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: 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 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
First Quarter 2022 Update
Fuse Branded Portfolio
As an emerging manufacturer of medical device implants, we are continuing to expand our Fuse branded portfolio of orthopedic implants and biologics. During the first quarter of 2022, we emphasized the sale of manufactured products within our Fuse portfolio. Due to the reduced costs of goods sold associated with our manufactured products within the Fuse portfolio, we are able to maximize our competitive advantage as a manufacturer and distributor of orthopedic implants and biologics. With additional launches of innovative Fuse products planned for this year, we anticipate a continued emphasis on the commercialization of these products through our Retail Model.
Research and Development
During the first quarter of 2022, we established a new
This new
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Impact of Coronavirus
Beginning in the first quarter of 2020, the novel coronavirus SARS-CoV-2 global
pandemic ("COVID-19") has significantly impacted
In
In
Currently, 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 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.
Severe Weather Conditions
During
In response to the dangerous weather conditions, our executive management team
immediately focused on the health and wellbeing of our employees, allowing
employees to work from home to avoid driving to our offices. Our management also
worked to minimize the impact on our customers by rescheduling and coordinating
new surgery dates. We resumed full operations on
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.
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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
Wholesale. Under our wholesale distribution model, ("Wholesale Model"), we sell
our products directly to independent distributors rather than to hospitals and
medical facilities
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
Pricing Pressures
Pricing pressure has increased in our industry due to (i) continuous consolidation among healthcare providers, (ii) trends toward managed healthcare, (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 optimize revenue per Case.
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.
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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 revenues. For the Three Months Ended March 31, March 31, 2022 (% Rev) 2021 (% Rev) Net revenues$ 4,554,338 100%$ 4,440,759 100% Cost of revenues 1,625,191 36% 1,853,865 42% Gross profit 2,929,147 64% 2,586,894 58% Operating expenses: Selling, general, administrative and other 1,709,541 38% 1,435,310 32% Commissions 1,505,671 33% 1,564,753 35% Depreciation and amortization 34,402 1% 16,794 0% Total operating expenses 3,249,614 71% 3,016,857 68% Operating loss (320,467 ) -7% (429,963 ) -10% Other expense Interest expense 32,958 1% 19,000 0% Total other expense 32,958 1% 19,000 0% Operating loss before tax (353,425 ) -8% (448,963 ) -10% Income tax expense 4,856 0% 4,360 0% Net loss$ (358,281 ) -8%$ (453,323 ) -10%
Three Months Ended
Net Revenues
For the three months ended
For the three months ended
Additionally, as discussed above in "Severe Weather Conditions", we believe the
severe weather conditions that we experienced in
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. We intend to increase our Retail Case volume by increasing sales volumes with our existing retail customer base as well as on-boarding new surgeons, distributors, and retail customers.
Cost of Revenues
For the three months ended
As a percentage of revenues, cost of revenues decreased 6% percentage points to
approximately 36% for the three months ended
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Beginning in 2022, the Company changed its 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
Gross Profit
For the three months ended
As a percentage of revenues, gross profit increased approximately 6% for the
three months ended
Selling, General, Administrative, and Other Expenses
For the three months ended
As a percentage of net revenues, SG&A accounted for approximately 38% for the
three months ended
Commissions
For the three months ended
As a percentage of net revenues, commission expense accounted for approximately
33% for the three months ended
Depreciation and amortization
For the three months ended
Interest
For the three months ended
Tax
For the three months ended
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Net Loss
For the three months ended
Cash Flows
A summary of our cash flows is as follows:
Three Months EndedMarch 31, 2022 2021
Net cash provided by (used in) operating activities
(138,835 ) - Net cash provided by (used in) financing activities (524,841 ) 175,000
Net increase (decrease) in cash and cash equivalents
Net Cash Provided by Operating Activities
During the three months ended
The increase provided by operating activities of
For the three months ended
The increase of
For the three months ended
Liquidity
Our primary sources of liquidity are cash from our operations and the Credit and
Security Agreement (the "Credit Agreement") with
On
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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
The A&R SBA Loan Agreement was paid in full in conjunction with entering into the Credit Agreement.
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
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Capital Expenditures
For the three months ended
Off-Balance Sheet Arrangements
For the three 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
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