The following discussion highlights our results of operations and the principal
factors that have affected our consolidated financial condition, our liquidity
and our capital resources for the periods described. The discussion also
provides information that our management believes is relevant for an assessment
and understanding of our consolidated financial condition and results of
operations presented herein. The following discussion and analysis are based on
our Financial Statements contained in this Annual Report, which have been
prepared in accordance with generally accepted accounting principles in the
United States of America ("GAAP"). The discussion and analysis should be read in
conjunction with our Financial Statements and the related notes therein.
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Explanatory Note
As described in "Item 1. Business, Corporate and Available Information," and
elsewhere in this Annual Report, our Financial Statements include the accounts
of our Company and our wholly-owned subsidiaries, CPM, and Maxim. Intercompany
transactions have been eliminated in consolidation.
Overview
We are a Manufacturer, distributor, and wholesaler of medical devices offering a
broad portfolio of Orthopedic Implants, Biologics, and other medical devices. A
more detailed description of our business operation can be found in "Item 1.
Business" within this Annual Report.
We believe 2020 proved pivotal for our growth as a Manufacturer and innovative
product developer. Our focus to shift our business model from a sole distributor
to an integrated Manufacturer and distributor has seen successful results in
2020, with continued growth and success leading into 2021. Highlights of our
2020 strategic milestones include the following:
(i) On June 9, 2020, we successfully held our second Annual Meeting of
Fuse Shareholders ("2020 Annual Meeting").
(ii) In August 2020, we were listed as the one-hundred thirty-seventh
(136th) largest public company by revenue in the Dallas-Fort Worth
Metroplex, by the Dallas Morning News.
(iii) In November 2020, Deloitte recognized our Company for our fast
growth with a ranking of forty-three (43rd) on their 2020 Technology
Fast 500TM.
(iv) In December 2020, we launched FuseChoiceTM, FuseChoiceTM Plus, and
FuseChoiceTM Max, part of our amniotic and umbilical membrane
product line. We also announced the planned 2021 launches of three
additional Biologics product lines including the FuseChoice DermTM,
FusePureTM, and FuseTrilogyTM products.
(v) In January 2021, we entered into a marketing agreement with CarePICS
Telehealth to increase our wound care offerings.
(vi) In January 2021, we entered into an exclusive agreement with
Orthovestments, LLC for the manufacturing and commercialization of
the novel OrbitumTM Staple System which increases our Manufactured
product portfolio.
(vii) In February 2021, we launched our Fuse ACP Anterior Cervical Plating
System, expanding our offerings in our Spine division.
Severe Weather Conditions
During February 2021, the state of Texas experienced record-breaking winter
weather which resulted in dangerous road conditions, widespread power outages,
water outages and contamination of the water supply, causing significant
disruptions through-out Texas, including our corporate office and distribution
center for several days.
Our executive management team immediately focused on the health and wellbeing of
our employees, while also working to minimize the impact on our customers. We
resumed full operations on March 1, 2021 and are currently working to address
the Cases, sales support, and administrative functions backlog. Generally,
surgical cases canceled due to the severe weather have been rescheduled to
subsequent weeks . (See Item 1A. "Risk Factors- Risks Related to Our Business
and Industry", for additional information).
Impact of COVID-19 to Fuse
The novel coronavirus SARS CoV-2 ("COVID-19") global pandemic has presented and
continues to present significant risks to our business plan. During our first
quarter 2020 and as a response to COVID-19, the Governor of Texas declared a
state of disaster and issued an executive order requiring hospitals to defer all
elective surgeries. The order was effective March 19, 2020 through April 22,
2020.
On April 17, 2020, the Governor of Texas issued an additional executive order
permitting hospital facilities to resume elective surgeries effective April 22,
2020 with certain restrictions, including maintaining a percentage of available
beds for potential COVID-19 related patients. The disaster declaration in Texas
and similar declarations in other governmental jurisdictions, specifically the
temporary deferral of all elective surgeries, adversely impacted our results of
operations for the second quarter 2020, in particular, the periods prior to
April 22, 2020.
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A second executive order suspending elective surgeries and procedures was issued
on June 30, 2020. It was amended on July 9, 2020 to encompass all counties
within the 11 Trauma Service Areas in Texas. This executive order was lifted on
September 17, 2020 and elective surgeries and procedures in these areas were
resumed.
During the second quarter of 2020, we implemented strategic cost reductions in
order to mitigate the impact of COVID-19 on our business. Included in these
initiatives were company-wide salary reductions of all our employees, including
our executive officers. As of December 31, 2020, a majority of the reduced
salaries have been reinstated.
Despite the adverse effects of COVID-19 on our business in the second quarter of
2020, our net income for the year ended December 31, 2020 increased over the
year December 31, 2019. However, our revenue declined for the year ended
December 31, 2020 compared to 2019. We believe that our revenues for the third
and fourth quarters of 2020 were strengthened due to performance of deferred
second quarter elective surgeries in the third and fourth quarters of 2020.
However, the strength of those two quarters did not entirely compensate for the
second quarter deterioration due to COVID-19. Our products support patient
conditions which are degenerative in nature. While most of our products are used
in procedures that are currently considered elective, the procedures are
typically necessary for a patient to restore mobility, reduce pain and increase
quality of life. Other cases are emergency in nature involving trauma.
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.
Subsequent to the government-imposed shelter-in-place mandates and prohibitions
on elective surgeries in response to COVID-19, revenues for the third quarter of
2020 were higher than our historical seasonality trends due to surgeries
deferred in the second quarter of 2020 due to elective surgery restrictions
being performed in the third and fourth quarters.
For the years ended December 31, 2020 and 2019, approximately $12.8 million
(60%) and $13.1 million (57%) of revenues were generated during the third and
fourth quarters of 2020 and 2019, respectively. We use this seasonality trend to
assist us in enterprise-wide resource planning such as purchasing, product
inventory logistics, and human capital management.
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. (See "Item 1. Business" for additional information).
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.
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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 Pressures
Pricing pressure has increased in our industry due to (i) continuous
consolidation among healthcare providers, (ii) trends toward managed care
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.
During 2020, we believe we were successful in minimizing the impact of pricing
pressures as reflected with average revenue per Case of $5,583 for 2020 and
$4,228 for 2019. During 2020, our strategy to emphasize our Retail Model proved
successful as Retail Cases represented approximately 89% of revenue, or an
approximate 6% increase over 2019.
Compensation Initiatives
We expect to continue to offer compensation and other valuable long-term
incentives, such as equity incentives, to key distributors, executives, and
employees as a means to expand our strategic partnerships and industry
relationships. During 2020, our Board granted equity incentives to our
Scientific Advisory Board members (SABs), key distributors, independent
contractors and employees. (See "Item 1. Business" for additional information).
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Results of Operations
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
The following table sets forth certain financial information from our
consolidated statements of operations along with a percentage of net revenue and
should be read in conjunction with the Financial Statements and related notes
included in this report.
For the For the
Year Ended % of Total Year Ended % of Total
December 31, Revenues December 31, Revenues
2020 2020 2019 2019
Net revenues $ 21,398,936 100.0% $ 22,900,277 100.0%
Cost of revenues 8,694,713 41% 11,762,790 51%
Gross profit 12,704,223 59% 11,137,487 49%
Operating expenses
Selling, general, administrative, and
other 6,541,659 31% 8,466,077 37%
Commissions 7,086,335 33% 5,982,075 26%
Depreciation and amortization 104,143 0% 107,073 1%
Goodwill impairment - 0% 932,203 4%
Total operating expenses 13,732,137 64% 15,487,428 68%
Operating loss (1,027,914 ) -5% (4,349,941 ) -19%
Other income (expense):
Change in fair value of contingent
purchase consideration (290,635 ) -2% 1,936,164 9%
Interest expense (94,953 ) 0% (121,633 ) -1%
Total other income (expense) (385,588 ) -2% 1,814,531 8%
Operating loss before income tax (1,413,502 ) -7% (2,535,410 ) -11%
Income tax expense 18,993 0% 781,085 4%
Net loss $ (1,432,495 ) -7% $ (3,316,495 ) -14%
Net Revenues
For the year ended December 31, 2020, our net revenues were $21,398,936 compared
to $22,900,277 for the year ended December 31, 2019, a decrease of $1,501,341,
or approximately 6.6%.
For the year ended December 31, 2020, Retail Case volume decreased approximately
14% compared to the year ended December 31, 2019, and revenues from Retail Cases
decreased by approximately 0.01% compared to revenues from Retail Cases for the
year ended December 31, 2019. Revenues from Retail Cases as a percentage of
total revenues increased to 89% of revenues for the year ended December 31,
2020, from 83% of revenues for the year ended December 31, 2019. We believe the
increase in revenue from Retail Cases as a percent of total revenues reflects
the execution of our strategies to shift more of our business to higher margin
Retail Cases through improvement of our supply chain management. Therefore,
wholesale revenue as a percent of total revenue has decreased.
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 Retail 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 medical facilities, surgeons, and
distributors.
Cost of Revenues
For the year ended December 31, 2020, our cost of revenues was $8,694,713
compared to $11,762,790 for the year ended December 31, 2019, which is a
decrease of $3,068,077, or approximately 26%
As a percentage of revenues, cost of revenues was approximately 41% for the year
ended December 31, 2020 compared to 51% for the year ended December 31, 2019. As
a percentage of revenues, this reduction was primarily driven by (a)(i) an
approximate 7% reduction in cost of revenues primarily driven by a reduction in
Case volume product mix, (a)(ii) an approximate 6% decline in the inventory loss
provision for slow-moving and obsolescence and inventory shrink; offset in part
by, (b)(i) an approximate 2% increase in medical instruments purchased, and
(b)(ii) approximately 1% in net shipping expense, other supply chains related
costs.
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Gross Profit
For the year ended December 31, 2020, our gross profit was $12,704,223 compared
to $11,137,487 for the year ended December 31, 2019, representing an increase of
$1,566,736, or approximately 14%.
As a percentage of revenues, gross profit increased 10% from approximately 49%
to approximately 59% for the years ended December 31, 2020 and 2019. As a
percentage of revenues, the increase primarily resulted from those items
discussed in Cost of Revenues.
Selling, General, Administrative and Other
For the year ended December 31, 2020, our selling, general, administrative, and
other expenses (SG&A) were $6,541,659 compared to SG&A of $8,466,077 for the
year ended December 31, 2019, representing a decrease of $1,924,418 or 23%.
As a percentage of net revenues, SG&A accounted for approximately 31% for the
year ended December 31, 2020, and 37% for the year ended December 31, 2019. As a
percentage of revenues, the reduction of approximately 6% was primarily driven
by: (a)(i) a $817,039 decline in leased staffing costs, (a)(ii) a $474,845
reduction in bad debt expense, (a)(iii) a $465,586 decline in professional fees,
(a)(iv) a $100,350 reduction in travel and entertainment, and (a)(v) a $74,494
reduction in stock based compensation; offset, in part by, (b)(i) a $7,896
increase in other administrative expenses and other.
The reductions in leased staffing cost of $817,039, the decrease of $465,586 in
professional fees, the decrease of $354,166 in SAB costs, and the $100,350
reduction in travel and entertainment costs reflects our commitment to our
strategic cost containment initiatives.
Commissions
For the year ended December 31, 2020, our commissions expense increased to
$7,086,335 from $5,982,075 for the year ended December 31, 2019, an increase of
$1,104,260, or approximately 18.5%.
As a percentage of net revenues, commissions expense accounted for approximately
33% for the year ended December 31, 2020, and 26% for the year ended December
31, 2019. This increase is primarily driven by an approximate three percent (3%)
increase in revenues eligible for commissions and an approximately four percent
(4%) increase in average commission rates for the year ended December 31, 2020
compared to the year ended December 31, 2019.
Depreciation and Amortization
For the year ended December 31, 2020, our depreciation and amortization expense
decreased to $104,143 from $107,073 for the year ended December 31, 2019, a
decrease of $2,930. The decrease is primarily the result of an approximate
(a)(i) $12,882 reduction in amortization of intangible assets which were fully
amortized, such as noncompete agreements and customer relationships, acquired
pursuant to the Maxim Acquisition (see Note 4 of our accompanying consolidated
Financial Statements, entitled "Goodwill and Intangible Assets"), offset, in
part, by (b)(i) an approximate $9,952 increase in depreciation expense as a
result of investment in IT infrastructure such as additional and replacement
user workstations.
Goodwill Impairment
During 2020, we assessed the recoverability of the carrying value of our
goodwill as a result of (i) the continuation of adverse economic and business
trends, and (ii) revisions to our anticipated future operating results. There
was no impairment of goodwill as of December 31, 2020. For further information
on goodwill impairment, please see Note 2 of our accompanying Financial
Statements, entitled "Significant Accounting Policies, Goodwill and Other
Intangible Assets."
Change in Fair Value of Contingent Purchase Consideration
For the year ended December 31, 2020, we determined that the earnings
thresholds, as detailed in the CPM Acquisition Agreement, were not met for
payments under the earn-out ("Earn-Out"). Therefore, based on our 2020 financial
performance, we will make no payments to NC 143 for either the base Earn-Out or
the bonus Earn-Out for 2020.
As of December 31, 2020, the fair value of the Earn-Out liability was
re-measured to fair value under the probability weighted income approach, as
further explained in Note 2 of our accompanying consolidated Financial
Statements, entitled "Significant Accounting Policies, Fair Value Measurements."
As a result, the current fair value of the Earn-Out liability was increased by
$290,635, from $11,645,365 to $11,936,000. For more information on the change in
the fair value of contingent purchase consideration, please see Note 2 on our
accompanying Financial Statements, entitled "Significant Accounting Policies,
Fair Value Measurements."
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Interest
For the year ended December 31, 2020, our interest expense declined to $94,953
from $121,633 for the year ended December 31, 2019, which is a reduction of
$26,680, or approximately 22%. This decline in interest expense is primarily
attributable to (a)(i) an approximate $21,748 reduction in interest rates on our
RLOC, (a)(ii) an approximate $11,850 reduction due to lower average borrowings
on our RLOC, offset, in part, by (b)(i) $407 increase in interest expense
related to the notes payable - related party notes, (b)(ii) $2,720 increase in
interest expense related to the Paycheck Protection Program Loan ("PPP Loan"),
and (b)(iii) $3,791 increase in interest related to the Economic Injury Disaster
Loan ("EIDL Loan").
Tax
For the year ended December 31, 2020, we recognized a tax expense of $18,993,
compared to $781,085 for the year ended December 31, 2019. The tax expense
recognized in 2019 is a result of recognition of a valuation allowance for
deferred tax assets based on management's determination that it is more likely
than not that all or a portion of the deferred tax asset will not be realized.
For additional information, please see Note 11 of our accompanying consolidated
Financial Statements, entitled "Income Taxes."
Net Loss
For the year ended December 31, 2020, we had a net loss of $1,432,495, compared
to net loss of $3,316,495 for the year ended December 31, 2019, reflecting a
reduction in our net loss of $1,884,000, or approximately 57%. The primary
drivers for our reduction in net loss for the year ended December 31, 2020 were
(a)(i) a $1,566,736 increase in gross profit, (a)(ii) $1,924,418 reduction in
selling, general, administrative, and other, (a)(iii) $932,203 reduction in
goodwill impairment, (a)(iv) $762,092 reduction in income tax, (a)(v) $26,680
reduction in interest expense, and (a)(vi) $2,930 reduction in depreciation and
amortization, offset, in part, by (b)(i) $2,226,799 increase in change in fair
value of contingent purchase consideration, and (b)(ii) $1,104,260 increase in
commissions.
Liquidity and Capital Resources
Cash Flows
A summary of our cash flows is as follows:
Year Ended
December 31,
2020 2019
Net cash provided by/(used in) operating activities $ 236,654 $ (4,739 )
Net cash used in investing activities (20,757 ) (15,318 )
Net cash (used in)/provided by financing activities (127,749 ) 275,053
Net increase in cash and cash equivalents $ 88,148 $ 254,996Net Cash Provided by/(Used In) Operating Activities
Our net cash provided by operating activities was $236,654 for year ended
December 31, 2020 compared to net cash used in operating activities of $4,739
for the year ended December 31, 2019. The increase of $241,393 primarily
resulted from: (a)(i) a $1,884,000 reduction in net loss, (a)(ii) a $827,623
reduction in account receivable, a $476,333 reduction in inventories, (a)(iii) a
$443,803 increase in accounts payable, (a)(iv) a $25,944 reduction in prepaid
expenses and other current assets; offset, in part, by (b)(i) a $1,248,200
reduction in accrued expenses, (b)(ii) a $1,187,436 increase in long term
accounts receivable, and (b)(iii) $980,674 in non-cash adjustments.
Net Cash Used In Investing Activities
Our net cash used in investing activities for the year ended December 31, 2020
was $20,757 compared to $15,318 for the year ended December 31, 2019. This
increase of $5,439 was primarily driven by investment in information technology
related to new and replacement user workstations.
Net Cash Provided by (Used in) Financing Activities
Our net cash used in financing activities was $127,749 for the year ended
December 31, 2020, compared to net cash provided by financing activities of
$275,053 for the year ended December 31, 2019. This decrease of $402,802 is
primarily driven by (a)(i)
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$1,114,202 reduction in net borrowings from our RLOC; offset in part, by (b)(i)
$361,400 proceeds from the PPP, (b)(ii) $200,000 proceeds from notes payable -
related parties, and (b)(iii) $150,000 in proceeds from EIDL Loan.
Liquidity
Our primary sources of liquidity are cash from our operations and our RLOC with
Amegy Bank. At December 31, 2020, our current assets exceeded our current
liabilities by $5,372,651 (our "Working Capital"), which included $1,187,458 in
cash and cash equivalents. Cash from our operations and net borrowings on our
RLOC supports our Working Capital needs.
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"). 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 ("Second Amendment"). 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 (the
"Third Amendment"). 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 (the "Fourth Amendment"). 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
(the "Fifth Amendment"). 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 fiscal
quarters ending June 30, 2020 and 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
("Sixth Amendment"), which extended the termination date of our RLOC to May 4,
2021. The Company was in compliance with all RLOC covenants as of December 31,
2020. (See Note 5, "Senior Secured Revolving Credit Facility" of our
accompanying consolidated notes to our Financial Statements, beginning on page
F-1).
We rely on the RLOC for capital expenditures and day-to-day Working Capital
needs. As of March 8, 2021, we had approximately $1,375,335 in available cash,
and $698,047 available on our RLOC for borrowing (subject to certain borrowing
base limitations). Borrowings on our RLOC are repaid from cash generated from
our operations.
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Payroll Protection Program
On April 11, 2020, we received approval from the U.S. Small Business
Administration ("SBA") to fund our request for a PPP Loan created as part of the
recently enacted Coronavirus Aid, Relief, and Economic Security Act ("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 Company has filed for forgiveness of the entire balance.
The PPP Loan is reflected in short term liabilities in our accompanying
consolidated balance sheets on F-1 as we expect the PPP Loan will be forgiven
during 2021. (See Note 7, "Payroll Protection Program" of our accompanying
consolidated notes to our Financial Statements, beginning on page F-1).
Economic Injury Disaster Loan
On May 12, 2020, we executed the standard loan documents required for securing
an EIDL Loan from the SBA in light of the impact of the COVID-19 pandemic on our
business. Pursuant to that certain Loan Authorization and Agreement (the "SBA
Loan Agreement"), the principal amount of the EIDL Loan was $150,000, with
proceeds to be used for working capital purposes. 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 consolidated statements of operations. (See Note 8, "Economic
Injury Disaster Loan" of our accompanying consolidated notes to our Financial
Statements, beginning on page F-1).
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 $2 million to $3 million and anticipate these
investments to occur primarily during the calendar year 2022. We expect sources
of capital for these investments to be derived from cash from operations and
additional debt financing.
Off-Balance Sheet Arrangement
As of December 31, 2020, we had no off-balance sheet arrangements.
Impact of Inflation
We do not believe the effect of inflation, as measured by fluctuations in the
U.S. Consumer Price Index, has had a material impact on our Financial Statements
for the year ended December 31, 2020.
Critical Accounting Policies and Estimates
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 consolidated notes to our Financial Statements and
found elsewhere in this 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 consolidated notes to our Financial Statements.
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