10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the quarterly period ended: September 30, 2016 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

Commission File Number: 000-10093

Fuse Medical, Inc.

(Exact name of registrant as specified in its charter) 

Delaware	59-1224913
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1300 Summit Avenue, Suite 670, Fort Worth, TX	76102
(Address of principal executive offices)	(Zip Code)

(817) 439-7025

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨

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

Large accelerated filer	¨	Non-accelerated filer	¨
Accelerated filer	¨	Smaller reporting company	x
(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

As November 11, 2016, 6,890,808 shares of the registrant’s common stock, were outstanding.

FUSE MEDICAL, INC.

FORM 10-Q

INDEX

		PAGE
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements		F-1
	Condensed Consolidated Balance Sheets at September 30, 2016 (Unaudited) and December 31, 2015		F-1
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015 (Unaudited)		F-2
	Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the Nine Months Ended September 30, 2016 (Unaudited)		F-3
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015 (Unaudited)		F-4
	Notes to the Condensed Consolidated Financial Statements (Unaudited)		F-5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		3
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		7
Item 4.	Controls and Procedures		7
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		8
Item 1A.	Risk Factors		8
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		8
Item 3.	Defaults upon Senior Securities		8
Item 4.	Mine Safety Disclosures		8
Item 5.	Other Information		8
Item 6.	Exhibits		8
Signatures			9

 

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FUSE MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2016			December 31, 2015
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	61,734		$	8,157
Accounts receivable, net of allowance of $3,704 and $15,145, respectively		22,328			298,011
Inventories		31,591			81,209
Prepaid expenses and other current assets		5,224			18,828
Total current assets		120,877			406,205
Property and equipment, net		12,432			24,978
Security deposit		3,822			3,822
Total assets	$	137,131		$	435,005
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable	$	113,966		$	295,579
Accounts payable - related parties		8,598			22,202
Accrued expenses		14,437			12,267
Deferred revenues		91,534			-
Convertible notes payable, net of discount		54,749			-
Note payable - related party		100,000			-
Total current liabilities		383,284			330,048
Note payable - related party		-			100,000
Deferred rent		824			-
Total liabilities		384,108			430,048
Commitments and contingencies
Stockholders’ equity (deficit):
Preferred stock, $0.01 par value; 20,000,000 shares authorized; no shares issued and outstanding		-			-
Common stock, $0.01 par value; 100,000,000 shares authorized; 6,890,808 shares issued and outstanding		68,908			68,908
Additional paid-in capital		2,324,843			2,251,093
Accumulated deficit		(2,640,728	)		(2,315,044	)
Total stockholders’ equity (deficit)		(246,977	)		4,957
Total liabilities and stockholders’ equity (deficit)	$	137,131		$	435,005

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

F-1

FUSE MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Three			For the Three			For the Nine			For the Nine
	Months Ended			Months Ended			Months Ended			Months Ended
	September 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
Revenues	$	107,584		$	442,857		$	421,170		$	1,192,718
Cost of revenues		42,536			165,268			144,654			436,913
Gross profit		65,048			277,589			276,516			755,805
Operating expenses:
General, administrative and other		182,134			755,367			600,813			1,565,012
Operating loss		(117,086	)		(477,778	)		(324,297	)		(809,207	)
Other income (expense):
Interest expense		(31,824	)		(1,885	)		(35,324	)		(5,348	)
Loss on disposal of property and equipment		-			(979	)		(1,580	)		(979	)
Gain on settlement of accounts payable		35,517			-			35,517			-
Total other income (expense)		3,693			(2,864	)		(1,387	)		(6,327	)
Net loss	$	(113,393	)	$	(480,642	)	$	(325,684	)	$	(815,534	)
Net loss per common share - basic and diluted	$	(0.02	)	$	(0.08	)	$	(0.05	)	$	(0.14	)
Weighted average number of common shares outstanding - basic and diluted		6,890,808			6,260,373			6,890,808			5,952,933

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

 

F-2

FUSE MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016

(Unaudited)

					Additional
	Common Stock				Paid-In		Accumulated
	Shares		Amount		Capital		Deficit			Total
Balance, December 31, 2015		6,890,808	$	68,908	$	2,251,093	$	(2,315,044	)	$	4,957
Recognition of beneficial conversion feature on convertible promissory notes issued		-		-		73,750		-			73,750
Net loss		-		-		-		(325,684	)		(325,684	)
Balance, September 30, 2016		6,890,808	$	68,908	$	2,324,843	$	(2,640,728	)	$	(246,977	)

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

F-3

FUSE MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Nine			For the Nine
	Months Ended			Months Ended
	September 30, 2016			September 30, 2015
Cash flows from operating activities:
Net loss	$	(325,684	)	$	(815,534	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt discount		28,499			-
Depreciation		10,666			21,888
Loss on disposal of property and equipment		1,580			979
Gain on settlement of accounts payable		(35,517	)		-
Share-based compensation		-			418,000
Transfer of property and equipment as part of expense reimbursement		-			6,000
Bad debt expense		-			3,704
Changes in operating assets and liabilities:
Accounts receivable		275,683			19,209
Inventories		49,618			63,801
Prepaid expenses and other current assets		13,604			6,021
Security deposit		-			(3,822	)
Accounts payable		(146,096	)		(76,715	)
Accounts payable - related parties		(13,604	)		(22,025	)
Accrued expenses		2,170			46,279
Deferred revenues		91,534			-
Deferred rent		824			-
Net cash used in operating activities		(46,723	)		(332,215	)
Cash flows from investing activities:
Purchases of property and equipment		-			(1,580	)
Proceeds from the disposal of property and equipment		300			650
Net cash provided by (used in) investing activities		300			(930	)
Cash flows from financing activities:
Advances to related parties		-			(43,240	)
Repayments received from related parties		-			93,240
Proceeds from issuance of promissory notes		100,000			-
Repayments of promissory notes		-			(17,250	)
Proceeds from issuance of promissory note to related party		-			100,000
Proceeds from sale of common stock		-			190,000
Net cash provided by financing activities		100,000			322,750
Net increase (decrease) in cash and cash equivalents		53,577			(10,395	)
Cash and cash equivalents - beginning of period		8,157			67,555
Cash and cash equivalents - end of period	$	61,734		$	57,160
Supplemental disclosure of cash flow information:
Interest paid	$	5,250		$	1,588
Non-cash investing and financing activities:
Recognition of beneficial conversion feature on convertible promissory notes issued	$	73,750		$	-
Transfer security deposit as part of expense reimbursement	$	-		$	2,489

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

F-4

FUSE MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

(Unaudited)

Note 1. Nature of Operations and Liquidity

Overview

Fuse Medical, Inc. (together with its subsidiaries, the “Company” or “Fuse Medical”) was formed in Delaware on July 18, 2012 as Fuse Medical, LLC. Fuse Medical V, LP was formed in Texas on November 15, 2012 and upon formation was owned 59% by Fuse Medical, LLC. Fuse Medical VI, LP was formed in Texas on January 31, 2013 and upon formation was owned 59% by Fuse Medical, LLC. On February 12, 2015, Certificates of Termination were filed for Fuse Medical V, LP and Fuse Medical VI, LP. On February 20, 2015, a Certificate of Cancellation was filed in Delaware, and on August 5, 2015, a Certificate of Withdrawal was filed in Texas, for Fuse Medical, LLC.

On December 18, 2013, Fuse Medical, LLC entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Golf Rounds.com, Inc. (the “Registrant”), Project Fuse LLC (a wholly-owned subsidiary of Golf Rounds.com, Inc.) (“Merger Sub”), and D. Alan Meeker, solely in his capacity as the representative of the members of Fuse Medical, LLC (the “Representative”). Effective as of May 28, 2014, prior to the consummation of the Merger, Golf Rounds.com, Inc. amended its certificate of incorporation to change its name from “GolfRounds.com, Inc.” to “Fuse Medical, Inc.” On May 28, 2014, the transactions contemplated by the Merger Agreement closed wherein Merger Sub merged with and into Fuse Medical, LLC, with Fuse Medical, LLC surviving as a wholly-owned subsidiary of Fuse Medical, Inc. (the “Merger”). Accordingly, on May 28, 2014, the Company was recapitalized in a reverse merger. All references to the Company or Fuse Medical before May 28, 2014 are to Fuse Medical, LLC. On May 30, 2014, the Company changed its fiscal year end from August 31 to December 31.

Fuse Medical distributes diversified healthcare products and supplies, including medical biologics, internal fixation products, bone substitute materials and other medical supplies in several states. The Company strives to provide cost savings and clinical outcomes to its customers, which include physicians and medical facilities.

Basis of Presentation

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

The condensed consolidated balance sheet information as of December 31, 2015 was derived from the audited consolidated financial statements included in the Company’s Report on Form 10-K filed with the Securities and Exchange Commission on March 25, 2016. These condensed consolidated financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2015 and notes thereto included in the Company’s Report on Form 10-K for the year ended December 31, 2015.

The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the entire fiscal year or for any other period.

 

F-5

FUSE MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

(Unaudited)

Going Concern

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. As shown in the accompanying financial statements, we have incurred a net loss of $325,684 for the nine months ended September 30, 2016. As of September 30, 2016, we had $61,734 of cash and cash equivalents on hand, a stockholders’ deficit of $246,977 and a working capital deficit of $262,407. The Company’s ability to continue as a going concern is contingent on securing additional debt or equity financing from outside investors. As a result, the Company’s independent registered public accounting firm, in its report on the Company’s 2015 consolidated financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.

The estimated costs of operations while we attempt to ramp up our revenues is substantially greater than the funds we had available on September 30, 2016. The Company’s existence is dependent upon management’s ability to implement its business plan and/or obtain additional funding. There can be no assurance that the Company’s financing efforts, if successful, would result in profitable operations or the resolution of the Company’s liquidity problems. Even if the Company is able to obtain additional financing, it may include undue restrictions on our operations in the case of debt, or cause substantial dilution for our stockholders in the case of equity financing. During July 2016 through October 2016, the Company received aggregate proceeds of $150,000 from the issuance of promissory notes payable (See Notes 4 and 10). The accompanying financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.

Note 2. Significant Accounting Policies

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements. Actual results could differ from those estimates. Significant estimates in the accompanying consolidated financial statements include the allowance for doubtful accounts, valuation of inventories, the estimates of depreciable lives and valuation of property and equipment, and the valuation allowance on deferred tax assets.

Earnings (Loss) Per Share

The Company’s computation of earnings (loss) per share (EPS) includes basic and diluted EPS. Basic EPS is calculated by dividing the Company’s net income (loss) by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that would have occurred if securities or other contracts to issue common shares (e.g. warrants and options) had been exercised or converted into common shares at the beginning of the period, or issuance date, if later, and had shared in the net income (loss) of the Company. Diluted EPS is computed using the treasury stock method, which assumes that outstanding options and warrants are exercised and the proceeds are used to purchase common shares at the average market price during the period. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

As of September 30, 2016 and 2015, common stock equivalents included options to purchase 604,788 and 609,576 common shares, respectively. These instruments are not considered in the calculation of diluted loss per share because the effect would be anti-dilutive.

 

F-6

FUSE MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

(Unaudited)

Fair Value Measurements

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

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

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

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

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

Revenue Recognition
       

The Company recognizes revenue when: (i) persuasive evidence of an arrangement exists; (ii) the fees are fixed or determinable; (iii) no significant Company obligations remain; and (iv) collection of the related receivable is reasonably assured. The Company reports revenues for transactions in which it is the primary obligor on a gross basis and revenues in which it acts as an agent (earning a fixed percentage of the sale) on a net basis, (net of related costs). The Company reflects funds collected from customers as deferred revenues until all revenue recognition criteria have been met.

Revenues is comprised of sales of medical biologics, internal fixation products, bone substitute materials and other medical supplies. For customers that order products as needed (i.e. for specific cases), the Company invoices the customer on the date the product is utilized. For customers that order larger quantities of the same product (subject to minimums) at a reduced selling price, the Company invoices the customers as each unit of the product is utilized. Payment terms are net 30 days after the invoice date.

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

Income Taxes

The Company uses the asset and liability method to compute the differences between the tax basis of assets and liabilities and the related financial amounts. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized. The Company has deferred tax assets and liabilities that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets are subject to periodic recoverability assessments. Realization of the deferred tax assets, net of deferred tax liabilities, is principally dependent upon achievement of projected future taxable income.

The Company records a liability for uncertain tax positions when it is probable that a loss has been incurred and the amount can be reasonably estimated. As of September 30, 2016, the Company had no liabilities for uncertain tax positions. The Company's policy is to recognize interest and penalties related to income tax matters as a component of income tax expense. The Company continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings.

F-7

FUSE MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

(Unaudited)

Stock-Based Compensation

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

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers”. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle-based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements and disclosures.

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-10),” which provides guidance as to management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or at the date that the financial statements are available to be issued when applicable). Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company will adopt ASU 2014-15 on the Company’s financial statement presentation and disclosures after the effective date.

In February 2016, the FASB issued Accounting Standards Update 2016-02, “Leases,” which requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of the adoption of ASU 2016-02 on the Company’s financial statements and disclosures.

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

F-8

FUSE MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

(Unaudited)

Note 3. Property and Equipment

Property and equipment consisted of the following at September 30, 2016 and December 31, 2015:

	September 30, 2016			December 31, 2015
Computer equipment	$	29,290		$	31,053
Furniture and fixtures		6,347			9,315
Leasehold improvements		6,728			6,728
Office equipment		1,580			1,580
Software		-			10,500
		43,945			59,176
Less: accumulated depreciation		(31,513	)		(34,198	)
Property and equipment, net	$	12,432		$	24,978

Depreciation expense of $3,502 and $8,563 was recognized during the three months ended September 30, 2016 and 2015, respectively, and $10,666 and $21,888 was recognized during the nine months ended September 30, 2016 and 2015, respectively.

Note 4. Convertible Notes Payable

Convertible notes payable consisted of the following at September 30, 2016 and December 31, 2015:

	September 30, 2016			December 31, 2015
Note payable originating July 15, 2016; no monthly payments required; bearing interest at 10%; maturing at December 31, 2016 [A]	$	50,000		$	-
Note payable originating August 23, 2016; no monthly payments required; bearing interest at 10%; maturing at December 31, 2016 [B]		50,000			-
Total		100,000			-
Less: Discount		(45,251	)		-
Net	$	54,749		$	-

[A] - On July 15, 2016, the Company obtained a short-term loan of $50,000 in exchange for a promissory note (convertible at the holder’s sole discretion at $0.08 per share) bearing 10% interest per annum, which principal shall be repaid along with and any all accrued interest on or before December 31, 2016 or upon a change in control of the Company. On the date of issuance, the conversion price of the promissory note was less than the market price of the Company’s common stock. This resulted in a beneficial conversion feature of $42,500, which is treated as a discount to the promissory note and is being amortized over the term of the promissory note.

[B] - On August 23, 2016, the Company obtained a short-term loan of $50,000 in exchange for a promissory note (convertible at the holder’s sole discretion at $0.08 per share) bearing 10% interest per annum, which principal shall be repaid along with and any all accrued interest on or before December 31, 2016 or upon a change in control of the Company. On the date of issuance, the conversion price of the promissory note was less than the market price of the Company’s common stock. This resulted in a beneficial conversion feature of $31,250, which is treated as a discount to the promissory note and is being amortized over the term of the promissory note.

F-9

FUSE MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

(Unaudited)

On October 19, 2016, the promissory notes issued on July 15, 2016 and August 23, 2016 were amended whereby the convertibility feature was removed prior to the maturity date of December 31, 2016 or upon a change in control of the Company. Notwithstanding, on or after January 16, 2017, at the holder’s sole discretion, the holder has the right to convert all or any portion of the then unpaid principal and interest balance into shares of the Company’s common stock at a conversion price of $0.08 per share (See Notes 1 and 10).

Interest expense on outstanding convertible notes payable of $30,074 (of which $28,499 was the amortization of beneficial conversion features) was recognized during the three and nine months ended September 30, 2016. As of September 30, 2016, accrued interest payable was $1,575, which is included in accrued expenses on the accompanying condensed consolidated balance sheet.

Note 5. Note Payable – Related Party

On January 15, 2015, the Company issued a two-year promissory note to a significant stockholder in exchange for cash proceeds of $100,000. The note is unsecured, bears interest at 7.0% and requires 18 monthly payments of interest only commencing at the beginning of month seven. The note includes a provision that in the event of default the interest rate would increase to the default interest rate of 18%. The first six months of interest is deferred until maturity. The outstanding principal balance along with all accrued and unpaid interest is due at maturity. The balance of the note payable – related party at September 30, 2016 and December 31, 2015 was $100,000 (See Note 9).

Interest expense on the note payable – related party of $1,750 and $1,885 was recognized during the three months ended September 30, 2016 and 2015, respectively, and $5,250 and $5,348 was recognized during the nine months ended September 30, 2016 and 2015, respectively. As of September 30, 2016 and December 31, 2015, accrued interest on the note payable – related party was $3,796, which is included in accrued expenses on the accompanying condensed consolidated balance sheet.

Note 6. Commitments and Contingencies

Legal Matters

On January 27, 2014, M. Richard Cutler and Cutler Law Group, P.C. (the “Plaintiffs”) filed a complaint in the District Court of Harris County, Texas, 2014-03355, against Fuse, Alan Meeker, Rusty Shelton, Jonathan Brown, Robert H. Donehew and Golf Rounds.com, Inc. (the “Defendants”). On April 21, 2014, the complaint was dismissed for “want of prosecution.” The Plaintiffs had 30 days from April 21, 2014 to file a motion to reinstate the case and no timely action was taken by the Plaintiffs. However, the Plaintiffs did file a motion to reinstate on May 22, 2014 and it was granted. The Defendants argued a Motion to Dismiss before the court on July 25, 2014 and, on July 28, 2014, the court granted the motion and dismissed the Plaintiffs' (i) breach of fiduciary duty claim against all Defendants, (ii) suit on sworn account claim against all Defendants except Fuse, and (iii) quantum meruit claim against all Defendants except Fuse. The Defendants were also awarded attorneys' fees in the amount of $4,343. Discovery in the case ended on March 25, 2015 and Plaintiffs failed to file any discovery requests during the period or seek an extension of the period. On April 27, 2015, Defendants filed a motion for summary judgment in this matter for failure to prosecute and on the grounds that the claims were not legally viable. On April 28, 2015, Plaintiffs filed a Notice of Non-Suit, which effectively withdrew the lawsuit against the Defendants without prejudice to Plaintiffs’ right to refile the lawsuit at any time subject to the applicable statute of limitations.

On September 18, 2015, Plaintiffs refiled a complaint in the District Court of Harris County, Texas, Cause No. 2015-55652 and added PH Squared, LLC as an additional Plaintiff. Thereafter, the term “Plaintiffs” collectively refers to M. Richard Cutler, Cutler Law Group, P.C. and PH Squared, LLC. The new complaint asserts essentially the same claims as the original nonsuited complaint: (i) suit on sworn account against Fuse; (ii) fraud against all Defendants; and (iii) breach of contract against all Defendants for allegedly violating a non-circumvention/non-disclosure agreement. Richard Cutler is the sole principal of Cutler Law Group, P.C., which provided legal representation to its clients, Craig Longhurst and PH Squared, LLC d/b/a PharmHouse Pharmacy (“Cutler’s Client”), during a failed merger attempt between Fuse and Golf Rounds.com, Inc. (the “Failed Transaction”). The Plaintiffs have alleged that the Failed Transaction failed to materialize notwithstanding the efforts of Mr. Cutler, his law firm and PH Squared, LLC. The Plaintiffs have further alleged that the Defendants continued to pursue a similar transaction without Cutler’s Client or the Plaintiffs. The Plaintiffs claim that the Defendants are responsible for damages in the amount of $46,465 plus interest for the breach of contract claim because Plaintiffs were not paid their legal fees by Cutler’s Client and Plaintiffs did not receive equity in the merged company that would have resulted from the Failed Transaction. Plaintiffs are also asking for undisclosed damages related to the fraud and breach of contract claims, and are asking for exemplary damages as a result of allegedly intentional fraud that some or all of the Defendants allegedly committed. Plaintiffs also seek their attorneys’ fees and costs for having brought the action. On November 18, 2015, Fuse filed a counterclaim against PH Squared, LLC for breach of contract and further asserted a counterclaim and third party claim against PH Squared, LLC’s principle, Craig Longhurst, for fraud in the inducement. Fuse also seeks a declaratory judgment on the intended third party beneficiary status of Plaintiffs Cutler and Cutler Law Group related to a non-circumvention/non-disclosure agreement.

F-10

FUSE MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

(Unaudited)

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

Settlement of Accounts Payable

On July 26, 2016, the Company settled outstanding accounts payable of $60,517 owed to its former legal counsel for $25,000. Accordingly, the Company recognized a gain on settlement of $35,517 during the three months ended September 30, 2016.

Note 7. Stockholders’ Equity (Deficit)

Stock Options

A summary of the Company’s stock option activity during the nine months ended September 30, 2016 is presented below:

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
	No. of			Exercise		Contractual		Intrinsic
	Shares			Price		Term		Value
Balance outstanding at December 31, 2015		609,576		$	0.42
Granted		-
Exercised		-
Forfeited		-
Expired		(4,788	)	$	8.77
Balance outstanding at September 30, 2016		604,788		$	0.35		3.8	$	-
Exercisable at September 30, 2016		204,788		$	0.53		3.7	$	-

F-11

FUSE MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

(Unaudited)

Note 8. Concentrations

Concentration of Credit Risk

The Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. The Company has not experienced any losses in such accounts through September 30, 2016. On January 1, 2013, the standard insurance amount of $250,000 per depositor, per bank, became effective. As of September 30, 2016, the Company’s bank balances did not exceed FDIC insured amounts.

Concentration of Revenues, Accounts Receivable and Suppliers

For the three and nine months ended September 30, 2016 and 2015, the Company had significant customers with individual percentage of total revenues equaling 10% or greater as follows:

	For the Three			For the Three			For the Nine			For the Nine
	Months Ended			Months Ended			Months Ended			Months Ended
	September 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
Customer 1		67.3	%		66.2	%		68.0	%		71.2	%
Customer 2		29.4	%		20.6	%		16.5	%		13.6	%
Totals		96.7	%		86.8	%		84.5	%		84.8	%

At September 30, 2016 and December 31, 2015, concentration of accounts receivable with significant customers representing 10% or greater of accounts receivable was as follows:

	September 30, 2016			December 31, 2015
Customer 1		60.8	%		-
Customer 2		20.7	%		62.7	%
Customer 3		14.2	%		-
Customer 4		-			13.0	%
Totals		95.7	%		75.7	%

 

F-12

FUSE MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

(Unaudited)

For the three and nine months ended September 30, 2016 and 2015, the Company had significant suppliers representing 10% or greater of goods purchased as follows:

	For the Three			For the Three			For the Nine			For the Nine
	Months Ended			Months Ended			Months Ended			Months Ended
	September 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
Supplier 1		81.5	%		71.8	%		39.2	%		75.1	%
Supplier 2		18.5	%		28.2	%		31.4	%		24.9	%
Supplier 3		-			-			29.4	%		-
Totals		100.0	%		100.0	%		100.0	%		100.0	%

Note 9. Related Party Transactions

During the three months ended March 31, 2015, the Company allocated an aggregate of $43,240 of compensation paid to the Company's General Counsel to an entity that is owned partially by certain officers and directors of the Company. During the six months ended June 30, 2015, the Company was reimbursed the entire amount of compensation of the Company's General Counsel that had been allocated to the entity that is owned partially by certain officers and directors of the Company during the prior two quarters in the amount of $93,240.

As of September 30, 2016 and December 31, 2015, $8,598 and $22,202, respectively, is owed to officers and directors of the Company or entities controlled by these individuals. This amount is included in accounts payable – related parties on the accompanying condensed consolidated balance sheet.

On January 15, 2015, the Company issued a two-year promissory note to a significant stockholder in exchange for cash proceeds of $100,000. The note is unsecured, bears interest at 7.0% and requires 18 monthly payments of interest only commencing at the beginning of month seven. The note includes a provision that in the event of default the interest rate would increase to the default interest rate of 18%. The first six months of interest is deferred until maturity. The outstanding principal balance along with all accrued and unpaid interest is due at maturity (See Note 5).

During the period from inception through September 30, 2016, several members of the Company’s management provided services at no charge to the Company. The financial statements do not include an estimate of the fair value of these services.

Note 10. Subsequent Events

On October 19, 2016, the promissory notes issued on July 15, 2016 and August 23, 2016 were amended whereby the convertibility feature was removed prior to the maturity date of December 31, 2016 or upon a change in control of the Company. Notwithstanding, on or after January 16, 2017, at the holder’s sole discretion, the holder has the right to convert all or any portion of the then unpaid principal and interest balance into shares of the Company’s common stock at a conversion price of $0.08 per share (See Notes 1 and 4).

On October 19, 2016, the Company obtained a short-term loan of $50,000 in exchange for a promissory note bearing 10% interest per annum, which principal shall be repaid along with any and all accrued interest on or before December 31, 2016 or upon a change in control of the Company. Notwithstanding, on or after January 16, 2017, at the holder’s sole discretion, the holder has the right to convert all or any portion of the then unpaid principal and interest balance into shares of the Company’s common stock at a conversion price of $0.08 per share (See Note 1).

F-13

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

Explanatory Note 

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

Overview 

Fuse Medical markets, distributes and sells diversified healthcare products and supplies, including medical biologics, internal fixation products, bone substitute materials and for use in a variety of surgical procedures in various types of facilities (ambulatory surgical centers, hospitals and physician offices and other medical facilities) where surgeons and doctors treat patients and operate.

Critical Accounting Policies

In response to financial reporting release FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, from the SEC, we have selected our more subjective accounting estimation processes for purposes of explaining the methodology used in calculating the estimate, in addition to the inherent uncertainties pertaining to the estimate and the possible effects on our financial condition. The accounting estimates involve certain assumptions that, if incorrect, could have a material adverse impact on our results of operations and financial condition. Our more significant accounting policies can be found in Note 2 of our unaudited interim condensed consolidated financial statements found elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC. There have been no material changes to our Critical Accounting Policies during the period covered by this report.

Recent Accounting Pronouncements

See Note 2 to the condensed consolidated financial statements for management’s discussion of recent accounting pronouncements.

Results of Operations

The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes included in this report. 

Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015

Net Revenues

For the three months ended September 30, 2016, net revenues were $107,584, compared to $442,857 for the three months ended September 30, 2015, a decrease of $335,273, or 75.7%. In the beginning of 2016, due to increased competition for biologics sold in larger order quantities, the Company was forced to decrease its pricing for these products. In addition, our revenues from biologics sold at the retail level also declined. In response, the Company began to vigorously attempt to increase its revenues from biologics by consigning a limited quantity of biologic units to each of several new facilities allowing them to utilize the products and only requiring the facilities to pay for the products provided they were able to get reimbursed by insurance. The majority of the new facilities were not able to get reimbursed by insurance. While we expect the decline in revenues is primarily attributable to both the aforementioned decreased pricing of biologics sold in larger order quantities as well as seasonality, there can be no assurance revenues shall increase an adequate amount to cover the cost of operations.

Cost of Revenues

For the three months ended September 30, 2016, our cost of revenues was $42,536, compared to $165,268 for the three months ended September 30, 2015, representing a decrease of $122,732, or 74.3%. The overall cost of revenues decreased proportionately with the decrease in net revenues during the current year quarter. Cost of revenues includes costs to purchase goods and freight and shipping costs for items sold to customers.

 

3

Gross Profit

For the three months ended September 30, 2016, we generated a gross profit of $65,048, compared to $277,589 for the three months ended September 30, 2015, a decrease of $212,541, or 76.6%. The decrease in gross profit was primarily due to a decrease in revenues derived from the sale of biologics sold in larger order quantities as well as those at the retail sales level.

General, Administrative and Other

For the three months ended September 30, 2016, general, administrative and other operating expenses decreased to $182,134 from $755,367 for the three months ended September 30, 2015, representing a decrease of $573,233, or 75.9%. This decrease is primarily attributable to decreases in salaries and wages (including independent contractors) and related costs of $338,214, stock-based compensation of $168,000 and legal and professional fees of $26,524. General, administrative and other operating expenses during the three months ended September 30, 2016 consisted primarily of salaries and wages and related costs, legal and professional fees, insurance, rent and travel costs.

Interest Expense

For the three months ended September 30, 2016, interest expense increased to $31,824 from $1,885 for the three months ended September 30, 2015, representing an increase of $29,939, or 1,588%. During the current year quarter, the Company issued promissory notes aggregating $100,000, bearing 10% interest, convertible at $0.08 per share, each with a maturity date of December 31, 2016, in exchange for cash proceeds of $100,000. On the date of issuance, the conversion price of the promissory notes was less than the market price of the Company’s common stock. This resulted in a beneficial conversion feature in the aggregate amount of $73,750, which is treated as a discount to the promissory notes and is being amortized over the term of the promissory notes. The increase in interest expense in the current year period is a result of the amortization of the discount stemming from the beneficial conversion feature.

Net Loss

For the three months ended September 30, 2016, the Company generated a net loss of $113,393 compared to a net loss of $480,642 for the three months ended September 30, 2015. The decrease in the net loss is primarily due to the decrease in general, administrative and other expenses, partially offset by the decrease in gross profit.

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

Net Revenues

For the nine months ended September 30, 2016, net revenues were $421,170, compared to $1,192,718 for the nine months ended September 30, 2015, a decrease of $771,548, or 64.7%. In the beginning of 2016, due to increased competition for biologics sold in larger order quantities, the Company was forced to decrease its pricing for these products. In addition, our revenues from biologics sold at the retail level also declined. In response, the Company began to vigorously attempt to increase its revenues from biologics by consigning a limited quantity of biologic units to each of several new facilities allowing them to utilize the products and only requiring the facilities to pay for the products provided they were able to get reimbursed by insurance. The majority of the new facilities were not able to get reimbursed by insurance. While we expect the decline in revenues is primarily attributable to both the aforementioned decreased pricing of biologics sold in larger order quantities as well as seasonality, there can be no assurance revenues shall increase an adequate amount to cover the cost of operations.

 

4

Cost of Revenues

For the nine months ended September 30, 2016, our cost of revenues was $144,654, compared to $436,913 for the nine months ended September 30, 2015, representing a decrease of $292,259, or 66.9%. During the second quarter of 2016, the Company exchanged some slow moving inventory items of a particular manufacturer for other inventory items made by the same manufacturer that the Company sells on a regular basis. As the Company had previously established a reserve on this inventory, the exchange of this inventory resulted in the reversal of $35,985 of the reserve, which decreased the cost of revenues. This was partially offset by an increase in cost of revenues resulting from the Company’s attempts to increase its revenues from biologics by consigning a limited quantity of biologic units to each of several new facilities allowing them to utilize the products and only requiring the facilities to pay for the products provided they were able to get reimbursed by insurance. The majority of the new facilities were not able to get reimbursed by insurance. In sum, the overall cost of revenues decreased more proportionately than net revenues decreased during the current year quarter. Cost of revenues includes costs to purchase goods and freight and shipping costs for items sold to customers.

Gross Profit

For the nine months ended September 30, 2016, we generated a gross profit of $276,516, compared to $755,805 for the nine months ended September 30, 2015, a decrease of $479,289, or 63.4%. The decrease in gross profit was primarily due to a decrease in revenues derived from the sale of biologics sold in larger order quantities as well as those at the retail sales level, partially offset by the reversal of a reserve on inventory.

General, Administrative and Other

For the nine months ended September 30, 2016, general, administrative and other operating expenses decreased to $600,813 from $1,565,012 for the nine months ended September 30, 2015, representing a decrease of $964,199, or 61.6%. This decrease is primarily attributable to decreases in salaries and wages (including independent contractors) and related costs of $617,336, stock-based compensation of $168,000, legal and professional fees of $63,814 and travel expenses of $55,995. General, administrative and other operating expenses during the nine months ended September 30, 2016 consisted primarily of salaries and wages and related costs, legal and professional fees, rent and insurance.

Interest Expense

For the nine months ended September 30, 2016, interest expense increased to $35,324 from $5,348 for the nine months ended September 30, 2015, representing an increase of $29,976, or 561%. During the current year period, the Company issued promissory notes aggregating $100,000, bearing 10% interest, convertible at $0.08 per share, each with a maturity date of December 31, 2016, in exchange for cash proceeds of $100,000. On the date of issuance, the conversion price of the promissory notes was less than the market price of the Company’s common stock. This resulted in a beneficial conversion feature in the aggregate amount of $73,750, which is treated as a discount to the promissory notes and is being amortized over the term of the promissory notes. The increase in interest expense in the current year period is a result of the amortization of the discount stemming from the beneficial conversion feature.

Net Loss

For the nine months ended September 30, 2016, the Company generated a net loss of $325,684 compared to a net loss of $815,534 for the nine months ended September 30, 2015. The decrease in the net loss is primarily due to the decrease in general, administrative and other expenses, partially offset by the decrease in gross profit.

Liquidity and Capital Resources

A summary of our cash flows is as follows:

	Nine Months Ended September 30,
	2016			2015
Net cash used in operating activities	$	(46,723	)	$	(332,215	)
Net cash provided by (used in) investing activities		300			(930	)
Net cash provided by financing activities		100,000			322,750
Net increase (decrease) in cash and cash equivalents	$	53,577		$	(10,395	)

 

5

Net Cash Used in Operating Activities

Net cash used in operating activities during the nine months ended September 30, 2016 resulted primarily from a net loss of $325,684, a decrease in accounts payable of $146,096 and a gain on settlement of accounts payable of $35,517, partially offset by a decrease in accounts receivable of $275,683, an increase in deferred revenues of $91,534, a decrease in inventories of $49,618 and amortization of debt discount of $28,499.

Net cash used in operating activities during the nine months ended September 30, 2015 resulted primarily from a net loss of $815,534 and a decrease in accounts payable of $76,715, partially offset by share-based compensation of $418,000, a decrease in inventories of $63,801 and an increase in accrued expenses of $46,279.

Net Cash Provided By (Used in) Investing Activities

Net cash provided by investing activities for the nine months ended September 30, 2016 resulted from cash proceeds from the disposal of property and equipment of $300.

Net cash used in investing activities for the nine months ended September 30, 2016 resulted from cash disbursements to acquire property and equipment of $1,580, offset by proceeds from the disposals of property and equipment of $650.

Net Cash Provided By Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2016 resulted from proceeds from the issuance of promissory notes of $100,000.

Net cash provided by financing activities for the nine months ended September 30, 2015 resulted from proceeds from the sale of common stock of $190,000, proceeds from the issuance of a promissory note to a related party of $100,000 and net repayments received from related parties of $50,000, partially offset by repayments of notes payable of $17,250.

Liquidity

Historically, our primary sources of liquidity have been from the issuances of debt and equity securities as well as sales of products. At September 30, 2016, we had a working capital deficit of $262,407, including $61,734 in cash and cash equivalents. As of November 11, 2016, the Company had approximately $23,000 in available cash. Our cash is concentrated in a large financial institution. Management believes that its current cash balance is enough to sustain operations for two months. In their report dated March 25, 2016, our independent registered public accounting firm included an emphasis-of-matter paragraph with respect to our financial statements for the year ended December 31, 2015 concerning the Company’s assumption that we will continue as a going concern. Our ability to continue as a going concern is an issue raised as a result of our recurring losses from operations.

In January 2015, the Company issued a $100,000 promissory note which is due January 2017.

During July 2016 through October 2016, the Company received aggregate proceeds of $150,000 from the issuance of promissory notes payable, bearing 10% interest per annum, which principal shall be repaid along with any and all accrued interest on or before December 31, 2016 or upon a change in control of the Company. Notwithstanding, on or after January 16, 2017, at either of the holders’ sole discretion, the holder has the right to convert all or any portion of the then unpaid principal and interest balance into shares of the Company’s common stock at a conversion price of $0.08 per share. The Company has been negotiating a potential sale of a majority of the Company’s common stock to the holders of the notes described above. Although we cannot provide you with any assurance that this investment will close, we expect it to close within a few days of the filing date of this report. Any such investment would provide the Company with enough capital to sustain its current operations for at least 12 months. If we are unable to close on the proposed investment or are unsuccessful in generating material revenues, we may need to cease operations.

 

6

The estimated costs of operations while we work to increase our revenues is substantially greater than the funds we have on hand. The Company's existence is dependent upon management's ability to implement its business plan and/or obtain additional funding. If our efforts to raise capital are unsuccessful and the Company is unable to increase revenues, we believe that we will need to cease operations. There can be no assurance that the Company's efforts will result in a resolution of the Company's liquidity problems.

Capital Expenditures

For the nine months ended September 30, 2016, the Company had no material capital expenditures. The Company has no material commitments for capital expenditures as of September 30, 2016. Depending on our cash position, we may spend up to $100,000 in capital expenditures over the next 12 months. These capital expenditures will be allocated across growth initiatives, including expansion of inventories and fixed assets. Depending on the results of management’s ability to implement its business plan and utilize our physician network, our capital expenditures may be less than anticipated.

Cautionary Note Regarding Forward-Looking Statements

This report includes forward-looking statements including statements regarding liquidity including raising funds in order to sustain our current operations.

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 

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

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Our management carried out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”).

Based on their evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls Over Financial Reporting

There have not been any significant changes in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

 

7

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

From time to time, we are a party to, or otherwise involved in, legal proceedings arising in the normal and ordinary course of business. There were no material changes during the period covered by this report to any pending legal proceedings previously reported.

ITEM 1A. RISK FACTORS.

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

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. 

On July 15, 2016, the Company obtained a short-term loan of $50,000 in exchange for a promissory note (convertible at the holder’s sole discretion at $0.08 per share) bearing 10% interest per annum, which principal shall be repaid along with and any all accrued interest on or before December 31, 2016 or upon a change in control of the Company. The issuance of the securities was exempt from registration under Rule 506(b) of the Securities Act of 1933.

On August 23, 2016, the Company obtained a short-term loan of $50,000 in exchange for a promissory note (convertible at the holder’s sole discretion at $0.08 per share) bearing 10% interest per annum, which principal shall be repaid along with and any all accrued interest on or before December 31, 2016 or upon a change in control of the Company. The issuance of the securities was exempt from registration under Rule 506(b) of the Securities Act of 1933.

On October 19, 2016, the promissory notes issued on July 15, 2016 and August 23, 2016 were amended whereby the convertibility feature was removed prior to the maturity date of December 31, 2016 or upon a change in control of the Company. Notwithstanding, on or after January 16, 2017, at the holder’s sole discretion, the holder has the right to convert all or any portion of the then unpaid principal and interest balance into shares of the Company’s common stock at a conversion price of $0.08 per share.

On October 19, 2016, the Company obtained a short-term loan of $50,000 in exchange for a promissory note bearing 10% interest per annum, which principal shall be repaid along with any and all accrued interest on or before December 31, 2016 or upon a change in control of the Company. Notwithstanding, on or after January 16, 2017, at the holder’s sole discretion, the holder has the right to convert all or any portion of the then unpaid principal and interest balance into shares of the Company’s common stock at a conversion price of $0.08 per share. The issuance of the securities was exempt from registration under Rule 506(b) of the Securities Act of 1933.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES. 

None. 

ITEM 4. MINE SAFETY DISCLOSURES. 

Not applicable. 

ITEM 5. OTHER INFORMATION. 

The disclosure under Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” is incorporated under this Item 5.

ITEM 6. EXHIBITS. 

See the exhibits listed in the accompanying “Exhibit Index”.

 

8

SIGNATURES

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

	FUSE MEDICAL, INC.
Date: November 14, 2016	By:	/s/ Christopher Pratt
		Christopher Pratt
		Chief Executive Officer  (Principal Executive Officer)

Date: November 14, 2016	By:	/s/ David Hexter
		David Hexter
		Chief Financial Officer  (Principal Accounting Officer)

 

9

EXHIBIT INDEX

Exhibit No.	Description
2.1	Agreement and Plan of Merger, dated as of December 18, 2013, by and among Golf Rounds.com, Inc. (now known as Fuse Medical, Inc.), Project Fuse LLC, Fuse Medical, LLC and D. Alan Meeker, solely in his capacity as the representative of the Fuse members, as amended by First Amendment to Agreement and Plan of Merger, dated as of March 3, 2014 and Second Amendment to Agreement and Plan of Merger, dated as of April 11, 2014 (filed as exhibit 2.1 to the Form 8-K/A filed on August 29, 2014, and incorporated herein by reference)
3.1	Amended and Restated Certificate of Incorporation of the Company (filed as Exhibit 3.1 to our Current Report on Form 8-K, filed on September 15, 2014, and incorporated herein by reference)
3.1(a)	Amendment to the Amended and Restated Certificate of Incorporation of the Company (filed as Annex A to our Information Statement, filed on December 4, 2015, and incorporated herein by reference)
3.2	Bylaws (filed as Exhibit 3.2 to our Current Report on Form 8-K, filed on May 29, 2014, and incorporated herein by reference)
3.3	Certificate of Merger, as filed with the Secretary of State of the State of Delaware on May 28, 2014 (filed as Exhibit 3.3 to the Form 8-K filed on May 29, 2014)
10.18*	Form of 2016 Promissory Note
31.1*	Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**	Certification of the Chief Executive Officer and the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS *	XBRL Instance Document
101.SCH *	XBRL Taxonomy Extension Schema Document
101.CAL *	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF *	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB *	XBRL Taxonomy Extension Label Linkbase Document
101.PRE *	XBRL Taxonomy Extension Presentation Linkbase Document

_______________

*	Filed herewith.
**	Furnished herewith.

10

EX-10.18

EXHIBIT 10.18

THIS PROMISSORY NOTE (THIS “NOTE”) AND THE SHARES UNDERLYING THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE FEDERAL OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR HYPOTHECATED IN ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH LAWS AS MAY BE APPLICABLE OR, AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY, THAT AN EXEMPTION FROM SUCH APPLICABLE LAWS EXISTS.

PROMISSORY NOTE

$50,000.00 _________, 2016

FOR VALUE RECEIVED, the undersigned, Fuse Medical, Inc., a Delaware corporation (“Maker”), hereby promises to pay to the order of ________________, or its assigns (“Payee”), at _____________________, the principal amount of Fifty Thousand and no/100 Dollars ($50,000.00), together with interest at a rate per annum equal to ten percent (10%). Interest payable under this Note shall be computed on the basis of a 365-day year and actual days elapsed. All past due principal shall bear interest from the date of maturing thereof at a rate equal to the lesser of eighteen percent (18%) per annum or the maximum rate of interest permitted from time to time by applicable law.

All unpaid principal and interest shall be due and payable, upon the demand of Payee, at any time on or after the earlier of: (i) December 31, 2016; or (ii) the closing of that certain Securities Purchase Agreement contemplated to be executed by and between Maker and an affiliate of Payee for the purchase of shares of common stock of Maker that will, upon issuance, represent a majority of the then issued and outstanding common stock of Maker. Notwithstanding anything herein to the contrary, on or after January 16, 2017, Payee, at Payee’s sole and absolute discretion, by providing written notice to Maker, shall have the right to convert all or any portion of the then unpaid principal and interest balance of this Note into common stock of the Maker at a conversion price equal to $0.08 per share of common stock, subject to proportional increase or decrease, as applicable, for any combination or stock split.

Maker, and each surety, endorser, guarantor, and, other party now or hereafter liable for the payment of any sums of money payable on this Note, jointly and severally waive presentment, demand for payment, protest, demand for past due payments, notice of intention to accelerate, notice of nonpayment, diligence in enforcement, and any and all other notices or demands in connection with the delivery, acceptance, performance, default or enforcement of this Note, and expressly consent and agree that their liability on this Note shall not be affected at any time, whether before or after maturity, by any indulgence, or any partial payments, renewals, or extensions hereof (whether one or more), or any release or discharge of any person against whom any such party may have a right of recourse, regardless of whether the holder hereof expressly reserves any rights against any such party.

All amounts payable hereunder by the Maker shall be payable to the Payee at the address set forth above or at such other place as the Payee or the holder hereof may, from time to time, indicate in writing to the Maker, and shall be made by the Maker in lawful money of the United States by check or in cash at such place of payment.

 

1

This Note may be prepaid in whole or in part at any time and from time to time without premium or penalty. Any partial prepayments shall be applied first to any accrued but unpaid interest and then to the outstanding principal installments in inverse order of maturity.

If any payment required to be made hereunder becomes due and payable on a non-business day, the maturity thereof shall extend to the next business day and interest shall be payable at the rate applicable thereto during such extension. The term “business day” shall mean a calendar day excluding Saturdays, Sundays or other days on which banks in the State of Texas are required or authorized to remain closed.

If this Note is placed in the hands of an attorney for collection, Maker agrees to pay attorneys’ fees and costs and expenses of collection, including but not limited to court costs.

Upon either: (i) the failure of prompt and timely payment when due of any installment of principal or interest under this Note; (ii) the occurrence of any default or failure to perform any covenant, agreement or obligation under any document, instrument, or agreement evidencing security for this Note or under any other agreement between Maker and Payee; or (iii) the commencement of any proceeding under any bankruptcy, insolvency, or debtor relief law against Maker, then the holder hereof, at its option, may declare the entire unpaid balance of principal and accrued interest hereunder to be immediately due and payable.

This Note shall be governed by and construed in accordance with the laws of the State of Texas and applicable laws of the United States.

In no contingency or event whatsoever shall the amount paid or agreed to be paid by Maker, received by Payee, or requested or demanded to be paid by Maker exceed the maximum amount permitted by applicable law. In the event any such sums paid to Payee by Maker would exceed the maximum amount permitted by applicable law, Payee shall automatically apply such excess to the unpaid principal amount of this Note or, if the amount of such excess exceeds the unpaid principal amount of this Note, such excess automatically shall be applied by Payee to the unpaid principal amount of other indebtedness, if any, owed by Maker to Payee, or if there be no such other indebtedness, such excess shall be paid to Maker. All sums paid or agreed to be paid by Maker, received by Payee, or requested or demanded to be paid by Maker which are or hereafter may be construed to be or in respect of compensation for the use, forbearance, or detention of money shall, to the extent permitted by applicable law, be amortized, prorated, spread and allocated throughout the full term of all indebtedness of Maker to Payee, to the end that the actual rate of interest hereon shall never exceed the maximum rate of interest permitted from time to time by applicable law.

NO ORAL AGREEMENTS. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

FUSE MEDICAL, INC., a Delaware corporation
By:
	David Hexter, CFO

2

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Christopher Pratt, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Fuse Medical, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2016	By:	/s/ Christopher Pratt
		Christopher Pratt
		Chief Executive Officer (Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, David Hexter, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Fuse Medical, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2016	By:	/s/ David Hexter
		David Hexter
		Chief Financial Officer (Principal Financial Officer)

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Fuse Medical, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2016, as filed with the Securities and Exchange Commission on the date hereof, I, Christopher Pratt, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

1.	The quarterly report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and
2.	The information contained in the quarterly report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 14, 2016	By:	/s/ Christopher Pratt
		Christopher Pratt
		Chief Executive Officer (Principal Executive Officer)

In connection with the quarterly report of Fuse Medical, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2016, as filed with the Securities and Exchange Commission on the date hereof, I, David Hexter, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

1.	The quarterly report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and
2.	The information contained in the quarterly report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 14, 2016	By:	/s/ David Hexter
		David Hexter
		Chief Financial Officer (Principal Financial Officer)

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2016	Nov. 11, 2016
Document And Entity Information
Entity Registrant Name	Fuse Medical, Inc.
Entity Central Index Key	0000319016
Document Type	10-Q
Document Period End Date	Sep. 30, 2016
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		6,890,808
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2016

XML

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)	Sep. 30, 2016	Dec. 31, 2015
Current assets:
Cash and cash equivalents	$ 61,734	$ 8,157
Accounts receivable, net of allowance of $3,704 and $15,145, respectively	22,328	298,011
Inventories	31,591	81,209
Prepaid expenses and other current assets	5,224	18,828
Total current assets	120,877	406,205
Property and equipment, net	12,432	24,978
Security deposit	3,822	3,822
Total assets	137,131	435,005
Current liabilities:
Accounts payable	113,966	295,579
Accounts payable - related parties	8,598	22,202
Accrued expenses	14,437	12,267
Deferred revenues	91,534
Convertible notes payable, net of discount	54,749
Note payable - related party	100,000
Total current liabilities	383,284	330,048
Note payable - related party		100,000
Deferred rent	824
Total liabilities	384,108	430,048
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $0.01 par value; 20,000,000 shares authorized; no shares issued and outstanding
Common stock, $0.01 par value; 100,000,000 shares authorized; 6,890,808 shares issued and outstanding	68,908	68,908
Additional paid-in capital	2,324,843	2,251,093
Accumulated deficit	(2,640,728)	(2,315,044)
Total stockholders' equity (deficit)	(246,977)	4,957
Total liabilities and stockholders' equity (deficit)	$ 137,131	$ 435,005

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)	Sep. 30, 2016	Dec. 31, 2015
Current assets:
Net of allowance, accounts receivable	$ 3,704	$ 15,145
Stockholders' equity (deficit):
Preferred Stock Par Value	$ 0.01	$ 0.01
Preferred Stock Shares Authorized	20,000,000	20,000,000
Preferred Stock Shares Issued	0	0
Preferred Stock Shares Outstanding	0	0
Common Stock Par Value	$ 0.01	$ 0.01
Common Stock Shares Authorized	100,000,000	100,000,000
Common Stock Shares Issued	6,890,808	6,890,808
Common Stock Shares Outstanding	6,890,808	6,890,808

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Condensed Consolidated Statements Of Operations
Revenues	$ 107,584	$ 442,857	$ 421,170	$ 1,192,718
Cost of revenues	42,536	165,268	144,654	436,913
Gross profit	65,048	277,589	276,516	755,805
Operating expenses:
General, administrative and other	182,134	755,367	600,813	1,565,012
Operating loss	(117,086)	(477,778)	(324,297)	(809,207)
Other income (expense):
Interest expense	(31,824)	(1,885)	(35,324)	(5,348)
Loss on disposal of property and equipment		(979)	(1,580)	(979)
Gain on settlement of accounts payable	35,517		35,517
Total other income (expense)	3,693	(2,864)	(1,387)	(6,327)
Net loss	$ (113,393)	$ (480,642)	$ (325,684)	$ (815,534)
Net loss per common share - basic and diluted	$ (0.02)	$ (0.08)	$ (0.05)	$ (0.14)
Weighted average number of common shares outstanding - basic and diluted	6,890,808	6,260,373	6,890,808	5,952,933

XML

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (Unaudited) - 9 months ended Sep. 30, 2016 - USD ($)	Common Stock	Additional Paid-In Capital	Accumulated Deficit	Total
Beginning Balance, Amount at Dec. 31, 2015	$ 68,908	$ 2,251,093	$ (2,315,044)	$ 4,957
Beginning Balance, Shares at Dec. 31, 2015	6,890,808
Recognition of beneficial conversion feature on convertible promissory notes issued		73,750		73,750
Net loss			(325,684)	(325,684)
Ending Balance, Amount at Sep. 30, 2016	$ 68,908	$ 2,324,843	$ (2,640,728)	$ (246,977)
Ending Balance, Shares at Sep. 30, 2016	6,890,808

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited) - USD ($)	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
Cash flows from operating activities:
Net loss	$ (325,684)	$ (815,534)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt discount	28,499
Depreciation	10,666	21,888
Loss on disposal of property and equipment	1,580	979
Gain on settlement of accounts payable	(35,517)
Share-based compensation		418,000
Transfer of property and equipment as part of expense reimbursement		6,000
Bad debt expense		3,704
Changes in operating assets and liabilities:
Accounts receivable	275,683	19,209
Inventories	49,618	63,801
Prepaid expenses and other current assets	13,604	6,021
Security deposit		(3,822)
Accounts payable	(146,096)	(76,715)
Accounts payable - related parties	(13,604)	(22,025)
Accrued expenses	2,170	46,279
Deferred revenues	91,534
Deferred rent	824
Net cash used in operating activities	(46,723)	(332,215)
Cash flows from investing activities:
Purchases of property and equipment		(1,580)
Proceeds from the disposal of property and equipment	300	650
Net cash provided by (used in) investing activities	300	(930)
Cash flows from financing activities:
Advances to related parties		(43,240)
Repayments received from related parties		93,240
Proceeds from issuance of promissory notes	100,000
Repayments of promissory notes		(17,250)
Proceeds from issuance of promissory notes to related party		100,000
Proceeds from sale of common stock		190,000
Net cash provided by financing activities	100,000	322,750
Net increase (decrease) in cash and cash equivalents	53,577	(10,395)
Cash and cash equivalents - beginning of period	8,157	67,555
Cash and cash equivalents - end of period	61,734	57,160
Supplemental disclosure of cash flow information:
Interest paid	5,250	1,588
Non-cash investing and financing activities:
Recognition of beneficial conversion feature on convertible promissory notes issued	73,750
Transfer security deposit as part of expense reimbursement		$ 2,489

XML

Nature of Operations and Liquidity

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

Note 1. Nature of Operations and Liquidity

Overview

Fuse Medical, Inc. (together with its subsidiaries, the “Company” or “Fuse Medical”) was formed in Delaware on July 18, 2012 as Fuse Medical, LLC. Fuse Medical V, LP was formed in Texas on November 15, 2012 and upon formation was owned 59% by Fuse Medical, LLC. Fuse Medical VI, LP was formed in Texas on January 31, 2013 and upon formation was owned 59% by Fuse Medical, LLC. On February 12, 2015, Certificates of Termination were filed for Fuse Medical V, LP and Fuse Medical VI, LP. On February 20, 2015, a Certificate of Cancellation was filed in Delaware, and on August 5, 2015, a Certificate of Withdrawal was filed in Texas, for Fuse Medical, LLC.

On December 18, 2013, Fuse Medical, LLC entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Golf Rounds.com, Inc. (the “Registrant”), Project Fuse LLC (a wholly-owned subsidiary of Golf Rounds.com, Inc.) (“Merger Sub”), and D. Alan Meeker, solely in his capacity as the representative of the members of Fuse Medical, LLC (the “Representative”). Effective as of May 28, 2014, prior to the consummation of the Merger, Golf Rounds.com, Inc. amended its certificate of incorporation to change its name from “GolfRounds.com, Inc.” to “Fuse Medical, Inc.” On May 28, 2014, the transactions contemplated by the Merger Agreement closed wherein Merger Sub merged with and into Fuse Medical, LLC, with Fuse Medical, LLC surviving as a wholly-owned subsidiary of Fuse Medical, Inc. (the “Merger”). Accordingly, on May 28, 2014, the Company was recapitalized in a reverse merger. All references to the Company or Fuse Medical before May 28, 2014 are to Fuse Medical, LLC. On May 30, 2014, the Company changed its fiscal year end from August 31 to December 31.

Fuse Medical distributes diversified healthcare products and supplies, including medical biologics, internal fixation products, bone substitute materials and other medical supplies in several states. The Company strives to provide cost savings and clinical outcomes to its customers, which include physicians and medical facilities.

Basis of Presentation

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

The condensed consolidated balance sheet information as of December 31, 2015 was derived from the audited consolidated financial statements included in the Company’s Report on Form 10-K filed with the Securities and Exchange Commission on March 25, 2016. These condensed consolidated financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2015 and notes thereto included in the Company’s Report on Form 10-K for the year ended December 31, 2015.

The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the entire fiscal year or for any other period.

Going Concern

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. As shown in the accompanying financial statements, we have incurred a net loss of $325,684 for the nine months ended September 30, 2016. As of September 30, 2016, we had $61,734 of cash and cash equivalents on hand, a stockholders’ deficit of $246,977 and a working capital deficit of $262,407. The Company’s ability to continue as a going concern is contingent on securing additional debt or equity financing from outside investors. As a result, the Company’s independent registered public accounting firm, in its report on the Company’s 2015 consolidated financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.

The estimated costs of operations while we attempt to ramp up our revenues is substantially greater than the funds we had available on September 30, 2016. The Company’s existence is dependent upon management’s ability to implement its business plan and/or obtain additional funding. There can be no assurance that the Company’s financing efforts, if successful, would result in profitable operations or the resolution of the Company’s liquidity problems. Even if the Company is able to obtain additional financing, it may include undue restrictions on our operations in the case of debt, or cause substantial dilution for our stockholders in the case of equity financing. During July 2016 through October 2016, the Company received aggregate proceeds of $150,000 from the issuance of promissory notes payable (See Notes 4 and 10). The accompanying financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.

XML

Significant Accounting Policies

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

Note 2. Significant Accounting Policies

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements. Actual results could differ from those estimates. Significant estimates in the accompanying consolidated financial statements include the allowance for doubtful accounts, valuation of inventories, the estimates of depreciable lives and valuation of property and equipment, and the valuation allowance on deferred tax assets.

Earnings (Loss) Per Share

The Company’s computation of earnings (loss) per share (EPS) includes basic and diluted EPS. Basic EPS is calculated by dividing the Company’s net income (loss) by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that would have occurred if securities or other contracts to issue common shares (e.g. warrants and options) had been exercised or converted into common shares at the beginning of the period, or issuance date, if later, and had shared in the net income (loss) of the Company. Diluted EPS is computed using the treasury stock method, which assumes that outstanding options and warrants are exercised and the proceeds are used to purchase common shares at the average market price during the period. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

As of September 30, 2016 and 2015, common stock equivalents included options to purchase 604,788 and 609,576 common shares, respectively. These instruments are not considered in the calculation of diluted loss per share because the effect would be anti-dilutive.

Fair Value Measurements

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

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

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

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

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

Revenue Recognition
       

The Company recognizes revenue when: (i) persuasive evidence of an arrangement exists; (ii) the fees are fixed or determinable; (iii) no significant Company obligations remain; and (iv) collection of the related receivable is reasonably assured. The Company reports revenues for transactions in which it is the primary obligor on a gross basis and revenues in which it acts as an agent (earning a fixed percentage of the sale) on a net basis, (net of related costs). The Company reflects funds collected from customers as deferred revenues until all revenue recognition criteria have been met.

Revenues is comprised of sales of medical biologics, internal fixation products, bone substitute materials and other medical supplies. For customers that order products as needed (i.e. for specific cases), the Company invoices the customer on the date the product is utilized. For customers that order larger quantities of the same product (subject to minimums) at a reduced selling price, the Company invoices the customers as each unit of the product is utilized. Payment terms are net 30 days after the invoice date.

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

Income Taxes

The Company uses the asset and liability method to compute the differences between the tax basis of assets and liabilities and the related financial amounts. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized. The Company has deferred tax assets and liabilities that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets are subject to periodic recoverability assessments. Realization of the deferred tax assets, net of deferred tax liabilities, is principally dependent upon achievement of projected future taxable income.

The Company records a liability for uncertain tax positions when it is probable that a loss has been incurred and the amount can be reasonably estimated. As of September 30, 2016, the Company had no liabilities for uncertain tax positions. The Company's policy is to recognize interest and penalties related to income tax matters as a component of income tax expense. The Company continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings.

Stock-Based Compensation

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

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers”. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle-based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements and disclosures.

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-10),” which provides guidance as to management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or at the date that the financial statements are available to be issued when applicable). Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company will adopt ASU 2014-15 on the Company’s financial statement presentation and disclosures after the effective date.

In February 2016, the FASB issued Accounting Standards Update 2016-02, “Leases,” which requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of the adoption of ASU 2016-02 on the Company’s financial statements and disclosures.

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

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Property and Equipment

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

Note 3. Property and Equipment

Property and equipment consisted of the following at September 30, 2016 and December 31, 2015:

	September 30, 2016			December 31, 2015
Computer equipment	$	29,290		$	31,053
Furniture and fixtures		6,347			9,315
Leasehold improvements		6,728			6,728
Office equipment		1,580			1,580
Software		-			10,500
		43,945			59,176
Less: accumulated depreciation		(31,513	)		(34,198	)
Property and equipment, net	$	12,432		$	24,978

Depreciation expense of $3,502 and $8,563 was recognized during the three months ended September 30, 2016 and 2015, respectively, and $10,666 and $21,888 was recognized during the nine months ended September 30, 2016 and 2015, respectively.

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Convertible Notes Payable

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

Note 4. Convertible Notes Payable

Convertible notes payable consisted of the following at September 30, 2016 and December 31, 2015:

	September 30, 2016			December 31, 2015
Note payable originating July 15, 2016; no monthly payments required; bearing interest at 10%; maturing at December 31, 2016 [A]	$	50,000		$	-
Note payable originating August 23, 2016; no monthly payments required; bearing interest at 10%; maturing at December 31, 2016 [B]		50,000			-
Total		100,000			-
Less: Discount		(45,251	)		-
Net	$	54,749		$	-

[A] - On July 15, 2016, the Company obtained a short-term loan of $50,000 in exchange for a promissory note (convertible at the holder’s sole discretion at $0.08 per share) bearing 10% interest per annum, which principal shall be repaid along with and any all accrued interest on or before December 31, 2016 or upon a change in control of the Company. On the date of issuance, the conversion price of the promissory note was less than the market price of the Company’s common stock. This resulted in a beneficial conversion feature of $42,500, which is treated as a discount to the promissory note and is being amortized over the term of the promissory note.

[B] - On August 23, 2016, the Company obtained a short-term loan of $50,000 in exchange for a promissory note (convertible at the holder’s sole discretion at $0.08 per share) bearing 10% interest per annum, which principal shall be repaid along with and any all accrued interest on or before December 31, 2016 or upon a change in control of the Company. On the date of issuance, the conversion price of the promissory note was less than the market price of the Company’s common stock. This resulted in a beneficial conversion feature of $31,250, which is treated as a discount to the promissory note and is being amortized over the term of the promissory note.

On October 19, 2016, the promissory notes issued on July 15, 2016 and August 23, 2016 were amended whereby the convertibility feature was removed prior to the maturity date of December 31, 2016 or upon a change in control of the Company. Notwithstanding, on or after January 16, 2017, at the holder’s sole discretion, the holder has the right to convert all or any portion of the then unpaid principal and interest balance into shares of the Company’s common stock at a conversion price of $0.08 per share (See Notes 1 and 10).

Interest expense on outstanding convertible notes payable of $30,074 (of which $28,499 was the amortization of beneficial conversion features) was recognized during the three and nine months ended September 30, 2016. As of September 30, 2016, accrued interest payable was $1,575, which is included in accrued expenses on the accompanying condensed consolidated balance sheet.

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Notes Payable - Related Party

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

Note 5. Notes Payable - Related Party

On January 15, 2015, the Company issued a two-year promissory note to a significant stockholder in exchange for cash proceeds of $100,000. The note is unsecured, bears interest at 7.0% and requires 18 monthly payments of interest only commencing at the beginning of month seven. The note includes a provision that in the event of default the interest rate would increase to the default interest rate of 18%. The first six months of interest is deferred until maturity. The outstanding principal balance along with all accrued and unpaid interest is due at maturity. The balance of the note payable – related party at September 30, 2016 and December 31, 2015 was $100,000 (See Note 9).

Interest expense on the note payable – related party of $1,750 and $1,885 was recognized during the three months ended September 30, 2016 and 2015, respectively, and $5,250 and $5,348 was recognized during the nine months ended September 30, 2016 and 2015, respectively. As of September 30, 2016 and December 31, 2015, accrued interest on the note payable – related party was $3,796, which is included in accrued expenses on the accompanying condensed consolidated balance sheet.

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

Note 6. Commitments and Contingencies

Legal Matters

On January 27, 2014, M. Richard Cutler and Cutler Law Group, P.C. (the “Plaintiffs”) filed a complaint in the District Court of Harris County, Texas, 2014-03355, against Fuse, Alan Meeker, Rusty Shelton, Jonathan Brown, Robert H. Donehew and Golf Rounds.com, Inc. (the “Defendants”). On April 21, 2014, the complaint was dismissed for “want of prosecution.” The Plaintiffs had 30 days from April 21, 2014 to file a motion to reinstate the case and no timely action was taken by the Plaintiffs. However, the Plaintiffs did file a motion to reinstate on May 22, 2014 and it was granted. The Defendants argued a Motion to Dismiss before the court on July 25, 2014 and, on July 28, 2014, the court granted the motion and dismissed the Plaintiffs' (i) breach of fiduciary duty claim against all Defendants, (ii) suit on sworn account claim against all Defendants except Fuse, and (iii) quantum meruit claim against all Defendants except Fuse. The Defendants were also awarded attorneys' fees in the amount of $4,343. Discovery in the case ended on March 25, 2015 and Plaintiffs failed to file any discovery requests during the period or seek an extension of the period. On April 27, 2015, Defendants filed a motion for summary judgment in this matter for failure to prosecute and on the grounds that the claims were not legally viable. On April 28, 2015, Plaintiffs filed a Notice of Non-Suit, which effectively withdrew the lawsuit against the Defendants without prejudice to Plaintiffs’ right to refile the lawsuit at any time subject to the applicable statute of limitations.

On September 18, 2015, Plaintiffs refiled a complaint in the District Court of Harris County, Texas, Cause No. 2015-55652 and added PH Squared, LLC as an additional Plaintiff. Thereafter, the term “Plaintiffs” collectively refers to M. Richard Cutler, Cutler Law Group, P.C. and PH Squared, LLC. The new complaint asserts essentially the same claims as the original nonsuited complaint: (i) suit on sworn account against Fuse; (ii) fraud against all Defendants; and (iii) breach of contract against all Defendants for allegedly violating a non-circumvention/non-disclosure agreement. Richard Cutler is the sole principal of Cutler Law Group, P.C., which provided legal representation to its clients, Craig Longhurst and PH Squared, LLC d/b/a PharmHouse Pharmacy (“Cutler’s Client”), during a failed merger attempt between Fuse and Golf Rounds.com, Inc. (the “Failed Transaction”). The Plaintiffs have alleged that the Failed Transaction failed to materialize notwithstanding the efforts of Mr. Cutler, his law firm and PH Squared, LLC. The Plaintiffs have further alleged that the Defendants continued to pursue a similar transaction without Cutler’s Client or the Plaintiffs. The Plaintiffs claim that the Defendants are responsible for damages in the amount of $46,465 plus interest for the breach of contract claim because Plaintiffs were not paid their legal fees by Cutler’s Client and Plaintiffs did not receive equity in the merged company that would have resulted from the Failed Transaction. Plaintiffs are also asking for undisclosed damages related to the fraud and breach of contract claims, and are asking for exemplary damages as a result of allegedly intentional fraud that some or all of the Defendants allegedly committed. Plaintiffs also seek their attorneys’ fees and costs for having brought the action. On November 18, 2015, Fuse filed a counterclaim against PH Squared, LLC for breach of contract and further asserted a counterclaim and third party claim against PH Squared, LLC’s principle, Craig Longhurst, for fraud in the inducement. Fuse also seeks a declaratory judgment on the intended third party beneficiary status of Plaintiffs Cutler and Cutler Law Group related to a non-circumvention/non-disclosure agreement.

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

Settlement of Accounts Payable

On July 26, 2016, the Company settled outstanding accounts payable of $60,517 owed to its former legal counsel for $25,000. Accordingly, the Company recognized a gain on settlement of $35,517 during the three months ended September 30, 2016.

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Stockholders' Equity (Deficit)

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

Note 7. Stockholders' Equity (Deficit)

Stock Options

A summary of the Company’s stock option activity during the nine months ended September 30, 2016 is presented below:

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
	No. of			Exercise		Contractual		Intrinsic
	Shares			Price		Term		Value
Balance outstanding at December 31, 2015		609,576		$	0.42
Granted		-
Exercised		-
Forfeited		-
Expired		(4,788	)	$	8.77
Balance outstanding at September 30, 2016		604,788		$	0.35		3.8	$	-
Exercisable at September 30, 2016		204,788		$	0.53		3.7	$	-

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Concentrations

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

Note 8. Concentrations

Concentration of Credit Risk

The Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. The Company has not experienced any losses in such accounts through September 30, 2016. On January 1, 2013, the standard insurance amount of $250,000 per depositor, per bank, became effective. As of September 30, 2016, the Company’s bank balances did not exceed FDIC insured amounts.

Concentration of Revenues, Accounts Receivable and Suppliers

For the three and nine months ended September 30, 2016 and 2015, the Company had significant customers with individual percentage of total revenues equaling 10% or greater as follows:

	For the Three			For the Three			For the Nine			For the Nine
	Months Ended			Months Ended			Months Ended			Months Ended
	September 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
Customer 1		67.3	%		66.2	%		68.0	%		71.2	%
Customer 2		29.4	%		20.6	%		16.5	%		13.6	%
Totals		96.7	%		86.8	%		84.5	%		84.8	%

At September 30, 2016 and December 31, 2015, concentration of accounts receivable with significant customers representing 10% or greater of accounts receivable was as follows:

	September 30, 2016			December 31, 2015
Customer 1		60.8	%		-
Customer 2		20.7	%		62.7	%
Customer 3		14.2	%		-
Customer 4		-			13.0	%
Totals		95.7	%		75.7	%

For the three and nine months ended September 30, 2016 and 2015, the Company had significant suppliers representing 10% or greater of goods purchased as follows:

	For the Three			For the Three			For the Nine			For the Nine
	Months Ended			Months Ended			Months Ended			Months Ended
	September 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
Supplier 1		81.5	%		71.8	%		39.2	%		75.1	%
Supplier 2		18.5	%		28.2	%		31.4	%		24.9	%
Supplier 3		-			-			29.4	%		-
Totals		100.0	%		100.0	%		100.0	%		100.0	%

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Related Party Transactions

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

Note 9. Related Party Transactions

During the three months ended March 31, 2015, the Company allocated an aggregate of $43,240 of compensation paid to the Company's General Counsel to an entity that is owned partially by certain officers and directors of the Company. During the six months ended June 30, 2015, the Company was reimbursed the entire amount of compensation of the Company's General Counsel that had been allocated to the entity that is owned partially by certain officers and directors of the Company during the prior two quarters in the amount of $93,240.

As of September 30, 2016 and December 31, 2015, $8,598 and $22,202, respectively, is owed to officers and directors of the Company or entities controlled by these individuals. This amount is included in accounts payable – related parties on the accompanying condensed consolidated balance sheet.

On January 15, 2015, the Company issued a two-year promissory note to a significant stockholder in exchange for cash proceeds of $100,000. The note is unsecured, bears interest at 7.0% and requires 18 monthly payments of interest only commencing at the beginning of month seven. The note includes a provision that in the event of default the interest rate would increase to the default interest rate of 18%. The first six months of interest is deferred until maturity. The outstanding principal balance along with all accrued and unpaid interest is due at maturity (See Note 5).

During the period from inception through September 30, 2016, several members of the Company’s management provided services at no charge to the Company. The financial statements do not include an estimate of the fair value of these services.

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Subsequent Events

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

Note 10. Subsequent Events

On October 19, 2016, the promissory notes issued on July 15, 2016 and August 23, 2016 were amended whereby the convertibility feature was removed prior to the maturity date of December 31, 2016 or upon a change in control of the Company. Notwithstanding, on or after January 16, 2017, at the holder’s sole discretion, the holder has the right to convert all or any portion of the then unpaid principal and interest balance into shares of the Company’s common stock at a conversion price of $0.08 per share (See Notes 1 and 4).

On October 19, 2016, the Company obtained a short-term loan of $50,000 in exchange for a promissory note bearing 10% interest per annum, which principal shall be repaid along with any and all accrued interest on or before December 31, 2016 or upon a change in control of the Company. Notwithstanding, on or after January 16, 2017, at the holder’s sole discretion, the holder has the right to convert all or any portion of the then unpaid principal and interest balance into shares of the Company’s common stock at a conversion price of $0.08 per share (See Note 1).

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Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2016

Significant Accounting Policies Policies

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements. Actual results could differ from those estimates. Significant estimates in the accompanying consolidated financial statements include the allowance for doubtful accounts, valuation of inventories, the estimates of depreciable lives and valuation of property and equipment, and the valuation allowance on deferred tax assets.

Earnings (Loss) Per Share

The Company’s computation of earnings (loss) per share (EPS) includes basic and diluted EPS. Basic EPS is calculated by dividing the Company’s net income (loss) by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that would have occurred if securities or other contracts to issue common shares (e.g. warrants and options) had been exercised or converted into common shares at the beginning of the period, or issuance date, if later, and had shared in the net income (loss) of the Company. Diluted EPS is computed using the treasury stock method, which assumes that outstanding options and warrants are exercised and the proceeds are used to purchase common shares at the average market price during the period. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

As of September 30, 2016 and 2015, common stock equivalents included options to purchase 604,788 and 609,576 common shares, respectively. These instruments are not considered in the calculation of diluted loss per share because the effect would be anti-dilutive.

Fair Value Measurements

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

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

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

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

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

Revenue Recognition

The Company recognizes revenue when: (i) persuasive evidence of an arrangement exists; (ii) the fees are fixed or determinable; (iii) no significant Company obligations remain; and (iv) collection of the related receivable is reasonably assured. The Company reports revenues for transactions in which it is the primary obligor on a gross basis and revenues in which it acts as an agent (earning a fixed percentage of the sale) on a net basis, (net of related costs). The Company reflects funds collected from customers as deferred revenues until all revenue recognition criteria have been met.

Revenues is comprised of sales of medical biologics, internal fixation products, bone substitute materials and other medical supplies. For customers that order products as needed (i.e. for specific cases), the Company invoices the customer on the date the product is utilized. For customers that order larger quantities of the same product (subject to minimums) at a reduced selling price, the Company invoices the customers as each unit of the product is utilized. Payment terms are net 30 days after the invoice date.

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

Income Taxes

The Company uses the asset and liability method to compute the differences between the tax basis of assets and liabilities and the related financial amounts. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized. The Company has deferred tax assets and liabilities that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets are subject to periodic recoverability assessments. Realization of the deferred tax assets, net of deferred tax liabilities, is principally dependent upon achievement of projected future taxable income.

The Company records a liability for uncertain tax positions when it is probable that a loss has been incurred and the amount can be reasonably estimated. As of September 30, 2016, the Company had no liabilities for uncertain tax positions. The Company's policy is to recognize interest and penalties related to income tax matters as a component of income tax expense. The Company continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings.

Stock-Based Compensation

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

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers”. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle-based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements and disclosures.

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-10),” which provides guidance as to management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or at the date that the financial statements are available to be issued when applicable). Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company will adopt ASU 2014-15 on the Company’s financial statement presentation and disclosures after the effective date.

In February 2016, the FASB issued Accounting Standards Update 2016-02, “Leases,” which requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of the adoption of ASU 2016-02 on the Company’s financial statements and disclosures.

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

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Property and Equipment (Tables)

9 Months Ended

Sep. 30, 2016

Property And Equipment Tables

Property and Equipment

Property and equipment consisted of the following at September 30, 2016 and December 31, 2015:

	September 30, 2016			December 31, 2015
Computer equipment	$	29,290		$	31,053
Furniture and fixtures		6,347			9,315
Leasehold improvements		6,728			6,728
Office equipment		1,580			1,580
Software		-			10,500
		43,945			59,176
Less: accumulated depreciation		(31,513	)		(34,198	)
Property and equipment, net	$	12,432		$	24,978

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Convertible Notes Payable (Tables)

9 Months Ended

Sep. 30, 2016

Convertible Notes Payable Tables

Convertible notes payable

Convertible notes payable consisted of the following at September 30, 2016 and December 31, 2015:

	September 30, 2016			December 31, 2015
Note payable originating July 15, 2016; no monthly payments required; bearing interest at 10%; maturing at December 31, 2016 [A]	$	50,000		$	-
Note payable originating August 23, 2016; no monthly payments required; bearing interest at 10%; maturing at December 31, 2016 [B]		50,000			-
Total		100,000			-
Less: Discount		(45,251	)		-
Net	$	54,749		$	-

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Stockholders' Equity (Deficit) (Tables)

9 Months Ended

Sep. 30, 2016

Stockholders Equity Deficit Tables

Summary of the stock option activity

A summary of the Company’s stock option activity during the nine months ended September 30, 2016 is presented below:

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
	No. of			Exercise		Contractual		Intrinsic
	Shares			Price		Term		Value
Balance outstanding at December 31, 2015		609,576		$	0.42
Granted		-
Exercised		-
Forfeited		-
Expired		(4,788	)	$	8.77
Balance outstanding at September 30, 2016		604,788		$	0.35		3.8	$	-
Exercisable at September 30, 2016		204,788		$	0.53		3.7	$	-

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Concentrations (Tables)

9 Months Ended

Sep. 30, 2016

Revenues [Member]

Concentration of Revenues, Accounts Receivable and Supplier

For the three and nine months ended September 30, 2016 and 2015, the Company had significant customers with individual percentage of total revenues equaling 10% or greater as follows:

	For the Three			For the Three			For the Nine			For the Nine
	Months Ended			Months Ended			Months Ended			Months Ended
	September 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
Customer 1		67.3	%		66.2	%		68.0	%		71.2	%
Customer 2		29.4	%		20.6	%		16.5	%		13.6	%
Totals		96.7	%		86.8	%		84.5	%		84.8	%

Accounts Receivable [Member]

Concentration of Revenues, Accounts Receivable and Supplier

At September 30, 2016 and December 31, 2015, concentration of accounts receivable with significant customers representing 10% or greater of accounts receivable was as follows:

	September 30, 2016			December 31, 2015
Customer 1		60.8	%		-
Customer 2		20.7	%		62.7	%
Customer 3		14.2	%		-
Customer 4		-			13.0	%
Totals		95.7	%		75.7	%

Accounts Payable [Member]

Concentration of Revenues, Accounts Receivable and Supplier

For the three and nine months ended September 30, 2016 and 2015, the Company had significant suppliers representing 10% or greater of goods purchased as follows:

	For the Three			For the Three			For the Nine			For the Nine
	Months Ended			Months Ended			Months Ended			Months Ended
	September 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
Supplier 1		81.5	%		71.8	%		39.2	%		75.1	%
Supplier 2		18.5	%		28.2	%		31.4	%		24.9	%
Supplier 3		-			-			29.4	%		-
Totals		100.0	%		100.0	%		100.0	%		100.0	%

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Nature of Operations and Liquidity (Details Narrative) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015	Dec. 31, 2015	Dec. 31, 2014
Nature Of Operations And Liquidity Details Narrative
Net loss	$ (113,393)	$ (480,642)	$ (325,684)	$ (815,534)
Cash and cash equivalents	61,734	$ 57,160	61,734	$ 57,160	$ 8,157	$ 67,555
Stockholders' equity (deficit)	(246,977)		(246,977)		$ 4,957
Working capital (deficit)	$ (262,407)		$ (262,407)

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Significant Accounting Policies (Details Narrative) - shares	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
Significant Accounting Policies Details Narrative
Options to purchase included in common stock equivalents	604,788	609,576

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Property and Equipment (Details) - USD ($)	Sep. 30, 2016	Dec. 31, 2015
Property and equipment, gross	$ 43,945	$ 59,176
Less: accumulated depreciation	(31,513)	(34,198)
Property and equipment, net	12,432	24,978
Computer equipment [Member]
Property and equipment, gross	29,290	31,053
Furniture and fixtures [Member]
Property and equipment, gross	6,347	9,315
Leasehold improvements [Member]
Property and equipment, gross	6,728	6,728
Office equipment [Member]
Property and equipment, gross	1,580	1,580
Software [Member]
Property and equipment, gross		$ 10,500

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Property and Equipment (Details Narrative) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Property And Equipment Details Narrative
Depreciation expense	$ 3,502	$ 8,563	$ 10,666	$ 21,888

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Convertible Notes Payable (Details) - USD ($)	Sep. 30, 2016	Dec. 31, 2015
Total	$ 100,000
Less: Discount	(45,251)
Net	54,749
Convertible Notes Payable [Member]
Total	50,000
Convertible Notes Payable One [Member]
Total	$ 50,000

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Convertible Notes Payable (Details Narrative) - USD ($)	9 Months Ended
	Sep. 30, 2016	Dec. 31, 2015
Outstanding convertible notes payable	$ 30,074
Accrued interest payable	3,796	$ 3,796
Convertible Notes Payable [Member]
Amortization of beneficial conversion features	28,499
Accrued interest payable	$ 1,575

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Notes Payable - Related Party (Details Narrative) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015	Dec. 31, 2015
Notes Payable - Related Party Details Narrative
Note payable - related party	$ 100,000		$ 100,000		$ 100,000
Interest expense on notes payable	1,750	$ 1,885	5,250	$ 5,348
Accrued interest payable	$ 3,796		$ 3,796		$ 3,796

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Commitments and Contingencies (Details Narrative) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Notes to Financial Statements
Gain on settlement of accounts payable	$ 35,517		$ 35,517

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Stockholders' Equity (Deficit) (Details)	9 Months Ended
	Sep. 30, 2016 USD ($) $ / shares shares
Stockholders Equity Deficit Details
No. of Shares, Beginning Balance | shares	609,576
Granted, No. Of Shares | shares
Exercised, No. Of Shares | shares
Forfeited, No. Of Shares | shares
Expired, No. Of Shares | shares	(4,788)
No. of Shares, Ending Balance | shares	604,788
Exercisable, No. Of Shares | shares	204,788
Weighted Average Exercise Price, Beginning Balance | $ / shares	$ 0.42
Granted, Weighted Average Exercise Price | $ / shares
Exercised, Weighted Average Exercise Price | $ / shares
Forfeited, Weighted Average Exercise Price | $ / shares
Expired, Weighted Average Exercise Price | $ / shares	8.77
Weighted Average Exercise Price, Ending Balance | $ / shares	0.35
Exercisable, Weighted Average Exercise Price | $ / shares	$ 0.53
Weighted Average Remaining Contractual Term, Balance outstanding	3 years 9 months 18 days
Weighted Average Remaining Contractual Term, Exercisable	3 years 8 months 12 days
Aggregate Intrinsic Value, Balance outstanding | $
Aggregate Intrinsic Value, Exercisable | $

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Concentrations (Details) - Revenues [Member]	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Concentration of Revenues	96.70%	86.80%	84.50%	84.80%
Customer 1 [Member]
Concentration of Revenues	67.30%	66.20%	68.00%	71.20%
Customer 2 [Member]
Concentration of Revenues	29.40%	20.60%	16.50%	13.60%

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Concentrations (Details 1) - Accounts Receivable [Member]	Sep. 30, 2016	Dec. 31, 2015
Concentration of accounts receivable	95.70%	75.70%
Customer 1 [Member]
Concentration of accounts receivable	60.80%	0.00%
Customer 2 [Member]
Concentration of accounts receivable	20.70%	62.70%
Customer 3 [Member]
Concentration of accounts receivable	14.20%	0.00%
Customer 4 [Member]
Concentration of accounts receivable	0.00%	13.00%

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Concentrations (Details 2)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Concentrations Supplier	100.00%	100.00%	100.00%	100.00%
Supplier 1 [Member]
Concentrations Supplier	81.50%	71.80%	39.20%	75.10%
Supplier 2 [Member]
Concentrations Supplier	18.50%	28.20%	31.40%	24.90%
Supplier 3 [Member]
Concentrations Supplier	0.00%	0.00%	29.40%	0.00%

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Related Party Transactions (Details Narrative) - USD ($)	Sep. 30, 2016	Dec. 31, 2015
Related Party Transactions Details Narrative
Accounts payable - related parties	$ 8,598	$ 22,202