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, 2021, 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 4, 2022, 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 April 2021, we entered into an agreement with a private company to exclusively market and distribute Insulin Insights, an FDA-cleared software product that recommends optimal insulin dosing for diabetic patients in the United States, including Puerto Rico, except for selected accounts. We made investments in this private software company and in another private company whose product, Discern is a test for early Alzheimer's disease. We continue to develop additional complementary, innovative products in-house, and seek out other arrangements for additional products and services that we believe will bring value to our customers and to our company. 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 March 31, 2022, we had total revenues of $14.0 million and net income of $3.4 million, compared to total revenues of $13.2 million and net income of $4.9 million in the same period in 2021.

Recent Developments

In 2021, variable fee license revenues (fee-per-test), which grew strongly in the first half of 2021, decreased subsequently in the second half of 2021. We believe this new pattern in the home-testing market is due to a COVID-19 related timing change in the behavior of insurance plans when ordering QuantaFlo testing from our health risk assessment customers.

The first quarter results of 2022 support this pattern of testing earlier in the year, as the home-testing market had higher volume of sequential revenues, which grew 67% compared to the fourth quarter of 2021. However, we do not know if this newly observed pattern will continue in 2022 or in future years.

We believe that the relatively slower growth in the period-over-period comparison, was due to the COVID-19 pandemic. Our staff and many of our customers and prospects experienced a higher-than-normal rate of employee absence due to illness, which can have a slowing effect on its sales cycle.

As we look forward into 2022, there is continued uncertainty as recent outbreaks of new 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.

Common Stock Repurchase

On March 14, 2022, our Board of Directors authorized a share repurchase program under which we may repurchase up to $20.0 million of our outstanding common stock. Under this program, we may purchase shares on a discretionary basis from time to



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time through open market purchases, privately negotiated transactions or other means, including through Rule 10b5-1 trading plans or through the use of other techniques such as accelerated share repurchases. The timing and amount of any transactions will be subject to our discretion and based upon market conditions and other opportunities that we may have for the use or investment of our cash balances. The repurchase program has no expiration date, does not require the purchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice. We purchased 2,030 shares of our common stock for approximately $0.1 million during the three months ended March 31, 2022.

Results of Operations

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

Revenues

We had revenues of $14.0 million for the three months ended March 31, 2022, an increase of $0.8 million, or 6%, compared to $13.2 million in the same period in 2021. 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 March 31, 2022, consisting of $7.9 million from fixed-fee licenses and $5.8 million from variable-fee licenses compared to $12.9 million in the same period of the prior year, consisting of $7.2 million from fixed-fee licenses and $5.7 million from variable-fee licenses. The remainder was from sales of other products, which were $0.3 million in both the periods.

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.

Operating expenses

We had total operating expenses of $10.0 million for the three months ended March 31, 2022, an increase of $2.9 million or 41%, compared to $7.1 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 72% in the first quarter of 2022 as compared to 54% 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 $1.0 million for the three months ended March 31, 2022, a decrease of $0.6 million, or 39%, compared to $1.6 million in the same period of the prior year. The primary reason for this change was that the prior year period included a non-recurring inventory adjustment for supplies.

Engineering and product development expense

We had engineering and product development expense of $1.1 million for the three months ended March 31, 2022, an increase of $0.4 million, or 62%, compared to $0.7 million in the same period of the prior year. The increase was primarily due to increased headcount and annual pay increases in line with our business expansion, expiry of COVID-19 related payroll tax credits received in the prior year and consulting costs associated with ongoing projects to extend QuantaFlo to additional cardiovascular diseases. As a percentage of revenues, engineering and product development expense was 8% in the first quarter of 2022, as compared to 5% in the prior year period.

Sales and marketing expense

We had sales and marketing expense of $4.7 million for the three months ended March 31, 2022, an increase of $1.9 million, or 66%, compared to $2.8 million in the same period of the prior year. The increase was primarily due to increased headcount and annual salary increases, ceasing to claim COVID-19 related payroll tax credits received in the prior year period and associated


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expense to serve a continued expansion of customer activities. As a percentage of revenues, sales and marketing expense increased to 33% in the first quarter of 2022, as compared to 21% in the prior year period.

General and administrative expense

We had general and administrative expense of $3.3 million for the three months ended March 31, 2022, an increase of $1.2 million, or 59%, compared to $2.1 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 insurance, compensation due to annual salary increases, ceasing to claim COVID-19 related payroll tax credits received in the prior year period, information technology related subscriptions, legal, and other professional fees. As a percentage of revenues, general and administrative expense increased to 24% in the first quarter of 2022, as compared to 16% in the prior year period.

Other income

We had total other income of $1.0 thousand for each of the three months ended March 31, 2022 and 2021, which remained flat even though interest income decreased by $2.0 thousand from the prior year period due to a gain on sale of old equipment of $1.0 thousand, which was partially offset by credit card merchant fees. In the prior year period interest income was also partially offset by credit card merchant fees.

Net income

We had net income of $3.4 million, or $0.50 per basic share and $0.41 per diluted share, for the three months ended March 31, 2022, a decrease of $1.5 million, or 31%, compared to a net income of $4.9 million, or $0.73 per basic share and $0.60 per diluted share, for the same period of the prior year.

Liquidity and Capital Resources

We had cash and cash equivalents of $38.4 million on March 31, 2022 compared to $37.3 million at December 31, 2021, and total current liabilities of $5.8 million at March 31, 2022 compared to $4.9 million at December 31, 2021. As of March 31, 2022, we had working capital of approximately $44.7 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 were 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 prepayment for product licenses for distribution in the United States, including Puerto Rico, of Insulin Insights, as well as make minority investments in other privately-held companies in new product areas similar to our investments in Mellitus Health Inc. and Neurodiagnostics Inc.

Operating activities

We generated $1.5 million of net cash from operating activities for the three months ended March 31, 2022, compared to $4.6 million of net cash from operating activities for the same period of the prior year. The change was primarily due to lower net income, and higher trade receivables, as well as higher prepaid expenses during the first quarter of 2022, which increased our working capital requirements as compared to the prior year period. Non-cash adjustments to reconcile net income to net cash from operating activities provided net cash of $1.1 million and were primarily due to stock-based compensation expense of $0.6 million, depreciation of $0.2 million, deferred tax assets of $0.2 million and loss on disposal of assets for lease of $0.1 million. Changes in operating assets and liabilities used $2.9 million of net cash. These changes in operating assets and liabilities included cash used by trade accounts receivable of $1.8 million, prepaid and other expenses of $2.0 million, partially offset by cash provided by accrued expenses of $0.9 million.

Investing activities

We used $0.3 million of net cash in investing activities for the three months ended March 31, 2022, which reflects funding of purchases of assets for lease of $0.2 million and fixed asset purchases of $0.1 million to support our growing business.



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We used $0.2 million of net cash in investing activities for the three months ended March 31, 2021, which reflects funding of purchases of assets for lease of $0.1 million and fixed asset purchases $0.1 million to support our growing business.

Financing activities

We used $0.1 million in net cash from financing activities during the three months ended March 31, 2022, which reflects payment of taxes withheld for stock grants of $0.1 and $0.1 million for the treasury stock acquisition, under our recently announced share purchase program, partially offset by proceeds from exercise of stock options of $0.1 million.

We generated $9,000 in net cash from financing activities during the three months ended March 31, 2021, due to proceeds from exercise of stock options.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures in the financial statements. Critical accounting policies are those accounting policies that may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and that have a material impact on financial condition or operating performance. While we base our estimates and judgments on our experience and on various other factors that we believe to be reasonable under the circumstances, actual results may differ from these estimates under different assumptions or conditions. For a discussion of our critical accounting policies and estimates, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and notes to the financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 4, 2022. There have been no material changes to these critical accounting policies and estimates through March 31, 2022 from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2021.

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