The following discussion and analysis should be read together with our financial statements and the related notes appearing elsewhere in this annual report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See "Cautionary Note Regarding Forward-Looking Statements and Industry Data" for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under "Risk Factors" and elsewhere in this annual report on Form 10-K.
Overview
We are a company providing technology solutions to improve the clinical
effectiveness and efficiency of healthcare providers. Our mission is to develop,
manufacture and market innovative proprietary products and services that assist
our customers in evaluating and treating chronic diseases. Our patented and FDA
cleared product, QuantaFlo, which measures arterial blood flow in the
extremities to aid in the diagnosis of PAD. In
In the year ended
Recent Developments
Late in the first quarter and into the second quarter of 2020, we experienced decreased test volumes due to COVID-19 related "social distancing" and other executive orders mandating "shelter-in-place" or similar restrictions. These governmental restrictions limited patient visits by our customers, and restricted participation in trade shows and in-person training. As such restrictions have been lifted around the country and non-emergency medical services resumed in late 2020, our business returned to and even exceeded pre-COVID-19 levels. However, sales personnel continued to be limited in ability to attend trade shows and conduct in-person training through early 2021. In the third and fourth quarters of 2020, we experienced even higher test volumes as our customers accelerated usage due to a backlog of untested patients. In 2021, variable fee license revenues (fee-per-test), which grew strongly in the first half of 2021, decreased sequentially in the second half of 2021. We believe this new pattern in the home-testing market is due to a
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COVID-19 related timing change in the behavior of insurance plans when ordering
QuantaFlo testing from our health risk assessment customers. We believe this new
pattern of testing earlier in the year and the effect on variable fee license
revenues may not continue in 2022 or even beyond 2022. However, in
As we look forward into 2022, there is continued uncertainty as recent outbreaks of variants have occurred and vaccination rates lag in certain jurisdictions. New, additional or different restrictions could be imposed, which could impact the usage of our product by our customers, or further impact the timing of demand for our products. Other customers who have fixed-fee licenses could decide to cancel their licenses if they are not able to use our device as frequently as they had anticipated in light of such restrictions.
In
In
Sources of Revenues and Expenses
Revenues
We generate revenues primarily from the rental or license of our vascular testing product. We recognize revenues from the licensing of our vascular testing product pursuant to agreements that normally automatically renew each month with revenues recognized on a daily convention basis. Our arrangements with customers for our vascular testing product are normally on a month-to-month basis with fees billed at the rates established in our customer agreements, which are either fixed fees, or variable fees based on usage. We also recognize revenue for hardware and supplies sales, as well as sales of product licenses under our exclusive marketing and distribution agreement, as of the date of shipment.
Cost of revenues
Our cost of revenues for our vascular testing product consists primarily of five components: the depreciation expense of our vascular testing product for lease; the write-off of the residual value of our vascular testing products retired from active leasing; manufacturing oversight personnel costs; the cost of hardware and supplies sold; and other miscellaneous items, such as freight, that are not directly related to product production. Each vascular testing product unit has a depreciation schedule based on the cost of the unit. The cost of each unit is depreciated on a straight-line basis over 36 months. Each unit has its own cost of production, which varies from time to time. We believe that the cost of each unit is a function of manufacturing efficiencies, supply costs and fixed overhead expense as affected by volume of units produced, which change from time to time. When cost of production is lower, the new units have a lower monthly depreciation and decrease the average depreciation per unit per month, which means our cost of revenues is lower. Similarly, if cost of production is higher, the new units will have a higher monthly depreciation and increase the average depreciation per unit per month, which means our cost of revenues is higher. We believe growth in the number of monthly depreciation charges is predominately due to our sales and marketing efforts, which add new customers to an established customer base. The retirement of units from active leasing is primarily a function of the aggregate number of vascular testing units rented and the occurrence from time to time of system upgrades. The cost of hardware or supplies sold are the cost of production for the item sold. The other costs of revenue vary primarily as a function of the aggregate number of vascular testing units rented and changes in operations such as manufacturing, delivery or maintenance.
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Engineering and product development expense
Our engineering and product development expense consists of costs associated with the design, development, testing and enhancement of our vascular testing product and other products in development. We also include salaries and related employee benefits, research-related overhead expenses and fees paid to external service providers in our engineering and product development expense.
Sales and marketing expense
Our sales and marketing expense consists primarily of sales commissions and support costs, salaries and related employee benefits, travel, education, trade show and marketing costs.
General and administrative expense
Our general and administrative expense consists primarily of salaries and related employee benefits, professional service fees, associated travel costs and depreciation and amortization expense.
Total other expense
Our total other income expense primarily reflects other taxes and fees as well as interest income and expense.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with
? the allowance for doubtful accounts, which impacts revenue;
? the valuation of inventory, which impacts profit margins;
the recognition and measurement of current and deferred income taxes (including
? the measurement of uncertain tax positions), which impact our provision for
taxes; and
the valuation and recognition of investments, which impacts our investment
? portfolio balance when we assess fair value and interest and other income, net,
when we record impairments.
For additional information relating to these and other accounting policies, see Note 2 to our audited financial statements, appearing elsewhere in this this annual report on Form 10-K.
Revenue Recognition
We recognize revenue from the licensing of our vascular testing product pursuant to agreements that automatically renew each month with revenue recognized on a daily convention basis. Our arrangements with customers for our vascular testing product are normally on a month-to-month basis with fees billed at the rates established in the customer agreement, which are either fixed fees or variable fees based on usage. We also recognize revenue for hardware and supplies sales as of the date of shipment. Our sale arrangements contain multiple products and services, including License fee for vascular testing product, system accessories, and service. Other than service, we generally deliver all of
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the products upfront. Each of these products and services is a distinct performance obligation. System accessories and service are also sold on a standalone basis.
Allowance for Doubtful Accounts
We make estimates of the collectability of accounts receivable, especially analyzing the aging and nature of accounts receivable and historical bad debts, customer concentrations, customer credit-worthiness, current economic trends, and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Credit evaluations are undertaken for all major sales transactions before shipment is authorized. On a quarterly basis, we evaluate aged items in the accounts receivable aging report and provide an allowance in an amount that we deem adequate for doubtful accounts. If management were to make different judgments or utilize different estimates, material differences in the amount of our reported operating expenses could result.
Inventory Valuation
Inventory is stated at the lower of cost or net realizable value on a first-in,
first-out basis. The cost basis of our inventory is reduced for any products
that are considered excessive or obsolete based upon assumptions about future
demand and market conditions. If actual future demand or market conditions are
less favorable than those projected by management, additional inventory
write-downs may be required, which could have a material adverse effect on the
results of our operations. For example, in the fourth quarter of 2021 we
terminated a distribution agreement and wrote-down
Accounting for Income Taxes
Deferred income taxes result primarily from temporary differences between financial and tax reporting. Deferred tax assets and liabilities are determined based on the difference between the financial statement basis and tax basis of assets and liabilities using enacted tax rates. Future tax benefits are subject to a valuation allowance when management is unable to conclude that our deferred tax assets will more-likely-than-not be realized from the results of operations.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. If we determine that a tax position will more likely than not be sustained on audit, then the second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. We re-evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effective settlement of audit issues, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision.
Investment Valuation
We have investments in equity securities in privately held companies without readily determinable fair values, which are generally recorded at cost, plus or minus subsequent observable price changes in orderly transactions for identical or similar investments, less impairments. As part of our assessment for impairment indicators, we consider significant deterioration in the earnings performance and overall business prospects of the investee as well as significant adverse changes in the external environment these investments operate. If our qualitative assessment indicates the investments are impaired, the fair value of these equity securities would be estimated, which would involve a significant degree of judgement and subjectivity.
No impairment charges were recorded during the year ended
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Factors Affecting Future Results
We have not identified any other factors that have a recurring effect that are necessary to understand period to period comparisons as appropriate, nor any one-time events that have an effect on the financials.
Results of Operations
Year Ended
Revenues
We had revenues of
Revenues from fees for vascular testing products are recognized monthly for each unit installed with a customer, usually billed as a fixed monthly fee or as a variable monthly fee dependent on usage. The primary reason for the increase in revenues was growth in the number of installed units from both new customers and established customers, which we believe is the result of our sales and marketing efforts. We have not yet generated any material revenues under our Insulin Insights distribution agreement.
Operating Expenses
We had total operating expenses of
Cost of Revenues
We had cost of revenues of
Engineering and Product Development Expense
We had engineering and product development expense of
Sales and Marketing Expense
We had sales and marketing expense of
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subscriptions, consulting fee and other expenses. As a percentage of revenues, sales and marketing expense increased to 27% in 2021, as compared to 26% in 2020.
General and Administrative Expense
We had general and administrative expense of
Other Income and Expense
We had other income of
Provision for Taxes
In 2021, we recorded an income tax expense of
Net Income
For the foregoing reasons, we had a net income of
Non-GAAP Financial Measures
We prepare our consolidated financial statements in conformity with accounting
principles generally accepted in
Liquidity and Capital Resources
We had cash and cash equivalents of
Our cash is held in a variety of non-interest bearing bank accounts and
interest-bearing instruments subject to investment guidelines allowing for
holdings in
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We generated
Investing Activities
We used
Financing Activities
We generated
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