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 March 31, 2019
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
INFUSYSTEM HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
20-3341405
(State or Other Jurisdiction ofIncorporation or Organization)
(I.R.S. EmployerIdentification No.)
31700 Research Park Drive
Madison Heights, Michigan 48071
(Address of Principal Executive Offices)
Registrant’s Telephone Number, including Area Code: (248) 291-1210
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 during the past 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 and post 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 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.
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 Securities Exchange Act). Yes ☐ No ☒
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
As of May 10, 2019, 19,702,807 shares of the registrant’s common stock, par value $0.0001 per share, were outstanding.
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 March 31, 2019 and December 31, 2018
-Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018
-Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018
-Notes to the Unaudited Condensed Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
14
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
17
Item 4.
Controls and Procedures
PART II -
OTHER INFORMATION
Legal Proceedings
18
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
19
Signatures
20
PART I – FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
As of
March 31,
December 31,
(in thousands, except share data)
2019
2018
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories
Other current assets
Total current assets
Medical equipment for sale or rental
Medical equipment in rental service, net of accumulated depreciation
Property & equipment, net of accumulated depreciation
Intangible assets, net
Operating lease right of use assets
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Capital lease liability, current
Current portion of long-term debt
Other current liabilities
Total current liabilities
Long-term debt, net of current portion
Deferred income taxes
Operating lease liabilities, net of current portion
Total liabilities
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 23,221,296 and 19,702,807, respectively, as of March 31, 2019 and 23,095,513 and 19,577,024, respectively, as of December 31, 2018
Additional paid-in capital
Retained deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
(in thousands, except share and per share data)
March 31
Net revenues
Cost of revenues
Gross profit
Selling, general and administrative expenses:
Amortization of intangibles
Selling and marketing
General and administrative
Total selling, general and administrative
Operating (loss) income
Other expense:
Interest expense
Other expense
(Loss) income before income taxes
Provision for income taxes
Net (loss) income
Net (loss) income per share:
Basic
Diluted
Weighted average shares outstanding:
-
CONDENSED CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY
Common Stock
Additional
Treasury Stock
Total
Par Value
Paid in
Retained
Stockholders’
(in thousands)
Shares
Amount
Capital
Deficit
Equity
Balances at December 31, 2017
Stock based shares issued upon vesting - gross
Stock-based compensation expense
Employee stock purchase plan
Common stock repurchased as part of Repurchase Program
Net income
Balances at March 31, 2018
Balances at December 31, 2018
Common stock repurchased to satisfy minimum statutory withholding on stock-based compensation
Net loss
Balances at March 31, 2019
See accompanying notes to unaudited condensed consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NET CASH PROVIDED BY OPERATING ACTIVITIES
INVESTING ACTIVITIES
Purchase of medical equipment and property
Proceeds from sale of medical equipment and property
NET CASH USED IN INVESTING ACTIVITIES
FINANCING ACTIVITIES
Principal payments on term loans and capital lease obligations
Debt issuance costs
Common stock repurchased to satisfy statutory withholding on employee stock based compensation plans
Cash proceeds - stock plans
NET CASH USED IN FINANCING ACTIVITIES
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
-960
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. The Company provides products and services to hospitals, oncology practices and facilities and other alternative site healthcare providers. Headquartered in Madison Heights, Michigan, the Company delivers local, field-based customer support, and also operates pump 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, 2018 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.
Certain prior period reclassifications were made to conform with the current period presentation. These reclassifications had no effect on reported (loss) income, overall cash flows, total assets, total liabilities or stockholders’ equity as previously reported.
2.
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”, which changes the subsequent measurement of goodwill impairment by eliminating Step 2 from the impairment test. Under the new guidance, an entity will measure impairment using the difference between the carrying amount and the fair value of the reporting unit. The new standard is effective for fiscal years beginning after December 15, 2019 (i.e. a January 1, 2020 effective date), with early adoption permitted for goodwill impairment tests with measurement dates after January 1, 2017. The Company believes the adoption will not have a material impact on its consolidated balance sheets, statements of operations, statements of cash flows and related disclosures.
In June 2016, the FASB issued ASU 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 is effective as of January 1, 2020. 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:
Third-Party Payor Rentals
Direct Payor Rentals
Product Sales
Total - Net revenues
4.
Medical Equipment
Medical equipment is comprised of the following (in thousands):
Medical Equipment for sale or rental
Medical Equipment in rental service
Medical Equipment in rental service - pump reserve
Accumulated depreciation
Medical Equipment in rental service - net
Depreciation expense for medical equipment for the three months ended March 31, 2019 was $1.7 million, compared to $1.5 million for the same prior year period, which were recorded in “cost of revenues” for each period.
5.
Property and Equipment
Property and equipment is comprised of the following (in thousands):
March 31, 2019
December 31, 2018
Gross Assets
Accumulated Depreciation
Furniture, fixtures, and equipment
Automobiles
Leasehold improvements
Depreciation expense for property and equipment for both the three months ended March 31, 2019 and 2018 was $0.1 million. This expense was recorded in general and administrative expenses.
6. Intangible Assets
The carrying amount and accumulated amortization of intangible assets is comprised of the following (in thousands):
Accumulated Amortization
Net
Nonamortizable intangible assets:
Trade names
Amortizable intangible assets:
Physician and customer relationships
Non-competition agreements
Software
Total nonamortizable and amortizable intangible assets
Amortization expense for the three months ended March 31, 2019 was $1.1 million compared to $1.2 million for the three months ended March 31, 2018. Expected annual amortization expense for intangible assets recorded as of March 31, 2019 is as follows (in thousands):
4/1-12/31/2019
2020
2021
2022
2023
2024 and thereafter
Amortization expense
7.
Debt
On February 5, 2019, the Company and its lender entered into the fifth amendment (the “Fifth Amendment”) to its existing credit facility (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 March 31, 2019, the Company’s term loans and equipment line under its credit facility had balances of $30.4 million and $2.6 million, respectively. The net availability under the revolving credit line under the credit facility is based upon our eligible accounts receivable and eligible inventory and is computed as follows (in thousands):
Revolver:
Gross availability
Outstanding draws
Letters of credit
Landlord reserves
Availability on Revolver
The Company had future maturities of loans as of March 31, 2019 as follows (in thousands):
2023 and thereafter
Term Loan A
Term Loan C
Equipment Line
Unamortized value of the debt issuance costs
The following is a breakdown of the Company’s current and long-term debt (in thousands):
Current Portion
Long-Term Portion
Unamortized value of debt issuance costs
As of March 31, 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 March 31, 2019 was 5.25% (LIBOR of 2.50% plus 2.75%). The actual CBFR Loan rate at March 31, 2019 was 5.50% (lender’s prime rate of 5.50%).
As of March 31, 2019, the Company was in compliance with all debt-related covenants under the Credit Agreement.
8.
Income Taxes
During both the three months ended March 31, 2019 and 2018, the Company recorded expense provision for income taxes of $0.1 million. The income tax provision 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. The Company’s management has determined that it is more likely than not that the Company will not recognize the benefits of its federal and state deferred tax assets. Accordingly, the Company had a full valuation allowance for all deferred tax assets at March 31, 2019 and December 31, 2018.
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 involved in any legal proceedings that the Company believes could have a material effect on the Company’s financial condition, results of operations or cash flows.
10.
(Loss) Earnings Per Share
Basic (loss) income per share is computed by dividing net (loss) income by the weighted average number of common shares outstanding during the period. Diluted (loss) 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 (loss) income per share computations:
Numerator:
Net (loss) income (in thousands)
Denominator:
Weighted average common shares outstanding:
Dilutive effect of non-vested awards
For the three months ended March 31, 2019, there were no stock options that were excluded from the calculation because they would have an anti-dilutive effect. For the three months ended March 31, 2018, 0.3 million of stock options were not included in the calculation because they would have an anti-dilutive effect.
11.
Leases
On January 1, 2019 (the “Effective Date”), the Company adopted ASU 2016-02, Leases (Topic 842); ASU 2018-10, Codification Improvements to Topic 842, Leases; and ASU 2018-11, Targeted Improvements (collectively, “Topic 842”) using a modified retrospective transition approach, which requires Topic 842 to be applied to all leases existing at the date of initial application. Under Topic 842, lessees are required to recognize a lease liability and right-of-use asset (“ROU asset”) for all leases and to disclose key information about leasing arrangements. Additionally, leases will be classified as either financing or operating; the classification will determine the pattern of expense recognition and classification within the statement of operations. The Company has elected to apply its lease accounting policy only to leases with a term greater than twelve months.
The Effective Date is the Company’s date of initial application. Consequently, our financial information was not updated and the disclosures required under the new standard are not provided for dates and periods prior to January 1, 2019.
Topic 842 provides several optional practical expedients that can be adopted at transition. We have elected the “package of practical expedients”, which does not require us to reassess our prior conclusions regarding lease identification, lease classification and initial direct costs. We did not elect the practical expedient of hindsight to the evaluation of lease options (e.g. renewal).
The most significant effects related to this adoption relate to (i) the recognition of new ROU assets and lease liabilities on our balance sheet for our real estate and equipment operating leases; and (ii) significant new disclosures about our leasing activities. Upon adoption, we recognized approximately $3.1 million in additional operating lease liabilities with corresponding ROU assets of approximately the same amount.
Topic 842 also provides practical expedients for an entity’s ongoing accounting. We have elected the “combining lease and non-lease components” practical expedient and also elected to apply the short-term lease recognition exemption to certain leases; therefore, we did not recognize ROU assets and lease liabilities for these leases.
In adopting Topic 842, we have determined and will continue to determine whether an arrangement is a lease at inception. Our operating leases are primarily for office space, service facility centers and equipment under operating lease arrangements that expire at various dates over the next seven years. Our leases do not contain any restrictive covenants. Our office leases generally contain renewal options for periods ranging from one to five years. Because we are 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. Our office leases do not contain any material residual value guarantees. Our equipment leases generally do not contain renewal options. We are not reasonably certain to exercise the renewal options for those equipment leases that do contain renewal options, thus, the options are not considered in determining the lease term and payments associated with the option years are excluded from lease payments.
For our equipment leases, we have used and will use the implicit rate in the lease as the discount rate, when available, otherwise, we use our incremental borrowing rate as the discount rate. For our office leases, the implicit rate is typically not available, so we have used and will use our incremental borrowing rate as the discount rate. Our lease agreements include both lease and non-lease components. We have elected the practical expedient that allows us to combine lease and non-lease components for all of our leases.
Payments due under our operating leases include fixed payments as well as variable payments. For our 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 our equipment leases, variable payments may consist of sales taxes, property taxes and other fees.
The components of lease costs for the three months ended March 31, 2019 are as follows (in thousands):
Operating lease cost
Variable lease cost
Total lease cost
Operating lease expense for the three months ended March 31, 2018 were $0.3 million.
Amounts reported in the condensed consolidated balance sheet as of March 31, 2019 for our operating leases are as follows (in thousands):
Operating lease ROU assets
Total operating lease liabilities
Supplemental cash flow information and non-cash activity related to our leases are as follows (in thousands):
Cash paid for amounts included in the measurement of lease liabilities and ROU assets:
Operating cash flow from operating leases
ROU assets recognized upon adoption of Topic 842:
Operating leases
Weighted average remaining lease terms and discount rates for our leases as of March 31, 2019 are as follows:
Years
Weighted average remaining lease term:
Rate
Weighted average discount rate:
Future maturities of lease liabilities as of March 31, 2019 are as follows (in thousands):
Operating Leases (a)
Thereafter
Total undiscounted lease payments
Less: Imputed interest
Total lease liabilities
The Company disclosed in our 2018 Annual Report on Form 10-K maturities of lease liabilities as of December 31, 2018, in accordance with ASC 840. During the quarter ended March 31, 2019, the Company determined that it improperly included certain lease commitments in the maturities table as of December 31, 2018 in Note 10 of the 2018 Annual Report on Form 10-K. The table overstated our lease maturities as follows (in thousands): $121 in 2019, $370 in 2020, $381 in 2021, $392 in 2022, $404 in 2023 and $2,528 in the thereafter period.
The Company assessed the materiality of this error, considering both the qualitative and quantitative factors and determined that for the year ended December 31, 2018, the error was immaterial. The Company has decided to correct this immaterial error as a revision to our previously issued financial statements by adjusting the maturities of the lease liabilities as of December 31, 2018 for the overstated amounts as reflected in the table below (in thousands):
Operating
(As Revised)
Total require payments
Less amounts representing interest (3.5%)
Present value of minimum lease payments
Less current maturities
Long-term capital lease liability
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 (“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 to which the Company may be involved in 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 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 our 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.
InfuSystem Holdings, Inc. Results of Operations for the Three Months Ended March 31, 2019 Compared to the Three Months Ended March 31, 2018
Net Revenues
Our net revenues for the quarter ended March 31, 2019 were $18.2 million, an increase of $1.7 million, or 10.4%, compared to $16.5 million for the quarter ended March 31, 2018. During the period, net revenues from rentals increased $0.6 million, or 4.5%, 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 as well as decreased allowance for bad debt expense. Net revenues from product sales for the three months ended March 31, 2019 were $3.1 million, an increase of $1.0 million, or 51.6%, compared to the same period of 2018. This increase was primarily the result of an increase in disposable sales of $0.6 million and equipment sales of $0.4 million due to the Company’s efforts to expand its product offering and the timing of pump sales.
Gross Profit
Gross profit for the quarter ended March 31, 2019 was $10.3 million, an increase of $0.1 million, or 1.0%, compared to the quarter ended March 31, 2018. As a percentage of revenues, gross profit for the quarter ended March 31, 2019 was 56.8%, down from 62.1% for the same prior year period primarily due to growth in the Company’s lower margin products and increased supply costs in anticipation of future growth. The increase in gross profit for the period is mainly due to the increase in net revenues for the period, which was partially offset by an increase of $0.5 million in the costs of disposables sold, $0.5 million in the costs of supply and pump rentals, $0.4 million in the costs of pumps and accessories sold and $0.2 million in pump depreciation expense.
Amortization of Intangible Assets
Amortization of intangible assets for the quarter ended March 31, 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 first quarter of 2019.
Selling and Marketing Expenses
Selling and marketing expenses for the quarter ended March 31, 2019 were $2.6 million, an increase of $0.3 million, or 13.1%, compared to $2.3 million for the quarter ended March 31, 2018. This increase was largely attributable to an increase in salaries and related expenses of $0.1 million, advertising costs of $0.1 million and travel and related expenses of $0.1 million in support of revenue growth. Selling and marketing expenses during these periods consisted of sales personnel salaries, commissions and associated fringe benefit 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 March 31, 2019 were $7.0 million, an increase of $0.9 million, or 14.2%, from $6.2 million for the quarter ended March 31, 2018. The increase in G&A expenses versus the comparable prior year period was primarily due to increases in employee compensation related expenses of $0.5 million, legal and strategic alternative costs of $0.2 million, professional fees and outside services of $0.1 million and service and repair costs of $0.1 million. The increase in employee compensation related expenses was primarily attributable to a $0.3 million increase in salaries and related expenses, a $0.1 million increase in stock compensation expense and a $0.1 million net increase in the incentive bonus accrual.
Other Income and Expenses
During the quarter ended March 31, 2019, we incurred interest expense of $0.5 million, an increase of $0.1 million, or 46.0%, compared to the comparable prior year period. This was a net result of the new term debt that was entered into during 2018, partially offset by payments of the previous term debt as well as higher interest rates in 2019 as compared to 2018.
During both the three months ended March 31, 2019 and 2018, the Company recorded expense provision for income taxes of $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 March 31, 2019 and December 31, 2018, the Company had a full valuation allowance for all deferred tax assets, as management determined that it is more likely than not the Company will not 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”). As of March 31, 2019, we had cash and cash equivalents of $1.9 million and $9.1 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, inventory, 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 February 5, 2019, the Company and its 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 March 31, 2019, our term loans and equipment line under the Credit Agreement had balances of $30.4 million and $2.6 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):
Cash Flows:
Operating Cash Flow. Net cash provided by operating activities for the three months ended March 31, 2019 was $1.3 million compared to cash provided by operating activities of $1.1 million for the three months ended March 31, 2018. This increase was primarily attributable to the cash flow effect of improved working capital, increased accounts payable and other liabilities partially offset by increased accounts receivable and other assets, and the cash flow effect from net income in the first quarter of 2018 to a net loss in the first quarter of 2019.
Investing Cash Flow. Net cash used in investing activities was $2.8 million for the three months ended March 31, 2019 compared to cash used in investing activities of $0.2 million for the three months ended March 31, 2018. The increase in cash used was due to a $2.4 million increase in cash used to purchase medical equipment, which was partially offset by a $0.2 million decrease in proceeds from the sales of medical equipment.
Financing Cash Flow. Net cash used in financing activities for the three months ended March 31, 2019 was $0.9 million compared to cash used of $2.8 million for the three months ended March 31, 2018. The decrease in net cash used was primarily attributable to our decision to pay down our term loan debt, make required capital lease payments and repurchase shares of common stock as part of a share repurchase program in the first quarter of 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.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are 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.
We are not involved in any legal proceedings that we 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
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Item 6. Exhibits
31.1*
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
*
XBRL Taxonomy Extension Presentation Linkbase Document
Filed herewith
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.
Date: May 15, 2019
/s/ Richard DiIorio
Richard DiIorio
Chief Executive Officer, President and Director