Explanatory Note
As used in this report on Form 10-Q, "we", "us", "our", and the "Company" refer
to
This discussion and analysis should be read in conjunction with the interim
unaudited condensed consolidated financial statements of our Company and the
related notes included in this report for the periods presented (our "Financial
Statements"), the audited consolidated financial statements of our Company and
the related notes thereto and the Management's Discussion and Analysis of
Financial Condition and Results of Operations in our Company's Annual Report on
Form 10-K for the fiscal year ended
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: spinal implants for trauma, degenerative disc disease, and deformity indications (collectively, we refer to these bulleted products as Orthopedic Implants).
We also provide a wide array of osteo-biologics and regenerative products, which include human allografts, tendons, synthetic skin and bone substitute materials, and regenerative tissues, which we refer to as ("Biologics").
All of our medical devices are cleared by the
Third Quarter 2022 Update
Fuse Branded Portfolio
As an emerging manufacturer of medical device implants, we have continued to expand our Fuse branded portfolio of orthopedic implants and biologics, with three new product launches in 2022. In the second quarter of 2022, we launched the Sterizo Tibial Revision System, which includes a modular baseplate design, with stem and augment options for primary applications. In the third quarter, we launched the Fuse PSS Pedicle Screw System with Minimally Invasive Surgery ("MIS") features, and the Fuse PSS Pedicle Screw System for open surgeries with both low and mid top reduction options. We anticipate a continued emphasis on the commercialization of these products through our Retail Model, as we continue to expand our national distribution footprint.
Research and Development
During the first quarter of 2022, we established a new
This new
Impact of Coronavirus
Currently, the future trajectory of the COVID-19 pandemic remains uncertain,
both in the
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Given these various uncertainties, it is unclear the extent to which lingering slowdowns in elective procedures will affect our business during 2022 and beyond. We expect that the effects of COVID-19 on our business will depend on various factors including (i) the magnitude and length of increased case waves in markets we serve, including from new variants of COVID-19, (ii) the comfort level of patients returning to clinics and hospitals, (iii) the extent to which localized elective surgery shutdowns occur, (iv) the unemployment rate's effect on potential patients lacking medical insurance coverage, and (v) general hospital capacity constraints occurring because of the need to treat COVID-19 patients.
COVID-19 has also continued to present uncertainties and delays in our local and national supply chain, for both raw materials and finished goods. This disruption in our supply chain has adversely impacted lead times to; manufacture products, launch product lines, and commercialize our products in the marketplace. As a result, we are continuing to source alternate suppliers to help mitigate the impact to our supply chain.
Current Trends and Outlook
Seasonality
We are subject to seasonal fluctuations in sales, which cause fluctuations in quarterly results of operations. Because of the seasonality of our business, results for any quarter are not necessarily indicative of results that may be achieved in other quarters or for a full fiscal year.
Historically, we have experienced greater revenue and greater sales volume, as a percentage of revenue, during the last two calendar quarters of our fiscal year compared to the first two calendar quarters of the year. We believe this revenue trend is primarily due to the increase in elective surgeries during the last two quarters of the calendar year, which are partially satisfied by patient annual healthcare deductibles being met in those two quarters. We use this seasonality trend to assist us in enterprise-wide resource planning, such as purchasing, product inventory logistics, and human capital demands.
Retail and Wholesale Cases
We believe our comprehensive selection of Orthopedic Implants and Biologics products is pivotal to our ability to acquire new customers, increase sales to existing customers and increase overall sales volume, revenues, and profitability. We continue to review and evaluate our product lines, ensuring we maintain a high-quality and cost-effective selection of Orthopedic Implants and Biologics.
We measure sales volume based on medical procedures in which our products were sold and used (each a Case). We consider Cases resulting from direct sales to hospitals and medical facilities to be Retail Cases and Cases resulting from sales to third-parties, such as distributors, or sub-distributors, to be Wholesale Cases. Some of our sales for Wholesale Cases are on a consignment basis with the third-party.
Retail. Under our retail distribution model, ("Retail Model"), we sell directly to our end customers, which consist of hospitals and medical facilities, utilizing (i) our full-time sales representatives whom we employ or engage as independent contractors and (ii) independent sales representatives 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 sales through our Wholesale Model as Wholesale Cases.
Retail Cases in our industry command higher revenue price points than Wholesale Cases. Because Retail Cases involve direct sales to our end customers, we typically receive a higher gross profit margin due to the absence of any third party in the sales process. However, we may pay commissions to our full time or independent sales representatives with respect to Retail Sales increasing our commission expenses. Retail Cases generally generate substantially more gross profit than Wholesale Case transactions but are subject to commission expenses, which we do not incur with respect to Wholesale Cases.
Wholesale Cases in our industry command lower revenue price-points than Retail Cases as the third-party reseller must build in its own profit margin. Because Wholesale Cases involve sales to third parties who sell our products to end customers, our profit margins are reduced for these Cases due to the lower sales price. Consequently, our Wholesale Cases generate substantially lower gross profit than our Retail Cases, which is offset in part by the fact that we do not incur any commission costs on Wholesale Cases.
Pricing Pressures
Pricing pressures have 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
pressures, reductions in reimbursement levels or coverage, or other cost
containment measures can significantly impact our business, future operating
results and financial condition. For the three months ended
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2021, our average revenues per Case was
To offset pricing pressures, we employ strategies which include locating and retaining new customers, increasing volume with existing customers, and continued emphasis on promoting sales through our Retail Model. Our strategy to emphasize our Retail Model proved successful as Retail Cases represented approximately 96% of revenue for the third quarter of 2022, which is an approximate 3% increase over the same quarter of 2021.
To further offset the impact of pricing pressures, the Company employs
strategies to reduce the cost of revenues by increasing Fuse branded product
lines. For the three 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 our 2021 Annual Report. These policies are considered critical because they may result in fluctuations in our reported results from period to period due to the significant judgments, estimates, and assumptions about highly complex and inherently uncertain matters. In addition, the use of different judgments, assumptions, or estimates could have a material impact on our financial condition or results of operations. We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as appropriate based on changing conditions.
There have been no material changes to our critical accounting policies during the period covered by this report.
Recent Accounting Pronouncements
We describe recent accounting pronouncements in Note 2, "Significant Accounting Policies" of our accompanying interim unaudited condensed consolidated notes to our Financial Statements beginning on page F-1.
Results of Operations
The following table sets forth certain financial information from our interim unaudited condensed consolidated statements of operations along with a percentage of net 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, 2022 (% Rev) 2021 (% Rev) Net revenues$ 4,536,595 100%$ 4,250,554 100% Cost of revenues 1,481,648 33% 1,861,620 44% Gross profit 3,054,947 67% 2,388,934 56% Operating expenses: Selling, general, administrative and other expenses 1,708,543 38% 1,559,708 37% Commissions 1,219,311 27% 1,495,720 35% Depreciation and amortization 82,199 1% 14,493 0% Total operating expenses 3,010,053 66% 3,069,921 72% Operating (loss) profit 44,894 1% (680,987 ) -16% Other expense Interest expense 46,992 1% 12,512 0% Gain on Payroll Protection Program Loan extinguishment - 0% - 0% Total other expense 46,992 1% 12,512 0% Net (loss) income before income tax (2,098 ) 0% (693,499 ) -16% Income tax expense 7,278 0% 3,537 0% Net (loss) income$ (9,376 ) 0%$ (697,036 ) -16% 4
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Three Months Ended
Net Revenues
For the three months ended
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 revenue and gross profit levels. For the remaining quarter of 2022, we will seek to increase our Retail Cases with our existing retail customer base and continue to add additional retail customers.
Cost of Revenues
For the three months ended
As a percentage of revenues, cost of revenues decreased by 11% to 33% for the
three months ended
Gross Profit
For the three months ended
As a percentage of revenues, gross profit increased by 11% to 67% 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 38% and 37% for the three months ended
Commissions
For the three months ended
As a percentage of net revenues, commission expense accounted for approximately
27% for the three months ended
Depreciation and amortization
For the three months ended
Beginning in 2022, we changed our estimated useful life for its investment
in medical instruments from 0 to 3 years based upon an analysis of our inventory
and actual utilization of non-sterile medical instruments. For the three months
ended
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our management increased property and equipment by
Interest
For the three months ended
Income tax
For the three months ended
Net Loss
For the three months ended
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, 2022 (% Rev) 2021 (% Rev) Net revenues$ 13,759,223 100%$ 14,356,328 100% Cost of revenues 4,830,480 35% 5,935,093 41% Gross profit 8,928,743 65% 8,421,235 59% Operating expenses: - 0% Selling, general, administrative and other expenses 4,840,852 35% 5,016,594 35% Commissions 4,188,841 30% 4,894,845 34% Depreciation and amortization 226,243 2% 46,751 0% Total operating expenses 9,255,936 67% 9,958,190 69% Operating loss (327,193 ) -2% (1,536,955 ) -11% Other expense Interest expense 116,477 1% 47,561 0% Gain on Payroll Protection Program Loan extinguishment - 0% (361,400 ) 0% Total other expense 116,477 1% (313,839 ) -2% Net loss before income tax (443,670 ) -3% (1,223,116 ) -9% Income tax expense 17,305 0% 12,723 0% Net loss$ (460,975 ) -3%$ (1,235,839 ) -9% Net Revenues
For the nine months ended
For the nine months ended
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by 4% compared to revenues from Retail Cases as a percent of revenues for the
nine 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 revenue and gross profit levels. For the remaining quarter of 2022, we will seek to increase our Retail Cases with our existing retail customer base and continue to add additional retail customers.
Cost of Revenues
For the nine months ended
As a percentage of revenues, cost of revenues decreased approximately 6% to
approximately 35% for the nine months ended
Gross Profit
For the nine months ended
As a percentage of net revenue, gross profit increased by approximately 6% to
65% 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% for the nine months ended
Commissions
For the nine months ended
As a percentage of net revenues, commissions expenses accounted for
approximately 30% for the nine months ended
Depreciation and amortization
For the nine months ended
Beginning in 2022, we changed our estimated useful life for its investment
in medical instruments from 0 to 3 years based upon an analysis of our inventory
and actual utilization of non-sterile medical instruments. For the nine months
ended
Interest
For the nine months ended
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Income tax
For the nine months ended
Payroll Protection Program Loan Forgiveness
For the nine months ended
Net Loss
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, 2022 2021 Net cash provided by operating activities $ 866,257$ 231,479 Net cash used in investing activities (520,794 ) - Net cash provided by (used in) financing activities (392,664 ) 346,345
Net increase (decrease) in cash and cash equivalents $ (47,201 )
Net Cash Provided by Operating Activities
During the nine months ended
The increase provided by operating activities of
During the nine months ended
The increase of
For the nine months ended
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The decrease of
Liquidity
Our primary sources of liquidity are cash from our operations and the Credit and
Security Agreement (the "Credit Agreement") with
On
We used borrowings under the Facility to repay in full (i) our Amended and
Restated Business Loan Agreement, dated
Borrowings under the Facility bear interest at a floating rate, which will be at the Prime Rate plus 1.75%. Under the Facility, we must pay certain fees as set forth in the Credit Agreement. Our obligations with respect to the Credit Agreement are secured by a pledge of substantially all of our assets, including accounts receivables, deposit accounts, intellectual property, investment property, inventory, equipment and equity interests in our subsidiaries.
The Credit Agreement contains customary affirmative and negative covenants,
including limitations on our ability to incur additional debt, grant or permit
additional liens, make investments and acquisitions, merge or consolidate with
others, dispose of assets, pay dividends and distributions, pay subordinated
indebtedness and enter into affiliate transactions. In addition, the Credit
Agreement contains financial covenants requiring us on a consolidated basis to
maintain, as of the last day of each calendar month (i) a current ratio of not
less than 1.0 to 1.0, (ii) a fixed charge coverage ratio of not less than 1.0 to
1.0, (iii) a loan turnover rate of not greater than 60, and (iv) minimum
liquidity of not less than
The foregoing description does not constitute a complete summary of the terms of the Credit Agreement and is qualified in its entirety by reference to the full text of the Credit Agreement, which is filed as Exhibit 10.45 to our 2021 Annual Report.
We rely on the Credit Agreement for capital expenditures and day-to-day Working
Capital needs. As of
Payroll Protection Program
On
EIDL Loan
On
On
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to
The A&R SBA Loan Agreement was paid in full in conjunction with entering into the Credit Agreement.
Strategic Growth Initiative
Our strategic growth plan provides for capital investment for new product
launches, private label branding, and the upgrade of our financial systems which
support our infrastructure. We deem these investments essential to support our
growth and expansion objectives. We estimate the range of this type of
investment to be approximately
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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