Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q


Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the quarterly period ended September 30, 2020

or

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the transition period from              to             

 

Commission File Number: 001-35020

 

ex_212652img001.jpg


INFUSYSTEM HOLDINGS, INC.

(Exact name of registrant as specified in its charter)


Delaware

20-3341405

(State or Other Jurisdiction of
Incorporation or Organization)

(I.R.S. Employer
Identification No.)

 

3851 West Hamlin Road

Rochester Hills, Michigan 48309

(Address of Principal Executive Offices)

 

Registrant’s Telephone Number, including Area Code: (248) 291-1210


Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on which Registered

Common Stock, par value $0.0001 per share

INFU

NYSE American LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No   ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No   ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ☐ Accelerated filer  ☐ Non-accelerated filer  ☒ Smaller reporting company  ☒
       
Emerging growth company  ☐      

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No   ☒

 

As of November 6, 2020, 20,236,932 shares of the registrant’s common stock, par value $0.0001 per share, were outstanding.

 



 

1

 

 

INFUSYSTEM HOLDINGS, INC. AND SUBSIDIARIES

 

Index to Form 10-Q

 

 

 

PAGE 

PART I -

FINANCIAL INFORMATION

 

     

Item 1.

Financial Statements 

 3

     

 

-Unaudited Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019

3

 

-Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019

4

 

-Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019

5

 

-Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019

6

 

-Notes to the Unaudited Condensed Consolidated Financial Statements

7

     

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

     

Item 4.

Controls and Procedures

28

     

PART II -

OTHER INFORMATION

 

     

Item 1.

Legal Proceedings

29

     

Item 1A.

Risk Factors

29

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

     

Item 3.

Defaults Upon Senior Securities

29

     

Item 4.

Mine Safety Disclosures

29

     

Item 5.

Other Information

29

     

Item 6.

Exhibits

30

     

 

Signatures

31

 

2

 

 

PART I—FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

INFUSYSTEM HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

   

As of

 
   

September 30,

   

December 31,

 

(in thousands, except share data)

 

2020

   

2019

 
                 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 1,939     $ 2,647  

Accounts receivable, net

    13,927       12,097  

Inventories

    3,973       2,899  

Other current assets

    1,587       1,662  
                 

Total current assets

    21,426       19,305  

Medical equipment for sale or rental

    1,359       1,306  

Medical equipment in rental service, net of accumulated depreciation

    36,110       33,225  

Property & equipment, net of accumulated depreciation

    4,286       4,037  

Intangible assets, net

    12,238       15,463  

Operating lease right of use assets

    4,784       5,733  

Other assets

    105       155  
                 

Total assets

  $ 80,308     $ 79,224  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               

Current liabilities:

               

Accounts payable

  $ 6,936     $ 7,962  

Current portion of long-term debt

    7,759       8,082  

Other current liabilities

    5,009       5,803  
                 

Total current liabilities

    19,704       21,847  

Long-term debt, net of current portion

    27,034       30,295  

Deferred income taxes

    120       104  

Operating lease liabilities, net of current portion

    4,061       4,644  
                 

Total liabilities

    50,919       56,890  
                 

Stockholders’ equity:

               

Preferred stock, $.0001 par value: authorized 1,000,000 shares; none issued

    -       -  

Common stock, $.0001 par value: authorized 200,000,000 shares; issued and outstanding 23,755,421 and 20,236,932, respectively, as of September 30, 2020 and 23,400,625 and 19,882,136, respectively, as of December 31, 2019

    2       2  

Additional paid-in capital

    84,092       83,699  

Retained deficit

    (54,705 )     (61,367 )
                 

Total stockholders’ equity

    29,389       22,334  
                 

Total liabilities and stockholders’ equity

  $ 80,308     $ 79,224  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3

 

 

INFUSYSTEM HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 

(UNAUDITED)

 

   

Three Months Ended

   

Nine Months Ended

 

(in thousands, except share and per share data)

 

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Net revenues

  $ 25,125     $ 21,489     $ 72,677     $ 59,405  

Cost of revenues

    10,003       9,251       28,914       25,470  

Gross profit

    15,122       12,238       43,763       33,935  
                                 

Selling, general and administrative expenses:

                               

Provision for doubtful accounts

    11       160       534       (30 )

Amortization of intangibles

    1,075       1,077       3,225       3,326  

Selling and marketing

    2,196       2,402       7,263       7,480  

General and administrative

    8,587       6,936       24,949       20,945  
                                 

Total selling, general and administrative

    11,869       10,575       35,971       31,721  
                                 

Operating income

    3,253       1,663       7,792       2,214  

Other expense:

                               

Interest expense

    (283 )     (488 )     (1,018 )     (1,436 )

Other income (expense)

    8       (11 )     (20 )     (71 )
                                 

Income before income taxes

    2,978       1,164       6,754       707  

Provision for income taxes

    (38 )     (29 )     (92 )     (151 )

Net income

  $ 2,940     $ 1,135     $ 6,662     $ 556  
                                 

Net income per share:

                               

Basic

  $ 0.15     $ 0.06     $ 0.33     $ 0.03  

Diluted

    0.14       0.05       0.31       0.03  

Weighted average shares outstanding:

                               

Basic

    20,179,056       19,781,527       20,060,416       19,690,737  

Diluted

    21,663,414       20,679,431       21,637,481       20,503,933  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4

 

 

 

INFUSYSTEM HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF

STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

 

   

Common Stock

   

Additional

           

Treasury Stock

   

Total

 
           

Par Value

   

Paid in

   

Retained

           

Par Value

   

Stockholders’

 

(in thousands)

 

Shares

   

Amount

   

Capital

   

Deficit

   

Shares

   

Amount

   

Equity

 

Balances at June 30, 2019

    23,237     $ 2     $ 83,557     $ (63,307 )     (3,518 )   $ -     $ 20,252  

Stock-based shares issued upon vesting - gross

    121       -       109       -       -       -       109  

Stock-based compensation expense

    -       -       240       -       -       -       240  

Employee stock purchase plan

    14       -       70       -       -       -       70  

Common stock repurchased to satisfy minimum statutory withholding on stock-based compensation

    (16 )     -       (87 )     -       -       -       (87 )

Net income

    -       -       -       1,135       -       -       1,135  

Balances at September 30, 2019

    23,356     $ 2     $ 83,889     $ (62,172 )     (3,518 )   $ -     $ 21,719  
                                                         

Balances at June 30, 2020

    23,651     $ 2     $ 83,845     $ (57,645 )     (3,518 )   $ -     $ 26,202  

Stock-based shares issued upon vesting - gross

    127       -       -       -       -       -       -  

Stock-based compensation expense

    -       -       659       -       -       -       659  

Employee stock purchase plan

    15       -       116       -       -       -       116  

Common stock repurchased to satisfy minimum statutory withholding on stock-based compensation

    (38 )     -       (528 )     -       -       -       (528 )

Net income

    -       -       -       2,940       -       -       2,940  

Balances at September 30, 2020

    23,755     $ 2     $ 84,092     $ (54,705 )     (3,518 )   $ -     $ 29,389  
                                                         

Balances at December 31, 2018

    23,096     $ 2     $ 83,167     $ (62,728 )     (3,518 )   $ -     $ 20,441  

Stock-based shares issued upon vesting - gross

    288       -       124       -       -       -       124  

Stock-based compensation expense

    -       -       770       -       -       -       770  

Employee stock purchase plan

    33       -       123       -       -       -       123  

Common stock repurchased to satisfy minimum statutory withholding on stock-based compensation

    (61 )     -       (295 )     -       -       -       (295 )

Net income

    -       -       -       556       -       -       556  

Balances at September 30, 2019

    23,356     $ 2     $ 83,889     $ (62,172 )     (3,518 )   $ -     $ 21,719  
                                                         

Balances at December 31, 2019

    23,401     $ 2     $ 83,699     $ (61,367 )     (3,518 )   $ -     $ 22,334  

Stock-based shares issued upon vesting - gross

    419       -       -       -       -       -       -  

Stock-based compensation expense

    -       -       1,222       -       -       -       1,222  

Employee stock purchase plan

    29       -       190       -       -       -       190  

Common stock repurchased to satisfy minimum statutory withholding on stock-based compensation

    (122 )     -       (1,269 )     -       -       -       (1,269 )

Common stock - issued

    28       -       250       -       -       -       250  

Net income

    -       -       -       6,662       -       -       6,662  

Balances at September 30, 2020

    23,755     $ 2     $ 84,092     $ (54,705 )     (3,518 )   $ -     $ 29,389  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5

 

 

 

INFUSYSTEM HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   

Nine Months Ended

 
   

September 30,

 

(in thousands)

 

2020

   

2019

 
                 

OPERATING ACTIVITIES

               

Net income

  $ 6,662     $ 556  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Provision for doubtful accounts

    534       (30 )

Depreciation

    7,267       5,727  

Loss on disposal of medical equipment and other assets

    150       390  

Gain on sale of medical equipment

    (2,949 )     (1,264 )

Amortization of intangible assets

    3,225       3,326  

Amortization of deferred debt issuance costs

    13       29  

Stock-based compensation

    1,222       780  

Deferred income taxes

    16       76  

Changes in assets - (Increase)/Decrease:

               

Accounts receivable

    (1,490 )     (735 )

Inventories

    (1,074 )     (514 )

Other current assets

    75       (233 )

Other assets

    (114 )     (326 )

Changes in liabilities - Increase/(Decrease):

               

Accounts payable and other liabilities

    (869 )     1,752  

NET CASH PROVIDED BY OPERATING ACTIVITIES

  $ 12,668     $ 9,534  
                 

INVESTING ACTIVITIES

               

Purchase of medical equipment

    (11,955 )     (15,005 )

Purchase of property and equipment

    (865 )     (1,415 )

Proceeds from sale of medical equipment, property and equipment

    3,870       2,239  

NET CASH USED IN INVESTING ACTIVITIES

    (8,950 )     (14,181 )
                 

FINANCING ACTIVITIES

               

Principal payments on term loans, equipment line, revolving credit facility and other financing

    (35,458 )     (3,915 )

Cash proceeds from 2019 equipment line, equipment line, revolving credit facility and other financing

    31,861       7,462  

Debt issuance costs

    -       (3 )

Common stock repurchased to satisfy statutory withholding on employee stock-based compensation plans

    (1,269 )     (295 )

Cash proceeds from stock plans

    190       237  

Common stock - issued

    250       -  

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

    (4,426 )     3,486  
                 

Net change in cash and cash equivalents

    (708 )     (1,161 )

Cash and cash equivalents, beginning of period

    2,647       4,318  

Cash and cash equivalents, end of period

  $ 1,939     $ 3,157  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

6

 

INFUSYSTEM HOLDINGS, INC. AND SUBSIDIARIES

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 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, 2019 as filed with the SEC.

 

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. In particular, the coronavirus (“COVID-19”) pandemic and the resulting adverse impacts to global economic conditions, as well as potential adverse impacts to our operations, may impact future estimates including, but not limited to: revenue recognition; leases; accounts receivable and allowance for doubtful accounts; income taxes; and long-lived asset valuations.

 

Certain prior period reclassifications were made to conform with the current period presentation. These reclassifications had no effect on reported income (loss), overall cash flows, total assets, total liabilities or stockholders’ equity as previously reported.

 

 

 

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 to be smaller reporting companies under the SEC’s definition. The Company qualifies as a smaller reporting company under the SEC’s definition. 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.

 

7

 

 

3.

Revenue Recognition

 

The following table presents the Company’s disaggregated revenue by offering type (in thousands):

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Third-Party Payer Rentals

  $ 12,672     $ 10,662     $ 36,660     $ 29,147  

Direct Payer Rentals

    7,933       6,617       22,733       19,444  

Product Sales

    4,520       4,210       13,284       10,814  
                                 

Total - Net revenues

  $ 25,125     $ 21,489     $ 72,677     $ 59,405  

 

Third-Party Payer Rentals are entirely attributed to revenues of the Integrated Therapy Services (“ITS”) segment. Product Sales are entirely attributed to revenues of the Durable Medical Equipment Services (“DME Services”) segment. For the three months ended September 30, 2020, $3.0 million and $4.9 million of Direct Payer Rentals were attributed to the ITS and DME Services segments, respectively. For the three months ended September 30, 2019, $2.8 million and $3.8 million were attributed to the ITS and DME Services segments, respectively.

 

For the nine months ended September 30, 2020, $8.7 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, 2019, $8.0 million and $11.4 million were attributed to the ITS and DME Services segments, respectively.

 

The following table presents the Company’s disaggregated revenue by offering type as a percentage of total net revenues:

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Third-Party Payer Rentals

    50.4 %     49.6 %     50.4 %     49.1 %

Direct Payer Rentals

    31.6 %     30.8 %     31.3 %     32.7 %

Product Sales

    18.0 %     19.6 %     18.3 %     18.2 %
                                 

Total - Net revenues

    100.0 %     100.0 %     100.0 %     100.0 %

 

8

 

 

4.

Medical Equipment

 

Medical equipment consisted of the following (in thousands):

 

   

September 30,

   

December 31,

 
   

2020

   

2019

 

Medical Equipment for sale or rental

  $ 1,385     $ 1,334  

Medical Equipment for sale or rental - pump reserve

    (26 )     (28 )

Medical Equipment for sale or rental - net

    1,359       1,306  
                 

Medical Equipment in rental service

    82,445       75,853  

Medical Equipment in rental service - pump reserve

    (786 )     (720 )

Accumulated depreciation

    (45,549 )     (41,908 )

Medical Equipment in rental service - net

    36,110       33,225  
                 

Total

  $ 37,469     $ 34,531  

 

Depreciation expense for medical equipment for the three and nine months ended September 30, 2020 was $2.3 million and $6.7 million, respectively, compared to $2.0 million and $5.4 million for the same prior year periods, respectively, which were recorded in “cost of revenues” for each period.

 

 

 

5.

Property and Equipment

 

Property and equipment consisted of the following (in thousands):

 

   

September 30, 2020

   

December 31, 2019

 
   

Gross

Assets

   

Accumulated

Depreciation

   

Total

   

Gross

Assets

   

Accumulated

Depreciation

   

Total

 

Furniture, fixtures, and equipment

  $ 3,897     $ (2,267 )   $ 1,630     $ 3,202     $ (1,928 )   $ 1,274  

Automobiles

    117       (99 )     18       117       (90 )     27  

Leasehold improvements

    3,409       (771 )     2,638       3,366       (630 )     2,736  
                                                 

Total

  $ 7,423     $ (3,137 )   $ 4,286     $ 6,685     $ (2,648 )   $ 4,037  

 

Depreciation expense for property and equipment for the three and nine months ended September 30, 2020 was $0.2 million and $0.6 million, respectively, compared to $0.1 million and $0.3 million for the same prior year periods, respectively. This expense was recorded in “general and administrative expenses” for each period.

 

9

 

 

6.

Intangible Assets

 

The carrying amount and accumulated amortization of intangible assets consisted of the following (in thousands):

 

   

September 30, 2020

   

December 31, 2019

 
   

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

    36,534       (28,331 )     8,203       36,534       (26,550 )     9,984  

Software

    11,230       (9,195 )     2,035       11,230       (7,751 )     3,479  
                                                 

Total nonamortizable and amortizable intangible assets

  $ 49,787     $ (37,549 )   $ 12,238     $ 49,787     $ (34,324 )   $ 15,463  

 

Amortization expense for the three and nine months ended September 30, 2020 was $1.1 million and $3.2 million, respectively, compared to $1.1 million and $3.3 million for the same prior year periods, respectively. Expected annual amortization expense for intangible assets recorded as of September 30, 2020 is as follows (in thousands):

 

   

10/1 -

                                   

2025 and

         
   

12/31/2020

   

2021

   

2022

   

2023

   

2024

   

thereafter

   

Total

 
                                                         

Amortization expense

  $ 1,060     $ 3,930     $ 2,051     $ 548     $ 548     $ 2,101     $ 10,238  

 

 

 

7.

Debt

 

On February 5, 2019, the Company and its primary lender entered into the fifth amendment (the “Fifth Amendment”) to its Credit Agreement, entered into on March 23, 2015 (as amended, the “Credit Agreement”). The Fifth Amendment amended the Credit Agreement to, among other things:

 

 

increase our borrowing capacity under the equipment line to $8.0 million, which allows for capital expenditure financing to the Company for the sole purpose of purchasing medical equipment (the “Equipment Line”);

 

revise the definition of earnings before interest, taxes, depreciation and amortization (“EBITDA”), a non-GAAP financial measure, to include additional add-back adjustments for the years ended December 31, 2018 and 2019;

 

revise the definition of fixed charge coverage ratio for the year ended December 31, 2019 to include an unfinanced portion of capital expenditures of up to $7.0 million for the year ended December 31, 2019;

 

revise the Credit Agreement’s maximum permitted indebtedness to finance the acquisition, construction or improvement of any fixed or capital assets; and

 

revise the maximum leverage ratio for each of the quarters during December 31, 2018 and December 31, 2019.

 

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 have been classified as an Other Financing liability, which is being paid off monthly over the term of the lease. The balance of Other Financing as of September 30, 2020 was $1.1 million.

 

On November 7, 2019, the Company and its primary lender entered into the sixth amendment (the “Sixth Amendment”) to its Credit Agreement. The Sixth Amendment amended the Credit Agreement to, among other things:

 

 

provide for a 2019 capital expenditure loan (the “2019 Equipment Line”) commitment of $10.0 million (in addition to the existing Equipment Line of $8.0 million), which may be drawn upon until the earlier of the full commitment being advanced or December 31, 2020, to be used solely to purchase eligible equipment to be used in the Company’s business and in amounts not to exceed 90.0% of the invoiced hard costs of such acquired equipment;

 

10

 

 

increase the commitment for the revolving credit facility (the “Revolver”) under the Credit Agreement to $11.8 million;

 

revise the definition of EBITDA to include the following additional or revised add-back adjustments: (i) one-time charges in an aggregate amount not to exceed $0.3 million and incurred prior to December 31, 2019 relating to the Company’s integration of business previously served by another major provider of electronic oncology pumps; (ii) one-time charges in an aggregate amount not to exceed $0.3 million and incurred prior to December 31, 2019 relating to the Company’s facility move; (iii) lease buyout expenses not to exceed: (x) $0.1 million incurred on or prior to December 31, 2018; (y) $0.2 million incurred after December 31, 2018 but on or prior to March 31, 2019; and (z) $0.2 million incurred after September 30, 2019 but on or prior to December 31, 2020; and (iv) any other non-cash charges for such period (but excluding certain non-cash charges);

 

revise the definition of Fixed Charge Coverage Ratio to mean, for any period, the ratio of (a) EBITDA minus Maintenance Capital Expenditures (defined to mean, for any period, 50.0% of depreciation expense) to (b) Fixed Charges, all calculated for the Company and its subsidiaries on a consolidated basis in accordance with GAAP;

 

revise the definitions of Revolving Credit Maturity Date and Term Maturity Date to mean the date five years after the Sixth Amendment Effective Date and add a definition for the 2019 Equipment Line Maturity Date to provide for the same maturity date;

 

reflect the refinancing of the Term A Loans, Term B Loans and Term C Loan as a single term loan (the “Term Loan”) on the Sixth Amendment Effective Date and, commencing on the last Business Day of December 2019, the consecutive quarterly principal installment payments changed to approximately $1.2 million; and

 

revise Section 5.01(e) of the Credit Agreement, which governs the Company’s obligation to deliver financial statements to the lender, to require the Company to provide financial statements (x) as soon as possible but in any event within 30 days of the end of each fiscal quarter, or within 30 days of the end of each calendar month if any revolving loans were outstanding in the month, (y) in connection with, and prior to, requesting any letter of credit and (z) at such other times as may be requested by the lender.

 

These debt amendments were accounted for as debt modifications. As of September 30, 2020, the Company was in compliance with all debt-related covenants under the Credit Agreement.

 

As of September 30, 2020, the Company’s Term Loan, Equipment Line and 2019 Equipment Line under the Credit Agreement had balances of $23.1 million, $6.4 million and $4.3 million, respectively. The availability under the Revolver is subject to a borrowing base, which is calculated as the sum of the Company’s eligible accounts receivable and eligible inventory as defined by the Credit Agreement. As of September 30, 2020, the borrowing base was approximately $15.5 million, which exceeded the gross available borrowing amount of $11.8 million. The following table illustrates the net availability under the Revolver as of the applicable balance sheet date (in thousands):

 

   

September 30,

   

December 31,

 
   

2020

   

2019

 

Revolver:

               

Gross availability

  $ 11,750     $ 11,750  

Outstanding draws

    -       -  

Letters of credit

    (1,750 )     (1,750 )

Landlord reserves

    (162 )     (150 )

Availability on Revolver

  $ 9,838     $ 9,850  

 

11

 

The Company had future maturities of loans and other financings as of September 30, 2020 as follows (in thousands):

 

   

2020

   

2021

   

2022

   

2023

   

2024 and thereafter

   

Total

 

Term Loan

  $ 1,154     $ 4,615     $ 4,615     $ 4,615     $ 8,074     $ 23,073  

Equipment Line

    400       1,600       1,600       1,600       1,200       6,400  

2019 Equipment Line

    214       855       855       855       1,495       4,274  

Unamortized value of the debt issuance costs

    (4 )     (17 )     (17 )     (17 )     (15 )     (70 )

Other financing

    169       725       222       -       -       1,116  

Total

  $ 1,933     $ 7,778     $ 7,275     $ 7,053     $ 10,754     $ 34,793  

 

The following is a breakdown of the Company’s current and long-term debt (in thousands):

 

September 30, 2020

 

December 31, 2019

 
                                                   
   

Current

Portion

   

Long-Term Portion

   

Total

     

Current

Portion

   

Long-Term Portion

   

Total

 

Term Loan

  $ 4,615     $ 18,458     $ 23,073  

Term Loan

  $ 5,768     $ 21,919     $ 27,687  

Equipment Line

    1,600       4,800       6,400  

Equipment Line

    1,600       6,000       7,600  

2019 Equipment Line

    855       3,419       4,274  

2019 Equipment Line

    79       1,495       1,574  

Unamortized value of debt issuance costs

    (17 )     (53 )     (70 )

Unamortized value of debt issuance costs

    (17 )     (66 )     (83 )

Other financing

    706       410       1,116  

Other financing

    652       947       1,599  

Total

  $ 7,759     $ 27,034     $ 34,793  

Total

  $ 8,082     $ 30,295     $ 38,377  

 

As of September 30, 2020, interest on the credit facility is payable at our option as a (i) Eurodollar Loan, which bears interest at a per annum rate equal to the applicable 30-day London Interbank Offered Rate (“LIBOR”) plus an applicable margin ranging from 2.00% to 3.00% or (ii) CB Floating Rate (“CBFR”) Loan, which bears interest at a per annum rate equal to the greater of (a) the lender’s prime rate or (b) LIBOR plus 2.50%, in each case, plus a margin ranging from -1.00% to 0.25% based on our leverage ratio as defined in the Credit Agreement. The actual Eurodollar Loan rate at September 30, 2020 was 2.44% (LIBOR of 0.19% plus 2.25%). The actual CBFR Loan rate at September 30, 2020 was 2.50% (lender’s prime rate of 3.25% minus 0.75%).

 

 

 

8.

Income Taxes

 

During the three and nine months ended September 30, 2020, the Company recorded provision for income taxes of less than $0.1 million and $0.1 million, respectively. The income tax provision relates principally to the Company’s state and local taxes and foreign operations in Canada. During the three and nine months ended September 30, 2019, the Company recorded expense provision for income taxes of less than $0.1 million and $0.2 million, respectively.

 

The Company’s realization of its deferred tax assets is dependent upon many factors, including, but not limited to, the Company’s ability to generate sufficient taxable income. Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. At December 31, 2019, there were cumulative losses in recent years and no assurance of future taxable income which provided the basis for the Company’s assessment that the Company will not recognize the benefits of its federal and state deferred tax assets. During 2020, primarily in the second and third quarters, the Company has generated significant pre-tax income. Management will continue to evaluate both positive and negative evidence in the fourth quarter of 2020, including actual operating results and projections of future taxable results, to assess the realization of its deferred tax assets and if a full or partial release of its valuation allowance is warranted. The Company had a full valuation allowance for all deferred tax assets at September 30, 2020 and December 31, 2019.

 

12

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act, along with earlier issued IRS guidance, includes provisions related to refundable payroll tax credits, deferral of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company assessed the impact of these CARES Act provisions and the subsequently released government guidance related to COVID-19 on our financial position and results of operations and determined their impact was not material. The Company continues to evaluate certain effects from the qualified investment property deduction. On April 15, 2020, the Company received a $4.1 million loan under the Federal Paycheck Protection Program (“PPP”) created under the CARES Act. In response to revised eligibility guidelines announced by the U.S. Small Business Administration shortly thereafter, the Company repaid this loan in full on May 7, 2020.

 

 

 

9.

Commitments, Contingencies and Litigation

 

From time to time in the ordinary course of its business, the Company may be involved in legal proceedings, the outcomes of which may not be determinable. The results of litigation 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 legal proceedings that the Company currently believes could have a material effect on the Company’s financial condition, results of operations or cash flows.

 

 

 

10.

Earnings Per Share

 

Basic income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted income 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 per share computations:

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 

Numerator:

 

2020

   

2019

   

2020

   

2019

 

Net income (in thousands)

  $ 2,940     $ 1,135     $ 6,662     $ 556  

Denominator:

                               

Weighted average common shares outstanding:

                               

Basic

    20,179,056       19,781,527       20,060,416       19,690,737  

Dilutive effect of common stock equivalents

    1,484,358       897,904       1,577,065       813,196  

Diluted

    21,663,414       20,679,431       21,637,481       20,503,933  

Net income per share:

                               

Basic

  $ 0.15     $ 0.06     $ 0.33     $ 0.03  

Diluted

  $ 0.14     $ 0.05     $ 0.31     $ 0.03  

 

For both the three and nine months ended September 30, 2020, less than 0.1 million of outstanding options and 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. For the three and nine months ended September 30, 2019, 0.1 million and less than 0.1 million, respectively, of outstanding options and 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.

 

 

 

11.

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.

 

13

 

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, 2020 and 2019 are as follows (in thousands):

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Operating lease cost

  $ 410     $ 533     $ 1,238     $ 1,425  

Variable lease cost

    64       56       253       182  

Total lease cost

  $ 474     $ 589     $ 1,491     $ 1,607  

 

Supplemental cash flow information and non-cash activity related to the Company’s leases are as follows (in thousands):

 

   

Nine Months Ended

 
   

September 30,

 
   

2020

   

2019

 

Cash paid for amounts included in the measurement of lease liabilities and ROU assets:

               

Operating cash flow from operating leases

  $ 1,130     $ 1,201  
                 

ROU assets obtained in exchange for lease obligations:

               

Operating leases

  $ 260     $ 3,338  

 

Weighted average remaining lease terms and discount rates for the Company’s leases are as follows:

 

   

As of September 30,

 
   

2020

   

2019

 
                 
   

Years

   

Years

 

Weighted average remaining lease term:

               

Operating leases

    7.1       7.5  
   

Rate

   

Rate

 

Weighted average discount rate:

               

Operating leases

    7.8 %     7.6 %

 

14

 

Future maturities of lease liabilities as of September 30, 2020 are as follows (in thousands):

 

   

Operating Leases

 

2020

  $ 371  

2021

    1,107  

2022

    1,043  

2023

    940  

2024

    948  

Thereafter

    3,166  

Total undiscounted lease payments

    7,575  

Less: Imputed interest

    (2,435 )

Total lease liabilities

  $ 5,140  

 

 

 

12.

Business Segment Information

 

During the fourth quarter of 2019, the Company reorganized its segment reporting from one reportable segment to two reportable segments, ITS and DME Services, due to changes in the Company’s internal reporting and the information evaluated by its chief operating decision-maker. 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 and direct payer rental 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, 2020 and 2019:

 

2020

                               
                   

Corporate/

         

(in thousands)

 

ITS

   

DME Services

   

Eliminations

   

Total

 
                                 

Net revenues - external

  $ 15,638     $ 9,487     $ -     $ 25,125  

Net revenues - internal

    -       1,459       (1,459 )     -  

Total net revenues

    15,638       10,946       (1,459 )     25,125  

Gross profit

    10,095       5,027       -       15,122  
                                 

Selling , general and administrative expenses

                    11,869       11,869  

Interest expense

                    (283 )     (283 )

Other income

                    8       8  

Provision for income taxes

                    (38 )     (38 )
                                 

Net income

                          $ 2,940  
                                 

Total Assets

  $ 51,547     $ 26,761     $ 2,000     $ 80,308  

Purchases of medical equipment

  $ 1,685     $ 1,487     $ -     $ 3,172  

Depreciation and amortization of intangible assets

  $ 2,694     $ 866     $ -     $ 3,560  

 

15

 

2019

                               
                   

Corporate/

         

(in thousands)

 

ITS

   

DME Services

   

Eliminations

   

Total

 
                                 

Net revenues - external

  $ 13,468     $ 8,021     $ -     $ 21,489  

Net revenues - internal

    -       968       (968 )     -  

Total net revenues

    13,468       8,989       (968 )     21,489  

Gross profit

    8,652       3,586       -       12,238  
                                 

Selling, general and administrative expenses

                    10,575       10,575  

Interest expense

                    (488 )     (488 )

Other expense

                    (11 )     (11 )

Provision for income taxes

                    (29 )     (29 )
                                 

Net income

                            1,135  
                                 

Total Assets

  $ 54,757     $ 21,138     $ 2,000     $ 77,895  

Purchases of medical equipment

  $ 5,695     $ 1,715     $ -     $ 7,410  

Depreciation and amortization of intangible assets

  $ 2,412     $ 716     $ -     $ 3,128  

 

The financial information summarized below is presented by reportable segment for the nine months ended September 30, 2020 and 2019:

 

2020

                               
                   

Corporate/

         

(in thousands)

 

ITS

   

DME Services

   

Eliminations

   

Total

 
                                 

Net revenues - external

  $ 45,369     $ 27,308     $ -     $ 72,677  

Net revenues - internal

    -       3,955       (3,955 )     -  

Total net revenues

    45,369       31,263       (3,955 )     72,677  

Gross profit

    29,480       14,283       -       43,763  
                                 

Selling , general and administrative expenses

                    35,971       35,971  

Interest expense

                    (1,018 )     (1,018 )

Other expense

                    (20 )     (20 )

Provision for income taxes

                    (92 )     (92 )
                                 

Net income

                          $ 6,662  
                                 

Total Assets

  $ 51,547     $ 26,761     $ 2,000     $ 80,308  

Purchases of medical equipment

  $ 6,705     $ 5,250     $ -     $ 11,955  

Depreciation and amortization of intangible assets

  $ 8,042     $ 2,450     $ -     $ 10,492  

 

16

 

2019

                               
                   

Corporate/

         

(in thousands)

 

ITS

   

DME Services

   

Eliminations

   

Total

 
                                 

Net revenues - external

  $ 37,182     $ 22,223     $ -     $ 59,405  

Net revenues - internal

    -       2,789       (2,789 )     -  

Total net revenues

    37,182       25,012       (2,789 )     59,405  

Gross profit

    23,482       10,453       -       33,935  
                                 

Selling, general and administrative expenses

                    31,721       31,721  

Interest expense

                    (1,436 )     (1,436 )

Other expense

                    (71 )     (71 )

Provision for income taxes

                    (151 )     (151 )
                                 

Net income

                            556  
                                 

Total Assets

  $ 54,757     $ 21,138     $ 2,000     $ 77,895  

Purchases of medical equipment

  $ 10,500     $ 4,505     $ -     $ 15,005  

Depreciation and amortization of intangible assets

  $ 6,903     $ 2,150     $ -     $ 9,053  

 

 

 

13.

COVID-19

 

On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which has spread globally and throughout the United States. With the exception of in-person visits to our customer facilities by our sales staff, the Company has continued to operate despite stay-at-home orders and other government mandated shutdowns across the United States and Canada under exceptions allowed by those orders for the healthcare industry.

 

We have taken 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 show relevant symptoms. We also continued to undertake 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 is continuing to actively monitor the situation and is in constant communication with our workforce as well as with our customers and vendors. Other specific actions we have taken include purchasing additional inventory of supplies and pumps, as well as purchasing personal protective equipment for our employees. While the Company’s business is considered critical, we are unable to predict the impact that COVID-19 will have on future periods due to numerous uncertainties. While COVID-19 has not unfavorably affected our operations to date, the extent of the impact in the future, if any, 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. A prolonged outbreak could, among other things, strain our business continuity plans, create delays in our growth and strategic initiatives, reduce our sales and marketing activities, limit our access to financing on favorable terms, increase our exposure to potential impairment charges related to long-lived and intangible assets, hinder our ability to support our clients and operate our business effectively, heighten the risk of disruption to our information and reporting systems and internal controls, including those over financial reporting and other risk management systems, or require us to incur substantial costs. We are closely monitoring the impact of COVID-19 on all aspects of our business and may take further actions as may be required by federal, state or local authorities, or that we determine are in the best interests of our employees, customers and partners. As the conditions surrounding COVID-19 continue to evolve rapidly, we will continue to actively manage our response in collaboration with customers, government officials and stakeholders, and assess any potential impacts to our financial position and operating results, as well as adverse developments in our business.

 

17

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The terms “InfuSystem”, the “Company”, “we”, “our” and “us” used herein refer to InfuSystem Holdings, Inc. and its subsidiaries.

 

Cautionary Statement Regarding Forward-Looking Statements

 

Certain statements contained in this quarterly report on Form 10-Q are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “strategy,” “future,” “likely,” variations of such words and other similar expressions, as they relate to the Company, are intended to identify forward-looking statements. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company is identifying certain factors that could cause actual results to differ, perhaps materially, from those indicated by these forward-looking statements. Those factors, risks and uncertainties include, but are not limited to, the effect of the coronavirus (COVID-19) pandemic on our business, potential changes in healthcare payer mix and overall healthcare reimbursement, including the Centers for Medicare and Medicaid Services (“CMS”) competitive bidding and fee schedule reductions, sequestration, concentration of customers, increased focus on early detection of cancer, competitive treatments, dependency on Medicare Supplier Number, availability of chemotherapy drugs, global financial conditions, changes and enforcement of state and federal laws, natural forces, competition, dependency on suppliers, risks in acquisitions & joint ventures, U.S. Healthcare Reform, relationships with healthcare professionals and organizations, technological changes related to infusion therapy, the Company’s ability to implement information technology improvements and to respond to technological changes, the ability of the Company to successfully integrate acquired businesses, dependency on key personnel, dependency on banking relations and the ability to comply with our credit facility covenants, and other risks associated with our common stock, as well as any litigation in which the Company may be involved from time to time; and other risk factors as discussed in the Company’s annual report on Form 10-K for the year ended December 31, 2019, this quarterly report on Form 10-Q and in other filings made by the Company from time to time with the Securities and Exchange Commission (“SEC”). Our annual report on Form 10-K is available on the SEC’s EDGAR website at www.sec.gov, and a copy may also be obtained by contacting the Company. All forward-looking statements made in this Form 10-Q speak only as of the date of this report. We do not intend, and do not undertake any obligation, to update any forward-looking statements to reflect future events or circumstances after the date of such statements, except as required by law.

 

Overview

 

We are a leading national health care service provider, facilitating outpatient care for Durable Medical Equipment manufacturers and health care providers. We provide our products and services to hospitals, oncology practices, ambulatory surgery centers, and other alternate site health care providers. Our headquarters is in Rochester Hills, Michigan, and we operate our business from a total of five locations in the United States and Canada. We deliver local, field-based customer support as well as operate pump service and repair Centers of Excellence in Michigan, Kansas, California, Massachusetts and Ontario, Canada. InfuSystem, Inc., a wholly-owned subsidiary of the Company, is accredited by the Community Health Accreditation Program while First Biomedical, a wholly-owned subsidiary of the Company, is ISO certified.

 

InfuSystem competes for and retains its business primarily on the basis of its long participation and strong reputation in the Durable Medical Equipment space, its long-standing relationships with Durable Medical Equipment manufacturers and its health care provider customers, and the high levels of service it provides. Current barriers to entry for potential competitors are created by our (i) growing number of third-party payer networks under contract; (ii) economies of scale, which allow for predictable reimbursement and less costly purchase and management of the pumps, respectively; (iii) established, long-standing relationships as a provider of pumps to outpatient oncology practices in the U.S. and Canada; (iv) fleet of ambulatory and large volume infusion pumps for rent and for sale, which may allow us to be more responsive to the needs of physicians, outpatient oncology practices, hospitals, outpatient surgery centers, homecare practices, patient rehabilitation centers and patients than a new market entrant; (v) five geographic locations in the U.S. and Canada that allow for same day or next day delivery of pumps; and (vi) pump repair and service capabilities at all of these facilities. We do not perform any research and development on pumps, but we have made, and continue to make investments in our information technology.

 

During the fourth quarter of 2019, the Company reorganized its segment reporting from one reportable segment to two reportable segments, Integrated Therapy Services (“ITS”) and Durable Medical Equipment Services (“DME Services”), due to changes in our internal reporting and the information evaluated by our chief operating decision-maker.

 

18

 

The segment gross margin metric focused on in this Management’s Discussion and Analysis (“MD&A”) was calculated after adjusting for certain inter-segment cost allocations, whereas the segment gross margin metric focused on in the MD&A presented in our Annual Report for the fiscal year ended December 31, 2019 on Form 10-K and our quarterly report for the quarterly period ended March 31, 2020 on Form 10-Q was calculated before inter-segment cost allocations. The change reflects a closer alignment of the data presented to and the information used by the Company’s chief operating decision-maker for assessing allocations of capital and more closely reflects the performance of each business segment.

 

ITS Segment

 

Our ITS segment’s core purpose is to seek opportunities to leverage our unique know-how in clinic-to-home health care involving Durable Medical Equipment, our logistics and billing capabilities, our growing network of third-party payers under contract, and our clinical and biomedical capabilities. This leverage may take the form of new products and/or services, strategic alliances, joint ventures and/or acquisitions. The leading service within our ITS segment is to supply electronic ambulatory infusion pumps and associated disposable supply kits to private oncology clinics, infusion clinics and hospital outpatient oncology clinics to be utilized in the treatment of a variety of cancers including colorectal cancer and other disease states (“Oncology Business”). Colorectal cancer is the fourth most prevalent form of cancer in the United States, according to the American Cancer Society, and the standard of care for the treatment of colorectal cancer relies upon continuous chemotherapy infusions delivered via ambulatory infusion pumps. One of the primary goals for the ITS segment is to expand into treatment of other cancers. There are a number of approved treatment protocols for pancreatic, head and neck, esophageal and other cancers, as well as other disease states which present opportunities for growth. There are also a number of other drugs currently approved by the U.S. Food and Drug Administration, as well as agents in the pharmaceutical development pipeline, which we believe could potentially be used with continuous infusion protocols for the treatment of diseases other than colorectal cancer. Additional drugs or protocols currently in clinical trials may also obtain regulatory approval over the next several years. If these new drugs or protocols obtain regulatory approval for use with continuous infusion protocols, we expect the pharmaceutical companies to focus their sales and marketing efforts on promoting the new drugs and protocols to physicians.

 

Furthermore, our Oncology Business focuses mainly on the continuous infusion of chemotherapy. Continuous infusion of chemotherapy can be described as the gradual administration of a drug via a small, lightweight, portable infusion pump over a prolonged period of time. A cancer patient can receive his or her medicine anywhere from one to 30 days per month depending on the chemotherapy regimen that is most appropriate to that individual’s health status and disease state. This may be followed by periods of rest and then repeated cycles with treatment goals of progression-free disease survival. This drug administration method has replaced intravenous push or bolus administration in specific circumstances. The advantages of slow continuous low doses of certain drugs are well documented. Clinical studies support the use of continuous infusion chemotherapy for decreased toxicity without loss of anti-tumor efficacy. The 2015 National Comprehensive Cancer Network Guidelines recommend the use of continuous infusion for treatment of numerous cancer diagnoses. We believe that the growth of continuous infusion therapy is driven by three factors: evidence of improved clinical outcomes; lower toxicity and side effects; and a favorable reimbursement environment.

 

We believe that oncology practices have a heightened sensitivity to providing quality service and whether they are reimbursed for services they provide. Simultaneously, CMS and private insurers are increasingly focused on evidence-based medicine to inform their reimbursement decisions — that is, aligning reimbursement with clinical outcomes and adherence to standards of care. Continuous infusion therapy is a main component of the standard of care for certain cancer types because clinical evidence demonstrates superior outcomes. Payers’ recognition of this benefit is reflected in their relative reimbursement policies for clinical services related to the delivery of this care.

 

Additional areas of growth for our ITS segment are as follows:

 

 

Pain Management - providing our ambulatory pumps, products, and services for pain management in the area of post-surgical continuous peripheral nerve block.

 

Negative Pressure Wound Therapy (“NPWT”) - as announced in February 2020, NPWT includes providing the Durable Medical Equipment, related consumables, overseeing logistics, biomedical services, and managing third-party billing of the U.S. home healthcare market, which as a subset of the broader NPWT market, has an estimated addressable home healthcare market of $600 million per year.

 

Acquisitions - we believe there are additional opportunities, beyond our acquisition of Ciscura Holding Company, Inc., and its subsidiaries (“Ciscura”) in April 2015, to acquire smaller, regional health care service providers, in whole or part that perform similar services to us but do not have the national market access, network of third-party payer contracts or operating economies of scale that we currently enjoy.

 

Information technology-based services - we also plan to continue to capitalize on key new information technology-based services such as EXPRESS, InfuSystem Mobile, InfuBus or InfuConnect, Pump Portal and BlockPain Dashboard®.

 

19

 

The payer environment within our ITS segment is in a constant state of change. We continue to extend our considerable breadth of payer networks under contract as patients move into different insurance coverages, including Medicaid and Insurance Marketplace products. In some cases, this may slightly reduce our aggregate billed revenues payment rate but result in an overall increase in collected revenues, due to a reduction in concessions. Consequently, we are increasingly focused on revenues net of concessions.

 

DME Services Segment

 

Our DME Services segment’s core service is to (i) sell or rent new and pre-owned pole-mounted and ambulatory infusion pumps; (ii) sell treatment-related consumables; and (iii) provide biomedical recertification, maintenance and repair services for oncology practices as well as other alternate site settings including home care and home infusion providers, skilled nursing facilities, pain centers and others. We also provide these products and services to customers in the hospital market. We purchase new and pre-owned pole-mounted and ambulatory infusion pumps from a variety of sources on a non-exclusive basis. We repair, refurbish and provide biomedical certification for the devices as needed. The pumps are then available for sale, rental or to be used within our ambulatory infusion pump management service.

 

COVID-19 Update

 

On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which has spread globally and throughout the United States. We have taken 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 show relevant symptoms. We also continued to undertake 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 is continuing to actively monitor the situation and is in constant communication with our workforce as well as with our customers and vendors. While COVID-19 has not unfavorably affected our operations to date, the extent and nature of the impact in the future, if any, 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. We are continuing to closely monitor the impact of COVID-19 on all aspects of our business and may take further actions as may be required by federal, state or local authorities, or that we determine are in the best interests of our employees, customers and partners. As the conditions surrounding COVID-19 continue to evolve rapidly, we will continue to actively manage our response in collaboration with customers, government officials and stakeholders, and assess any potential impacts to our financial position and operating results, as well as adverse developments in our business. For further information regarding the effect of COVID-19 on the Company, please see Part II, Item 1A. Risk Factors to this Form 10-Q, which is incorporated herein by reference.

 

COVID-19 Comprehensive Financial Impacts

 

The COVID-19 global pandemic has caused significant disruption to the United States and global economies and has severely impacted the overall healthcare industry and the related supply chain.  The focus on preparing and treating large numbers of COVID-19 patients has resulted in significant shifts in demand and related shortages in certain types of medical equipment, including infusion pumps, while at the same time reducing capacity for non-COVID-19 services such as elective surgeries.  These impacts have created a significant net favorable dynamic for InfuSystem resulting in increased net revenues and margins in certain of our service lines only partially offset by reductions in others during the 2020 second and third quarterly periods.  Some of these benefits are not expected to occur in future quarters, such as elevated levels of sales of new and pre-owed medical equipment, whereas some are expected to continue but partially diminish over time, including a portion of the increased volume of rental revenues.  COVID-19 has also heightened potential risks that did not impact the current quarter but may impact the Company on a delayed basis such as an unfavorable impact to payor mix caused by extended periods of high unemployment rates in the United States and an increased number of uninsured patients.  It is uncertain what impact the second wave of COVID-19 currently underway in the United States will have on the demand for our products and services.  However, we continue to prepare for disruptions in the current and future periods, both positive and negative. 

 

20

 

InfuSystem Holdings, Inc. Results of Operations for the Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019

 

The following represents the Company’s results of operations for the three months ended September 30, 2020 and 2019.

 

   

Three Months Ended

         
   

September 30,

   

Better/

 

(in thousands, except share and per share data)

 

2020

   

2019

   

(Worse)

 
                         

Net revenues:

                       

ITS

  $ 15,638     $ 13,468     $ 2,170  

DME Services (inclusive of inter-segment revenues)

    10,946       8,989       1,957  

Less: elimination of inter-segment revenues

    (1,459 )     (968 )     (491 )

Total

    25,125       21,489       3,636  

Gross profit (exclusive of certain inter-segment allocations):

                       

ITS

    11,554       9,620       1,934  

DME Services

    3,568       2,618       950  

Total

    15,122       12,238       2,884  

Gross profit (inclusive of certain inter-segment allocations) (a):

                       

ITS

    10,095       8,652       1,443  

DME Services

    5,027       3,586       1,441  

Total

    15,122       12,238       2,884  
                         

Selling, general and administrative expenses

                       

Provision for doubtful accounts

    11       160       149  

Amortization of intangibles

    1,075       1,077       2  

Selling and marketing

    2,196       2,402       206  

General and administrative

    8,587       6,936       (1,651 )

Total selling, general and administrative expenses

    11,869       10,575       (1,294 )
                         

Operating income

    3,253       1,663       1,590  
                         

Other expense

    (275 )     (499 )     224  
                         

Income before income taxes

    2,978       1,164       1,814  

Provision for income taxes

    (38 )     (29 )     (9 )
                         

Net income

  $ 2,940     $ 1,135     $ 1,805  
                         

Net income per share:

                       

Basic

  $ 0.15     $ 0.06     $ 0.09  

Diluted

  $ 0.14     $ 0.05     $ 0.08  

Weighted average shares outstanding:

                       

Basic

    20,179,056       19,781,527       397,529  

Diluted

    21,663,414       20,679,431       983,983  

 

(a) Inter-segment allocations are for cleaning and repair services performed on medical equipment.

  

 

Net Revenues

 

Net revenues for the quarter ended September 30, 2020 (“third quarter of 2020”) were $25.1 million, an increase of $3.6 million, or 16.9%, compared to $21.5 million for the quarter ended September 30, 2019 (“third quarter of 2019”).  The increase was due to continued market penetration in Oncology and a strong market demand for infusion pumps in the DME Services segment.  Increased net revenues were achieved in both the ITS and DME Services segments.

 

21

 

ITS

 

ITS net revenue of $15.6 million increased $2.2 million, or 16.1%, during the third quarter of 2020 as compared to the prior year period. This increase was primarily attributable to growth in the Company’s customer base due to favorable changes in the competitive environment for oncology services, improved third party payor billing throughput and other market related organic growth. Although less prevalent than the 2020 second quarter, the pain management business continued to be unfavorably impacted by COVID-19 related reduced volumes of orthopedic surgeries in certain regions of the United States. Despite this impact, pain management net revenue for the 2020 third quarter was about the same as prior year due to market penetration achieved during the 2019 fourth quarter and first half of 2020.

 

DME Services

 

DME Services net revenue of $9.5 million increased $1.5 million, or 18.3%, during the third quarter of 2020 as compared to the prior year period.  This performance was driven by strong market demand for infusion pumps needed to treat high numbers of COVID-19 patients, expansion of our market share with national home infusion service providers and the addition of new devices to our product offerings stemming from new partnerships with certain medical device manufacturers.  The demand mainly benefited rental revenues, which increased by $1.1 million.  Sales of new and pre-owned medical equipment returned to normal levels during the 2020 third quarter, down from the peak amounts shipped during the 2020 second quarter.

 

Gross Profit (inclusive of certain inter-segment allocations)

 

Gross profit for the third quarter of 2020 of $15.1 million increased $2.9 million, or 23.6%, from $12.2 million for the third quarter of 2019. The increase was driven by the increase in net revenues and a higher gross profit as a percentage of net revenue (“gross margin”). Both operating segments contributed to these improvements. Gross margin increased to 60.2% during the third quarter of 2020 as compared to 57.0% during the prior year, an increase of 3.2%.

 

ITS

 

ITS gross profit was $10.1 million, during the third quarter of 2020, representing an increase of $1.5 million, or 16.7%, compared to the prior year. The improvement reflected an increase in net revenues and a higher gross margin which improved to 64.6%, an increase of 0.4%, from the prior year. The higher gross margin was the result of improved leverage of fixed costs, including medical equipment depreciation, and a better payor rate mix.

 

DME Services

 

DME Services gross profit during the third quarter of 2020 was $5.0 million, representing an increase of $1.4 million, or 40.2%, over the prior year. This increase was due to the COVID-19 related increase in net revenues from medical equipment sales and rental revenue and a higher gross margin. The DME gross margin was 53.0% during the current quarter which was 8.3% higher than the prior year. This increase was the result of improved gross margin mix associated with higher rental revenues.

 

Provision for Doubtful Accounts

 

Provision for doubtful accounts for the third quarter of 2020 was less than $0.1 million, a decrease of $0.1 million, compared to the third quarter of 2019. We did not incur any significant disruptions to payments from our customers during the third quarter of 2020 that can be directly associated with COVID-19; however, we cannot be certain that business disruptions associated with COVID-19 will not unfavorably impact future customer collections or our ability to recover unreserved accounts receivable balances.

 

Selling and Marketing Expenses

 

Selling and marketing expenses for the third quarter of 2020 and the third quarter of 2019 were approximately $2.2 million and $2.4 million, respectively, representing a modest decrease. Selling and marketing expenses as a percentage of net revenues decreased to 8.7% compared to the same prior year period at 11.2%. This decrease reflected COVID-19 related lower customer travel and entertainment expenses, a shift in the proportion of net revenue favoring the DME Services segment, which has a lower commission to sales ratio than the ITS Services segment, and improved net revenue leverage of fixed selling and marketing expenses. Selling and marketing expenses during these periods consisted of sales personnel salaries, commissions and associated fringe benefit and payroll-related items, marketing, overall travel and entertainment and other miscellaneous expenses.

 

22

 

General and Administrative Expenses

 

General and administrative (“G&A”) expenses for the third quarter of 2020 were $8.6 million, an increase of 23.8% from $6.9 million for the third quarter of 2019. G&A expenses during these periods consisted primarily of accounting, administrative, third-party payer billing and contract services, customer service, nurses on staff, new product services, service center personnel salaries, fringe benefits and other payroll-related items, professional fees, legal fees, stock-based compensation, insurance and other miscellaneous items. The increase of $1.7 million was largely due to an increase in employee compensation related expenses of $1.4 million and higher general business expenses of $0.3 million. The higher personnel expenses reflect higher staff levels supporting the increase in revenues, higher estimated short and long-term management incentive compensation and annual inflationary increases. The higher general business expenses include higher rent and deprecation associated with the relocation of our headquarters in 2019, higher costs for telecommunication services, higher office expenses and increased premiums associated with the company’s general risk insurance policies. These increases were partially offset by lower outside services expenses and lower travel and entertainment expenses totaling $0.1 million. G&A expenses as a percentage of net revenues for the current quarter, increased to 34.2% compared to 32.3% for the prior year mainly reflecting the year-over-year increases partially offset by improved net revenue leverage over fixed costs.

 

Other Income and Expenses

 

During the third quarter of 2020, other income and expense included interest expense of $0.3 million, a decrease of $0.2 million, or 42.0%, compared to the third quarter of 2019. This decrease resulted from lower weighted average interest rates on our outstanding debt in 2020 as compared to 2019, partially offset by the impact from higher average outstanding borrowings during the second quarter of 2020.

 

Provision for Income Taxes

 

During the third quarter of 2020, we recorded a provision for income taxes of less than $0.1 million, representing an effective tax rate of 1.3% on pre-tax income totaling $3.0 million, compared to a provision for income taxes of less than $0.1 million, representing an effective tax rate of 2.5% on pre-tax income totaling $1.2 million, for the third quarter of 2019. The effective tax rates differed from the U.S. statutory rates during both periods due mainly to the availability of net operating losses almost fully offsetting the current tax provision in most jurisdictions we operate in and a decrease in the valuation reserve recorded on our net deferred tax assets which fully offset our deferred tax provisions for each period. During 2020, primarily in the second and third quarters, the Company has generated significant pre-tax income. Management will continue to evaluate both positive and negative evidence in the fourth quarter of 2020, including actual operating results and projections of future taxable results, to assess the realization of its deferred tax assets and if a full or partial release of its valuation allowance is warranted. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in response to the COVID-19 pandemic, which provides numerous tax provisions and other stimulus measures. The Company assessed the impact of these CARES Act provisions and the subsequently released government guidance related to COVID-19 on our financial position and results of operations and determined their impact was not material. The Company continues to evaluate certain effects from the qualified investment property deduction.

 

23

 

InfuSystem Holdings, Inc. Results of Operations for the Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019

 

The following represents the Company’s results of operations for the nine months ended September 30, 2020 and 2019.

 

   

Nine Months Ended

         
   

September 30,

   

Better/

 

(in thousands, except share and per share data)

 

2020

   

2019

   

(Worse)

 
                         

Net revenues:

                       

ITS

  $ 45,369     $ 37,182     $ 8,187  

DME Services (inclusive of inter-segment revenues)

    31,263       25,012       6,251  

Less: elimination of inter-segment revenues

    (3,955 )     (2,789 )     (1,166 )

Total

    72,677       59,405       13,272  

Gross profit (exclusive of certain inter-segment allocations):

                       

ITS

    33,435       26,271       7,164  

DME Services

    10,328       7,664       2,664  

Total

    43,763       33,935       9,828  

Gross profit (inclusive of certain inter-segment allocations) (a):

                       

ITS

    29,480       23,482       5,998  

DME Services

    14,283       10,453       3,830  

Total

    43,763       33,935       9,828  
                         

Selling, general and administrative expenses

                       

Provision for doubtful accounts

    534       (30 )     (564 )

Amortization of intangibles

    3,225       3,326       101  

Selling and marketing

    7,263       7,480       217  

General and administrative

    24,949       20,945       (4,004 )

Total selling, general and administrative expenses

    35,971       31,721       (4,250 )
                         

Operating income

    7,792       2,214       5,578  
                         

Other expense

    (1,038 )     (1,507 )     469  
                         

Income before income taxes

    6,754       707       6,047  

Provision for income taxes

    (92 )     (151 )     59  
                         

Net income

  $ 6,662     $ 556     $ 6,106  
                         

Net income per share:

                       

Basic

  $ 0.33