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
Second 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
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 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.
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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 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. 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. 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 appropriate 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 six 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 2020 Annual Report. These policies are considered critical because they may result in fluctuations in our reported results from
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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
June 30, June 30,
2021 (% Rev) 2020 (% Rev)
Net revenues $ 5,665,015 100% $ 4,010,666 100%
Cost of revenues 2,219,608 39% 1,796,663 45%
Gross profit 3,445,407 61% 2,214,003 55%
Operating expenses:
Selling, general, administrative and other
expenses 2,021,576 36% 1,161,476 29%
Commissions 1,834,372 32% 1,420,239 35%
Depreciation and amortization 154,665 0% 30,752 1%
Total operating expenses 4,010,613 71% 2,612,467 65%
Operating loss (426,006 ) -8% (398,464 ) -10%
Other expense
Interest expense 16,048 0% 24,021 1%
Gain on Payroll Protection Program Loan
extinguishment (361,400 ) -6% - 0%
Total other expense (345,352 ) -6% 24,021 1%
Operating (loss) before tax (80,654 ) -1% (422,485 ) -11%
Income tax benefit 4,826 0% 946 0%
Net loss $ (85,480 ) -2% $ (423,431 ) -11%
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 decreased approximately six
percentage points to approximately 39% for the three months ended
Gross Profit
For the three months ended
As a percentage of net revenue, gross profit increased approximately six
percentage points to 61% for the three months ended
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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 36% and 29% for the three months ended
Commissions
For the three months ended
As a percentage of net revenues, commission expense accounted for approximately
32% 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
Paycheck Protection Program Loan Forgiveness
For the three months ended
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Net Loss
For the three months ended
As a percentage of revenue, net loss represented approximately 2% and 11% for
the three months ended
The approximate nine percentage point decrease in net loss as a percentage of revenue was primarily attributable to (a)(i) an approximate six percentage point increase in gross profit, (a)(ii) an approximate six percentage point increase in the gain on extinguishment of debt, (a)(iii) an approximate three percentage point decrease in commissions, and (a)(iv) an approximate one percentage point decrease in depreciation and amortization, offset, in part, by (b) an approximate seven percentage point increase in selling, general, administrative, and other expenses.
Six 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 Six Months Ended
June 30, June 30,
2021 (% Rev) 2020 (% Rev)
Net revenues $ 10,105,774 100% $ 8,647,169 100%
Cost of revenues 4,073,473 40% 3,779,559 44%
Gross profit 6,032,301 60% 4,867,610 56%
Operating expenses: - 0% - 0%
Selling, general, administrative and other
expenses 3,456,887 34% 3,642,247 42%
Commissions 3,399,125 34% 2,811,356 33%
Depreciation and amortization 32,258 0% 60,735 1%
Total operating expenses 6,888,270 68% 6,514,338 75%
Operating loss (855,969 ) -8% (1,646,728 ) -19%
Other expense - 0% - 0%
Interest expense 35,048 0% 55,022 1%
Gain on Payroll Protection Program Loan
extinguishment (361,400 ) 9% - 0%
Total other expense (326,352 ) -3% 55,022 1%
Operating (loss) before tax (529,617 ) -5% (1,701,750 ) -20%
Income tax benefit 9,186 0% 5,680 0%
Net loss $ (538,803 ) -5% $ (1,707,430 ) -20%
Net Revenues
For the six months ended
For the six months ended
Our Wholesale Cases for the six months ended
Cost of Revenues
For the six months ended
As a percentage of revenues, cost of revenues decreased approximately four
percentage points to approximately 40% for the six months ended
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Gross Profit
For the six months ended
As a percentage of net revenue, gross profit increased by approximately four
percentage points to 60% for the six months ended
Selling, General, Administrative, and Other Expenses
For the six months ended
As a percentage of net revenues, selling, general, administrative and other
expenses accounted for approximately 34% and 42% for the six months ended
Commissions
For the six months ended
As a percentage of net revenues, commissions expenses accounted for
approximately 34% for the six months ended
Depreciation and amortization
For the six months ended
Interest
For the six months ended
Income tax
For the six months ended
Paycheck Protection Program Loan Forgiveness
For the six months ended
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Net Loss
For the six months ended
As a percentage of revenue, net loss represented approximately 5% and 20% for
the six months ended
Liquidity and Capital Resources
Cash Flows
A summary of our cash flows is as follows:
Six Months Ended June 30,
2021 2020
Net cash provided by operating activities
- (20,757 )
Net cash provided by financing activities - 47,251
Net increase in cash and cash equivalents
Net Cash Provided by Operating Activities
During the six months ended
For the six months ended
During the six months ended
Net Cash Provided by Financing Activities
For the six months ended
For the six months ended
Liquidity
Our primary sources of liquidity are cash from our operations and our RLOC with
On
On
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On
On
On
On
In conjunction with obtaining the Fifth Amendment, we obtained an additional
On
On
We were not in compliance with the trailing twelve months minimum quarterly
EBITDA requirement of
We rely on our RLOC for capital expenditures and other day-to-day Working
Capital needs. As of
Paycheck Protection Program
On
EIDL Loan
On
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capital purposes. Interest accrues at the rate of 3.75% per annum. Installment
payments, including principal and interest, are due monthly beginning
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 six months ended
Off-Balance Sheet Arrangements
For the six 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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