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INFUSYSTEM : Management’s Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

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The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included in this Form 10-K. The
forward-looking statements included in this discussion and elsewhere in this
Form 10-K involve risks and uncertainties, including those set forth under
“Cautionary Statement About Forward-Looking Statements.” Actual results and
experience could differ materially from the anticipated results and other
expectations expressed in our forward-looking statements as a result of a number
of factors, including but not limited to those discussed in this Item and in
Item 1A – “Risk Factors.”



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Overview


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

InfuSystem competes for and retains its business primarily on the basis of its
long participation and strong reputation in the Durable Medical Equipment space,
its long-standing relationships with Durable Medical Equipment manufacturers and
its health care provider customers, and the high levels of service it provides.
Current barriers to entry for potential competitors are created by our (i)
growing number of third-party payor networks under contract, which included
nearly 675 third-party payor networks for the fiscal year ended December 31,
2019
, an increase of 15% over the prior year period; (ii) economies of scale,
which allow for predictable reimbursement and less costly purchase and
management of the pumps, respectively; (iii) established, long-standing
relationships as a provider of pumps to outpatient oncology practices in the
U.S. and Canada; (iv) pump fleet of ambulatory and large volume infusion pumps
for rent and for sale, which may allow us to be more responsive to the needs of
physicians, outpatient oncology practices, hospitals, outpatient surgery
centers, homecare practices, patient rehabilitation centers and patients than a
new market entrant; (v) five geographic locations in the U.S. and Canada that
allow for same day or next day delivery of pumps; and (vi) pump repair and
service capabilities at all of these facilities. We do not perform any research
and development on pumps, but we have made, and continue to make investments in
our information technology.

During the fourth quarter of 2019, the Company reorganized its segment reporting
from one reportable segment to two reportable segments, ITS and DME Services,
due to changes in our internal reporting and the information evaluated by our
chief operating decision-maker. The Company has recast the 2018 segment
information to reflect this change.


ITS Segment


Our ITS segment’s core purpose is to seek opportunities to leverage our unique
know-how in clinic-to-home health care involving Durable Medical Equipment, our
logistics and billing capabilities, our growing network of third-party payors
under contract, and our clinical and biomedical capabilities. This leverage may
take the form of new products and/or services, strategic alliances, joint
ventures and/or acquisitions. The leading service within our ITS segment is to
supply electronic ambulatory infusion pumps and associated disposable supply
kits to private oncology clinics, infusion clinics and hospital outpatient
oncology clinics to be utilized in the treatment of a variety of cancers
including colorectal cancer and other disease states (“Oncology Business”).
Colorectal cancer is the fourth most prevalent form of cancer in the United
States
, according to the American Cancer Society, and the standard of care for
the treatment of colorectal cancer relies upon continuous chemotherapy infusions
delivered via ambulatory infusion pumps. One of the primary goals for the ITS
segment is to expand into treatment of other cancers. In 2019, our Oncology
Business approximated 63% of our total revenues. In 2019, we generated
approximately 34% of our total revenues from treatments for colorectal cancer
and 29% of our revenues from treatments for non-colorectal disease states. There
are a number of approved treatment protocols for pancreatic, head and neck,
esophageal and other cancers, as well as other disease states which present
opportunities for growth. There are also a number of other drugs currently
approved by the U.S. Food and Drug Administration (the “FDA”), as well as agents
in the pharmaceutical development pipeline, which we believe could potentially
be used with continuous infusion protocols for the treatment of diseases other
than colorectal cancer. Additional drugs or protocols currently in clinical
trials may also obtain regulatory approval over the next several years. If these
new drugs or protocols obtain regulatory approval for use with continuous
infusion protocols, we expect the pharmaceutical companies to focus their sales
and marketing efforts on promoting the new drugs and protocols to physicians.

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



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The use of continuous infusion has been demonstrated to decrease or alter the
toxicity of a number of cytotoxic, or cell killing agents. Higher doses of drugs
can be infused over longer periods of time, leading to improved tolerance and
decreased toxicity. For example, the cardiotoxicity (heart muscle damage) of the
chemotherapy drug Doxorubicin is decreased by schedules of administration
according to The Chemotherapy Source Book by Michael C. Perry. Nausea, vomiting,
diarrhea and decreased white blood cell and platelet counts are all affected by
duration of delivery. Continuous infusion can lead to improved tolerance and
patient comfort while enhancing the patient’s ability to remain on the
chemotherapy regimen. Additionally, the lower toxicity profile and resulting
reduction in side effects enables patients undergoing continuous infusion
therapy to continue a relatively normal lifestyle, which may include continuing
to work, going shopping, and caring for family members. We believe that the
partnering of physician management and patient autonomy provide for the highest
quality of care with the greatest patient satisfaction.

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

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


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


  ? Negative Pressure Wound Therapy ("NPWT") - as announced in February 2020, will
    include providing the Durable Medical Equipment, overseeing logistics,
    biomedical services, and managing third-party billing of the U.S. home health
    care market, which as a subset of the broader NPWT market, has an estimated
    addressable home health care market of $600 million per year.


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


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



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


DME Services Segment


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


Key Business Metrics


Our management monitors a number of financial and non-financial measures and
ratios on a regular basis in order to track the progress of our business and
make adjustments as necessary. We believe that the most important of these
measures and ratios include net revenues and our order-to-cash process, fleet
utilization, operating margin, operating expenses, profitability, cash and cash
equivalents, and debt levels including available credit and leverage ratios.
These measures and ratios are compared to standards or objectives set by
management, so that actions can be taken, as necessary, in order to achieve the
standards and objectives.



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InfuSystem Holdings, Inc. Results of Operations for the year ended December 31,
2019
compared to the year ended December 31, 2018



                                                Year Ended        Year Ended
(in thousands, except share and per share      December 31,      December 31,       Increase/
data)                                              2019              2018           (Decrease)

Net revenues:
ITS                                            $      51,540$      41,443$     10,097
DME Services                                          29,575            25,695            3,880
Total                                                 81,115            67,138           13,977
Cost of revenues:
ITS                                                   14,689            11,998            2,691
DME Services                                          19,544            15,570            3,974
Total                                                 34,233            27,568            6,665
Gross profit:
ITS                                                   36,851            29,445            7,406
DME Services                                          10,031            10,125              (94 )
Total                                                 46,882            39,570            7,312

Selling, general and administrative expenses
Amortization of intangibles                            4,402             4,649             (247 )
Selling and marketing                                  9,932             9,107              825
General and administrative                            29,023            25,399            3,624
Total selling, general and administrative
expenses                                              43,357            39,155            4,202

Operating income                                       3,525               415            3,110

Other expense                                         (2,001 )          (1,457 )           (544 )

Income (loss) before income taxes                      1,524            (1,042 )          2,566
Provision for income taxes                              (163 )             (53 )           (110 )

Net income (loss)                              $       1,361$      (1,095 )$      2,456

Net Income (loss) per share:
Basic                                          $        0.07$       (0.05 )$       0.12
Diluted                                        $        0.07$       (0.05 )$       0.12
Weighted average shares outstanding:
Basic                                             19,731,498        21,417,628       (1,686,130 )
Diluted                                           20,839,396        21,417,628         (578,232 )




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Net Revenues


Net revenues for the year ended December 31, 2019 were $81.1 million, an
increase of $14.0 million, or 20.8%, compared to the prior year’s net revenues
of $67.1 million. This increase was due to increases in both the ITS and DME
Services segments of $10.1 million and $3.9 million, respectively.


ITS


ITS net revenue increased $10.1 million, or 24.4%, compared to the prior year.
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.


DME Services


DME Services net revenue increased $3.9 million, or 15.1%, compared to the prior
year. This increase was largely due to an increase in product sales of $3.8
million
, or 35.8%, and an increase of $0.1 million, or 0.6%, in rental revenues.
Product sales growth was largely attributable to the growth in the sales of
pumps of $2.4 million, an increase in the sales of disposable products of $1.3
million
, with the remaining $0.1 million contribution from the sales of
accessories and other ancillary sales.


Gross Profit


Gross profit for the year ended December 31, 2019 increased $7.3 million, or
18.5%, from $39.6 million for the year ended December 31, 2018 to $46.9 million.
The increase was driven by an increase in the ITS segment of $7.4 million,
slightly offset by a decrease in the DME Services segment of $0.1 million. Gross
profit as a percentage of net revenues (“gross margin”) decreased to 57.8%
compared to the prior year at 58.9%.


ITS


ITS gross profit increased $7.4 million, or 25.2%, compared to the prior year.
This increase was driven mainly by the increase in net revenues, which was
partially offset by higher incremental costs for supplies and materials and
equipment depreciation expense. ITS gross margin increased to 71.5% compared to
the prior year at 71.0%.


DME Services


DME Services gross profit decreased $0.1 million, or 0.9%, compared to the prior
year. This decrease was driven by periodic changes in product mix, slightly
offset by an increase in net revenue. Decrease in profitability was impacted by
higher incremental costs for both pump sales and disposable sales. DME Services
gross margin decreased to 33.9% compared to the prior year at 39.4%.

Amortization of Intangible Assets

Amortization of intangible assets decreased $0.2 million, or 5.3% compared to
the prior year. The decrease is attributable to certain intangible assets
becoming fully amortized, thus, the related amortization no longer existed
during 2019.

Selling and Marketing Expenses

Selling and marketing expenses for the year ended December 31, 2019 were $9.9
million
, an increase of $0.8 million, or 9.1%, compared to $9.1 million for the
year ended December 31, 2018. Selling and marketing expenses as a percentage of
net revenues, decreased to 12.2% compared to the prior year at 13.6%. The
increase of $0.8 million was largely due to an increase in salaries and related
expenses of $0.7 million as a direct result of our net revenue growth. Selling
and marketing expenses during these years consisted of sales personnel salaries,
commissions and associated fringe benefit and payroll-related items, marketing,
overall travel and entertainment and other miscellaneous expenses.

General and Administrative Expenses

General and administrative (“G&A”) expenses for the year ended December 31, 2019
were $29.0 million, an increase of 14.3% from $25.4 million for the year ended
December 31, 2018. General and administrative expenses as a percentage of net
revenues, decreased to 35.8% compared to the prior year at 37.8%. The increase
of $3.6 million was largely due to an increase in employee compensation related
expenses of $2.9 million, outside services of $0.6 million, rent and related
expenses of $0.4 million, accounting fees of $0.2 million and an additional
increase of $0.3 million made up of dues & subscriptions, telephone and service
costs. These increases were partially offset by decreases in legal and
shareholder costs of $0.6 million and bank service charges of $0.2 million. The
increase in employee compensation related expenses was primarily attributable to
a $1.9 million increase in salaries and related expenses and a $1.0 million net
increase in incentive bonuses. G&A expenses during the years ended December 31,
2019
and 2018 consisted primarily of accounting, administrative, third-party
payor billing and contract services, customer service, nurses on staff, new
product services, and service center personnel salaries, fringe benefits and
other payroll-related items, professional fees, legal fees, stock-based
compensation, insurance and other miscellaneous items.



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The following table includes additional details regarding our G&A expenses for
the years ended December 31 (in thousands):



                                            2019               2018            Difference
Stock compensation costs               $          997     $          957     $            40
Expense in connection with the
corporate office lease                            252                  -                 252
Office move expenses                              258                  -                 258
Contested proxy and other
shareholder costs                                  23                251                (228 )
Management reorganization/transition
costs                                              76                250                (174 )
Fees to integrate business of other
provider                                          163                  -                 163
Exited facility costs                               -                 44                 (44 )
Certain other non-recurring costs
(a)                                               463                476                 (13 )
Total                                           2,232              1,978                 254

G&A - other than discrete costs &
stock-based compensation                       26,791             23,421               3,370

G&A - Total                            $       29,023$       25,399     $         3,624




  (a) Strategic costs - For 2019, we recorded expenses associated with other
      strategic opportunity costs of $273,000 and revenue cycle management
      restructuring initiatives of $190,000. For 2018, we recorded expenses
      associated with other strategic opportunity costs of $397,000 and revenue
      cycle management restructuring initiatives of $79,000.




Other Income and Expenses



During the year ended December 31, 2019, we incurred interest expense of $1.9
million
, an increase of $0.5 million, or 34.1%, compared to December 31, 2018.
This was a net result of higher debt levels, including the new term debt that
was entered into during 2019, partially offset by payments of the previous term
debt as well as higher interest rates in 2019 as compared to 2018.


Provision for Income Taxes


During the year ended December 31, 2019, we recorded a provision for income
taxes of $0.2 million compared to a provision for income taxes of $0.1 million
for the year ended December 31, 2018.


Inflation


Management believes that there has been no material effect on the results of
operations or financial condition as a result of inflation or changing prices of
our ambulatory infusion pumps during the period from January 1, 2018 through
December 31, 2019.



Subsequent Events



We have evaluated subsequent events through the date that our consolidated
financial statements are issued. On January 30, 2020, the World Health
Organization
(“WHO”) recognized the coronavirus (“COVID-19”) as a global health
emergency and as a global pandemic on March 11, 2020. Public health responses
have included national pandemic preparedness and response plans, travel
restrictions, quarantines, curfews, event postponements and cancellations and
closures of facilities including local schools and businesses. The global
pandemic and actions taken to contain the coronavirus have adversely affected
the global economy and financial markets.

While the healthcare sectors served by InfuSystem are largely insulated from
economic cycles and periodic business disruptions, our ability to deliver
services and products may be impacted by these ongoing pandemic containment
measures, which have resulted in significant disruptions to global supply chains
and the temporary closures of supplier and manufacturer facilities. We are
implementing measures to protect the health and safety of our employees, in
addition to maintaining the ability for clinics to properly treat their patients
in the event there is a disruption to the supply chain. These steps include
acquiring additional infusion pumps, shipping reserve quantities of supplies to
our customers, preparing a significant part of our workforce to work from home
and providing additional personal protective equipment for our operations team.
We believe that these efforts will give us the ability and flexibility to
maintain our operations throughout the duration of the current outbreak. We have
plans in place and are ready to implement additional actions if the duration of
these challenges is prolonged.

If this global pandemic were to continue for a prolonged period of time, it
could materially and adversely impact our business, financial condition, results
of operations and cash flows. The extent of the impact will depend on future
developments, including actions taken to contain the coronavirus.



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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, entered
into on March 23, 2015 (as amended, the “Credit Agreement”). As of December 31,
2019
, we had cash and cash equivalents of $2.6 million and $9.9 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 organic 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 July 31, 2018, the Company and its primary lender entered into the fourth
amendment to its Credit Agreement (“Fourth Amendment”). The Fourth Amendment
allowed for, among other things, a loan to the Company for the repurchase of up
to approximately 2.8 million shares of capital stock from an individual
shareholder, his affiliates, and a second shareholder, in an aggregate amount
not to exceed $8.6 million (“Term Loan C”); and allows for capital expenditure
financing to the Company for the sole purpose of purchasing medical equipment in
an aggregate amount not to exceed $6.4 million (the “Equipment Line”). There
were no principal payments due on the Equipment Line until December 31, 2019 at
which time it converted to an additional term loan. The Fourth Amendment also
made changes to certain covenants, specifically, to exclude borrowings used to
fund the stock repurchases referenced above from the definition of fixed
charges, as defined by the Credit Agreement, and to reduce the ratio of earnings
before depreciation, income taxes and amortization to fixed charges from
1.25:1.0 to 1.15:1.0. In addition, the Fourth Amendment eliminates the net worth
covenant and the excess cash flow provisions while modifying the quarterly
principal payment amounts. Term Loan C matures on December 6, 2021, and the
Equipment Line matures on December 31, 2024.

On February 5, 2019, the Company and its primary lender entered into the fifth
amendment to its Credit Agreement (the “Fifth Amendment”). Among other things,
the Fifth Amendment amended the Credit Agreement to:


  ? increase our borrowing capacity under the Equipment Line to $8.0 million;


  ? 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 or ending December 31, 2018 and 2019;


  ? 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;


  ? 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 December 31, 2019 was $1.6 million.

On November 7, 2019, the Company and its primary lender entered into the sixth
amendment to the Credit Agreement (the “Sixth Amendment”). 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 our business and in amounts not to exceed
    90.0% of the invoiced hard costs of such acquired equipment;


  ? increase the commitment under the Revolver 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 our
    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 our
    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 on the Sixth Amendment Effective Date and, commencing on the
    last Business Day of December 2019, the consecutive quarterly principal
    installment payments will change to approximately $1.2 million; and




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  ? revise Section 5.01(e) of the Credit Agreement, which governs our obligation
    to deliver financial statements to the lender, to require us to provide the
    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 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 December
31, 2019
, the Company was in compliance with all debt-related covenants under
the Credit Agreement.



As of December 31, 2019, our term loans, Equipment Line and 2019 Equipment Line
under the Credit Agreement had balances of $27.7 million, $7.6 million and $1.6
million, respectively. The availability under the Revolver is based upon our
eligible accounts receivable and eligible inventory and is computed as follows
(in thousands):



                            December 31,      December 31,
                                2019              2018
Revolver:
Gross Availability         $       11,750$       9,973
Outstanding Draws                       -                 -
Letters of Credit                  (1,750 )            (750 )
Landlord Reserves                    (150 )             (70 )
Availability on Revolver   $        9,850$       9,153

As of December 31, 2019, interest on the loans as part of the Credit Agreement
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 a 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 December 31,
2019
was 4.25% (LIBOR of 1.75% plus 2.50%). The actual CBFR Loan rate at
December 31, 2019 was 4.25% (lender’s prime rate of 5.50% minus 0.50%).


Share Repurchases


As described previously, on September 30, 2019, our Board of Directors approved
the Share Repurchase Program. As of December 31, 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 year
ended December 31, 2019 was $13.9 million compared to $11.4 million for the year
ended December 31, 2018. This $2.5 million, or 21.8%, increase was primarily
attributable to an increase in net income (loss) adjusted for non-cash items of
$4.0 million and the positive cash flow effect of a net incremental increase in
accounts payable and other liabilities of $2.3 million, which was partially
offset by an incremental increase in accounts receivable of $3.5 million.

Investing Cash Flow. Net cash used in investing activities was $19.6 million for
the year ended December 31, 2019 compared to $5.0 million for the year ended
December 31, 2018. The increase in net cash used was primarily due to a $11.6
million
increase in cash used to purchase medical equipment in support of our
revenue growth and a $2.6 million increase in cash used to purchase other
assets, mainly related to the buildout and move to our new corporate
headquarters.

Financing Cash Flow. Net cash provided by financing activities for the year
ended December 31, 2019 was $4.1 million compared to cash used of $5.6 million
for the year ended December 31, 2018. The net increase in net cash provided was
primarily attributable to our decision to repurchase shares of common stock as
part of a share repurchase program in 2018.



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Contractual Obligations


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


Contingent Liabilities


We are not aware of any contingent liabilities.

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates, assumptions and judgments that affect the amounts reported in the
financial statements, including the notes thereto. We consider critical
accounting policies to be those that require more significant judgments and
estimates in the preparation of our consolidated financial statements, including
the following: revenue recognition; leases; accounts receivable and allowance
for doubtful accounts; income taxes; and long-lived asset valuations. Management
relies on historical experience and other assumptions believed to be reasonable
in making its judgments and estimates. Actual results could differ materially
from those estimates.

Management believes its application of accounting policies, and the estimates
inherently required therein, are reasonable. These accounting policies and
estimates are periodically reevaluated, and adjustments are made when facts and
circumstances dictate a change.

Our accounting policies are more fully described under the heading “Summary of
Significant Accounting Policies” in Note 2 to our Consolidated Financial
Statements included in this Form 10-K. We believe the following critical
accounting estimates are the most significant to the presentation of our
financial statements and require the most difficult, subjective and complex
judgments:



Revenue Recognition



On January 1, 2018 the Company adopted the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) Topic 606 – Revenue from
Contracts with Customers (“ASC 606”) and concluded that, consistent with prior
reporting, the Company has two separate revenue streams: rentals and product
sales. The adoption of ASC 606 requires certain customer concessions associated
with rental revenues reported in accordance with ASC 605 – Revenue Recognition,
previously reported in selling, general and administrative expenses as
“provision for doubtful accounts” to now be recorded as a reduction of net
rental revenues as they are considered price concessions of the transaction
price under the new revenue guidance. ASC 606 was adopted on a modified
retrospective method.

ASC 606 stipulates revenue recognition at the time and in an amount that
reflects the consideration expected to be received for the performance
obligations that have been provided. ASC 606 defines contracts as written, oral
and through customary business practice. Under this definition, the Company
considers contracts to be created at the time that the rental service is
authorized or an order to purchase product is agreed upon regardless of whether
or not there is a written contract.

The Company has two separate and distinct performance obligations offered to its
customers: a rental service performance obligation or a product sale performance
obligation. A performance obligation is a promise in a contract to transfer a
distinct good or service to the customer and is defined as the unit of account
for revenue recognition under ASC 606. These performance obligations are related
to separate revenue streams and at no point are they combined into a single
transaction. Sources of net revenues include commercial insurance payors,
government insurance payors, medical facilities and patients.

The Company generates the majority of its revenue from the rental of infusion
pumps to its customers and a minority of its revenue from product sales. For the
rental service performance obligation, revenue is based on its standalone price,
determined by using reimbursement rates established by third-party payor or
other contracts. Revenue is recognized in the period in which the related
performance obligation is satisfied, which is typically at the point in time
that a patient concludes a treatment, or in certain arrangements, based on the
number of pumps that a facility has onsite. The Company’s revenues related to
product sales is recognized at the time that control of the product has been
transferred to the customer; either at the time the product is shipped or the
time the product has been received by the customer, depending on the delivery
terms. The Company does not commit to long-term contracts to sell customers a
certain minimum quantity of products.



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The Company employs certain significant judgments to estimate the dollar amount
of revenue, and related concessions, allocated to the rental service and sale of
products. These judgments include, among others, the estimation of variable
consideration. Variable consideration, specifically related to the Company’s
third-party payor rental revenues, is estimated as implied price concessions
resulting from differences between the rates charged for services performed and
the expected reimbursements for commercial payors and other implied customer
concessions. The estimates for variable consideration are based on historical
collections with similar payors, aged accounts receivable by payor class and
payor correspondence using the portfolio approach, which provide a reasonable
basis for estimating the variable portion of a transaction. The Company doesn’t
believe it is probable that a significant reversal of revenue will occur in
future periods because (i) there is no significant uncertainty about the amount
of considerations that are expected to be collected based on collection history
and (ii) the large number of sufficiently similar contracts allows the Company
to adequately estimate the component of variable consideration.

Net revenues are adjusted when changes in estimates of variable consideration
occur. Changes in estimates typically arise as a result of new information
obtained, such as actual payment receipt or denial, or pricing adjustments by
payors. Subsequent changes to estimates of transaction prices are recorded as
adjustments to net revenue in the period of the change. Subsequent changes that
are determined to be the result of an adverse change in the payors ability to
pay are recorded as an allowance for doubtful accounts.


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 are classified as either financing or
operating; the classification determines 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 we 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 ten 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.



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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.

Accounts Receivable and Allowance for Doubtful Accounts

Amounts billed that have not yet been collected that also meet the conditions
for unconditional right to payment are presented as accounts receivable.
Accounts receivable related to rental service and delivery of products are
reported at their estimated transaction prices, inclusive of adjustments for
variable consideration, based on the amounts expected to be collected from
payors. The Company writes off accounts receivable once collection efforts have
been exhausted and an account is deemed to be uncollectible. Subsequent to the
adoption of ASC 606, an allowance for doubtful accounts is established only as a
result of an adverse change in the Company’s payors’ ability to pay outstanding
billings. The allowance for doubtful accounts was not material as of December
31, 2019
.



Income Taxes



We recognize deferred income tax liabilities and assets based on (i) the
differences between the financial statement carrying amounts and the tax basis
of assets and liabilities, using enacted tax rates in effect in the years the
differences are expected to reverse and (ii) the tax credit carry forwards.
Deferred income tax (expense) benefit results from the change in net deferred
tax assets or deferred tax liabilities. A valuation allowance is recorded when,
in the opinion of management, it is more likely than not that some or all of any
deferred tax assets will not be realized. To make this assessment, we consider
the historical and projected future taxable income or loss in each tax
jurisdiction and we review our tax planning strategies. We have recorded a full
valuation allowances against deferred tax assets as realization has not met the
more likely than not criteria. Since future financial results may differ from
previous estimates, periodic adjustments to our valuation allowances may be
necessary. In addition, continued improvement in our pre-tax income could result
in a full or partial reversal of our valuation allowance.

Provisions for federal, state and foreign taxes are calculated based on reported
pre-tax earnings based on current tax law and include the cumulative effect of
any changes in tax rates from those used previously in determining deferred tax
assets and liabilities. Certain items of income and expense are recognized in
different time periods for financial reporting than for income tax purposes;
thus, such provisions differ from the amounts currently receivable or payable.

We estimate the impact of uncertain income tax positions on the income tax
return. These estimates impact income taxes receivable, accounts payable and
accrued liabilities on the balance sheet and provision for income taxes on the
income statement. We follow a two-step approach for recognizing uncertain tax
positions. First, management evaluates the tax position for recognition by
determining if the weight of available evidence indicates it is
more-likely-than-not that the position will be sustained upon examination.
Second, for positions that are determined are more-likely-than-not to be
sustained, we recognize the tax benefit as the largest benefit that has a
greater than 50% likelihood of being sustained. We establish a reserve for
uncertain tax positions liability that is comprised of unrecognized tax benefits
and related interest and penalties. We adjust this liability in the period in
which an uncertain tax position is effectively settled, the statute of
limitations expires for the relevant taxing authority to examine the tax
position, or more information becomes available. For more information, refer to
the “Income Taxes” discussion included in Note 8 in the Notes to the
Consolidated Financial Statements.


Adoption of ASU 2019-12


The Company adopted ASU 2019-12, Income Taxes (Topic 740): Simplifying the
Accounting for Income Taxes, in the fourth quarter of 2019. This guidance
simplifies various aspects related to accounting for income taxes by removing
certain exceptions to the general principles in Topic 740 and also clarifies and
amends existing guidance to improve consistent application. The guidance is
effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2020. Early adoption is permitted, including
adoption in any interim period for which financial statements have not yet been
issued. Certain amendments may be applied on a retrospective, modified
retrospective or prospective basis. As permitted, the Company elected to early
adopt this guidance for the year ended December 31, 2019. The adoption of this
guidance did not have a significant impact on the Company’s financial statements
and primarily resulted in the reclassification of an immaterial amount from
non-income tax expense to income tax expense related to the accounting for
franchise taxes, with no impact to the Company’s consolidated net income, equity
or cash flows.



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Long-lived Asset Valuation


We evaluate the carrying value of long-lived assets for impairment by analyzing
the operating performance and anticipated future cash flows for those assets,
whenever events or changes in circumstances indicate that the carrying amounts
of such assets may not be recoverable. We evaluate the need to adjust the
carrying value of the underlying assets if the sum of the expected cash flows is
less than the carrying value. Our projection of future cash flows, the level of
actual cash flows, the methods of estimation used for determining fair values
and salvage values can impact impairment. Any changes in management’s judgments
could result in greater or lesser annual depreciation and amortization expense
or impairment charges in the future. Depreciation and amortization of long-lived
assets is calculated using the straight-line method over the estimated useful
lives of the assets.

We performed our annual impairment analysis of all indefinite-lived intangible
assets in October 2019 and determined that the fair value of all the assets was
greater than the carrying value, resulting in no impairment of indefinite-lived
assets.

The Company assesses impairment indicators related to its internally-developed,
internal-use software, specifically looking at the effectiveness and useful
lives of each project and sub-project to determine if impairment indicators are
present. In December 2019 and 2018, respectively, the Company assessed the
impairment indicators and found none to be present.

For more information, refer to the “Intangible Assets” discussion included in
Note 6 in the Notes to the Consolidated Financial Statements included in this
Form 10-K.

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