FUSE MEDICAL, INC. – 10-Q – 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
This discussion and analysis should be read in conjunction with the interim
unaudited condensed consolidated financial statements of our Company and the
related notes included in this report for the periods presented (our "Financial
Statements"), the audited consolidated financial statements of our Company and
the related notes thereto and the Management's Discussion and Analysis of
Financial Condition and Results of Operations in our Company's Annual Report on
Form 10-K for the fiscal year ended
Report"), filed with the
to Section 13 or 15(d) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), on
Overview
We are a manufacturer and national distributor of medical devices. We provide a
broad portfolio of orthopedic implants including:
• Foot and Ankle: internal and external fixation products;
• Orthopedics: upper and lower extremity plating and total joint
reconstruction implants;
• Sports Medicine: soft tissue fixation and augmentation for sports medicine
procedures;
• Spine: full spinal implants for trauma, degenerative disc disease, and
deformity indications (collectively, we refer to these bulleted products as
Orthopedic Implants).
We also provide a wide array of osteo-biologics and regenerative products, which
include human allografts, tendons, synthetic skin and bone substitute materials,
and regenerative tissues, which we refer to as ("Biologics").
All of our medical devices are cleared by the
("FDA") for sale in
licensed tissue banks accredited by the
Additionally, we are licensed by the FDA for storage and distribution of human
cells, tissues and cellular and bone-based products (HCT/Ps), and we are an
FDA-registered medical device specification developer and repackager/relabeler,
and manufacturer of record, (a "Manufacturer"). We are seeking to grow our
manufacturing operations, both by internal product development and by acquiring
existing FDA approved devices and related intellectual property.
First Quarter 2022 Update
Fuse Branded Portfolio
As an emerging manufacturer of medical device implants, we are continuing to
expand our Fuse branded portfolio of orthopedic implants and biologics. During
the first quarter of 2022, we emphasized the sale of manufactured products
within our Fuse portfolio. Due to the reduced costs of goods sold associated
with our manufactured products within the Fuse portfolio, we are able to
maximize our competitive advantage as a manufacturer and distributor of
orthopedic implants and biologics. With additional launches of innovative Fuse
products planned for this year, we anticipate a continued emphasis on the
commercialization of these products through our Retail Model.
Research and Development
During the first quarter of 2022, we established a new
Board
efforts to manufacture Fuse branded products. This new
internal design and development of new products utilizing novel materials with
osseointegration and anti-bacterial properties.
This new
instrumental in our design and launch of multiple Fuse product lines within our
portfolio.
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Impact of Coronavirus
Beginning in the first quarter of 2020, the novel coronavirus SARS-CoV-2 global
pandemic ("COVID-19") has significantly impacted
global economies. The COVID-19 pandemic has significantly affected our
customers, employees, and business operations. In
generally, the pandemic has led to the cancellation or deferral of elective
surgeries and procedures with certain hospitals, ambulatory surgery centers, and
other medical facilities; restrictions on travel; the implementation of physical
distancing measures; and the temporary or permanent closure of businesses. Since
the first quarter of 2020, in response to COVID-19, the Governor of
declared several executive orders limiting elective surgeries based on hospital
facility capacity. During
customers temporarily restricted elective surgeries. Generally, these surgical
cases were deferred and rescheduled to subsequent months.
In
with the rise of COVID-19 cases due to the Delta variant.
In
Omicron, which surged throughout the fourth quarter of 2021 and into 2022.
Currently, the future trajectory of the COVID-19 pandemic remains uncertain,
both in the
treatments and the development and distribution of vaccines, though the
efficacy, timing, and adoption of various treatments and vaccines is uncertain,
particularly with respect to new variants of COVID-19 which have emerged and
will likely continue to emerge.
Given these various uncertainties, it is unclear the extent to which lingering
slowdowns in elective procedures will affect our business during 2022 and
beyond. We expect that the effects of COVID-19 on our business will depend on
various factors including (i) the magnitude and length of increased case waves
in markets we serve, including from new variants of COVID-19, (ii) the comfort
level of patients returning to clinics and hospitals, (iii) the extent to which
localized elective surgery shutdowns occur, (iv) the unemployment rate's effect
on potential patients lacking medical insurance coverage, and (v) general
hospital capacity constraints occurring because of the need to treat COVID-19
patients.
COVID-19 has also continued to present uncertainties and delays in our local and
national supply chain, for both raw materials and finished goods. This
disruption in our supply chain has adversely impacted lead times to; manufacture
products, launch product lines, and commercialize our products in the
marketplace. As a result, we are continuing to source alternate suppliers to
help mitigate the impact to our supply chain.
Severe Weather Conditions
During
weather which resulted in dangerous road conditions, power outages, which caused
significant disruptions through-out
distribution center for several days.
In response to the dangerous weather conditions, our executive management team
immediately focused on the health and wellbeing of our employees, allowing
employees to work from home to avoid driving to our offices. Our management also
worked to minimize the impact on our customers by rescheduling and coordinating
new surgery dates. We resumed full operations on
worked to address the surgical caseload, sales support, and administrative
functions backlog. Generally, surgical Cases canceled due to the severe weather
have been rescheduled to subsequent weeks.
Current Trends and Outlook
Seasonality
We are subject to seasonal fluctuations in sales, which cause fluctuations in
quarterly results of operations. Because of the seasonality of our business,
results for any quarter are not necessarily indicative of results that may be
achieved in other quarters or for a full fiscal year.
Historically, we have experienced greater revenue and greater sales volume, as a
percentage of revenue, during the last two calendar quarters of our fiscal year
compared to the first two calendar quarters of the year. We believe this revenue
trend is primarily due to the increase in elective surgeries during the last two
quarters of the calendar year, which are partially satisfied by patient annual
healthcare deductibles being met in those two quarters. We use this seasonality
trend to assist us in enterprise-wide resource planning, such as purchasing,
product inventory logistics, and human capital demands.
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Retail and Wholesale Cases
We believe our comprehensive selection of Orthopedic Implants and Biologics
products is pivotal to our ability to acquire new customers, increase sales to
existing customers and increase overall sales volume, revenues, and
profitability. We continue to review and evaluate our product lines, ensuring we
maintain a high-quality and cost-effective selection of Orthopedic Implants and
Biologics.
We measure sales volume based on medical procedures in which our products were
sold and used (each a Case). We consider Cases resulting from direct sales to
hospitals and medical facilities to be Retail Cases and Cases resulting from
sales to third-parties, such as distributors, or sub-distributors, to be
Wholesale Cases. Some of our sales for Wholesale Cases are on a consignment
basis with the third-party.
Retail. Under our retail distribution model, ("Retail Model"), we sell directly
to our end customers, which consist of hospitals and medical facilities,
utilizing (i) our full-time sales representatives whom we employ or engage as
independent contractors and (ii) independent sales representatives
non-exclusive basis. In both instances, we pay the sales representative a
commission with respect to sales made by the representative. We refer to sales
through our Retail Model as Retail Cases.
Wholesale. Under our wholesale distribution model, ("Wholesale Model"), we sell
our products directly to independent distributors rather than to hospitals and
medical facilities
commissions from any sales by the independent distributor to the end customer.
We refer to sales through our Wholesale Model as Wholesale Cases.
Retail Cases in our industry command higher revenue price points than Wholesale
Cases. Because Retail Cases involve direct sales to our end customers, we
typically receive a higher gross profit margin due to the absence of any third
party in the sales process. However, we may pay commissions to our full time or
independent sales representatives with respect to Retail Sales increasing our
commission expenses. Retail Cases generally generate substantially more gross
profit than Wholesale Case transactions but are subject to commission expenses
which we do not incur with respect to Wholesale Cases.
Wholesale Cases in our industry command lower revenue price-points than Retail
Cases as the third-party reseller must build in its own profit margin. Because
Wholesale Cases involve sales to third parties
customers, our profit margins are reduced for these Cases due to the lower sales
price. Consequently, our Wholesale Cases generate substantially lower gross
profit than our Retail Cases, which is offset in part by the fact that we do not
incur any commission costs on Wholesale Cases.
Pricing Pressures
Pricing pressure has increased in our industry due to (i) continuous
consolidation among healthcare providers, (ii) trends toward managed healthcare,
(iii) increased government oversight of healthcare costs, and (iv) new laws and
regulations that address healthcare reimbursement and pricing. Pricing pressure,
reductions in reimbursement levels or coverage, or other cost containment
measures can significantly impact our business, future operating results, and
financial condition.
To offset pricing pressure, we employ strategies to optimize revenue per Case.
For the three months ended
mitigated the impact of pricing pressures as reflected with average revenues per
Case of
Model proved successful as Retail Cases represented approximately 94% of revenue
for the first quarter of 2022, or an approximate 4% increase over the same
quarter of 2021.
Critical Accounting Policies
The preparation of our Financial Statements and the related disclosures in
conformity with GAAP, requires our management to make judgments, assumptions,
and estimates that affect the amounts of revenue, expenses, income, assets, and
liabilities, reported in our Financial Statements and accompanying notes.
Understanding our accounting policies and the extent to which our management
uses judgment, assumptions, and estimates in applying these policies is integral
to understanding our Financial Statements.
We describe our most significant accounting policies in Note 2, "Significant
Accounting Policies" of our accompanying interim unaudited condensed
consolidated notes to our Financial Statements beginning on page F-1 and found
elsewhere in this report and in our 2021 Annual Report. These policies are
considered critical because they may result in fluctuations in our reported
results from period to period due to the significant judgments, estimates, and
assumptions about highly complex and inherently uncertain matters. In addition,
the use of different judgments, assumptions, or estimates could have a material
impact on our financial condition or results of operations. We evaluate our
critical accounting estimates and judgments required by our policies on an
ongoing basis and update them as appropriate based on changing conditions.
There have been no material changes to our critical accounting policies during
the period covered by this report.
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Recent Accounting Pronouncements
We describe recent accounting pronouncements in Note 2, "Significant Accounting
Policies," of our accompanying interim unaudited condensed consolidated notes to
our Financial Statements beginning on page F-1.
Results of Operations
The following table sets forth certain financial information from our interim
unaudited condensed consolidated statements of operations, along with a
percentage of net revenues.
For the Three Months Ended
March 31, March 31,
2022 (% Rev) 2021 (% Rev)
Net revenues $ 4,554,338 100% $ 4,440,759 100%
Cost of revenues 1,625,191 36% 1,853,865 42%
Gross profit 2,929,147 64% 2,586,894 58%
Operating expenses:
Selling, general, administrative and other 1,709,541 38% 1,435,310 32%
Commissions 1,505,671 33% 1,564,753 35%
Depreciation and amortization 34,402 1% 16,794 0%
Total operating expenses 3,249,614 71% 3,016,857 68%
Operating loss (320,467 ) -7% (429,963 ) -10%
Other expense
Interest expense 32,958 1% 19,000 0%
Total other expense 32,958 1% 19,000 0%
Operating loss before tax (353,425 ) -8% (448,963 ) -10%
Income tax expense 4,856 0% 4,360 0%
Net loss $ (358,281 ) -8% $ (453,323 ) -10%
Three Months Ended
Net Revenues
For the three months ended
to
or approximately 2.6%.
For the three months ended
approximately 26% compared to the three months ended
revenues from Retail Cases increased by approximately 8% compared to revenues
from Retail Cases for the three months ended
Retail Cases as a percentage of total revenues increased to 94% of revenues for
the three months ended
ended
percent of total revenues reflects the execution of our strategies to shift more
of our business to higher margin Retail Cases through improvement of our supply
chain management. Consequently, wholesale revenue as a percent of total revenue
has decreased.
Additionally, as discussed above in "Severe Weather Conditions", we believe the
severe weather conditions that we experienced in
impact on our first quarter revenues for 2022.
As discussed above in "Current Trends and Outlook," we believe that as our
industry faces increased pricing pressures, we will need to focus on increased
volume of Cases to maintain gross profit levels. We intend to increase our
Retail Case volume by increasing sales volumes with our existing retail customer
base as well as on-boarding new surgeons, distributors, and retail customers.
Cost of Revenues
For the three months ended
compared to
decrease of
As a percentage of revenues, cost of revenues decreased 6% percentage points to
approximately 36% for the three months ended
approximately 42% for the three months ended
net revenues, the decrease of approximately 6% primarily resulted from (a)(i) a
decrease of 6% in the inventory loss provision for slow-moving and obsolescence,
(ii) a decrease of 4% for medical instruments purchased based on new product
development, (iii) a 2% reduction in cost of revenues product mix, (iv) a
decrease of approximately 1% of purchase price variance and shipping costs, net;
offset, in part, by (b) an increase of 6% in inventory shrink.
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Beginning in 2022, the Company changed its estimated useful life for its
investment in medical instruments from 0 to 3 years based upon an analysis of
our inventory and actual utilization of non-sterile medical instruments. For
the three months ended
equipment by
reflected on our
and statements of operations.
Gross Profit
For the three months ended
representing an increase of
As a percentage of revenues, gross profit increased approximately 6% for the
three months ended
profit varied and included primarily, (a)(i) a decrease of 6% in the inventory
loss provision for slow-moving and obsolescence, (ii) a decrease of 4% for
medical instruments purchased based on new product development, (iii) a 2%
reduction in cost of revenues product mix, (iv) a decrease of approximately 1%
of purchase price variance and shipping costs, net; offset, in part, by (b) an
increase of 6% in inventory shrink.
Selling, General, Administrative, and Other Expenses
For the three months ended
other expenses ("SG&A") increased to
months ended
approximately 19.1%.
As a percentage of net revenues, SG&A accounted for approximately 38% for the
three months ended
2021
primarily resulted from (i) an increase of 6% in bad debt expense; (ii) a 1%
increase in leased staffing costs; (iii) a 1.6% reduction in professional fees
relating to audit, legal and consulting expenses; (iv) an increase of 1.3% for
employee expense reimbursements related to business development and travel
costs; and (v) a 2.3% reduction in stock-based compensation.
Commissions
For the three months ended
approximately 3.8%.
As a percentage of net revenues, commission expense accounted for approximately
33% for the three months ended
three months ended
is directly due to the reduction of average commission rates associated with
total revenues.
Depreciation and amortization
For the three months ended
increase of
increase in amortization of intangible assets including the newly fees
associated with obtaining the Credit Agreement, and (ii) an approximate
decrease in depreciation expense relating to fully depreciated assets in 2021.
Interest
For the three months ended
from
average borrowings on our Credit Agreement with CNH, and an increase in the
interest rate on the Credit Agreement.
Tax
For the three months ended
expense of
"Income Taxes," of our accompanying interim unaudited condensed consolidated
notes to our Financial Statements, beginning on page F-1.
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Net Loss
For the three months ended
compared to a net loss
respectively, representing a reduction in net loss of
approximately 20.1%. The drivers for our reduction in net loss for the three
months ended
(ii) an increase of
commissions, offset, in part, by (b)(i) an increase of
other expense, (iii) an increase of
(iv) a
of
Cash Flows
A summary of our cash flows is as follows:
Three Months Ended March 31,
2022 2021
Net cash provided by (used in) operating activities
Net cash used in investing activities
(138,835 ) - Net cash provided by (used in) financing activities (524,841 ) 175,000
Net increase (decrease) in cash and cash equivalents
Net Cash Provided by Operating Activities
During the three months ended
activities was
for the three months ended
The increase provided by operating activities of
from: (a)(i) a
increase in cash provided by accrued expenses; (iv) a
provided by the net loss adjusted for non-cash items; (v) a
cash provided by accounts payable; offset, in part, by (b)(i) a
increase in cash used for long term accounts receivable, and (ii) a
increase in cash used for prepaid expenses and other current assets.
For the three months ended
was
investing activities was zero.
The increase of
medical instruments. Beginning in 2022, the Company changed its estimated useful
life for its investment in medical instruments from 0 to 3 years based upon an
analysis of our inventory and actual utilization of non-sterile medical
instruments.
For the three months ended
was
three months ended
in financing activities was driven by the net activity on our credit facility.
Liquidity
Our primary sources of liquidity are cash from our operations and the Credit and
Security Agreement (the "Credit Agreement") with
current assets exceeded our current liabilities by
Capital"), which included
from our operations and net borrowings on our Credit Agreement supports our
Working Capital needs for 2022. Beyond 2022, we believe that we will be able to
support itself through our Credit Agreement until the we are able to support
ourselves solely from the cash provided by operations.
On
Agreement provides for a secured revolving credit facility maturing on
1, 2025
forth in the Credit Agreement.
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We used borrowings under the Facility to repay in full (i) our Amended and
Restated Business Loan Agreement, dated
Administration Loan Authorization and Agreement, dated
Agreement may be used for working capital and payment of fees, costs and
expenses incurred in connection with the Credit Agreement.
Borrowings under the Facility bear interest at a floating rate, which will be at
the Prime Rate plus 1.75%. Under the Facility, we must pay certain fees as set
forth in the Credit Agreement. Our obligations with respect to the Credit
Agreement are secured by a pledge of substantially all of our assets, including
accounts receivables, deposit accounts, intellectual property, investment
property, inventory, equipment and equity interests in our subsidiaries.
The Credit Agreement contains customary affirmative and negative covenants,
including limitations on our ability to incur additional debt, grant or permit
additional liens, make investments and acquisitions, merge or consolidate with
others, dispose of assets, pay dividends and distributions, pay subordinated
indebtedness and enter into affiliate transactions. In addition, the Credit
Agreement contains financial covenants requiring us on a consolidated basis to
maintain, as of the last day of each calendar month (i) a current ratio of not
less than 1.0 to 1.0, (ii) a fixed charge coverage ratio of not less than 1.0 to
1.0, (iii) a loan turnover rate of not greater than 60, and (iv) minimum
liquidity of not less than
charge coverage ratio for twelve consecutive months, the minimum liquidity
covenant shall cease to be effective. The Credit Agreement also includes events
of default customary for facilities of this type and upon the occurrence of any
such event of default, all outstanding loans under the Facility may be
accelerated and/or the lenders' commitments terminated.
The foregoing description does not constitute a complete summary of the terms of
the Credit Agreement and is qualified in its entirety by reference to the full
text of the Credit Agreement, which is filed as Exhibit 10.45 to our 2021 Annual
Report.
We rely on the Credit Agreement for capital expenditures and day-to-day Working
Capital needs. As of
cash, and
certain borrowing base limitations). Borrowings on our Credit Agreement are
repaid from cash generated from our operations.
Payroll Protection Program
On
Administration
recently enacted Coronavirus Aid, Relief, and Economic Security Act ("CARES
Act") administered by the SBA. In connection with the PPP Loan, we entered into
a promissory note in the principal amount of
requirements of the CARES Act, we used the proceeds from the PPP Loan primarily
for payroll costs. We applied for and received forgiveness for the total amount
of the PPP Loan during the second quarter of 2021. (See Note 7, "Payroll
Protection Program" of our accompanying consolidated notes to our Financial
Statements, beginning on page F-1).
EIDL Loan
On
an EIDL Loan from the SBA in light of the impact of the COVID-19 pandemic on our
business. Pursuant to that certain Loan Authorization and Agreement (the "SBA
Loan Agreement"), the principal amount of the EIDL Loan was
proceeds to be used for working capital purposes. In connection therewith, we
received a
an offset in Selling, General, Administrative and Other Expenses in our
accompanying consolidated statements of operations in 2020. (See Note 8,
"Economic Injury Disaster Loan" of our accompanying consolidated notes to our
Financial Statements, beginning on page F-1).
On
SBA for an amended and restated loan and authorization and agreement ("A&R SBA
Loan Agreement") required for securing an increase in the Company's Original
Note from the SBA EIDL Loan. Pursuant to the A&R SBA Loan Agreement, the
principal amount for the EIDL Loan was increased by
proceeds to be used for working capital purposes. Interest accrues at the rate
of 3.75% per annum. Installment payments, including principal and interest, were
due monthly beginning
Original Note) in the amount of
was payable thirty years from the date of the A&R SBA Loan Agreement.
The A&R SBA Loan Agreement was paid in full in conjunction with entering into
the Credit Agreement.
Our strategic growth plan provides for capital investment for new product
launches, private label branding, and the upgrade of our financial systems which
support our infrastructure. We deem these investments essential to support our
growth and expansion objectives. We estimate the range of this type of
investment to be approximately
investments to occur primarily during the calendar year 2022. We expect sources
of capital for these investments to be derived from cash from operations and
utilizing the maximum limit with our new credit facility.
8
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Capital Expenditures
For the three months ended
capital expenditures.
Off-Balance Sheet Arrangements
For the three months ended
arrangements.
Cautionary Note Regarding Forward-Looking Statements
This report includes forward-looking statements including statements regarding
liquidity.
The words "believe," "may," "estimate," "continue," "anticipate," "intend,"
"should," "plan," "could," "target," "potential," "is likely," "will," "expect",
and similar expressions, as they relate to us, are intended to identify
forward-looking statements. We have based these forward-looking statements
largely on our current expectations and projections about future events and
financial trends that we believe may affect our financial condition, results of
operations, business strategy, and financial needs.
The results anticipated by any of these forward-looking statements might not
occur. Important factors that could cause actual results to differ from those in
the forward-looking statements include; the conditions of the capital markets,
particularly for smaller companies; the willingness of doctors and facilities to
purchase the products that we sell; certain regulatory issues adversely
affecting our margins; insurance companies denying reimbursement to facilities
undertake no obligation to publicly update or revise any forward-looking
statements, whether as the result of new information, future events, or
otherwise.
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