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. 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 most of 2021 and during the first quarter of 2022. We have also seen staffing challenges, both in our organization and at the clinics we serve, as another lingering consequence of the COVID-19 pandemic. While we saw some level of recovery in the second and third quarters of 2022, ongoing consequences of the pandemic remain uncertain. 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.
Since the onset of COVID-19, we have remained proactive to ensure we continue to adapt to the needs of our employees, clinicians and patients. However, we cannot assure you 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.
Overview
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 underserved chronic diseases in the home setting to improve patient outcomes and quality of life and help control rising healthcare expenditures. 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 cancer 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. This evolving home care delivery model is recognized by policymakers 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 lymphedema products are the Flexitouch and Entre systems and our airway clearance product is the AffloVest. 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. In December 2020, we received 510(k) clearance for two new indications for our Flexitouch Plus system: phlebolymphedema and lipedema. 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. Sales and rentals of our lymphedema products represented 85% and 99% of our revenue in the nine months ended September 30, 2022 and 2021, respectively.
On September 8, 2021, we acquired the assets of the AffloVest airway clearance product line from IBC, a privately-held company which developed and manufactured AffloVest. AffloVest is a portable, wearable vest
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that provides airway clearance to treat patients with chronic respiratory conditions such as bronchiectasis or conditions resulting from neuromuscular disorders. For the nine months ended September 30, 2022 and 2021 sales of AffloVest represented 15% and 1% of our revenue, respectively.
To support the growth of our business, we continue to invest in our commercial infrastructure, consisting of our direct sales force, training resources, reimbursement capabilities and clinical expertise. We market our lymphedema products in the United States using a direct-to-patient and -provider model. The AffloVest device is sold through respiratory durable medical equipment providers throughout the United States that service patients and bill third-party payers for the product. We also employ a small group of respiratory specialists, who educate DME representatives, provide product demonstrations for targeted clinicians and support technical questions related to the AffloVest. As of September 30, 2022, we employed a field staff of 297 Tactile employees, made up of sales representatives, as well as managers, who provide support throughout the United States for our lymphedema and respiratory therapies. This compares to 249 as of September 30, 2021.
We invest in our reimbursement function to improve operational efficiencies and enhance individual payer expertise, while continuing our strategic focus of payer development. Our payer relations function focuses on payer policy development, education, contract negotiations, and data analysis. Our reimbursement operations function 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 function has been actively working with Medicare and a broad base of private payers to understand the ever-changing reimbursement criteria being introduced. While the U.S. government’s declaration of a public health emergency (PHE) related to the COVID-19 pandemic has relaxed some Medicare criteria for respiratory patients, these circumstances are ever-changing, and 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, 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 had previously been suspended in 2020. In 2021, all of our clinical trials 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 products, perform quality assurance and ship our products from our facility in Minnesota. The AffloVest device continued to be manufactured and shipped by IBC on our behalf pursuant to a Transition Services Agreement through April 30, 2022. On May 1, 2022, we began manufacturing and shipping the AffloVest device from our Minnesota-based facility.
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 or that we will be able to meet any increased demand.
In July 2022, we launched Kylee™ a free mobile app that makes it easier for patients to manage their conditions by tracking treatments and symptoms, as well as having direct access to educational resources.
For the three months ended September 30, 2022, we generated revenue of $65.3 million and had a net loss of $2.3 million, compared to revenue of $52.5 million and a net loss of $3.4 million for the three months ended September 30, 2021. For the nine months ended September 30, 2022, we generated revenue of $172.9 million and had a net loss of $22.5 million, compared to revenue of $146.3 million and a net loss of $4.3 million for the nine months ended September 30, 2021. Our primary sources of capital since our initial public offering in 2016 have been from operating income and bank financing.
We operate in one segment for financial reporting purposes.
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Results of Operations
Comparison of the Three and Nine Months Ended September 30, 2022 and 2021
The following table presents our results of operations for the periods indicated:
Three Months Ended
September 30,
Change
(In thousands)
2022
2021
$
%
Condensed Consolidated Statement
% of
% of
of Operations Data:
revenue
revenue
Revenue
Sales revenue
$
55,545
85
%
$
44,460
85
%
$
11,085
25
%
Rental revenue
9,717
15
%
8,037
15
%
1,680
21
%
Total revenue
65,262
100
%
52,497
100
%
12,765
24
%
Cost of revenue
Cost of sales revenue
15,476
24
%
13,096
25
%
2,380
18
%
Cost of rental revenue
2,992
4
%
2,433
5
%
559
23
%
Total cost of revenue
18,468
28
%
15,529
30
%
2,939
19
%
Gross profit
Gross profit - sales revenue
40,069
61
%
31,364
60
%
8,705
28
%
Gross profit - rental revenue
6,725
11
%
5,604
10
%
1,121
20
%
Gross profit
46,794
72
%
36,968
70
%
9,826
27
%
Operating expenses
Sales and marketing
26,583
41
%
22,231
42
%
4,352
20
%
Research and development
1,581
2
%
1,409
3
%
172
12
%
Reimbursement, general and administrative
16,257
25
%
14,500
28
%
1,757
12
%
Intangible asset amortization and earn-out
3,993
6
%
195
—
%
3,798
N.M.
%
Total operating expenses
48,414
74
%
38,335
73
%
10,079
26
%
Loss from operations
(1,620)
(2)
%
(1,367)
(3)
%
(253)
19
%
Other expense
(736)
(2)
%
(120)
—
%
(616)
N.M.
%
Loss before income taxes
(2,356)
(4)
%
(1,487)
(3)
%
(869)
58
%
Income tax (benefit) expense
(77)
—
%
1,868
3
%
(1,945)
(104)
%
Net loss
$
(2,279)
(4)
%
$
(3,355)
(6)
%
$
1,076
(32)
%
“N.M.” Not Meaningful
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Nine Months Ended
September 30,
Change
(In thousands)
2022
2021
$
%
Consolidated Statement
% of
% of
of Operations Data:
revenue
revenue
Revenue
Sales revenue
$
147,980
86
%
$
124,215
85
%
$
23,765
19
%
Rental revenue
24,905
14
%
22,114
15
%
2,791
13
%
Total revenue
172,885
100
%
146,329
100
%
26,556
18
%
Cost of revenue
Cost of sales revenue
41,366
24
%
36,425
25
%
4,941
14
%
Cost of rental revenue
7,640
4
%
6,501
4
%
1,139
18
%
Total cost of revenue
49,006
28
%
42,926
29
%
6,080
14
%
Gross profit
Gross profit - sales revenue
106,614
62
%
87,790
60
%
18,824
21
%
Gross profit - rental revenue
17,265
10
%
15,613
11
%
1,652
11
%
Gross profit
123,879
72
%
103,403
71
%
20,476
20
%
Operating expenses
Sales and marketing
79,335
46
%
61,949
42
%
17,386
28
%
Research and development
4,949
3
%
3,885
3
%
1,064
27
%
Reimbursement, general and administrative
47,369
27
%
42,802
30
%
4,567
11
%
Intangible asset amortization and earn-out
12,834
8
%
294
—
%
12,540
N.M.
%
Total operating expenses
144,487
84
%
108,930
75
%
35,557
33
%
Loss from operations
(20,608)
(12)
%
(5,527)
(4)
%
(15,081)
N.M.
%
Other expense
(1,765)
(1)
%
(154)
—
%
(1,611)
N.M.
%
Loss before income taxes
(22,373)
(13)
%
(5,681)
(4)
%
(16,692)
N.M.
%
Income tax expense (benefit)
114
—
%
(1,365)
(1)
%
1,479
(108)
%
Net loss
$
(22,487)
(13)
%
$
(4,316)
(3)
%
$
(18,171)
N.M.
%
“N.M.” Not Meaningful
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Revenue
Revenue increased $12.8 million, or 24%, to $65.3 million in the three months ended September 30, 2022, compared to $52.5 million in the three months ended September 30, 2021. The increase in total revenue was attributable to an increase of $10.2 million in sales of the airway clearance product line, which includes the AffloVest product acquired on September 8, 2021, and an increase of $2.6 million, or 5%, in sales and rentals of the lymphedema product line in the quarter ended September 30, 2022, compared to the 2021 third quarter.
Revenue increased $26.6 million, or 18%, to $172.9 million in the nine months ended September 30, 2022, compared to $146.3 million in the nine months ended September 30, 2021. The increase in total revenue was attributable to an increase of $25.5 million in sales of the airway clearance product line, which includes the AffloVest product acquired on September 8, 2021, and an increase of $1.0 million, or 1%, in sales and rentals of the lymphedema product line for the nine months ended September 30, 2022. The first nine months of 2022 revenue from the lymphedema product line was adversely affected by the fact that first quarter 2022 revenue was negatively impacted by the prolonged recovery from COVID-19, including the resurgence due to the Omicron 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 continued to impact our ability to recruit and retain quality candidates for our direct sales force, particularly during the first quarter of 2022.
Revenue from the Veterans Administration represented 10% and 13% of total revenue in the three months ended September 30, 2022 and 2021, respectively. Revenue from the Veterans Administration represented 11% and 14% of total revenue in the nine months ended September 30, 2022 and 2021, respectively. Revenue from Medicare represented 17% of total revenue in each of the three months ended September 30, 2022 and 2021. Revenue from Medicare represented 17% and 18% of total revenue in the nine months ended September 30, 2022 and 2021, respectively.
The following table summarizes our revenue by product line for the three and nine months ended September 30, 2022 and 2021, both in dollars and percentage of total revenue:
Three Months Ended
September 30,
Change
(In thousands)
2022
2021
$
%
Revenue
Lymphedema products
$
54,214
$
51,636
$
2,578
5%
Airway clearance products
11,048
861
10,187
N.M.
Total
$
65,262
$
52,497
$
12,765
24%
Percentage of total revenue
Lymphedema products
83%
98%
Airway clearance products
17%
2%
Total
100%
100%
“N.M.” Not Meaningful
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Nine Months Ended
September 30,
Change
(In thousands)
2022
2021
$
%
Revenue
Lymphedema products
$
146,502
$
145,468
$
1,034
1%
Airway clearance products
26,383
861
25,522
N.M.
Total
$
172,885
$
146,329
$
26,556
18%
Percentage of total revenues
Lymphedema products
85%
99%
Airway clearance products
15%
1%
Total
100%
100%
“N.M.” Not Meaningful
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 have been, and may continue to be, significantly different than historical trends as a result of the COVID-19 pandemic and related impacts.
Cost of Revenue and Gross Margin
Cost of revenue increased $3.0 million, or 19%, to $18.5 million in the three months ended September 30, 2022, compared to $15.5 million in the three months ended September 30, 2021. Cost of revenue increased $6.1 million, or 14%, to $49.0 million in the nine months ended September 30, 2022, compared to $42.9 million in the nine months ended September 30, 2021. The increase in cost of revenue in both periods was primarily attributable to the additional contribution of AffloVest sales and an increase in inbound freight costs.
The total gross margin was 72% and 70% of revenue in the three months ended September 30, 2022 and 2021, respectively, and 72% and 71% of revenue in the nine months ended September 30, 2022 and 2021, respectively.
Sales and Marketing Expenses
Sales and marketing expenses increased $4.4 million, or 20%, to $26.6 million in the three months ended September 30, 2022, compared to $22.2 million in the three months ended September 30, 2021. The increase was primarily attributable to a:
● $4.3 million increase in personnel-related compensation expense as a result of the increased headcount in the collective field commercial team;
● $0.5 million increase in travel and entertainment expense; and
● $0.1 million increase related to sales meetings and tradeshows .
These increases were p artially offset by a $0.5 million decrease in expenses for new product introduction.
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Sales and marketing expenses increased $17.4 million, or 28%, to $79.3 million in the nine months ended September 30, 2022, compared to $61.9 million in the nine months ended September 30, 2021. The increase was primarily attributable to a:
● $12.7 million increase in personnel-related compensation expense as a result of the increased headcount in the collective field commercial team;
● $2.6 million increase in travel and entertainment expense;
● $1.2 million increase related to our annual national sales training meeting;
● $0.5 million increase related to sales meetings and tradeshows; and
● $0.4 million increase in expenses for new product introduction.
Research and Development Expenses
Research and development (“R&D”) expenses increased $0.2 million, or 12%, to $1.6 million in the three months ended September 30, 2022, compared to $1.4 million in the three months ended September 30, 2021, which was primarily attributable to an increase in personnel-related compensation expense and R&D supplies.
R&D expenses increased $1.1 million, or 27%, to $5.0 million in the nine months ended September 30, 2022, compared to $3.9 million in the nine months ended September 30, 2021, which was primarily attributable to an increase in personnel-related compensation expense, R&D supplies, and professional services.
Reimbursement, General and Administrative Expenses
Reimbursement, general and administrative expenses increased $1.8 million, or 12%, to $16.3 million in the three months ended September 30, 2022, compared to $14.5 million in the three months ended September 30, 2021. This increase was primarily attributable to a:
● $1.3 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer relations and corporate functions; and
● $1.3 million increase in occupancy costs, depreciation expense, and legal and professional fees.
These increases were partially offset by a $0.8 million decrease in acquisition costs.
Reimbursement, general and administrative expenses increased $4.6 million, or 11%, to $47.4 million in the nine months ended September 30, 2022, compared to $42.8 million in the nine months ended September 30, 2021. This increase was primarily attributable to a:
● $2.7 million increase in occupancy costs, depreciation expense, and legal and professional fees;
● $2.6 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer relations and corporate functions; and
● $0.1 million increase in travel and entertainment expenses.
These increases were partially offset by a $0.8 million decrease in acquisition costs.
Intangible Asset Amortization and Earn-out Expense
Intangible asset amortization and earn-out expense increased $3.8 million to $4.0 million in the three months ended September 30, 2022, compared to $0.2 million in the three months ended September 30, 2021. The increase in intangible asset amortization and earn-out expense was partially attributable to the increase in the estimated fair value of our earn-out liability and partially attributable to a full quarter of amortization in the 2022 period versus a half month of amortization in the 2021 period.
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Intangible asset amortization and earn-out expense increased $12.5 million to $12.8 million in the nine months ended September 30, 2022, compared to $0.3 million in the nine months ended September 30, 2021. The increase in intangible asset amortization and earn-out expense was primarily attributable to the increase in the estimated fair value of our earn-out liability.
Other Expense, Net
Other expense, net was $0.7 million and $0.1 million for the three months ended September 30, 2022 and 2021, respectively, and was $1.8 million and $0.2 million for the nine months ended September 30, 2022 and 2021, respectively. The increase in both periods was primarily attributable to an increase in interest expense .
Income Taxes
We recorded an income tax benefit of $77 thousand and an income tax expense of $1.9 million for the three months ended September 30, 2022 and 2021, respectively. We recorded an income tax expense of $0.1 million and an income tax benefit of $1.4 million for the nine months ended September 30, 2022 and 2021, respectively. The differences relate to a full valuation allowance being recorded for net deferred tax assets for the current year periods, whereas no valuation allowance was recorded for the 2021 periods.
Liquidity and Capital Resources
Cash Flows
At September 30, 2022, our principal sources of liquidity were cash and cash equivalents of $ 23.4 million and net accounts receivable of $ 69.5 million. This compares to cash and cash equivalents of $22.4 million and net accounts receivable of $44.3 million at September 30, 2021.
The following table summarizes our cash flows for the periods indicated:
Nine Months Ended
September 30,
(In thousands)
2022
2021
Net cash provided by (used in):
Operating activities
$
1,354
$
(2,975)
Investing activities
(1,844)
(81,237)
Financing activities
(4,313)
58,758
Net decrease in cash and cash equivalents
$
(4,803)
$
(25,454)
Operating Activities
Net cash provided by operating activities during the nine months ended September 30, 2022 was $1.4 million, primarily resulting from non-cash net (loss) income adjustments of $23.3 million and a net increase in operating assets and liabilities of $0.6 million, partially offset by a net loss of $22.5 million. The non-cash net (loss) income adjustments consisted primarily of $10.9 million related to a change in fair value of earn-out liability, $7.7 million of stock-based compensation expense and $4.7 million of depreciation and amortization expense. The uses of cash related to changes in operating assets primarily consisted of increases in net investment in leases of $2.6 million, accounts receivable of $2.3 million, inventories of $3.8 million, and prepaid expenses and other assets of $0.3 million. The changes in operating liabilities consisted of increases in accrued expenses and other liabilities of $6.8 million, accounts payable of $6.1 million, and accrued payroll and related taxes of $1.4 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
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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.
Investing Activities
Net cash used in investing activities during the nine months ended September 30, 2022, was $1.8 million, consisting of 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.
Financing Activities
Net cash used in financing activities during the nine months ended September 30, 2022, was $4.3 million, primarily consisting of payments of $5.3 million made on our term loan, slightly offset by $1.0 million in proceeds from exercise of common stock options and the issuance of common stock under the ESPP.
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.
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. The Restated Credit Agreement amended and restated in its entirety our prior 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 is reflected on our condensed consolidated financial statements as a note payable. 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.
On September 8, 2021, in connection with the closing of the AffloVest Acquisition, 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.
On February 22, 2022, we entered into a Second Amendment Agreement (the “Second Amendment”), which further amends the Credit Agreement, including with respect to the financial covenants.
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
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8, 2024. Pursuant to the Second Amendment, we made a mandatory principal prepayment of the term loan of $3.0 million on February 22, 2022.
As of September 30, 2022, the outstanding balance of the term loan was $24.8 million and the outstanding balance under the revolving credit facility was $25.0 million. As of September 30, 2022, there was no availability under our 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, a minimum fixed charge coverage ratio, a minimum consolidated EBITDA covenant and a minimum liquidity covenant. As of September 30, 2022, we were in compliance with all financial covenants under the Credit Agreement.
For additional information regarding the Credit Agreement, including interest rates, fees and maturities, see Note 9 – “Credit Agreement” of the condensed consolidated financial statements contained in this report.
Future Cash Requirements
For a discussion of our material estimated future cash requirements under our contractual obligations and commercial commitments, in total and disaggregated into current and long-term , see “Future Cash Requirements” included in Item 7, 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, 2021. There have been no material changes since December 31, 2021.
As discussed in Note 4 – “Acquisitions” of the condensed consolidated financial statements contained in this report, t he initial earn-out payment under the AffloVest Acquisition is $10.0 million, of which we will pay $5.0 million on or before November 28, 2022, and of which we will pay $5.0 million, plus an imputed interest payment of $250,000, on or before May 26, 2023.
Adequacy of Resources
Our future cash requirements may vary significantly from those now planned and will depend on many factors, including:
● the impact and duration 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;
● increases in interest rates;
● labor shortages and wage inflation;
● component price inflation;
● costs to develop and implement new products; and
● use of capital for acquisitions or licenses, if any.
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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 and other factors such as inflation and rising interest rates are difficult to predict, we believe our cash, cash equivalents and cash flows from operations will be sufficient to meet our working capital, capital expenditure, debt repayment and related interest, and other cash requirements for at least the next twelve months.
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 Estimates
Critical accounting estimates are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations. For additional information, please see the discussion of our most critical accounting estimates under “Critical Accounting 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, 2021.
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, 2021. There have been no material changes since December 31, 2021.
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.