Fuse Medical, Inc. - Quarter Report: 2015 June (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

FORM 10-Q

For the quarterly period ended: June 30, 2015 

Commission File Number: 000-10093

Fuse Medical, Inc.

(Exact name of registrant as specified in its charter) 

(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. 

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 of August 10, 2015, 5,890,808 shares of common stock, par value $0.01 per share, and 0 shares of preferred stock, par value $0.01 per share, of the registrant were outstanding.

FUSE MEDICAL, INC.

FORM 10-Q 

June 30, 2015 

INDEX

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 

This Quarterly Report on Form 10-Q contains forward-looking statements, including, without limitation, in the section captioned “Management’s Discussion and Analysis of Financial Condition and Result of Operations” and elsewhere. Any and all statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact may be deemed forward-looking statements. Terms such as “may,” “might,” “would,” “should,” “could,” “project,” “estimate,” “pro-forma,” “predict,” “potential,” “strategy,” “anticipate,” “attempt,” “develop,” “plan,” “help,” “believe,” “continue,” “intend,” “expect,” “future,” and terms of similar import (including the negative of any of the foregoing) may be intended to identify forward-looking statements. However, not all forward-looking statements may contain one or more of these identifying terms. Forward-looking statements in this Quarterly Report on Form 10-Q may include, without limitation, statements regarding: (i) the plans and objectives of management for future operations; (ii) a projection of income (including income/loss), earnings (including earnings/loss) per share, capital expenditures, dividends, capital structure or other financial items; (iii) our future financial performance, including any such statement contained in a discussion and analysis of financial condition by management or in the results of operations included pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”); (iv) our beliefs regarding potential clinical and other health benefits of medical products we distribute; and (v) the assumptions underlying or relating to any statement described in points (i), (ii), (iii) or (iv) above.  

The forward-looking statements are not meant to predict or guarantee actual results, performance, events or circumstances and may not be realized because they are based upon our current projections, plans, objectives, beliefs, expectations, estimates and assumptions and are subject to a number of risks and uncertainties and other influences, many of which we have no control over. Actual results and the timing of certain events and circumstances may differ materially from those described by the forward-looking statements as a result of these risks and uncertainties. Factors that may influence or contribute to the inaccuracy of the forward-looking statements or cause actual results to differ materially from expected or desired results may include, without limitation, our inability to obtain adequate financing, the significant length of time and resources associated with the development of our products and related insufficient cash flows and resulting illiquidity, our inability to expand our business, significant government regulation of our business and the healthcare industry, the results of clinical studies or trials, lack of product diversification, volatility in the price of our raw materials, existing or increased competition, results of arbitration and litigation, stock volatility and illiquidity, and our failure to implement our business plans or strategies.  

Readers are cautioned not to place undue reliance on forward-looking statements because of the risks and uncertainties related to them and to the risk factors. We disclaim any obligation to update the forward-looking statements contained in this Quarterly Report on Form 10-Q to reflect any new information or future events or circumstances or otherwise. 

Readers should read this Quarterly Report on Form 10-Q in conjunction with our financial statements and the related notes thereto in this Quarterly Report on Form 10-Q, and other documents which we may file from time to time with the SEC. 

PART I. FINANCIAL INFORMATION 

ITEM 1. FINANCIAL STATEMENTS

FUSE MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

FUSE MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

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

FUSE MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2015

(Unaudited)

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

FUSE MEDICAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

FUSE MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 AND 2014

(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 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.

Fuse Medical distributes diversified healthcare products and supplies, including biologics, internal fixation products and bone substitute materials 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, 2014 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 April 15, 2015. These condensed consolidated financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2014 and notes thereto included in the Company’s Report on Form 10-K for the year ended December 31, 2014. 

The results of operations for the three and six months ended June 30, 2015 and 2014 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 $334,892 and used $389,924 of cash in our operating activities during the six months ended June 30, 2015. As of June 30, 2015, we had $17,106 of cash and cash equivalents on hand, stockholders’ equity of $53,612 and working capital of $114,962. While management expects operating trends to improve over the course of 2015, 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 2014 consolidated financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern. 

FUSE MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 AND 2014

(Unaudited)

Management plans to continue to implement its business plan and to fund operations by raising additional capital through the issuance of debt and equity securities. Commencing with the fourth quarter of 2014, we began to ramp up our efforts to increase revenues derived from the sale of internal fixation products, which will increase the amount of gross profits from operations. Accordingly, we shall have increased spending on payroll expenses as we increase our professional staff in this effort. Since the beginning of 2015, we have received proceeds of: (i) $100,000 from a loan from a significant stockholder; (ii) $100,000 from the sale of common shares to a related party; and (iii) $90,000 from the sale of common shares in private offerings, of which we are seeking up to $2,000,000 from these private offerings. No assurance can be given that such financing will be available, or if available, at rates favorable to the Company or its stockholders.

The estimated costs of operations while we ramp up our revenues is substantially greater than the amount of funds we had available on June 30, 2015. 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 will 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. 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. 

The weighted average number of common shares outstanding has been retroactively restated for: (i) the equivalent number of shares received by the accounting acquirer as a result of the reverse merger as if these shares had been outstanding as of the beginning of the earliest period presented; and (ii) the 14.62 to 1 reverse stock split that occurred May 28, 2014. 

As of June 30, 2015 and 2014, common stock equivalents included options to purchase 11,628 and 22,572 common shares, respectively. These instruments are not considered in the calculation of diluted loss per share because the effect would be anti-dilutive. 

FUSE MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 AND 2014

(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: 

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. 

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 June 30, 2015, 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. 

FUSE MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 AND 2014

(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”) No. 2014-09, “Revenue from Contracts with Customers”. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle-based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments 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 June 2014, the FASB issued Accounting Standards Update No. 2014-12, “Compensation - Stock Compensation (Topic 718)”. The ASU was issued to clarify the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. ASU 2014-12 is effective for reporting periods beginning after December 15, 2015. The adoption of ASU 2014-12 is not expected to have a significant impact on the Company’s consolidated financial position or results of operations.  

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. ASU 2014-15 requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company is currently evaluating the impact of the adoption of ASU 2014-15 on the Company’s financial statements and disclosures. 

In November 2014, the FASB issued Accounting Standards Update No. 2014-16, “Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity”. The amendments in ASU 2014-16 do not change the current criteria in U.S. GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required. The amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. ASU 2014-16 applies to all entities that are issuers of, or investors in, hybrid financial instruments that are issued in the form of a share and is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2014-16 on the Company’s financial statements and disclosures. 

FUSE MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 AND 2014

(Unaudited)

In February 2015, the FASB issued Accounting Standards Update No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis”. ASU 2015-02 provides guidance on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). ASU 2015-02 is effective for periods beginning after December 15, 2015. Early adoption is permitted. The adoption of ASU 2015-02 is not expected to have a material effect on the Company’s consolidated financial statements. 

In April 2015, the FASB issued Accounting Standards Update No. 2015-03, “Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs”. ASU 2015-03 requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. Prior to the issuance of ASU 2015-03, debt issuance costs were required to be presented in the balance sheet as an asset. ASU 2015-03 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. The Company is currently evaluating the impact of the adoption of ASU 2015-03 on the Company’s financial statements and disclosures. 

In July 2015, the FASB issued Accounting Standards Update 2015-11, “Simplifying the Measurement of Inventory”, which requires that inventory within the scope of ASU 2015-11 be measured at the lower of cost and net realizable value. Inventory measured using last-in, first-out (“LIFO”) and the retail inventory method are not impacted by the new guidance. ASU 2015-11 applies to all other inventory, which includes inventory that is measured using first-in, first-out (“FIFO”) or average cost. An entity should measure inventory within the scope of ASU 2015-11 at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for public business entities in fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2015-11 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.  

Note 3. Property and Equipment 

Property and equipment consisted of the following at June 30, 2015 and December 31, 2014: 

Depreciation expense for the three and six months ended June 30, 2015 and 2014 was $8,631, $3,685, $13,325 and $5,722, respectively. 

FUSE MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 AND 2014

(Unaudited)

Note 4. Notes Payable

Notes payable consisted of the following at June 30, 2015 and December 31, 2014: 

[A] - On January 15, 2015, the Company issued a two-year promissory note in exchange for cash proceeds of $100,000 from an entity of which 35% ownership is controlled by an individual that is a director and former Chief Executive Officer of the Company. 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 8).  

During the three and six months ended June 30, 2015 and 2014, interest expense of $1,884, $20,129, $3,463 and $29,958, respectively, was recognized on outstanding notes payable. As of June 30, 2015, accrued interest payable was $3,204, which is included in accrued expenses on the accompanying condensed consolidated balance sheet. 

Note 5. 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 this matter 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. Also 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. The Defendants believe the lawsuit was completely without merit and will continue to vigorously contest it in the event that Plaintiffs refile their complaint.  

FUSE MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 AND 2014

(Unaudited)

Richard Cutler is the sole principal of Plaintiff, Cutler Law Group, which provided legal representation to its client, Craig Longhurst (“Cutler’s Client”), that was interested in engaging in a transaction with Fuse and Golf Rounds.com, Inc. (“Cutler’s Failed Transaction”). The Plaintiffs had alleged that Cutler’s Failed Transaction failed to materialize notwithstanding the efforts of Mr. Cutler and his law firm to document the transaction. The Plaintiffs further had alleged that the Defendants continued to pursue a similar transaction without Cutler’s Client or the Plaintiffs. The Plaintiffs had claimed that the Defendants were responsible for damages in the amount of (i) $46,465 plus interest because Plaintiffs were not paid their legal fees by Cutler’s Client nor receive equity in Golf Rounds.com, Inc. that Plaintiffs hoped would be issued from Cutler’s Failed Transaction; (ii) $46,465 plus interest due to Defendants being unjustly enriched from Plaintiffs’ legal services to Cutler’s Client; (iii) $1,186,000 plus interest, being the alleged value of shares that Plaintiffs claimed to be entitled from Cutler’s Failed Transaction, which amount should allegedly be tripled as exemplary damages as a result of intentional fraud and/or negligent representations that some or all of the Defendants allegedly committed and that such conduct allegedly constitutes conspiracy to commit fraud; (iv) $1,186,000, allegedly arising from a breach of a Non-Competition and Non-Disclosure Agreement to which Plaintiffs were not a party; (v) $1,000,000 for breach of fiduciary duty by the Defendants because they would have been directors and officers of the surviving corporation in Cutler’s Failed Transaction had it not failed and Defendants’ moving on to another transaction without Plaintiffs; and (vi) Plaintiffs’ attorneys fees and costs for having brought the action. 

Note 6. Stockholders’ Equity 

Common Stock 

On January 12, 2015, the Company sold 200,000 common shares for $100,000, or $0.50 per share, to an entity controlled by certain officers and directors of the Company. 

In March 2015, the Company began selling shares of its common stock at $0.50 per share in private offerings with the intent of raising up to $2,000,000 from these private offerings. As of June 30, 2015, the Company sold an aggregate of 180,000 common shares for aggregate proceeds of $90,000, or $0.50 per share, through these private offerings. 

Stock Options

A summary of the Company’s stock option activity during the six months ended June 30, 2015 is presented below: 

FUSE MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 AND 2014

(Unaudited)

Note 7. 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 June 30, 2015. On January 1, 2013, the standard insurance amount of $250,000 per depositor, per bank, became effective. As of June 30, 2015, the Company’s bank balances did not exceed FDIC insured amounts. 

Concentration of Revenues, Accounts Receivable and Suppliers 

For the three and six months ended June 30, 2015 and 2014, the Company had significant customers with individual percentage of total revenues equaling 10% or greater as follows: 

At June 30, 2015 and December 31, 2014, concentration of accounts receivable with significant customers representing 10% or greater of accounts receivable was as follows: 

For the three and six months ended June 30, 2015 and 2014, the Company had significant suppliers representing 10% or greater of goods purchased as follows: 

FUSE MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 AND 2014

(Unaudited)

Note 8. 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. The balance due from the entity was $0 and $50,000 as of June 30, 2015 and December 31, 2014, respectively. 

As of June 30, 2015 and December 31, 2014, $21,403 and $43,134, 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 in exchange for cash proceeds of $100,000 from an entity of which 35% ownership is controlled by an individual that is a director and former Chief Executive Officer of the Company. 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 4). 

Commencing January 1, 2013 through January 31, 2014, the Company occupied office space on a month-to-month basis for its corporate headquarters for $500 a month from Crestview Farm, an entity controlled by an individual that is a director and former Chief Executive Officer of the Company. The individual serves as the Manager of Crestview Farm. Rent expense for these facilities was $0 and $500 for the six months ended June 30, 2015 and 2014, respectively. 

During the period from inception through June 30, 2015, 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 9. Subsequent Event

On July 17, 2015, Ross Eichberg, the General Counsel for the Company resigned. In connection with Mr. Eichberg's resignation, the Company granted Mr. Eichberg options to purchase 600,000 shares of the Company's common stock at $0.26 per share, which was equal to 90% of the 30-day trading average of the Company's common stock prior to the grant date of July 17, 2015. The options have a term of five years from the grant date. The options become exercisable as follows: 100,000 (1/6) of the options shall vest 13 months after the grant date and an additional 100,000 options (1/6) shall vest each of the following months for five months thereafter so that all of the options shall be vested as of 18 months after the grant date. The fair value of the stock options issued was $168,000, all of which will be recognized immediately as an expense because the stock options were fully vested as of the grant date.

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

Forward-looking statements

When used in this Report, words or phrases such as “will likely result,” “management expects,” “we expect,” “will continue,” “is anticipated,” “estimated” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on any such forward-looking statements, each of which speaks only at the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. We have no obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements. Forward-looking statements involve a number of risks and uncertainties including, but not limited to, general economic conditions, competitive factors and other risk factors as set forth in our Annual Report on Form 10-K filed on April 15, 2015. 

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

Explanatory Note 

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

Overview 

On May 28, 2014 (the “recapitalization date”), Fuse Medical, LLC was acquired by Fuse Medical, Inc. (formerly Golf Rounds.com, Inc.), an inactive publicly-held company, in a reverse merger transaction accounted for as a recapitalization of Fuse Medical, LLC (the “Recapitalization” or the “Reverse Merger”). All of the units reflecting membership interests in Fuse Medical, LLC that were issued and outstanding immediately prior to the effective time of the Merger were cancelled and converted into 3,600,000 shares of Fuse Medical, Inc.’s common stock (on a post-Reverse Stock Split basis), representing 90% of the Registrant’s issued and outstanding common stock after giving effect to the Merger (the “Merger Consideration”). The Merger Consideration was allocated among the members of Fuse Medical, LLC immediately prior to the effective time of the Merger (the “Holders”) in accordance with Fuse Medical’s limited liability company operating agreement. Prior to the Merger, and effective on and as of the business day immediately prior to the effective time of the Merger, the general partners in Fuse Medical V, LP and Fuse Medical VI, LP agreed to surrender their interests and the individual physicians that owned the remaining limited partnership interests in Fuse Medical V, LP and Fuse Medical VI, LP agreed to exchange their interest to corresponding interests in Fuse Medical, LLC, each becoming one of the Holders. 

For accounting purposes, Fuse Medical, LLC is the acquirer and Fuse Medical, Inc. is the acquired company because, immediately following the completion of the transaction, Fuse Medical, LLC acquired both voting and management control of the consolidated entity. The Company is deemed to have issued 401,280 common shares to the original stockholders of the publicly-held entity. Accordingly, after completion of the recapitalization, the historical operations of the Company are those of Fuse Medical, LLC and the operations since the recapitalization date are those of Fuse Medical, LLC and Fuse Medical, Inc. The assets and liabilities of both companies are combined at historical cost on the recapitalization date. No step-up in basis or intangible assets or goodwill was recorded in this transaction. As a result of the closing of the Merger, the Company now has 500,000,000 shares of common stock, par value $0.01 per share, and 20,000,000 shares of preferred stock, par value $0.01 per share authorized. 

The medical distribution industry is in a mature life-cycle phase. For most of the products we offer there are a number of integrated competitors, several of which are publically traded, that not only manufacture and produce their own products, but also have established distribution and sales networks and participate in large group purchasing organizations within the medical industry. Most of these competitors have linked physicians to their entities by engaging select physician and surgical specialties through consulting agreements, clinical trials remuneration and other compensation models. As mature companies, they also have extensive legacy systems and expensive administrative and sales commission cost structures. In addition, there are numerous independent medical distributorships primarily focused on limited geographic markets and products located across the United States. 

Few competitive companies, however, are structured to allow for physician and key stakeholder equity and operational input in their companies. As a growth company, we currently compete through the following means: 

Strategy

Our strategy is to continue to expand our end customer, physician, manufacturer and supplier partnership base, both in the regions we currently serve and in new regions across North America that are conducive to our business model. The principal elements of our business strategy are to: 

Integrate and Increase Profits

We intend to continue integrating and implementing best practices across all aspects of our operating facilities and product service lines, including financial, staffing, technology, products and packaging, distribution network and compliance. 

Our customers and partners require high levels of regulatory compliance, which we intend to accomplish through employee training, facility policies and procedures coupled with ongoing analysis of operating performance. We intend to implement new accounting, invoicing and logistics management and information technology systems. We believe all of these measures will increase the quality of service we can provide to our customers, increase the visibility of the Company, and maximize profitability. 

Expand Services and Supply Volume

We intend to expand our products and services as well as the number of our facility clients by growing our relationships with product manufacturers and suppliers. We plan to increase the volume we sell and distribute in the following ways: continued development of our sales and account management representative network structure to drive physician and facility relationships; growth of our partnership model with other healthcare manufacturers and providers who bring incremental service lines, strategic value and synergy; attraction of new services and customers by demonstrating product quality, customer service and cost value propositions; and attraction of new sales and service revenue in territories we feel may be underserved and provide ease of market penetration. We plan to increase the volume we collect from our end user by implementing specific sales programs and, in the future, increasing personnel dedicated to sales generation. 

On July 17, 2014, we entered into an Independent Representative Agreement with Vilex, Inc. (“Vilex”), a national orthopedic internal fixation manufacturer, pursuant to which the Company was appointed as a representative of Vilex to promote and sell Vilex’s products in the United States. Under the agreement, the Company is a non-exclusive representative of Vilex, except for certain specified customers. The term of the Agreement is five years, and will automatically renew for additional one-year periods at the expiration of the original term unless terminated as provided therein. The Company will be paid a commission based on its net sales. 

On January 8, 2015, we entered into a Distribution and Supply Agreement with BioDlogics, LLC (“BioD”), pursuant to which we were appointed as a non-exclusive distributor of certain products of BioD and granted the right to promote and sell such products in the United States. The term of the agreement is from January 8, 2015, through December 31, 2016, unless earlier terminated in accordance with the agreement. The agreement sets forth a quota for the purchase of the products by us from BioD for the first year of the Agreement, which we agreed to use our best efforts to meet or exceed. 

Pursue Selective Strategic Relationships or Acquisitions

In the United States, the Company will continue to explore additional mergers and acquisitions and seek strategic alliances on a national basis with other companies that are developing, producing or distributing healthcare products and services. We plan to focus on partnerships and acquisitions that not only add revenues, cash flow and profitability to our financial position, but those that provide short and long-term growth potential and support the strategic goals and objectives of the Company. 

Explore International Markets

Internationally, we are exploring strategic partnerships and business models to penetrate the healthcare sectors for the products and services the Company provides.  

As a long-term objective, the Company will continue to explore the expansion of our operations and products into international markets. We have developed several relationships in markets where we believe the products, services and systems will be able to support an underserved market for western-based healthcare including the Middle East and Asia. We believe that moving into international markets will further establish the Company as a leader in our industry sector and will add incremental net income to the organization. 

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and results of operations, and which require a company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We believe that our estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions. We have identified in Note 2 - “Significant Accounting Policies” to the Company’s financial statements contained in this Report certain critical accounting policies that affect the more significant judgments and estimates used in the preparation of the financial statements. 

Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014

Net Revenues

For the three months ended June 30, 2015, net revenues were $487,347, compared to $263,307 for the three months ended June 30, 2014, an increase of $224,040, or 85.1%. Commencing November 2013, we began selling larger order quantities of the same product (subject to minimums) at a discounted selling price. Thus, on an aggregate basis, the average selling prices of our products will vary from period to period depending on the product mix. The increase in net revenues is primarily the result of increased sales of biologics to existing customers as well as the addition of commissions received from internal fixation products. 

Cost of Revenues

For the three months ended June 30, 2015, our cost of revenues was $178,266, compared to $104,681 for the three months ended June 30, 2014, representing an increase of $73,585, or 70.3%. During the periods presented, the costs of our individual inventory items did not materially change. Our cost of revenues, on a per unit basis, did not increase significantly during the three months ended June 30, 2015 compared to the prior year period. Accordingly, the percentage increase in costs of revenues represented approximately the same percentage increase in the number of units sold. Cost of revenues includes costs to purchase goods, transportation, storage, sales representatives and account management. 

Gross Profit

For the three months ended June 30, 2015, we generated a gross profit of $309,081, compared to $158,626 for the three months ended June 30, 2014, an increase of $150,455, or 94.8%. The increase in gross profit was primarily due to the increase in net revenues. Gross margins were 63.4% in the current year period compared to 60.2% for the comparable prior year period. The increase in gross margin percentage is primarily the result of the increase in net revenues derived from biologics having higher gross margins as well as commissions received from the sale of internal fixation products partially offset by the amount of revenues derived from the sale of larger order quantities at a discounted selling price. The Company’s gross margin percentage will vary depending upon the relative product mix of sales made on the gross basis and the net basis due to the varying cost and profit margins on the products distributed by the Company. 

Operating Expenses

General, Administrative and Other

For the three months ended June 30, 2015, general, administrative and other operating expenses increased to $424,971 from $365,816 for the three months ended June 30, 2014, representing an increase of $59,155, or 16.2%. This increase is primarily attributable to an increase in payroll and related costs of $151,016. Further, this increase is attributable to the Company’s expansion strategy and related costs to fund operations. General, administrative and other operating expenses during the three months ended June 30, 2015 consisted primarily of payroll and related costs, legal and professional fees, consulting expense and travel expenses. 

Merger Costs

For the three months ended June 30, 2015, merger costs decreased to $0 from $226,207 for the three months ended June 30, 2014. Merger costs were incurred for the reverse merger with Golf Rounds.com, Inc. that closed on May 28, 2014. 

Interest Expense

For the three months ended June 30, 2015, interest expense decreased to $1,884 from $20,704 for the three months ended June 30, 2014, representing a decrease of $18,820, or 90.9%. Interest expense decreased due to a lower amount of notes payable outstanding during the current year period that resulted from the conversion, on December 31, 2014, of outstanding notes payable having a principal balance of $1,512,014 and accrued interest of $57,893 into 1,509,528 common shares of the Company. Interest expense for the prior year period also included $575 of interest on the Company’s line of credit that was fully repaid and closed in October 2014. 

Net Income (Loss)

For the three months ended June 30, 2015, the Company incurred a net loss of $117,774 compared to a net loss of $453,627 for the three months ended June 30, 2014. The decrease in the net loss is primarily due to the elimination of merger costs and the increase in gross profit. 

Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014

Net Revenues

For the six months ended June 30, 2015, net revenues were $749,861, compared to $424,870 for the six months ended June 30, 2014, an increase of $324,991, or 76.5%. Commencing November 2013, we began selling larger order quantities of the same product (subject to minimums) at a discounted selling price. Thus, on an aggregate basis, the average selling prices of our products will vary from period to period depending on the product mix. The increase in net revenues is primarily the result of increased sales of biologics to existing customers as well as the addition of commissions received from internal fixation products. 

Cost of Revenues

For the six months ended June 30, 2015, our cost of revenues was $271,645, compared to $163,504 for the six months ended June 30, 2014, representing an increase of $108,141, or 66.1%. During the six months ended June 30, 2015, we increased the allowance for inventory obsolescence by $2,310. Excluding the increase in the allowance for obsolescence recognized during the current year period, our cost of revenues increased by $105,831, or 64.7%. During the periods presented, the costs of our individual inventory items did not materially change. Our cost of revenues, on a per unit basis, did not increase significantly during the six months ended June 30, 2015 compared to the prior year period. Accordingly, excluding the increase to the allowance for inventory obsolescence, the percentage increase in costs of revenues represented approximately the same percentage increase in the number of units sold. The increase in cost of revenues was due to an increase in the number of units sold as well as the increase to the reserve for inventory obsolescence. Cost of revenues includes costs to purchase goods, transportation, storage, sales representatives and account management. 

Gross Profit

For the six months ended June 30, 2015, we generated a gross profit of $478,216, compared to $261,366 for the six months ended June 30, 2014, an increase of $216,850, or 83.0%. The increase in gross profit was primarily due to the increase in net revenues. Excluding the increase in the allowance for inventory obsolescence in the current year period, gross margins were 64.1% in the current year period compared to 61.5% for the comparable prior year period. The increase in gross margin percentage is primarily the result of the increase in net revenues derived from biologics having higher gross margins as well as commissions received from the sale of internal fixation products partially offset by the amount of revenues derived from the sale of larger order quantities at a discounted selling price. The Company’s gross margin percentage will vary depending upon the relative product mix of sales made on the gross basis and the net basis due to the varying cost and profit margins on the products distributed by the Company.

Operating Expenses

General, Administrative and Other

For the six months ended June 30, 2015, general, administrative and other operating expenses increased to $809,645 from $541,461 for the six months ended June 30, 2014, representing an increase of $268,184, or 49.5%. This increase is primarily attributable to an increase in payroll and related costs of $395,436. Further, this increase is attributable to the Company’s expansion strategy and related costs to fund operations. General, administrative and other operating expenses during the six months ended June 30, 2015 consisted primarily of payroll and related costs, legal and professional fees, consulting expense and travel expenses. 

Merger Costs

For the six months ended June 30, 2015, merger costs decreased to $0 from $269,493 for the six months ended June 30, 2014. Merger costs were incurred for the reverse merger with Golf Rounds.com, Inc. that closed on May 28, 2014. 

Interest Expense

For the six months ended June 30, 2015, interest expense decreased to $3,463 from $31,096 for the six months ended June 30, 2014, representing a decrease of $27,633, or 88.9%. Interest expense decreased due to a lower amount of notes payable outstanding during the current year period that resulted from the conversion, on December 31, 2014, of outstanding notes payable having a principal balance of $1,512,014 and accrued interest of $57,893 into 1,509,528 common shares of the Company. Interest expense for the prior year period also included $1,138 of interest on the Company’s line of credit that was fully repaid and closed in October 2014. 

Net Income (Loss)

For the six months ended June 30, 2015, the Company incurred a net loss of $334,892 compared to a net loss of $579,507 for the six months ended June 30, 2014. The decrease in the net loss is primarily due to the elimination of merger costs and the increase in gross profit. 

Liquidity and Capital Resources

Net cash used in operating activities during the six months ended June 30, 2015 totaled $389,924 and resulted primarily from a net loss of $334,892 and an increase in accounts receivable of $123,042, offset by an increase in accounts payable of $35,025 and a decrease in inventories of $34,296. 

Net cash used in investing activities during the six months ended June 30, 2015 totaled $525. 

Net cash provided by financing activities during the six months ended June 30, 2015 was $340,000 and resulted from proceeds from the sale of our common stock of $190,000, proceeds from the issuance of a promissory note to a related party of $100,000 and repayments received from related parties of $93,240, offset by advances to related parties of $43,240. 

We do not anticipate declaring any dividends prior to regaining profitability. The payment of dividends will be contingent upon our revenues and earnings, if any, our capital requirements and our general financial condition. The payment of any dividends will be within the discretion of our board of directors. We presently intend to retain all earnings, if any, for use in our business operations and, accordingly, we do not anticipate declaring any dividends in the foreseeable future. 

We intend to increase our revenues by expanding our client base as well as growing the number of manufacturers and suppliers from which we obtain products. We plan to increase the number of facility clients and physicians offering our products by utilizing our existing sales and account management representative network structure to drive physician and facility relationships. Our plans to increase the number of product lines available for sale will result in entering into agreements with manufacturers or suppliers, some of which may require the purchase of inventory while others may involve consigned inventory or a commission structure not requiring the purchase of inventory. In sum, our expansion strategy will likely require an increase in our working capital to fund increased inventories, accounts receivable and operating costs, including salaries and case coverage costs, legal fees, information technology platforms and travel and marketing expenses, offset by any increases in our accounts payable to the product manufacturers and suppliers. The working capital needed for this expansion shall be derived from operations and an increase in our net borrowings, sale of our securities or a combination thereof. 

Historically, our primary sources of liquidity have been from the issuances of debt and equity securities. Since the beginning of 2015, we have received proceeds of: (i) $100,000 from a loan from WHIG, LLC, a significant stockholder and an entity of which 35% ownership is controlled by an individual that is a director and former Chief Executive Officer of the Company; (ii) $100,000 from the sale of common shares to Cooks Bridge II, LLC, an entity controlled by certain officers and directors of the Company; and (iii) $90,000 from the sale of common shares in private offerings. 

At June 30, 2015, we had working capital of $114,962, including $17,106 in cash and cash equivalents. As of August 10, 2015, the Company had approximately $63,000 in available cash. The Company is currently attempting to raise up to $2,000,000 from private offerings (of which $90,000 has been raised to date) in order to fund operations. These proceeds will be used to meet cash flow deficits during the next 12 months and to accelerate the growth of the business. If we are unable to raise capital, we believe that, with our current available cash along with anticipated revenues, we will need to reduce operating expenses. In fact, during June 2015, the number of employees decreased. 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, realize efficiencies in technology development and utilize our physician network, our capital expenditures may be less than anticipated. Our cash balances are kept liquid in order to support our growing infrastructure needs. The majority of our cash is concentrated in a large financial institution. 

The estimated costs of operations while we work to increase our revenues is substantially greater than the amount of funds we had available on June 30, 2015. 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 will result in profitable operations or the resolution of the Company’s liquidity problems. The accompanying financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern. 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As of June 30, 2015, the Company has had losses from operations for the last several quarters. During June 2015, the number of employees decreased and efforts have been focused on increasing revenues from our most profitable products in order to sustain operations and eventually resume profitable operations. Management plans to raise additional funds through offering our shares of common stock in private and/or public offerings and through debt financing, if available and needed. There can be no assurances, however, that the Company will be able to obtain any financings or that such financings will be sufficient to sustain our business operations or permit the Company to implement its intended business strategy. The Company plans to become profitable by increasing the sale of diversified healthcare products and supplies, including biologics, internal fixation products and bone substitute materials that it markets, distributes and sells. 

In their report dated April 15, 2015, our independent registered public accounting firm included an emphasis-of-matter paragraph with respect to our financial statements for the year ended December 31, 2014 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 current working capital requirements and recurring losses from operations. 

The Company has financed its operations from the issuance of notes payable and equity securities. On December 31, 2014, outstanding notes payable having a principal balance of $1,512,014 and accrued interest of $57,893 were converted into 1,509,528 common shares of the Company. On July 29, 2015, the outstanding note payable to PharmHouse Pharmacy having a principal balance of $6,000 was repaid in full. 

As of August 10, 2015, the aggregate notes payable are $100,000 to WHIG, LLC, and $11,250 to PharmHouse Pharmacy. The maturity dates and amounts of each individual notes payable are as follows: 

Outstanding Notes Payable

On May 28, 2014, as part of the Merger, the Company assumed an aggregate of $17,250 (of which $6,000 was repaid on July 29, 2015) of promissory notes payable to PharmHouse Pharmacy. The remaining note is unsecured, bears interest at 3.25% and requires quarterly payments of interest only. The outstanding principal balance along with all accrued and unpaid interest is due at maturity. 

On January 15, 2015, the Company issued a promissory note payable in the amount of $100,000 to WHIG, LLC. The note payable is for a term of twenty-four (24) months and is unsecured, bears interest at 7.0% and requires 18 monthly payments of interest that commence at the beginning of month seven. The first six months of interest is deferred until maturity. The note includes a provision that upon an event of default the interest rate would increase to the default interest rate of 18%. The outstanding principal balance along with all accrued and unpaid interest is due at maturity. 

Capital Expenditures

For the six months ended June 30, 2015, the Company had material capital expenditures of $525. The Company has no material commitments for capital expenditures as of June 30, 2015. 

Commitments and Contractual Obligations

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

Off-balance Sheet Arrangements

The Company has no off-balance sheet arrangements. 

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.

Disclosures Controls and Procedures

Our management carried out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, required by Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”) of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under 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 and 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 were no changes in our internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Refer to Note 5 - “Commitments and Contingencies” in our consolidated financial statements included in this Report on Form 10-Q. 

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 April 29, 2015, the Company issued 20,000 shares of common stock to Adam C. Brown, at a purchase price of $0.50 per share, or an aggregate amount of $10,000. The Company intends to use the net proceeds from this offering for general working capital purposes. The Company issued the shares pursuant to the registration exemptions of the Securities Act afforded under Section 4(2) thereunder. The Company relied upon representations from the investor that it was an “accredited investor” within the meaning of Rule 501(a) under the Securities Act as a basis for the exemption. 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES. 

None. 

ITEM 4. MINE SAFETY DISCLOSURES. 

Not applicable. 

ITEM 5. OTHER INFORMATION. 

None. 

ITEM 6. EXHIBITS. 

_______________ 

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. 

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