The following discussion and analysis should be read together with our condensed
unaudited financial statements and the related notes appearing elsewhere in this
quarterly report on Form 10-Q and with the audited financial statements and
notes for the fiscal year ended December 31, 2020, and the information under the
headings "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our Annual Report on Form 10-K filed
with the SEC on March 9, 2021, or the Annual Report. This discussion contains
forward-looking statements reflecting our current expectations that involve
risks and uncertainties. See "Cautionary Note Regarding Forward-Looking
Statements" 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" in the
Annual Report.
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 products and services that assist our
customers in evaluating and treating chronic diseases. In 2011, we began
commercializing our first patented and U.S. Food and Drug Administration, or
FDA, cleared product, which measured arterial blood flow in the extremities to
aid in the diagnosis of peripheral arterial disease, or PAD. In March 2015, we
received FDA 510(k) clearance for the next generation version of our product,
QuantaFlo®, which we began commercializing in August 2015. In September 2020 and
in April 2021 respectively, we entered into two agreements with private
companies to exclusively market and distribute new product lines in the United
States, including Puerto Rico, except for selected accounts, and in September
2021, we signed our first customer to a license for one of these new product
lines. Our recent investments in, and/or distribution agreements with, these
private companies may allow us to expand our current product offering beyond
QuantaFlo® for PAD, in addition to our internal research and development
efforts. We believe our current products and services, and any future products
or services that we may offer, position us to provide valuable information to
our customer base, which in turn permits them to better guide patient care.
In the three months ended September 30, 2021, we had total revenues of $14.0
million and net income of $4.2 million, compared to total revenues of $10.7
million and net income of $4.9 million in the same period in 2020. In the nine
months ended September 30, 2021, we had total revenues of $41.5 million and net
income of $15.7 million, compared to total revenues of $26.5 million and net
income of $8.6 million in the same period in 2020.
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, which
limited patient visits by our customers. As such restrictions have been lifted
around the country and non-emergency medical services resumed in late 2020, our
business has returned to and even exceeded pre-COVID-19 levels. However, as we
look forward into the remainder of 2021 and 2022, there is uncertainty as recent
outbreaks of variants had 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.
We continue to operate as close to normal as possible, notwithstanding the
COVID-19 pandemic. We may have experienced some effects due to the Delta
variant of COVID-19 during the third quarter of 2021 as the sequential growth of
our revenues dipped, in particular, revenue from variable-fee licenses, where
tests are conducted in the home.
Results of Operations
Three Months Ended September 30, 2021 Compared to Three Months Ended September
30, 2020
Revenues
We had revenues of $14.0 million for the three months ended September 30, 2021,
an increase of $3.3 million, or 30%, compared to $10.7 million in the same
period in 2020. Our revenues are primarily from fees charged to customers for
use of our vascular testing products and from sale of accessories used with
these products. We recognized revenues of $13.7 million from fees for our
vascular testing products for the three months ended September 30, 2021,
consisting of $7.8 million from fixed-fee licenses and $5.9 million from
variable-fee licenses compared to $10.4 million in the same period of the prior
year, consisting of $6.3 million from fixed-
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fee licenses and $4.1 million from variable-fee licenses. The remainder was from
sales of other products, which were $0.3 million in both periods.
We experienced the effects of COVID-19 beginning late in the first quarter and
primarily during the second quarter of 2020, which decreased our revenues, in
particular, revenue from variable-fee licenses. However, in the third quarter of
2020, our business returned to and even exceeded pre-COVID-19 levels, and we
experienced even higher test volumes as our customers accelerated usage due to a
backlog of untested patients. This increased testing volume continued in the
first half of 2021, until slowing of sequential growth in revenues from
variable-fee licenses in the third quarter of 2021, which we believe this may be
either due to effects of the Delta variant of COVID-19 during the third quarter
of 2021, or due to a new seasonality in the home-testing market, which it hasn't
seen in prior periods, or due to both.
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, partially offset by some effects from the COVID-19 pandemic in the
third quarter of 2021.
Operating expenses
We had total operating expenses of $8.7 million for the three months ended
September 30, 2021, an increase of $3.5 million or 69%, compared to $5.2 million
in the same period in the prior year. The primary reasons for this change were
increased expenses associated with our expanding business, such as increased
personnel expense. As a percentage of revenues, operating expenses increased to
63% in the third quarter of 2021 as compared to 48% in the prior year period.
The changes in the various components of our operating expenses are described
below.
Cost of revenues
We had cost of revenues of $1.4 million for the three months ended September 30,
2021, an increase of $0.6 million, or 69%, compared to $0.8 million in the same
period of the prior year. The primary reason for this change was an inventory
adjustment for supplies and increased headcount. As a percentage of revenues,
cost of revenues increased to 10% in the third quarter of 2021, as compared to
8% in the prior year period.
Engineering and product development expense
We had engineering and product development expense of $1.0 million for the three
months ended September 30, 2021, an increase of $0.3 million, or 54%, compared
to $0.7 million in the same period of the prior year. The increase was primarily
due to increased clinical studies costs as well as increased headcount and
consulting costs associated with projects. As a percentage of revenues,
engineering and product development expense was 7% in the third quarter of 2021,
as compared to 6% in the prior year period.
Sales and marketing expense
We had sales and marketing expense of $4.0 million for the three months ended
September 30, 2021, an increase of $1.9 million, or 88%, compared to $2.1
million in the same period of the prior year. The increase was primarily due to
increased headcount and associated expense to serve a continued expansion of
customer activities. As a percentage of revenues, sales and marketing expense
increased to 28% in the third quarter of 2021, as compared to 20% in the prior
year period.
General and administrative expense
We had general and administrative expense of $2.4 million for the three months
ended September 30, 2021, an increase of $0.8 million, or 50%, compared to $1.6
million in the same period of the prior year. The increase was primarily due to
the growth in our business, which led to increased expenses including the
expansion of board of directors, insurance, joining Nasdaq market, and other
professional fees. As a percentage of revenues, general and administrative
expense increased to 17% in the third quarter of 2021, as compared to 15% in the
prior year period.
Other income/expense
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We had other income of $4,000 for the three months ended September 30, 2021,
compared to other income of $40,000 in the same period of the prior year. The
decrease was primarily due to lower miscellaneous income.
Pre-tax net income
For the foregoing reasons, we had pre-tax net income of $5.3 million, or $0.78
per basic share and $0.65 per diluted share, for the three months ended
September 30, 2021, a decrease of $0.3 million, or 6%, compared to a pre-tax net
income of $5.6 million, or $0.85 per basic share and $0.70 per diluted share for
the same period of the prior year.
Income tax expense
We had income tax expense of $1.1 million for the three months ended September
30, 2021, compared to income tax expense of $0.7 million for the three months
ended September 30, 2020. Increase of tax expense in the current quarter was due
to lower tax benefits relating to employee stock plans, federal and state
research and development credit.
Net income
For the foregoing reasons, we had net income of $4.2 million, or $0.61 per basic
share and $0.51 per diluted share, for the three months ended September 30,
2021, a decrease of $0.7 million, or 15%, compared to a net income of $4.9
million, or $0.74 per basic share and $0.61 per diluted share, for the same
period of the prior year.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30,
2020
Revenues
We had revenues of $41.5 million for the nine months ended September 30, 2021,
an increase of $15.0 million, or 56%, compared to $26.5 million in the same
period in 2020. Our revenues are primarily from fees charged to customers for
use of our vascular testing products and from sales of accessories used with
these products. We recognized revenues of $40.7 million from fees for our
vascular testing products for the nine months ended September 30, 2021,
consisting of $22.7 million from fixed-fee licenses and $18.0 million from
variable-fee licenses, compared to $25.8 million in the same period of the prior
year, consisting of $18.7 million from fixed-fee licenses and $7.1 million from
variable-fee licenses. The remainder was from sales of other products, which
were $0.8 million compared to $0.7 million in the same period of the prior year.
We experienced the effects of COVID-19 beginning late in the first quarter and
primarily during the second quarter of 2020, which decreased our revenues, in
particular, revenue from variable-fee licenses. However, in the third quarter of
2020, our business returned to and even exceeded pre-COVID-19 levels, and we
experienced even higher test volumes as our customers accelerated usage due to a
backlog of untested patients. This increased testing volume continued in the
first half of 2021, until a slowing of sequential growth in the third quarter of
2021, which we believe may be either due to effects of the Delta variant of
COVID-19 during the third quarter of 2021, or due to a new seasonality in the
home-testing market, which it hasn't seen in prior periods, or due to both.
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, partially offset by some effects from the COVID-19 pandemic in the
third quarter of 2021.
Operating expenses
We had total operating expenses of $23.8 million for the nine months ended
September 30, 2021, an increase of $7.2 million or 43%, compared to $16.6
million in the same period in the prior year. The primary reasons for this
change were due to increased expenses associated with our expanding business,
such as increased personnel expenses, including stock-based compensation,
partially offset by payroll tax reductions available in the first half as
compared to the prior year period. As a percentage of revenues, operating
expenses decreased to 57% in the first nine months of 2021 as compared to 62% in
the prior year period. The changes in the various components of our operating
expenses are described below.
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Cost of revenues
We had cost of revenues of $4.0 million for the nine months ended September 30,
2021, an increase of $1.6 million, or 67%, compared to $2.4 million in the same
period of the prior year. The primary reasons for this change were increased
personnel expenses and an inventory adjustment. As a percentage of revenues,
cost of revenues increased to 10% in the nine months ended September 30, 2021,
as compared to 9% in the prior year period.
Engineering and product development expense
We had engineering and product development expense of $2.7 million for the nine
months ended September 30, 2021, an increase of $0.4 million or 18%, compared to
$2.3 million in the same period of the prior year. The primary reason for the
increase was higher clinical studies expenses. As a percentage of revenues,
engineering and product development expenses decreased to 7% in the first nine
months of 2021, compared to 9% in the prior year period.
Sales and marketing expense
We had sales and marketing expense of $10.4 million for the nine months ended
September 30, 2021, an increase of $3.1 million, or 43%, compared to $7.3
million in the same period of the prior year. The increase was primarily due to
increased headcount and associated expense to serve a continued expansion of
customer activities. As a percentage of revenues, sales and marketing expense
decreased to 25% in the first nine months of 2021, as compared to 27% in the
prior year period.
General and administrative expense
We had general and administrative expense of $6.7 million for the nine months
ended September 30, 2021, an increase of $2.1 million, or 45%, compared to $4.6
million in the same period of the prior year. The increase was primarily due to
the growth in our business, which led to increased expenses including the
expansion of board of directors, insurance and subscriptions, partially offset
by payroll tax credits and consulting fee expenses. As a percentage of revenues,
general and administrative expense decreased to 16% in the first nine months of
2021, as compared to 17% in the prior year period.
Other income/expense
We had other income of $14,000 for the nine months ended September 30, 2021,
compared to other income of $69,000 in the same period of the prior year. The
decrease was primarily due to lower miscellaneous income and interest income.
Pre-tax net income
For the foregoing reasons, we had pre-tax net income of $17.7 million, or $2.64
per basic share and $2.18 per diluted share, for the nine months ended September
30, 2021, an increase of $7.7 million, or 77%, compared to a pre-tax net income
of $10.0 million, or $1.53 per basic share and $1.25 per diluted share for the
same period of the prior year.
Income tax expense
We had income tax expense of $2.0 million for the nine months ended September
30, 2021, an increase of $0.6 million or 43%, compared to income tax expense of
$1.4 million in the same period of the prior year. The tax expense increase was
due to increased income from operations, which was partially offset by tax
benefits associated with share-based compensation plans, and federal and state
research and development credit benefit.
Net income
For the foregoing reasons, we had net income of $15.7 million, or $2.34 per
basic share and $1.93 per diluted share, for the nine months ended September 30,
2021, an increase of $7.1 million, or 82%, compared to a net income of $8.6
million, or $1.31 per basic share and $1.07 per diluted share, for the same
period of the prior year.
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Liquidity and Capital Resources
We had cash and cash equivalents of $35.9 million at September 30, 2021 compared
to $22.1 million at December 31, 2020, and total current liabilities of $6.7
million at September 30, 2021 compared to $4.5 million at December 31, 2020. As
of September 30, 2021, we had working capital of approximately $39.4 million.
Our cash and cash equivalents are held in a variety of interest and non-interest
bearing bank and money market accounts. All cash is readily available and there
no restrictions on cash. We may also hold interest-bearing instruments subject
to investment guidelines allowing for holdings in U.S. government and agency
securities, corporate securities, taxable municipal bonds, commercial paper and
money market accounts. In addition, we may also choose to invest some of our
cash resources in other entities that may have complementary technologies or
product offerings, such as our recent decision to acquire inventory for
distribution in the United States, including Puerto Rico, of two new product
line offerings, as well as make minority investments in other privately-held
companies in new product areas.
Operating activities
We generated $14.4 million of net cash from operating activities for the nine
months ended September 30, 2021 compared to $9.6 million of net cash from
operating activities for the same period of the prior year. The change was
primarily due to increase of net income, which occurred due to growth in our
business. Non-cash adjustments to reconcile net income to net cash from
operating activities provided net cash of $2.2 million and were primarily due to
stock-based compensation expense of $0.7 million, deferred tax expense of $0.8
million, depreciation of $0.5 million, and loss on disposal of assets for lease
of $0.2 million. Changes in operating assets and liabilities used $3.5 million
of net cash. These changes in operating assets and liabilities included cash
used by trade accounts receivable of $1.2 million, prepaid and other expenses of
$3.0 million, inventory of $1.4 million and trade payables of $0.3 million,
deferred revenue and other non-current liabilities of $0.1 million, partially
offset by cash provided by accrued expenses of $2.5 million and other noncurrent
assets $0.1 million.
Investing activities
We used $0.6 million of net cash in investing activities for the nine months
ended September 30, 2021, which reflects funding of purchases of assets for
lease of $0.3 million and fixed asset purchases of $0.3 million to support our
growing business.
We used $0.7 million of net cash in investing activities for the nine months
ended September 30, 2020, which reflects funding of notes receivable of $0.4
million, purchases of assets for lease of $0.2 million and fixed asset purchases
$0.1 million to support our growing business.
Financing activities
We generated $54,000 in net cash from financing activities during the nine
months ended September 30, 2021, due to proceeds from exercise of stock options.
We generated $174,000 in net cash from financing activities during the nine
months ended September 30, 2020, due to proceeds from exercise of stock options.
Off-Balance Sheet Arrangements
As of September 30, 2021, and December 31, 2020, we had no off-balance sheet
arrangements.
Commitments and Contingencies
As of September 30, 2021, and December 31, 2020, other than
employment/consulting agreements with key executive officers and our facilities
lease obligation, we had no material commitments other than the liabilities
reflected in our financial statements.
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