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.
Overview
We are a medical technology company that develops and commercializes medical devices in the United States. Our mission is to reveal and treat people with underserved chronic conditions and help them care for themselves at home. We focus our efforts on advancing the standard of care in home-based solutions for patients with lymphedema and chronic respiratory conditions by improving clinical, patient and economic outcomes. In our lymphedema product line, our sales and marketing channel focus includes (1) oncology-related clinicians who treat cancer survivors diagnosed with secondary lymphedema related to their cancer treatments, (2) vascular disease clinicians who support patients with lymphedema, chronic venous insufficiency, and lipedema and (3) wound, vein and lymphatic massage clinics. In our airway clearance product line, we support patients suffering from chronic respiratory conditions, particularly bronchiectasis, and we sell our products indirectly through home medical equipment and DME providers. We generally employ a direct-to-patient and -clinician business model within our lymphedema portfolio, through which we obtain patient referrals from clinicians, manage insurance claims on behalf of our patients and their clinicians, deliver our solutions directly to patients and train them on the proper use of our solutions. Across our two product lines, our home-based solutions deliver cost-effective, clinically proven and long-term treatment for indicated patients.
Our current lymphedema products are the Flexitouch Plus, Entre Plus and Nimbl pneumatic compression pump systems and our airway clearance product is a High-Frequency Chest Wall Oscillation (“HFCWO”) device called AffloVest. The Flexitouch system product line is considered an advanced pneumatic compression device. The first generation Flexitouch system received 510(k) clearance from the U.S. Food and Drug Administration (the “FDA”) in July 2002, introducing a medical device technology to address the many limitations of self-administered home-based manual lymphatic drainage therapy. A second generation Flexitouch system received 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. A third generation, Flexitouch Plus, received 510(k) clearance from the FDA in June 2017. In December 2020, we received 510(k) clearance from the FDA for two new indications for our Flexitouch Plus system: phlebolymphedema and lipedema. The Entre system product line and Nimbl product line are considered basic, or simple, pneumatic compression devices. These systems are sold or rented to patients who need a simple pump or who do not yet qualify for insurance reimbursement for an advanced compression device e.g., a Flexitouch Plus system. We introduced the Entre system in the United States in February 2013, this device was manufactured by Thermotek, Inc. and received FDA clearance in 2010. In 2015, we received FDA clearance for our own first generation Entre system and the second generation, Entre Plus, was released in March 2024. Nimbl, our next-generation pneumatic compression platform, received 510(k) clearance in June 2024 and was commercially launched for upper extremity lymphedema in October 2024 and launched for lower extremity lymphedema in February 2025. Sales and rentals of our lymphedema products represented 83% and 86% of our revenue in the three months ended March 31, 2025 and 2024, 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 three months ended March 31, 2025 and 2024, sales of AffloVest represented 17% and 14% 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, DME sales team, marketing team including clinical education programs, patient education team, reimbursement capabilities and clinical expertise. We market our lymphedema products using a direct-to-patient and -clinician 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 March 31, 2025, we employed 161 account managers and 103 specialists for our lymphedema products and a
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team of 19 specialists supporting our airway clearance products. This compares to 158 account managers and 111 specialists for our lymphedema products and a team of 17 specialists supporting our airway clearance products as of March 31, 2024.
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.
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.
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. We also manufacture and ship the AffloVest device from our Minnesota-based facility.
I n 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. Flexitouch Plus and Nimbl devices include Bluetooth technology, which is viewable using Kylee.
For the three months ended March 31, 2025, we generated revenue of $61.3 million and had a net loss of $3.0 million, compared to revenue of $61.1 million and a net loss of $2.2 million for the three months ended March 31, 2024. 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.
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Results of Operations
Comparison of the Three Months Ended March 31, 2025 and 2024
The following table presents our results of operations for the periods indicated:
Three Months Ended
March 31,
Change
(In thousands)
2025
2024
$
%
Condensed Consolidated Statement
% of
% of
of Operations Data:
revenue
revenue
Revenue
Sales revenue
$
52,469
86
%
$
53,307
87
%
$
(838)
(2)
%
Rental revenue
8,799
14
%
7,781
13
%
1,018
13
%
Total revenue
61,268
100
%
61,088
100
%
180
0
%
Cost of revenue
Cost of sales revenue
13,891
23
%
14,944
24
%
(1,053)
(7)
%
Cost of rental revenue
2,031
3
%
2,715
5
%
(684)
(25)
%
Total cost of revenue
15,922
26
%
17,659
29
%
(1,737)
(10)
%
Gross profit
Gross profit - sales revenue
38,578
63
%
38,363
63
%
215
1
%
Gross profit - rental revenue
6,768
11
%
5,066
8
%
1,702
34
%
Gross profit
45,346
74
%
43,429
71
%
1,917
4
%
Operating expenses
Sales and marketing
27,516
45
%
27,357
45
%
159
1
%
Research and development
1,741
3
%
2,143
4
%
(402)
(19)
%
Reimbursement, general and administrative
19,998
32
%
16,261
26
%
3,737
23
%
Intangible asset amortization and earn-out
633
1
%
632
1
%
1
0
%
Total operating expenses
49,888
81
%
46,393
76
%
3,495
8
%
Loss from operations
(4,542)
(7)
%
(2,964)
(5)
%
(1,578)
53
%
Interest income
895
1
%
713
1
%
182
26
%
Interest expense
(424)
(1)
%
(567)
(1)
%
143
(25)
%
Other income
—
—
%
9
—
%
(9)
(100)
%
Loss before income taxes
(4,071)
(7)
%
(2,809)
(5)
%
(1,262)
45
%
Income tax benefit
(1,097)
(2)
%
(600)
(1)
%
(497)
83
%
Net loss
$
(2,974)
(5)
%
$
(2,209)
(4)
%
$
(765)
35
%
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Revenue
Revenue increased $0.2 million, or 0.3%, to $61.3 million in the three months ended March 31, 2025, compared to $61.1 million in the three months ended March 31, 2024. The increase in total revenue was attributable to an increase of $1.9 million, or 22%, in sales of the airway clearance product line in the three months ended March 31, 2025, compared to the three months ended March 31, 2024. The increase was mostly offset by a decrease of $1.8 million, or 3%, in sales and rentals of the lymphedema product line in the three months ended March 31, 2025, compared to the three months ended March 31, 2024.
The increase in the airway clearance product line revenue in the three months ended March 31, 2025, was primarily attributable to increased placements of AffloVest among our DME partners. The decrease in the lymphedema product line revenue in the three months ended March 31, 2025 was primarily attributable to a decrease in headcount of our field sales team.
The following table summarizes our revenue by product line for the three months ended March 31, 2025 and 2024, both in dollars and percentage of total revenue:
Three Months Ended
March 31,
Change
(In thousands)
2025
2024
$
%
Revenue
Lymphedema products
$
50,554
$
52,313
$
(1,759)
(3)%
Airway clearance products
10,714
8,775
1,939
22%
Total
$
61,268
$
61,088
$
180
0%
Percentage of total revenue
Lymphedema products
83%
86%
Airway clearance products
17%
14%
Total
100%
100%
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 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 decreased $1.7 million, or 10%, to $15.9 million in the three months ended March 31, 2025, compared to $17.7 million in the three months ended March 31, 2024. The decrease in cost of revenue was primarily attributable to lower manufacturing and warranty costs.
Gross margin was 74% and 71% in the three months ended March 31, 2025 and 2024, respectively.
Sales and Marketing Expenses
Sales and marketing expenses increased $0.2 million, or 1%, to $27.5 million in the three months ended March 31, 2025, compared to $27.4 million in the three months ended March 31, 2024. The increase was primarily attributable to a $0.6 million increase in travel and entertainment expenses, partially offset by a $0.2
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million decrease in expenses for a new product launch, a $0.1 million decrease in personnel-related compensation expenses and a $0.1 million decrease in expenses related to sales meetings and tradeshow s.
Research and Development Expenses
Research and development (“R&D”) expenses decreased $0.4 million, or 19%, to $1.7 million in the three months ended March 31, 2025, compared to $2.1 million in the three months ended March 31, 2024. The decrease was primarily attributable to a $0.3 million decrease in clinical study related expenses and a $0.2 million decrease in personnel-related compensation expenses, partially offset by a $0.1 million increase in IT-related expenses.
Reimbursement, General and Administrative Expenses
Reimbursement, general and administrative expenses increased $3.7 million, or 23%, to $20.0 million in the three months ended March 31, 2025, compared to $16.3 million in the three months ended March 31, 2024. This increase was primarily attributable to a $2.5 million increase in personnel-related compensation expenses, a $1.0 million increase in IT-related expenses, and $0.2 million increase in occupancy costs, depreciation expense and professional fees.
Intangible Asset Amortization and Earn-out Expense
Intangible asset amortization and earn-out expense remained consistent at $0.6 million for each of the three months ended March 31, 2025 and 2024.
Interest Income and Interest Expense
Interest income increased $0.2 million, or 26%, to $0.9 million in the three months ended March 31, 2025, compared to $0.7 million in the three months ended March 31, 2024, primarily due to a higher cash balance in an Institutional Insured Liquid Deposit demand account. Interest expense decreased $0.2 million, or 25%, to $0.4 million in the three months ended March 31, 2025, compared to $0.6 million in the three months ended March 31, 2024, primarily due to the decrease in the outstanding balance of our term loan.
Income Taxes
We recorded an income tax benefit of $1.1 million and $0.6 million for the three months ended March 31, 2025 and 2024, respectively. The primary driver of the change in our effective tax rate was attributable to the Company recording less expense related to stock-based compensation discrete items when compared to the prior year period.
Liquidity and Capital Resources
Cash Flows
On March 31, 2025, our principal sources of liquidity were cash of $ 83.6 million and net accounts receivable of $ 35.7 million. This compares to cash of $60.7 million and net accounts receivable of $47.4 million at March 31, 2024.
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The following table summarizes our cash flows for the periods indicated:
Three Months Ended
March 31,
(In thousands)
2025
2024
Net cash provided by (used in):
Operating activities
$
417
$
924
Investing activities
(407)
(502)
Financing activities
(10,758)
(749)
Net decrease in cash
$
(10,748)
$
(327)
Operating Activities
Net cash provided by operating activities during the three months ended March 31, 2025 was $0.4 million, resulting from non-cash net income adjustments of $4.0 million, a net loss of $3.0 million and a net decrease in operating assets and liabilities of $0.7 million. The positive non-cash net income adjustments consisted primarily of $2.1 million of stock-based compensation expense and $1.7 million of depreciation. Cash used relating to the change in operating assets and liabilities primarily consisted of a decrease in net accounts receivable of $9.2 million, a $1.4 million increase in accounts payable and a $0.3 million increase in accrued expenses and other liabilities, partially offset by a decrease in accrued payroll and related taxes of $7.0 million, an increase in prepaid expenses and other assets of $2.5 million, a decrease in income taxes payable of $1.3 million, an increase in right of use operating lease assets of $0.3 million, an increase in net investment in leases of $0.3 million and an increase in inventories of $0.2 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 net accounts receivable of $6.7 million and an increase in inventories of $1.7 million.
Investing Activities
Net cash used in investing activities during the three months ended March 31, 2025, was $0.4 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.
Financing Activities
Net cash used in financing activities during the three months ended March 31, 2025, was $10.8 million, primarily consisting of payments of $10.0 million for the repurchase of our common stock and a payment of $0.8 million made on our term loan.
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.
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
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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 amended 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, added 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 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.
On February 22, 2022, we entered into a Second Amendment Agreement (the “Second Amendment”), which further amends the Credit Agreement. 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.
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”).
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. The Fourth Amendment also eliminated the liquidity financial covenant and modified 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 provided for an additional term loan in the amount of $8.25 million, which we used for a paydown of the revolving credit facility. 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.
On November 1, 2024, we entered into a Fifth Amendment Agreement (the “Fifth Amendment”), which further amended the Credit Agreement. The Fifth Amendment permits the Company to make payments to repurchase shares of its common stock, as long as the Company is not in default before and after giving effect to such repurchases, and as long as such repurchases do not exceed $30.0 million.
As of March 31, 2025, we had outstanding borrowings of $25.5 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.
For additional information regarding the Credit Agreement, including interest rates, fees and maturities, see Note 8 – “Credit Agreement” of the condensed consolidated financial statements contained in this report.
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Share Repurchase Program
On October 30, 2024, our Board of Directors authorized a program to repurchase up to $30.0 million of common stock. Under the program, purchases may be made from time to time in the open market, in privately negotiated purchases, or both. The timing and number of shares to be purchased will be based on the price of our common stock, general business and market conditions and other investment considerations and factors. The share repurchase program expires on October 31, 2026. The program does not obligate us to repurchase any specific number of shares and may be suspended or discontinued at any time without prior notice.
During the three months ended March 31, 2025, we repurchased 635,603 shares for approximately $10.0 million. We used cash on hand to fund these repurchases. As of March 31, 2025, approximately $16.5 million remained authorized under the stock repurchase program.
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, 2024. There have been no material changes since December 31, 2024.
Adequacy of Resources
Our future cash requirements may vary significantly from those now planned and will depend on many factors, including:
● the impacts of inflation, rising interest rates or a recession on our business;
● sales and marketing resources needed to further penetrate our market;
● expansion of our operations;
● IT investments to scale our business;
● 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 revisions to existing products; and
● use of capital for acquisitions or licenses, if any.
Historically, we have experienced increases in our expenditures consistent with the growth in our revenue, operations and personnel, and we anticipate that our expenditures will continue to increase as we expand our business.
We believe our cash 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.
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Inflation and changing prices did not have a material effect on our business during the quarter ended March 31, 2025. However, recent changes and announcements in U.S. and global tariff frameworks could negatively impact our supply chain and increase our cost of goods sold. The ultimate impact of tariffs, including any related responses, are uncertain and will depend on various factors, including which tariffs are ultimately implemented, the timing of implementation, any exemptions available, and the amount, scope and nature of the tariffs. We continue to analyze the potential impact of recently announced tariffs, trade actions and related effects on our business and, at this time, we estimate that the impacts on our cost of goods sold could be up to $5.0 million for the year ended December 31, 2025. While we are actively working to mitigate tariff impacts, there is no assurance that such actions will be effective.
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, 2024.
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, 2024. There have been no material changes since December 31, 2024.
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.