Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this report.
Coronavirus (COVID-19)
The United States economy in general and our business specifically have been negatively affected by the COVID-19 pandemic. There are no reliable estimates of how long the pandemic will last or how many people are likely to be affected by it. For that reason, we are unable to reasonably estimate the long-term impact of the pandemic on our business at this time. Our first priority with regard to the COVID-19 pandemic is to ensure the safety and health of our employees, clinicians and patients. Subject to that, we are focusing our efforts on attempting to continue our business operations in this unprecedented environment. Part of our strategy includes changing many of our processes and practices in an effort to help mitigate the impact of COVID-19 on our business so that we can support our clinicians and safely make our at-home therapies available to patients. Since the onset of COVID-19, we have remained proactive to ensure we continue to adapt to our employees, clinicians and patients needs. These changes to our business include, but are not limited to:
● Initially, we modified our operations with the primary focus on keeping our employees safe while continuing to serve our clinicians and patients. As an essential business under federal guidelines, we continued to manufacture product and implemented multiple, smaller rotational shifts and other best practices to help protect the health and safety of our workforce. More recently, we have migrated closer to our pre-COVID work shifts, however we have implemented more stringent safety measures including mandatory use of face masks, social distancing and temperature checks for our employees.
● We have continued to incorporate remote and flexible work arrangements for employees whenever possible, including real-time, online training of our new sales representatives.
● Continuing employee travel and contact restrictions to reduce exposure.
● Collaborating with payers to modify coverage requirements by serving patients virtually.
● In concert with COVID-19 social distancing requirements and recommendations, we moved to a “no contact” virtual patient training model. This new model substantially reduced the need for in-person contact and visits to patients’ homes and clinics in order to protect the health and limit the exposure of both our trainers and patients. Accordingly in the second quarter of 2020, we inactivated our independent healthcare practitioners, who acted as at-home trainers to educate patients on the proper use of our systems, in order to allow these individuals to have access to specific COVID related financial relief.
● We continue to transition large, in-person medical education programs in favor of conducting virtual meetings whenever possible.
● When in-person visits are required, we are supporting clinicians and patients by using rigorous infection control practices.
We cannot assure you that these changes to our processes and practices will be successful in mitigating the impact of COVID-19 on our business. We continue to evaluate and, if appropriate, will adopt other measures in the future related to the ongoing safety of our employees, clinicians and patients. Additional information related to the COVID-19 pandemic is included in the MD&A sections below.
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Overview
We are a medical technology company that develops and provides innovative medical devices for the treatment of chronic diseases. Our mission is to help people suffering from chronic diseases live better and care for themselves at home. We focus our efforts on advancing the standard of care in treating chronic diseases in the home setting to improve patient outcomes and quality of life and help control rising healthcare expenditures. Our initial area of therapeutic focus is vascular disease, with a goal of advancing the standard of care in treating lymphedema and chronic venous insufficiency. We possess a unique, scalable platform to deliver at-home healthcare solutions throughout the United States. This evolving home care delivery model is recognized by policy-makers and insurance payers as a key for controlling rising healthcare costs. Our solutions deliver cost-effective, clinically proven, long-term treatment for people with these chronic diseases.
Our current products are the Flexitouch system and Entre system. A predecessor to our Flexitouch system received 510(k) clearance from the U.S. Food and Drug Administration (the “FDA”) in July 2002, and we introduced the system to address the many limitations of self-administered home-based manual lymphatic drainage therapy. We began selling our more advanced Flexitouch system after receiving 510(k) clearance from the FDA in October 2006. In September 2016, we received 510(k) clearance from the FDA for the Flexitouch system in treating lymphedema of the head and neck. In June 2017, we announced that we received 510(k) clearance from the FDA for the Flexitouch Plus, the third-generation version of our Flexitouch system. We derive the vast majority of our revenue from our Flexitouch system. Sales and rentals of our Flexitouch system represented 88% and 91% of our revenue in the six months ended June 30, 2020 and 2019, respectively.
We introduced our Entre system in the United States in February 2013. The Entre system is sold or rented to patients who need a simple pump or who do not yet qualify for insurance reimbursement for an advanced compression device such as our Flexitouch system. For the six months ended June 30, 2020 and 2019, sales and rentals of our Entre system represented 12% and 9% of our revenue, respectively.
In October 2018, we licensed, from Sun Scientific, Inc., the intellectual property rights related to the Airwear Gradient Compression Wrap, or the Airwear wrap, in the United States and Canada, for use in all medical applications, including but not limited to swelling/edema and ulcers (including lymphedema and chronic venous insufficiency conditions), but excluding the use of the intellectual property in the field of prophylaxis for deep vein thrombosis. In the second quarter of 2020, we reevaluated the Airwear wrap go-to market plan, and determined to focus our strategy on more advanced solutions within our core, long-standing Flexitouch and Entre franchises. Accordingly, we made the strategic decision to discontinue the Airwear wrap in the second quarter of 2020. Due to the planned discontinuation of the product line, we recorded a $4.0 million non-cash impairment charge to fully write-off the inventory and long-lived assets of the Airwear wrap in the quarter ended June 30, 2020. See Note 3 - “Summary of Significant Accounting Policies” to the consolidated financial statements in this report for more information regarding this impairment charge and discontinuation. Further, effective July 31, 2020, Sun Scientific, Inc. terminated the license agreement with us related to the Airwear wrap.
To support the growth of our business, we invest heavily in our commercial infrastructure, consisting of our direct sales force, home training materials, contracted at-home trainers, reimbursement capabilities and clinical expertise. We market our products in the United States using a direct-to-patient and -provider model. Our direct salesforce has grown to a team of 250 employees as of June 30, 2020, compared to over 215 employees as of June 30, 2019. This model allows us to directly approach patients and clinicians, whereby we disintermediate the traditional durable medical equipment channel, allowing us to capture both the manufacturer and distributor margins.
In concert with COVID-19 social distancing requirements, we moved to a “no contact” virtual patient training model. This new model substantially reduced the need for in-person contact and visits to patients’ homes and clinics. Accordingly in the second quarter of 2020, we inactivated our independent healthcare practitioners, who acted as at-home trainers to educate patients on the proper use of our systems.
As it relates to the impact of COVID-19 on our second quarter commercial processes, we continue to see a certain number of healthcare facilities and clinics with restricted access to their clinicians, reduced patient
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consultations and treatments, or being closed temporarily due to the pandemic. Towards the latter half of the quarter, we began to see some of the restrictions loosen, in line with the applicable governmental regulations. As most of our clinician customers practice outside of a hospital, we can interact with clinicians and patients on a virtual basis, using video conferencing and other non-direct means. We expect these virtual interactions with clinicians and patients to continue into the future until the pandemic subsides, and perhaps as a best practice in the future. To that end, we will continue to work towards expanding our commercial organization throughout the second half of 2020 by adding to our direct sales force.
We invest substantial resources in our Reimbursement Department to improve operational efficiencies and enhance individual payer expertise, while continuing our strategic focus of payer development. Our Payer Development group is composed of both strategic and analytical teams, with focus on payer decision-maker relationships and education, payer policy development and revision, payer contract negotiations, and payer data analysis. Our experienced Reimbursement Operations group is responsible for verifying patient insurance benefits, individual patient case development, prior authorization submissions, case follow-up, and appeals when necessary. Since the onset of COVID-19, our Reimbursement Department has been actively working with Medicare and a broad base of private payers to understand the ever-changing reimbursement criteria that are being introduced. We have seen increasing flexibility in coverage criteria with select payers in which they will now allow the use of virtual patient interactions in place of the previously required in-person interactions. However, as these circumstances are ever-changing, the extent to which these changes will impact our business in the future is not determinable at this time.
We also have a clinical team, consisting of a scientific advisory board, in-house therapists and nurses, and a medical director (part-time), that serves as a resource to clinicians and patients and guides the development of clinical evidence in support of our products. Most clinical studies require observation and interaction with clinicians and patients to monitor results and progress. Given the impact of COVID-19, patient recruitment for our clinical studies involving our products and clinical outcomes has been suspended. We do not have an expectation for when the clinical studies will resume.
We rely on third party contract manufacturers for the sourcing of parts, the assembly of our controllers and the manufacturing of the garments used with our systems. We conduct final assembly of the garments used with our Flexitouch system, perform quality assurance and ship our products from our facility in Minneapolis, Minnesota.
To date, our supply chain has not been materially impacted by COVID-19. We continue to receive our product on time and believe that we have enough safety stock to meet our short and mid-term demand. However, we cannot assure you that our supply chain will not be materially impacted in the future.
For the three months ended June 30, 2020, we generated revenue of $35.1 million and had a net loss of $13.9 million, compared to revenue of $45.2 million and net income of $2.8 million for the three months ended June 30, 2019. For the six months ended June 30, 2020, we generated revenue of $78.8 million and had a net loss of $15.2 million, compared to revenue of $82.8 million and net income of $4.3 million for the six months ended June 30, 2019. Our primary sources of capital to date have been from operating income, private placements of our capital stock and capital raised in our initial public offering, which closed on August 2, 2016.
We operate in one segment for financial reporting purposes.
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Results of Operations
Comparison of the Three and Six Months Ended June 30, 2020 and 2019
The following tables present our results of operations for the periods indicated:
Three Months Ended
June 30,
Change
(In thousands)
2020
2019
$
%
Condensed Consolidated Statement
% of
% of
of Operations Data:
revenue
revenue
Revenue
Sales revenue
$
29,518
84
%
$
38,790
86
%
$
(9,272)
(24)
%
Rental revenue
5,602
16
%
6,410
14
%
(808)
(13)
%
Total revenue
35,120
100
%
45,200
100
%
(10,080)
(22)
%
Cost of revenue
Cost of sales revenue
8,388
24
%
11,586
26
%
(3,198)
(28)
%
Cost of rental revenue
1,820
5
%
2,109
4
%
(289)
(14)
%
Total cost of revenue
10,208
29
%
13,695
30
%
(3,487)
(25)
%
Gross profit
Gross profit - sales revenue
21,130
60
%
27,204
60
%
(6,074)
(22)
%
Gross profit - rental revenue
3,782
11
%
4,301
10
%
(519)
(12)
%
Gross profit
24,912
71
%
31,505
70
%
(6,593)
(21)
%
Operating expenses
Sales and marketing
17,398
50
%
18,418
41
%
(1,020)
(6)
%
Research and development
1,105
3
%
1,234
3
%
(129)
(10)
%
Reimbursement, general and administrative
14,372
41
%
8,811
19
%
5,561
63
%
Total operating expenses
32,875
94
%
28,463
63
%
4,412
16
%
(Loss) income from operations
(7,963)
(23)
%
3,042
7
%
(11,005)
N.M.
%
Other income
36
—
%
165
—
%
(129)
(78)
%
(Loss) income before income taxes
(7,927)
(23)
%
3,207
7
%
(11,134)
N.M.
%
Income tax expense
5,923
17
%
422
1
%
5,501
N.M.
%
Net (loss) income
$
(13,850)
(40)
%
$
2,785
6
%
$
(16,635)
N.M.
%
“N.M.” Not Meaningful
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Six Months Ended
June 30,
Change
(In thousands)
2020
2019
$
%
Condensed Consolidated Statement
% of
% of
of Operations Data:
revenue
revenue
Revenue
Sales revenue
$
67,141
85
%
$
69,621
84
%
$
(2,480)
(4)
%
Rental revenue
11,654
15
%
13,196
16
%
(1,542)
(12)
%
Total revenue
78,795
100
%
82,817
100
%
(4,022)
(5)
%
Cost of revenue
Cost of sales revenue
19,310
25
%
20,998
25
%
(1,688)
(8)
%
Cost of rental revenue
3,500
4
%
4,056
5
%
(556)
(14)
%
Total cost of revenue
22,810
29
%
25,054
30
%
(2,244)
(9)
%
Gross profit
Gross profit - sales revenue
47,831
60
%
48,623
59
%
(792)
(2)
%
Gross profit - rental revenue
8,154
11
%
9,140
11
%
(986)
(11)
%
Gross profit
55,985
71
%
57,763
70
%
(1,778)
(3)
%
Operating expenses
Sales and marketing
40,368
51
%
35,809
43
%
4,559
13
%
Research and development
2,789
4
%
2,515
3
%
274
11
%
Reimbursement, general and administrative
25,242
32
%
18,205
22
%
7,037
39
%
Total operating expenses
68,399
87
%
56,529
68
%
11,870
21
%
(Loss) income from operations
(12,414)
(16)
%
1,234
2
%
(13,648)
N.M.
%
Other income
302
—
%
332
—
%
(30)
(9)
%
(Loss) income before income taxes
(12,112)
(16)
%
1,566
2
%
(13,678)
N.M.
%
Income tax expense (benefit)
3,045
4
%
(2,691)
(3)
%
5,736
N.M.
%
Net (loss) income
$
(15,157)
(20)
%
$
4,257
5
%
$
(19,414)
N.M.
%
“N.M.” Not Meaningful
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Revenue
Revenue decreased $10.1 million, or 22%, to $35.1 million in the three months ended June 30, 2020, compared to $45.2 million in the three months ended June 30, 2019. The decrease in total revenue was attributable to a decrease of $9.8 million, or 24%, in sales and rentals of the Flexitouch system and a decrease of $0.2 million, or 6%, in sales and rentals of the Entre system in the quarter ended June 30, 2020. The COVID-19 pandemic continued to have an impact on second quarter revenue. The decrease in second quarter revenue was impacted by our limited ability to access our clinician customers and their patients. Specifically, we continued to see healthcare facilities and clinics restricting access to their clinicians, reducing patient consultations, or closing temporarily due to COVID-19.
Revenue decreased $4.0 million, or 5%, to $78.8 million in the six months ended June 30, 2020, compared to $82.8 million in the six months ended June 30, 2019, which decrease was primarily attributable to a decrease of approximately $5.4 million, or 7%, in sales and rentals of our Flexitouch system, offset partially by an increase of $1.3 million, or 17%, in sales and rentals of the Entre system for the six months ended June 30, 2020. Revenue in the first two months of 2020 was ahead of our expectations. Beginning in March 2020 and continuing throughout the second quarter, revenue was impacted by the COVID-19 pandemic, which disrupted our ability to access our clinician customers and their patients. Specifically, we saw healthcare facilities and clinics restricting access to their clinicians, reducing patient consultations, or closing temporarily due to COVID-19 .
Revenue from the Veterans Administration represented 12% and 18% of total revenue in the three months ended June 30, 2020 and 2019, respectively. Revenue from the Veterans Administration represented 14% and 19% of total revenue in the six months ended June 30, 2020 and 2019, respectively. Revenue from Medicare represented 15% and 11% of total revenue in the three months ended June 30, 2020 and 2019, respectively. Revenue from Medicare represented 15% and 11% of total revenue in the six months ended June 30, 2020 and 2019, respectively.
The following tables summarize our revenue by product for the three and six months ended June 30, 2020 and 2019, both in dollars and percentage of total revenue:
Three Months Ended
June 30,
Change
(In thousands)
2020
2019
$
%
Revenue
Flexitouch system
$
31,127
$
40,959
$
(9,832)
(24)%
Other products (1)
3,993
4,241
(248)
(6)%
Total
$
35,120
$
45,200
$
(10,080)
(22)%
Percentage of total revenue
Flexitouch system
89%
91%
Other products (1)
11%
9%
Total
100%
100%
(1) The “other products” line primarily includes revenue from our Entre system. The Actitouch system and the Airwear wrap contributed immaterial amounts of revenue for each of the three months ended June 30, 2020 and 2019.
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Six Months Ended
June 30,
Change
(In thousands)
2020
2019
$
%
Revenue
Flexitouch system
$
69,713
$
75,068
$
(5,355)
(7)%
Other products (1)
9,082
7,749
1,333
17%
Total
$
78,795
$
82,817
$
(4,022)
(5)%
Percentage of total revenues
Flexitouch system
88%
91%
Other products (1)
12%
9%
Total
100%
100%
(1) The “other products” line primarily includes revenue from our Entre system. The Actitouch system and the Airwear wrap contributed immaterial amounts of revenue for each of the six months ended June 30, 2020 and 2019.
Our business is affected by seasonality. In the first quarter of each year, when most patients have started a new insurance year and have not yet met their annual out-of-pocket payment obligations, we experience substantially reduced demand for our products. We typically experience higher revenue in the third and fourth quarters of the year when patients have met their annual insurance deductibles, thereby reducing their out-of-pocket costs for our products, and because patients desire to exhaust their flexible spending accounts at year end. This seasonality applies only to purchases and rentals of our products by patients covered by commercial insurance and is not relevant to Medicare, Medicaid or the Veterans Administration, as those payers either do not have plans that have declining deductibles over the course of the plan year and/or do not have plans that include patient deductibles for purchases or rentals of our products. Further, seasonality trends in 2020 may be significantly different than in prior years as a result of the COVID-19 pandemic and related impacts.
Cost of Revenue and Gross Margin
Cost of revenue decreased $3.5 million, or 25%, to $10.2 million in the three months ended June 30, 2020, compared to $13.7 million in the three months ended June 30, 2019. Cost of revenue decreased $2.2 million, or 9%, to $22.8 million in the six months ended June 30, 2020, compared to $25.1 million in the six months ended June 30, 2019. The decrease in cost of revenue in both periods was primarily attributable to a decrease in the number of Flexitouch systems sold and rented, slightly offset by, in the six month period, an increase in other products sales and rentals, and in both periods, the $0.4 million inventory impairment charge related to discontinuing the Airwear wrap product line.
The total gross margin rate increase to 71% of sales in each of the three and six months ended June 30, 2020, compared to 70% in each of the three and six months ended June 30, 2019, were primarily attributable to the composition of sales and rental mix by payer.
Sales and Marketing Expenses
Sales and marketing expenses decreased $1.0 million, or 6%, to $17.4 million in the three months ended June 30, 2020, compared to $18.4 million in the three months ended June 30, 2019. The decrease was primarily attributable to a $1.7 million reduction of our external patient training expense as a result of pivoting to more virtual patient trainings, $0.8 million of reduced travel and entertainment expense due to decreased travel and a $0.6 million decrease from reduced tradeshows and professional services, partially offset by continued investment in our field sales team and marketing initiatives to increase clinician awareness, resulting in an increase of $2.1 million in personnel-related compensation expense, including $0.2 million of incremental stock-based compensation expense.
Sales and marketing expenses increased $4.6 million, or 13%, to $40.4 million in the six months ended June 30, 2020, compared to $35.8 million in the six months ended June 30, 2019. The increase was primarily attributable to our continued investment in our field sales team and marketing initiatives to increase clinician awareness, resulting in an increase of $5.8 million in personnel-related compensation expense, including $0.2 million of incremental stock-based compensation expense, partially offset by a reduction of $1.2 million of other
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sales associated expenses including external patient training expense and travel and entertainment expense, as a result of moving to increased virtual patient trainings and decreased travel activities.
Research and Development Expenses
Research and development (“R&D”) expenses decreased $0.1 million, or 10%, to $1.1 million in the three months ended June 30, 2020, compared to $1.2 million in the three months ended June 30, 2019, which decrease was primarily attributable to slowing of clinical studies activities as a result of COVID-19.
R&D expenses increased $0.3 million, or 11%, to $2.8 million in the six months ended June 30, 2020, compared to $2.5 million in the six months ended June 30, 2019, which increase was primarily attributable to first quarter investments in our R&D team and clinical studies projects, partially offset by the slowing of these projects upon the onset of COVID-19.
Reimbursement, General and Administrative Expenses
Reimbursement, general and administrative expenses increased $5.6 million, or 63%, to $14.4 million in the three months ended June 30, 2020, compared to $8.8 million in the three months ended June 30, 2019. This increase was primarily attributable to a $3.6 million impairment charge related to the write-off of our Airwear wrap-related long-lived assets and a $1.7 million increase in occupancy costs, depreciation expense, legal and professional fees. The increase in reimbursement, general and administrative expenses was also attributable to a $0.3 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer development and corporate functions.
Reimbursement, general and administrative expenses increased $7.0 million, or 39%, to $25.2 million in the six months ended June 30, 2020, compared to $18.2 million in the six months ended June 30, 2019. This increase was primarily attributable to a $3.6 million impairment charge related to the write-off of our Airwear wrap-related long-lived assets and a $2.5 million increase in occupancy costs, depreciation expense, legal and professional fees. The increase in reimbursement, general and administrative expenses was also attributable to a $0.9 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer development and corporate functions.
Other Income, Net
Other income, net, was less than $0.1 million and was $0.2 million for the three months ended June 30, 2020 and 2019, respectively, and was $0.3 million for each of the six months ended June 30, 2020 and 2019, respectively. Other income was primarily impacted by interest income realized on marketable securities and a one-time gain on a cost method investment in the first quarter of 2020 .
Income Taxes
We recorded an income tax expense of $5.9 million and an income tax expense of $0.4 million for the three months ended June 30, 2020 and 2019, respectively. We recorded an income tax expense of $3.0 million and an income tax benefit of $2.7 million for the six months ended June 30, 2020 and 2019, respectively. The primary driver of the change in our income tax expense in both periods was a decrease in tax-deductible share-based compensation activity, as compared to the prior year period.
Liquidity and Capital Resources
Cash Flows
At June 30, 2020, our principal sources of liquidity were cash and cash equivalents of $ 31.3 million, marketable securities of $ 6.0 million and net accounts receivable of $ 30.6 million, as well as the borrowing capacity available under our Credit Agreement.
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The following table summarizes our cash flows for the periods indicated:
Six Months Ended
June 30,
(In thousands)
2020
2019
Net cash (used in) provided by:
Operating activities
$
(7,980)
$
851
Investing activities
15,731
3,714
Financing activities
820
376
Net increase in cash and cash equivalents
$
8,571
$
4,941
Operating Activities
Net cash used in operating activities during the six months ended June 30, 2020, was $8.0 million, resulting from a net loss of $15.2 million and net decrease in operating assets and liabilities of $7.7 million, which were offset by non-cash net income adjustments of $14.8 million. The non-cash net income adjustments consisted primarily of $5.1 million of stock-based compensation expense, a $4.3 million decrease in deferred taxes, a $4.0 million impairment loss charge related to the write-off of our Airwear wrap product line, and $1.4 million of depreciation and amortization expense. The uses of cash related to changes in operating assets primarily consisted of increases in inventories of $5.9 million, an increase in income taxes of $1.6 million, increase in net investment in leases of $0.5 million and an increase in prepaid expenses and other assets, partially offset by a decrease in accounts receivable of $1.2 million. The changes in operating liabilities consisted of increases in accounts payable of $1.6 million and accrued expenses of $1.0 million, offset by a decrease in accrued payroll and related taxes of $3.1 million.
Net cash provided by operating activities during the six months ended June 30, 2019, was $0.9 million, resulting from net income of $4.3 million and non-cash net income adjustments of $5.3 million, which were offset by a net increase in operating assets and liabilities of $8.7 million. The non-cash net income adjustments consisted of $5.1 million of stock-based compensation expense and $1.8 million of depreciation and amortization expense, partially offset by deferred income tax changes of $1.6 million. The uses of cash related to changes in operating assets primarily consisted of increases in net investment in leases of $5.9 million, inventory of $2.0 million, income taxes receivable of $1.5 million, and increase in accounts receivable of $1.2 million. The changes in operating liabilities consisted of increases in accounts payable of $1.6 million and accrued expense of $0.5 million, partially offset by a decrease in accrued payroll and related taxes of $0.4 million.
Investing Activities
Net cash provided by investing activities during the six months ended June 30, 2020, was $15.7 million, primarily consisting of $16.5 million in proceeds from maturities of marketable securities, partially offset by $0.8 million in purchases of property and equipment and patent costs.
Net cash provided by investing activities during the six months ended June 30, 2019, was $3.7 million, primarily consisting of $5.6 million in net marketable securities activity partially offset by $1.8 million in purchases of product tooling and computer and manufacturing equipment, leasehold improvements and furniture and fixtures.
Financing Activities
Net cash provided by financing activities during the six months ended June 30, 2020, was $0.8 million, consisting of $2.4 million in proceeds from exercise of common stock options and the issuance of common stock under the ESPP, partially offset by $1.6 million in taxes paid for the net share settlement of restricted stock units.
Net cash provided by financing activities during the six months ended June 30, 2019, was $0.4 million, consisting of proceeds from the issuance of common stock under the ESPP of $1.9 million and exercises of
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common stock options of $1.5 million, partially offset by $3.0 million in taxes paid for the net share settlement of restricted stock units.
Credit Agreement
On August 3, 2018, we entered into a credit agreement with Wells Fargo Bank, National Association, which was amended by a First Amendment dated February 12, 2019, a Waiver and Second Amendment dated March 25, 2019, and a Third Amendment dated August 2, 2019 (collectively, the “Credit Agreement”), which expires on August 3, 2021.
The Credit Agreement provides for a $10.0 million revolving credit facility, with the ability to increase the amount of the revolving loans available and/or add one or more term loan facilities not to exceed an incremental $25.0 million, subject to satisfaction of certain conditions. As of June 30, 2020, and the date on which we filed this report, we did not have any outstanding borrowings under the Credit Agreement.
Our obligations under the Credit Agreement are secured by a security interest in substantially all of our and our subsidiaries’ assets and are also guaranteed by our subsidiaries. The Credit Agreement contains a number of restrictions and covenants, including that we maintain compliance with a maximum leverage ratio and a minimum liquidity covenant. As of June 30, 2020, we were in compliance with all financial covenants under the Credit Agreement. For additional information on the Credit Agreement, see Note 9 – “Credit Agreement” to the condensed consolidated financial statements in this report .
Adequacy of Capital Resources
Our future capital requirements may vary significantly from those now planned and will depend on many factors, including:
● the impact of the COVID-19 pandemic on our business;
● sales and marketing resources needed to further penetrate our market;
● expansion of our operations domestically and/or internationally;
● response of competitors to our solutions and applications;
● costs associated with clinical research activities;
● costs to develop and implement new products; and
● use of capital for acquisitions or licenses, if any.
Historically, we have experienced increases in our expenditures consistent with the growth in our revenue, operations and personnel, and we anticipate that our expenditures will continue to increase as we expand our business.
Although the impact of the COVID-19 pandemic is difficult to predict, we believe our cash, cash equivalents, marketable securities and cash flows from operations together with the Credit Agreement will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months.
Inflation and changing prices did not have a material effect on our business during the six months ended June 30, 2020, and we do not expect that inflation or changing prices will materially affect our business for at least the next twelve months.
In August 2017, we filed a shelf registration statement on Form S-3 with the SEC. Under the shelf registration statement, we may offer and sell from time to time up to $200.0 million of common stock, preferred stock, debt securities, warrants, rights or units. The shelf registration statement also registered for resale from
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time to time up to 5,703,534 shares of our common stock held by the selling stockholders named therein. In September 2017, certain of the selling stockholders completed a secondary offering of 3,795,000 shares of our common stock at a public offering price of $33.00 per share. We did not receive any proceeds from the sale of the shares by the selling stockholders.
Coronavirus Aid, Relief, and Economic Security (CARES) Act
On March 27, 2020 the CARES Act was signed into law. The CARES Act is a tax-and-spending package intended to provide economic relief to address the impact of the COVID-19 pandemic. The CARES Act includes several tax provisions that, among other things, allow businesses to carry back net operating losses (“NOLs”) arising in 2018, 2019, and 2020 to the prior five tax years. As a result, we were able to carry back NOLs allowing us to record a $2.6 million income tax receivable in the first quarter of 2020.
In addition, the CARES Act provided $100 billion in relief funds to hospitals and other healthcare providers on the front lines of the COVID-19 pandemic. An initial $30 billion of the funds were released for immediate infusion and were distributed to all facilities and providers that received Medicare fee-for-service (“FFS”) reimbursements in 2019. On April 10, 2020, we received $1.2 million of the initial allotment to all facilities and providers which was determined to be our proportionate share. Within 45 days of each reporting period end, we are required to comply with reporting requirements confirming funds were utilized in a manner described within the terms and conditions outlined by the U.S. Department of Health & Human Services. We are currently in the process of evaluating the impact and applicability of these funds on our financial statements.
Contractual and Commercial Commitments Summary
For a discussion on our contractual and commercial commitments, see Item 7, “Contractual and Commercial Commitments Summary,” included in our Annual Report on Form 10-K for the year ended December 31, 2019. There have been no material changes since December 31, 2019.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt. Additionally, we are not a party to any derivative contracts or synthetic leases.
Recent Accounting Pronouncements
Refer to Note 3 – “Summary of Significant Accounting Policies” of the condensed consolidated financial statements contained in this report for a description of recently issued accounting pronouncements that are applicable to our business.
Critical Accounting Policies and Estimates
A “critical accounting policy” is one that is both important to the portrayal of our financial condition and results and requires management’s most subjective or complex judgments, often as a result of the need to make estimates about the effect of items that are inherently uncertain. For additional information, please see the discussion of our significant accounting policies under “Critical Accounting Policies and Significant Estimates ” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2019.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
For a discussion on our market risks, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” included in our Annual Report on Form 10-K for the year ended December 31, 2019. There have been no material changes since December 31, 2019.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.