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
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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 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
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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 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%.
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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.
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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, 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 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.
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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.
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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,
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.
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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
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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.
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