UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended:
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of |
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(I.R.S. Employer |
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incorporation or organization) |
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Identification No.) |
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(Address of principal executive offices) |
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(Zip Code) |
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes ☐ No ☐
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: As of November 5, 2022,
FUSE MEDICAL, INC.
FORM 10-Q
INDEX
1
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
FUSE MEDICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in dollars, except share data)
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September 30, 2022 |
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December 31, 2021 |
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(Unaudited) |
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Assets |
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Current assets: |
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Cash |
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$ |
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$ |
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Accounts receivable, net of allowance of $ |
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Inventories |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Long term accounts receivable, net of allowance of $ |
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Intangible assets, net |
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Goodwill |
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Total assets |
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$ |
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$ |
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Liabilities and Stockholders' Equity (Accumulated Deficit) |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued expenses |
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Convertible notes payable - related parties |
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Notes payable - related parties |
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Senior secured revolving credit facility |
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Total current liabilities |
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Earn-out liability |
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Total liabilities |
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Commitments and contingencies |
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Stockholders' equity (accumulated deficit) |
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Preferred stock, $ outstanding |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
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( |
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( |
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Total stockholders' equity (accumulated deficit) |
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( |
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( |
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Total liabilities and stockholders' equity (accumulated deficit) |
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$ |
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$ |
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See notes to interim unaudited condensed consolidated financial statements.
F-1
FUSE MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in dollars, except share data)
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For the Three Months Ended September 30, |
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For the Nine Months Ended September 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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Net revenues |
$ |
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$ |
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$ |
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$ |
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Cost of revenues |
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Gross profit |
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Operating expenses: |
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Selling, general, administrative and other |
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Commissions |
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Depreciation and amortization |
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Total operating expenses |
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Operating (loss) profit |
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( |
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( |
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( |
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Other (income) expense: |
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Interest expense |
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Gain on Payroll Protection Loan extinguishment |
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- |
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- |
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- |
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( |
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Total other (income) expense |
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( |
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Net loss before income tax |
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( |
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( |
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( |
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Income tax expense |
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Net loss |
$ |
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$ |
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$ |
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$ |
( |
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Net loss per common share - basic |
$ |
( |
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$ |
( |
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$ |
( |
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$ |
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Weighted average number of common shares outstanding - basic |
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See notes to interim unaudited condensed consolidated financial statements.
F-2
FUSE MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited)
(in dollars, except share data)
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Common Stock |
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Additional Paid-In |
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Retained Earnings/ |
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Shares |
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Amount |
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Capital |
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(Deficit) |
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Total |
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Balance, December 31, 2021 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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Stock compensation expense |
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- |
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- |
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- |
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Net loss |
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- |
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- |
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- |
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( |
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Balance, March 31, 2022 |
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( |
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( |
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Stock compensation expense |
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- |
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- |
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- |
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Net loss |
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- |
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- |
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- |
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( |
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( |
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Balance, June 30, 2022 |
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( |
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( |
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Stock compensation expense |
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- |
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- |
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- |
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Net loss |
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- |
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- |
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- |
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( |
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( |
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Balance, September 30, 2022 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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Common Stock |
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Additional Paid-In |
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Retained Earnings/ |
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Shares |
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Amount |
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Capital |
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(Deficit) |
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Total |
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Balance, December 31, 2020 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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Stock compensation expense |
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- |
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- |
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- |
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Net loss |
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- |
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- |
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- |
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( |
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( |
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Balance, March 31, 2021 |
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( |
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( |
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Stock compensation expense |
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- |
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- |
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- |
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Net loss |
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- |
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- |
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- |
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( |
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( |
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Balance, June 30, 2021 |
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( |
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( |
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Stock compensation expense |
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- |
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- |
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- |
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Net loss |
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- |
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- |
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- |
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( |
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( |
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Balance, September 30, 2021 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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See notes to interim unaudited condensed consolidated financial statements.
F-3
FUSE MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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For the Nine Months Ended September 30, |
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2022 |
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2021 |
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Cash flows from operating activities |
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Net loss |
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$ |
( |
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$ |
( |
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Adjustments to reconcile net loss to net cash provided by operating activities: |
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Depreciation and amortization |
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Stock based compensation |
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Provision for bad debts and discounts |
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( |
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Provision for long term accounts receivable |
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Provision for slow moving inventory |
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( |
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( |
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Gain on Payroll Protection Program Loan extinguishment |
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- |
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( |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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Inventories |
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( |
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( |
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Prepaid expenses and other current assets |
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( |
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( |
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Long term accounts receivable |
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( |
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( |
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Accounts payable |
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Accrued expenses |
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Net cash provided by operating activities |
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Cash flows from investing activities |
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Purchase of property and equipment |
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( |
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- |
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Net cash (used in) investing activities |
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( |
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- |
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Cash flows from financing activities |
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Net payments on CNH senior secured revolving credit facility |
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( |
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- |
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Payments from Economic Injury Disaster Loan, net |
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- |
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( |
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Proceeds on Economic Injury Disaster Loan |
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- |
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Net cash (used in) financing activities |
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( |
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Net increase (decrease) in cash |
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( |
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Cash and cash equivalents - beginning of period |
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Cash and cash equivalents - end of period |
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$ |
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$ |
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Supplemental disclosure of cash flow information: |
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Cash paid for interest |
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$ |
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$ |
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See notes to interim unaudited condensed consolidated financial statements.
F-4
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Nature of Operations
Overview
Fuse Medical, Inc., a Delaware corporation (the “Company”), is a manufacturer and national distributor of medical devices and surgical implants for the orthopedic market. The Company acquired CPM Medical Consultants, LLC (“CPM”) in
Nature of Business
The Company is a manufacturer, distributor, and wholesaler of medical device implants, offering a broad portfolio of orthopedic implants and biologics including: (i) internal and external fixation products; (ii) upper and lower extremity plating and total joint reconstruction implants; (iii) soft tissue fixation and augmentation for sports medicine procedures; (iv) spinal implants for trauma, degenerative disc disease and deformity indications; and (v) a wide array of osteo-biologics and regenerative products, which include human allografts, substitute bone materials, tendons, and regenerative tissues. All of the Company’s medical devices are approved by the FDA for sale in the United States, and all of the Company’s Biologics suppliers are licensed tissue banks accredited by the American Association of Tissue Banks.
The Company’s broad portfolio of Orthopedic Implants and Biologics provide high-quality products to assist surgeons with positive patient outcomes and cost-effective solutions for its customers, which include hospitals, medical facilities, and sub-distributors. The Company operates under exclusive and non-exclusive agreements with certain vendors and supply partners in the geographic territories the Company serves.
The Company continuously reviews and expands its product lines to ensure that they offer a comprehensive, high-quality and cost-effective selection of Orthopedic Implants and Biologics so that the Company can be more relevant to its customer needs while continuing to grow its existing customer base. Additionally, the Company continues to grow its manufacturing operations, both by internal product development as well as the acquisition of existing FDA cleared devices.
Basis of Presentation
The interim unaudited condensed consolidated financial statements included herein reflect all material adjustments (consisting of normal recurring adjustments and reclassifications and non-recurring adjustments) which, in the opinion of the Company, are ordinary and necessary for a fair presentation of results for the interim periods. Certain information and footnote disclosures required under generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The Company believes the disclosures are adequate to make the information presented not misleading.
The condensed consolidated balance sheet information as of December 31, 2021, was derived from the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2021 (“2021 Annual Report”), filed with the SEC pursuant to Section 13 or 15(d) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on March 31, 2022. These interim unaudited condensed consolidated financial statements should be read in conjunction with the 2021 Annual Report.
The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the entire fiscal year or for any other period as the Company has historically experienced seasonal trends with greater revenue and volume between the last two calendar quarters compared to the first two calendar quarters of the year.
F-5
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2. Significant Accounting Policies
Principles of Consolidation
The interim unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, CPM. Intercompany transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the interim unaudited condensed consolidated financial statements in accordance with GAAP, requires the Company to make estimates and assumptions that affect the Company’s reported amounts in the interim unaudited condensed consolidated financial statements.
Actual results could differ from those estimates. Significant estimates on the accompanying interim unaudited condensed consolidated financial statements include the allowance for doubtful accounts, valuation of inventories, the Company’s effective income tax rate, the fair value calculations of stock-based compensation, goodwill, finite lived intangibles and the earn-out (“Earn-Out”) liability.
Segment Reporting
In accordance with Accounting Standards Codification (“ASC”) No. 280, “Segment Reporting,” the Company uses the management approach for determining its reportable segments. The management approach is based upon the way that management reviews performance and allocates resources. The Company’s Chief Executive Officer serves as the Company’s chief operating decision maker, and the management team reviews operating results on a consolidated basis for purposes of allocating resources and evaluating the financial performance of the Company. The Company has integrated the operations of CPM and, prior to its dissolution, Maxim. Accordingly, the Company has determined that it has
Reclassification
Medical instrument depreciation was previously reported as a component of cost of revenues in the Company’s accompanying consolidated statements of operations. Medical instruments are orthopedic devices that are utilized in all cases where our Orthopedic Implants are implanted. Subsequent to December 31, 2021, the Company began depreciating these medical instruments over 3 years and have now reclassed this depreciation expense to depreciation and amortization in the accompanying consolidated statements of operations.
Loss Per Common Share
Loss per common share, basic is calculated by dividing the net income/(loss) attributable to common stockholders by the weighted-average number of common stock, par value $
Diluted loss per common share is computed by dividing net income/(loss) by the weighted-average number of Common Stock equivalents outstanding for the period determined using the treasury stock method. For the nine months ended September 30, 2022 and 2021, the Company excluded the effects of outstanding stock options, convertible notes and, to the extent vested, restricted stock as their effects were antidilutive due to the Company’s operating loss during these periods. (See Note 9, “Stockholders’ Equity” for the terms and conditions of restricted stock).
F-6
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Fair Value Measurements
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The Company classifies assets and liabilities recorded at fair value under the fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. The fair value measurements are classified under the following hierarchy:
Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets and liabilities in active markets;
Level 2—Observable inputs, other than quoted market prices, that are either directly or indirectly observable in the marketplace for identical or similar assets and liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities; and
Level 3—Unobservable inputs that are supported by little or no market activity that are significant to the fair value of assets or liabilities.
In connection with the CPM Acquisition, the Company initially recorded a $
The Earn-Out liability, which represents contingent consideration associated with the CPM Acquisition, is recorded as a liability. This liability is subject to re-measurement to fair value at each reporting date until the contingency is resolved and the changes in fair value are recognized in the consolidated statements of operations at each reporting period.
The Earn-Out was remeasured to fair value under the probability weighted income approach. As a result, the fair value of the Earn-Out liability was reduced by $
There was
Financial Instruments
The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments. The recorded values of notes payable approximate their respective fair values based upon their effective interest rates.
Cash and Cash Equivalents
The Company considers highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. There were
Accounts Receivable and Allowances
Accounts receivable are non-interest bearing and are stated at gross invoice amounts less an allowance for doubtful accounts receivable and an allowance for contractual discount pricing. Credit is extended to customers based on an evaluation of their financial condition, industry reputation, and other factors considered by the Company. The Company generally does not require collateral or
F-7
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
other security interest to support accounts receivable. Based on trends and specific factors, the customer’s credit terms may be modified, including required payment upon delivery.
The Company performs regular on-going credit evaluations of its customers as deemed relevant. As events, trends, and circumstances warrant, the Company estimates the amounts that are more likely than not to be uncollectible. These amounts are recognized as bad debt expense and are reflected within selling, general, administrative and other expenses on the Company’s accompanying interim unaudited condensed consolidated statements of operations.
When accounts are deemed uncollectible, they are often referred to the Company’s outside legal firm for litigation. Accounts deemed uncollectible are written-off in the period when the Company has exhausted its efforts to collect overdue and unpaid receivables or otherwise has evaluated other circumstances that indicate that the Company should abandon such efforts. Accounts deemed uncollectible are removed from the Company’s accounts receivable portfolio, with a corresponding offset to the allowance for doubtful accounts receivable. The Company may record additional allowances for doubtful accounts based on known trends and expectations to ensure the Company’s accounts receivable portfolio is recorded at net realizable value. Specific allowances are re-evaluated and adjusted as additional facts and information become available. Previously written-off accounts receivable subsequently collected are recognized as a reduction of bad debt expense when funds are received.
The Company estimates its allowance for contractual discount pricing, by evaluating specific accounts where information indicates the customer is offered contractual pricing and discount allowances. In these arrangements, the Company uses assumptions and judgement, based on the best available facts and circumstances to record a specific allowance for the amounts due from those customers. The allowance is offset by a corresponding reduction to revenue. These specific allowances are re-evaluated, analyzed, and adjusted as additional information becomes available to determine the total amount of the allowance. The Company may record additional allowances based on trends and expectations to ensure the Company’s accounts receivable portfolio is recorded at net realizable value.
Inventories
Inventories are stated at the lower of cost or net realizable value (first-in, first-out) which includes an allowance for slow-moving inventory, expired inventory, and inventory obsolescence. Inventories consist entirely of finished goods and include internal and external fixation products; upper and lower extremity plating and total joint reconstruction; soft tissue fixation and augmentation for sports medicine procedures; spinal implants for trauma, degenerative disc disease, and deformity indications (collectively, “Orthopedic Implants”) and osteo-biologics and regenerative tissue which include human allografts, substitute bone materials, tendons, as well as amniotic tissues (collectively, “Biologics”). The Company reviews the market value of inventories whenever events and circumstances indicate that the carrying value of inventories may not be recoverable from the estimated future sales price less cost of disposal and normal gross profit. In cases where the market values are less than the carrying value, a write-down is recognized equal to an amount by which the carrying value exceeds the market value of inventories.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets per the following table. Expenditures for additions and improvements are capitalized, while repairs and maintenance are expensed as incurred. The Company reviews long-lived assets for impairment annually or whenever changes in circumstances indicate that the carrying amount of an asset might not be recoverable.
|
Category |
|
Useful Life |
|
Computer equipment and software |
|
|
|
Furniture and fixtures |
|
|
|
Office equipment |
|
|
|
Medical instruments |
|
|
|
Software |
|
|
Upon the retirement or disposition of property and equipment, the related cost and accumulated depreciation is removed. A gain is recorded when consideration received is more than the disposed asset’s cost, net of depreciation, and a loss is recorded when consideration received is less than the disposed asset’s cost, net of depreciation.
F-8
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Long-Lived Assets
The Company reviews other long-lived assets for indicators of impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The evaluation is performed at the lowest level of identifiable cash flows, which is at the individual asset level or the asset group level. The undiscounted cash flows expected to be generated by the related assets are estimated over their useful life based on updated projections. If the evaluation indicates that the carrying amount of the assets may not be recoverable, any potential impairment is measured based upon the fair value of the related assets or asset group as determined by an appropriate market appraisal or other valuation technique. Assets classified as held for sale, if any, are recorded at the lower of carrying amount or fair value less costs to sell.
Goodwill and Other Intangible Assets
Goodwill is determined based on an acquisition purchase price in excess of the fair value of identified net assets acquired. Intangible assets with lives restricted by contractual, legal, or other means are amortized over their useful lives.
Goodwill is not amortized, but is tested in the fourth quarter each year for impairment, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. The Company performs its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. If the carrying value of a reporting unit exceeds its fair value, an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value.
ASC 350-30-35-18, “Intangible assets not subject to amortization,” indicates that an intangible asset that is not subject to amortization shall be tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. The Company’s 510(k) intangible asset has an indefinite life. The Company does not believe that a triggering event has occurred as of September 30, 2022.
The Company’s intangible assets subject to amortization consist primarily of acquired non-compete agreements, funds to secure the Company’s Credit and Security Agreement (the “Credit Agreement”) with CNH Finance Fund I, L.P., and customer relationships. Amortization expense is calculated using the straight-line method over the asset’s expected useful life.
Revenue Recognition
The Company’s revenues are generated from the sales of Orthopedic Implants and Biologics to support orthopedic surgeries. The Company obtains purchase orders from its customers for the sale of its products, which set forth the general terms and conditions including line item pricing and payment terms (generally due upon receipt). The Company recognizes revenue when its customers obtain control over the assets (generally when the title passes upon shipment or when a product is utilized in a surgery), and it is probable that the Company will collect substantially all the amounts due. Individual promised goods are the Company’s only performance obligation.
Due to the nature of its products, the Company’s product returns have been historically immaterial.
The Company includes shipping and handling fees in net revenues. Shipping and handling costs are associated with outbound freight after control over a product has transferred to a customer and are accounted for as a fulfillment cost and are included in cost of goods sold on the Company’s accompanying interim unaudited condensed consolidated statements of operations.
F-9
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Revenue Differentiation
The Company measures sales volume based on medical procedures in which the Company’s products are sold and used (“Cases”). The Company considers Cases resulting from direct sales to medical facilities to be retail cases (“Retail Cases”) and Cases resulting from sales to third parties, such as non-medical facilities, distributors, or sub-distributors, to be wholesale cases (“Wholesale Cases”). Some of the Company’s sales for Wholesale Cases are on a consignment basis with a third party. When consigned, the revenue is not recorded until the device is implanted in a patient during surgery. In the Company’s industry, Retail Cases are typically sold at higher price points than Wholesale Cases, resulting in greater revenue and gross profit per Case.
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
||||
|
Category |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Wholesale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Cost of Revenues
Cost of revenues consists of (i) cost of goods sold, (ii) freight and shipping costs for items sold to customers, (iii) cost of storage, (iv) inventory shrink, and (v) an estimate for slow-moving inventory, expired inventory, and inventory obsolescence.
Stock-Based Compensation
Stock-based compensation expense is measured at the grant date fair value of the award and is expensed over the requisite service period. For employee stock-based awards, the Company calculates the fair value of the award on the date of grant using the Black-Scholes option pricing model. Determining the fair value of stock-based awards at the grant date under this model requires judgment, including estimating volatility, employee stock option exercise behaviors, and forfeiture rates. The assumptions used in calculating the fair value of stock-based awards represent the Company's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. For non-employee stock-based awards, the Company calculates the fair value of the award on the date of grant in the same manner as employee awards, however, the awards are revalued at the end of each reporting period and the pro-rata compensation expense is adjusted accordingly until such time the non-employee award is fully vested, at which time the total compensation recognized to date shall equal the fair value of the stock-based award as calculated on the measurement date, which is the date at which the award recipient’s performance is complete. The estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised.
Recent Accounting Pronouncements
The Company considers the applicability and impact of all Accounting Standard Updates (“ASU”) issued, both effective and not yet effective.
Other recent accounting pronouncements issued by the Financial Accounting Standards Board, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the SEC did not or are not believed by the Company to have a material impact on the Company's present or future consolidated financial statements.
F-10
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3. Property and Equipment
Property and equipment consisted of the following at September 30, 2022 and December 31, 2021:
|
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
||
|
Computer equipment and software |
|
$ |
|
|
|
$ |
|
|
|
Medical instruments |
|
|
|
|
|
|
- |
|
|
Office equipment |
|
|
- |
|
|
|
- |
|
|
Property and equipment costs |
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
|
Property and equipment, net |
|
$ |
|
|
|
$ |
|
|
Depreciation expense for the three months ended September 30, 2022 and 2021 was $
Note 4. Goodwill and Intangible Assets
The following table summarizes the Company’s goodwill and other intangible assets:
|
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
|
Amortization period (years) |
||
|
Intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
510(k) product technology |
|
$ |
|
|
|
$ |
|
|
|
|
|
Customer relationships |
|
|
|
|
|
|
|
|
|
|
|
CNH Credit Agreement |
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated amortization |
|
|
( |
) |
|
|
( |
) |
|
|
|
Intangible assets, net |
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
|
|
|
$ |
|
|
|
|
Amortization expense for the three months ended September 30, 2022 and 2021 was $
Company’s intangible assets subject to amortization consist primarily of acquired non-compete agreements, funds to secure the Credit Agreement with CNH Finance Fund I, L.P., and customer relationships.
Note 5. Senior Secured Revolving Credit Facility
On
On September 21, 2018, the Company executed the First Amendment to the RLOC with Amegy Bank (the “First Amendment”). The First Amendment (i) waived the Company’s events of default under the RLOC through the fiscal quarter ended September 30, 2018, and (ii) added a covenant that the Company achieve quarterly net income of $
On November 19, 2018, the Company executed the Second Amendment to the RLOC with Amegy Bank (the “Second Amendment”). The Second Amendment (i) waived the Company’s events of default under the RLOC, (ii) reduced the aggregate limit of the RLOC to $
F-11
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On
On December 18, 2019, the Company executed the Fourth Amendment to the RLOC with Amegy Bank (the “Fourth Amendment”). Pursuant to the Fourth Amendment, Amegy Bank (i) waived the Company’s events of default under the RLOC, (ii) reduced the aggregate limit of the RLOC to $
On May 21, 2020, the Company executed the Fifth Amendment to the RLOC with Amegy Bank (the “Fifth Amendment”). Pursuant to the Fifth Amendment, Amegy Bank (i) waived the Company’s events of default under the RLOC, (ii) amended the financial covenants to state that
In conjunction with executing the Fifth Amendment to the RLOC, the Company obtained an additional $
On November 12, 2020, the Company executed a Sixth Amendment to the RLOC with Amegy Bank (the “Sixth Amendment”), which extended the termination date of our RLOC to
On May 4, 2021, the Company executed a Seventh Amendment to the RLOC with Amegy Bank (the “Seventh Amendment”), waiving the events of default for the three months ended March 31, 2021 and extending the termination date of the RLOC until
On August 5, 2021, the Company 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.
The Company was not in compliance with the minimum quarterly EBITDA requirement for the twelve months ended September 30, 2021.
On November 4, 2021, the Company executed the Eighth Amendment to the RLOC with Amegy bank (the “Eighth Amendment”). Pursuant to the Eighth Amendment, Amegy Bank (i) waived the events of default for the Company not meeting the minimum quarterly EBITDA for the twelve months ended September 30, 2021, (ii) reduced the aggregate limit of the loans offered pursuant to the Loan Agreement to $
On December 14, 2021, the Company entered into the Credit Agreement (the “Credit Agreement”) with CNH Finance Fund I, L.P., a Delaware limited partnership (the “Lender”). The Credit Agreement provides for a secured revolving credit facility maturing on
The Company used borrowings under the Facility to repay in full (i) the Amended and Restated Business Loan Agreement, dated December 31, 2017, among ZB, N.A. (d/b/a Amegy Bank) and the Company and CPM (the “Borrowers”), as amended, and (ii) the U.S. Small Business Administration Loan Authorization and Agreement, dated May 12, 2020, between the Company and the U.S. Small Business Association, as amended. Borrowings under the Credit Agreement may be used for payment of fees, costs and expenses incurred in connection with the Credit Agreement and working capital for the Borrowers and their subsidiaries.
Borrowings under the Credit Agreement bear interest at a floating rate, which will be at the Prime Rate plus
F-12
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The obligations of the Borrowers with respect to the Credit Agreement are secured by a pledge of substantially all of the personal property assets of the Borrowers, including accounts receivables, deposit accounts, intellectual property, investment property, inventory, equipment and equity interests in their respective subsidiaries.
The Credit Agreement contains customary affirmative and negative covenants, including limitations on the Company’s and its subsidiaries’ 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 the Company on a consolidated basis to maintain, as of
The Credit Agreement contains customary representations and warranties of the Borrowers. These representations and warranties have been made solely for the benefit of the Lender and such representations and warranties should not be relied on by any other person, including investors. In addition, such representations and warranties (i) have been qualified by disclosures made to the Lender in connection with the agreement, (ii) are subject to the materiality standards contained in the agreement which may differ from what may be viewed as material by investors and (iii) were made only as of the date of the agreement or such other date as is specified in the Credit Agreement.
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.
Pursuant to the Credit Agreement, the Company had an outstanding balance of $
Note 6. Notes Payable – Related Parties
During July 2016 through October 2016, the Company obtained three working capital loans from NC 143 and RMI in the aggregate amount of $
On May 6, 2020, the Company borrowed $
During the three months ended September 30, 2022 and 2021, interest expense of $
Note 7 – Payroll Protection Program
F-13
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8 – Economic Injury Disaster Loan
On May 12, 2020, the Company executed the standard loan documents (“SBA Loan Agreement”) 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 the Company’s business (the “EIDL Loan”). Pursuant to the SBA Loan Agreement, the principal amount of the EIDL Loan was $
EIDL Loan interest expense incurred for the three months ended September 30, 2022 was approximately
On September 24, 2021, the Company 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 the Company’s 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 $
The Company used borrowings under the Credit Agreement, as discussed in Note 5, to repay in full (i) the Amended and Restated Business Loan Agreement, dated December 31, 2017, among ZB, N.A. (d/b/a Amegy Bank) and the Borrowers as amended, and (ii) EIDL Loan.
Note 9. Stockholders’ Equity
Stock-Based Compensation
The 2018 Amended and Restated Equity Incentive Plan of Fuse Medical, Inc. (“2018 Equity Plan”) is the Company’s stock-based compensation plan, which the Company’s Board of Directors (the “Board”) adopted on April 5, 2017, and subsequently amended and restated on December 13, 2018. The 2018 Equity Plan provides for the granting of equity awards, including qualified incentive and non-qualified stock options, stock appreciation awards, and restricted stock awards to employees, directors, consultants, and advisors. Awards granted pursuant to the 2018 Equity Plan are subject to a vesting schedule set forth in individual agreements.
The Company estimates the fair value of stock-based compensation utilizing the Black-Scholes option pricing model. Black-Scholes option pricing is calculated using several variables, including the expected option term, expected volatility of the Company’s stock price over the expected option term, expected risk-free interest rate over the expected option term, expected dividend yield rate over the expected option term, and an estimate of expected forfeiture rates. The Company believes this valuation methodology is appropriate for estimating the fair value of stock options granted to employees and directors, which are subject to ASC Topic 718 requirements. The Company estimates of fair value may not be reflective of actual future values or amounts ultimately realized by recipients of these grants. The Company recognizes compensation on a straight-line basis over the requisite service period for each award.
The Company utilizes the simplified method to estimate the expected life for stock options granted to employees, as the Company does not have sufficient historical data regarding stock option exercises. The risk-free interest rate is based on the U.S. Treasury yields with terms equivalent to the expected life of the related option at the time of the grant. Dividend yield is based on historical trends. While the Company believes these estimates are reasonable, the compensation expense recorded would increase if the expected life was increased, a higher expected volatility was used, or if the expected dividend yield increased.
The Company made an accounting policy election to account for forfeitures when they occur, versus estimating the number of awards that are expected to vest, in accordance with ASU 2016-09.
F-14
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Non-Qualified Stock Option Awards
The Board did
A summary of the Company’s stock option activity for the nine months ended September 30, 2022, is presented below:
|
|
|
No. of Shares |
|
|
Weighted Average Exercise Price |
|
|
Weighted Average Remaining Contractual Term |
|
|
Aggregate Intrinsic Value |
|
||||
|
Balance outstanding at December 31, 2021 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
Granted |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Exercised |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Forfeited |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Expired |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Balance outstanding at September 30, 2022 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
- |
|
|
Exercisable at September 30, 2022 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
- |
|
Restricted Common Stock
The non-vested restricted stock awards (“RSAs”), as of September 30, 2022, were granted to the Company’s Board members as compensation. These awards vest only upon: (i) the occurrence of one of the Accelerating Events: (a) a Change in Control (as defined in an RSA Agreement); or (b) listing of the Company’s Common Stock on either NYSE or NASDAQ Stock Market; and (ii) the director’s delivery to the Company a Notice of Acceleration of Vesting (as defined in an RSA Agreement), within the Acceleration Notice Period (as defined in an RSA Agreement).
As of September 30, 2022, and 2021, it was not probable that the performance conditions on the outstanding RSAs would be met, therefore,
There were
|
|
Number of Shares |
|
|
Fair Value |
|
|
Weighted Average Grant Date Fair Value |
|
|||
|
Non-vested, December 31, 2021 |
|
|
|
|
$ |
|
|
|
$ |
|
|
|
Granted |
|
- |
|
|
|
- |
|
|
|
- |
|
|
Vested |
|
- |
|
|
|
- |
|
|
|
- |
|
|
Forfeited |
|
- |
|
|
|
- |
|
|
|
- |
|
|
Non-vested, September 30, 2022 |
|
|
|
|
$ |
|
|
|
$ |
|
|
F-15
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10. Income Taxes
The Company is subject to U.S. federal income taxes, in addition to state and local income taxes.
The components of income tax expense are as follows:
|
|
|
For the Nine Months Ended September 30, 2022 |
|
|
For the Nine Months Ended September 30, 2021 |
|
||
|
Current: |
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
|
|
|
$ |
|
|
|
State |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
Federal |
|
|
|
|
|
|
|
|
|
State |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit) |
|
$ |
|
|
|
$ |
|
|
Significant components of the Company's deferred income tax assets and liabilities are as follows:
|
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
Net operating loss carryover |
|
$ |
|
|
|
$ |
|
|
|
Accounts receivable |
|
|
|
|
|
|
|
|
|
Compensation |
|
|
|
|
|
|
|
|
|
Inventory |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Intangibles |
|
|
( |
) |
|
|
( |
) |
|
Property and equipment |
|
|
( |
) |
|
|
( |
) |
|
Total deferred tax liabilities |
|
|
( |
) |
|
|
( |
) |
|
Deferred tax assets, net |
|
$ |
|
|
|
$ |
|
|
|
Valuation allowance: |
|
|
|
|
|
|
|
|
|
Beginning of year |
|
|
( |
) |
|
|
( |
) |
|
Increase during the year |
|
|
( |
) |
|
|
( |
) |
|
Ending balance |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
|
|
|
$ |
|
|
A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. The Company recorded a valuation allowance totaling $
At September 30, 2022, the Company estimates it has approximately $
F-16
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company believes its tax positions will more likely than not be upheld upon examination. As such, the Company has not recorded a liability for unrecognized tax positions. As of September 30, 2022, all the tax years remained open to examination for three years from the tax year in which net operating losses are utilized. The Company was not subject to examination by any income taxing authority as of September 30, 2022.
A reconciliation of income tax computed at the U.S. statutory rate to the effective income tax rate is as follows:
|
|
|
Nine Months Ended |
|
|||
|
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
|
Expected U.S. federal incomes as statutory rate |
|
|
|
|
|
|
|
Gain on Payroll Protection Loan |
|
|
|
|
|
|
|
Permanent differences |
|
|
|
|
|
|
|
State and local income taxes, net of federal benefit |
|
- |
|
|
- |
|
|
Change in deferred tax asset valuation allowance |
|
- |
|
|
- |
|
|
Effective tax rate |
|
- |
|
|
- |
|
Our effective income tax rates for the nine months ended September 30, 2022 and September 30, 2021 were -
Note 11. Concentrations
Concentration of Revenues, Accounts Receivable and Suppliers
For the nine months ended September 30, 2022 and 2021, the following significant customers had an individual percentage of total revenues equaling ten percent (10%) or greater:
|
|
For the Nine Months Ended |
|
|||||
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
||
|
Customer 1 |
|
|
% |
|
|
|
% |
|
Customer 2 |
|
|
% |
|
|
|
% |
|
Customer 3 |
|
|
% |
|
|
|
% |
|
Totals |
|
|
% |
|
|
|
% |
At September 30, 2022 and December 31, 2021, there was one and two significant customers, respectively, that had a concentration of accounts receivable representing ten percent (10%) or greater of accounts receivable:
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
||
|
Customer 1 |
|
|
% |
|
|
|
% |
|
Customer 2 |
|
|
% |
|
|
|
% |
|
Totals |
|
|
% |
|
|
|
% |
For the nine months ended September 30, 2022 and 2021, the following significant suppliers represented ten percent (10%) or greater of goods purchased:
|
|
For the Nine Months Ended |
|
|||||
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
||
|
Supplier 1 |
|
|
% |
|
|
|
% |
|
Supplier 2 |
|
|
% |
|
|
|
% |
|
Supplier 3 |
|
|
% |
|
|
|
% |
|
Totals |
|
|
% |
|
|
|
% |
F-17
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12. Related Party Transactions
Lease with 1565 North Central Expressway, LP
For its principal executive office, the Company leases an aggregate of approximately
For the nine months ended September 30, 2022 and 2021, the Company paid approximately $
AmBio Contract
The Company engaged AmBio Staffing, LLC (“AmBio”), a Texas licensed Professional Employment Organization, to provide payroll processing, employee benefit administration, and related human capital services effective January 1, 2017. Mr. Brooks owns and controls AmBio. As of September 30, 2022, AmBio operations support approximately
As of September 30, 2022 and December 31, 2021, the Company owed amounts to AmBio of approximately $
Operations
Historically, the Company conducts various related-party transactions with entities that are owned by or affiliated with Mr. Brooks and Mr. Reeg. These transactions are based on wholesale contractual agreements that the Company believes are on terms and conditions substantially similar to other third-party contractual agreements. As described more fully below, these transactions include: selling and purchasing of inventory on a wholesale basis, commissions earned and paid and shared-service fee arrangements.
MedUSA Group, LLC
MedUSA Group, LLC (“MedUSA”) is a sub-distributor previously owned and controlled by Mr. Brooks and Mr. Reeg. Effective as of October 1, 2022, Mr. Brooks and Mr. Reeg sold their interest in MedUSA to an unaffiliated party. MedUSA remains a sub-distributor with the Company. However, MedUSA is no longer deemed a related party to Fuse on and after October 31, 2022.
During the nine months ended September 30, 2022 and 2021, the Company:
|
|
• |
sold Orthopedic Implants and Biologics products to MedUSA in the amounts of approximately |
|
|
• |
incurred approximately $ |
As of September 30, 2022 and December 31, 2021, the Company had approximately $
As of September 30, 2022 and December 31, 2021, the Company had outstanding balances due from MedUSA of approximately
Payment terms per the stocking and distribution agreement with MedUSA are 30 days from receipt of invoice. As of September 30, 2022, MedUSA had
F-18
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Texas Overlord, LLC
Texas Overlord, LLC (“Overlord”) is an investment holding company owned and controlled by Mr. Brooks.
During the nine months ended September 30, 2022 and 2021, the Company:
|
|
• |
incurred approximately $ |
As of September 30, 2022 and December 31, 2021, the Company had approximately
As of September 30, 2022 and December 31, 2021, the Company had
NBMJ, Inc.
NBMJ, Inc. d/b/a Incare Technology (“NBMJ”) is a durable medical equipment, wound care, and surgical supplies distributor owned and controlled by Mr. Brooks.
During the nine months ended September 30, 2022 and 2021, the Company sold Biologics products to NBMJ in the amounts of approximately $
As of September 30, 2022 and December 31, 2021, the Company had $
Payment terms per the stocking and distribution agreement with NBMJ are 30 days from receipt of invoice. As of September 30, 2022, NBMJ had
Bass Bone and Spine Specialists
Bass Bone & Spine Specialists (“Bass”) operates as a sub-distributor of surgical implants and is owned and controlled by Mr. Brooks.
During the nine months ended September 30, 2022 and 2021, the Company:
|
|
• |
sold Orthopedic Implants and Biologics products to Bass in the amounts of approximately $ |
As of September 30, 2022 and December 31, 2021, the Company had outstanding balances due from Bass of approximately $
Payment terms per the stocking and distribution agreement with Bass are 30 days from receipt of invoice. As of September 30, 2022, Bass had
Sintu, LLC
Sintu, LLC (“Sintu”) operates as a sub-distributor of surgical implants and is owned and controlled by Mr. Brooks.
During the nine months ended September 30, 2022 and 2021, the Company incurred approximately $
As of September 30, 2022, and December 31, 2021, the Company had approximately $
F-19
FUSE MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Tiger Orthopedics, LLC
Tiger Orthopedics, LLC (“Tiger”) operates as a sub-distributor of surgical implants and is owned and controlled by Mr. Brooks.
During the nine months ended September 30, 2022 and September 30, 2021, the Company sold Orthopedic Implants and Biologics products to Tiger in the amounts of approximately
As of September 30, 2022 and December 31, 2021, the Company had
Payment terms per the stocking and distribution agreement with Tiger are 30 days from receipt of invoice. As of September 30, 2022, Tiger had
Modal Manufacturing, LLC
Modal Manufacturing, LLC (“Modal”) is a manufacturer of medical devices owned and controlled by Mr. Brooks.
During the nine months ended September 30, 2022 and 2021, the Company purchased approximately $
As of September 30, 2022 and December 31, 2021, the Company had outstanding balances owed to Modal of approximately $
Payment terms per the stocking and distribution agreement with Modal are 30 days from receipt of invoice. As of September 30, 2022, the Company had a past due balance of approximately $
F-20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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 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 December 31, 2021 (our “2021 Annual Report”), filed with the Securities and Exchange Commission (the “SEC”) pursuant to Section 13 or 15(d) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on March 31, 2022.
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 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 licensed by the FDA for storage and distribution of human cells, tissues and cellular and bone-based products (HCT/Ps), and 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 and related intellectual property.
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 Scientific Advisory Board, (“SAB”), for Sports Medicine and Extremities to further expand our efforts to manufacture Fuse branded products. This new SAB was created for the internal design and development of new products utilizing novel materials with osseointegration capabilities and anti-bacterial properties. Our projects continue to move through the development process towards FDA clearance and commercialization, with anticipated “first to market” designations on these new and differentiated technologies.
This new SAB complements our existing Spine and Orthopedic SABs which have been instrumental in our design and launch of multiple Fuse product lines within our portfolio.
Impact of Coronavirus
Currently, 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.
2
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 September 30, 2022 and
3
2021, our average revenues per Case was $4,260 and $4,409, respectively. For the nine months ended September 30, 2022 and 2021, our average revenues per Case was $4,404 and $5,343, respectively.
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 September 30, 2022 and 2021, our average cost of revenues per Case was $1,391 and $1,931, respectively. For the nine months ended September 30, 2022 and 2021, our average cost of revenues per Case was $1,546 and $1,992, respectively. Our strategy to increase Fuse branded products proved successful as the revenues produced by these products increased to approximately 50% of revenue for the nine months ended September 30, 2022, which is an approximate 24% increase over the same period of 2021.
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, 2022 |
|
(% Rev) |
|
September 30, 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
Three Months Ended September 30, 2022, Compared to Three Months Ended September 30, 2021
Net Revenues
For the three months ended September 30, 2022, net revenues were $4,536,595 compared to $4,250,554 for the three months ended September 30, 2021, which is an increase of $286,041 or approximately 7%. This increase was primarily attributable to the diminishing economic impacts of COVID-19.
For the three months ended September 30, 2022, the percent of Retail Cases increased 1% compared to the three months ended September 30, 2021. Revenues from Retail Cases as a percent of revenues for the three months ended September 30, 2022, increased by 3% compared to revenues from Retail Cases as a percent of revenues for the three months ended September 30, 2021. Although the volume and percent of revenues increased, it was an insufficient increase in volume to offset the reduction in revenue per case.
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 September 30, 2022, our cost of revenues was $1,481,648, compared to $1,861,620 for the three months ended September 30, 2021, representing a decrease of $379,972, or approximately 20%.
As a percentage of revenues, cost of revenues decreased by 11% to 33% for the three months ended September 30, 2022, compared to approximately 44% for the three months ended September 30, 2021. The 11% reduction in cost of revenues, as a percentage of revenues, is due to the difference of methodology on how medical instruments are expensed.
Gross Profit
For the three months ended September 30, 2022, we generated a gross profit of $3,054,947, compared to $2,388,934 for the three months ended September 30, 2021, representing an increase of $666,013, or approximately 28%. The increase in gross profit is due to the increase in net revenues and the reduction in cost of revenues as discussed above.
As a percentage of revenues, gross profit increased by 11% to 67% for the three months ended September 30, 2022, compared to approximately 56% for the three months ended September 30, 2021. This increase in gross profit as a percentage of revenues was primarily caused by the decrease 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, 2022, selling, general, administrative, and other expenses increased to $1,708,543 from $1,559,708 for the three months ended September 30, 2021, representing an increase of $148,835, or approximately 10%.
As a percentage of net revenues, selling, general, administrative, and other expenses accounted for approximately 38% and 37% for the three months ended September 30, 2022 and September 30, 2021, respectively. As a percentage of net revenue, the increase of approximately 1% primarily resulted from (a)(i) an approximate 1% increase in provision for bad debt, (ii) an approximate 3% increase in professional expenses, offset, in part, by (b)(i) an approximate 1% decline in stock-based compensation (ii) an approximate 1% decrease in leased staffing costs, and (iii) an approximate 1% decline in selling expenses, comprised of marketing and travel and entertainment expenses.
Commissions
For the three months ended September 30, 2022 and September 30, 2021, commission expense was $1,219,311 and $1,495,720, respectively, representing a decrease of $276,409, or approximately 18%.
As a percentage of net revenues, commission expense accounted for approximately 27% for the three months ended September 30, 2022, and 35% for the three months ended September 30, 2021. The overall reduction of commissions expense is directly due to the reduction of average commission rates associated with total revenues.
Depreciation and amortization
For the three months ended September 30, 2022, our depreciation and amortization expense increased to $82,199 from $14,493 for the three months ended September 30, 2021, representing an increase of $67,706. This increase was primarily due to the depreciation of medical instruments, as detailed below, and the amortization of the fees associated with obtaining the Credit Agreement.
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 September 30, 2022,
5
our management increased property and equipment by $97,821 and recorded depreciation expense of $49,484 which is reflected on our September 30, 2022 unaudited condensed consolidated balance sheet and statements of operations.
Interest
For the three months ended September 30, 2022, interest expense increased to $46,992 from $12,512 for the three months ended September 30, 2021, which is an increase of $34,480, or approximately 276%. The increase of $34,480 was primarily driven by (a)(i) an approximate $18,105 increase in interest costs caused by an increase in LIBOR market interest rates, (ii) an approximate $11,240 increase in interest related to increased borrowings on our Credit Agreement in comparison to our RLOC, and (iii) an approximate $5,135 increase related to accrued interest on our EIDL Loan.
Income tax
For the three months ended September 30, 2022, we recorded an income tax expense of approximately $7,278, compared to $3,537, for the three months ended September 30, 2021. For additional information, please see Note 10, “Income Taxes,” of our accompanying Financial Statements, beginning on page F-1.
Net Loss
For the three months ended September 30, 2022, we had net loss of $9,376 compared to $697,036 for the three months ended September 30, 2021, respectively, representing a decrease in net loss of $687,660 or approximately 99%. The drivers for our decrease in net loss for the three months ended September 30, 2022 were (a)(i) a $379,972 reduction in cost of revenue, (ii) an increase of $286,041 in net revenues, (iii) a $276,409 decrease in commissions, offset, in part, by (b)(i) an increase of $148,835 in SG&A and other expense, (ii) an increase of $67,706 in depreciation and amortization, (iii) a $34,480 increase in interest expense, and (iv) an increase in tax expense of $3,741.
Nine Months Ended September 30, 2022, Compared to Nine Months Ended September 30, 2021
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, 2022 |
|
(% Rev) |
|
September 30, 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 September 30, 2022, net revenues were $13,759,223 compared to $14,356,328 for the nine months ended September 30, 2021, a decrease of $597,105 or approximately 4%. This decrease was primarily attributable to the impact of pricing pressures within certain facilities, as well as the mix of products used in Cases.
For the nine months ended September 30, 2022, the percent of Retail Cases increased 7% compared to the nine months ended September 30, 2021. Revenues from Retail Cases as a percent of revenues for the nine months ended September 30, 2022, increased
6
by 4% compared to revenues from Retail Cases as a percent of revenues for the nine months ended September 30, 2021. Although the volume and percent of revenues increased, it was an insufficient increase in volume to offset the reduction in revenue per case.
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 September 30, 2022, our cost of revenues was $4,830,480, compared to $5,935,093 for the nine months ended September 30, 2021, representing a decrease of $1,104,613, or approximately 19%.
As a percentage of revenues, cost of revenues decreased approximately 6% to approximately 35% for the nine months ended September 30, 2022, compared to approximately 41% for the nine months ended September 30, 2021. The 6% decrease as a percentage of net revenues resulted from (a)(i) an approximate 14% decrease in medical instrument expense, and (ii) 1% reduction in cost of revenues product mix offset, in part, by (b)(i) an approximate 9% increase in inventory shrink and inventory loss provision.
Gross Profit
For the nine months ended September 30, 2022, we generated a gross profit of $8,928,743, compared to $8,421,235 for the nine months ended September 30, 2021, representing an increase of $507,508, or approximately 6%. The increase in gross profit is due to the reduction in cost of revenues as a percentage of net revenues as discussed above.
As a percentage of net revenue, gross profit increased by approximately 6% to 65% for the nine months ended September 30, 2022, compared to 59% for the nine months ended September 30, 2021. This increase in gross profit as a percentage of revenues was primarily caused by the decrease 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, 2022, selling, general, administrative, and other expenses decreased to $4,840,852 from $5,016,594 for the nine months ended September 30, 2021, representing a decrease of $175,742, or approximately 4%.
As a percentage of net revenues, selling, general, administrative and other expenses accounted for approximately 35% for the nine months ended September 30, 2022 and September 30, 2021. As a percentage of net revenue, the consistent percentage of net revenues included (a)(i) an approximate 2% increase in leased staffing costs, (ii) an approximate 1% increase in professional expense, (iii) a 1% increase for employee expense reimbursements related to business development and travel costs offset, in part, by (b)(i) an approximate 2% decline in the provision for bad debt and (ii) an approximate 2% decline in stock based compensation.
Commissions
For the nine months ended September 30, 2022 and September 30, 2021, commissions expense was $4,188,841 and $4,894,845, respectively, representing a decrease of $706,005, or approximately 14%.
As a percentage of net revenues, commissions expenses accounted for approximately 30% for the nine months ended September 30, 2022, and 34% for the nine months ended September 30, 2021. The overall reduction of commissions expense is directly due to the reduction of average commission rates associated with 4% reduction in total revenues as discussed above.
Depreciation and amortization
For the nine months ended September 30, 2022, our depreciation expense increased to $226,243 from $46,751 for the nine months ended September 30, 2021, representing an increase of $179,492. This increase was primarily due to the depreciation of medical instruments, as detailed below, and the amortization of the fees associated with obtaining the Credit Agreement.
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 September 30, 2022, our management increased property and equipment by $520,794 and recorded a depreciation expense of $128,097 which is reflected on our September 30, 2022 unaudited condensed consolidated balance sheet and statements of operations.
Interest
For the nine months ended September 30, 2022, interest expense increased to $116,477 from $47,561 for the nine months ended September 30, 2021, which is an increase of $68,916, or approximately 145%. The increase of $68,916 was primarily driven by (a)(i) an approximate $34,142 increase in interest related to increased borrowings on our Credit Agreement in comparison to our RLOC, (ii) an approximate $29,823 increase in interest costs caused by an increase in the LIBOR market interest rates, (iii) an approximate
7
$2,720 increase related to accrued interest on our PPP Loan, and (iv) an approximate $2,231 increase related to accrued interest on our EIDL Loan.
Income tax
For the nine months ended September 30, 2022, we recorded an income tax expense of approximately $17,305 compared to $12,723, for the nine months ended September 30, 2021. For additional information, please see Note 10, “Income Taxes,” of our accompanying interim unaudited condensed consolidated notes to our Financial Statements, beginning on page F-1.
Payroll Protection Program Loan Forgiveness
For the nine months ended September 30, 2022, we recorded a gain on the Payroll Protection Program Loan extinguishment of zero, compared to $361,400, for the nine months ended September 30, 2021. For additional information, please see Note 7, “Payroll Protection Program,” of our accompanying interim unaudited condensed consolidated notes to our Financial Statements, beginning on page F-1.
Net Loss
For the nine months ended September 30, 2022, we had a net loss of $460,975 compared to a net loss $1,235,839 for the nine months ended September 30, 2021, respectively, representing a decrease in net loss of $774,864, or approximately 63%. The drivers for our reduction in net loss for the nine months ended September 30, 2022 were (a)(i) a $1,104,613 reduction in cost of revenue, (ii) a decrease of $175,742 in SG&A and other expense, (iii) a $706,005 decrease in commissions, offset, in part, by (b)(i) a decrease of $597,105 in net revenues, (ii) a decrease of $361,400 in gains from the Payroll Protection Program extinguishment, (iii) an increase of $179,492 in depreciation and amortization, (iv) a $68,916 increase in interest expense, and (v) an increase in tax expense of $4,582.
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 |
) |
|
$ |
577,824 |
|
Net Cash Provided by Operating Activities
During the nine months ended September 30, 2022, net cash provided by operating activities was $866,257 compared to $231,479 for the nine months ended September 30, 2021, representing an increase of $634,778.
The increase provided by operating activities of $634,778 primarily resulted from: (a)(i) a $1,182,540 increase in cash provided by the net loss adjusted for non-cash items; (ii) a $893,167 increase in cash provided by accrued expenses; (iii) a $206,228 increase in cash provided by inventories; a (iv) $14,467 increase in cash used for prepaid expenses and other current assets; and (v) a $13,766 increase in cash provided by long term accounts receivable; offset, in part, by (b)(i) a $863,766 decrease in cash provided by accounts receivable; and (ii) a $811,624 increase in cash used for accounts payable.
Net Cash Used in Investing Activities
During the nine months ended September 30, 2022, net cash used in investing activities was $520,794 compared to zero for the nine months ended September 30, 2021, representing a decrease of $520,794.
The increase of $520,794 used in investing activities was for the purchase of medical instruments. 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.
Net Cash Used in Financing Activities
For the nine months ended September 30, 2022, net cash used in financing activities was $392,664, compared to $346,345 cash used in financing activities for the nine months ended September 30, 2021.
8
The decrease of $739,009 used in financing activities was from the net activity on our credit facility.
Liquidity
Our primary sources of liquidity are cash from our operations and the Credit and Security Agreement (the “Credit Agreement”) with CNH Finance Fund I, L.P., a Delaware limited partnership (“CNH”) described below. On September 30, 2022, our current assets exceeded our current liabilities by $1,555,048 (our “Working Capital”), which included $505,989 in cash and cash equivalents. We believe cash from our operations and net borrowings on our Credit Agreement supports our Working Capital needs for 2022. Beyond 2022, we believe that we will be able to support itself through our Credit Agreement until the we are able to support ourselves solely from the cash provided by operations.
On December 14, 2021, we entered into the Credit Agreement with CNH. The Credit Agreement provides for a secured revolving credit facility maturing on January 1, 2025 (the “Facility”) with an initial maximum principal in the amount of $5,000,000. Borrowings under the Facility are subject to a borrowing base as set forth in the Credit Agreement.
We used borrowings under the Facility to repay in full (i) our Amended and Restated Business Loan Agreement, dated December 31, 2017, among ZB, N.A. (d/b/a Amegy Bank) as amended (the “RLOC”), and (ii) the U.S. Small Business Administration Loan Authorization and Agreement, dated May 12, 2020, with the U.S. Small Business Association, as amended. Borrowings under the Credit Agreement may be used for working capital and payment of fees, costs and expenses incurred in connection with the Credit Agreement.
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 $175,000, provided that if we comply with the fixed charge coverage ratio for twelve consecutive months, the minimum liquidity covenant shall cease to be effective. The Credit Agreement also includes events of default customary for facilities of this type and upon the occurrence of any such event of default, all outstanding loans under the Facility may be accelerated and/or the lenders’ commitments terminated.
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 September 30, 2022, we had approximately $505,989 in available cash, and had reached the borrowing limit based on our borrowing base limitations. Borrowings on our Credit Agreement are repaid from cash generated from our operations.
Payroll Protection Program
On April 11, 2020, we received approval from the SBA to fund our request for a loan under the Payroll 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 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 in 2020. (See Note 8, “Economic Injury Disaster Loan” of our accompanying consolidated notes to our Financial Statements, beginning on page F-1).
On September 24, 2021, the Company 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 the Company’s 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
9
to $500,000, with proceeds to be used for working capital purposes. Interest accrued at the rate of 3.75% per annum. Installment payments, including principal and interest, were 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 was payable thirty years from the date of the A&R SBA Loan Agreement.
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 $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 utilizing the maximum limit with our new credit facility.
Capital Expenditures
For the nine months ended September 30, 2022, we had no material commitments for capital expenditures.
Off-Balance Sheet Arrangements
For the nine months ended September 30, 2022, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this item.
ITEM 4. CONTROLS AND PROCEDURES.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports, that are filed or submitted under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that this information is accumulated and communicated to management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
We conducted an evaluation (pursuant to Rule 13a-15(b) promulgated under the Exchange Act), under the supervision and with the participation of management, including our Chief Executive and Chief Financial Officers, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act) as of September 30, 2022.
Based on our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of September 30, 2022.
10
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
See the exhibits listed in the accompanying “Exhibit Index”.
11
EXHIBIT INDEX
|
Exhibit No. |
|
Description |
|
|
|
|
|
|
|
|
|
3.1 |
|
|
|
|
|
|
|
3.2 |
|
|
|
|
|
|
|
31.1* |
|
|
|
|
|
|
|
|
|
|
|
31.2* |
|
|
|
|
|
|
|
|
|
|
|
32.1** |
|
|
|
|
|
|
|
|
|
|
|
101.INS * |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
|
|
|
|
|
101.SCH * |
|
Inline XBRL Taxonomy Extension Schema Document |
|
|
|
|
|
|
|
|
|
101.CAL * |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
|
|
|
|
|
101.DEF * |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
|
|
|
|
|
|
101.LAB * |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
|
|
|
|
|
|
101.PRE * |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
|
|
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
|
* |
Filed herewith. |
|
** |
Furnished herewith |
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
FUSE MEDICAL, INC. |
|
|
|
|
|
|
|
|
Date: November 14, 2022 |
By: |
/s/ Christopher C. Reeg |
|
|
|
|
Christopher C. Reeg |
|
|
|
|
Chief Executive Officer and Director (Principal Executive Officer) |
|
|
Date: November 14, 2022 |
By: |
/s/ Lawrence S. Yellin |
|
|
|
|
Lawrence S. Yellin |
|
|
|
|
Chief Financial Officer and Director (Principal Financial Officer) |
|
13