What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-06 compared with 2023-11-06 · 55 added, 113 removed, 126 unchanged (57% of the section changed)

18 unchanged sentences

The Entre Plus 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 Plus system.

Sales and rentals of our lymphedema products represented 88% and 85% of our revenue in the nine months ended September 30, 2023 and 2022, 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.

Sales and rentals of our lymphedema products represented 86% and 85% of our revenue in the three months ended March 31, 2024 and 2023, respectively.

On September 8, 2021, we acquired the assets of the AffloVest airway clearance product line.

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 the nine months ended September 30, 2023 and 2022, sales of AffloVest represented 12% and 15% of our revenue, respectively.

For the three months ended March 31, 2024 and 2023, sales of AffloVest represented 14% and 15% 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.

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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 September 30, 2023, we employed 246 (245 at June 30, 2023) field sales representatives for our lymphedema products and a team of 13 (10 at June 30, 2023) supporting our airway clearance products.

This compares to 251 field sales representatives for our lymphedema products and a team of 10 supporting our airway clearance products as of September 30, 2022.

As of March 31, 2024, we employed 269 field sales representatives for our lymphedema products and a team of 17 supporting our airway clearance products.

This compares to 246 field sales representatives (excluding 4 key account managers) for our lymphedema products and a team of 12 specialists supporting our airway clearance products as of March 31, 2023.

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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We conduct final assembly of the garments used with our products, perform quality assurance and ship our products from our facility in Minnesota.

We also manufacture and ship the AffloVest device from our Minnesota-based facility.

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, 2023, we generated revenue of $69.6 million and had net income of $22.3 million, compared to revenue of $65.3 million and a net loss of $2.3 million for the three months ended September 30, 2022.

For the nine months ended September 30, 2023, we generated revenue of $196.8 million and had net income of $20.3 million, compared to revenue of $172.9 million and a net loss of $22.5 million for the nine months ended September 30, 2022.

For the three months ended March 31, 2024, we generated revenue of $61.1 million and had a net loss of $2.2 million, compared to revenue of $58.8 million and a net loss of $1.9 million for the three months ended March 31, 2023.

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.

We operate in one segment for financial reporting purposes.

Current Economic Conditions and the Effects of Coronavirus (COVID-19)

The lingering effects of the COVID-19 pandemic, as well as general global economic downturns and macroeconomic trends, including heightened inflation, capital market volatility, interest rate fluctuations, increased unemployment and economic slowdown or recession, may result in unfavorable conditions that could negatively affect demand for our products and exacerbate some of the other risks that affect our business, financial condition and results of operations.

The United States economy in general and our business specifically have been negatively affected by the COVID-19 pandemic.

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 nine months of 2023 , consequences of the pandemic remain uncertain.

Although the effects of the COVID-19 pandemic on our operating results continue to subside, the pandemic could still have an unfavorable effect on our financial position, results of operations and cash flows.

Current Economic Conditions

General global economic downturns and macroeconomic trends, including heightened inflation, capital market volatility, interest rate fluctuations, increased unemployment and economic slowdown or recession, may result in unfavorable conditions that could negatively affect demand for our products and exacerbate some of the other risks that affect our business, financial condition and results of operations.

Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2023 and 2022

Comparison of the Three Months Ended March 31, 2024 and 2023

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

Three Months Ended

September 30,

(In thousands)

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Total operating expenses

Income (loss) from operations

Other expense

Income (loss) before income taxes

Loss from operations

Other income (expense)

Loss before income taxes

Income tax benefit

Net income (loss)

“N.M.” Not Meaningful

Nine Months Ended

September 30,

(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

Income (loss) from operations

Other expense

Income (loss) before income taxes

Income tax (benefit) expense

Net income (loss)

Revenue increased $4.3 million, or 7%, to $69.6 million in the three months ended September 30, 2023, compared to $65.3 million in the three months ended September 30, 2022.

The increase in total revenue was attributable to an increase of $8.3 million, or 15%, in sales and rentals of the lymphedema product line, partially offset by a decrease of $4.0 million, or 36%, in sales of the airway clearance product line in the quarter ended September 30, 2023, compared to the quarter ended September 30, 2022.

Revenue increased $23.9 million, or 14%, to $196.8 million in the nine months ended September 30, 2023, compared to $172.9 million in the nine months ended September 30, 2022.

The increase in total revenue was attributable to an increase of $25.8 million, or 18%, in sales and rentals of the lymphedema product line, partially offset by a decrease of $1.9 million, or 7%, in sales of the airway clearance product line in the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.

The increase in the lymphedema product line revenue in the three and nine months ended September 30, 2023, was attributable to increasing productivity of our field sales team and enhancing our portfolio through the development and introduction of new products.

The decrease in the airway clearance product line revenue in the three and nine months ended September 30, 2023, was attributable to one large DME provider experiencing slowed placements of our AffloVest system due to the expiration of the COVID-19 Public Health Emergency waiver and a return to “pre-public health emergency’ eligibility requirements.

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

Revenue increased $2.2 million, or 4%, to $61.1 million in the three months ended March 31, 2024, compared to $58.8 million in the three months ended March 31, 2023.

The increase in total revenue was attributable to an increase of $2.6 million, or 5%, in sales and rentals of the lymphedema product line, partially offset by a decrease of $0.3 million, or 4%, in sales of the airway clearance product line in the quarter ended March 31, 2024, compared to the quarter ended March 31, 2023.

The increase in the lymphedema product line revenue in the three months ended March 31, 2024, was attributable to increasing productivity of our field sales team and continued strength within our entry-level Entre Plus system.

The decrease in the airway clearance product line revenue in the three months ended March 31, 2024, was attributable to one large DME provider experiencing slowed placements of our AffloVest system due to the expiration of the COVID-19 Public Health Emergency waiver in May 2023 and a return to “pre-public health emergency’ eligibility requirements.

The following table summarizes our revenue by product line for the three months ended March 31, 2024 and 2023, both in dollars and percentage of total revenue:

Three Months Ended

September 30,

(In thousands)

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Airway clearance products

“N.M.” Not Meaningful

Nine Months Ended

September 30,

(In thousands)

Lymphedema products

Airway clearance products

Percentage of total revenues

Lymphedema products

Airway clearance products

Our business is affected by seasonality.

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Cost of Revenue and Gross Margin

Cost of revenue increased $1.8 million, or 10%, to $20.2 million in the three months ended September 30, 2023, compared to $18.5 million in the three months ended September 30, 2022.

Cost of revenue increased $8.6 million, or 18%, to $57.6 million in the nine months ended September 30, 2023, compared to $49.0 million in the nine months ended September 30, 2022.

The increase in cost of revenue was primarily attributable to the increase in sales and rentals of the lymphedema product line in both periods.

Gross margin was 70.9% and 71.7% in the three months ended September 30, 2023 and 2022, respectively, and 70.7% and 71.7% in the nine months ended September 30, 2023 and 2022, respectively.

Cost of revenue increased $0.3 million, or 2%, to $17.7 million in the three months ended March 31, 2024, compared to $17.4 million in the three months ended March 31, 2023.

The increase in cost of revenue was primarily attributable to the increase in sales and rentals of the lymphedema product line.

Gross margin was 71.1% and 70.5% in the three months ended March 31, 2024 and 2023, respectively.

Sales and Marketing Expenses

Sales and marketing expenses decreased $0.6 million, or 2%, to $26.0 million in the three months ended September 30, 2023, compared to $26.6 million in the three months ended September 30, 2022.

decrease was primarily attributable a $0.6 million decrease in personnel-related compensation expenses and a $0.4 million decrease in travel and entertainment expenses.

These decreases were partially offset by a $0.3 million increase in expenses for new product introduction and a $0.1 million increase in subscription fee expenses.

Sales and marketing expenses increased $1.2 million, or 2%, to $80.5 million in the nine months ended September 30, 2023, compared to $79.3 million in the nine months ended September 30, 2022.

The increase was primarily attributable to a $1.4 million increase in personnel-related compensation expenses, a $0.3 million increase in subscription fee expenses and a $0.2 million increase in expenses for new product introduction.

These increases were partially offset by a $0.5 million decrease in travel and entertainment expenses and a $0.2 million decrease in expenses related to sales meetings and tradeshows.

Sales and marketing expenses increased $1.1 million, or 4%, to $27.4 million in the three months ended March 31, 2024, compared to $26.3 million in the three months ended March 31, 2023.

The increase was

primarily attributable a $0.5 million increase in travel and entertainment expenses, a $0.3 million increase in personnel-related compensation expenses and a $0.3 million increase in general office and printing expenses .

Research and Development Expenses

Research and development (“R&D”) expenses increased $0.4 million, or 24%, to $2.0 million in the three months ended September 30, 2023, compared to $1.6 million in the three months ended September 30, 2022.

The increase was primarily attributable to a $0.2 million increase in personnel-related compensation expenses and a $0.2 million increase in clinical study related expenses.

R&D expenses increased $1.1 million, or 22%, to $6.0 million in the nine months ended September 30, 2023, compared to $4.9 million in the nine months ended September 30, 2022.

The increase was primarily attributable to a $0.8 million increase in personnel-related compensation expenses and a $0.3 million increase in clinical study related expenses.

Research and development (“R&D”) expenses decreased $0.1 million, or 4%, to $2.1 million in the three months ended March 31, 2024, compared to $2.2 million in the three months ended March 31, 2023.

The decrease was primarily attributable to a $0.2 million decrease in professional fees, partially offset by a $0.1 million increase in personnel-related compensation expenses.

Reimbursement, General and Administrative Expenses

Reimbursement, general and administrative expenses increased $0.2 million, or 1%, to $16.5 million in the three months ended September 30, 2023, compared to $16.3 million in the three months ended September 30, 2022.

This increase was primarily attributable to a $0.2 million increase in personnel-related compensation expenses.

Reimbursement, general and administrative expenses decreased $0.5 million, or 1%, to $46.9 million in the nine months ended September 30, 2023, compared to $47.4 million in the nine months ended September 30, 2022.

This decrease was primarily attributable to a $2.0 million decrease in occupancy costs, depreciation expense, and legal and professional fees, partially offset by a $1.5 million increase in personnel-related compensation expenses.

Reimbursement, general and administrative expenses increased $0.8 million, or 5%, to $16.3 million in the three months ended March 31, 2024, compared to $15.4 million in the three months ended March 31, 2023.

This increase was primarily attributable to a $0.5 million increase in personnel-related compensation expenses and a $0.4 million increase in IT related expenses, partially offset by a $0.1 million decrease in professional fees.

Intangible Asset Amortization and Earn-out Expense

Intangible asset amortization and earn-out expense decreased $7.1 million to a benefit of $3.1 million in the three months ended September 30, 2023, compared to an expense of $4.0 million in the three months ended September 30, 2022.

The benefit primarily related to a decrease in the fair value of the earn-out expense of $3.7 million for the three months ended September 30, 2023, due to the lower than expected airway clearance product revenue, compared to an increase in the fair value of the earn-out expense of $3.4 million for the three months ended September 30, 2022.

Intangible asset amortization and earn-out expense decreased $13.4 million to a benefit of $0.6 million in the nine months ended September 30, 2023, compared to an expense of $12.8 million in the nine months ended September 30, 2022.

The benefit primarily related to a decrease in the fair value of the earn-out expense of $2.5 million for the nine months ended September 30, 2023, due to the lower than expected airway clearance product revenue, compared to an increase in the fair value of the earn-out expense of $10.9 million for the nine months ended September 30, 2022.

Other Expense, Net

Other expense, net was $0.4 million and $0.7 million for the three months ended September 30, 2023 and 2022, respectively.

The decrease was primarily due to an increase in interest income.

Other expense, net was $2.2 million and $1.8 million for the nine months ended September 30, 2023 and 2022, respectively.

The increase was due to an increase in interest expense, partially offset by an increase in interest income.

We recorded an income tax benefit of $14.7 million and an income tax benefit of $0.1 million for the three months ended September 30, 2023 and 2022, respectively.

The primary driver of the change was attributable to the release of the valuation allowance related to the future realization of deferred tax assets.

We recorded an income tax benefit of $16.3 million and an income tax expense of $0.1 million for the nine months ended September 30, 2023 and 2022, respectively.

The primary driver of the change was attributable to the release of the valuation allowance related to the future realization of deferred tax assets.

Intangible asset amortization and earn-out expense decreased $0.7 million to $0.6 million in the three months ended March 31, 2024, compared to $1.3 million in the three months ended March 31, 2023.

The decrease was related to there being no earn-out expense in the three months ended March 31, 2024 compared to an increase in the fair value of the earn-out expense of $0.7 million for the three months ended March 31, 2023.

Other Income (Expense), Net

We recorded other income, net of $0.1 million and other expense, net of $1.0 million for the three months ended March 31, 2024 and 2023, respectively.

The primary drivers of the change were a decrease in interest expense of $0.6 million and an increase in interest income of $0.6 million.

We recorded an income tax benefit of $0.6 million and an income tax benefit of $2.9 million for the three months ended March 31, 2024 and 2023, respectively.

The primary driver of the change in our effective tax rate was the fact that we did not have a full valuation allowance on our deferred tax assets for the current year period, while the prior year period reported a full valuation allowance.

Liquidity and Capital Resources

At September 30, 2023, our principal sources of liquidity were cash and cash equivalents of $ 66.0 million and net accounts receivable of $ 58.5 million.

This compares to cash and cash equivalents of $23.4 million and net accounts receivable of $69.5 million at September 30, 2022.

At March 31, 2024, our principal sources of liquidity were cash and cash equivalents of $ 60.7 million and net accounts receivable of $ 47.4 million.

This compares to cash and cash equivalents of $55.0 million and net accounts receivable of $71.0 million at March 31, 2023.

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

Nine Months Ended

September 30,

Three Months Ended

(In thousands)

3 unchanged sentences

Financing activities

Net increase (decrease) in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Operating Activities

Net cash provided by operating activities during the nine months ended September 30, 2023 was $17.5 million, resulting from net income of $20.3 million and a net increase in operating assets and liabilities of $9.9 million, which were partially offset by non-cash net income adjustments of $12.7 million.

Cash provided relating to the change in operating assets and liabilities primarily consisted of a decrease in accounts receivable of $19.3 million and a decrease in net investment in leases of $2.5 million, partially offset by a decrease in accrued expenses of $5.5 million, a decrease in accounts payable of $3.6 million, a decrease in accrued payroll and related taxes of $2.3 million, and an increase in prepaid expenses and inventories of $0.7 million.

The negative non-cash net loss adjustments consisted primarily of $20.7 million of deferred income taxes and a $2.5 million change in the fair value of earn-out liability, offset by $5.6 million of stock-based compensation expense and $4.9 million of depreciation and amortization expense.

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 provided by operating activities during the three months ended March 31, 2024 was $0.9 million, resulting from non-cash net loss adjustments of $3.8 million, partially offset by a net loss of $2.2 million and a net decrease in operating assets and liabilities of $0.6 million.

The positive non-cash net loss adjustments consisted primarily of $2.0 million of stock-based compensation expense and $1.6 million of depreciation and amortization expense.

Cash used relating to the change in operating assets and liabilities primarily consisted of a decrease in accrued payroll and related taxes of $5.8 million, a decrease in accounts payable and accrued expenses of $1.6, an increase in prepaid expenses and other assets of $0.8 million and a decrease in income taxes payable of $0.7 million, partially offset by a decrease in accounts receivable of $6.7 million and an increase in inventories of $1.7 million.

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.

The non-cash net loss adjustments consisted primarily of $2.0 million of stock-based compensation expense, $1.6 million of depreciation and amortization expense and a $0.7 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.

Investing Activities

Net cash used in investing activities during the nine months ended September 30, 2023, was $1.5 million, consisting of purchases of property and equipment, and patent costs.

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 three months ended March 31, 2024, was $0.5 million, consisting of purchases of property and equipment primarily related to tenant improvements, and patent costs.

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.

Financing Activities

Net cash provided by financing activities during the nine months ended September 30, 2023, was $28.1 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, partially offset by a payment of $5.0 million on the AffloVest earn-out and a $2.3 million payment made on our term loan.

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 used in financing activities during the three months ended March 31, 2024, was $0.7 million, primarily consisting of a $0.8 million payment made on our term loan.

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.

Credit Agreement

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

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

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

The Fourth Amendment, among other things, decreased the commitment fees payable under the revolving credit facility and eliminated the temporary increase in the applicable margin for Adjusted Term SOFR loans.

2 unchanged sentences

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

As of September 30, 2023, we had outstanding borrowings of $46.8 million under the Credit Agreement, comprised of $30.0 million under the term loan and $16.8 million under the revolving credit facility.

On December 21, 2023, we made a payment of $16.8 million to repay in full the outstanding balance on the revolving credit facility.

As of March 31, 2024, we had outstanding borrowings of $28.5 million under the Credit Agreement, comprised entirely of the term loan.

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

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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.

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.

Inflation and changing prices did not have a material effect on our business during the quarter ended March 31, 2024, and we do not expect that inflation or changing prices will materially affect our business for at least the next twelve months.

Recent Accounting Pronouncements

7 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