tcmd_Current_Folio_10Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

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: 001-37799


Tactile Systems Technology, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware

 

41-1801204

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

 

 

 

1331 Tyler Street NE, Suite 200

Minneapolis, Minnesota

 

55413

(Address of Principal Executive Offices)

 

(Zip Code)

(612) 355-5100

(Registrant’s Telephone Number, Including Area Code)


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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

Large accelerated filer 

    

 

    

Accelerated filer

 

 

 

 

 

 

 

Non-accelerated filer 

 

(Do not check if a smaller reporting company)

 

Smaller reporting company 

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

As of November 10, 2016 there were 16,813,826 shares of common stock, $0.001 par value per share, outstanding.

 

 


 

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TABLE OF CONTENTS

 

 

 

 

 

 

    

PART I—FINANCIAL INFORMATION

    

 

 

 

 

 

 

Item 1. 

 

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

 

21 

Item 4. 

 

Controls and Procedures

 

21 

 

 

 

 

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

22 

Item 1A. 

 

Risk Factors

 

22 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

22 

Item 3. 

 

Defaults Upon Senior Securities

 

22 

Item 4. 

 

Mine Safety Disclosures

 

22 

Item 5. 

 

Other Information

 

23 

Item 6. 

 

Exhibits

 

23 

Forward-Looking Information

All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business, operations and financial performance and condition, are forward-looking statements. In some cases, you can identify forward-looking statements by the following words: "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "might," "target," "ongoing," "plan," "potential," "predict," "project," "should," "will," "would," or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance or achievements to be materially different from the information expressed or implied by the forward-looking statements in this Quarterly Report on Form 10-Q. Forward-looking statements may include, among other things, statements relating to:

·

our expectations regarding the potential market size and widespread adoption of our products;

·

our ability to increase awareness of lymphedema and chronic venous insufficiency and to demonstrate the clinical and economic benefits of our solutions to clinicians and patients;

·

developments and projections relating to our competitors or our industry;

·

the expected growth in our business and our organization, including outside of the United States;

·

our ability to achieve and maintain adequate levels of coverage or reimbursement for our products and the effect of a recent change to the level of Medicare coverage;

·

our financial performance, our estimates of our expenses, future revenues, capital requirements and our needs for, or ability to obtain, additional financing;

·

our ability to retain and recruit key personnel, including the continued development and expansion of our sales and marketing organization;

·

our ability to obtain an adequate supply of components for our products from our third party suppliers;

·

our ability to obtain and maintain intellectual property protection for our products or avoid claims of infringement;

·

our ability to identify and develop new products;


 

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·

our compliance with extensive government regulation;

·

the volatility of our stock price; and

·

our expectations regarding the time during which we will be an emerging growth company under the JOBS Act.

You should read the matters described in "Risk Factors" and the other cautionary statements made in the final prospectus (the “Prospectus”) dated July 27, 2016 for our initial public offering filed with the Securities and Exchange Commission (the “SEC”) on July 28, 2016 and in this Quarterly Report on Form 10-Q. We cannot assure you that the forward-looking statements in this report will prove to be accurate and therefore you are encouraged not to place undue reliance on forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. You are urged to carefully review and consider the various disclosures made by us in this report and in other reports filed with the SEC that advise of the risks and factors that may affect our business. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we may make.

 

 

 


 

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PART I—FINANCIAL INFORMATION

Item 1.  Financial Statements.

Tactile Systems Technology, Inc.

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2016

 

2015

 

(In thousands, except share and per share data)

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

39,294

 

$

7,060

 

Accounts receivable, net

 

 

13,021

 

 

14,151

 

Inventories

 

 

6,248

 

 

5,781

 

Deferred income taxes

 

 

1,781

 

 

1,766

 

Prepaid expenses

 

 

808

 

 

602

 

Total current assets

 

 

61,152

 

 

29,360

 

Property and equipment, net

 

 

1,399

 

 

1,346

 

Other assets

 

 

 

 

 

 

 

Patent costs, net

 

 

2,304

 

 

2,489

 

Medicare accounts receivable – long term

 

 

1,644

 

 

2,039

 

Deferred income taxes

 

 

387

 

 

402

 

Other non-current assets

 

 

50

 

 

1,337

 

Total other assets

 

 

4,385

 

 

6,267

 

Total assets

 

$

66,936

 

$

36,973

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity (Deficit)

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

4,808

 

$

3,336

 

Accrued payroll and related taxes

 

 

4,250

 

 

3,355

 

Accrued expenses

 

 

1,212

 

 

916

 

Future product royalties

 

 

265

 

 

991

 

Income taxes payable

 

 

172

 

 

904

 

Total current liabilities

 

 

10,707

 

 

9,502

 

Long-term liabilities

 

 

 

 

 

 

 

Deferred compensation

 

 

150

 

 

193

 

Total liabilities

 

 

10,857

 

 

9,695

 

Convertible preferred stock

 

 

 

 

 

 

 

Series B convertible preferred stock; $0.001 par value, no shares authorized, issued or outstanding as of September 30, 2016 and 5,319,066 shares authorized and 2,733,468 shares issued and outstanding as of December 31, 2015 

 

 

 —

 

 

12,599

 

Series A convertible preferred stock; $0.001 par value, no shares authorized, issued or outstanding as of September 30, 2016 and 3,112,153 shares authorized and 3,108,589 shares issued and 3,061,488 shares outstanding as of December 31, 2015

 

 

 —

 

 

20,328

 

Stockholders’ equity (deficit)

 

 

 

 

 

 

 

Preferred stock; $0.001 par value, 50,000,000 shares authorized and no shares issued and outstanding as of September 30, 2016

 

 

 —

 

 

 —

 

Common stock; $0.001 par value, 300,000,000 shares authorized, 16,812,655 shares issued and 16,746,645 shares outstanding as of September 30, 2016, and 14,184,175 shares authorized and 3,222,902 shares issued and outstanding as of December 31, 2015

 

 

17

 

 

3

 

Additional paid-in capital

 

 

61,214

 

 

 —

 

Accumulated deficit

 

 

(5,152)

 

 

(5,652)

 

Total stockholders’ equity (deficit)

 

 

56,079

 

 

(5,649)

 

Total liabilities and stockholders’ equity (deficit)

 

$

66,936

 

$

36,973

 

See accompanying notes to the condensed consolidated financial statements.

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Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(In thousands, except share and per share data)

    

2016

    

2015

    

2016

    

2015

 

Revenues, net

 

$

22,635

 

$

16,820

 

$

56,064

 

$

41,712

 

Cost of goods sold

 

 

6,282

 

 

4,466

 

 

15,417

 

 

11,839

 

Gross profit

 

 

16,353

 

 

12,354

 

 

40,647

 

 

29,873

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

8,979

 

 

6,199

 

 

23,858

 

 

17,297

 

Research and development

 

 

1,285

 

 

1,094

 

 

3,314

 

 

2,922

 

Reimbursement, general and administrative

 

 

5,115

 

 

3,599

 

 

12,495

 

 

9,448

 

Total operating expenses

 

 

15,379

 

 

10,892

 

 

39,667

 

 

29,667

 

Income from operations

 

 

974

 

 

1,462

 

 

980

 

 

206

 

Other income

 

 

10

 

 

3

 

 

20

 

 

18

 

Income before income taxes

 

 

984

 

 

1,465

 

 

1,000

 

 

224

 

Income tax expense

 

 

492

 

 

589

 

 

500

 

 

90

 

Net income

 

 

492

 

 

876

 

 

500

 

 

134

 

Convertible preferred stock dividends

 

 

224

 

 

470

 

 

1,247

 

 

1,396

 

Allocation of undistributed earnings to preferred stockholders

 

 

99

 

 

262

 

 

 —

 

 

 —

 

Net income (loss) attributable to common stockholders

 

$

169

 

$

144

 

$

(747)

 

$

(1,262)

 

Net income (loss) per common share attributable to common stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.01

 

$

0.05

 

$

(0.12)

 

$

(0.44)

 

Diluted

 

$

0.01

 

$

0.03

 

$

(0.12)

 

$

(0.44)

 

Weighted-average common shares used to compute net income (loss) per common share attributable to common stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

12,253,877

 

 

3,148,294

 

 

6,317,875

 

 

2,854,112

 

Diluted

 

 

13,982,799

 

 

4,799,308

 

 

6,317,875

 

 

2,854,112

 

See accompanying notes to the condensed consolidated financial statements.

 

 

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Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series B Preferred Stock

 

Series A Preferred Stock

 

 

Common Stock

 

Additional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paid-In

 

Accumulated

 

 

 

 

(In thousands, except share data)

    

Shares

    

Amount

    

Shares

    

Amount

    

    

Shares

    

Par Value

    

Capital

    

Deficit

    

Total

 

Balances, December 31, 2014

 

2,733,468

 

$

11,894

 

3,061,488

 

$

19,188

 

 

2,626,619

 

$

3

 

$

442

 

$

(6,872)

 

$

(6,427)

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

232

 

 

 

 

232

 

Exercise of common stock options and warrants

 

 —

 

 

 

 —

 

 

 

 

596,283

 

 

5

 

 

862

 

 

 

 

867

 

Preferred stock dividends

 

 

 

534

 

 

 

862

 

 

 

 

 

 

(1,396)

 

 

 —

 

 

(1,396)

 

Net income for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

134

 

 

134

 

Balances, September 30, 2015

 

2,733,468

 

$

12,428

 

3,061,488

 

$

20,050

 

 

3,222,902

 

$

8

 

$

140

 

$

(6,738)

 

$

(6,590)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2015

 

2,733,468

 

$

12,599

 

3,061,488

 

$

20,328

 

 

3,222,902

 

$

3

 

$

 

$

(5,652)

 

$

(5,649)

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

902

 

 

 

 

902

 

Exercise of common stock options

 

 —

 

 

 

 —

 

 

 

 

234,135

 

 

1

 

 

223

 

 

 

 

224

 

Preferred stock dividend

 

 

 

436

 

 

 

811

 

 

 

 

 

 

(1,247)

 

 

 

 

(1,247)

 

Sale of common stock from initial public offering, net of offering expenses

 

 

 

 

 

 

 

 

4,120,000

 

 

4

 

 

35,378

 

 

 

 

35,382

 

Preferred stock dividends paid in cash

 

 

 

 

 

 

(8,207)

 

 

 

 

 

 

 —

 

 

 

 

 —

 

Common stock issued in lieu of series B preferred stock dividend

 

 

 

 

 

 

 

 

956,842

 

 

1

 

 

(1)

 

 

 

 

 —

 

Conversion of series B preferred stock to common stock

 

(2,733,468)

 

 

(13,035)

 

 

 

 

 

2,733,468

 

 

3

 

 

13,032

 

 

 

 

13,035

 

Conversion of series A preferred stock to common stock

 

 

 

 

(3,061,488)

 

 

(12,932)

 

 

3,190,985

 

 

3

 

 

12,929

 

 

 

 

12,932

 

Common stock issued for series A & B preferred stock liquidation preference

 

 

 

 

 

 

 

 

2,354,323

 

 

2

 

 

(2)

 

 

 

 

 —

 

Net income for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

500

 

 

500

 

Balances, September 30, 2016

 

 —

 

$

 —

 

 —

 

$

 —

 

 

16,812,655

 

$

17

 

$

61,214

 

$

(5,152)

 

$

56,079

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

 

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Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

(In thousands)

    

2016

    

2015

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

 

$

500

 

$

134

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

675

 

 

622

 

Deferred income taxes

 

 

 —

 

 

90

 

Stock-based compensation expense

 

 

859

 

 

232

 

Deferred compensation

 

 

 —

 

 

(6)

 

Change in allowance for doubtful accounts

 

 

465

 

 

250

 

Changes in assets and liabilities

 

 

 

 

 

 

 

Accounts receivable

 

 

665

 

 

1,092

 

Inventories

 

 

(467)

 

 

(1,849)

 

Prepaid expenses and other non-current assets

 

 

(233)

 

 

(708)

 

Medicare accounts receivable – long-term

 

 

395

 

 

(704)

 

Accounts payable

 

 

1,695

 

 

1,053

 

Accrued payroll and related taxes

 

 

895

 

 

246

 

Accrued expenses and income taxes payable

 

 

(387)

 

 

(173)

 

Future product royalties

 

 

(726)

 

 

(445)

 

Net cash provided by (used in) operating activities

 

 

4,336

 

 

(166)

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(518)

 

 

(420)

 

Patent costs

 

 

(24)

 

 

(18)

 

Net cash used in investing activities

 

 

(542)

 

 

(438)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Payments on notes payable

 

 

 —

 

 

(7)

 

Proceeds from exercise of common stock options and warrants

 

 

224

 

 

867

 

Dividends paid on preferred stock

 

 

(8,207)

 

 

 —

 

Fees paid for IPO

 

 

(4,777)

 

 

 —

 

Proceeds from IPO

 

 

41,200

 

 

 —

 

Net cash provided by financing activities

 

 

28,440

 

 

860

 

Net change in cash and cash equivalents

 

 

32,234

 

 

256

 

Cash and cash equivalents – beginning of period

 

 

7,060

 

 

5,416

 

Cash and cash equivalents – end of period

 

$

39,294

 

$

5,672

 

Supplemental cash flow disclosure

 

 

 

 

 

 

 

Cash paid for interest

 

$

 —

 

$

 —

 

Cash paid for taxes

 

$

1,261

 

$

226

 

See accompanying notes to the condensed consolidated financial statements.

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Tactile Systems Technology, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Note 1.  Nature of Operations and Basis of Presentation

Nature of Operations

Tactile Systems Technology, Inc. (“we,” “us,” and “our”) is the sole manufacturer and distributor of the Flexitouch and Entré Systems, medical devices that help control symptoms of lymphedema, a chronic and progressive medical condition that is often an unintended consequence of cancer treatment, and the ACTitouch System, a medical device used to treat venous leg ulcers and chronic venous insufficiency. We provide our products for use in the home and sell them through vascular, wound and lymphedema clinics throughout the United States.  We do business as “Tactile Medical.”

Basis of Presentation

Our accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including those which are normal and recurring) considered necessary for a fair presentation of the interim financial information have been included. The results for the nine months ended September 30, 2016 are not necessarily indicative of results to be expected for the year ending December 31, 2016, or for any other interim period or for any future year. Our business is affected by seasonality. In the first quarter of each year, when most patients have started a new insurance year and have not paid their annual deductibles, we experience substantially reduced demand for our products. We typically experience higher sales in the third and fourth quarters as a result of patients having paid their annual insurance deductibles in full, thereby reducing their out-of-pocket costs for our products, or because patients often spend the remaining balances in their flexible spending accounts.  The condensed consolidated interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in our final prospectus dated July 27, 2016 filed with the SEC on July 28, 2016.

We were originally incorporated in Minnesota under the name Tactile Systems Technology, Inc. on January 30, 1995. During 2006, we established a merger corporation and subsequently, on July 21, 2006, merged with and into this merger corporation. The resulting corporation assumed the name Tactile Systems Technology, Inc. The purpose of this merger was to reincorporate the company in Delaware, increase the number of authorized common shares to 8.9 million and assign a par value of $0.001 to our common stock.  In September 2013, we began doing business as “Tactile Medical.”

In connection with preparing for our initial public offering, our board of directors and stockholders approved a one-for-2.820044 reverse stock split of our capital stock. The reverse stock split became effective in June 2016.  All share and per share amounts in these financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to this reverse stock split, including reclassifying an amount equal to the reduction in par value of common stock to additional paid-in capital.

On August 2, 2016 we closed the initial public offering of our common stock, which resulted in the sale of 4,120,000 shares of our common stock at a public offering price of $10.00 per share. We received net proceeds from the initial public offering of approximately $35.4 million, after deducting underwriting discounts and approximately $2.9 million of transaction expenses. In connection with the closing of the initial public offering, all of our outstanding redeemable convertible preferred stock automatically converted to common stock on August 2, 2016.  At August 2, 2016, we did not have any redeemable convertible preferred stock issued or outstanding.  The significant increase in common stock outstanding in connection with the initial public offering is expected to impact the year-over-year comparability of our earnings per share calculations in future periods. 

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Basis of Consolidation

The condensed consolidated financial statements include the accounts of Tactile Systems Technology, Inc. and its wholly owned subsidiary, Swelling Solutions, Inc., after elimination of intercompany accounts and transactions.

JOBS Act Accounting Election

As an emerging growth company under the Jumpstart Our Business Startups (“JOBS”) Act, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. We have elected to take advantage of the extended transition period for adopting new or revised accounting standards that have different effective dates for public and private companies until such time as those standards apply to private companies.

Estimates

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  We continue to refine our estimates of the Medicare and other accounts receivable and related revenue recognition based on information available to us related to historical approval rates.

Significant Accounting Policies

During the nine months ended September 30, 2016 there were no material changes in our significant accounting policies. See Note 1 to the condensed consolidated financial statements included in our final Prospectus dated July 27, 2016, filed with the SEC on July 28, 2016, for information regarding our significant accounting policies.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance creating Accounting Standards Codification (“ASC”) Section 606, “Revenue from Contracts with Customers.” The new section will replace Section 605, “Revenue Recognition,” and creates modifications to various other revenue accounting standards for specialized transactions and industries. The section is intended to conform revenue accounting principles with a concurrently issued International Financial Reporting Standards to reconcile previously differing treatment between United States practices and those of the rest of the world and to enhance disclosures related to disaggregated revenue information. The updated guidance, which was amended July 9, 2015, is effective for annual reporting periods beginning on or after December 15, 2017, and interim periods within those annual periods. We will adopt the new provisions of this accounting standard at the beginning of fiscal year 2018, because early adoption is not allowed. We are currently evaluating the impact of this new standard on our consolidated financial statements.

In November 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-l7, “Income Taxes: Balance Sheet Classification of Deferred Taxes,” which requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. The ASU is effective for annual periods beginning after December 15, 20l7, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for all entities. We are currently evaluating the impact of this new standard on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842), which supersedes the existing guidance for lease accounting, “Leases” (Topic 840). ASU 2016-02 requires lessees to recognize a lease liability and a right of use asset for all leases. Lessor accounting remains largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at or entered into after the date of initial adoption, with an option to elect to use certain transition relief. We are currently evaluating the impact of this new standard on our consolidated financial statements.

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In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes and statutory tax withholding requirements and classification within the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2016. We are currently evaluating the impact of this new standard on our consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses,” to require the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently evaluating the impact of this new standard on our consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments,” to provide clarity on how certain cash receipt and cash payment transactions are presented and classified within the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently evaluating the impact of this new standard on our consolidated financial statements.

Cash and Cash Equivalents

Cash and cash equivalents consist of all cash on hand, deposits and funds invested in available for sale securities with original maturities of three months or less at the time of purchase. At September 30, 2016, our cash was held primarily in checking and money market accounts.

Note 2.  Patent Costs, Net

Our patents, all of which are subject to amortization, are summarized as follows:

 

 

 

 

 

 

 

 

 

 

As of

 

As of

 

(In thousands)

    

September 30, 2016

    

December 31, 2015

 

Patents

 

$

3,428

 

$

3,403

 

Less: accumulated amortization

 

 

(1,124)

 

 

(914)

 

Net patents

 

$

2,304

 

$

2,489

 

 

Amortization expense was $0.2 million for the nine-month periods ended September 30, 2016 and September 30, 2015, and $0.1 million for the three-month periods ended September 30, 2016 and September 30, 2015. Future amortization expenses are expected as follows:

 

 

 

 

 

(In thousands)

 

 

 

 

2016 (October 1 - December 31)

    

$

69

 

2017

 

 

279

 

2018

 

 

279

 

2019

 

 

279

 

2020

 

 

279

 

Thereafter

 

 

1,119

 

Total

 

$

2,304

 

 

 

 

 

 

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Note 3.  Accrued Expenses

Accrued expenses consisted of the following:

 

 

 

 

 

 

 

 

 

 

As of

 

As of

 

(In thousands)

    

September 30, 2016

    

December 31, 2015

 

Accrued warranty

 

$

540

 

$

360

 

Accrued clinical

 

 

71

 

 

130

 

Other

 

 

601

 

 

426

 

Total

 

$

1,212

 

$

916

 

 

 

 

 

 

 

Note 4.  Line of Credit — Bank

We have a $2.0 million line of credit with a bank that bears interest based on the prime rate, which was 3.50% as of September 30, 2016, and expires on May 11, 2017. Our credit line is secured by substantially all of our assets, including property and equipment, accounts receivable and inventory. Our credit line contains customary conditions as to borrowing, events of default and covenants, including covenants that restrict our ability to dispose of assets, merge with or acquire other entities, and incur indebtedness or encumbrances. There was no outstanding balance on the line of credit as of September 30, 2016 or as of December 31, 2015.  

Note 5.  Commitments and Contingencies

Lease Obligations

In March 2008, we entered into a non-cancelable operating lease agreement for building space for our corporate headquarters that provides for monthly rent, real estate taxes and operating expenses that was extended to July 31, 2021. Rent expense was $0.6 million for both the nine-month periods ended September 30, 2016 and September 30, 2015, and $0.2 million for both the three-month periods ended September 30, 2016 and September 30, 2015.

In July 2016, we entered into a non-cancelable operating lease agreement for building space to accommodate the relocation of our manufacturing, quality, and research and development functions. The lease agreement extends through October 2021 and provides for monthly rent, real estate taxes and operating expenses. Because we did not take possession of this leased facility prior to September 30, 2016, no associated rent expense has been recorded in our statement of operations as of September 30, 2016.

We also have operating lease agreements for certain computer and office equipment that expire in 2020. The leases provide an option to purchase the related equipment at fair market value at the end of the lease.

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Future base minimum lease payments for all lease obligations are expected to be as follows for the years ending December 31:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Computer/Office

 

 

 

 

(In thousands)

    

Building

    

Equipment

    

Total

 

2016 (October 1 - December 31)

 

$

154

 

$

5

 

$

159

 

2017

 

 

695

 

 

20

 

 

715

 

2018

 

 

714

 

 

18

 

 

732

 

2019

 

 

733

 

 

11

 

 

744

 

2020

 

 

753

 

 

1

 

 

754

 

Thereafter

 

 

506

 

 

 

 

506

 

Total

 

$

3,555

 

$

55

 

$

3,610

 

Major Vendors

We had purchases from three vendors that accounted for 36% and 45% of total purchases for the nine-month periods ended September 30, 2016 and September 30, 2015, respectively, and 35% of total purchases for each of the three-month periods ended September 30, 2016 and September 30, 2015.

Purchase Commitment

We issued purchase orders in February 2016 totaling $7.6 million for inventory that we expect to receive between October 2016 and July 2017.

Employment Agreements

We have entered into employment agreements with certain of our officers. The agreements provide for payment of severance ranging from nine to 15 months of then-current annualized base salary in the event of termination by us without cause or by the employee for good reason or, in the case of two of the officers, death, disability, or as a result of a qualifying termination after a change in control. The agreements also provide for payment of an amount equal to nine to 15 months of the then-current annual target bonus in the event of termination by us without cause or by the employee for good reason, or, in the case of two of the officers, death, disability, or as a result of a qualifying termination after a change in control.  In addition, the agreements provide for the vesting of certain equity compensation through the date of termination in the event of termination by us without cause or by the employee for good reason.

Deferred Compensation

Deferred compensation consisted of 66,010 shares of restricted common stock as of September 30, 2016. These  shares of restricted common stock were issued upon the conversion of 45,523 shares of restricted Series A preferred stock outstanding immediately prior to the completion of our initial public offering. The restricted shares vest upon the earlier of a change in control, as defined in the restricted stock agreement, or May 2, 2017.

Retirement Plan

We maintain a 401(k) retirement plan for our employees in which eligible employees can contribute a percentage of their pre-tax compensation. We may also make discretionary contributions to the 401(k) plan. We made contributions of $120,000 and $100,000 for the nine-month periods ended September 30, 2016 and September 30, 2015, respectively, and $45,000 and $36,000 for the three-month periods ended September 30, 2016 and September 30, 2015, respectively.

Note 6.  Stockholders' Equity

In September and October 2012, we received gross proceeds of $10.4 million for issuance of 2,733,468 shares of our Series B preferred stock at $3.80 per share. The Series B preferred stock included a liquidation preference of the original investment plus an accruing dividend at a rate of 6%, compounded annually, whether or not declared. The accruing dividend was payable upon a voluntary or involuntary liquidation or dissolution of our company, upon

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conversion of the Series B preferred stock to common stock, upon redemption of the Series B preferred stock or at such time as we paid a dividend on other shares of our capital stock. The accruing dividend could have been paid in cash or, at the option of the stockholder, additional shares of Series B preferred stock determined by dividing the amount of the accruing dividend by the Series B preferred stock purchase price as adjusted. There were $2.6 million of undeclared cumulative preferred dividends as of August 2, 2016, the date we closed our initial public offering and paid those dividends in the form of shares of our common stock. Holders of shares of Series B preferred stock were entitled to votes equal to the number of shares of common stock into which such Series B preferred stock could be converted.

Each share of Series B preferred stock could be converted into equal shares of common stock at the option of the Series B preferred stock holder at any time. In addition, the Series B preferred stock shares were automatically convertible into common shares upon the sale of shares of common stock to the public at a price per share of at least $11.42 in a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, resulting in at least $30 million of proceeds to our company, net of underwriting discounts and commissions and after which the common stock is listed on an United States national securities exchange. Each Series B Preferred stockholder was also entitled to receive the number of common shares equal to the Series B preferred stock original issue price divided by the initial public offering price per share. In addition, each Series B Preferred stockholder was entitled to receive the number of common shares equal to (1) the accrued dividends on the shares of Series B preferred stock divided by the original issue price of the Series B preferred stock and (2) the accrued dividends on the shares of Series B preferred stock divided by the initial public offering price per share in the offering.

From 2007 through 2009, we received gross proceeds of $13.0 million for the issuance of 3,061,488 shares of our Series A preferred stock at $4.23 per share. The Series A preferred stock included a liquidation preference of the original investment plus an accruing dividend at a rate of 6%, compounded annually, whether or not declared. The accruing dividend was payable upon a voluntary or involuntary liquidation or dissolution of our company or upon conversion of the Series A preferred stock to common stock, upon redemption of the Series A preferred stock or at such time as we paid a dividend on other shares of our capital stock. The accruing dividend would be paid in cash. There were $8.2 million of undeclared cumulative preferred dividends as of August 2, 2016, the date we closed our initial public offering and paid those dividends in cash. Holders of shares of Series A preferred stock were entitled to votes equal to the number of shares of common stock into which such Series A preferred stock could be converted. Purchasers of the Series A preferred stock received anti-dilution rights whereby if we issued or sold additional shares of preferred or common shares at a purchase price below $4.23 per share, we would issue additional shares to these purchasers of Series A preferred stock to effectively reduce their purchase price. The Series B preferred stock was sold at a price less than the Series A preferred stock. As a result, we issued 83,972 shares of common stock for this anti-dilution provision.

Each share of Series A preferred stock could be converted into equal shares of common stock at the option of the Series A preferred stock holder at any time. In addition, the Series A preferred stock shares were automatically convertible into common shares upon the sale of shares of common stock to the public at a minimum price of $11.42 per share in a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, resulting in at least $30 million of proceeds to our company, net of underwriting discounts and commissions. Each Series A Preferred stockholder was also entitled to receive the number of common shares equal to the Series A preferred stock original issue price divided by the initial public offering price per share.

At the time of its issuance, we determined that the Series B and Series A preferred stock contained two embedded features: (1) optional redemption by the holder and (2) optional conversion by the holder. We determined that each of the embedded features met the definition of a derivative and that the Series B and Series A preferred stock should be considered an equity host for the purposes of assessing the embedded derivatives for potential bifurcation. The following was noted regarding these embedded features:

Optional Redemption by the Holder.    We determined that the redemption feature was not clearly and closely related to the equity host instrument but does not meet the definition of a derivative. As such, the redemption feature did not require bifurcation under the guidance for derivatives.

Optional Conversion by the Holder.    The optional conversion feature was determined to be clearly and closely related to the Series B and Series A preferred stock host. As such the conversion feature did not require bifurcation under ASC 815-“Derivatives and Hedging”.

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The Series B and Series A preferred stock was assessed under ASC 470, "Debt," to determine if there was a beneficial conversion feature. We determined there was no beneficial conversion feature.

We completed the initial public offering of our common stock on August 2, 2016, in which we sold 4,120,000 shares of our common stock at a public offering price of $10.00 per share. Immediately prior to the completion of the initial public offering, all then-outstanding shares of our Series A and Series B preferred stock were converted into 5,924,453 shares of our common stock. Our Series A preferred stock converted to common stock at a ratio of 1-for-1.03 and our Series B preferred stock converted to common stock at a ratio of 1-for-1. In addition, immediately prior to the completion of the initial public offering, we issued 2,354,323 additional shares of our common stock that our Series A and Series B preferred stockholders were entitled to receive in connection with the conversion of the preferred stock, and we issued 956,842 shares of our common stock to pay accrued dividends on our Series B preferred stock. We also paid $8.2 million in cumulative accrued dividends to our Series A convertible preferred stockholders in conncection with the initial public offering, including $0.1 million of dividends paid to the holders of the common restricted shares.

Stock-Based Compensation

Our equity compensation plans provide for the grant of incentive and nonqualified stock options, as well as other stock-based awards, including restricted stock and restricted stock units, to employees, non-employee directors and other consultants who provide services to us. Restricted stock awards result in the issuance of new shares when granted. For other stock-based awards, new shares are issued when the award is exercised, vested or released according to the terms of the agreement.

In June 2016, we adopted the 2016 Equity Incentive Plan (the “2016 Plan”), pursuant to which an aggregate of 4.8 million shares of our common stock may be awarded to employees, directors and consultants as equity awards in the form of stock grants, restricted stock awards, stock options, restricted stock units, performance shares and other equity awards. With the adoption of the 2016 Plan, the board of directors decided we would no longer grant any options under our other existing equity compensation plans.  At September 30, 2016, there were 4.5 million shares remaining available for grant under the 2016 Plan.

We recorded stock-based compensation expense of $0.7 million and $0.9 million for the three-month and nine-month periods ended September 30, 2016, respectively, and $0.1 million and $0.2 million for the three-month and nine-month periods ended September 30, 2015, respectively. This expense was allocated as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2016

    

2015

    

2016

    

2015

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

$

33

 

$

21

 

$

71

 

$

52

 

Sales and marketing

 

 

188

 

 

47

 

 

272

 

 

125

 

Research and development

 

 

14

 

 

 —

 

 

14

 

 

 —

 

Reimbursement, general and administrative

 

 

474

 

 

19

 

 

502

 

 

55

 

Total stock-based compensation expense

 

$

709

 

$

87

 

$

859

 

$

232

 

 

 

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Stock Options

We have granted stock option awards which generally vest over four years and have a contractual term of ten years from the date of grant. Our stock option activity was as follows:

 

 

 

 

 

 

 

 

    

 

    

 

Weighted Average

 

 

 

Options

 

 

Exercise Price

 

 

 

(#)

 

 

($/share)

 

 

 

 

 

 

 

 

Outstanding at December 31, 2015

 

1,840,448

 

$

1.18

 

Granted

 

305,236

 

 

10.60

 

Exercised

 

(234,948)

 

 

0.95

 

Forfeited

 

(23,535)

 

 

2.84

 

Outstanding at September 30, 2016

 

1,887,201

 

$

2.33

 

Of the total outstanding options at September 30, 2016,  1,283,036 were exercisable with a weighted average exercise price of $1.02 per share. The total outstanding options had a weighted average remaining contractual life of 5.7 years.

At September 30, 2016, there was approximately $2.0 million of unrecognized stock option expense under our equity compensation plans, which is expected to be recognized on a straight-line basis over a weighted average period of 2.7 years.

Restricted Stock Units

In conjunction with our initial public offering, we granted 307,594 restricted stock units (“RSUs”) under the 2016 Plan to executives,  other employees and non-employee directors, which RSUs had an aggregate grant date fair value of $3.1 million. These RSUs include only a time-based service condition.  The compensation expense of these RSUs was determined using the fair value of the company’s common stock on the date of grant, and compensation expense will be recognized on a straight-line basis over the requisite vesting period.  At September 30, 2016, there was $2.9 million of total unrecognized compensation expense related to these unvested RSUs, which is expected be recognized over a weighted average period of 2.5 years.

Employee Stock Purchase Plan

Our employee stock purchase plan (“ESPP”), which was approved by our board of directors on April 27, 2016 and by our stockholders on June 20, 2016, allows participating employees to purchase shares of our common stock at a discount through payroll deductions. The plan is available to all of our employees and employees of participating subsidiaries. Participating employees may purchase common stock, on a voluntary after tax-basis, at a price equal to 85% of the lower of the closing market price per share of our common stock on the first or last trading day of each stock purchase period. The plan ordinarily consists of six-month purchase periods, beginning on May 16 and November 16 of each calendar year, but the initial purchase period began on July 27, 2016 and will end on May 15, 2017. A total of 1.6 million shares of common stock are reserved for issuance under the plan, and this share reserve will automatically be supplemented each January 1 through the year 2026 by an amount equal to the least of (1) 1% of the shares of our common stock outstanding on the immediately preceding December 31, (2) 500,000 shares or (3) such lesser amount as our board of directors may determine. No purchases were made under the plan in the nine months ended September 30, 2016.  We recognized $0.2 million in stock-based compensation expense related to the ESPP for each of the three-month and nine-month periods ended September 30, 2016. We did not recognize any stock-based compensation expense related to the ESPP in either of the three-month or nine-month periods ended September 30, 2015.

Note 7.  Income Taxes

We record our interim provision for income taxes by applying our estimated annual effective tax rate to our year-to-date pre-tax income and adjust the provision for discrete tax items recorded in the period. Deferred income taxes result from temporary differences between the reporting of amounts for financial statement purposes and income tax purposes. These differences relate primarily to different methods used for income tax purposes including depreciation

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and amortization, warranty and vacation accruals, and deductions related to allowances for doubtful accounts receivable and inventory reserves.

We recorded income tax expense of $0.5 million for the three-month and nine-month periods ended September 30, 2016, respectively. We recorded income tax expense of $0.6 million and $0.1 million for the three-month and nine-month periods ended September 30, 2015, respectively. Our provisions for income taxes included current federal and state income tax expense, as well as deferred federal and state income tax expense.

We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the condensed consolidated financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.

With few exceptions, we are no longer subject to U.S. federal, state or local income tax examinations by tax authorities for the years before 2011. We are not currently under examination by any taxing jurisdiction. In the event of any future tax assessments, we have elected to record the income taxes and any related interest and penalties as income tax expense on our statement of operations.

Note 8.  Net Income (Loss) Per Share Attributable to Common Stockholders

The following table sets forth the computation of our basic and diluted net income (loss) per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

    

2016

    

2015

    

2016

    

2015

 

(In thousands, except per share data)

 

 

 

 

 

Net income

 

$

492

 

$

876

 

$

500

 

$

134

 

Convertible preferred stock dividends

 

 

224

 

 

470

 

 

1,247

 

 

1,396

 

Allocation of undistributed earnings to preferred stockholders

 

 

99

 

 

262

 

 

 —

 

 

 —

 

Net income (loss) attributable to common stockholders

 

$

169

 

$

144

 

$

(747)

 

$

(1,262)

 

Weighted average shares outstanding

 

 

12,253,877

 

 

3,148,294

 

 

6,317,875

 

 

2,854,112

 

Effect of common stock options, warrants, restricted stock units and employee stock purchase plan shares

 

 

1,728,922

 

 

1,651,014

 

 

 —

 

 

 —

 

Weighted-average shares used to compute diluted net income (loss) per share

 

 

13,982,799

 

 

4,799,308

 

 

6,317,875

 

 

2,854,112

 

Net income (loss) per share - Basic

 

$

0.01

 

$

0.05

 

$

(0.12)

 

$

(0.44)

 

Net income (loss) per share - Diluted

 

$

0.01

 

$

0.03

 

$

(0.12)

 

$

(0.44)

 

 

As of September 30, 2016, total common shares outstanding and the potentially dilutive shares totaled approximately 18.5 million shares.

The following potentially dilutive securities were excluded from the computation of weighted shares outstanding for the three-month and nine-month periods ended September 30, 2016 and September 30, 2015 because these securities would have had an anti-dilutive impact:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

    

2016

    

2015

    

2016

    

2015

 

 

 

 

 

 

 

Convertible preferred stock outstanding

 

 —

 

 —

 

 —

 

5,794,958

 

Restricted stock units

 

 —

 

 —

 

373,604

 

 —

 

Common stock options

 

31,016

 

 —

 

1,887,201

 

1,861,709

 

Employee stock purchase plan shares

 

 —

 

 —

 

35,821

 

 —

 

Common stock warrants

 

 —

 

 —

 

5,800

 

14,518

 

Total

 

31,016

 

 —

 

2,302,426

 

7,671,185

 

 

 

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this report.

Overview

We are a medical technology company that develops and provides innovative medical devices for the treatment of chronic diseases at home. We focus on advancing the standard of care in treating chronic diseases in the home setting to improve patient outcomes and quality of life and help control rising healthcare expenditures. We possess a unique, scalable platform to deliver at-home healthcare solutions throughout the United States. This evolving home care delivery model is recognized by policy-makers and payers as a key for controlling rising healthcare expenditures. Our initial area of therapeutic focus is vascular disease, with a goal of advancing the standard of care in treating lymphedema and chronic venous insufficiency. Our solutions deliver cost-effective, clinically proven, long-term treatment for these chronic diseases.

Our proprietary products are the Flexitouch System, the Entré System, and the ACTitouch System. A predecessor to our Flexitouch System received 510(k) clearance from the U.S. Food and Drug Administration (the “FDA”) in July 2002, and we introduced the system to address the many limitations of self-administered home-based manual lymphatic drainage therapy. We began selling our more advanced Flexitouch System after receiving 510(k) clearance from the FDA in October 2006. Historically, we derived substantially all of our revenues from our Flexitouch System. For the nine months ended September 30, 2016 and 2015, sales of our Flexitouch System represented 86% and 87% of our revenues, respectively.  In September 2016, we received 510(k) clearance from the FDA for the Flexitouch System in treating lymphedema of the head and neck.

In September 2012, we acquired our second proprietary product, the ACTitouch System. The system received 510(k) clearance from the FDA in June 2013, and we began selling the product in September 2013 to address the many limitations of non-removable multilayered bandages that are worn by patients suffering from venous leg ulcers. We also introduced our Entré System in the United States in February 2013. The Entré System is sold to patients for whom a more basic pump is suitable or who do not yet qualify for insurance reimbursement for an advanced compression device such as our Flexitouch System. For the nine months ended September 30, 2016 and 2015, sales of our ACTitouch and Entré Systems combined represented 14% and 13% of revenues, respectively.

To support the growth of our business, we invest heavily in our commercial infrastructure, consisting of our direct sales force, home training resources, reimbursement capabilities and clinical expertise. We market our products in the United States using a direct-to-patient and -provider model. Our direct sales force has grown from three representatives in March 2005 to a team of over 110 people as of September 30, 2016. This model allows us to directly approach patients and clinicians, whereby we disintermediate the traditional durable medical equipment channel, allowing us to capture both the manufacturer and distributor margins. We also utilize over 300 licensed, independent healthcare practitioners as home trainers who educate patients on the proper use of our systems. We invest substantial resources in our reimbursement operations group of over 65 people that focuses on verifying case-by-case benefits, obtaining prior authorization, billing and collecting payments from payers and providing customer support services. Our payer relations group of over 25 people is responsible for developing relationships with payer decision-makers to educate them on our product efficacy, develop overall payer coverage policies and reimbursement criteria, manage Medicare patient claims and contracts with payers, and serve as an advocacy liaison between patients, clinicians and payers throughout the appeals process. We also have a clinical team, consisting of a scientific advisory board, in-house therapists and nurses, and a medical director (part-time), that serves as a resource to clinicians and patients and guides our development of clinical evidence in support of our products.

Our patients are reimbursed by government and private payers for the purchase of our products pursuant to established rates with each payer. We rely on third-party contract manufacturers for the sourcing of parts, the assembly of our controllers and the manufacturing of the garments used with our systems. We conduct final assembly of the garments used with our Flexitouch System, perform quality assurance, and ship our products from our facility in Minneapolis, Minnesota.

For the three months ended September 30, 2016, we generated revenues of $22.6 million and had net income of $0.5 million, compared to revenues of $16.8 million and net income of $0.9 million for the three months ended

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Table of Contents

September 30, 2015. For the nine months ended September 30, 2016, we generated revenues of $56.1 million and net income of $0.5 million, compared to revenues of $41.7 million and net income of  $0.1 million for the nine months ended September 30, 2015. Our primary sources of capital to date have been from operating income and private placements of our capital stock, as well as our initial public offering, which closed on August 2, 2016. We operate in one segment for financial reporting purposes.

Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2016 and 2015

The following table presents our results of operations for the periods indicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

2016

 

2015

 

Change

 

(In thousands, except percentages)

    

    

    

% of revenue

    

    

    

% of revenue

    

$

    

%

  

Condensed Consolidated Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

22,635

 

100

%  

$

16,820

 

100

%  

$

5,815

 

35

%

Cost of goods sold

 

 

6,282

 

28

 

 

4,466

 

27

 

 

1,816

 

41

 

Gross profit

 

 

16,353

 

72

 

 

12,354

 

73

 

 

3,999

 

32

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

8,979

 

40

 

 

6,199

 

37

 

 

2,780

 

45

 

Research and development

 

 

1,285

 

6

 

 

1,094

 

7

 

 

191

 

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