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 Mellitus Health, Inc., or
Mellitus, 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 Mellitus, including a recent senior
secured loan of $1.0 million and secured convertible promissory note of $179
thousand (see Note 7 to our unaudited condensed interim financial statements
included elsewhere in this Form 10-Q), and in another private company that does
business as Synaps Dx, whose product, Discern, is a test for early Alzheimer's
disease. We continue to develop additional complementary, innovative products
in-house. For example, QuantaFlo can now be used as an aid to identify patients
with another cardiovascular disease. We intend to sell this extension to our
existing customer base and others as an upgrade to our software as a service
business model. The clinical problem may be as important as PAD. A medical aide
performs the test in a primary care setting similar to how one uses QuantaFlo
for PAD. It uses the existing FDA clearance as we anticipated this extension
many years ago. The technology is protected by trade secrets. A manuscript has
been submitted to a peer-reviewed journal for publication. Because the peer
review and publication date are controlled by the publisher, the timing is not
under our control. The process of selling the product has begun. The product is
on the shelf and ready to ship as soon as the contracts are signed. We also
intend to continue to 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 September 30, 2022, we had total revenues of $14.0
million and net income of $3.7 million, compared to total revenues of $14.0
million and net income of $4.2 million in the same period in 2021. In the nine
months ended September 30, 2022, we had total revenues of $42.9 million and net
income of $11.1 million, compared to total revenues of $41.5 million and net
income of $15.7 million in the same period in 2021.
Recent Developments
Overall, testing is up at our largest customers. The number of fixed-fee license
units from both new customers and established customers has increased. Our
variable-fee revenues have declined in part due to a large customer reachng a
volume pricing milestone and market share shifts from higher priced customers to
lower priced customers.
Common Stock Repurchase Program
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 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
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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 47,458 shares of our
common stock for approximately $2.0 million during the three months ended
September 30, 2022 and 148,500 shares of our common stock for approximately $5.0
million during the nine months ended September 30, 2022.
Results of Operations
Three Months Ended September 30, 2022 Compared to Three Months Ended September
30, 2021
Revenues
We had revenues of $14.0 million for the each of three months ended September
30, 2022 and 2021. Our revenues are primarily from fees charged to customers for
use of our products and from sale of accessories used with these products. We
recognized revenues of $13.5 million from fees for our products for the three
months ended September 30, 2022, consisting of $8.6 million from fixed-fee
licenses and $4.9 million from variable-fee licenses compared to $13.7 million
in the same period of the prior year, consisting of $7.8 million from fixed-fee
licenses and $5.9 million from variable-fee licenses. The remainder was from
sales of hardware and equipment accessories, which were $0.5 million for three
months ended September 30, 2022 compared to $0.3 million for the same period in
the prior year.
Revenues from fees for products are recognized monthly, usually billed as a
fixed monthly fee or; as a variable monthly fee dependent on usage.
The primary reason for the increase in fixed-fee 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. The primary
reasons for the decrease in variable-fee revenues were a large customer reaching
a volume pricing milestone and market share shifts from higher priced customers
to lower priced customers.
Operating expenses
We had total operating expenses of $9.6 million for the three months ended
September 30, 2022, an increase of $0.9 million or 10%, compared to $8.7 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
68% in the third quarter of 2022 as compared to 63% 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 $1.1 million for the three months ended September 30,
2022, a decrease of $0.3 million or 18%, compared to $1.4 million for the same
period in 2021. The decrease was primarily due to an inventory adjustment in the
prior year period. As a percentage of revenues, cost of revenues decreased to 8%
in the third quarter of 2022 as compared to 10% in the prior year period.
Engineering and product development expense
We had engineering and product development expense of $1.2 million for the three
months ended September 30, 2022, an increase of $0.2 million, or 20%, compared
to $1.0 million in the same period of the prior year. The increase was primarily
due to annual pay increases and consulting costs associated with ongoing
projects to extend QuantaFlo to additional cardiovascular diseases, partially
offset by lower clinical studies costs. As a percentage of revenues, engineering
and product development expense was at 9% in the third quarter of each of 2022,
compared to 7% for the prior year period.
Sales and marketing expense
We had sales and marketing expense of $4.2 million for the three months ended
September 30, 2022, an increase of $0.2 million, or 5%, compared to $4.0 million
in the same period of the prior year. The increase was primarily due to annual
salary increases, and associated expense to serve a continued expansion of
customer activities, as well as increase in trade shows and
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subscription costs. As a percentage of revenues, sales and marketing expense
increased to 30% in the third quarter of 2022, as compared to 28% in the prior
year period.
General and administrative expense
We had general and administrative expense of $3.1 million for the three months
ended September 30, 2022, an increase of $0.7 million, or 29%, compared to $2.4
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,
compensation due to increased headcount and annual salary increases, higher
professional fee and insurance costs. As a percentage of revenues, general and
administrative expense increased to 22% in the third quarter of 2022, as
compared to 17% in the prior year period.
Other income
We had total other income of $134 thousand for the three months ended September
30, 2022 compared to $4 thousand in 2021. The increase of $130 thousand from the
prior year period is primarily due to increase in interest income from higher
rates on short term government debt and money market funds.
Income tax provision (benefit)
We had income tax provision of $0.9 million for the three months ended September
30, 2022, a decrease of $0.2 million or 18%, compared to income tax expense of
$1.1 million in the same period of the prior year. The change was primarily due
to lower taxable income.
Net income
We had net income of $3.7 million, or $0.55 per basic share and $0.46 per
diluted share, for the three months ended September 30, 2022, a decrease of $0.5
million, or 11%, compared to a net income of $4.2 million, or $0.61 per basic
share and $0.51 per diluted share, for the same period of the prior year.
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30,
2021
Revenues
We had revenues of $42.9 million for the nine months ended September 30, 2022,
an increase of $1.4 million, or 3%, compared to $41.5 million in the same period
in 2021. Our revenues are primarily from fees charged to customers for use of
our products and from sales of accessories used with these products. We
recognized revenues of $41.8 million from fees for our products for the nine
months ended September 30, 2022, consisting of $25.1 million from fixed-fee
licenses and $16.7 million from variable-fee licenses, compared to $40.7
million in the same period of the prior year, consisting of $22.7 million from
fixed-fee licenses and $18.0 million from variable-fee licenses. The remainder
was from sales of hardware and equipment accessories, which were $1.1 million
compared to $0.8 million in the same period of the prior year.
Revenues from fees for 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 fixed-fee 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. The primary
reasons for the decrease in variable-fee revenues were a large customer reaching
a volume pricing milestone and market share shift from higher priced customers
to lower priced customers.
Operating expenses
We had total operating expenses of $29.3 million for the nine months ended
September 30, 2022, an increase of $5.5 million or 23%, compared to $23.8
million in the same period in the prior year. The primary reasons for this
change were increases due to personnel expense, including employee benefits due
to an increased headcount, increases of insurance cost and expiry of COVID-19
related payroll tax credits received in the prior year period, and increases in
patent and legal expenses. As a percentage of revenues,
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operating expenses increased to 68% in the first nine months of 2022 as compared
to 57% 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 $3.1 million for the nine months ended September 30,
2022, a decrease of $0.9 million, or 22%, compared to $4.0 million in the same
period of the prior year. The primary reasons for this change were decreased
third party customer support, consulting expenses and an inventory adjustment in
the prior year period. As a percentage of revenues, cost of revenues decreased
to 7% in the nine months ended September 30, 2022, as compared to 10% in the
prior year period.
Engineering and product development expense
We had engineering and product development expense of $3.4 million for the nine
months ended September 30, 2022, an increase of $0.7 million, or 29%, compared
to $2.7 million in the same period of the prior year. The increase was primarily
due to personnel expense due to an increased headcount and associated expense,
consulting expenses and expiry of COVID-19 related payroll tax credits received
in the prior year. As a percentage of revenues, engineering and product
development expenses increased to 8% in the nine months ended September 30,
2022, compared to 7% in the prior year period.
Sales and marketing expense
We had sales and marketing expense of $13.0 million for the nine months ended
September 30, 2022, an increase of $2.6 million, or 25%, compared to $10.4
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, dues and subscriptions, travel costs, trade show costs and
expiry of COVID-19 related payroll tax credits received in the prior. As a
percentage of revenues, sales and marketing expense increased to 30% in the nine
months ended September 30, 2022, as compared to 25% in the prior year period.
General and administrative expense
We had general and administrative expense of $9.8 million for the nine months
ended September 30, 2022, an increase of $3.1 million, or 45%, compared to $6.7
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 increased headcount and annual salary increases, information
technology related subscriptions, legal expenses and expiry of COVID-19 related
payroll tax credits received in the prior year. As a percentage of revenues,
general and administrative expense increased to 23% in the nine months ended
September 30, 2022, as compared to 16% in the prior year period.
Other income
We had other income of $149 thousand for the nine months ended September 30,
2022, compared to other income of $14 thousand in the same period of the prior
year. The increase was primarily due to higher interest income from higher rates
on short term government debt and money market funds and interest on promissory
notes.
Income tax provision
We had income tax provision of $2.6 million for the nine months ended September
30, 2022, an increase of $0.6 million or 29%, compared to $2.0 million in the
prior year period. The increase was primarily due to lower tax benefits
associated with stock-based compensation plans.
Net income
For the foregoing reasons, we had net income of $11.1 million, or $1.65 per
basic share and $1.38 per diluted share, for the nine months ended September 30,
2022, a decrease of $4.6 million, or 29%, compared to a net income of $15.7
million, or $2.34 per basic share and $1.93 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 $45.5 million on September 30, 2022 compared
to $37.3 million at December 31, 2021, and total current liabilities of $8.4
million at September 30, 2022 compared to $4.9 million at December 31, 2021.
Cash and cash equivalents as of September 30, 2022, includes treasury bills. As
of September 30, 2022, we had working capital of approximately $43.3 million. We
believe the current high inflation has minimal impact on our liquidity.
Our cash and cash equivalents are held in a variety of interest and non-interest
bearing bank, money market accounts and treasury bills. All cash is readily
available and not restricted. 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 and Synaps Dx.
Operating activities
We generated $15.8 million of net cash from operating activities for the nine
months ended September 30, 2022, compared to $14.4 million of net cash from
operating activities for the same period of the prior year. The change was
primarily due to lower inventory, higher accrued expenses, and lower prepaid
expenses during the nine months ended September 2022, which decreased 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 $1.2 million and were primarily due to stock-based
compensation expense of $0.7 million, depreciation of $0.5 million, loss on
disposal of assets for lease of $0.3 million, and allowance for doubtful
accounts of $0.1, partially offset by higher deferred tax expense of $0.4
million. Changes in operating assets and liabilities provided $3.5 million of
net cash. These changes in operating assets and liabilities included cash
provided by prepaid expenses and other assets of $2.1 million, accrued expenses
of $3.2 million and deferred revenue of $0.2 million, partially offset by cash
used by other non-current assets of $1.9 million and trade receivable of $0.1
million.
Investing activities
We used $2.5 million of net cash in investing activities for the nine months
ended September 30, 2022, which reflects purchase of long-term notes receivable
of $1.2 million, funding to purchase assets for lease of $0.9 million and fixed
asset purchases of $0.4 million to support our growing business.
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 $0.3 million to support our
growing business.
Financing activities
We used $5.0 million in net cash from financing activities during the nine
months ended September 30, 2022, which reflects payment of taxes withheld for
stock grants of $0.1 and $5.0 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 $54.0 thousand in net cash from financing activities during the
nine months ended September 30, 2021, due to proceeds from exercise of stock
options.
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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
September 30, 2022 from those discussed in our Annual Report on Form 10-K for
the year ended December 31, 2021.
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