to hospitals.

Major third-party payors of hospitals, such as private healthcare insurers, periodically revise their payment methodologies based, in part, upon changes in government sponsored healthcare programs. We cannot predict these periodic revisions with certainty, and such revisions may result in stricter standards for reimbursement of hospital chargesobtain clearances or could make the 510(k) process unavailable for certain specified products, potentially adversely impactingof our business,products. A PMA must be submitted to the FDA if the device cannot be cleared through the

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510(k) process or is not exempt from premarket review by the FDA. A PMA must be supported by extensive data, including results of operations,preclinical studies and financial conditions.

The FDAclinical trials, manufacturing and similar state authorities require uscontrol data and proposed labeling, to list and register certain products, because we are a distributor, marketer, specification developer and repackager/relabeler and Manufacturer for FDA-regulated products.

As a distributor, marketer, and now a specification developer and repackager/relabeler of FDA-regulated products, we may be subject to independent requirements to register and list certain products. We may be required to obtain state licensure or certifications and may be subject to inspections, in addition to complying with derivative requirements applicabledemonstrate to the manufacturersFDA’s satisfaction the safety and effectiveness of the products we market. Failuredevice for its intended use. The PMA process is more costly and uncertain than the 510(k) Clearance process, and generally takes between one and three years, if not longer. In addition, any modification to comply with such applicable requirementsa 510(k)-cleared device that could resultsignificantly affect its safety or effectiveness, or that would constitute a major change in its intended use, design or manufacture, requires a wide variety of enforcement actions, ranging from warning letters to more severe sanctions, such as significant costly fines and civil penalties, operating restrictions, injunctions, and criminal prosecutions, all of which could adversely impact our business.new 510(k) Clearance or, possibly, a PMA.

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

The medical device industry is characterized by extensive intellectual property litigation and, from time to time, we may become the subject of claims of infringement or misappropriation. Regardless of outcome, such claims are expensive to defend and divert management and operating personnel from other business issues. A successful claim or claims of patent or other intellectual property infringement against us could result in payment of significant monetary damages and/or royalty payments or negatively impact our ability to sell current or future products in the affected category.

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

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

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

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

Computer malware, viruses, and hacking and phishing attacks by third parties have become more prevalent in our industry, have occurred on our systems in the past, and may occur on our systems in the future. Because techniques used to obtain unauthorized access to or sabotage systems change frequently and generally are not recognized until successfully launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. As cyber-security threats develop and grow, it may be necessary to make significant further investments to protect data and infrastructure. If an actual or perceived breach of our security occurs, (i) we could suffer severe reputational damage adversely affecting customer or investor confidence, (ii) the market perception of the effectiveness of our security measures could be harmed, (iii) we could lose potential sales and existing customers, our ability to deliver our servicesproducts or operate our business may be impaired, (iv) we may be subject to litigation or regulatory investigations or orders, and (v) we may incur significant liabilities. Our insurance coverage may not be adequate to cover the potentially significant losses that may result from security breaches. Additionally, while we currently do not have cybersecurity coverage, we plan to evaluate options for this type of coverage in 2019.2020.

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

We benefit substantially from the leadership and performance of our executives and certain key employees. For example, key members of our executive team have experience with successfully scaling an early stage medical device company to achieve profitability. Our success will depend on our ability to retain our current executives and key employees, and to attract and retain qualified personnel in the future. Competition for executives and key employees in our industry is intense and we cannot guarantee that we will be able to retain our personnel nor attract new, qualified personnel. This uncertainty may be especially true during periods in which we face challenges such as financial difficulties or a reduced stock price. The loss of the services of certain members of our executives or key employees could prevent or delay the implementation and completion of our strategic objectives or divert management’s attention to seeking qualified replacements. Each member of the executive team and our key employees may terminate employment without notice and without cause or good reason. The members of our executive team are not subject to non-competition

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or employment agreements. Accordingly, the adverse effect resulting from the loss of certain members of the executive team could be compounded by our inability to prevent them from competing with us.

Pressure to contain costs and reduce prices could negatively impact on our future operations.

Pricing pressure has increased in our industry primarily due to continued consolidation among healthcare providers, trends toward managed care, the recent shift toward increased government involvement of healthcare costs, and laws and regulations relating to

reimbursement and pricing. Pricing pressure, reductions in reimbursement levels or coverage, or other cost containment measures could unfavorably impact our business, future operating results and financial condition.

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

In 2018, our top customer represented approximately twenty percent (20%) of our consolidated net revenues. If an existing contract with one of our few top customers expires without being replaced or the customer or certain healthcare provider customer terminates the contract prior to its expiration, we could lose that customer relationship, which could adversely impact our business, future operating results, and financial condition.

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

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

Our success partially depends on our ability to retain and motivate our distributors, independent sales agencies, and their representatives to sell our products in certain territories. However, such parties may not be successful in implementing our strategies and marketing plans. Some of our distributors and independent sales agencies do not sell our products exclusively and may offer competing products from other companies. Our distributors and independent sales agencies may terminate their contracts with us, may devote insufficient sales efforts to our products, or may focus their sales efforts on other products that produce greater commissions for them, which could adversely affect our operations and operating results. We also may not be able to find additional distributors and independent sales representatives who will agree to market or distribute our products on commercially reasonable terms, if at all. If we are unable to establish new distribution and independent sales representative relationships or renew current distribution and sales agency agreements on commercially acceptable terms, our business, financial condition and results of operations could be materially and adversely affected.

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

Our future growth and profitability will partially depend on our marketing performance and appropriate cost structure, including our ability to:

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

Interruption of manufacturing operations could adversely affect our business.

Our suppliers have manufacturing facilities for certain product lines that may be concentrated in one (1) or more plants. Damage to these facilities or issues in our manufacturing arising from a failure to follow specific internal protocols and procedures, compliance concerns relating to quality systems regulations, equipment breakdown or malfunction, among other factors, could adversely affect the availability of our products. In the event of an interruption in manufacturing of certain products, we may be unable to quickly shift to alternate means of production to meet customer demand. In the event of a significant interruption, we may experience lengthy delays in resuming production of affected products due to the need for regulatory approvals. We may experience loss of market share, additional expense, or harm to our reputation.

Additionally, we contract with only one (1) supplier for the raw materials (polymers) that we use to produce our products. While we have not experienced a shortage of polymers in the past and believe that it is unlikely that there will be one in the future, if there were a shortage of polymers, it could either increase the cost of production for or prevent us from being able to produce some of our products, which could adversely affect our future results of operations and financial condition.

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

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

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

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

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

We do business with companies that are owned or controlled by our Chief Executive Officer and Chairman of the Board and President, which could create actual or potential conflicts of interest.

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

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

Some members of our executive team may dedicate inadequate time and attention to our Company.

Our Chief Executive Officer and Chairman of the Board and President, and Chief Financial Officer may become distracted by other matters, reducing the amount of time they allocate to the affairs of our Company. For example, Mr. Reeg and Mr. Brooks both own other companies, and they may allocate more of their time to the operations of those companies. If members of our executive team devote more substantial amounts of their time to those matters in the future, their ability to devote sufficient time to our operations may be limited and could negatively impact our business.

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

We may pursue future business combinations with other companies or strategic acquisitions of complementary businesses, product lines, or technologies. There can be no assurance that such acquisitions will be available at all, nor on terms acceptable to us. These transactions may require additional capital, which may increase our indebtedness or outstanding shares, resulting in a dilution to our stockholders or a reduction in working capital. The inability to obtain such future capital may inhibit our growth and operating results. Integration of acquisitions or additional products can be costly, time-consuming, and complicated which could significantly impact operating results. Furthermore, the integration of any acquisition may disproportionally divert our executive team’s time and resources from our primary business and its operations. We may sell some or all of our product lines to other companies or we may agree to

merge with another company. There can be no assurance that future transactions will ultimately benefit our Company. If we face difficulty integrating future acquisitions or if our executive team’s attention is diverted, our future results of operations may negatively impact our business, results of operations, and financial condition.

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

Poor or deteriorating economic conditions in the U.S. could adversely affect the demand for healthcare services and consequently, the demand for our products and services.products. Poor economic conditions also could lead our suppliers to offer less favorable terms of purchase, which would negatively affect our cash flows and profitability. These and other possible consequences of financial and economic decline could have material adverse effect on our business, results of operations, and financial condition.

Risks Related to Ownership of Our Common Stock

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

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

For example, we cannot provide assurance that, in the future, our executive team will not find a material weakness in connection with its periodic review of our internal controls and processes over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We also cannot provide assurance that we could correct any such weakness to allow our executive team to assess the effectiveness of our internal controls over financial reporting as of the end of our fiscal year with enough time to state that such assessment will have been fairly stated in our 2018 Annual Report, or state that we have maintained effective internal controls over financial reporting as of the end of our fiscal year. If we fail to comply with any of these regulations, we could be subject to a range of regulatory actions, fines or other sanctions or litigation. If we disclose any material weakness in our internal controls over financial reporting, our stock price could decline.

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

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

Historically, the market price for our Common Stock has been highly volatile and trades at low volumes. From time to time, the market has experienced significant price and volume fluctuations, which we believe are unrelated to our operating performance. Fluctuations in the trading price or liquidity of our Common Stock may reduce the value of an investment in our Common Stock.

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

Holders of Record

As of March 14, 2019,12, 2020, there were 374357 account holders of record of our Common Stock listed with our transfer agent, American Stock Transfer and Trust Company, LLC.

Dividends

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

ITEM 6. SELECTED FINANCIAL INFORMATION.

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

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

The following discussion highlights our results of operations and the principal factors that have affected our consolidated financial condition, our liquidity and our capital resources for the periods described. The discussion also provides information that our management believes is relevant for an assessment and understanding of our consolidated financial condition and results of operations presented herein. The following discussion and analysis are based on our Financial Statements contained in this 2018 Annual Report, which have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”GAAP”). The discussion and analysis should be read in conjunction with our Financial Statements and the related notes therein.

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Explanatory Note

As described in “Item 1. 1. Business,, Historical Company Corporate and Available Information,” and elsewhere in this 2018 Annual Report, the CPM Acquisition occurred during December 2017 and reflects CPM as the reporting entity for 2017 and 2016. Effective on the Change-in-Control Date, Fuse consolidated with CPM. Effectiveeffective on the Maxim Closing Date, we completed the Maxim Acquisition and integrated its operations for periods after the Maxim Closing Date. Our Financial Statements include the accounts of Maxim as of and for the five (5) months ended December 31, 2018. Intercompany transactions have been eliminated in consolidation.

Overview

We are a nationalmanufacturer, distributor, and Manufacturerwholesaler of medical devices offering a broad portfolio of Orthopedic Implants, Biologics, and other medical devices. A more detailed description of our business operation can be found in “Item 1. Business” within this 2018 Annual Report.

We believe 2018 was2019 proved pivotal for our growth as a year of transitionmanufacturer and investmentinnovative product developer. Our focus to shift our business model from a sole distributor to an integrated manufacturer and distributor has seen successful results in our future.2019, with continued growth and success leading into 2020. Highlights of our 20182019 strategic milestones include the following:

Current Trends and Outlook

Seasonality

Our Company isWe are subject to seasonal fluctuations in sales, which cause fluctuations in quarterly results of operations. Because of theour seasonality, of the Company’s 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 typically experience greater revenue and greater sales volume, as a percentage of revenue, during the last two (2) calendar quarters compared to the first two (2) calendar quarters of the year. This increase is primarily due to more patient annual healthcare deductibles being met during the last two (2) quarters of the calendar year compared to the first two (2) quarters of the calendar year, which is partially satisfied by elective surgeries. For the yearyears ended December 31, 2019 and 2018, and 2017, approximately fifty-five (55%$13.1 million (57%) and fifty-one (51%$14.6 million (55%) of revenues were generated during the third and fourth quarters of 20182019 and 2017,2018, respectively. We use this seasonality trend to assist us in enterprise-wide resource planning such as purchasing and product inventory logistics.

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Retail and Wholesale Cases

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

We measure sales volume based on medical procedures in which our products were sold and used (“Cases,” and each a “Case”(a “Case”). We consider Cases resulting from direct sales to hospitals and medical facilities to be retail Cases (“Retail Cases”) and Cases resulting from sales to third-parties, such as non-medical facilities, distributors, or sub-distributors, to be wholesale Cases (“Wholesale Cases”).Cases. Some of our sales for Wholesale Cases are on a consignment basis with the third-party.

Retail Cases in our industry command higher revenue price points than Wholesale Cases, becauseCases. Because Retail Cases involve direct sales to medical facilities, which means thatour end customers, we receive a higher profit margin due to the absence of any third party in the sales process, before we pay any potential commissions to a directfull time or contractedindependent sales representative or sub-distributor.representative. As a result, Retail Cases generally generate substantially more gross profit than Wholesale Case transactions.

On the other hand, Wholesale Cases in our industry command lower revenue price-points than Retail Cases, becauseCases. Because Wholesale Cases involve sales to third parties who sell our products to end users, which reducescustomers, our profit margins are reduced for these Cases. Thus, our Wholesale Cases generate substantially lower gross profit than our Retail Cases, but are not subject to additional overhead support costs, such as case coverage and commissions. Furthermore, ourOur Wholesale Case business can only be profitable withis highly dependent on minimum volume sales levels to achieve appropriate product sales volume, but during 2018 we noticed that our Wholesale Cases required reduced sales volumes than in the past, causing us to shift our operations to focus on Retail Cases during 2018.profitability.

Pricing Pressures

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

To offset pricing pressure, we employ strategies to increaseoptimize revenue per Case. During 2018,2019, we believe we were successful in minimizing the impact of pricing pressures as reflected with a slight increase in revenues per Case. For the year ended December 31, 2018, and 2017, our average revenuesrevenue per Case were $3,985of $4,228 for 2019 and $3,818, respectively. Our improvement in average revenues per Case was primarily due$4,328 for 2018. During 2019, our strategy to emphasize our success with shifting product revenue from Wholesale Case revenues to Retail Case revenues, which we accomplished by managing our supply chain to prioritize sales forModel proved successful as Retail Cases represented approximately 83% of revenue, or, an approximate 6% increase over sales for Wholesale Cases.2018.

Compensation Initiatives

We expect to continue to offer compensation and other valuable long-term incentives, such as equity incentives, to key distributors, executives, and employees as a means to expand our strategic partnerships and industry relationships. During 2018, we established our SABs and2019, our Board granted equity incentives to our Scientific Advisory Board members (SABs), key distributors, independent contractors and employees. Pl(Sease seeee “Item 1. Business” for additional information.information).

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Results of Operations

Year Ended December 31, 20182019 Compared to Year Ended December 31, 20172018

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

Net Revenues

For the year ended December 31, 2018,2019, our net revenues were $26,342,038,$22,900,277 compared to $26,407,206$26,342,038 for the year ended December 31, 2017,2018, a decrease of $65,168,$3,441,761, or approximately less than one percent (1%)13%.

For the year ended December 31, 2018,2019, Retail Cases increaseddecreased by forty-seven percent (47%)approximately 7% compared to the year ended December 31, 2017. With that increase, we saw2018, and revenues from Retail Cases increaseincreased by thirty percent (30%)approximately 6% compared to revenues from Retail Cases for the year ended December 31, 2017. We believe that the increase in2018. Revenues from Retail Cases and decrease in Wholesale Cases resulted from shifting moreas a percentage of our businesstotal revenues increased to Retail Cases through the better management83% of our supply.

As a result of our strategy to focus on Retail Cases, our Wholesale Cases declined by thirty-five percent (35%) in the year ended December 31, 2018, compared to Wholesale Cases during the year ended December 31, 2017. Accordingly, revenues from Wholesale Cases for the year ended December 31, 2018, declined by forty-one percent (41%) compared to2019, from 77% of revenues from Wholesale Cases for the year ended December 31, 2017.2018. We believe the increase in revenue from Retail Cases as a percent of total revenues reflects the execution of our strategies to shift more of our business to higher margin Retail Cases through improvement of our supply chain management.  Therefore, wholesale revenue as a percent of total revenue has decreased.

As discussed above in “Current Trends and Outlook”, 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. We intend to increase our Retail Case volume by focusing our operations on Retail Cases to increaseincreasing sales volumes with our existing retail customer base and toas well as on-boarding new surgeons, distributors, and retail customers.

Cost of Revenues

For the year ended December 31, 2018,2019, our cost of revenues was $13,352,558,$11,762,790 compared to $14,582,416$13,352,558 for the year ended December 31, 2017,2018, which is a decrease of $1,229,858$1,589,768, or approximately eight percent (8%).13%

As a percentage of revenues, cost of revenues decreased four (4) percentage pointswas approximately 51% for the years ended December 31, 2019 and 2018.   While remaining stable, the components making up the cost were variable and consisted of the following:   (i)(a) an approximate 5% decrease in medical instruments purchased based on lower demand, (b) an approximate 3% reduction in cost of revenues primarily driven by a reduction in Case volume product mix; offset, in part, by (ii) an approximate 7% increase in the inventory loss provision for slow-moving and obsolescence.

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Gross Profit

For the year ended December 31, 2019, our gross profit was $11,137,487 compared to approximately fifty-one percent (51%)$12,989,480 for the year ended December 31, 2018, compared torepresenting a decrease of $1,851,993, or approximately fifty-five percent (55%) for the year ended December 31, 2017. The decline as13%.

As a percentage of revenues, primarily resulted fromgross profit remained stable at approximately 49% for the years ended December 31, 2019 and 2018. The components of gross profit varied and included (i)(a) an approximate nine percent (9%)5% decrease in medical instruments purchased based on lower demand, (b) an approximate 3% reduction in cost of revenues caused largelyprimarily driven by a reduction in Case volume product mix; offset, in part, by (b) an approximately three percent (3%) increase in medical instruments purchased based on higher demand and (ii) an approximate two percent (2%)7% increase in the inventory loss provision for slow-moving and obsolescence, identified during our inventory operations system upgrades.

Gross Profit

For the year ended December 31, 2018, our gross profit was $12,989,480 compared to $11,824,790 for the year ended December 31, 2017, representing an increase of $1,164,690 or approximately ten percent (10%).

As a percentage of revenues, gross profit increased by approximately four (4) percentage points to forty-nine percent (49%) for the year ended December 31, 2018, from forty-five (45%) percentfor the year ended December 31, 2017. The increase as a percentage of revenues is primarily the result (i) an approximate nine percent (9%) reduction in cost of revenues caused largely by an approximate two percent (2%) decline in Case volume, as a result of a decline in Wholesale Cases, offset in part by (ii)(a) a three percent (3%) increase in medical instruments purchased based on higher demandupgrades and (b) an approximate two percent (2%) increase in the inventory loss provision for slow-moving and obsolescence, identified by inventory operations system upgrades.periodic cycle-counts.

Selling, General, Administrative and Other

For the year ended December 31, 2018,2019, our selling, general, administrative, and other expenses increased(SG&A) were $8,466,077, or approximately flat when compared to SG&A of $8,466,128 from $5,315,657 for the year ended December 31, 2017, which is an increase of $3,150,471, or approximately fifty-nine percent (59%).2018.

As a percentage of net revenues, selling, general, administrative, and other expenseSG&A accounted for approximately thirty-two percent (32%)37% for the year ended December 31, 2018,2019, and twenty percent (20%)32% for the year ended December 31, 2017.2018. As a percentage of revenues, the increase of approximately twelve (12) percentage points5% primarily resulted from (i)(a) an increase of $1,492,523$571,832 in leased staffing,bad debt expense driven by an increase in aged customer accounts receivables, (b) an increase of $905,132$307,500 in legal, valuation, and consulting fees,SAB costs, a reflection of the first full year of SAB costs since the 2018 SAB establishment, and (c) an increase of $792,317 in stock-based compensation$140,892 for employee expense reimbursements related to our implementation of our equity incentive plan during 2018 to support our SABs,business development and (d) an approximate $113,820 increase in general corporate costs,travel costs; offset, in part, by (ii)(a) a $153,321 reduction in bad debt expense. The reduction in bad debt expense is primarily due to the higher bad debt expense incurred during the fiscal year ended December 31, 2017.

The $1,492,523 increase$333,332 decrease in leased staffing resulted, in part, from to the on-boarding of our Chairman of the Board and President, two (2) senior sales consultants, and new leadership positions in our supply chain operations. This increase cost was offset by general employee attrition without the back-filling of unnecessary staff roles.

The $905,132 increasecosts, (b) a $253,746 reduction in legal fees, (c) a $225,946 reduction in consulting and valuation consulting fees primarily resulted from (i) approximately $191,324audit costs, and (d) a $207,250 reduction in non-recurring legal, audit, and valuation professional fees relating to the CPM Acquisition, (ii) approximately $97,921 of non-recurring legal, audit, and valuation professional fees related to our responses and successful resolution of comments to our Annual Report on Form 10-K for the year ended December 31, 2017, from the SEC that we received during the second quarter of 2018, (iii) approximately $116,969 of non-recurring legal, and valuation professional fees related to the Maxim Acquisition, (iv) approximately $70,000 of non-recurring professional fees to assess, remediate, and document our internal controls and processes over financial reporting, (v) approximately $79,168 of legal and professional fees related to our capital structure and first-year implementation of our equity incentive plan, and (vi) approximately $349,750 in general corporate and securities legal compliance costs.stock-based compensation expense.

Commissions

For the year ended December 31, 2018,2019, our commissions expense increaseddecreased to $6,431,967$5,982,075 from $5,641,122$6,431,967 for the year ended December 31, 2017, an increase2018, a decrease of $790,845,$449,892, or approximately fourteen percent (14%)7%.

As a percentage of net revenues, commissions expensesexpense accounted for approximately twenty-four percent (24%)26% for the year ended December 31, 2018,2019, and twenty-one percent (21%)24% for the year ended December 31, 2017. We believe this three (3) percentage point2018. This increase is mainly causedprimarily driven by thean approximate forty-seven percent (47%)6% increase in volumerevenues from Retail Cases as a percentage of Retail Cases.total revenues for the year ended December 31, 2019 compared to the year ended December 31, 2018. Please see “Current Trends and Outlook” for additional information. We do not incur commissions expensesexpense on revenues derived byfrom Wholesale Cases.

Depreciation and Amortization

For the year ended December 31, 2018,2019, our depreciation and amortization expense increased to $49,685,$107,073 from $14,521$49,685 for the year ended December 31, 2017,2018, an increase of $35,164.$57,388. The increase is primarily the result of approximately $33,925an approximate (i) $47,500 in amortization of intangible assets, such as noncompete agreements and customer relationships, acquired pursuant to the Maxim Acquisition as of the Maxim Closing Date, and approximately $1,239(ii) an approximate $9,900 increase in depreciation expense as a result of investment in IT infrastructure such as additional and replacement user workstationsworkstations.

Goodwill Impairment

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

Change in fair valueFair Value of contingent purchase considerationContingent Purchase Consideration

For the year ended December 31, 2018,2019, we determined that the earnings thresholds, as detailed in the CPM Acquisition Agreement, were not met for paymentspayments under the earn-out (“Earn-Out”Earn-Out”). Therefore, based on our 20182019 financial performance, we made no payments to NC 143 for either the base Earn-Out or the bonus Earn-Out.

As of December 31, 2018,2019, the fair value of the Earn-Out liability was re-measured to fair value under the probability weighted income approach, as further explained in Note 2 of our accompanying consolidated Financial Statements, entitled “Significant Accounting

Policies, Fair Value Measurements.” As a result, the initialcurrent fair value of the Earn-Out liability was reduced by $5,663,014,$1,936,164, from $19,244,543$13,581,529 to $13,581,529.$11,645,365.

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Interest

Interest

For the year ended December 31, 2018,2019, our interest expense declined to $133,944$121,633 from $161,669$133,944 for the year ended December 31, 2017,2018, which is a reduction of by $27,725,$12,311, or approximately seventeen (17) percentage points.9%. The decline is primarily due to an approximate $40,554$19,728 reduction in interest expense based on a decrease in our RLOC borrowings, because of our enhanced cash management program utilizing an overnight sweep product provided by Amegy Bank, offset, in part, by an approximately $12,829$7,417 increase in interest costs causedexpense driven by an increasechanges in the LIBOR market interest rates and the one percent (1%) increase in cost of borrowings on the RLOC pursuant to the Second Amendment of the RLOC executed on November 19, 2018 (“Second Amendment”), which we disclosed in our Current Report on Form 8-K filed with the SEC on November 21, 2018 (“November 2018 Form 8-K”Amendment”).

Tax

For the year ended December 31, 2018,2019, we realizedrecognized a tax expense of $781,085, compared to a tax benefit of $386,784 whichfor the year ended December 31, 2018. The tax expense recognized in 2019 is a result of recognition of a valuation allowance for deferred tax assets based on our before incomemanagement’s determination that it is more likely than not that all or a portion of the deferred tax losses, offset by the lower tax rates. We continue to enjoy the benefits of lower corporate tax rates afforded by the U.S. Tax Reform Law, and we are evaluating how the U.S. Tax Reform Law may impact future results of our business and opasset will not be realized. erations. For additional information, please see Note 1011 of our accompanying consolidated Financial Statements, entitled “Income Taxes”.Taxes.”

Net IncomeLoss (Income)

For the year ended December 31, 2018,2019, we had a net incomeloss of $3,957,554,$3,316,495, compared to a net income of $699,678$3,957,554 for the year ended December 31, 2017, representing an increase of $3,257,876, or approximately four hundred-sixty six percent (466%). The primary factor for this increase2018, reflecting a reduction in our net income wasof $7,274,049, or approximately 184%.  The primary drivers for our reduction in net income for the year ended December 31, 2019 were (i)(a) a $3,726,850 reduction of $5,663,014 in the change in fair value of contingent purchase consideration. consideration, (b) a $3,441,761 reduction in revenues, (c) an increase of $1,167,869 in income tax expense, (d) a $932,203 goodwill impairment charge, (e) an increase of $1,476,090 in the inventory obsolescence adjustment, and (f) $57,388 increase in depreciation and amortization; offset, in part, by (ii)(a) a $1,792,125 reduction in cost of revenues, (b) a $449,891 reduction in commissions, and (c) a $12,311 reduction in interest expense.

For more information on the change in the fair value of contingent purchase consideration, please see Note 2 of our accompanying Financial Statements, entitled “Significant Accounting Policies, Fair Value Measurements.

As a percentage of revenues, net income was approximately fifteen percent (15%)” For further information on goodwill impairment, please see Note 2 “Significant Accounting Policies, Goodwill and three percent (3%) for the year-ended December 31, 2018, and 2017, respectively.

The approximate twelve (12) percentage point increase in net income as a percentage of revenues is primarily attributable to (i)(a) an increase of approximately five (5) percentage points related to gross profit, (b) an increase of approximate twenty-one (21) percentage points related to change in fair value of contingent purchase consideration, and (c) an increase of approximately one (1) percentage point related to our increase in income tax benefit; offset, in part, by (ii)(a) an increase of approximately twelve (12) percentage points in selling, general, administrative, and other expenses, and (b) an increase in approximately three (3) percentage points in our commission expenses.Other Intangible Assets.”

Liquidity and Capital Resources

Cash Flows

A summary of our cash flows is as follows:

Net Cash (Used In) Provided by Operating Activities

For the year ended December 31, 2018,2019, our net cash used in operating activities was $4,739, compared to net cash provided by operating activities wasof $2,479,900 compared to $1,604,536 for the year ended December 31, 2017.2018. This increasedecrease of $875,364 $2,484,639 primarily resulted from: (i)(a) a reduction in net income of $3,957,554,$7,274,049, (b) a $1,881,556 decrease in inventories, (c)(1) a $917,689 decreasean increase of $2,541,304 in accounts receivable, (2) (c) a $843,820 increase$325,187 reduction in accrued expenses, and (3)(d) a $2,913 decrease

$154,283 reduction in inventories, (e) a $13,210 increase in prepaid expenses and other current assets,assets; offset, in part, by (ii)(a) $7,498,278 in non-cash adjustments, and (b) a $82,824 reduction$122,759 increase in accounts payable and (b) $5,040,808 in non-cash adjustments.payable.

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Net Cash Used in Investing Activities

Our net cash used in investing activities for the year ended December 31, 20182019 was $15,318, compared to $ was $104,935, compared to $11,602104,935 for the year ended December 31, 2017.2018. This increasedecrease of $93,333 resulted from $41,838 used to$89,617 was primarily driven by (i) a $26,520 reduction in the purchase of property and equipment, such as additionalnew and replacement user workstations, and server upgrades, and(ii) $63,097 invested inreduction related to the acquisition of Maxim, net of cash acquired.

Net Cash Used inProvided by (Used in) Financing Activities

For the year ended December 31, 2018,2019, our net cash provided by financing activities was $275,053, compared to net cash used in financing activities wasof $2,335,366 compared to $1,566,666 for the year ended December 31, 2017.2018. This increase of $768,700$2,610,419 is primarily duedriven by (i) a $10,788,677 reduction in payments to $1,937,903 in net payments from our RLOC, (ii) $8,575,721 reduction in our RLOC borrowings, and a payment of a(iii) the $397,463 reduction in purchase price adjustment of $397,463 related to the CPM Acquisition.

Liquidity

Our primary sources of liquidity are cash from our operations and our RLOC with Amegy Bank. At December 31, 2018,2019, our current assets exceeded our current liabilities by $10,051,117$7,413,444 (our “Working Capital”“Working Capital”), which included $844,314$1,099,310 in cash and cash equivalents. Cash from our operations and net borrowings on our RLOC supports commissions, payrollour Working Capital needs.

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

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

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

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

We rely on the RLOC for capital expenditures and day-to-day Working Capital needs. As of March 14, 2019,12, 2020, we had approximately $853,000$952,000 in available cash, and $1,781,000$201,000 available on our RLOC for borrowing (subject to certain borrowing base limitations). Borrowings on our RLOC are repaid from cash generated from our operations. Mr. Brooks continues to personally guarantee fifty percent (50%) of the outstanding RLOC amount.

The Second Amendment to the RLOC waived some events of default under the RLOC for certain periods and modified certain material terms related to borrowing base, the aggregate limit of loans offered under the RLOC, the termination date, interest rate, financial covenants, and events of default. For more information, please see our November 2018 Form 8-K, which is herein incorporated by reference.

Our strategic growth plan provides for capital investment tofor new product launches, private label branding, and the upgrade of our financial systems which support our infrastructure, and elevate the skills of our support staff.infrastructure. We deem these investments essential to support our growth and expansion objectives. We estimate the range of this type of investment to be approximately $300,000$2 million to $500,000$3 million and anticipate the investmentthese investments to occur inprimarily during the second halfthird and fourth quarters of calendar year 2019. 2020. We expect sources of capital for these investments to be derived from cash from operations and additional debt financing.

Our projections for calendar years 2019, 2020, 2021, and 20212022 include expansion opportunities throughbased on carefully evaluated expected return on investments. We expect to replace the AmBio Contract (See Note 13, “Related Party Transactions – AmBio Contract” on our accompanying Financial Statements, beginning on page F-1) through a competitive request for proposal process during the second half

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of 2020. We believe this will support our efforts to reduce human capital and integrated partnershipsrelated costs, while enhancing benefit offerings and alliances as well as continued investment for training, development, and accountabilitycoverage for our independent contractorassociates.

Going Concern

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

Our ability to continue as a going concern for at least one year beyond the date of this filing is dependent upon our (i) successful execution of key rebranding initiatives, (ii) introduction, commercialization and sales teamof new proprietary products and office staff. We believe thatproduct lines, (iii) increased sale of existing products, with strategic emphasis on selling more Retail Cases and increasing the percentage of Retail Cases sold as a percentage of all Cases we sell, and (iv) continued cost reductions. Additionally, we will need to refinance our RLOC willwith Amegy Bank with a new credit facility on commercially reasonable terms, or obtain equity financing.

Our financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should we be unable to continue to support these initiatives through 2019.as a going concern.

Off-balanceOff-Balance Sheet Arrangement

As of December 31, 20182019, we had no off-balance sheet arrangements.

Impact of Inflation

We do not believe the effect of inflation, as measured by fluctuations in the U.S. Consumer Price Index, has had a material impact on our Financial Statements for the year ended December 31, 2018.2019.

Critical Accounting Policies and Estimates

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 consolidated notes to our Financial Statements and found elsewhere in this 2018 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,addition, the use of different judgments, assumptions, or estimates could have a material impact on ourfinancial 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.

Recent Accounting Pronouncements

We describe recent accounting pronouncements in Note 2, “Significant Accounting Policies” of our consolidated notes to our Financial Statements.

Cautionary Note Regarding Forward Looking Statements

This report contains forward-looking statements, including the statements regarding capital expenditures and liquidity.

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

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

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

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

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The Report of our independent registered public accounting firm, our consolidated Financial Statements,, the accompanying notes to our Financial Statements, that are filed as part of this 2018 Annual Report are listed under “Item“Item 15. Exhibits and Financial Statements Schedules” and are set forth in our Financial Statements, immediately following the signature pages of this 2018 Annual Report.

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

None.

ITEM 9A. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

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

Under the supervision and with the participation of our Board, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation (pursuant to Rule 13a-15(b) promulgated under the Exchange Act) of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e)13a-15(e) and 15d-15(e) promulgated under the Exchange Act, as of December 31, 2018.2019. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2018,2019, our disclosure controls and procedures were effective to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is (a) recorded, processed,

summarized and reported, within the time periods specified in the SEC’s rules and forms and is (b) accumulated and communicated to our executive team, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

effective.

Management’s Annual Report on Internal Control over Financial Reporting

Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining adequate internal control over financial reporting,, (as defined in Rule 13a-15(f) promulgated under the Exchange Act). Our internal control over financial reporting is a process designed to ensure the reliability of financial reporting and the preparation ofof financial statements for external purposes in accordance with GAAP.

Under the supervision and with the participation of our Board, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2018.2019. In making this assessment, our Chief Executive Officer and Chief Financial Officer used the criteria that have been set forth by COSO in Internal Control – Integrated Framework (2013). Based on evaluation by our Chief Executive Officer and Chief Financial Officer and under the COSO criteria, our Chief Executive Officer and Chief Financial Officer concluded that our internal control over financial reporting as of December 31, 2018,2019 is effective.

Changes in Internal Control over Financial Reporting

As more fully described in “Item 1. Business, Maxim Acquisition,” we acquired all of the outstanding equity securities of Maxim. We have established oversight, procedures, and controls to safeguard the assets and ensure accurate financial reporting for Maxim. There were no other changesNo change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the year ended December 31, 2018,2019 that have materiallymaterially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION.

On March 16, 2019, to reflect its original intent, our Board, acting by written unanimous consent effective December 31, 2018, modified the vesting terms for shares of our Common Stock subject to restricted stock awards granted to our directors as director compensation for the year ended December 31, 2017 (such awards, the “2017 RSAs”). The Board modified the 2017 RSAs so that shares of our Common Stock granted pursuant to the 2017 RSAs vest only upon: (i) the occurrence of a Change in Control (as defined in the 2017 RSAs), listing of our Common Stock on a national exchange, or the director’s termination of Continuous Service (as defined in the 2017 RSAs), and (ii) the director’s notification to our Company of such accelerating events, within a specified period.
None. 

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Executive Officers and Directors

The names and ages of our directors and executive officers are set forth below. All directors are elected annually by the stockholders to serve until the next annual meeting of the stockholders and until their successors are duly elected and qualified. The officers are appointed by our Board. There is no agreement or understanding between us and eachany director or executive officer pursuant to which they were selected as an officer or director.

Christopher C. Reeg

Mr. Reeg has served as our Chief Executive Officer and a member of our Board since December 19, 2016. Effective January 18, 2018, our Board appointed Mr. Reeg to the additional role of Secretary. Mr. Reeg has also served as the Chief Executive Officer of CPM since 2017 and Maxim since 2018. Mr. Reeg founded Maxim in 2011 and served as its President until we acquired Maxim in August 2018. Mr. Reeg led the design, development, and successful commercialization of a spinal implant that received the approval of the FDA in 2013 and is currently manufactured and distributed by Fuse. Prior to forming Maxim, Mr. Reeg founded LMI Ortho, a distributor of spine and Orthopedic Implants purchased from domestic and international manufacturers and suppliers. While at LMI Ortho, Mr. Reeg acquired importation rights for a total joint orthopedic portfolio. Working with surgeons in the United States, Mr. Reeg expanded implant product lines and developed effective growth strategies based on design and market intelligence. Before entering the orthopedic industry with LMI Ortho in 1996, Mr. Reeg formed Spectramed, Inc., a multi-state home respiratory company where he served as its President until the sale of Spectramed, Inc., to a national healthcare company in 2001. Having founded two (2) medical implant manufacturing and distributing companies and served as an executiveexecutive officer in those companies, Mr. Reeg brings significant experience and knowledge regarding how to successfully navigate the medical device industry.

Mark W. Brooks

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

Renato V. Bosita, Jr., MD

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

Ricky Raj S. Kalra, MD

Dr. Kalra has served as an independent member of our Board since his appointment on July 13, 2017. Dr. Kalra is a spine fellowship-trained neurosurgeon based in Dallas, Texas. He attended Rice University where he received a degree in economics. He also attended London School of Economics as a Hansard Scholar. Dr. Kalra worked at Merrill Lynch in its investment banking group as an energy and power analyst after his undergraduate education. He then attended Washington University School of Medicine in Saint Louis, from which he graduated in 2009, and completed his neurosurgery residency at the University of Utah in 2016. As part of his spine fellowship in 2015, Dr. Kalra trained in Germany under Dr. Rudolf Beisse. Dr. Kalra has published more than twenty (20) scientific articles and book chapters and has received the Preuss award by the Congress of Neurological Surgeons for his research in brain tumors. Dr. Kalra was appointed to the Board for his financial acumen as well as experience in healthcare.

William E. McLaughlin, III

Mr. McLaughlin has served as a member of our Board since December 19, 2016, as Interim Chief Financial Officer from March 31, 2017 until January 18, 2018, when our Board appointed Mr. McLaughlin, to his current position of Chief Financial Officer and Treasurer. Mr. McLaughlin, 55, was elected as a member of our Board on December 19, 2016. Mr. McLaughlin is a certified public accountant licensed in the State of Texas and has over 26 years of experience in accounting and financial reporting for privateprivate and large public companies traded on the New York Stock Exchange (“NYSE”NYSE”) and

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NASDAQ Stock Market (“NASDAQ”NASDAQ”) in addition to his work for “big-four” public accounting firms. Mr. McLaughlin has also served as Chief Financial Officer of CPM since 2014 and Maxim since 2018. Mr. McLaughlin joined CPM as Vice President Finance, Controller in 2013. From 2006 until he joined CPM, Mr. McLaughlin served as Vice President Finance, Controller for Caris Life Sciences, Inc., a $180 million international, anatomic pathology, and molecular biotechnology laboratories and multi-state physician practices enterprise. Having over 26 years of experience in accounting and financial reporting for private and public companies, Mr. McLaughlin brings considerable financial expertise to our Board.

Family Relationships

There are no family relationships among our existing or incoming directors or officers.

Involvement in Certain Legal Proceedings

No executive officer or directorNone of our Companyexecutive officers or directors is a party in a legal proceeding adverse to us or any of our subsidiaries or has a material interest adverse to us or any of our subsidiaries. No executive officer or director has been involved in the last ten (10) years in any of the following:

Section 16(a) Beneficial Ownership Reporting Compliance

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

We believe that, during 2018,2019, our directors, executive officers, and ten percent (10%) stockholders complied with all Section 16(a) filing requirements, except for the following:requirements.

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

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Corporate Governance

Board Committees

We do not believe that with the current size of our Company, it is necessary for us to have a separately-designated standing audit committee, therefore our entire Board serves as the audit committee. William E. McLaughlin III serves as our “audit committee financial expert,” as such term is defined under the rules promulgated under the Exchange Act. Mr. McLaughlin meets the requirements of serving as our “audit committee financial expert” from his extensive background in accounting and financial reporting for both private and large public companies.companies. For more information on Mr. McLaughlin, please see “Item 10. Executive Officers and Directors” in this 2018 Annual Report.

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

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

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

We have not made any material changes to the procedures to which the security holders may recommend Board candidates to our Company during the year ended December 31, 2018.2019.

Board Leadership Structure Oversight

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

Board Assessment of Risk

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

Code of Ethics

Our Board has adopted a code of ethics (the “Code“Code of Ethics”Ethics”) that applies to all our employees, including our Chief Executive Officer and Chief Financial Officer. The Code of Ethics provides written standards that we believe are reasonably designed to (i) deter wrongdoing; (ii) promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; (iii) encourage full, fair, accurate, timely, and understandable disclosure and compliance with laws, rules, and regulations, including insider trading, corporate opportunities, and whistle-blowing; and (iv) facilitate the prompt

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

Stockholder Communications

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

ITEM 11. EXECUTIVE COMPENSATION.

Executive Compensation Discussion and Analysis

The following discussion and analysis of our compensation arrangements with our named executive officers (“Named Executive Officers”Officers”) should be read together with the compensation tables and related disclosures set forth elsewhere in this 2018 Annual Report. Our Named Executive Officers for the year ended December 31, 2018,2019, were:

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

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

Executive Compensation Philosophy and Objectives   

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

Setting Executive Compensation

Our Board is responsible for establishing and periodically reviewing the compensation of our executive officers and approving all equity awards, including those to our executive officers. Our Board also reviews the performance of our executive officers and determines whether salary adjustments are necessary or recommended.

Elements of Compensation

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

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

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

Base Salary

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

The base salary for our Named Executive Officers for the year ending December 31, 2018,2019, was:

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

For the year ending December 31, 2018,2019, our Board determined that $300,000 was an appropriate base salary for Mr. Reeg due to the amount of responsibility and oversight that the Chief Executive Officer position requires. The Board increased Mr. Reeg’s salary by $60,000 from the previous year because of his additional responsibilities surrounding the integration of CPM and Maxim into Fuse.

Mr. McLaughlin received $200,000 as base salary for the year ending December 31, 2018, which increased by $38,396 from the previous year.2019, Our Board believes this amount is appropriate because Mr. McLaughlin serves as our Chief Financial Officer, a position that is primarily responsible for the financial well-being of our Company. Additionally, the Board seeks to provide Mr. McLaughlin with a competitive salary for his extensive financial and accounting background. Our Board believes that the increase in Mr. McLaughlin’s salary from the previous year is commensurate with his additional responsibilities surrounding the integration of CPM and Maxim into our Company.

Mr. Brooks was appointed to the executive position of President by our Board on January 18, 2018.2018, following the CPM Acquisition. Mr. Brooks has the highest base salary of our Named Executive Officers, due toin part because of his extensive experience and knowledge of the amount of responsibility that the President position requiresmedical device industry and the business relationships that Mr. Brooks brings to our Company. Mr. Brooks has extensive experience and knowledge of the medical device industry. Following the CPM Acquisition, our Board deemed it necessary to have Mr. Brooks involved in the day-to-day operations of our Company. Also, the base salary for Mr. Brooks was partially determined by the earnings he received when he was the sole owner of CPM,CPM, which our Board believes correlates with Mr. Brooks position as President of our Company.

Cash Incentive and Bonus Awards

Our Board has the discretion to reward executives with cash incentive and bonus awards. We may pay cash incentive awards if we meet or exceed performance goals as determined by our Board for that year, and we generally give bonus awards to reward executives for short-term performance goals. We are not required to give our executives these awards, and only do so upon the recommendation and approval of our Board.

Executive Long-Term Incentive Compensation

Our Board has the authority to provide compensation to our executives based on the value of and changes in the value of our Common Stock. We grant equity compensation to reward our executives for positive business results and to retain our executives long-term for their services to our Company.

Under At our 2017 Equity Incentive Plan of Fuse (“2017 Equity Plan”),2019 Annual Meeting, pursuant to the Definitive Proxy Statement which we filed with the SEC as Exhibit 99.2 toon May 13, 2019, our Current Report on Form 8-K on April 6, 2017,shareholders ratified our Amended and Restated 2018 Equity Incentive Plan (“2018 Equity Plan”). Under our 2018 Equity Plan, which is hereinafter incorporatedwas adopted by reference (“April 2017 Form 8-K”),our Board in December 2018, we authorize our Board to grant stock options, restricted stock, restricted stock units, stock appreciation rights, and other stock awards to our management and employees.

In December 2018, our Board amended and restated the 2017 Equity Plan with the Amended and Restated 2018 Equity Incentive Plan of Fuse (“2018 Equity Plan”), which we filed with the SEC as Exhibit 10.1to our Current Report on Form 8-K on December 18, 2018, which is hereinafter incorporated by reference (“December 2018 Form 8-K”). The 2018 Equity Plan supersedes the 2017 Equity Plan, but we reference the 2017 Equity Plan in this 2018 Annual Report because we granted awards to our directors pursuant to the 2017 Equity Plan during the year ended December 31, 2018.

In 2018, we granted all three of our Named Executive Officers one (1) restricted stock award (“RSA”). The material terms of each RSA are governed by the 2017 Equity Plan, filed in our April 2017 Form 8-K. However, we granted this equity compensation to our Named Executive Officers as compensation for their services as members of our Board. The RSAs for these Named Executive Officers are as follows:

Medical Benefits

Medical benefits are a component of our Company’s compensation plan that is offered to attract and retain highly-qualified individuals. Our Named Executive Officers are offered medical benefits that are generally made available to all employees of our Company at similar cost.

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2019 Summary Compensation Table

The following information is related to the compensation paid, distributed, or accrued by our Company for 20182019 and 2017,2018, to our Named Executive Officers, including our Chief Executive Officer (“Principal Executive Officer”Officer”) and the other most highly compensated executive officers serving at the end of the last fiscal year whose compensation exceeded $100,000.

Provisions of Termination or Change-in-Control

In the event of a change-in-control, NC 143 would receive Earn-Out payments pursuant to the CPM Acquisition Agreement and all equity awards pursuant to the 2018 Equity Plan would fully vest.

Other Executive Compensation Arrangements

None.

Outstanding Awards at Fiscal Year End

The following information is descriptive of options of shares of Common Stock that have not vested but we granted to our Named Executive Officers as of December 31, 2018.2019.

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