NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.Basis of Presentation, Nature of Operations and Summary of Significant Accounting Policies
The terms “InfuSystem”, the “Company”, “we”, “our” and “us” are used herein to refer to InfuSystem Holdings, Inc. and its subsidiaries. InfuSystem is a leading provider of infusion pumps and related products and services for patients in the home, oncology clinics, ambulatory surgery centers, and other sites of care. The Company provides products and services to hospitals, oncology practices and facilities and other alternative site health care providers. Headquartered in Rochester Hills, Michigan, the Company delivers local, field-based customer support, and also operates pump service and repair Centers of Excellence in Michigan, Kansas, California, Massachusetts, Texas and Ontario, Canada.
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, the unaudited condensed consolidated financial statements do not include all of the information and notes required by U.S. Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. The accompanying unaudited condensed consolidated financial statements include all adjustments, composed of normal recurring adjustments, considered necessary by management to fairly state the Company’s results of operations, financial position and cash flows. The operating results for the interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the SEC on March 15, 2022.
The unaudited condensed consolidated financial statements are prepared in conformity with GAAP, which requires the use of estimates, judgments and assumptions that affect the amounts of assets and liabilities at the reporting date and the amounts of revenue and expenses in the periods presented. The Company believes that the accounting estimates employed are appropriate and the resulting balances are reasonable; however, due to the inherent uncertainties in making estimates, actual results could differ from the original estimates, requiring adjustments to these balances in future periods.
2.Recent Accounting Pronouncements and Developments
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-13, “Financial Instruments (Topic 326) Credit Losses”. Topic 326 changes the impairment model for most financial assets and certain other instruments. Under the new standard, entities holding financial assets and net investment in leases that are not accounted for at fair value through net income are to be presented at the net amount expected to be collected. An allowance for credit losses will be a valuation account that will be deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial asset. Topic 326 was originally effective as of January 1, 2020, although in November 2019, the FASB delayed the effective date until fiscal years beginning after December 15, 2022 for SEC filers eligible as of the FASB's deferral date to be smaller reporting companies under the SEC’s definition. The Company qualified as a smaller reporting company in November 2019 when the FASB delayed the effective date of Topic 326. Early adoption is permitted. The Company is currently evaluating the impact of Topic 326 on its consolidated balance sheets, statements of operations, statements of cash flows and related disclosures.
3.Business Combinations
Acquisitions Accounted for Using the Purchase Method
On January 31, 2021, the Company acquired the business and the majority of the assets of FilAMed, a privately-held biomedical services company based in Bakersfield, California. In becoming part of the Company's Durable Medical Equipment Services ("DME Services") segment, this acquisition supplements the Company’s existing biomedical recertification, maintenance and repair services for acute care facilities and other alternate site settings including home care and home infusion providers, skilled nursing facilities, pain centers and others.
On April 18, 2021, the Company acquired the business and substantially all of the assets of OB Healthcare Corporation (“OB Healthcare”), a privately-held biomedical services company based in Mesquite, Texas. OB Healthcare specializes in on-site repair, preventative maintenance, and device physical inventory management to hospitals and healthcare systems nationwide. The acquisition further develops and expands InfuSystem’s DME Services segment and complements the Company’s purchase of FilAMed.
The results of operations for FilAMed and OB Healthcare are included in the Company’s consolidated statements of operations from the respective closing dates.
Purchase Price Allocation
Pursuant to FASB Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations,” the purchase price for each of the acquisitions was allocated to the assets acquired and liabilities assumed based upon their estimated fair values as of the respective acquisition dates. The purchase price allocations were primarily based upon a valuation using management’s estimates and assumptions. The purchase price allocation was completed for FilAMed and OB Healthcare as of December 31, 2021. The following table summarizes the consideration paid and the allocation of the purchase price to the fair values of the assets acquired and liabilities assumed as of the respective acquisition dates for both FilAMed and OB Healthcare (in thousands):
| | | | | | | | | | | | | | | | | |
| FilAMed | | OB Healthcare | | Total Consideration |
Cash | $ | 1,400 | | | $ | 6,250 | | | $ | 7,650 | |
Working capital, paid in cash | — | | | 325 | | | 325 | |
Contingent consideration, paid in cash | — | | | 750 | | | 750 | |
Total - consideration | $ | 1,400 | | | $ | 7,325 | | | $ | 8,725 | |
| | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | FilAMed | | OB Healthcare | | Total Acquisition Date Fair Value |
Accounts receivable | $ | — | | | $ | 725 | | | $ | 725 | |
Inventories | 74 | | | — | | | 74 | |
Medical equipment held for sale or rental | 40 | | | — | | | 40 | |
Property and equipment | 102 | | | 59 | | | 161 | |
Intangible assets | 1,015 | | | 3,000 | | | 4,015 | |
Goodwill | 169 | | | 3,541 | | | 3,710 | |
Operating lease right of use assets | 281 | | | 7 | | | 288 | |
Operating lease liabilities | (281) | | | (7) | | | (288) | |
Total - purchase price | $ | 1,400 | | | $ | 7,325 | | | $ | 8,725 | |
| | | | | | |
| | | | | |
The amount of acquisition costs for both transactions was $0.2 million for the nine months ended September 30, 2021 and was included in general and administrative expenses.
The Company fully paid all consideration for FilAMed as of December 31, 2021. On the OB Healthcare acquisition date, the Company made an initial cash payment of $6.1 million with subsequent cash payments of $0.4 million during the year ended December 31, 2021 and had an additional estimated amount due to the seller for contingent consideration of $0.8 million, which was recorded in the balance sheet under the heading for other current liabilities. The contingent consideration arrangement, as amended, required the Company to pay OB Healthcare $0.8 million if certain written contracts were executed. As of September 30, 2022, the requirement under the contingent consideration arrangement had been satisfied and the Company had made the required payment.
The following table shows the breakdown of the identified intangible assets acquired into major intangible asset classes for both acquisitions:
| | | | | | | | | | | | | | |
| | Acquisition Date Fair Value (Thousands) | | Weighted-Average Amortization Period (Years) |
Customer relationships | $ | 2,300 | | | 15 |
Unpatented technology | 943 | | | 7 |
Non-competition agreements | 472 | | | 5 |
Internal-use software | 300 | | | 5 |
| | | | |
Total intangible assets (a) | $ | 4,015 | | | 11.2 |
| | | | |
(a) There was no residual value, renewal terms or extensions associated with any intangible assets acquired. |
The goodwill acquired consists of expected synergies from combining operations of FilAMed and OB Healthcare with the DME Services segment as well as their respective assembled workforce who have specialized knowledge and experience. All of the goodwill is deductible for tax purposes.
Unaudited Pro Forma Financial Information
The unaudited pro forma financial information in the table below summarizes the combined results of operations of the Company, FilAMed and OB Healthcare as though the companies’ businesses had been combined as of January 1, 2021. The pro forma financial information for the three and nine months ended September 30, 2021 has been adjusted by $0.1 million and $0.2 million, respectively, for the tax effected amount of acquisition costs and non-recurring expenses directly attributable to the FilAMed and OB Healthcare acquisitions. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place at the beginning of each period presented nor is it indicative of future results. The following pro forma financial information presented also includes the pro forma depreciation and amortization charges from acquired tangible and intangible assets for the three and nine months ended September 30, 2021 (in thousands):
| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2021 |
Revenue | $ | 26,566 | | | $ | 76,633 | |
Net (loss) income | $ | (373) | | | $ | 1,268 | |
4.Revenue Recognition
The following tables present the Company’s disaggregated revenue by offering type (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2022 | | 2021 |
| Total Net Revenues | | Percentage of Total Net Revenues | | Total Net Revenues | | Percentage of Total Net Revenues |
| | | | | | | |
Third-Party Payer Rentals | $ | 14,161 | | | 51.9 | % | | $ | 13,512 | | | 50.9 | % |
Direct Payer Rentals | 7,801 | | | 28.6 | % | | 7,136 | | | 26.9 | % |
Product Sales | 3,562 | | | 13.1 | % | | 4,399 | | | 16.5 | % |
Services | 1,755 | | | 6.4 | % | | 1,519 | | | 5.7 | % |
| | | | | | | |
Total | $ | 27,279 | | | 100.0 | % | | $ | 26,566 | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
| Total Net Revenues | | Percentage of Total Net Revenues | | Total Net Revenues | | Percentage of Total Net Revenues |
| | | | | | | |
Third-Party Payer Rentals | $ | 41,425 | | | 51.1 | % | | $ | 39,436 | | | 52.0 | % |
Direct Payer Rentals | 23,745 | | | 29.3 | % | | 21,787 | | | 28.7 | % |
Product Sales | 10,968 | | | 13.5 | % | | 11,332 | | | 14.9 | % |
Services | 4,946 | | | 6.1 | % | | 3,308 | | | 4.4 | % |
| | | | | | | |
Total | $ | 81,084 | | | 100.0 | % | | $ | 75,863 | | | 100.0 | % |
Third-Party Payer Rentals are entirely attributed to revenues of the Integrated Therapy Services (“ITS”) segment. Services revenues are entirely attributed to the DME Services segment. For the three months ended September 30, 2022, $3.2 million and $4.6 million of Direct Payer Rentals were attributed to the ITS and DME Services segments, respectively. For the three months ended September 30, 2021, $3.1 million and $4.0 million of Direct Payer Rentals were attributed to the ITS and DME Services segments, respectively. For the three months ended September 30, 2022, less than $0.1 million and $3.6 million of Product Sales were attributed to the ITS and DME Services segments, respectively. For the three months ended September 30, 2021, all Product Sales were entirely attributed to the DME Services segment.
For the nine months ended September 30, 2022, $9.7 million and $14.0 million of Direct Payer Rentals were attributed to the ITS and DME Services segments, respectively. For the nine months ended September 30, 2021, $9.4 million and $12.4 million of Direct Payer Rentals were attributed to the ITS and DME Services segments, respectively. For the nine months ended September 30, 2022, $0.1 million and $10.9 million of Product Sales were attributed to the ITS and DME Services segments, respectively. For the nine months ended September 30, 2021, all Product Sales were entirely attributed to the DME Services segment.
5.Medical Equipment
Medical equipment consisted of the following (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Medical equipment for sale or rental | $ | 2,865 | | $ | 1,788 |
Medical equipment for sale or rental - pump reserve | (22) | | (46) |
Medical equipment for sale or rental - net | 2,843 | | 1,742 |
| | | |
Medical equipment in rental service | 97,021 | | 91,891 |
Medical equipment in rental service - pump reserve | (2,074) | | (1,074) |
Accumulated depreciation | (55,745) | | (50,946) |
Medical equipment in rental service - net | 39,202 | | 39,871 |
| | | |
Total | $ | 42,045 | | $ | 41,613 |
Depreciation expense for medical equipment for the three and nine months ended September 30, 2022 was $2.4 million and $7.3 million, respectively, compared to $2.4 million and $7.0 million for the same prior year periods, respectively. This expense was recorded in “cost of revenues” for each period. The pump reserve for medical equipment in rental service represents an estimate for medical equipment that is considered to be missing. The reserve calculated is equal to the net book value of assets that have not returned from the field within a certain timeframe. During the current period, the Company changed its estimate for missing pumps by shortening the time estimate of when a pump is considered missing. As a result of this change in estimate, the Company increased the pump reserve as of September 30, 2022 and increased its cost of sales for the three and nine months ended September 30, 2022 by $0.1 million and $0.6 million, respectively.
6.Property and Equipment
Property and equipment consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Gross Assets | | Accumulated Depreciation | | Total | | Gross Assets | | Accumulated Depreciation | | Total |
Furniture, fixtures, and equipment | $ | 5,306 | | $ | (3,067) | | $ | 2,239 | | $ | 4,812 | | $ | (2,528) | | $ | 2,284 |
Automobiles | 110 | | (105) | | 5 | | 110 | | (103) | | 7 |
Leasehold improvements | 3,448 | | (1,481) | | 1,967 | | 3,444 | | (1,212) | | 2,232 |
| | | | | | | | | | | |
Total | $ | 8,864 | | $ | (4,653) | | $ | 4,211 | | $ | 8,366 | | $ | (3,843) | | $ | 4,523 |
Depreciation expense for property and equipment for the three and nine months ended September 30, 2022 was $0.3 million and $0.8 million, respectively, compared to $0.2 million and $0.7 million for the same prior year periods, respectively. This expense was recorded in “general and administrative expenses” for each period.
7.Goodwill & Intangible Assets
The changes in the carrying value of goodwill by segment for the nine months ended September 30, 2022 are as follows (in thousands):
| | | | | | | | |
| | DME Services (a) |
Balance as of December 31, 2021 | $ | 3,710 |
Goodwill acquired | | — |
Balance as of September 30, 2022 | $ | 3,710 |
| | |
(a) The ITS segment has no recorded goodwill. |
The carrying amount and accumulated amortization of intangible assets consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Gross Assets | | Accumulated Amortization | | Net | | Gross Assets | | Accumulated Amortization | | Net |
Nonamortizable intangible assets | | | | | | | | | | | |
Trade names | $ | 2,000 | | $ | — | | $ | 2,000 | | $ | 2,000 | | $ | — | | $ | 2,000 |
Amortizable intangible assets: | | | | | | | | | | | |
Trade names | 23 | | (23) | | — | | 23 | | (23) | | — |
Physician and customer relationships | 38,834 | | (33,297) | | 5,537 | | 38,834 | | (31,401) | | 7,433 |
Non-competition agreements | 472 | | (138) | | 334 | | 472 | | (67) | | 405 |
Unpatented technology | 943 | | (224) | | 719 | | 943 | | (123) | | 820 |
Software | 11,530 | | (11,315) | | 215 | | 11,530 | | (11,258) | | 272 |
| | | | | | | | | | | |
Total nonamortizable and amortizable intangible assets | $ | 53,802 | | $ | (44,997) | | $ | 8,805 | | $ | 53,802 | | $ | (42,872) | | $ | 10,930 |
Amortization expense for the three and nine months ended September 30, 2022 was $0.7 million and $2.1 million, respectively, compared to $1.1 million and $3.3 million for the same prior year periods, respectively. This expense was recorded in “amortization of intangibles expenses” for each period. Expected remaining annual amortization expense for the next five years for intangible assets recorded as of September 30, 2022 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 and thereafter | | Total |
| | | | | | | | | | | | | |
Amortization expense | $ | 369 | | $ | 990 | | $ | 990 | | $ | 810 | | $ | 524 | | $ | 3,122 | | $ | 6,805 |
8.Debt
On February 5, 2021, the Company entered into a Credit Agreement (the “2021 Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent (the “Agent”), sole bookrunner and sole lead arranger, and the lenders party thereto. The borrowers under the 2021 Credit Agreement are the Company, InfuSystem Holdings USA, Inc. (“Holdings”), InfuSystem,
Inc. (“ISI”), First Biomedical, Inc. (“First Biomedical”), and IFC LLC (“IFC” and, collectively with the Company, Holdings, ISI and First Biomedical, the “Borrowers”).
The 2021 Credit Agreement provides for a revolving credit facility (the “Revolving Facility”) of $75.0 million, that matures on February 5, 2026. The Revolving Facility may be increased by $25.0 million, subject to certain conditions, including the consent of the Agent and obtaining necessary commitments. The lenders under the 2021 Credit Agreement may issue up to $7.0 million in letters of credit subject to the satisfaction of certain conditions. On February 5, 2021, the Borrowers made an initial borrowing of $30.0 million under the Revolving Facility. Proceeds from the loan, along with approximately $8.2 million in cash, were used to repay all amounts due under the Company’s then existing credit facility dated March 23, 2015 (the “2015 Credit Agreement”).
The 2021 Credit Agreement has customary representations and warranties. The ability to borrow under the facility is subject to ongoing compliance with a number of customary affirmative and negative covenants, including limitations on indebtedness, liens, mergers, acquisitions, investments, asset sales, affiliate transactions and restricted payments, as well as financial covenants, including the following:
•a minimum fixed charge coverage ratio (defined as the ratio of consolidated EBITDA (as defined in the 2021 Credit Agreement) less 50% of depreciation expense), to consolidated fixed charges (as defined in the 2021 Credit Agreement)) for the prior four most recently ended calendar quarters of 1.20 to 1.00; and
•a maximum leverage ratio (defined as total indebtedness to EBITDA for the prior four most recently ended calendar quarters) of 3.50 to 1.00.
The 2021 Credit Agreement includes customary events of default. The occurrence of an event of default will permit the lenders to terminate commitments to lend under the Revolving Facility and accelerate payment of all amounts outstanding thereunder.
Simultaneous with the execution of the 2021 Credit Agreement, the Company entered into a Pledge and Security Agreement to secure repayment of the obligations of the Borrowers. Under the Pledge and Security Agreement, each Borrower has granted to the Agent, for the benefit of various secured parties, a first priority security interest in substantially all of the personal property assets of each of the Borrowers, including the shares of each of Holdings, ISI and First Biomedical and the equity interests of IFC.
On February 5, 2021, in connection with the execution and closing of the 2021 Credit Agreement, the Company, along with its wholly owned subsidiaries as borrowers, terminated the 2015 Credit Agreement. All outstanding loans under the 2015 Credit Agreement were repaid and all liens under the 2015 Credit Agreement were released, except that a letter of credit originally issued under the 2015 Credit Agreement in the amount of approximately $0.8 million was transferred to the 2021 Credit Agreement.
The 2021 Credit Agreement was accounted for as a debt modification. As of September 30, 2022, the Company was in compliance with all debt-related covenants under the 2021 Credit Agreement.
On April 15, 2019, the Company sold for $2.0 million and immediately leased back certain medical equipment in rental service to a third party specializing in such transactions. The leaseback term is 36 months. Because the arrangement contains a purchase option that the Company is reasonably certain to exercise, this transaction did not qualify for the sale-leaseback accounting under ASC 842. The medical equipment remains recorded on the accompanying condensed consolidated balance sheet and the proceeds received were classified as an other financing liability. As of September 30, 2022, all amounts owed under this arrangement had been paid.
As referenced above, the Company executed and closed the 2021 Credit Agreement during the first quarter of 2021, and in connection with entering into that agreement, terminated the 2015 Credit Agreement. The following table illustrates the net availability under the Revolving Facility as of the applicable balance sheet date (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| | | |
Revolving Facility: | | | |
Gross availability | $ | 75,000 | | $ | 75,000 |
Outstanding draws | (34,706) | | (32,974) |
Letter of credit | (600) | | (600) |
Availability on Revolving Facility | $ | 39,694 | | $ | 41,426 |
The Company had future maturities of its long-term debt as of September 30, 2022 as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2023 | | 2024 | | 2025 | | 2026 and thereafter | | Total |
Revolving Facility | $ | — | | $ | — | | $ | — | | $ | — | | $ | 34,706 | | $ | 34,706 |
Total | $ | — | | $ | — | | $ | — | | $ | — | | $ | 34,706 | | $ | 34,706 |
The following is a breakdown of the Company’s current and long-term debt (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Current Portion | | Long-Term Portion | | Total | | Current Portion | | Long-Term Portion | | Total |
Revolving Facility | $ | — | | $ | 34,706 | | $ | 34,706 | | $ | — | | $ | 32,974 | | $ | 32,974 |
Other financing | — | | — | | — | | 423 | | — | | 423 |
| — | | 34,706 | | 34,706 | | 423 | | 32,974 | | 33,397 |
Unamortized value of debt issuance costs | — | | (245) | | (245) | | (74) | | (226) | | (300) |
Total | $ | — | | $ | 34,461 | | $ | 34,461 | | $ | 349 | | $ | 32,748 | | $ | 33,097 |
As of September 30, 2022, amounts outstanding under the Revolving Facility provided under the 2021 Credit Agreement bear interest at a variable rate equal to, at the Company’s election, a LIBO Rate for Eurodollar loans or an Alternative Base Rate for ABR loans, as defined by the 2021 Credit Agreement, plus a spread that will vary depending upon the Company’s leverage ratio. The spread ranges from 2.00% to 3.00% for Eurodollar Loans and 1.00% to 2.00% for base rate loans. The weighted-average Eurodollar loan rate at September 30, 2022 was 5.07% (LIBO of 2.82% plus 2.25%). The actual ABR loan rate at September 30, 2022 was 7.50% (lender’s prime rate of 6.25% plus 1.25%).
9.Derivative Financial Instruments and Hedging Activities
In February 2021, the Company adopted a derivative investment policy which provides guidelines and objectives related to managing financial and operational exposures arising from market changes in short term interest rates. In accordance with this policy, the Company can enter into interest rate swaps or similar instruments, will endeavor to evaluate all the risks inherent in a transaction before entering into a derivative financial instrument and will not enter into derivative financial instruments for speculative or trading purposes. Hedging relationships are formally documented at the inception of the hedge and hedges must be highly effective in offsetting changes to future cash flows on hedged transactions at the inception of a hedge and on an ongoing basis to be designated for hedge accounting treatment.
The Company is exposed to interest rate risk related to its variable rate debt obligations under the 2021 Credit Agreement. In order to manage the volatility in interest rate markets, in February 2021, the Company entered into two interest rate swap agreements to manage exposure arising from this risk. On a combined basis, the agreements have a constant notional amount over a five-year term that ends on February 5, 2026. The agreements both pay the Company 30-day LIBOR on the
notional amount and the Company pays a fixed rate of interest equal to 0.73%. These derivative instruments are considered cash flow hedges. The Company does not have any other derivative financial instruments.
The tables below present the location and gross fair value amounts of the Company's derivative financial instruments and the associated notional amounts designated as cash flow hedges as of the applicable balance sheet date (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 |
| | Balance Sheet Location | | Notional | | Fair Value Derivative Assets |
Derivatives designated as hedges: | | | | | |
Cash flow hedges | | | | | | |
Interest rate swaps | Other assets | | $ | 20,000 | | $ | 2,109 |
| | | | |
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Balance Sheet Location | | Notional | | Fair Value Derivative Assets |
Derivatives designated as hedges: | | | | | |
Cash flow hedges | | | | | | |
Interest rate swaps | Other assets | | $ | 20,000 | | $ | 355 |
| | | | | | |
The tables below present the effect of our derivative financial instruments designated as hedging instruments in AOCI (in thousands):
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2022 | | 2021 |
Gain on cash flow hedges - interest rate swaps | | | |
Beginning balance | | $ | 1,140 | | $ | 39 |
Unrealized gain/(loss) recognized in AOCI | 679 | | 9 |
Amounts reclassified to interest expense (a) | (74) | | 32 |
Tax provision | (146) | | (10) |
Ending balance | | $ | 1,599 | | $ | 70 |
| | | | |
(a) Negative amounts represent interest income and positive amounts represent interest expense. Interest expense as presented in the condensed consolidated statement of operations and comprehensive income for the three months ended September 30, 2022 and 2021 was $0.4 million and $0.3 million, respectively. |
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2022 | | 2021 |
Gain on cash flow hedges - interest rate swaps | | | |
Beginning balance | | $ | 268 | | $ | — |
Unrealized gain recognized in AOCI | 1,802 | | 20 |
Amounts reclassified to interest expense (a) (b) | (48) | | 73 |
Tax provision | (423) | | (23) |
Ending balance | | $ | 1,599 | | $ | 70 |
| | | | |
(a) Negative amounts represent interest income and positive amounts represent interest expense. Interest expense as presented in the condensed consolidated statement of operations and comprehensive income for the nine months ended September 30, 2022 and 2021 was $1.0 million and $0.9 million, respectively. |
(b) As of September 30, 2022, $0.7 million of income is expected to be reclassified into earnings within the next 12 months. |
The Company did not incur any hedge ineffectiveness during the three or nine months ended September 30, 2022.
10.Income Taxes
During the three and nine months ended September 30, 2022, the Company recorded a provision for income taxes of $0.1 million and a benefit from income taxes of $0.3 million, respectively. The income tax benefit for the nine months ended September 30, 2022, relates principally to the Company's pre-tax losses during the period and also includes a benefit from excess tax benefits on exercises of stock options and vesting of restricted stock during the period. For the three and nine months ended September 30, 2021, the Company recorded a benefit from income taxes of $0.2 million and $0.9 million, respectively.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was enacted in response to the COVID-19 pandemic. The CARES Act among other things, allows employers to defer the deposit and payment of the employer's share of Social Security taxes. Under the CARES Act, the Company deferred paying $0.7 million of applicable gross payroll taxes as of December 31, 2020, which was included in other liabilities. The $0.7 million balance of the deferred Social Security taxes was expected to be paid in two equal annual installments during the years ending December 31, 2021 and 2022, respectively. In December 2021, the Company made the first of these two equal annual installment payments. As of September 30, 2022, the remaining balance of approximately $0.3 million is included in other liabilities.
11.Commitments, Contingencies and Litigation
From time to time in the ordinary course of its business, the Company may be involved in legal and regulatory proceedings, the outcomes of which may not be determinable. The results of litigation and regulatory proceedings are inherently unpredictable. Any claims against the Company, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in diversion of significant resources. The Company is not able to estimate an aggregate amount or range of reasonably possible losses for those legal matters for which losses are not probable and estimable, primarily for the following reasons: (i) many of the relevant legal proceedings are in preliminary stages and, until such proceedings develop further, there is often uncertainty regarding the relevant facts and circumstances at issue and potential liability; and (ii) many of these proceedings involve matters of which the outcomes are inherently difficult to predict. The Company has insurance policies covering potential losses where such coverage is cost effective.
The Company is not at this time involved in any proceedings that the Company currently believes could have a material effect on the Company’s financial condition, results of operations or cash flows.
12.Earnings (Loss) Per Share
Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share assumes the issuance of potentially dilutive shares of common stock during the period. The following table reconciles the numerators and denominators of the basic and diluted income (loss) per share computations:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
Numerator (in thousands): | 2022 | | 2021 | | 2022 | | 2021 |
Net income (loss) income: | $ | 443 | | $ | (448) | | $ | (89) | | $ | 1,033 |
Denominator: | | | | | | | |
Weighted average common shares outstanding: | | | | | | | |
Basic | 20,683,366 | | 20,577,886 | | 20,625,826 | | 20,468,842 |
Dilutive effect of common stock equivalents | 769,117 | | — | | — | | 1,526,374 |
Diluted | 21,452,483 | | 20,577,886 | | 20,625,826 | | 21,995,216 |
Net income (loss) income per share: | | | | | | | |
Basic | $ | 0.02 | | $ | (0.02) | | $ | — | | $ | 0.05 |
Diluted | $ | 0.02 | | $ | (0.02) | | $ | — | | $ | 0.05 |
For the three months ended September 30, 2022, there were 1,143,001 outstanding options and unvested restricted stock units with an exercise price above the current market value of the Company's common stock not included in the calculation because they would have an anti-dilutive effect. For the nine months ended September 30, 2022, all outstanding options and unvested restricted stock units were anti-dilutive due to the Company's net loss for the period and therefore are not included in the calculation. For the three months ended September 30, 2021, all outstanding options and unvested restricted stock units were anti-dilutive due to the Company's net loss for the period and therefore are not included in the calculation. For the nine months ended September 30, 2021, 0.3 million of outstanding options and unvested restricted stock units with an exercise price above the current market value of the Company’s common stock were not included in the calculation because they would have an anti-dilutive effect.
Share Repurchase Program
On June 30, 2021, our Board of Directors approved a stock repurchase program (the “Share Repurchase Program”) that authorizes the Company to repurchase up to $20.0 million of the Company’s outstanding common stock through June 30, 2024. Repurchases under the Share Repurchase Program are subject to market conditions, the periodic capital needs of the Company’s operating activities, and the continued satisfaction of all covenants under the Company’s existing 2021 Credit Agreement. Repurchases under the Share Repurchase Program may take place in the open market or in privately negotiated transactions and may be made under a Rule 10b5-1 plan. The Share Repurchase Program does not obligate the Company to repurchase shares and may be suspended, terminated, or modified at any time. As of September 30, 2022, the Company had repurchased and retired approximately $5.9 million, or 517,672 shares, of the Company's outstanding common stock under the Share Repurchase Program.
13.Leases
The Company’s operating leases are primarily for office space, service facility centers and equipment under operating lease arrangements that expire at various dates over the next ten years. The Company’s leases do not contain any restrictive covenants. The Company’s office leases generally contain renewal options for periods ranging from one to five years. Because the Company is not reasonably certain to exercise these renewal options, the options are not considered in determining the lease term, and payments associated with the option years are excluded from lease payments. The Company’s office leases do not contain any material residual value guarantees. The Company’s equipment leases generally do not contain renewal options.
Payments due under the Company’s operating leases include fixed payments as well as variable payments. For the Company’s office leases, variable payments include amounts for the Company’s proportionate share of operating expenses, utilities, property taxes, insurance, common area maintenance and other facility-related expenses. For the Company’s equipment leases, variable payments may consist of sales taxes, property taxes and other fees.
The components of lease costs for the three and nine months ended September 30, 2022 and 2021 are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Operating lease cost | | $ | 342 | | | $ | 302 | | | $ | 1,006 | | | $ | 998 | |
Variable lease cost | | 77 | | | 65 | | | 231 | | | 180 | |
Total lease cost | | $ | 419 | | | $ | 367 | | | $ | 1,237 | | | $ | 1,178 | |
Supplemental cash flow information and non-cash activity related to the Company’s leases are as follows (in thousands):
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2022 | | 2021 |
Cash paid for amounts included in the measurement of lease liabilities and right of use assets: | | | | |
Operating cash flow from operating leases | | $ | 946 | | | $ | 993 | |
| | | | |
Right of use assets obtained in exchange for lease obligations: | | | | |
Operating leases | | $ | 18 | | | $ | 288 | |
| | | | |
Increases to right of use assets resulting from lease modifications: | | | | |
Operating leases | | $ | 1,050 | | | $ | — | |
Weighted average remaining lease terms and discount rates for the Company’s operating leases are as follows:
| | | | | | | | | | | | | | |
| | As of September 30, |
| | 2022 | | 2021 |
| | | | |
| | Years | | Years |
Weighted average remaining lease term: | | 6.9 | | 6.3 |
| | | | |
| | Rate | | Rate |
Weighted average discount rate: | | 7.1% | | 7.7% |
Future maturities of lease liabilities as of September 30, 2022 are as follows (in thousands):
| | | | | | | | | | |
| | Operating Leases (a) | | |
2022 | | $ | 303 | | | |
2023 | | 1,159 | | | |
2024 | | 1,064 | | | |
2025 | | 1,033 | | | |
2026 | | 998 | | | |
2027 and thereafter | | 2,841 | | | |
Total undiscounted lease payments | | 7,398 | | | |
Less: Imputed interest | | (2,451) | | | |
Total lease liabilities | | $ | 4,947 | | | |
| | | | |
(a) Excludes $1.8 million of legally binding minimum lease payments for an office lease signed but not yet commenced. This lease has an expected term of 7 years and is expected to commence in 2023. |
14.Business Segment Information
The Company’s reportable segments are organized based on service platforms, with the ITS segment reflecting higher margin rental revenues that generally include payments made by third-party and direct payers and the DME Services segment reflecting lower margin product sales, direct payer rental and service revenues. Resources are allocated and performance is assessed for these segments by the Company’s Chief Executive Officer, whom the Company has determined to be its chief operating decision-maker. The Company believes that reporting performance at the gross profit level is the best indicator of segment performance.
The financial information summarized below is presented by reportable segment for the three months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
2022 | | | | | | | | |
(in thousands) | | ITS | | DME Services | | Corporate/ Eliminations | | Total |
| | | | | | | | |
Net revenues - external | | $ | 17,375 | | $ | 9,904 | | $ | — | | $ | 27,279 |
Net revenues - internal | | — | | 1,610 | | (1,610) | | — |
Total net revenues | | 17,375 | | 11,514 | | (1,610) | | 27,279 |
Gross profit | | 11,400 | | 4,819 | | — | | 16,219 |
| | | | | | | | |
Selling, general and administrative expenses | | | | | | 15,276 | | 15,276 |
Interest expense | | | | | | (385) | | (385) |
Other expense | | | | | | (11) | | (11) |
Provision for income taxes | | | | | | (104) | | (104) |
| | | | | | | | |
Net income | | | | | | | | $ | 443 |
| | | | | | | | |
Total assets | | $ | 61,735 | | $ | 35,246 | | $ | 2,000 | | $ | 98,981 |
Purchases of medical equipment | | $ | 2,088 | | $ | 1,695 | | $ | — | | $ | 3,783 |
Depreciation and amortization of intangible assets | | $ | 2,425 | | $ | 1,015 | | $ | — | | $ | 3,440 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
2021 | | | | | | | | |
(in thousands) | | ITS | | DME Services | | Corporate/Eliminations | | Total |
| | | | | | | | |
Net revenues - external | | $ | 16,581 | | $ | 9,985 | | $ | — | | $ | 26,566 |
Net revenues - internal | | — | | 1,440 | | (1,440) | | — |
Total net revenues | | 16,581 | | 11,425 | | (1,440) | | 26,566 |
Gross profit | | 10,574 | | 4,684 | | — | | 15,258 |
| | | | | | | | |
Selling, general and administrative expenses | | | | | | 15,609 | | 15,609 |
Interest expense | | | | | | (270) | | (270) |
Other expense | | | | | | (44) | | (44) |
Benefit from income taxes | | | | | | 217 | | 217 |
| | | | | | | | |
Net loss | | | | | | | | $ | (448) |
| | | | | | | | |
Total assets | | $ | 59,312 | | $ | 33,474 | | $ | 2,000 | | $ | 94,786 |
Purchases of medical equipment | | $ | 4,058 | | $ | 644 | | $ | — | | $ | 4,702 |
Depreciation and amortization of intangible assets | | $ | 2,785 | | $ | 955 | | $ | — | | $ | 3,740 |
The financial information summarized below is presented by reportable segment for the nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
2022 | | | | | | | | |
(in thousands) | | ITS | | DME Services | | Corporate/ Eliminations | | Total |
| | | | | | | | |
Net revenues - external | | $ | 51,260 | | $ | 29,824 | | $ | — | | $ | 81,084 |
Net revenues - internal | | — | | 4,860 | | (4,860) | | — |
Total net revenues | | 51,260 | | 34,684 | | (4,860) | | 81,084 |
Gross profit | | 32,251 | | 14,236 | | — | | 46,487 |
| | | | | | | | |
Selling, general and administrative expenses | | | | | | 45,862 | | 45,862 |
Interest expense | | | | | | (976) | | (976) |
Other expense | | | | | | (69) | | (69) |
Benefit from income taxes | | | | | | 331 | | 331 |
| | | | | | | | |
Net loss | | | | | | | | $ | (89) |
| | | | | | | | |
Total assets | | $ | 61,735 | | $ | 35,246 | | $ | 2,000 | | $ | 98,981 |
Purchases of medical equipment | | $ | 6,924 | | $ | 3,528 | | $ | — | | $ | 10,452 |
Depreciation and amortization of intangible assets | | $ | 7,194 | | $ | 3,062 | | $ | — | | $ | 10,256 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
2021 | | | | | | | | |
(in thousands) | | ITS | | DME Services | | Corporate/ Eliminations | | Total |
| | | | | | | | |
Net revenues - external | | $ | 48,826 | | $ | 27,037 | | $ | — | | $ | 75,863 |
Net revenues - internal | | — | | 4,484 | | (4,484) | | — |
Total net revenues | | 48,826 | | 31,521 | | (4,484) | | 75,863 |
Gross profit | | 31,028 | | 13,856 | | — | | 44,884 |
| | | | | | | | |
Selling, general and administrative expenses | | | | | | 43,666 | | 43,666 |
Interest expense | | | | | | (909) | | (909) |
Other expense | | | | | | (150) | | (150) |
Benefit from income taxes | | | | | | 874 | | 874 |
| | | | | | | | |
Net income | | | | | | | | $ | 1,033 |
| | | | | | | | |
Total assets | | $ | 59,312 | | $ | 33,474 | | $ | 2,000 | | $ | 94,786 |
Purchases of medical equipment | | $ | 7,550 | | $ | 2,095 | | $ | — | | $ | 9,645 |
Depreciation and amortization of intangible assets | | $ | 8,213 | | $ | 2,756 | | $ | — | | $ | 10,969 |
15.COVID-19
On March 11, 2020, the World Health Organization declared the outbreak of coronavirus (“COVID-19”) as a pandemic, which has spread globally and throughout the United States. During the period of the pandemic, we took a number of precautionary and preemptive steps to protect the safety and well-being of our employees while ensuring continuity of service to our clients, including, transitioning our employees to a remote work environment, suspending employee travel, canceling participation in industry events and in-person group meetings, promoting social distancing and enhanced cleaning and
sanitization efforts across office locations, and implementing protocols to quarantine employees who may have been exposed to COVID-19, or showed relevant symptoms. We also undertook preparedness plans at our facilities to maintain continuity of operations, which provide for flexible work arrangements without any significant disruptions to our business or control processes. Our management team continues to actively monitor the situation and is in constant communication with our workforce, customers and vendors. Since the pandemic started, outbreaks of COVID-19, including the Delta and Omicron variants, unfavorably impacted our revenue growth initiatives in certain product lines including Pain Management and NPWT. Such impacts included scattered restrictions on elective surgeries, delayed ramp-up in treatment volumes for new customers and, mainly during 2022, reduced availability of disposable medical supplies, all of which unfavorably impacted the Pain Management business. Additionally, restricted physical access to our customers facilities unfavorably impacted revenue growth initiatives for both the Pain Management and NPWT businesses. While the COVID-19 pandemic has not had any material unfavorable effects in our financial results for the three and nine months ended September 30, 2022, beyond these delays to our revenue growth plans, the extent of any future impact will depend on future developments, which are highly uncertain, cannot be predicted and could have a material adverse impact on our financial position, operating results and cash flows.