FUSE MEDICAL, INC. Explanatory Note
As used in this report on Form 10-Q, "we", "us", "our", and the "Company" refer
to
This discussion and analysis should be read in conjunction with 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
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
In
At this time, the future trajectory of the COVID-19 pandemic remains uncertain,
both in the
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
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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
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
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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.
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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, September 30,
2021 (% Rev) 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
Net Revenues
For the three months ended
For the three months ended
Our Wholesale Cases for the three months ended
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
As a percentage of revenues, cost of revenues increased approximately eight
percentage points to approximately 44% for the three months ended
Gross Profit
For the three months ended
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As a percentage of net revenue, gross profit decreased approximately eight
percentage points to 56% for the three months ended
Selling, General, Administrative, and Other Expenses
For the three months ended
As a percentage of net revenues, selling, general, administrative and other
expenses accounted for approximately 37% and 24% for the three months ended
Commissions
For the three months ended
As a percentage of net revenues, commission expense accounted for approximately
35% for the three months ended
Depreciation and amortization
For the three months ended
Interest
For the three months ended
Income tax
For the three months ended
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Net (Loss) Income
For the three months ended
As a percentage of revenue, net loss represented approximately 16% for the three
months ended
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
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, September 30,
2021 (% Rev) 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
Revenues from Retail Cases as a percent of revenues for the nine months ended
Revenues from Wholesale Cases as a percent of revenues for the nine months ended
Cost of Revenues
For the nine months ended
As a percentage of revenues, cost of revenues increased approximately one
percentage points to approximately 41% for the nine months ended
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Gross Profit
For the nine months ended
As a percentage of net revenue, gross profit decreased by approximately one
percentage points to 59% for the nine months ended
Selling, General, Administrative, and Other Expenses
For the nine months ended
As a percentage of net revenues, selling, general, administrative and other
expenses accounted for approximately 35% and 35% for the nine months ended
Commissions
For the nine months ended
As a percentage of net revenues, commissions expenses accounted for
approximately 34% for the nine months ended
Depreciation and amortization
For the nine months ended
Interest
For the nine months ended
Income tax
For the nine months ended
Paycheck Protection Program Loan Forgiveness
For the nine months ended
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Net Loss
For the nine months ended
As a percentage of revenue, net loss represented approximately 9% and 11% for
the nine months ended
Liquidity and Capital Resources
Cash Flows
A summary of our cash flows is as follows:
Nine Months Ended September 30,
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
For the nine months ended
During the nine months ended
Net Cash Provided by (Used in) Financing Activities
For the nine months ended
Liquidity
Our primary sources of liquidity are cash from our operations and our RLOC with
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On
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In conjunction with obtaining the Fifth Amendment, we obtained an additional
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We rely on our RLOC for capital expenditures and other day-to-day Working
Capital needs. As of
Paycheck Protection Program
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On
EIDL Loan
On
On
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
Capital Expenditures
For the nine months ended
Off-Balance Sheet Arrangements
For the nine months ended
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.
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