What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-08-07 compared with 2023-05-08 · 96 added, 47 removed, 136 unchanged (51% of the section changed)

18 unchanged sentences

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% of our revenue in each of the three months ended March 31, 2023 and 2022.

Sales and rentals of our lymphedema products represented 86% of our revenue in each of the six months ended June 30, 2023 and 2022.

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 that provides airway clearance to treat patients with chronic respiratory conditions such as bronchiectasis or conditions resulting from neuromuscular disorders.

For each of the three months ended March 31, 2023 and 2022, sales of AffloVest represented 15% of our revenue.

For each of the six months ended June 30, 2023 and 2022, sales of AffloVest represented 14% of our revenue.

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.

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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 March 31, 2023, we employed a field staff of 289, which consisted of 250 field sales representatives and 24 field managers for our lymphedema products, as well as a team of 15 supporting our airway clearance products.

This compares to a field staff of 271 as of March 31, 2022, which consisted of approximately 238 field sales representatives and 20 field managers for our lymphedema products, as well as a team of 13 supporting our airway clearance products.

As of June 30, 2023, we employed a field staff of 290, which consisted of 249 field sales representatives and 26 field managers for our lymphedema products, as well as a team of 15 supporting our airway clearance products.

This compares to a field staff of 289 as of June 30, 2022, which consisted of approximately 252 field sales representatives and 24 field managers for our lymphedema products, as well as a team of 13 supporting our airway clearance products.

We invest 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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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 March 31, 2023, we generated revenue of $58.8 million and had a net loss of $1.9 million, compared to revenue of $48.0 million and a net loss of $15.6 million for the three months ended March 31, 2022.

For the three months ended June 30, 2023, we generated revenue of $68.3 million and had a net loss of $0.1 million, compared to revenue of $59.6 million and a net loss of $4.6 million for the three months ended June 30, 2022.

For the six months ended June 30, 2023, we generated revenue of $127.2 million and had a net loss of $2.0 million, compared to revenue of $107.6 million and a net loss of $20.2 million for the six months ended June 30, 2022.

Our primary sources of capital since our initial public offering in 2016 have been from operating income, bank financing and our public offering in February 2023.

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From the onset of the pandemic, we have seen declines in the number of patients that healthcare facilities and clinics are able to treat due to enhanced safety protocols, and have also seen staffing challenges, both in our organization and at the clinics we serve.

While we saw some level of recovery in 2022 and in the first quarter of 2023 , there are no reliable estimates of how long the pandemic will last or what ultimate effects the pandemic will have.

While we saw some level of recovery in 2022 and in the first two quarters of 2023 , there are no reliable estimates of how long the pandemic will last 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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Results of Operations

Comparison of the Three Months Ended March 31, 2023 and 2022

Comparison of the Three and Six Months Ended June 30, 2023 and 2022

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

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Total operating expenses

Income (loss) from operations

Other expense

Income (loss) before income taxes

Income tax expense (benefit)

“N.M.” Not Meaningful

Six Months Ended

(In thousands)

Consolidated Statement

of Operations Data:

Sales revenue

Rental revenue

Total revenue

Cost of revenue

Cost of sales revenue

Cost of rental revenue

Total cost of revenue

Gross profit - sales revenue

Gross profit - rental revenue

Operating expenses

Sales and marketing

Research and development

Reimbursement, general and administrative

Intangible asset amortization and earn-out

Total operating expenses

Loss from operations

2 unchanged sentences

Income tax (benefit) expense

“N.M.” Not Meaningful

Revenue increased $10.9 million, or 23%, to $58.8 million in the three months ended March 31, 2023, compared to $48.0 million in the three months ended March 31, 2022.

The increase in total revenue was attributable to an increase of $9.1 million, or 22%, in sales and rentals of the lymphedema product line and an increase of $1.8 million, or 24%, in sales of the airway clearance product line in the quarter ended March 31, 2023, compared to the quarter ended March 31, 2022.

The following table summarizes our revenue by product line for the three months ended March 31, 2023 and 2022, both in dollars and percentage of total revenue:

Revenue increased $8.7 million, or 15%, to $68.3 million in the three months ended June 30, 2023, compared to $59.6 million in the three months ended June 30, 2022.

The increase in total revenue was attributable to an increase of $8.4 million, or 16%, in sales and rentals of the lymphedema product line and an increase of $0.3 million, or 4%, in sales of the airway clearance product line in the quarter ended June 30, 2023, compared to the quarter ended June 30, 2022.

Revenue increased $19.6 million, or 18%, to $127.2 million in the six months ended June 30, 2023, compared to $107.6 million in the six months ended June 30, 2022.

The increase in total revenue was attributable to an increase of $17.5 million, or 19%, in sales and rentals of the lymphedema product line and an increase of $2.1 million, or 14%, in sales of the airway clearance product line in the six months ended June 30, 2023, compared to the six months ended June 30, 2022.

The following table summarizes our revenue by product line for the three and six months ended June 30, 2023 and 2022, both in dollars and percentage of total revenue:

Three Months Ended

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“N.M.” Not Meaningful

Six Months Ended

(In thousands)

Lymphedema products

Airway clearance products

Percentage of total revenues

Lymphedema products

Airway clearance products

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.

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 have an increasing 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.

Cost of Revenue and Gross Margin

Cost of revenue increased $3.3 million, or 23%, to $17.4 million in the three months ended March 31, 2023, compared to $14.1 million in the three months ended March 31, 2022.

Cost of revenue increased $3.6 million, or 22%, to $20.0 million in the three months ended June 30, 2023, compared to $16.4 million in the three months ended June 30, 2022.

Cost of revenue increased $6.9 million, or 23%, to $37.4 million in the six months ended June 30, 2023, compared to $30.5 million in the six months ended June 30, 2022.

The increase in cost of revenue was primarily attributable to the additional contribution of AffloVest sales and an increase in inbound freight costs.

Gross margin was 70.5% and 70.6% in the three months ended March 31, 2023 and 2022, respectively.

Gross margin was 70.7% and 72.5% in the three months ended June 30, 2023 and 2022, respectively, and 70.6% and 71.6% in the six months ended June 30, 2023 and 2022, respectively.

Sales and Marketing Expenses

Sales and marketing expenses increased $2.4 million, or 10%, to $26.3 million in the three months ended March 31, 2023, compared to $23.9 million in the three months ended March 31, 2022.

The increase was primarily attributable to an increase in personnel-related compensation expense as a result of the increased headcount in the collective field commercial team.

Sales and marketing expenses decreased $0.6 million, or 2%, to $28.2 million in the three months ended June 30, 2023, compared to $28.8 million in the three months ended June 30, 2022.

The decrease was

primarily attributable to a $0.4 million decrease in travel and entertainment expenses and a $0.2 million decrease in personnel-related compensation expenses.

Sales and marketing expenses increased $1.8 million, or 3%, to $54.5 million in the six months ended June 30, 2023, compared to $52.8 million in the six months ended June 30, 2022.

The increase was primarily attributable to a $2.4 million increase in personnel-related compensation expense as a result of the increased headcount in the collective field commercial team and a $0.2 million increase in demo units expense for new product introduction.

This increase was partially offset by a $0.6 million decrease in travel and entertainment expenses.

Research and Development Expenses

Research and development (“R&D”) expenses increased $0.7 million, or 47%, to $2.2 million in the three months ended March 31, 2023, compared to $1.5 million in the three months ended March 31, 2022, which was primarily attributable to an increase in personnel-related compensation expense, third-party consulting and R&D supplies.

Research and development (“R&D”) expenses were $1.8 million for each of the three months ended June 30, 2023 and 2022.

R&D expenses increased $0.7 million, or 21%, to $4.1 million in the six months ended June 30, 2023, compared to $3.4 million in the six months ended June 30, 2022, which was primarily attributable to an increase in personnel-related compensation expense and third-party consulting.

Reimbursement, General and Administrative Expenses

Reimbursement, general and administrative expenses decreased $0.8 million, or 5%, to $15.4 million in the three months ended March 31, 2023, compared to $16.2 million in the three months ended March 31, 2022.

This decrease was primarily attributable to a $1.6 million decrease in occupancy costs, depreciation

expense, and legal and professional fees, partially offset by a $0.8 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 $0.1 million, or 1%, to $15.0 million in the three months ended June 30, 2023, compared to $14.9 million in the three months ended June 30, 2022.

This increase was primarily attributable to a $0.5 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, partially offset by a $0.4 million decrease in occupancy costs and legal and professional fees.

Reimbursement, general and administrative expenses decreased $0.7 million, or 2%, to $30.4 million in the six months ended June 30, 2023, compared to $31.1 million in the six months ended June 30, 2022.

This decrease was primarily attributable to a $1.8 million decrease in occupancy costs, depreciation expense, and legal and professional fees, partially offset by a $1.1 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer relations and corporate functions.

Intangible Asset Amortization and Earn-out Expense

Intangible asset amortization and earn-out expense decreased $5.8 million to $1.3 million in the three months ended March 31, 2023, compared to $7.1 million in the three months ended March 31, 2022.

The decrease in intangible asset amortization and earn-out expense was mainly attributable to a $0.7 million adjustment to the fair value of the earn-out liability for the three months ended March 31, 2023, compared to a $6.5 million adjustment for the three months ended March 31, 2022.

Intangible asset amortization and earn-out expense decreased $0.5 million to $1.2 million in the three months ended June 30, 2023, compared to $1.7 million in the three months ended June 30, 2022.

The decrease in intangible asset amortization and earn-out expense was mainly attributable to a $0.6 million adjustment to the fair value of the earn-out liability for the three months ended June 30, 2023, compared to a $1.1 million adjustment for the three months ended June 30, 2022.

Intangible asset amortization and earn-out expense decreased $6.3 million to $2.5 million in the six months ended June 30, 2023, compared to $8.8 million in the six months ended June 30, 2022.

The decrease in intangible asset amortization and earn-out expense was mainly attributable to a $1.2 million adjustment to the fair value of the earn-out liability for the six months ended June 30, 2023, compared to a $7.6 million adjustment for the six months ended June 30, 2022.

Other Expense, Net

Other expense, net was $1.0 million and $0.5 million for the three months ended March 31, 2023 and 2022, respectively.

The increase was primarily attributable to an increase in interest expense .

We recorded an income tax benefit of $2.9 million and an income tax expense of $0.2 million for the three months ended March 31, 2023 and 2022, respectively.

Other expense, net was $0.8 million and $0.6 million for the three months ended June 30, 2023 and 2022, respectively, and was $1.8 million and $1.0 million for the six months ended June 30, 2023 and 2022, respectively.

The increase in each period was primarily attributable to an increase in interest expense .

We recorded an income tax expense of $1.3 million and an income tax benefit of $20 thousand for the three months ended June 30, 2023 and 2022, respectively.

The difference relates to the fact that we expect to have current taxes payable for 2023, despite having a full valuation allowance.

Additionally, there are significant permanent adjustments for nondeductible meals expense and nondeductible stock issuance costs which were not relevant to the prior year period.

We recorded an income tax benefit of $1.6 million and an income tax expense of $0.2 million for the six months ended June 30, 2023 and 2022, respectively.

The benefit for the current year period reflects the tax effects of year-to-date losses that we expect to realize, whereas tax benefits from losses in the prior year period were not expected to be realized.

Liquidity and Capital Resources

At March 31, 2023, our principal sources of liquidity were cash and cash equivalents of $ 55.0 million and net accounts receivable of $ 71.0 million.

This compares to cash and cash equivalents of $21.2 million and net accounts receivable of $59.5 million at March 31, 2022.

At June 30, 2023, our principal sources of liquidity were cash and cash equivalents of $ 63.2 million and net accounts receivable of $ 62.0 million.

This compares to cash and cash equivalents of $23.4 million and net accounts receivable of $64.5 million at June 30, 2022.

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

Three Months Ended

Six Months Ended

(In thousands)

Net cash (used in) provided by:

Net cash provided by (used in):

Operating activities

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Operating Activities

Net cash used in operating activities during the three months ended March 31, 2023 was $0.5 million, resulting from a net decrease in operating assets and liabilities of $2.9 million and a net loss of $1.9 million, which were partially offset by non-cash net loss adjustments of $4.3 million.

Net cash provided by operating activities during the six months ended June 30, 2023 was $13.4 million, resulting from a net increase in operating assets and liabilities of $7.1 million and non-cash net loss adjustments of $8.3 million, which were partially offset by a net loss of $2.0 million.

Cash provided relating to the change in operating assets and liabilities primarily consisted of a decrease in accounts receivable of $15.9 million, a decrease in net investment in leases of $2.9 million and a decrease in inventories of $2.8 million, partially offset by a decrease in accrued expenses of $6.0 million, a decrease in accrued payroll and related taxes and income taxes payable of $4.0 million, a decrease in income taxes payable of $3.3 million, an increase in prepaid expenses of $0.7 million and a decrease in accounts payable of $0.7 million.

The non-cash net loss adjustments consisted primarily of $3.8 million of stock-based compensation expense, $3.3 million of depreciation and amortization expense and a $1.2 million change in fair value of earn-out liability.

Operating liabilities were unfavorably impacted by a decrease in accrued payroll and related taxes, accrued expenses and other liabilities and income taxes payable.

Operating assets were favorably impacted by a decrease in accounts receivable, net investment in leases and inventories.

Net cash used in operating activities during the three months ended March 31, 2022, was $3.2 million, resulting from a net loss of $15.6 million and a net decrease in operating assets and liabilities of $2.1 million, which was partially offset by non-cash net income (loss) adjustments of $10.3 million.

The non-cash net income (loss) adjustments consisted primarily of $6.5 million related to a change in fair value of earn-out liability, $2.2 million of stock-based compensation expense, $1.5 million of depreciation and amortization expense and $0.1 million of deferred income tax expense.

The uses of cash related to changes in operating assets primarily consisted of decreases in accounts receivable of $2.8 million and in net investment in leases of $0.2 million, partially offset by increases in prepaid expenses and other assets of $0.6 million and in inventories of $0.3 million.

The changes in operating liabilities consisted of a decrease in accrued payroll and related taxes of $2.7 million, partially offset by increases in accrued expenses and other liabilities of $1.4 million and accounts payable of $1.2 million.

Net cash used in operating activities during the six months ended June 30, 2022, was $0.9 million, resulting from a net loss of $20.2 million, which was partially offset by a net increase in operating assets and liabilities of $3.5 million and non-cash net (loss) income adjustments of $15.8 million.

The non-cash net (loss) income adjustments consisted primarily of $7.6 million related to a change in fair value of earn-out liability, $5.1 million of stock-based compensation expense, $3.0 million of depreciation and amortization expense and $0.1 million of deferred income tax expense.

The uses of cash related to changes in operating assets primarily consisted of increases in accounts receivable of $2.2 million, net investment in leases of $0.9 million and inventories of $0.7 million, partially offset by decreases in prepaid expenses and other assets of $1.9 million.

The changes in operating liabilities consisted of increases in accounts payable of $4.1 million and accrued expenses and other liabilities of $1.2 million.

Investing Activities

Net cash used in investing activities during the three months ended March 31, 2023, was $0.3 million, consisting of purchases of property and equipment, and patent costs.

Net cash used in investing activities during the three months ended March 31, 2022, was $0.2 million, consisting of purchases of property and equipment, and patent costs.

Net cash used in investing activities during the six months ended June 30, 2023, was $1.1 million, consisting of purchases of property and equipment, and patent costs.

Net cash used in investing activities during the six months ended June 30, 2022, was $0.4 million, consisting of purchases of property and equipment, and patent costs.

Financing Activities

Net cash provided by financing activities during the three months ended March 31, 2023, was $33.9 million, primarily consisting of net proceeds from the offering of our common stock of $34.6 million, slightly offset by a $0.8 million payment made on our term loan.

Net cash used by financing activities during the three months ended March 31, 2022, was $3.7 million, primarily consisting of payments of $3.8 million made on our term loan, slightly offset by $0.1 million in proceeds from exercise of common stock options.

Net cash provided by financing activities during the six months ended June 30, 2023, was $29.0 million, primarily consisting of net proceeds from the offering of our common stock of $34.6 million and $1.0 million in proceeds from the issuance of common stock under the ESPP.

The increase was partially offset by a payment of $5.0 million on the AffloVest earn-out and a $1.5 million payment made on our term loan.

Net cash used by financing activities during the six months ended June 30, 2022, was $3.6 million, primarily consisting of payments of $4.5 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.

Credit Agreement

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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 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.

The principal of the term loan is required to be repaid in quarterly installments of $750,000.

On February 22, 2022, we entered into a Second Amendment Agreement (the “Second Amendment”), which further amends the Credit Agreement.

The Second Amendment modifies the maximum leverage ratio,

the minimum fixed charge coverage ratio and the minimum consolidated EBITDA covenants under the Credit Agreement, and adds a minimum liquidity covenant.

The second amendment also increases the applicable margin for LIBOR rate loans under the Credit Agreement during the period commencing on the date of the Second Amendment and ending on the last day of the fiscal quarter ending June 30, 2023.

The Second Amendment modified the maximum leverage ratio, the minimum fixed charge coverage ratio and the minimum consolidated EBITDA covenants under the Credit Agreement, and added a minimum liquidity covenant, through the quarter ended June 30, 2023.

The Second Amendment also increased the applicable margin for LIBOR rate loans under the Credit Agreement during the period commencing on the date of the Second Amendment and ending on the last day of the fiscal quarter ending June 30, 2023.

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 March 31, 2023, we had outstanding borrowings of $48.3 million under the Credit Agreement, comprised of $23.3 million under the term loan and $25.0 million under the revolving credit facility.

On June 21, 2023, we entered into a Third Amendment Agreement (the “Third Amendment”) that replaced the interest rate benchmark under the Credit Agreement from LIBOR to the term Secured Overnight Financing Rate (“SOFR”).

All tenors of term SOFR are subject to a credit spread adjustment of 0.10% (“Adjusted Term SOFR”).

As of June 30, 2023, we had outstanding borrowings of $47.5 million under the Credit Agreement, comprised of $22.5 million under the term loan and $25.0 million under the revolving credit facility.

On August 1, 2023, we entered into a Fourth Amendment Agreement (the “Fourth Amendment”), which further amends the Credit Agreement.

The Fourth Amendment, among other things, decreases the commitment fees payable under the revolving credit facility and eliminates the language providing that the applicable margin for Adjusted Term SOFR loans was 3.50%.

The Fourth Amendment also eliminates the liquidity financial covenant and modifies the remaining financial covenants to reflect the termination of the temporary covenant relief period that was in place until June 30, 2023 pursuant to the Second Amendment.

In addition, the Fourth Amendment provides for an additional term loan in the amount of $8.25 million, which we used for a paydown of the revolving credit facility.

Following such payment, as of August 1, 2023, we had outstanding borrowings of $47.75 million under the Credit Agreement, comprised of $30.0 million under the term loan and $16.75 million under the revolving credit facility.

The Fourth Amendment also extends the maturity date of the term loans and revolving credit facility under the Credit Agreement from September 8, 2024 to August 1, 2026.

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.

2 unchanged sentences

There have been no material changes since December 31, 2022.

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 was $10.0 million, $5.0 million of which we paid in the fourth quarter of 2022, and $5.0 million, plus an imputed interest payment of $250,000, of which we are obligated to pay on or before May 26, 2023.

Adequacy of Resources

21 unchanged sentences

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