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 provides innovative
medical devices for the treatment of underserved chronic diseases. Our mission
is to help people suffering from chronic diseases live better and care for
themselves at home. We focus our efforts on advancing the standard of care in
treating underserved chronic diseases in the home setting to improve patient
outcomes and quality of life and help control rising healthcare expenditures.
Our areas of therapeutic focus are (1) vascular disease, with a goal of
advancing the standard of care in treating lymphedema and chronic venous
insufficiency, (2) oncology, where lymphedema is a common consequence among
cancer survivors and (3) providing airway clearance therapy for those suffering
from chronic respiratory conditions. We possess a unique, scalable platform to
deliver at-home healthcare solutions throughout the United States. This evolving
home care delivery model is recognized by policymakers and insurance payers as a
key for controlling rising healthcare costs. Our solutions deliver
cost-effective, clinically proven, long-term treatment for people with these
chronic diseases.
Our current lymphedema products are the Flexitouch and Entre systems and our
airway clearance product is the AffloVest. A predecessor to our Flexitouch
system received 510(k) clearance from the U.S. Food and Drug Administration (the
"FDA") in July 2002, and we introduced the system to address the many
limitations of self-administered home-based manual lymphatic drainage therapy.
We began selling our more advanced Flexitouch system after receiving 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. In June 2017, we announced that we received 510(k) clearance from
the FDA for the Flexitouch Plus, the third-generation version of our Flexitouch
system. In December 2020, we received 510(k) clearance for two new indications
for our Flexitouch Plus system: phlebolymphedema and lipedema. We introduced our
Entre system in the United States in February 2013 and the second generation,
Entre Plus, in March 2023. The Entre system is sold or rented to patients who
need a simple pump or who do not yet qualify for insurance reimbursement for an
advanced compression device such as our Flexitouch system. Sales and rentals of
our lymphedema products represented 85% of our revenue in each of the three
months ended March 31, 2023 and 2022.
On September 8, 2021, we acquired the assets of the AffloVest airway clearance
product line from IBC, a privately-held company which developed and manufactured
AffloVest. 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 each of the three months
ended March 31, 2023 and 2022, sales of AffloVest represented 15% of our
revenue.
To support the growth of our business, we continue to invest in our commercial
infrastructure, consisting of our direct sales force, training resources,
reimbursement capabilities and clinical expertise. We market our lymphedema
products in the United States using a direct-to-patient and -provider 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, 2023, we employed a field staff of 289, which consisted of 250 field sales
representatives and 24 field managers for our lymphedema products, as well as a
team of 15 supporting our airway clearance products. This compares to a field
staff of 271 as of March 31, 2022, which consisted of approximately 238 field
sales representatives and 20 field managers for our lymphedema products, as well
as a team of 13 supporting our airway clearance products.
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
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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.
In 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.
For the three months ended March 31, 2023, we generated revenue of $58.8 million
and had a net loss of $1.9 million, compared to revenue of $48.0 million and a
net loss of $15.6 million for the three months ended March 31, 2022. 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.
Current Economic Conditions and the Effects of Coronavirus (COVID-19)
The lingering effects of the COVID-19 pandemic, as well as general global
economic downturns and macroeconomic trends, including heightened inflation,
capital market volatility, interest rate fluctuations, increased unemployment
and economic slowdown or recession, may result in unfavorable conditions that
could negatively affect demand for our products and exacerbate some of the other
risks that affect our business, financial condition and results of operations.
The United States economy in general and our business specifically have been
negatively affected by the COVID-19 pandemic. From the onset of the pandemic, we
have seen declines in the number of patients that healthcare facilities and
clinics are able to treat due to enhanced safety protocols, and have also seen
staffing challenges, both in our organization and at the clinics we serve. While
we saw some level of recovery in 2022 and in the first quarter of 2023, there
are no reliable estimates of how long the pandemic will last or what ultimate
effects the pandemic will have. For that reason, we are unable to reasonably
estimate the long-term impact of the pandemic on our business at this time.
Since the onset of COVID-19, we have remained proactive to ensure we continue to
adapt to the needs of our employees, clinicians and patients. We cannot assure
you these changes to our processes and practices will be successful in
mitigating the impact of COVID-19 on our business. We continue to evaluate and,
if appropriate, will adopt other measures in the future related to the ongoing
safety of our employees, clinicians and patients.
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Results of Operations
Comparison of the Three Months Ended March 31, 2023 and 2022
The following table presents our results of operations for the periods
indicated:
Three Months Ended
March 31, Change
(In thousands) 2023 2022 $ %
Condensed Consolidated % of % of
Statement
of Operations Data: revenue revenue
Revenue
Sales revenue $ 52,791 90 % $ 41,170 86 % $ 11,621 28 %
Rental revenue 6,055 10 % 6,808 14 % (753) (11) %
Total revenue 58,846 100 % 47,978 100 % 10,868 23 %
Cost of revenue
Cost of sales revenue 14,642 25 % 12,080 25 % 2,562 21 %
Cost of rental revenue 2,736 5 % 2,036 4 % 700 34 %
Total cost of revenue 17,378 30 % 14,116 29 % 3,262 23 %
Gross profit
Gross profit - sales revenue 38,149 65 % 29,090 61 % 9,059 31 %
Gross profit - rental revenue 3,319 5 % 4,772 10 % (1,453) (30) %
Gross profit 41,468 70 % 33,862 71 % 7,606 22 %
Operating expenses
Sales and marketing 26,302 45 % 23,930 50 % 2,372 10 %
Research and development 2,233 4 % 1,520 3 % 713 47 %
Reimbursement, general and
administrative 15,434 26 % 16,217 34 % (783) (5) %
Intangible asset amortization
and earn-out 1,305 2 % 7,096 15 % (5,791) (82) %
Total operating expenses 45,274 77 % 48,763 102 % (3,489) (7) %
Loss from operations (3,806) (7) % (14,901) (31) % 11,095 (74) %
Other expense (993) (2) % (456) (1) % (537) 118 %
Loss before income taxes (4,799) (9) % (15,357) (32) % 10,558 (69) %
Income tax (benefit) expense (2,913) (5) % 211 - % (3,124) N.M. %
Net loss $ (1,886) (4) % $ (15,568) (32) % $ 13,682 (88) %
"N.M." Not Meaningful
Revenue
Revenue increased $10.9 million, or 23%, to $58.8 million in the three months
ended March 31, 2023, compared to $48.0 million in the three months ended March
31, 2022. The increase in total revenue was attributable to an increase of $9.1
million, or 22%, in sales and rentals of the lymphedema product line and an
increase of $1.8 million, or 24%, in sales of the airway clearance product line
in the quarter ended March 31, 2023, compared to the quarter ended March 31,
2022.
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The following table summarizes our revenue by product line for the three months
ended March 31, 2023 and 2022, both in dollars and percentage of total revenue:
Three Months Ended
March 31, Change
(In thousands) 2023 2022 $ %
Revenue
Lymphedema products $ 49,752 $ 40,654 $ 9,098 22%
Airway clearance products 9,094 7,324 1,770 24%
Total $ 58,846 $ 47,978 $ 10,868 23%
Percentage of total revenue
Lymphedema products 85% 85%
Airway clearance products 15% 15%
Total 100% 100%
"N.M." Not Meaningful
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
because patients 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 increased $3.3 million, or 23%, to $17.4 million in the three
months ended March 31, 2023, compared to $14.1 million in the three months ended
March 31, 2022. The increase in cost of revenue was primarily attributable to
the additional contribution of AffloVest sales and an increase in inbound
freight costs.
Gross margin was 70.5% and 70.6% in the three months ended March 31, 2023 and
2022, respectively.
Sales and Marketing Expenses
Sales and marketing expenses increased $2.4 million, or 10%, to $26.3 million in
the three months ended March 31, 2023, compared to $23.9 million in the three
months ended March 31, 2022. The increase was primarily attributable to an
increase in personnel-related compensation expense as a result of the increased
headcount in the collective field commercial team.
Research and Development Expenses
Research and development ("R&D") expenses increased $0.7 million, or 47%, to
$2.2 million in the three months ended March 31, 2023, compared to $1.5 million
in the three months ended March 31, 2022, which was primarily attributable to an
increase in personnel-related compensation expense, third-party consulting and
R&D supplies.
Reimbursement, General and Administrative Expenses
Reimbursement, general and administrative expenses decreased $0.8 million, or
5%, to $15.4 million in the three months ended March 31, 2023, compared to $16.2
million in the three months ended March 31, 2022. This decrease was primarily
attributable to a $1.6 million decrease in occupancy costs, depreciation
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expense, and legal and professional fees, partially offset by a $0.8 million
increase in personnel-related compensation expense as a result of increased
headcount in our reimbursement operations, payer relations and corporate
functions.
Intangible Asset Amortization and Earn-out Expense
Intangible asset amortization and earn-out expense decreased $5.8 million to
$1.3 million in the three months ended March 31, 2023, compared to $7.1 million
in the three months ended March 31, 2022. The decrease in intangible asset
amortization and earn-out expense was mainly attributable to a $0.7 million
adjustment to the fair value of the earn-out liability for the three months
ended March 31, 2023, compared to a $6.5 million adjustment for the three months
ended March 31, 2022.
Other Expense, Net
Other expense, net was $1.0 million and $0.5 million for the three months ended
March 31, 2023 and 2022, respectively. The increase was primarily attributable
to an increase in interest expense.
Income Taxes
We recorded an income tax benefit of $2.9 million and an income tax expense of
$0.2 million for the three months ended March 31, 2023 and 2022, respectively.
The difference relates to the fact that we expect to have current taxes payable
for 2023, despite having a full valuation allowance. Additionally, there are
significant permanent adjustments for nondeductible meals expense and
nondeductible stock issuance costs which were not relevant to the prior year
period.
Liquidity and Capital Resources
Cash Flows
At March 31, 2023, our principal sources of liquidity were cash and cash
equivalents of $55.0 million and net accounts receivable of $71.0 million. This
compares to cash and cash equivalents of $21.2 million and net accounts
receivable of $59.5 million at March 31, 2022.
The following table summarizes our cash flows for the periods indicated:
Three Months Ended
March 31,
(In thousands) 2023 2022
Net cash (used in) provided by:
Operating activities $ (502) $ (3,206)
Investing activities (291) (175)
Financing activities 33,875 (3,698)
Net increase (decrease) in cash and cash equivalents $ 33,082 $ (7,079)
Operating Activities
Net cash used in operating activities during the three months ended March 31,
2023 was $0.5 million, resulting from a net decrease in operating assets and
liabilities of $2.9 million and a net loss of $1.9 million, which were partially
offset by non-cash net loss adjustments of $4.3 million. The non-cash net loss
adjustments consisted primarily of $2.0 million of stock-based compensation
expense, $1.6 million of depreciation and amortization expense and a $0.7
million change in fair value of earn-out liability. Operating liabilities were
unfavorably impacted by a decrease in accrued payroll and related taxes, accrued
expenses and other liabilities and income taxes payable. Operating assets were
favorably impacted by a decrease in accounts receivable, net investment in
leases and inventories.
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Net cash used in operating activities during the three months ended March 31,
2022, was $3.2 million, resulting from a net loss of $15.6 million and a net
decrease in operating assets and liabilities of $2.1 million, which was
partially offset by non-cash net income (loss) adjustments of $10.3 million. The
non-cash net income (loss) adjustments consisted primarily of $6.5 million
related to a change in fair value of earn-out liability, $2.2 million of
stock-based compensation expense, $1.5 million of depreciation and amortization
expense and $0.1 million of deferred income tax expense. The uses of cash
related to changes in operating assets primarily consisted of decreases in
accounts receivable of $2.8 million and in net investment in leases of $0.2
million, partially offset by increases in prepaid expenses and other assets of
$0.6 million and in inventories of $0.3 million. The changes in operating
liabilities consisted of a decrease in accrued payroll and related taxes of $2.7
million, partially offset by increases in accrued expenses and other liabilities
of $1.4 million and accounts payable of $1.2 million.
Investing Activities
Net cash used in investing activities during the three months ended March 31,
2023, was $0.3 million, consisting of purchases of property and equipment, and
patent costs.
Net cash used in investing activities during the three months ended March 31,
2022, was $0.2 million, consisting of purchases of property and equipment, and
patent costs.
Financing Activities
Net cash provided by financing activities during the three months ended March
31, 2023, was $33.9 million, primarily consisting of net proceeds from the
offering of our common stock of $34.6 million, slightly offset by a $0.8 million
payment made on our term loan.
Net cash used by financing activities during the three months ended March 31,
2022, was $3.7 million, primarily consisting of payments of $3.8 million made on
our term loan, slightly offset by $0.1 million in proceeds from exercise of
common stock options.
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 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 term loan and the revolving credit facility
mature on September 8, 2024. 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. The principal of the term
loan is required to be repaid in quarterly installments of $750,000
commencing January 7, 2022, through July 8, 2024, with the remaining outstanding
balance due on September 8, 2024.
On February 22, 2022, we entered into a Second Amendment Agreement (the "Second
Amendment"), which further amends the Credit Agreement. The Second Amendment
modifies the maximum leverage ratio,
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the minimum fixed charge coverage ratio and the minimum consolidated EBITDA
covenants under the Credit Agreement, and adds a minimum liquidity covenant. The
second amendment also increases 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.
As of March 31, 2023, we had outstanding borrowings of $48.3 million under the
Credit Agreement, comprised of $23.3 million under the term loan and $25.0
million under the revolving credit facility.
For additional information regarding the Credit Agreement, including interest
rates, fees and maturities, see Note 9 - "Credit Agreement" of the condensed
consolidated financial statements contained in this report.
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,
2022. There have been no material changes since December 31, 2022.
As discussed in Note 4 - "Acquisitions" of the condensed consolidated financial
statements contained in this report, the initial earn-out payment under the
AffloVest Acquisition was $10.0 million, $5.0 million of which we paid in the
fourth quarter of 2022, and $5.0 million, plus an imputed interest payment of
$250,000, of which we are obligated to pay on or before May 26, 2023.
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;
? 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
? 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.
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Although the impact of the COVID-19 pandemic and other factors such as inflation
and rising interest rates are difficult to predict, we believe our cash, cash
equivalents 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.
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, 2022.
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