InfuSystem Holdings, Inc - Quarter Report: 2020 September (Form 10-Q)

 

 

Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-Q

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☒	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

 

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INFUSYSTEM HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

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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

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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.

 

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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

 

		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

 

		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

 

		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

 

		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

 

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.

 

3.	Revenue Recognition

 

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

 

 

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:

 

 

4.	Medical Equipment

 

Medical equipment consisted of the following (in thousands):

 

 

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):

 

 

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.

 

6.	Intangible Assets

 

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

 

 

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):

 

 

 

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;

 

 

●

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):

 

 

 

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

 

 

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

 

 

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.

 

 

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:

 

 

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.

 

 

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):

 

 

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

 

 

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

 

 

 

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

 

 

 

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:

 

 

 

 

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

 

 

 

 

 

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.