InfuSystem Holdings, Inc - Quarter Report: 2019 September (Form 10-Q)

PART I—FINANCIAL INFORMATION

INFUSYSTEM HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

INFUSYSTEM HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 

(UNAUDITED)

INFUSYSTEM HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF

STOCKHOLDERS’ EQUITY

(UNAUDITED)

INFUSYSTEM HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

INFUSYSTEM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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, potential changes in overall healthcare reimbursement, including the Centers for Medicare and Medicaid Services 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 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, 2018 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 provider of infusion pumps and related products and services for patients in the home, oncology clinics, ambulatory surgery centers and other sites of care from five locations in the United States and Canada. Through our operating subsidiaries, including InfuSystem, Inc. (“ISI”) and First Biomedical, Inc. (“First Biomedical”), we provide our products and services to hospitals, oncology practices and facilities and other alternate site health care providers. Headquartered in Madison Heights, Michigan, we deliver local, field-based customer support and also operate pump service and repair Centers of Excellence in Michigan, Kansas, California, Massachusetts and Ontario, Canada. ISI is accredited by the Community Health Accreditation Program while First Biomedical is ISO certified.

Our core service is to supply electronic ambulatory infusion pumps and associated disposable supply kits to oncology clinics, infusion clinics and hospital outpatient chemotherapy clinics to be utilized in the treatment of a variety of cancers including colorectal cancer and other disease states. Colorectal cancer is the third 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.

In addition, we sell or rent new and pre-owned pole mounted and ambulatory infusion pumps to, and 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 small-hospital market.

We are currently evaluating our internal financial reporting and the discrete financial measures utilized by the chief operating decision maker, which we expect to result in reportable segment disclosure for the year ended December 31, 2019 or the first quarter ended March 31, 2020.

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.

Our payor environment is in a constant state of change. Management is intent on extending its considerable breadth of payor contracts 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, effectively lessening bad debt expense on a micro level, but due to the mix of all payors may not have an impact on overall bad debt expense. Consequently, we are increasingly focused on net revenues, which include a reduction for bad debt.

In the midst of changes in the healthcare arena, we believe that we will support our overall business strategy discussed above by (i) focusing on supporting recurring revenues by increasing our pump fleet; (ii) improving liquidity and strengthening the balance sheet by keeping debt levels comparable to our operations; (iii) improving internal operational efficiencies; (iv) increasing our product and services offerings; (v) enhancing our technology offerings to the patients and providers of care; and (vi) investigating synergistic acquisitions.

Results of Operations for the Three Months Ended September 30, 2019 Compared to the Three Months Ended September 30, 2018

Net Revenues

Our net revenues for the quarter ended September 30, 2019 were $21.5 million, an increase of $4.8 million, or 28.9%, compared to $16.7 million for the quarter ended September 30, 2018. During this period, net revenues from rentals increased $3.5 million, or 25.5%, compared to the same 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 and growth in its pain management business. Net revenues from product sales for the three months ended September 30, 2019 were $4.2 million, an increase of $1.3 million, or 45.0%, compared to the same period of 2018. This increase was primarily the result of an increase in equipment sales of $1.0 million and disposable sales of $0.3 million due to the timing of pump sales and the Company’s efforts to expand its product offering.

Gross Profit

Gross profit for the quarter ended September 30, 2019 was $12.2 million, an increase of $2.6 million, or 26.5%, compared to the quarter ended September 30, 2018. As a percentage of revenues, gross profit for the quarter ended September 30, 2019 was 57.0%, down from 58.0% for the same prior year period primarily due to growth in the Company’s lower margin product sales and increased supply costs in anticipation of future growth. The increase in gross profit for the period was mainly due to the increase in net revenues for the period, which was partially offset by an increase of $0.9 million in the costs of pumps and accessories sold, $0.4 million in the costs of supply and pump rentals, $0.4 million in pump depreciation expense, $0.3 million in the costs of disposables sold, $0.1 million in service, repair and maintenance costs and $0.1 million in freight costs.

Amortization of Intangible Assets

Amortization of intangible assets for the quarter ended September 30, 2019 was $1.1 million, a decrease of $0.1 million compared to the same prior year period. This decrease is attributable to certain intangible assets becoming fully amortized, thus, the related amortization of those projects no longer existed in the third quarter of 2019.

Selling and Marketing Expenses

Selling and marketing expenses for the quarter ended September 30, 2019 were $2.4 million, an increase of $0.1 million, or 3.4%, compared to $2.3 million for the quarter ended September 30, 2018. This increase was largely attributable to an increase in commission expense of $0.2 million, which was partially offset by a decrease in salaries, travel and related expenses of $0.1 million. Selling and marketing expenses during these periods consisted of sales personnel salaries, commissions and associated fringe benefits and payroll-related items, marketing, share-based compensation, travel and entertainment and other miscellaneous expenses.

General and Administrative Expenses

General and Administrative (“G&A”) expenses for the quarter ended September 30, 2019 were $7.1 million, an increase of $0.8 million, or 12.9%, from $6.3 million for the quarter ended September 30, 2018. The increase in G&A expenses versus the comparable prior year period was primarily due to increases in employee compensation related expenses of $0.7 million and increases of $0.1 million each for outside services expense, rent expense, telephone expense and accounting fees. These increases were partially offset by a decrease in legal fees and strategic alternative costs of $0.4 million. The increase in employee compensation expenses was primarily attributable to a $0.9 million increase in salaries and related expenses, partially offset by a $0.2 million decrease in stock compensation expense.

Other Expenses

During the quarter ended September 30, 2019, we incurred interest expense of $0.5 million, an increase of $0.1 million, or 31.9%, compared to the comparable prior year period. This was a net result of the new term debt and equipment financing for capital expenditures that were entered into during the second half of 2018 and first half of 2019 and higher blended interest rates in 2019 as compared to 2018.

Income Taxes

During both the three months ended September 30, 2019 and 2018, the Company recorded expense provision for income taxes of less than $0.1 million. The provision for income taxes relates principally to the Company’s state and local taxes and foreign operations in Canada.

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. Accordingly, at both September 30, 2019 and December 31, 2018, the Company had a full valuation allowance for all deferred tax assets, as management determined that it is not more likely than not the Company will recognize the benefits of its federal and state deferred tax assets.

Results of Operations for the Nine Months Ended September 30, 2019 Compared to the Nine Months Ended September 30, 2018

Net Revenues

Our net revenues for the nine months ended September 30, 2019 were $59.4 million, an increase of $9.8 million, or 19.8%, compared to $49.6 million for the nine months ended September 30, 2018. During this period, net revenues from rentals increased $6.3 million, or 15.0%, compared to the same 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 and growth in its pain management business. Net revenues from product sales for the nine months ended September 30, 2019 were $10.8 million, an increase of $3.5 million, or 47.6%, compared to the same period of 2018. This increase was primarily the result of an increase in equipment sales of $2.2 million and disposable sales of $1.3 million due to the timing of pump sales and the Company’s efforts to expand its product offering.

Gross Profit

Gross profit for the nine months ended September 30, 2019 was $33.9 million, an increase of $4.3 million, or 14.7%, compared to the nine months ended September 30, 2018. As a percentage of revenues, gross profit for the nine months ended September 30, 2019 was 57.1%, down from 59.7% for the same prior year period primarily due to growth in the Company’s lower margin product sales and increased supply costs in anticipation of future growth. The increase in gross profit for the period was mainly due to the increase in net revenues for the period, which was partially offset by an increase of $1.9 million in the costs of pumps and accessories sold, $1.3 million in the costs of supply and pump rentals, $1.1 million in the costs of disposables sold, $0.9 million in pump depreciation expense, $0.2 million in service, repair and maintenance costs and $0.1 million in freight costs.

Amortization of Intangible Assets

Amortization of intangible assets for the nine months ended September 30, 2019 was $3.3 million, a decrease of $0.2 million compared to the same prior year period. This decrease is attributable to certain intangible assets becoming fully amortized, thus, the related amortization of those projects no longer existed in the nine months ended September 30, 2019.

Selling and Marketing Expenses

Selling and marketing expenses for the nine months ended September 30, 2019 were $7.5 million, an increase of $0.5 million, or 7.6%, compared to $7.0 million for the nine months ended September 30, 2018. The increase was largely attributable to an increase in commission expense of $0.4 million, advertising costs of $0.1 million and travel and related expenses of $0.1 million in support of revenue growth, partially offset by a $0.1 million decrease in salaries and related expenses. Selling and marketing expenses during these periods consisted of sales personnel salaries, commissions and associated fringe benefits and payroll-related items, marketing, share-based compensation, travel and entertainment and other miscellaneous expenses.

General and Administrative Expenses

G&A expenses for the nine months ended September 30, 2019 were $20.9 million, an increase of $2.1 million, or 11.0%, from $18.8 million for the same prior year period. The increase in G&A expenses versus the comparable prior year period was primarily due to increases in employee compensation related expenses of $1.7 million, outside services of $0.4 million, rent expense of $0.2 million and accounting fees of $0.2 million. These increases were partially offset by a decrease in legal and strategic alternative costs of $0.4 million. The increase in employee compensation related expenses was primarily attributable to a $1.3 million increase in salaries and related expenses, $0.3 million net increase in the incentive bonus accrual and a $0.1 million increase of stock compensation expense.

Other Expenses

During the nine months ended September 30, 2019, we incurred interest expense of $1.4 million, an increase of $0.5 million, or 46.4%, compared to the comparable prior year period. This was a net result of the new term debt and equipment financing for capital expenditures that were entered into during the second half of 2018 and first half of 2019 and higher blended interest rates in 2019 as compared to 2018.

Income Taxes

During the nine months ended September 30, 2019, the Company recorded provision for income taxes of $0.2 million compared to provision for income taxes of $0.1 million for the same comparable prior year period. The provision for income taxes relates principally to the Company’s state and local taxes and foreign operations in Canada.

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. Accordingly, at both September 30, 2019 and December 31, 2018, the Company had a full valuation allowance for all deferred tax assets, as management determined that it is not more likely than not the Company will recognize the benefits of its federal and state deferred tax assets.

Liquidity and Capital Resources

Overview:

We finance our operations and capital expenditures with internally-generated cash from operations and borrowings under our existing credit agreement (the “Credit Agreement”) or other financing arrangements. As of September 30, 2019, we had cash and cash equivalents of $3.2 million and $9.2 million of availability on our revolving credit facility under the Credit Agreement (the “Revolver”) compared to $4.3 million of cash and cash equivalents and $9.2 million of availability on our Revolver at December 31, 2018. Our liquidity and borrowing plans are established to align with our financial and strategic planning processes and ensure we have the necessary funding to meet our operating commitments, which primarily include the purchase of pumps and inventory, and payroll and general expenses. We also take into consideration our overall capital allocation strategy which includes investment for future growth, share repurchases and potential acquisitions. We believe we have adequate sources of liquidity and funding available for at least the next year, however, there are a number of factors that may negatively impact our available sources of funds. The amount of cash generated from operations will be dependent upon factors such as the successful execution of our business plan and general economic conditions.

  Long-Term Debt Activities:

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, 2019 was $1.8 million.

On February 5, 2019, the Company and its primary lender entered into the fifth amendment (the “Fifth Amendment”) to the Credit Agreement. Among other things, the Fifth Amendment amended the Credit Agreement to (1) increase our borrowing capacity under our existing equipment line to $8.0 million, (2) revise the definition of earnings before interest, taxes, depreciation and amortization, a non-GAAP financial measure, to include additional add-back adjustments for the years ended or ending December 31, 2018 and 2019, (3) revise the definition of fixed charge coverage ratio for the year ending December 31, 2019 to include an unfinanced portion of capital expenditures of up to $7.0 million for the year ending December 31, 2019, (4) revise the Credit Agreement’s maximum permitted indebtedness to finance the acquisition, construction or improvement of any fixed or capital assets and (5) revise the maximum leverage ratio for each of the quarters during December 31, 2018 and December 31, 2019.

As of September 30, 2019, our term loans and equipment line under the Credit Agreement had balances of $27.7 million and $8.0 million, respectively. The net availability under the Revolver is based upon our eligible accounts receivable and eligible inventory and is computed as follows (in thousands):

As of September 30, 2019, 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%. The actual Eurodollar Loan rate at September 30, 2019 was 4.81% (LIBOR of 2.06% plus 2.75%). The actual CBFR Loan rate at September 30, 2019 was 5.00% (lender’s prime rate of 5.00%).

As of September 30, 2019, the Company was in compliance with all debt-related covenants under the Credit Agreement.

On November 7, 2019, the Company and its primary lender entered into the Sixth Amendment to the Credit Agreement. Among other things, the Sixth Amendment amended the Credit Agreement to (1) provide for a new equipment line of $10.0 million in addition to our existing equipment line of $8.0 million, (2) increase the commitment under the Revolver to $11.8 million, (3) revise certain definitions, (4) refinance outstanding term loans into a single term loan and (5) revise the Company’s financial statement delivery requirements. See Note 12, Subsequent Events, to the accompanying unaudited condensed consolidated financial statements for further details regarding the Sixth Amendment to the Credit Agreement.

Share Repurchase Program

On September 30, 2019, our Board of Directors approved a stock repurchase program (the “Share Repurchase Program”) authorizing the Company to repurchase up to $5.0 million of the Company’s outstanding common stock through 2020. The repurchase program will be 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 Credit Agreement. As of September 30, 2019, we had availability of $9.2 million on our Revolver, all of which could be used to fund stock repurchases, subject to the restrictions and limitations of our Credit Agreement. Repurchases under the program may take place in the open market or in privately negotiated transactions and may be made under a Rule 10b5-1 plan. The repurchase program does not obligate the Company to repurchase shares and may be suspended, terminated, or modified at any time.

As of September 30, 2019, the Company has not repurchased any shares under the Share Repurchase Program.

 Cash Flows:

        Operating Cash Flow. Net cash provided by operating activities for the nine months ended September 30, 2019 was $9.5 million compared to net cash provided by operating activities of $8.2 million for the nine months ended September 30, 2018. This increase was primarily attributable to the favorable change in net income (loss) adjusted for non-cash items and the positive cash flow effect of a net incremental increase in accounts payable and other liabilities, which was partially offset by an incremental increase in accounts receivable.

        Investing Cash Flow. Net cash used in investing activities was $14.2 million for the nine months ended September 30, 2019 compared to net cash used in investing activities of $2.2 million for the nine months ended September 30, 2018. The increase in net cash used was due to a $11.9 million increase in cash used to purchase medical equipment and other assets and a $0.1 million decrease in proceeds from the sales of medical equipment.

        Financing Cash Flow. Net cash provided by financing activities for the nine months ended September 30, 2019 was $3.5 million compared to net cash used in financing activities of $5.6 million for the nine months ended September 30, 2018. The net increase in net cash provided was primarily attributable to cash proceeds from our equipment line and proceeds received as part of a new financing arrangement in 2019 and our decision to pay down our term loan debt and repurchase shares of common stock as part of a share repurchase program in 2018.

Critical Accounting Policies and Estimates

The unaudited condensed consolidated financial statements are prepared in conformity with U.S. GAAP, which require the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses in the periods presented. We believe that the accounting estimates employed are appropriate and resulting balances are reasonable; however, due to inherent uncertainties in making estimates, actual results could differ from the original estimates, requiring adjustments to these balances in future periods. The critical accounting estimates that affect the unaudited condensed consolidated financial statements and the judgments and assumptions used are consistent with those described in the notes to the audited consolidated financial statements in our annual report on Form 10-K for the year ended December 31, 2018, with the exception of our adoption of Topic 842. See Note 11 to the accompanying unaudited condensed consolidated financial statements for further details regarding our adoption of Topic 842.

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

InfuSystem is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.

Evaluation of Disclosure Controls and Procedures and Changes in Internal Control over Financial Reporting

We maintain a set of disclosure controls and procedures designed to ensure that material information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that material information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosures. Our CEO and CFO have evaluated these disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q and have determined that such disclosure controls and procedures were effective.

There has been no change in our internal control over financial reporting during our most recent calendar quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

From time to time in the ordinary course of our business, we may be involved in legal proceedings, the outcomes of which may not be determinable. The results of litigation are inherently unpredictable. Any claims against us, 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. We are 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. We have insurance policies covering potential losses where such coverage is cost effective and available.

We are not involved in any legal proceedings that we currently believe could have a material effect on our business, financial condition, results of operations or cash flows.

Item 1A. Risk Factors

For information regarding factors that could affect our results of operations, financial condition and liquidity, refer to the section entitled “Risk Factors” in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2018.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None. 

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6.     Exhibits

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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