FZMD 10-Q
Fuse Medical, Inc. (FZMD)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended:
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of |
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(I.R.S. Employer |
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incorporation or organization) |
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Identification No.) |
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(Address of principal executive offices) |
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(Zip Code) |
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(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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes ☐ No ☐
Securities registered pursuant to Section 12(b) of the Act:
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Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: As of November 5, 2021,
1
FUSE MEDICAL, INC.
FORM 10-Q
INDEX
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
FUSE MEDICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in dollars, except share data)
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September 30, 2021 |
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December 31, 2020 |
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(Unaudited) |
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Assets |
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Current assets: |
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Cash |
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$ |
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$ |
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Accounts receivable, net of allowance of $ |
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Inventories, net of allowance of $ |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Long term accounts receivable, net of allowance of $ |
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Intangible assets, net |
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Goodwill |
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Total assets |
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$ |
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$ |
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Liabilities and Stockholders' Equity (Accumulated Deficit) |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued expenses |
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Convertible notes payable - related parties |
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Paycheck Protection Program Loan |
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- |
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Economic Injury Disaster Loan - short term portion |
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- |
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Senior secured revolving credit facility |
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Total current liabilities |
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Notes payable - related parties |
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Economic Injury Disaster Loan - long term portion |
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Earn-out liability |
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Total long term liabilities |
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Total liabilities |
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Commitments and contingencies |
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Stockholders' equity (accumulated deficit) |
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Preferred stock, $ outstanding |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
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( |
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( |
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Total stockholders' equity (accumulated deficit) |
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( |
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( |
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Total liabilities and stockholders' equity (accumulated deficit) |
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$ |
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$ |
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See notes to unaudited condensed consolidated financial statements.
F-1
FUSE MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in dollars, except share data)
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For the Three Months Ended September 30, |
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For the Nine Months Ended September 30, |
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2021 |
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2020 |
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2021 |
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2020 |
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Net revenues |
$ |
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$ |
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$ |
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$ |
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Cost of revenues |
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Gross profit |
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Operating expenses: |
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Selling, general, administrative and other |
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Commissions |
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Depreciation and amortization |
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Total operating expenses |
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Operating (loss) income |
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( |
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( |
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Other (income) expense: |
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Interest expense |
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Gain on Paycheck Protection Loan extinguishment |
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- |
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- |
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- |
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Total other (income) expense |
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( |
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Net (loss) income before tax |
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( |
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( |
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Income tax benefit |
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Net (loss) income |
$ |
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$ |
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$ |
( |
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$ |
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Net (loss) income per common share - basic |
$ |
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$ |
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$ |
( |
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$ |
( |
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Net (loss) income per common share - diluted |
$ |
( |
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$ |
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$ |
( |
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$ |
( |
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Weighted average number of common shares outstanding - basic |
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Weighted average number of common shares outstanding - diluted |
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See notes to unaudited condensed consolidated financial statements.
F-2
FUSE MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited)
(in dollars, except share data)
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Common Stock |
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Additional Paid-In |
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Retained Earnings/ |
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Shares |
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Amount |
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Capital |
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(Deficit) |
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Total |
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Balance, December 31, 2020 |
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$ |
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$ |
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$ |
( |
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$ |
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Stock compensation expense |
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- |
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- |
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- |
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Net loss |
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- |
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- |
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- |
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( |
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( |
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Balance, March 31, 2021 |
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( |
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( |
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Stock compensation expense |
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- |
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- |
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- |
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Net loss |
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- |
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- |
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- |
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( |
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( |
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Balance, June 30, 2021 |
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( |
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( |
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Stock compensation expense |
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- |
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- |
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- |
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Net loss |
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- |
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- |
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- |
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( |
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( |
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Balance, September 30, 2021 |
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( |
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( |
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____________________________________________________________________________________________________________
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Common Stock |
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Additional Paid-In |
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Retained Earnings/ |
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Shares |
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Amount |
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Capital |
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(Deficit) |
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Total |
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Balance, December 31, 2019 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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Stock compensation expense |
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- |
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- |
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- |
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Net loss |
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- |
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- |
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- |
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( |
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( |
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Balance, March 31, 2020 |
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( |
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( |
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Stock compensation expense |
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- |
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- |
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- |
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Net loss |
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- |
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- |
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- |
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( |
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( |
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Balance, June 30, 2020 |
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( |
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( |
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Stock compensation expense |
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- |
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- |
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- |
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Net income |
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- |
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- |
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- |
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Balance, September 30, 2020 |
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( |
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( |
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See notes to unaudited condensed consolidated financial statements.
F-3
FUSE MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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For the Nine Months Ended September 30, |
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2021 |
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2020 |
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Cash flows from operating activities |
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Net loss |
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$ |
( |
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$ |
( |
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Adjustments to reconcile net loss to net cash provided by operating activities: |
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Depreciation and amortization |
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Stock based compensation |
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Provision for bad debts and discounts |
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Provision for long term accounts receivable |
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Provision for slow moving inventory |
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( |
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- |
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Gain on Payroll Protection Program Loan extinguishment |
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( |
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- |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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Inventories |
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( |
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Prepaid expenses and other current assets |
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( |
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Long term accounts receivable |
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( |
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( |
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Accounts payable |
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( |
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Accrued expenses |
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Net cash provided by operating activities |
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Cash flows from investing activities |
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Purchase of property and equipment |
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- |
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( |
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Net cash (used in) investing activities |
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- |
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( |
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Cash flows from financing activities |
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Payments on senior secured revolving credit facility, net |
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- |
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( |
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Proceeds from Paycheck Protection Program |
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- |
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Payments from Economic Injury Disaster Loan, net |
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( |
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- |
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Proceeds on Economic Injury Disaster Loan |
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Proceeds from related party promissory notes |
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- |
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Net cash provided by (used in) financing activities |
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( |
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Net increase in cash |
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Cash and cash equivalents - beginning of period |
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Cash and cash equivalents - end of period |
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$ |
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$ |
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Supplemental disclosure of cash flow information: |
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Cash paid for interest |
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$ |
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$ |
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See notes to unaudited condensed consolidated financial statements.
F-4
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Nature of Operations
Overview
Fuse Medical, Inc., a Delaware corporation (the “Company”), is a manufacturer and national distributor of medical devices and surgical implants for the orthopedic market. The Company acquired CPM Medical Consultants, LLC (“CPM”) in
Basis of Presentation
The interim unaudited condensed consolidated financial statements included herein reflect all material adjustments (consisting of normal recurring adjustments and reclassifications and non-recurring adjustments) which, in the opinion of the Company’s management, are ordinary and necessary for a fair presentation of results for the interim periods. Certain information and footnote disclosures required under generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The Company’s management believes the disclosures are adequate to make the information presented not misleading.
The condensed consolidated balance sheet information as of December 31, 2020, was derived from the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2020 (“2020 Annual Report”), filed with the SEC pursuant to Section 13 or 15(d) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on March 30, 2021. These interim unaudited condensed consolidated financial statements should be read in conjunction with the 2020 Annual Report.
The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the entire fiscal year or for any other period as the Company has historically experienced seasonal trends with greater revenue and volume during the last two calendar quarters compared to the first two calendar quarters of the year.
Note 2. Significant Accounting Policies
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, CPM and Maxim. Intercompany transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the interim unaudited condensed consolidated financial statements in accordance with GAAP, requires the Company’s management to make estimates and assumptions that affect the Company’s reported amounts in the interim unaudited condensed consolidated financial statements.
Actual results could differ from those estimates. Significant estimates on the accompanying interim unaudited condensed consolidated financial statements include the allowance for doubtful accounts, valuation of inventories, the Company’s effective income tax rate, and the fair value calculations of stock-based compensation, goodwill, finite lived intangibles and the earn-out (“Earn-Out”) liability. To the extent actual results are updated and estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised.
Segment Reporting
In accordance with Accounting Standards Codification (“ASC”) No. 280, “Segment Reporting,” the Company uses the management approach for determining its reportable segments. The management approach is based upon the way that management reviews performance and allocates resources. The Company’s Chief Executive Officer serves as the Company’s chief operating decision maker, and his management team reviews operating results on a consolidated basis for purposes of allocating resources and evaluating the financial performance of the Company. The Company has integrated the operations of both CPM and Maxim. Accordingly, the Company has determined that it has
F-5
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Net Income (Loss) Per Common Share
Net income (loss) per common share, basic is calculated by dividing the net income/(loss) attributable to common stockholders by the weighted-average number of common stock, par value $
Diluted income (loss) per common share is computed by dividing net income/(loss) by the weighted-average number of Common Stock equivalents outstanding for the period determined using the treasury stock method. For the three and nine months ended September 30, 2021, the Company excluded the effects of outstanding stock options, convertible notes and, to the extent in the money, restricted stock as their effects were antidilutive due to the Company’s operating loss during these periods. For the three and nine months ended September 30, 2020, the Company included the effects of outstanding stock options, convertible notes and, to the extent in the money, restricted stock.
Fair Value Measurements
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The Company classifies assets and liabilities recorded at fair value under the fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. The fair value measurements are classified under the following hierarchy:
Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets and liabilities in active markets;
Level 2—Observable inputs, other than quoted market prices, that are either directly or indirectly observable in the marketplace for identical or similar assets and liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities; and
Level 3—Unobservable inputs that are supported by little or no market activity that are significant to the fair value of assets or liabilities.
In connection with the CPM Acquisition in December 2017, the Company recorded an Earn-Out liability as part of the purchase consideration. The fair value of the Earn-Out liability is re-measured at each reporting period using Level 3 inputs with changes in fair value recorded in earnings. The Earn-Out payments are based on the financial performance of the Company between
The Earn-Out liability, which represented contingent consideration associated with the CPM Acquisition, is recorded as a liability. This liability is subject to re-measurement to fair value at each reporting date until the contingency is resolved and the changes in fair value are recognized in the consolidated statements of operations at each reporting period.
The Earn-Out was remeasured to fair value under the probability weighted income approach. As a result, the fair value of the Earn-Out liability was increased by $
There was
Financial Instruments
The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments. The recorded values of notes payable approximate their respective fair values based upon their effective interest rates.
F-6
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Cash and Cash Equivalents
The Company considers highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. There were
Accounts Receivable, Net of Allowance
Accounts receivable are non-interest bearing and are stated at gross invoice amounts less an allowance for doubtful accounts receivable and an allowance for contractual discount pricing. Credit is extended to customers based on an evaluation of their financial condition, industry reputation, and other factors considered by the Company’s management. The Company generally does not require collateral or other security interest to support accounts receivable. Based on trends and specific factors, the customer’s credit terms may be modified, including required payment upon delivery.
The Company performs regular on-going credit evaluations of its customers as deemed relevant. As events, trends, and circumstances warrant, the Company’s management estimates the amounts that are more likely than not to be uncollectible. These amounts are recognized as bad debt expense and are reflected within selling, general, administrative and other expenses on the Company’s accompanying interim unaudited condensed consolidated statements of operations.
When accounts are deemed uncollectible, they are often referred to the Company’s outside legal firm for litigation. Accounts deemed uncollectible are written-off in the period when the Company has exhausted its efforts to collect overdue and unpaid receivables or otherwise has evaluated other circumstances that indicate that the Company should abandon such efforts. Accounts deemed uncollectible are removed from the Company’s accounts receivable portfolio, with a corresponding offset to the allowance for doubtful accounts receivable. The Company may record additional allowances for doubtful accounts based on known trends and expectations to ensure the Company’s accounts receivable portfolio is recorded at net realizable value. Specific allowances are re-evaluated and adjusted as additional facts and information become available. Previously written-off accounts receivable subsequently collected are recognized as a reduction of bad debt expense when funds are received.
The Company’s management estimates its allowance for contractual discount pricing, by evaluating specific accounts where information indicates the customer is offered contractual pricing and discount allowances. In these arrangements, the Company’s management uses assumptions and judgement, based on the best available facts and circumstances to record a specific allowance for the amounts due from those customers. The allowance is offset by a corresponding reduction to revenue. These specific allowances are re-evaluated, analyzed, and adjusted as additional information becomes available to determine the total amount of the allowance. The Company may record additional allowances based on trends and expectations to ensure the Company’s accounts receivable portfolio is recorded at net realizable value.
Inventories, Net of Allowance
Inventories are stated at the lower of cost or net realizable value (first-in, first-out) which includes an allowance for slow-moving inventory, expired inventory, and inventory obsolescence. Inventories consist entirely of finished goods and include internal and external fixation products; upper and lower extremity plating and total joint reconstruction; soft tissue fixation and augmentation for sports medicine procedures; spinal implants for trauma, degenerative disc disease, and deformity indications (collectively, “Orthopedic Implants”) and osteo-biologics and regenerative tissue which include human allografts, substitute bone materials, tendons, as well as amniotic tissues (collectively, “Biologics”). The Company reviews the market value of inventories whenever events and circumstances indicate that the carrying value of inventories may not be recoverable from the estimated future sales price less cost of disposal and normal gross profit. In cases where the market values are less than the carrying value, a write-down is recognized equal to an amount by which the carrying value exceeds the market value of inventories.
F-7
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Property and Equipment, Net
Property and equipment are recorded at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets per the following table. Expenditures for additions and improvements are capitalized, while repairs and maintenance are expensed as incurred. The Company reviews long-lived assets for impairment annually or whenever changes in circumstances indicate that the carrying amount of an asset might not be recoverable.
|
Category |
|
Useful Life |
|
Computer equipment and software |
|
|
|
Furniture and fixtures |
|
|
|
Office equipment |
|
|
|
Software |
|
|
Upon the retirement or disposition of property and equipment, the related cost and accumulated depreciation is removed. A gain is recorded when consideration received is more than the disposed asset’s cost, net of depreciation, and a loss is recorded when consideration received is less than the disposed asset’s cost, net of depreciation.
Long Term Accounts Receivables, Net of Allowance
Long term accounts receivable reflects surgical cases where the patient has obtained a letter of protection, (“LOP”). A LOP is a contract that provides that the medical providers will be paid from any proceeds received from settlement of litigation of the underlying cause of action with respect to the event that necessitated medical goods and services. Once the medical provider receives payment, then the medical provider pays the Company’s invoice which payment is generally greater than 365 days from date of service. The LOP provides medical providers with greater certainty of full payment. This reclassification had no effect on the previously reported total assets or net loss.
The Company’s management estimates its allowance for contractual discount pricing, by evaluating specific accounts where information indicates the customer is offered contractual pricing and discount allowances. In these arrangements, the Company’s management uses assumptions and judgement, based on the best available facts and circumstances to record a specific allowance for the amounts due from those customers. The allowance is offset by a corresponding reduction to revenue. These specific allowances are re-evaluated, analyzed, and adjusted as additional information becomes available to determine the total amount of the allowance. The Company may record additional allowances based on trends and expectations to ensure the Company’s accounts receivable portfolio is recorded at net realizable value.
Long-Lived Assets
The Company reviews other long-lived assets for indicators of impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The evaluation is performed at the lowest level of identifiable cash flows, which is at the individual asset level or the asset group level. The undiscounted cash flows expected to be generated by the related assets are estimated over their useful life based on updated projections. If the evaluation indicates that the carrying amount of the assets may not be recoverable, any potential impairment is measured based upon the fair value of the related assets or asset group as determined by an appropriate market appraisal or other valuation technique. Assets classified as held for sale, if any, are recorded at the lower of carrying amount or fair value less costs to sell.
Goodwill and Other Intangible Assets, Net
Goodwill is determined based on an acquisition purchase price in excess of the fair value of identified net assets acquired. Intangible assets with lives restricted by contractual, legal, or other means are amortized over their useful lives.
Goodwill is not amortized, but is tested in the fourth quarter each year for impairment, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. The Company performs its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. If the carrying value of a reporting unit exceeds its fair value, an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value.
Accounting Standards Update (“ASU”) 350-30-35-18 indicates that an intangible asset that is not subject to amortization shall be tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that
F-8
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
the asset is impaired. The Company’s 510(k) intangible asset has an indefinite life. The Company does not believe that a triggering event has occurred as of September 30, 2021.
The Company’s intangible assets subject to amortization consist primarily of acquired customer relationships. Amortization expense is calculated using the straight-line method over the asset’s expected useful life.
Revenue Recognition
The Company’s revenues are generated from the sales of Orthopedic Implants and Biologics to support orthopedic surgeries. The Company obtains purchase orders from its customers for the sale of its products which sets forth the general terms and conditions including line item pricing and payment terms (generally due upon receipt). The Company recognizes revenue when its customers obtain control over the assets (generally when the title passes upon shipment or when a product is utilized in a surgery) and it is probable that the Company will collect substantially all the amounts due. Individual promised goods are the Company’s only performance obligation.
Due to the nature of its products, the Company’s product returns have been historically immaterial.
The Company includes shipping and handling fees in net revenues. Shipping and handling costs are associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold on the Company’s accompanying interim unaudited condensed consolidated statements of operations.
Revenue Differentiation
The Company measures sales volume based on medical procedures in which the Company’s products are sold and used (“Cases”). The Company considers Cases resulting from direct sales to medical facilities to be retail cases (“Retail Cases”) and Cases resulting from sales to third parties, such as non-medical facilities, distributors, or sub-distributors, to be wholesale cases (“Wholesale Cases”). Some of the Company’s sales for Wholesale Cases are on a consignment basis with a third party. When consigned, the revenue is not recorded until the device is implanted in a patient during surgery. In the Company’s industry, Retail Cases are typically sold at higher price points than Wholesale Cases, resulting in greater revenue and gross profit per Case.
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
|
September 30, 2021 |
|
|
September 30, 2020 |
|
|
September 30, 2021 |
|
|
September 30, 2020 |
|
||||
|
Category |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Wholesale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Cost of Revenues
Cost of revenues consists of (i) cost of goods sold, (ii) freight and shipping costs for items sold to customers, (iii) cost of storage, (iv) investment in medical instruments, which are expensed when acquired, (v) inventory shrink, and (vi) an estimate for slow-moving and expired inventory, and inventory obsolescence.
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 pro-rata compensation expense is adjusted accordingly until such time the non-employee award is fully vested, at which time the total compensation recognized to date shall equal the fair value of the stock-based award as calculated on the measurement date, which is the date at which the award recipient’s performance is complete. The estimation of stock-based awards that will ultimately vest
F-9
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
The Company considers the applicability and impact of all ASUs issued, both effective and not yet effective.
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-02, “Leases”, which requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than twelve (12) months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. The Company adopted this guidance effective
In January 2017, the FASB issued ASU 2017-04, “Intangibles-Goodwill and Other” (Topic 350): Simplifying the Test for Goodwill Impairment. This guidance eliminates Step 2 from the goodwill impairment test, instead requiring an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit’s fair value. The Company adopted ASU 2017-04 effective
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the SEC did not or are not believed by the Company’s management to have a material impact on the Company's present or future consolidated financial statements.
Note 3. Property and Equipment
Property and equipment consisted of the following at September 30, 2021 and December 31, 2020:
|
|
|
September 30, 2021 |
|
|
December 31, 2020 |
|
||
|
Computer equipment and software |
|
$ |
|
|
|
$ |
|
|
|
Property and equipment costs |
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
|
Property and equipment, net |
|
$ |
|
|
|
$ |
|
|
Depreciation expense for the three months ended September 30, 2021 and 2020 was $
Note 4. Goodwill and Intangible Assets
The following table summarizes the Company’s goodwill and other intangible assets:
|
|
|
September 30, 2021 |
|
|
December 31, 2020 |
|
|
Amortization period (years) |
||
|
510(k) product technology |
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated amortization |
|
|
( |
) |
|
|
( |
) |
|
|
|
Intangible assets, net |
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
|
|
|
$ |
|
|
|
|
F-10
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Amortization expense for the three months ended September 30, 2021 and 2020 was $
The Company’s intangible assets subject to amortization consist primarily of acquired customer relationships.
Note 5. Senior Secured Revolving Credit Facility
On
On September 21, 2018, the Company executed the First Amendment to the RLOC with Amegy Bank (the “First Amendment”). The First Amendment (i) waived the Company’s events of default under the RLOC through the fiscal quarter ended September 30, 2018, and (ii) added a covenant that the Company achieve quarterly net income of $
On November 19, 2018, the Company executed the Second Amendment to the RLOC with Amegy Bank (the “Second Amendment”). The Second Amendment (i) waived the Company’s events of default under the RLOC, (ii) reduced the aggregate limit of the RLOC to $
On
On December 18, 2019, the Company executed the Fourth Amendment to the RLOC with Amegy Bank (the “Fourth Amendment”). Pursuant to the Fourth Amendment, Amegy Bank (i) waived the Company’s events of default under the RLOC, (ii) reduced the aggregate limit of the RLOC to $
On May 21, 2020, the Company executed the Fifth Amendment to the RLOC with Amegy Bank (the “Fifth Amendment”). Pursuant to the Fifth Amendment, Amegy Bank (i) waived the Company’s events of default under the RLOC, (ii)
In conjunction with executing the Fifth Amendment to the RLOC, the Company obtained an additional $
On November 12, 2020, the Company executed a Sixth Amendment to the RLOC with Amegy Bank (the “Sixth Amendment”), which extended the termination date of our RLOC to
F-11
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On May 4, 2021, the Company executed a Seventh Amendment to the RLOC with Amegy Bank (the “Seventh Amendment”), waiving the events of default for the three months ended March 31, 2021 and extending the termination date of the RLOC until
On August 5, 2021, the Company received a waiver from Amegy Bank, waiving the events of default for the minimum quarterly EBITDA requirements for the twelve months ended June 30, 2021.
The Company was not in compliance with the minimum quarterly EBITDA requirement for the twelve months ended September 30, 2021 (For more information, please see Note 13, “Subsequent Events”).
The outstanding balance of the RLOC was $
Note 6. Notes Payable – Related Parties
During July 2016 through October 2016, the Company obtained three working capital loans from NC 143 and RMI in the aggregate amount of $
On May 6, 2020, the Company borrowed $
During the three months ended September 30, 2021 and 2020, interest expense of $
Note 7 – Paycheck Protection Program
On April 11, 2020, the Company received approval from the U.S. Small Business Administration (“SBA”) to fund the Company’s request for a loan under the Paycheck Protection Program (“PPP Loan”) created as part of the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the SBA. In connection with the PPP Loan, the Company entered into a promissory note in the principal amount of $
For the three months ended September 30, 2021, and 2020, the Company incurred approximately
F-12
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8 – Economic Injury Disaster Loan
On May 12, 2020, the Company executed the standard loan documents (“SBA Loan Agreement” or “Original Note") required for securing a loan from the SBA under its Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact of the COVID-19 pandemic on the Company’s business (the “EIDL Loan”). Pursuant to the SBA Loan Agreement, the principal amount of the EIDL Loan was $
On September 24, 2021, the Company executed the standard loan documents with the 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 $
EIDL Loan interest income for the three months and nine months ended September 30, 2021 was approximately $
Note 9. Stockholders’ Equity
Stock-Based Compensation
The 2018 Amended and Restated Equity Incentive Plan of Fuse Medical, Inc. (“2018 Equity Plan”) is the Company’s stock-based compensation plan, which the Company’s Board of Directors (the “Board”) adopted on April 5, 2017, and subsequently amended and restated on December 13, 2018. The 2018 Equity Plan provides for the granting of equity awards, including qualified incentive and non-qualified stock options, stock appreciation awards, and restricted stock awards to employees, directors, consultants, and advisors. Awards granted pursuant to the 2018 Equity Plan are subject to a vesting schedule set forth in individual agreements.
The Company’s management estimates the fair value of stock-based compensation utilizing the Black-Scholes option pricing model. Black-Scholes option pricing is calculated using several variables, including the expected option term, expected volatility of the Company’s stock price over the expected option term, expected risk-free interest rate over the expected option term, expected dividend yield rate over the expected option term, and an estimate of expected forfeiture rates. The Company’s management believes this valuation methodology is appropriate for estimating the fair value of stock options granted to employees and directors, which are subject to ASC Topic 718 requirements. The Company’s management estimates of fair value may not be reflective of actual future values or amounts ultimately realized by recipients of these grants. The Company recognizes compensation on a straight-line basis over the requisite service period for each award.
The Company’s management utilizes the simplified method to estimate the expected life for stock options granted to employees, as the Company does not have sufficient historical data regarding stock option exercises. The risk-free interest rate is based on the U.S. Treasury yields with terms equivalent to the expected life of the related option at the time of the grant. Dividend yield is based on historical trends. While the Company’s management believes these estimates are reasonable, the compensation expense recorded would increase if the expected life was increased, a higher expected volatility was used, or if the expected dividend yield increased.
The Company made an accounting policy election to account for forfeitures when they occur, versus estimating the number of awards that are expected to vest, in accordance with ASU 2016-09,
F-13
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Non-Qualified Stock Option Awards
The Board did
A summary of the Company’s stock option activity for the nine months ended September 30, 2021, is presented below:
|
|
|
No. of Shares |
|
|
Weighted Average Exercise Price |
|
|
Weighted Average Remaining Contractual Term |
|
|
Aggregate Intrinsic Value |
|
||||
|
Balance outstanding at December 31, 2020 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
Granted |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Exercised |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
Expired |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Balance outstanding at September 30, 2021 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
Exercisable at September 30, 2021 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Restricted Common Stock
The non-vested restricted stock awards (“RSAs”), as of September 30, 2021, were granted to the Company’s Board members as compensation. These awards vest only upon: (i) the occurrence of one of the Accelerating Events: (a) a Change in Control (as defined in an RSA Agreement); or (b) listing of the Company’s Common Stock on either NYSE or NASDAQ Stock Market; and (ii) the director’s delivery to the Company a Notice of Acceleration of Vesting (as defined in an RSA Agreement), within the Acceleration Notice Period (as defined in an RSA Agreement).
As of September 30, 2021, and 2020, it was not probable that the performance conditions on the outstanding RSAs would be met, therefore,
There were
|
|
Number of Shares |
|
|
Fair Value |
|
|
Weighted Average Grant Date Fair Value |
|
|||
|
Non-vested, December 31, 2020 |
|
|
|
|
$ |
|
|
|
$ |
|
|
|
Granted |
|
- |
|
|
|
- |
|
|
|
- |
|
|
Vested |
|
- |
|
|
|
- |
|
|
|
- |
|
|
Forfeited |
|
- |
|
|
|
- |
|
|
|
- |
|
|
Non-vested, September 30, 2021 |
|
|
|
|
$ |
|
|
|
$ |
|
|
F-14
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10. Income Taxes
The Company is subject to U.S. federal income taxes, in addition to state and local income taxes.
The components of income tax expense are as follows:
|
|
|
For the Nine Months Ended September 30, 2021 |
|
|
For the Nine Months Ended September 30, 2020 |
|
||
|
Current: |
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
|
|
|
$ |
|
|
|
State |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
Federal |
|
|
|
|
|
|
|
|
|
State |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit) |
|
$ |
|
|
|
$ |
|
|
Significant components of the Company's deferred income tax assets and liabilities are as follows:
|
|
|
September 30, 2021 |
|
|
December 31, 2020 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss carryover |
|
$ |
|
|
|
$ |
|
|
|
Accounts receivable |
|
|
|
|
|
|
|
|
|
Compensation |
|
|
|
|
|
|
|
|
|
Inventory |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Intangibles |
|
|
( |
) |
|
|
( |
) |
|
Property and equipment |
|
|
( |
) |
|
|
( |
) |
|
Total deferred tax liabilities |
|
|
( |
) |
|
|
( |
) |
|
Deferred tax assets, net |
|
$ |
|
|
|
$ |
|
|
|
Valuation allowance: |
|
|
|
|
|
|
|
|
|
Beginning of year |
|
|
( |
) |
|
|
( |
) |
|
Increase during the year |
|
|
( |
) |
|
|
( |
) |
|
Ending balance |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
|
|
|
$ |
|
|
A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. The Company’s management recorded a valuation allowance totaling $
At September 30, 2021, the Company’s management estimates it has approximately $
F-15
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
net operating loss carryover asset excludes the portion of net operating loss that are mathematically excluded from future use by the Company.
The Company’s management believes its tax positions will more likely than not be upheld upon examination. As such, the Company has not recorded a liability for unrecognized tax positions. As of September 30, 2021, all the tax years remained open to examination for three years from the tax year in which net operating losses are utilized. The Company was not subject to examination by any income taxing authority as of September 30, 2021.
A reconciliation of income tax computed at the U.S. statutory rate to the effective income tax rate is as follows:
|
|
|
Nine Months Ended |
|
|||
|
|
|
September 30, 2021 |
|
|
September 30, 2020 |
|
|
Expected U.S. federal incomes as statutory rate |
|
|
|
|
|
|
|
Gain on Paycheck Protection Loan |
|
|
|
|
|
|
|
Permanent differences |
|
|
|
|
|
|
|
State and local income taxes, net of federal benefit |
|
- |
|
|
- |
|
|
Change in deferred tax asset valuation allowance |
|
- |
|
|
- |
|
|
Effective tax rate |
|
- |
|
|
- |
|
Our effective income tax rates for the nine months ended September 30, 2021 and 2020 were (
Note 11. Concentrations
Concentration of Revenues, Accounts Receivable and Suppliers
For the nine months ended September 30, 2021 and 2020, the following significant customer had an individual percentage of total revenues equaling ten percent (10%) or greater:
|
|
For the Nine Months Ended |
|
|||||
|
|
September 30, 2021 |
|
|
September 30, 2020 |
|
||
|
Customer 1 |
|
|
% |
|
|
|
% |
|
Totals |
|
|
% |
|
|
|
% |
At September 30, 2021, and December 31, 2020, the following significant customer had a concentration of accounts receivable representing ten percent (10%) or greater of accounts receivable.
|
|
September 30, 2021 |
|
|
December 31, 2020 |
|
||
|
Customer 1 |
|
|
% |
|
|
|
% |
|
Totals |
|
|
% |
|
|
|
% |
For the nine months ended September 30, 2021 and 2020, the following significant suppliers represented ten percent (10%) or greater of goods purchased:
|
|
For the Nine Months Ended |
|
|||||
|
|
September 30, 2021 |
|
|
September 30, 2020 |
|
||
|
Supplier 1 |
|
|
% |
|
|
|
% |
|
Supplier 2 |
|
|
% |
|
|
|
% |
|
Totals |
|
|
% |
|
|
|
% |
F-16
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12. Related Party Transactions
Lease with 1565 North Central Expressway, LP
For its principal executive office, the Company leases an aggregate of approximately
For the nine months ended September 30, 2021 and 2020, the Company paid approximately $
AmBio Contract
The Company engaged AmBio Staffing, LLC (“AmBio”), a Texas licensed Professional Employment Organization, to provide payroll processing, employee benefit administration, and related human capital services effective January 1, 2017. Mr. Brooks owns and controls AmBio. As of September 30, 2021, AmBio operations support approximately 43 full time equivalents (“FTE”). Of those
As of September 30, 2021 and December 31, 2020, the Company owed amounts to AmBio of approximately $
Operations
Historically, the Company conducts various related-party transactions with entities that are owned by or affiliated with Mr. Brooks and Mr. Reeg. These transactions are based on wholesale contractual agreements that the Company’s management believes are on terms and conditions substantially similar to other third-party contractual agreements. As described more fully below, these transactions include: selling and purchasing of inventory on a wholesale basis, commissions earned and paid and shared-service fee arrangements.
MedUSA Group, LLC
MedUSA Group, LLC (“MedUSA”) is a sub-distributor owned and controlled by Mr. Brooks and Mr. Reeg.
During the nine months ended September 30, 2021 and 2020, the Company:
|
|
• |
sold Orthopedic Implants and Biologics products to MedUSA in the amounts of approximately $ |
|
|
• |
incurred approximately $ |
As of September 30, 2021 and December 31, 2020, the Company had approximately $
As of September 30, 2021 and December 31, 2020, the Company had outstanding balances due from MedUSA of approximately $
Texas Overlord, LLC
Texas Overlord, LLC (“Overlord”) is an investment holding-company owned and controlled by Mr. Brooks.
F-17
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During the nine months ended September 30, 2021 and 2020, the Company:
|
|
• |
incurred approximately $ |
As of September 30, 2021 and December 31, 2020, the Company had approximately $
As of September 30, 2021 and December 31, 2020, the Company had
NBMJ, Inc.
NBMJ, Inc. d/b/a Incare Technology (“NBMJ”) is a durable medical equipment, wound care, and surgical supplies distributor owned and controlled by Mr. Brooks.
During the nine months ended September 30, 2021 and 2020, the Company sold Biologics products to NBMJ in the amounts of approximately $
As of September 30, 2021 and December 31, 2020, the Company had $
Payment terms per the stocking and distribution agreement with NBMJ are 30 days from receipt of invoice.
Bass Bone and Spine Specialists
Bass Bone & Spine Specialists (“Bass”) operates as a sub-distributor of surgical implants and is owned and controlled by Mr. Brooks.
During the nine months ended September 30, 2021 and 2020, the Company:
|
|
• |
sold Orthopedic Implants and Biologics products to Bass in the amounts of approximately $ |
|
|
• |
incurred approximately |
As of September 30, 2021 and December 31, 2020, the Company had outstanding balances due from Bass of approximately
Payment terms per the stocking and distribution agreement with Bass are 30 days from receipt of invoice.
Sintu, LLC
Sintu, LLC (“Sintu”) operates as a sub-distributor of surgical implants and is owned and controlled by Mr. Brooks.
During the nine months ended September 30, 2021 and 2020, the Company incurred approximately $
As of September 30, 2021, and December 31, 2020, the Company had approximately $
Tiger Orthopedics, LLC
Tiger Orthopedics, LLC (“Tiger”) operates as a sub-distributor of surgical implants and is owned and controlled by Mr. Brooks.
During the nine months ended September 30, 2021 and September 30, 2020, the Company sold Orthopedic Implants and Biologics products to Tiger in the amounts of approximately $
F-18
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Payment terms per the stocking and distribution agreement with Tiger are 30 days from receipt of invoice.
Modal Manufacturing, LLC
Modal Manufacturing, LLC (“Modal”) is a manufacturer of medical devices owned and controlled by Mr. Brooks.
During the nine months ended September 30, 2021 and 2020, the Company purchased approximately $
As of September 30, 2021 and December 31, 2020, the Company had outstanding balances owed to Modal of approximately $
Payment terms per the stocking and distribution agreement with Modal are 30 days from receipt of invoice.
Note 13. Subsequent Events
In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through November 10, 2021.
On November 8, 2021 the Company received a waiver from Amegy Bank, waiving the events of default for minimum quarterly EBITDA requirement for the twelve months ended September 30, 2021 and extending the termination date of the RLOC to February 4, 2022. (See Note 5, “Senior Secured Revolving Credit Facility”)
The Company’s Management concluded there are no other material events or transactions for potential recognition or disclosure.
F-19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Explanatory Note
As used in this report on Form 10-Q, “we”, “us”, “our”, and the “Company” refer to Fuse Medical, Inc, a Delaware corporation.
This discussion and analysis should be read in conjunction with our interim unaudited condensed consolidated financial statements and the related notes included in this report for the periods presented (our “Financial Statements”), our audited consolidated financial statements and the related notes thereto and the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2020 Annual Report.
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 tissues, which include human allografts, substitute bone materials, tendons, and amniotic tissues, which we refer to as Biologics.
All of our medical devices are approved by the U.S. Food and Drug Administration (“FDA”) for sale in the United States, and all of our Biologics suppliers are licensed tissue banks accredited by the American Association of Tissue Banks. Additionally, we are an FDA-registered medical device specification developer and repackager/relabeler, and manufacturer of record (a “Manufacturer”). We are seeking to grow our manufacturing operations, both by internal product development and by acquiring existing FDA approved devices.
Third Quarter 2021 Update
Impact of Coronavirus
Beginning in the first quarter of 2020, the novel coronavirus SARS-CoV-2 global pandemic ("COVID-19") has significantly impacted Texas, the United States and global economies. The COVID-19 pandemic has significantly affected our customers, employees, and business operations. In Texas and in the United States 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 Texas has declared several executive orders limiting elective surgeries based on hospital facility capacity. During January 2021, certain of our hospital facility customers temporarily restricted elective surgeries. Generally, these surgical cases were deferred and rescheduled to subsequent months.
In August 2021, Texas Governor Gregg Abbott sent a letter to all hospitals in Texas requesting that they voluntarily defer elective surgeries in connection with the rise of COVID-19 cases due to the new Delta variant.
At this time, the future trajectory of the COVID-19 pandemic remains uncertain, both in the U.S. and in other markets. Progress has been made on therapeutic 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 2021 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 in returning to clinics and hospitals, (iii) the extent to which localized elective surgery shutdowns occur, (iv) the
3
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.
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 during the last two calendar quarters of our fiscal year compared to the first two calendar quarters of the year. We believe this revenue trend is primarily due to the increase in elective surgeries during the last two quarters of the calendar year, which are partially satisfied by patient annual healthcare deductibles being met in those two quarters. We use this seasonality trend to assist us in enterprise-wide resource planning, such as purchasing and product inventory logistics, and human capital demands.
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.
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 who work on a non-exclusive basis. In both instances, we pay the sales representative a commission with respect to sales made by the representative. We refer to sales through our Retail Model as Retail Cases.
Wholesale. Under our wholesale distribution model (“Wholesale Model”), we sell our products directly to independent distributors rather than to hospitals and medical facilities who are the ultimate end customer. We do not pay or receive commissions from any sales by the independent distributor to the end customer. We refer to our sales through our Wholesale Model as Wholesale Cases.
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.
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 who sell our products to end customers, our profit margins are reduced for these Cases due to the lower sales price. Our Wholesale Case business is highly dependent on minimum volume sales levels to generate revenues in excess of our fixed costs of revenues in order to achieve profitability.
Pricing Pressure
Pricing pressure has increased in our industry due to (i) continuous consolidation among healthcare providers, (ii) trends toward managed care, (iii) increased government oversight of healthcare costs, and (iv) new laws and regulations that address healthcare reimbursement and pricing. Pricing pressure, reductions in reimbursement levels or coverage, or other cost containment measures can significantly impact our business, future operating results and financial condition.
To offset pricing pressure, we employ strategies to maximize revenue per Case, which include locating and retaining new customers and increasing volume with existing customers. For the nine months ended September 30, 2021 and 2020, our average revenues per Case were $5,343 and $5,894, respectively. Our strategy to emphasize our Retail Model proved successful as Retail Cases represented approximately 92% of revenue for the third quarter of 2021, or an approximate 3% increase over the same quarter of 2020.
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
4
our 2020 Annual Report. These policies are considered critical because they may result in fluctuations in our reported results from period to period due to the significant judgments, estimates, and assumptions about highly complex and inherently uncertain matters. In addition, the use of different judgments, assumptions, or estimates could have a material impact on our financial condition or results of operations. We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as appropriate based on changing conditions.
There have been no material changes to our critical accounting policies during the period covered by this report.
Recent Accounting Pronouncements
We describe recent accounting pronouncements in Note 2, “Significant Accounting Policies” of our accompanying unaudited condensed consolidated notes to our Financial Statements beginning on page F-1.
5
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 revenue and should be read in conjunction with our Financial Statements and related notes included in this report.
|
|
For the Three Months Ended |
|
||||||||||
|
|
September 30, 2021 |
|
(% Rev) |
|
September 30, 2020 |
|
(% Rev) |
|
||||
|
Net revenues |
$ |
4,250,554 |
|
100% |
|
$ |
5,738,662 |
|
100% |
|
||
|
Cost of revenues |
|
1,861,620 |
|
44% |
|
|
2,043,722 |
|
36% |
|
||
|
Gross profit |
|
2,388,934 |
|
56% |
|
|
3,694,940 |
|
64% |
|
||
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, administrative and other expenses |
|
1,559,708 |
|
37% |
|
|
1,379,385 |
|
24% |
|
||
|
Commissions |
|
1,495,720 |
|
35% |
|
|
2,185,487 |
|
38% |
|
||
|
Depreciation and amortization |
|
14,493 |
|
0% |
|
|
23,312 |
|
0% |
|
||
|
Total operating expenses |
|
3,069,921 |
|
72% |
|
|
3,588,184 |
|
63% |
|
||
|
Operating (loss) income |
|
(680,987 |
) |
-16% |
|
|
106,756 |
|
2% |
|
||
|
Other expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
12,512 |
|
0% |
|
|
20,611 |
|
0% |
|
||
|
Gain on Paycheck Protection Program Loan extinguishment |
|
- |
|
0% |
|
|
- |
|
0% |
|
||
|
Total other expense |
|
12,512 |
|
0% |
|
|
20,611 |
|
0% |
|
||
|
Operating (loss) income before tax |
|
(693,499 |
) |
-16% |
|
|
86,145 |
|
2% |
|
||
|
Income tax benefit |
|
3,537 |
|
0% |
|
|
5,661 |
|
0% |
|
||
|
Net (loss) income |
$ |
(697,036 |
) |
-16% |
|
$ |
80,484 |
|
1% |
|
||
Three Months Ended September 30, 2021, Compared to Three Months Ended September 30, 2020
Net Revenues
For the three months ended September 30, 2021, net revenues were $4,250,554 compared to $5,738,662 for the three months ended September 30, 2020, which is a decrease of $1,488,108, or approximately 26%. This decrease was partly due the deferral of elective surgeries in the six months ended June 30, 2020 due to COVID-19 and rescheduling of those surgeries in the third and fourth quarters of 2020, which caused a shift of revenue from the first half of 2020 to the second half of 2020. We did not experience this same type of revenue shift in the three months ended September 30, 2021.
For the three months ended September 30, 2021, the percent of Retail Cases increased compared to the three months ended September 30, 2020. Revenues from Retail Cases as a percent of revenues for the three months ended September 30, 2021, increased by approximately 2% compared to revenues from Retail Cases as a percent of revenues for the three months ended September 30, 2020.
Our Wholesale Cases for the three months ended September 30, 2021, declined compared to Wholesale Cases during the three months ended September 30, 2020. Revenues from Wholesale Cases as a percent of revenues for the three months ended September 30, 2021, declined by approximately 2% compared to revenues from Wholesale Cases as a percent of revenues for the period ended September 30, 2020.
As discussed above in “Current Trends and Outlook,” we believe that as our industry faces increased pricing pressures, we will need to focus on increased volume of Cases to maintain gross profit levels. For the two remaining quarters of 2021, we will seek to increase our volume of Retail Case Sales to our existing retail customer base and add new retail customers.
Cost of Revenues
For the three months ended September 30, 2021, our cost of revenues was $1,861,620, compared to $2,043,722 for the three months ended September 30, 2020, representing a decrease of $182,102, or approximately 9%.
As a percentage of revenues, cost of revenues increased approximately eight percentage points to approximately 44% for the three months ended September 30, 2021, compared to approximately 36% for the three months ended September 30, 2020. The increase as a percentage of net revenues resulted from (a)(i) an approximate 4% increase in cost of goods sold, (a)(ii) an approximate 3% increase in medical instrument expense, (a)(iii) an approximate 1% increase in inventory shrink and inventory loss provision.
Gross Profit
For the three months ended September 30, 2021, we generated a gross profit of $2,388,934, compared to $3,694,940 for the three months ended September 30, 2020, representing a decrease of $1,306,006, or approximately 35%.
6
As a percentage of net revenue, gross profit decreased approximately eight percentage points to 56% for the three months ended September 30, 2021, compared to 64% for the three months ended September 30, 2020. This decrease in gross profit as a percentage of revenues was primarily caused by the increase in cost of revenues as a percentage of net revenues, as discussed above.
Selling, General, Administrative, and Other Expenses
For the three months ended September 30, 2021, selling, general, administrative, and other expenses increased to $1,559,708 from $1,379,385 for the three months ended September 30, 2020, representing an increase of $180,323 or approximately 13%.
As a percentage of net revenues, selling, general, administrative and other expenses accounted for approximately 37% and 24% for the three months ended September 30, 2021 and September 30, 2020, respectively. As a percentage of net revenue, the increase of approximately 13 percentage points primarily resulted from (a)(i) an approximate ten percentage point increase in leased staffing costs, (a)(ii) two percentage point increase in travel and entertainment and other costs, and (a)(iii) an approximate one percentage increase in marketing and business development.
Commissions
For the three months ended September 30, 2021 and September 30, 2020, commission expense was $1,495,720 and $2,185,487, respectively, representing a decrease of $689,767, or approximately 32%.
As a percentage of net revenues, commission expense accounted for approximately 35% for the three months ended September 30, 2021, and 38% for the three months ended September 30, 2020. This approximate three percentage-point decline primarily resulted from an approximate 3% decrease of revenues eligible for commissions.
Depreciation and amortization
For the three months ended September 30, 2021, our depreciation and amortization expense decreased to $14,493 from $23,312 for the three months ended September 30, 2020, representing a decrease of $8,819. This decrease was primarily the result of fixed assets becoming fully depreciated.
Interest
For the three months ended September 30, 2021, interest expense declined to $12,512 from $20,611 for the three months ended September 30, 2020, which is a reduction of $8,099, or approximately 39%. The decline of $8,099 was primarily driven by (a)(i) an approximate $6,554 decrease related to accrued interest on our EIDL Loan, (a)(ii) an approximate $907 decrease related to accrued interest on our PPP Loan and (a)(iii) an approximate $638 decrease in interest related our RLOC. The decline in interest expense on our RLOC is primarily driven by (a)(i) an approximate $1,910 reduction in borrowings, offset, in part, by (b)(i) an approximate $1,272 increase in interest rates.
Income tax
For the three months ended September 30, 2021, we recorded an income tax expense of approximately $3,537, compared to $5,661, for the three months ended September 30, 2020. For additional information, please see Note 10, “Income Taxes,” of our accompanying Financial Statements, beginning on page F-1.
7
Net (Loss) Income
For the three months ended September 30, 2021, we had a net loss of $697,036 compared to a net income of $80,484 for the three months ended September 30, 2020, respectively, representing an decrease in net income of $777,520 or approximately 966%.
As a percentage of revenue, net loss represented approximately 16% for the three months ended September 30, 2021 and net income represented 1% for the three months ended September 30, 2020, respectively.
The approximate 17 percentage point decrease in net income as a percentage of revenue was primarily attributable to (a) an approximate 13 percentage point increase in selling, general, administrative, and other expenses, and (a)(ii) an approximate eight percentage point decrease in gross profit, offset, in part, by (b)(i) an approximate three percentage point decrease in commissions.
Nine months Ended September 30, 2021, Compared to Nine months Ended September 30, 2020
Results of Operations
The following table sets forth certain financial information from our unaudited condensed consolidated statements of operations along with a percentage of net revenue and should be read in conjunction with our Financial Statements and related notes included in this report.
|
|
For the Nine Months Ended |
|
||||||||||
|
|
September 30, 2021 |
|
(% Rev) |
|
September 30, 2020 |
|
(% Rev) |
|
||||
|
Net revenues |
$ |
14,356,328 |
|
100% |
|
$ |
14,385,831 |
|
100% |
|
||
|
Cost of revenues |
|
5,935,093 |
|
41% |
|
|
5,823,281 |
|
40% |
|
||
|
Gross profit |
|
8,421,235 |
|
59% |
|
|
8,562,550 |
|
60% |
|
||
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, administrative and other expenses |
|
5,016,594 |
|
35% |
|
|
5,021,632 |
|
35% |
|
||
|
Commissions |
|
4,894,845 |
|
34% |
|
|
4,996,843 |
|
35% |
|
||
|
Depreciation and amortization |
|
46,751 |
|
0% |
|
|
84,047 |
|
1% |
|
||
|
Total operating expenses |
|
9,958,190 |
|
69% |
|
|
10,102,522 |
|
70% |
|
||
|
Operating loss |
|
(1,536,955 |
) |
-11% |
|
|
(1,539,972 |
) |
-11% |
|
||
|
Other expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
47,561 |
|
0% |
|
|
75,633 |
|
1% |
|
||
|
Gain on Paycheck Protection Program Loan extinguishment |
|
(361,400 |
) |
-3% |
|
|
- |
|
0% |
|
||
|
Total other expense |
|
(313,839 |
) |
-2% |
|
|
75,633 |
|
1% |
|
||
|
Operating (loss) before tax |
|
(1,223,116 |
) |
-9% |
|
|
(1,615,605 |
) |
-11% |
|
||
|
Income tax benefit |
|
12,723 |
|
0% |
|
|
11,341 |
|
0% |
|
||
|
Net loss |
$ |
(1,235,839 |
) |
-9% |
|
$ |
(1,626,946 |
) |
-11% |
|
||
Net Revenues
For the nine months ended September 30, 2021, net revenues were $14,356,328 compared to $14,385,831 for the nine months ended September 30, 2020, a decrease of $29,503.
Revenues from Retail Cases as a percent of revenues for the nine months ended September 30, 2021, increased approximately 2% compared to revenues from Retail Cases as a percent of revenues for the nine months ended September 30, 2020.
Revenues from Wholesale Cases as a percent of revenues for the nine months ended September 30, 2021, decreased 2% compared to revenues from Wholesale Cases as a percent of revenues for the period ended September 30, 2020.
Cost of Revenues
For the nine months ended September 30, 2021, our cost of revenues was $5,935,093, compared to $5,823,281 for the nine months ended September 30, 2020, representing an increase of $111,812, or approximately 2%.
As a percentage of revenues, cost of revenues increased approximately one percentage points to approximately 41% for the nine months ended September 30, 2021, compared to approximately 40% for the nine months ended September 30, 2020. The increase as a percentage of net revenues resulted from (a)(i) an approximate three percentage point increase in medical instrument expense, (a)(ii) an approximate one percentage point increase in cost of goods sold, offset, in part, by, (b)(i) an approximate three percentage-point decline in inventory shrink and inventory loss provision.
8
Gross Profit
For the nine months ended September 30, 2021, we generated a gross profit of $8,421,235, compared to $8,562,550 for the nine months ended September 30, 2020, representing a decrease of $141,315, or approximately 2%.
As a percentage of net revenue, gross profit decreased by approximately one percentage points to 59% for the nine months ended September 30, 2021, compared to 60% for the nine months ended September 30, 2020. This decrease in gross profit as a percentage of revenues was primarily caused by the increase in cost of revenues as a percentage of net revenues, as discussed above.
Selling, General, Administrative, and Other Expenses
For the nine months ended September 30, 2021, selling, general, administrative, and other expenses decreased to $5,016,594 from $5,021,632 for the nine months ended September 30, 2020, representing a decrease of $5,038.
As a percentage of net revenues, selling, general, administrative and other expenses accounted for approximately 35% and 35% for the nine months ended September 30, 2021 and September 30, 2020, respectively. For the nine months ended September 30 2021 compared to the nine months ended September 30, 2020, we experienced (a)(i) an approximate two percentage point increase in leased staffing costs, (a)(ii) an approximate one percentage point increase in travel, entertainment and marketing costs, offset, in part, by, (b)(i) an approximate one percentage point decline in stock based compensation, (b)(ii) an approximate one percentage point decrease in professional expense, and (b)(iii) an approximate one percentage-point decline in the provision for bad debt.
Commissions
For the nine months ended September 30, 2021 and September 30, 2020, commissions expense was $4,894,845 and $4,996,843, respectively, representing an decrease of $101,998, or approximately 2%.
As a percentage of net revenues, commissions expenses accounted for approximately 34% for the nine months ended September 30, 2021, and 35% for the nine months ended September 30, 2020. This approximate one percentage-point decline primarily resulted from an approximate 4% decrease of revenues eligible for commissions offset, in part, by a 3% increase in average commission rates.
Depreciation and amortization
For the nine months ended September 30, 2021, our depreciation expense decreased to $46,751 from $84,047 for the nine months ended September 30, 2020, representing a decrease of $37,296. This decrease was primarily the result of a reduction of fixed assets becoming fully depreciated.
Interest
For the nine months ended September 30, 2021, interest expense decreased to $47,561 from $75,633 for the nine months ended September 30, 2020, which is a decrease of $28,072, or approximately 37%. The decrease of $28,072 was primarily driven by (a)(i) an approximate $19,047 decrease in interest related to our RLOC, (a)(ii) an approximate $4,587 decrease related to interest on our EIDL Loan, (a)(iii) an approximate $4,530 decrease related to interest on our PPP Loan, offset, in part, by (b)(i) an approximate $92 increase in interest on our notes payable to related parties. The decline in interest expense on our RLOC is primarily driven by (a)(i) an approximate $15,908 reduction in borrowings and (a)(ii) an approximate $3,139 reduction in interest rates..
Income tax
For the nine months ended September 30, 2021, we recorded an income tax expense of approximately $12,723 compared to $11,341, for the nine months ended September 30, 2020. For additional information, please see Note 10, “Income Taxes,” of our accompanying Financial Statements, beginning on page F-1.
Paycheck Protection Program Loan Forgiveness
For the nine months ended September 30, 2021, we recorded a gain on the Paycheck Protection Program Loan extinguishment of $361,400, compared to zero, for the nine months ended September 30, 2020. For additional information, please see Note 7, “Paycheck Protection Program,” of our accompanying Financial Statements, beginning on page F-1.
9
Net Loss
For the nine months ended September 30, 2021, we had a net loss of $1,235,839 compared to a net loss $1,626,946 for the nine months ended September 30, 2020, respectively, representing a decrease in net loss of $391,107, or approximately 24%.
As a percentage of revenue, net loss represented approximately 9% and 11% for the nine months ended September 30, 2021 and September 30, 2020, respectively. The approximate two percentage point decrease in net loss as a percentage of revenue was primarily attributable to (a)(i) an approximate three percentage point increase in the gain on extinguishment of debt, offset, in part, by, (b)(i) an approximate one percentage point decline in gross profit.
Liquidity and Capital Resources
Cash Flows
A summary of our cash flows is as follows:
|
|
|
Nine Months Ended September 30, |
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|||||
|
|
|
2021 |
|
|
2020 |
|
||
|
Net cash provided by operating activities |
|
$ |
231,479 |
|
|
$ |
463,084 |
|
|
Net cash used in investing activities |
|
|
- |
|
|
|
(20,757 |
) |
|
Net cash provided by (used in) financing activities |
|
|
346,345 |
|
|
|
(2,749 |
) |
|
Net increase in cash and cash equivalents |
|
$ |
577,824 |
|
|
$ |
439,578 |
|
Net Cash Provided by Operating Activities
During the nine months ended September 30, 2021, net cash provided by operating activities was $231,479 compared to $463,084 for the nine months ended September 30, 2020, representing a decrease of $231,605. The decrease of $231,605 primarily resulted from: (a)(i) an $2,000,043 increase in inventories, net of slow moving and obsolescence reserves, (a)(ii) $1,340,386 in non-cash adjustments, (a)(iii) a $47,149 increase in prepaid expenses and other current assets, offset, in part, by, (b)(i) a $1,581,632 increase in accounts payable, (b)(ii) a $924,346 reduction in long-term accounts receivable, (b)(iii) a $391,107 reduction in net loss, (b)(iv) a $234,130 increase in accrued expenses, and (b)(v) a $24,758 reduction in accounts receivable.
Net Cash Used in Investing Activities
For the nine months ended September 30, 2021, there was no net cash used in investing activities.
During the nine months ended September 30, 2020, net cash used in investing activities was approximately $20,757 for our investments in new office workstations.
Net Cash Provided by (Used in) Financing Activities
For the nine months ended September 30, 2021, net cash provided by financing activities was $346,345 compared to net cash used in financing activities of $2,749 for the nine months ended September 30, 2020 representing an increase of $349,094. The increase of $349,094 primarily resulted from (a)(i) a reduction of $714,149 in payments on the RLOC and (a)(ii) an increase in EIDL loan proceeds of $200,000, offset, in part, by (b)(i) a reduction of $361,400 in proceeds from the PPP Loan, (b)(ii) a reduction of $200,000 in promissory notes proceeds and (b)(iii) an increase in payments on the EIDL Loan of $3,655.
Liquidity
Our primary sources of liquidity are cash from our operations and our RLOC with Amegy Bank. As of September 30, 2021, our current assets exceeded our current liabilities by $4,348,562 (our “Working Capital”), which includes $1,765,282 in cash and cash equivalents. We believe cash from our operations and net borrowings on our RLOC supports our Working Capital needs.
10
On December 29, 2017, we became party to a RLOC with Amegy Bank. The RLOC established an asset-based senior secured revolving credit facility in the amount of $5,000,000. The RLOC contains customary representation, warranties, covenants, events of default, and is collateralized by substantially all of our assets and provides that our Chairman of the Board and President personally guarantee a portion of the outstanding RLOC amount.
On September 21, 2018, we executed the First Amendment to the RLOC with Amegy Bank. The First Amendment (i) waived our events of default under the RLOC through the fiscal quarter ended September 30, 2018, and (ii) added a covenant that we achieve quarterly net income of $700,000 or more for the fiscal quarter ending on September 30, 2018.
On November 19, 2018, we executed the Second Amendment to the RLOC with Amegy Bank. The Second Amendment (i) waived our events of default under the RLOC, (ii) reduced the aggregate limit of the RLOC to $4,000,000, (iii) extended the maturity date to November 4, 2019, (iv) revised the variable interest rate to the one-month LIBOR rate plus four percent (4.00%) per annum, and (v) amended the financial covenants to state that we will not permit: the Fixed Charge Coverage Ratio of any calendar quarter end from and after the quarter ending June 30, 2019, to be less than 1.25 to 1.00; earnings before interest, taxes, depreciation and amortization (“EBITDA”) to be less than $700,000 for the fiscal quarter ending December 31, 2018, and $100,000 for the fiscal quarter ending March 31, 2019; modified the event of default related to consecutive quarterly losses to be applicable from and after the quarter ending June 30, 2019.
On May 9, 2019, we executed the Third Amendment to the RLOC with Amegy Bank. Pursuant to the Third Amendment, Amegy Bank (i) waived our events of default under the RLOC, (ii) reduced the aggregate limit of the RLOC to $3,500,000, (iii) reduced the limit of credit card exposure to $500,000, (iv) reduced the borrowing base component of Inventory to 30%, (v) amended the financial covenants to state that we will not permit EBITDA to be less than $100,000 for the fiscal quarter ending June 30, 2019 and $500,000 for the fiscal quarter ending September 30, 2019 and (vi) rescinded the loan sweep feature, requiring us to give notice of each requested loan by delivery of advance request to Amegy Bank.
On December 18, 2019, we executed the Fourth Amendment to the RLOC with Amegy Bank. Pursuant to the Fourth Amendment, Amegy Bank (i) waived our events of default under the RLOC, (ii) reduced the aggregate limit of the RLOC to $2,750,000, (iii) reduced and limited the annual salary of our Chairman of the Board and President, Mr. Brooks, to not exceed $550,000, (iv) amended the financial covenants to state that we will not permit EBITDA to be less than $600,000 for the fiscal quarter ending December 31, 2019 and $125,000 for the fiscal quarter ending March 31, 2020, (v) extended the termination date of the RLOC to May 4, 2020, and (vi) provides for our Chairman of the Board and President to personally guarantee one-hundred percent (100%) of the outstanding RLOC amount.
On May 21, 2020, we executed the Fifth Amendment to our RLOC with Amegy Bank. Pursuant to the Fifth Amendment, Amegy Bank (i) waived our events of default under the RLOC, (ii) amended the financial covenants to state that we will not permit EBITDA to be less than $25,000 for the trailing nine months ended September 30, 2020, and (iii) extended the termination date of our RLOC until November 4, 2020.
In conjunction with obtaining the Fifth Amendment, we obtained an additional $200,000 in capital in the form of subordinated debt from affiliates of Messrs. Brooks and Reeg. Specifically, on May 6, 2020, we borrowed $180,000 from NC 143, a limited partnership controlled by Mr. Brooks, and $20,000 from RMI, a company owned and controlled by Mr. Reeg, in exchange for two promissory notes which are unsecured and bear interest at 0.25% per annum until May 6, 2022, the maturity date, and 10.0% per annum after the maturity date. Principal and interest are due and payable on the maturity date, provided, however, any payment of principal and interest on the loans is subordinated to payment of all indebtedness under the RLOC.
On November 12, 2020 we executed a Sixth Amendment to the RLOC with Amegy Bank, which extended the termination date of our RLOC to May 4, 2021.
On May 4, 2021, we executed the Seventh Amendment to the RLOC with Amegy Bank, waiving the events of default for the quarter ending March 31, 2021 and extending the termination date of the RLOC until November 4, 2021.
On August 4, 2021, we received a waiver from Amegy Bank, waiving the events of default for the minimum quarterly EBITDA requirements for the twelve months ended June 30, 2021.
On November 8, 2021 we received a waiver from Amegy Bank, waiving the events of default for the minimum quarterly EBITDA requirement for the twelve months ended September 30, 2021 and extending the termination date of the RLOC to February 4, 2021. For more information, please see Note 13, “Subsequent Events”)
We rely on our RLOC for capital expenditures and other day-to-day Working Capital needs. As of November 5, 2021, we had approximately $779,571 in available cash, and $343,971 available on our RLOC for borrowing (subject to certain borrowing base limitations). Borrowings on our RLOC are repaid from cash generated from our operations.
Paycheck Protection Program
11
On April 15, 2020, we received approval from the SBA to fund our request for a loan under the Paycheck Protection Program created as part of the recently enacted CARES Act administered by the SBA. In connection with the PPP Loan, we entered into a promissory note in the principal amount of $361,400. In accordance with the requirements of the CARES Act, we used the proceeds from the PPP Loan primarily for payroll costs. The PPP Loan was scheduled to mature on April 11, 2022, had a 1.00% interest rate, and was subject to the terms and conditions applicable to all loans made pursuant to the PPP. We applied for and received forgiveness for the total amount of the PPP Loan during the second quarter of 2021.
EIDL Loan
On May 12, 2020, we executed the standard loan documents (“SBA Loan Agreement” or “Original Note") required for securing a loan from the SBA under its Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact of the COVID-19 pandemic on our business (the “EIDL Loan”). Pursuant to the SBA Loan Agreement, the principal amount of the EIDL Loan was $150,000, with proceeds to be used for working capital purposes. Interest accrues at the rate of 3.75% per annum. Installment payments, including principal and interest, are due monthly beginning May 12, 2021 (twelve months from the date of the SBA Loan Agreement) in the amount of $731. The balance of principal and interest is payable thirty years from the date of the SBA Loan Agreement. The EDIL Loan is reflected in long term liabilities in our accompanying interim unaudited condensed consolidated balance sheets. In connection therewith, we received a $10,000 advance, which does not have to be repaid and is reflected as an offset in selling, general, administrative and other expenses in our accompanying interim unaudited condensed consolidated statements of operations.
On September 24, 2021, we executed the standard loan documents with the SBA for an amended and restated loan and authorization and agreement (“A&R SBA Loan Agreement”) required for securing an increase in our 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 $350,000 to $500,000, with proceeds to be used for working capital purposes. Interest accrues at the rate of 3.75% per annum. Installment payments, including principal and interest, are due monthly beginning May 12, 2022 (twenty-four months from the date of the Original Note) in the amount of $2,515. The balance of principal and interest is payable thirty years from the date of the A&R SBA Loan Agreement. The EIDL Loan is reflected in long term liabilities in our accompanying interim unaudited condensed consolidated balance sheets.
Our strategic growth plan provides for the capital investment in 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 $2 million to $3 million and anticipate these investments to occur primarily during third and fourth quarters of calendar year 2021 and the first quarter of calendar year 2022. We expect sources of capital for these investments to be derived from cash from operations and additional debt and/or equity financing. (See Note 8, “Economic Injury Disaster Loan” of our accompanying interim unaudited condensed consolidated notes to our Financial Statements, beginning on page F-1).
Capital Expenditures
For the nine months ended September 30, 2021, we had no material commitments for capital expenditures.
Off-Balance Sheet Arrangements
For the nine months ended September 30, 2021, we had no off-balance sheet 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 who use the products that we sell; and our ability to sell products. We undertake no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events, or otherwise.
12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this item.
ITEM 4. CONTROLS AND PROCEDURES.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports, that are filed or submitted under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that this information is accumulated and communicated to management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
We conducted an evaluation (pursuant to Rule 13a-15(b) promulgated under the Exchange Act), under the supervision and with the participation of management, including our Chief Executive and Chief Financial Officers, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act) as of September 30, 2021.
Based on our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of September 30, 2021.
13
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
See the exhibits listed in the accompanying “Exhibit Index”.
14
EXHIBIT INDEX
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Exhibit No. |
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Description |
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3.1 |
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3.2 |
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10.1* |
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31.1* |
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31.2* |
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32.1** |
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101.INS * |
|
Inline XBRL Instance Document |
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101.SCH * |
|
Inline XBRL Taxonomy Extension Schema Document |
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101.CAL * |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF * |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB * |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE * |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
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|
|
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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* |
Filed herewith. |
|
** |
Furnished herewith |
15
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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FUSE MEDICAL, INC. |
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Date: November 10, 2021 |
By: |
/s/ Christopher C. Reeg |
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Christopher C. Reeg |
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Chief Executive Officer and Director (Principal Executive Officer) |
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Date: November 10, 2021 |
By: |
/s/ William E. McLaughlin, III |
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William E. McLaughlin, III |
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Senior Vice President, Chief Financial Officer and Director (Principal Financial Officer) |
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16