What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-08 compared with 2021-08-02 · 140 added, 98 removed, 161 unchanged (60% of the section changed)

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We have seen adverse impacts as it relates to the decline in the number of patients that healthcare facilities and clinics are able to treat due to enhanced safety protocols, particularly during 2020 and the first quarter of 2021.

While we saw some level of recovery in the second quarter of 2021, there are no reliable estimates of how long the pandemic will last, whether any recovery will be sustained or will reverse course, the severity of any resurgence of COVID-19 or variant strains of the virus, the effectiveness of vaccines and attitudes towards receiving them, or what ultimate effects the pandemic will have.

While we saw some level of recovery in the second quarter of 2021, the third quarter was negatively impacted by the prolonged recovery from COVID-19 and increased Delta variant cases during the period, which resulted in restricted access to clinics and hospitals and disrupted the recovery in patient visits versus the pre-COVID environment.

There are no reliable estimates of how long the pandemic will last, whether any recovery will be sustained or will reverse course, the severity of any resurgence of COVID-19 or variant strains of the virus, the effectiveness of vaccines and attitudes towards receiving them, or what ultimate effects the pandemic will have.

For that reason, we are unable to reasonably estimate the long-term impact of the pandemic on our business at this time.

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● Incorporating remote and flexible work arrangements for employees whenever possible, including real-time, online training of our new sales representatives.

In addition, we are actively developing our long-term in-office and remote work strategy with the goal of launching it in the second half of 2021.

In addition, we are actively developing our long-term in-office and remote work strategy with the goal of launching it in 2022.

● Eliminating employee travel restrictions in alignment with the opening of healthcare facilities and clinics while also continuing to maintain social distancing contact restrictions to reduce exposure.

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● Supporting clinicians and patients by using rigorous infection control practices when in-person visits are required.

● Following government guidelines related to vaccinations of our staff, as well as the needs of our patients and customers.

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.

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Additional information related to the COVID-19 pandemic is included in the MD&A sections below.

We are a medical technology company that develops and provides innovative medical devices for the treatment of chronic diseases.

In addition, we are closely monitoring mandatory vaccination requirements and related evolving guidance that is or may be applicable to us, including in our capacity as a U.S.

government contractor.

See See Part II, I tem 1A.

“ Risk Factors” in this Form 10-Q for additional information about vaccine mandates and potential risks related thereto.

We are a medical technology company that develops and provides innovative medical devices for the treatment of underserved 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.

Our areas of therapeutic focus are (1) vascular disease, with a goal of advancing the standard of care in treating lymphedema and chronic venous insufficiency, (2) oncology, where lymphedema is a common consequence among survivors and (3) providing airway clearance therapy for those suffering from chronic respiratory conditions.

We possess a unique, scalable platform to deliver at-home healthcare solutions throughout the United States.

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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.

Our current products are the Flexitouch system, Entre system and AffloVest.

A predecessor to our Flexitouch system received 510(k) clearance from the U.S.

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We derive the vast majority of our revenue from our Flexitouch system.

Sales and rentals of our Flexitouch system represented 88% of our revenue in each of the six months ended June 30, 2021 and 2020.

Sales and rentals of our Flexitouch system represented 86% and 88% of our revenue in the nine months ended September 30, 2021 and 2020, 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 each of the six months ended June 30, 2021 and 2020, sales and rentals of our Entre system represented 12% of our revenue.

For the nine months ended September 30, 2021 and 2020, sales and rentals of our Entre system represented 13% and 12% of our revenue, respectively.

On September 8, 2021, we acquired the assets of the AffloVest respiratory therapy product line from International Biophysics Corporation (“IBC”), a privately-held company which developed and manufactures AffloVest.

AffloVest is a portable, wearable vest that treats patients with chronic respiratory conditions such as COPD-associated breathing conditions like bronchiectasis, or conditions resulting from neuromuscular disorders and cystic fibrosis, by managing airway clearance.

For the nine months ended September 30, 2021, sales of our AffloVest represented 1% our revenue.

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.

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To support the growth of our business, we invest heavily in our commercial infrastructure, consisting of our direct sales force, training resources, reimbursement capabilities and clinical expertise.

We market our products in the United States using a direct-to-patient and -provider model.

We market our Flexitouch and Entre products in the United States using a direct-to-patient and -provider model.

Our field commercial team consists of our direct sales force and a team of Field Support Specialists.

Our collective field commercial team has grown to over 300 employees as of June 30, 2021, compared to 285 employees as of December 31, 2020.

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.

The AffloVest device is sold through home medical equipment and durable medical equipment providers throughout the United

In the quarter ended September 30, 2021, our direct sales force experienced increased turnover and difficulty in recruiting qualified replacements.

As a result, we had fewer direct sales representatives on September 30, 2021 compared to September 30, 2020.

We believe this to be a temporary condition.

Our collective field commercial team, including our respiratory sales force, has grown to over 335 employees as of September 30, 2021, compared to 285 employees as of December 31, 2020.

As it relates to the impact of COVID-19 on our commercial processes, in the first half of 2021, we continued to see restrictions loosen, in line with the applicable governmental regulations.

As a result, we continue to expand our interactions with clinicians and patients on an in-person basis, where possible, while continuing to engage in virtual interactions as requested.

Conversely, in the third quarter of 2021, we were adversely impacted by the resurgence of the Delta variant resulting in renewed patient cancellations, absenteeism of staff and access limitations implemented by clinics and health systems.

As a result, we continue to engage in virtual interactions if possible.

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 plan to continue to work towards expanding our commercial organization throughout 2021 by adding to our overall commercial team.

To that end, we plan to continue to work towards expanding our commercial organization through the remainder of 2021 and into 2022 by adding to our overall commercial team.

We invest substantial resources in our reimbursement function to improve operational efficiencies and enhance individual payer expertise, while continuing our strategic focus of payer development.

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We have seen increased flexibility in coverage criteria with select payers in which they 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 remain in place and the impact on our business in the future are not determinable at this time.

However, as these circumstances are ever-changing, the extent to which these changes will remain in place and the impact on our business in the future are not determinable at this time.

We also have a clinical team, consisting of a scientific advisory board, in-house therapists and nurses, and a Chief Medical Officer (part-time), that serves as a resource to clinicians and patients and guides the development of clinical evidence in support of our products.

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Given the impact of COVID-19, patient recruitment for our clinical studies involving our products and clinical outcomes had previously been suspended in 2020.

However, in the first half of 2021, approximately half of our clinical trial sites had resumed research activities as the healthcare provider staff are being reallocated from COVID-19 response teams or furloughs back to research activities.

Study visits and new patient enrollments are gradually resuming, albeit more slowly than targeted enrollment rates.

In 2021, all of our clinical trials have resumed research activities, including study visits and new patient enrollments, albeit more slowly than the targeted enrollment rates.

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.

The AffloVest device is currently manufactured and shipped by a third party, IBC, pursuant to a Transition Services Agreement.

We plan for IBC to continue to manufacture the product on our behalf through the first half of 2022 and we will begin to take over the shipping of products in the fourth quarter of 2021.

To date, our supply chain has not been materially impacted by COVID-19.

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However, we cannot assure you that our supply chain will not be materially impacted in the future.

For the three months ended June 30, 2021, we generated revenue of $51.1 million and had net income of $1.3 million, compared to revenue of $35.1 million and a net loss of $13.9 million for the three months ended June 30, 2020.

For the six months ended June 30, 2021, we generated revenue of $93.8 million and had a net loss of $1.0 million, compared to revenue of $78.8 million and a net loss of $15.2 million for the six months ended June 30, 2020.

For the three months ended September 30, 2021, we generated revenue of $52.5 million and had a net loss of $3.4 million, compared to revenue of $49.1 million and net income of $2.4 million for the three months ended September 30, 2020.

For the nine months ended September 30, 2021, we generated revenue of $146.3 million and had a net loss of $4.3 million, compared to revenue of $127.9 million and a net loss of $12.7 million for the nine months ended September 30, 2020.

Our primary sources of capital since inception 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.

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Results of Operations

Comparison of the Three and Six Months Ended June 30, 2021 and 2020

The following table presents our results of operations for the periods indicated:

Comparison of the Three and Nine Months Ended September 30, 2021 and 2020

The following tables present our results of operations for the periods indicated:

Three Months Ended

September 30,

(In thousands)

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Reimbursement, general and administrative

Intangible asset amortization

Total operating expenses

Loss from operations

Other (expense) income

Loss before income taxes

Income tax (benefit) expense

Net income (loss)

Six Months Ended

(Loss) income from operations

Other expense

(Loss) income before income taxes

Income tax expense (benefit)

Net (loss) income

“N.M.” Not Meaningful

Nine Months Ended

September 30,

(In thousands)

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Reimbursement, general and administrative

Intangible asset amortization

Total operating expenses

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Income tax (benefit) expense

Revenue increased $15.9 million, or 45%, to $51.1 million in the three months ended June 30, 2021, compared to $35.1 million in the three months ended June 30, 2020.

The increase in total revenue was attributable to an increase of $14.0 million, or 45%, in sales and rentals of the Flexitouch system and an increase of $2.0 million, or 49%, in sales and rentals of the Entre system in the quarter ended June 30, 2021.

Second quarter 2021 revenue benefited from the initial stages of recovery from the COVID-19 pandemic, with a portion of healthcare facilities and clinics relaxing restrictions and increasing patient throughput.

The increase in second quarter revenue was further driven by improvements in salesforce productivity and effective virtual education events yielding an expanded prescriber base and an increase in Medicare patients served.

Revenue increased $15.0 million, or 19%, to $93.8 million in the six months ended June 30, 2021, compared to $78.8 million in the six months ended June 30, 2020.

The increase was primarily attributable to an increase of $12.8 million, or 18%, in sales and rentals of our Flexitouch system and an increase of $2.2 million, or 24%, in sales and rentals of the Entre system for the six months ended June 30, 2021.

Revenue for the six months ended June 30, 2021, benefited from the initial stages of recovery from the COVID-19 pandemic, with a portion of healthcare facilities and clinics relaxing restrictions and increasing patient throughput, as well as an expanded prescriber base.

Revenue from the Veterans Administration represented 14% and 12% of total revenue in the three months ended June 30, 2021 and 2020, respectively.

Revenue from the Veterans Administration represented 14% of total revenue in each of the six months ended June 30, 2021 and 2020.

Revenue from Medicare represented 16% and 15% of total revenue in the three months ended June 30, 2021 and 2020, respectively.

Revenue from Medicare represented 18% and 15% of total revenue in the six months ended June 30, 2021 and 2020, respectively.

The following table summarizes our revenue by product for the three and six months ended June 30, 2021 and 2020, both in dollars and percentage of total revenue:

Revenue increased $3.4 million, or 7%, to $52.5 million in the three months ended September 30, 2021, compared to $49.1 million in the three months ended September 30, 2020.

The increase in total revenue was attributable to an increase of $1.1 million, or 3%, in sales and rentals of the Flexitouch system, an increase of $1.4 million, or 23%, in sales and rentals of the Entre system and $0.9 million in sales of the recently acquired AffloVest in the quarter ended September 30, 2021.

Third quarter 2021 revenue benefited from effective virtual education events and an increase in Medicare patients served.

Third quarter 2021 revenue was negatively impacted by the prolonged recovery from COVID-19, including the resurgence due to the Delta variant during the period, which resulted in restricted access to clinics and hospitals and disrupted the recovery in patient visits versus the pre-COVID environment.

In addition, the challenging labor market impacted our ability to recruit and retain quality candidates for our direct sales force .

Revenue increased $18.4 million, or 14%, to $146.3 million in the nine months ended September 30, 2021, compared to $127.9 million in the nine months ended September 30, 2020.

The increase was primarily attributable to an increase of $13.9 million, or 12%, in sales and rentals of our Flexitouch system, an increase of $3.7 million, or 24%, in sales and rentals of the Entre system and $0.9 million in sales of the recently acquired AffloVest for the nine months ended September 30, 2021.

Revenue for the first half of 2021 benefited from the initial stages of recovery from the COVID-19 pandemic, with a portion of healthcare facilities and clinics relaxing restrictions and increasing patient throughput, as well as an expanded prescriber base.

However, in the t hird quarter of 2021 revenue was negatively impacted by the prolonged recovery from COVID-19, including the resurgence due to the Delta variant during the period, which resulted in restricted access to clinics and hospitals and disrupted the recovery in patient visits versus the pre-COVID environment.

In addition, the challenging labor market impacted our ability to recruit and retain quality candidates for our direct sales force .

Revenue from the Veterans Administration represented 13% and 14% of total revenue in the three months ended September 30, 2021 and 2020, respectively.

Revenue from the Veterans Administration represented 14% of total revenue in each of the nine months ended September 30, 2021 and 2020.

Revenue from Medicare represented 17% and 16% of total revenue in the three months ended September 30, 2021 and 2020, respectively.

Revenue from Medicare represented 18% and 15% of total revenue in the nine months ended September 30, 2021 and 2020, respectively.

The following table summarizes our revenue by product for the three and nine months ended September 30, 2021 and 2020, both in dollars and percentage of total revenue:

Three Months Ended

September 30,

(In thousands)

Flexitouch system

Other products (1)

Percentage of total revenue

Flexitouch system

Other products (1)

(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, 2021 and 2020.

Six Months Ended

“N.M.” Not Meaningful

Nine Months Ended

September 30,

(In thousands)

Flexitouch system

Other products (1)

Percentage of total revenues

Flexitouch system

Other products (1)

(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, 2021 and 2020.

“N.M.” Not Meaningful

Our business is affected by seasonality.

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Cost of Revenue and Gross Margin

Cost of revenue increased $4.6 million, or 46%, to $14.9 million in the three months ended June 30, 2021, compared to $10.2 million in the three months ended June 30, 2020.

Cost of revenue increased $4.6 million, or 20%, to $27.4 million in the six months ended June 30, 2021, compared to $22.8 million in the six months ended June 30, 2020.

The increase in cost of revenue in both periods was primarily attributable to an increase in the number of Flexitouch and Entre systems sold and rented.

The total gross margin rate was 71% of sales in each of the three and six months ended June 30, 2021 and June 30, 2020.

Cost of revenue increased $1.4 million, or 10%, to $15.5 million in the three months ended September 30, 2021, compared to $14.1 million in the three months ended September 30, 2020.

Cost of revenue increased $6.0 million, or 16%, to $42.9 million in the nine months ended September 30, 2021, compared to $36.9 million in the nine months ended September 30, 2020.

The increase in cost of revenue in both periods was primarily attributable to an increase in the number of Flexitouch and Entre systems sold and rented, the additional contribution of AffloVest, and an increase in inbound freight costs.

The total gross margin rate was 70% and 71% of sales in the three months ended September 30, 2021 and 2020, respectively, and 71% of sales in each of the nine months ended September 30, 2021 and 2020.

Sales and Marketing Expenses

Sales and marketing expenses increased $3.5 million, or 20%, to $20.9 million in the three months ended June 30, 2021, compared to $17.4 million in the three months ended June 30, 2020.

The increase was primarily attributable to a $2.1 million increase in personnel-related compensation expense as a result of the increased headcount in the commercial team, a $0.7 million increase in our external patient training expense as a result of increased in-person trainings and a $0.7 million increase in travel and entertainment expense due to eased restrictions on travel .

Sales and marketing expenses decreased $0.6 million, or 2%, to $39.7 million in the six months ended June 30, 2021, compared to $40.4 million in the six months ended June 30, 2020.

The decrease was primarily attributable to a $2.0 million decrease from reduced sales meetings, tradeshows and professional services and a $0.6 reduction in external patient training expense, partially offset by a $2.0 million increase in personnel-related compensation expense as a result of the increased headcount in the commercial team.

Sales and marketing expenses increased $2.7 million, or 14%, to $22.2 million in the three months ended September 30, 2021, compared to $19.5 million in the three months ended September 30, 2020.

The increase was primarily attributable to a:

● $1.3 million increase in personnel-related compensation expense as a result of the increased headcount in the collective field commercial team, including sales personnel associated with the AffloVest acquisition;

● $1.4 million increase in other selling expenses, driven mostly by increased meetings, travel and entertainment expenses.

Sales and marketing expenses increased $2.1 million, or 3%, to $61.9 million in the nine months ended September 30, 2021, compared to $59.9 million in the nine months ended September 30, 2020.

The increase was primarily attributable to a:

● $3.3 million increase in personnel-related compensation expense as a result of the increased headcount in the collective field commercial team;

● $1.1 million increase in travel and entertainment expense due to eased restrictions on travel;

● $0.4 million increase in demo equipment expense.

These increases were partially offset by a:

● $2.0 million decrease in expenses due to reduced sales meetings, tradeshows and professional services;

● $0.7 million decrease in external patient training expense.

Research and Development Expenses

Research and development (“R&D”) expenses increased $0.1 million, or 9%, to $1.2 million in the three months ended June 30, 2021, compared to $1.1 million in the three months ended June 30, 2020, which was primarily attributable to an increase in clinical studies activity.

R&D expenses decreased $0.3 million, or 11%, to $2.5 million in the six months ended June 30, 2021, compared to $2.8 million in the six months ended June 30, 2020, which was primarily attributable to a $0.2 million decrease in professional services and a $0.1 million decrease in personnel-related compensation expense.

Research and development (“R&D”) expenses increased $0.3 million, or 28%, to $1.4 million in the three months ended September 30, 2021, compared to $1.1 million in the three months ended September 30, 2020, which was primarily attributable to an increase in professional services.

R&D expenses were $3.9 million in each of the nine months ended September 30, 2021 and 2020.

Reimbursement, General and Administrative Expenses

Reimbursement, general and administrative expenses decreased $0.2 million, or 2%, to $14.1 million in the three months ended June 30, 2021, compared to $14.4 million in the three months ended June 30, 2020.

This decrease was primarily attributable to a $3.6 million impairment charge related to the write-off of our Airwear wrap-related long-lived assets recorded in the second quarter of 2020, partially offset by a $1.9 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer relations and corporate functions and a combined $1.4 million increase in occupancy costs, depreciation expense and legal fees, in each case in the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

Reimbursement, general and administrative expenses increased $3.2 million, or 13%, to $28.4 million in the six months ended June 30, 2021, compared to $25.2 million in the six months ended June 30, 2020.

The increase was primarily attributable to a combined $3.5 million increase in occupancy costs, depreciation expense, legal and professional fees and a $3.3 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer relations and corporate functions, partially offset by a $3.6 million impairment charge related to the write-off of our Airwear wrap-related long-lived assets recorded in the second quarter of 2020.

Other Income (Expense), Net

Other income (expense), net was an expense of $24,000 and income of $36,000 for the three months ended June 30, 2021 and 2020, respectively, and was an expense of $34,000 and income of $0.3 million for the six months ended June 30, 2021 and 2020, respectively.

Other income (expense) was primarily impacted by interest income realized on marketable securities and the gain and loss on cost method investments .

We recorded an income tax benefit of $1.4 million and expense of $5.9 million for the three months ended June 30, 2021 and 2020, respectively.

We recorded an income tax benefit of $3.2 million and expense of $3.0 million for the six months ended June 30, 2021 and 2020, respectively.

The primary driver of these changes was a tax benefit related to a research and development credit recognized in the second quarter of 2021.

Reimbursement, general and administrative expenses increased $2.0 million, or 16%, to $14.5 million in the three months ended September 30, 2021, compared to $12.5 million in the three months ended September 30, 2020.

This increase was primarily attributable to a:

● $1.0 million increase in occupancy costs, depreciation expense, legal and professional fees;

● $0.8 million increase in transaction-related costs related to the acquisition of AffloVest;

● $0.3 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer relations and corporate functions.

Reimbursement, general and administrative expenses increased $5.1 million, or 14%, to $42.8 million in the nine months ended September 30, 2021, compared to $37.7 million in the nine months ended September 30, 2020.

The increase was primarily attributable to a:

● $4.5 million increase in occupancy costs, depreciation expense, legal and professional fees;

● $3.6 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer relations and corporate functions;

● $0.8 million increase in transaction-related costs related to the acquisition of AffloVest;

partially offset by a

● $3.6 million impairment charge related to the write-off of our Airwear wrap-related long-lived assets recorded in the second quarter of 2020.

Intangible Asset Amortization

Intangible asset amortization expense increased $0.1 million to $0.2 million in the three months ended September 30, 2021, compared to $0.1 million in the three months ended September 30, 2020, which was primarily attributable to the amortization recognized related to the assets recorded as a result of the acquisition of AffloVest.

Intangible asset amortization expenses increased $0.1 million to $0.3 million in the nine months ended September 30, 2021, compared to $0.2 million in the three months ended September 30, 2020, which was primarily attributable to the amortization recognized related to the assets recorded as a result of the acquisition of AffloVest.

Other (Expense) Income, Net

Other (expense) income, net was an expense of $0.1 million for each of the three months ended September 30, 2021 and 2020, and was an expense of $0.2 million and income of $0.2 million for the nine months ended September 30, 2021 and 2020, respectively.

Other (expense) income was primarily impacted by interest income realized on marketable securities, the gain and loss on cost method investments and an increase in interest expense recognized in the third quarter of 2021 .

We recorded an income tax expense of $1.9 million and an income tax benefit of $0.8 million for the three months ended September 30, 2021 and 2020, respectively.

The increase in income tax expense was primarily due to a change in our effective tax rate, which was attributable to a change in projected taxable income.

We recorded an income tax benefit of $1.4 million and an income tax expense of $2.3 million for the nine months ended September 30, 2021 and 2020, respectively.

The primary driver of the change was a tax benefit related to a research and development credit recognized in the second quarter of 2021 as well as 100% deductibility of business meals in 2021 as compared to 50% deductibility in 2020.

Liquidity and Capital Resources

At June 30, 2021, our principal sources of liquidity were cash and cash equivalents of $ 49.0 million and net accounts receivable of $ 42.6 million, as well as the borrowing capacity available under our Restated Credit Agreement.

At September 30, 2021, our principal sources of liquidity were cash and cash equivalents of $ 22.4 million and net accounts receivable of $ 44.3 million.

This compares to cash and cash equivalents of $47.9 million and net accounts receivable of $43.8 million at September 30, 2020.

The following table summarizes our cash flows for the periods indicated:

Six Months Ended

Nine Months Ended

September 30,

(In thousands)

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Financing activities

Net increase in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Operating Activities

Net cash used in operating activities during the six months ended June 30, 2021, was $1.9 million, resulting from a net loss of $1.0 million and a net decrease in operating assets and liabilities of $3.7 million, which was partially offset by non-cash net income (loss) adjustments of $2.8 million.

The non-cash net income (loss) adjustments consisted primarily of $5.1 million of stock-based compensation expense, $3.6 million in deferred taxes and $1.3 million of depreciation and amortization expense.

The uses of cash related to changes in operating assets primarily consisted of increases in inventories of $2.6 million, accounts receivable of $1.2 million, net investment in leases of $1.0 million and income taxes of $0.8 million, partially offset by a decrease in prepaid expenses and other assets of $0.5 million.

The changes in operating liabilities consisted of increases in accrued expenses of $1.7 million and accounts payable of $0.9 million, partially offset by a decrease in accrued payroll and related taxes of $1.2 million.

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, income taxes of $1.6 million, net investment in leases of $0.5 million and prepaid expenses and other assets of $0.3 million, 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 used in operating activities during the nine months ended September 30, 2021, was $3.0 million, resulting from a net loss of $4.3 million and a net decrease in operating assets and liabilities, net of acquisition, of $6.8 million, which was partially offset by non-cash net income (loss) adjustments of $8.1 million.

The non-cash net income (loss) adjustments consisted primarily of $7.7 million of stock-based compensation expense, $2.1 million of depreciation and amortization expense and a $1.7 million increase in deferred taxes.

The uses of cash related to changes in operating assets primarily consisted of increases in inventories of $3.6 million, in accounts receivable of $3.4 million, in net investment in leases of $1.7 million, in income taxes of $1.2 million, and in prepaid expenses and other assets of $1.1 million.

The changes in operating liabilities consisted of increases in accrued expenses and other liabilities of $2.9 million and accounts payable of $2.0 million, partially offset by a decrease in accrued payroll and related taxes of $1.3 million.

Net cash used in operating activities during the nine months ended September 30, 2020, was $2.2 million, resulting from a net loss of $12.7 million and a net increase in operating assets and liabilities of $7.9 million, which were offset by non-cash net income adjustments of $18.2 million.

The non-cash net income adjustments consisted primarily of $8.3 million of stock-based compensation expense, a $4.0 million impairment

loss charge related to the write-off of our Airwear wrap product line, a $3.9 million decrease in deferred taxes and $2.1 million of depreciation and amortization expense.

The uses of cash related to changes in operating assets primarily consisted of increases in accounts receivable of $5.5 million, in inventories of $3.5 million, in prepaid expenses and other assets of $1.6 million and in net investment in leases of $1.3 million, partially offset by a decrease in income taxes receivable of $0.7 million.

The changes in operating liabilities consisted primarily of increases in accrued expenses and other liabilities of $1.1 million, in accounts payable of $0.9 million and in accrued payroll and related taxes of $0.8 million.

Investing Activities

Net cash used in investing activities during the six months ended June 30, 2021, was $0.7 million, consisting of purchases of property and equipment, and patent costs.

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 used in investing activities during the nine months ended September 30, 2021, was $81.2 million, primarily consisting of acquisition-related payments of $79.8 million associated with the purchase of the AffloVest business and $1.4 million in purchases of property and equipment, and patent costs.

Net cash provided by investing activities during the nine months ended September 30, 2020, was $20.7 million, primarily consisting of $22.5 million in proceeds from maturities of marketable securities, partially offset by $1.8 million in purchases of property and equipment, and patent costs.

Financing Activities

Net cash provided by financing activities during the six months ended June 30, 2021, was $3.8 million, consisting of $4.9 million in proceeds from exercise of common stock options and the issuance of common stock under the ESPP, partially offset by $1.1 million in taxes paid for the net share settlement of performance and restricted stock units.

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 nine months ended September 30, 2021, was $58.8 million, primarily consisting of borrowings of $54.8 million net of debt issuance costs incurred and $5.1 million in proceeds from the exercise of common stock options and the issuance of common stock under the ESPP, partially offset by $1.2 million in taxes paid for the net share settlement of performance and restricted stock units.

Net cash provided by financing activities during the nine months ended September 30, 2020, was $1.0 million, consisting of $2.6 million in proceeds from the 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 performance and 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 “2018 Credit Agreement”).

On April 30, 2021, we entered into an Amended and Restated Credit Agreement (the “Restated Credit Agreement”) with the lenders from time to time party thereto, and Wells Fargo Bank, National Association, as Administrative Agent, which expires on April 30, 2024.

The Restated Credit Agreement amends and restates in its entirety the 2018 Credit Agreement.

As of June 30, 2021, and the date on which we filed this report, we did not have any outstanding borrowings under the Restated Credit Agreement.

The Restated Credit Agreement provides for a $25 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 $30 million in the aggregate, subject to satisfaction of certain conditions.

Our obligations under the Restated 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 Restated 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, 2021, we were in compliance with all financial covenants under the Restated Credit Agreement.

The Restated Credit Agreement amended and restated in its entirety the 2018 Credit Agreement.

On September 8, 2021, we entered into a First Amendment Agreement (the “Amendment”), which amends the Restated Credit Agreement (as amended by the Amendment, the “Credit Agreement”) with the lenders from time to time party thereto, and Wells Fargo Bank, National Association, as administrative agent.

The Amendment, among other things, adds a $30.0 million incremental term loan to the $25.0 million revolving credit facility provided by the Restated Credit Agreement.

The term loan and the revolving credit facility mature on September 8, 2024.

The Credit Agreement provides that, subject to satisfaction of certain conditions, we may increase the amount of the revolving loans available under the Credit Agreement and/or add one or more term loan facilities in an amount not to exceed $25.0 million in the aggregate, such that the total aggregate principal amount of loans available under the Credit Agreement (including under the revolving credit facility) does not exceed $80.0 million.

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, minimum fixed charge coverage ratio and a minimum consolidated EBITDA covenant.

As of September 30, 2021, we were in compliance with all financial covenants under the Credit Agreement.

On September 8, 2021, in connection with the closing of the acquisition of the AffloVest business, we borrowed the $30.0 million term loan and utilized that borrowing, together with a draw of $25.0 million under the revolving credit facility and cash on hand, to fund the purchase price.

The principal of the term loan is required to be repaid in quarterly installments of $750,000 commencing January 7, 2022, through July 8, 2024, with the remaining outstanding balance due on September 8, 2024 .

As of September 30, 2021, we had outstanding borrowings of $55.0 million under the Credit Agreement, comprised of $30.0 million under the term loan and $25.0 million under the revolving credit facility.

For additional information regarding the Credit Agreement, including interest rates, fees and maturities, see Note 10 – “Credit Agreement” of the condensed consolidated financial statements contained 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;

● the impact and duration of the COVID-19 pandemic on our business;

● sales and marketing resources needed to further penetrate our market;

● increased inflation-related costs associated with labor and/or suppliers;

● expansion of our operations domestically and/or internationally;

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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 and cash flows from operations together with the Restated 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, 2021, 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 million of common stock, preferred stock, debt securities, warrants, rights or units.

The shelf registration statement also registered for resale from time to time up to 5,703,534 shares of our common stock held by the selling stockholders named therein.

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.

Although the impact of the COVID-19 pandemic is difficult to predict, we believe our cash, cash equivalents and cash flows from operations together with availability under the Credit Agreement will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months.

Coronavirus Aid, Relief, and Economic Security (CARES) Act

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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.

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis