tcmd_Current_Folio_10Q

Table of Contents

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 March 31, 2017

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company”  in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Large accelerated filer      



    

 

    

Accelerated filer

 

 

 

 

 

 

 

 

 

 

Non-accelerated filer 

 

(Do not check if a smaller reporting company)

 

Smaller reporting company 

 

 

 

 

 

Emerging growth company

    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

As of May 5, 2017 there were 16,940,140 shares of common stock, $0.001 par value per share, outstanding.

 

 


 

Table of Contents

TABLE OF CONTENTS

 

 

 

 

 

 

    

PART I—FINANCIAL INFORMATION

    

 

 

 

 

 

 

Item 1. 

 

Condensed Consolidated Financial Statements

 

3

Item 2. 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

17

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

23

Item 4. 

 

Controls and Procedures

 

24

 

 

 

 

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

25

Item 1A. 

 

Risk Factors

 

25

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

25

Item 3. 

 

Defaults Upon Senior Securities

 

25

Item 4. 

 

Mine Safety Disclosures

 

26

Item 5. 

 

Other Information

 

26

Item 6. 

 

Exhibits

 

26

 

 

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Table of Contents

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 changes 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;

·

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 our Annual Report on Form 10-K for the year ended December 31, 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 filings with the Securities and Exchange Commission (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

(Unaudited)

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

(In thousands, except share and per share data)

    

2017

    

2016

 

Assets

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

20,714

 

$

30,701

 

Marketable securities

 

 

20,023

 

 

10,994

 

Accounts receivable, net

 

 

11,428

 

 

15,003

 

Inventories

 

 

6,933

 

 

6,554

 

Income taxes receivable

 

 

555

 

 

 —

 

Prepaid expenses

 

 

870

 

 

981

 

Total current assets

 

 

60,523

 

 

64,233

 

Property and equipment, net

 

 

2,273

 

 

1,563

 

Other assets

 

 

 

 

 

 

 

Patent costs, net

 

 

2,340

 

 

2,394

 

Medicare accounts receivable, long-term

 

 

2,869

 

 

2,823

 

Deferred income taxes

 

 

2,792

 

 

2,785

 

Other non-current assets

 

 

51

 

 

137

 

Total other assets

 

 

8,052

 

 

8,139

 

Total assets

 

$

70,848

 

$

73,935

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

4,862

 

$

5,018

 

Accrued payroll and related taxes

 

 

4,886

 

 

6,692

 

Accrued expenses

 

 

1,318

 

 

1,193

 

Future product royalties

 

 

48

 

 

67

 

Income taxes payable

 

 

 —

 

 

823

 

Total current liabilities

 

 

11,114

 

 

13,793

 

Long-term liabilities

 

 

 

 

 

 

 

Accrued warranty reserve, long-term

 

 

563

 

 

503

 

Total liabilities

 

 

11,677

 

 

14,296

 

Stockholders’ equity

 

 

 

 

 

 

 

Preferred stock; $0.001 par value, 50,000,000 shares authorized and no shares issued and outstanding as of March 31, 2017 and December 31, 2016

 

 

 —

 

 

 —

 

Common stock; $0.001 par value, 300,000,000 shares authorized, 16,909,154 shares issued and outstanding as of March 31, 2017, and 16,833,737 shares issued and outstanding as of December 31, 2016

 

 

17

 

 

17

 

Additional paid-in capital

 

 

63,449

 

 

62,406

 

Accumulated deficit

 

 

(4,277)

 

 

(2,773)

 

Accumulated other comprehensive loss

 

 

(18)

 

 

(11)

 

Total stockholders’ equity

 

 

59,171

 

 

59,639

 

Total liabilities and stockholders’ equity

 

$

70,848

 

$

73,935

 

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

 

 

 

March 31,

 

(In thousands, except share and per share data)

    

2017

    

2016

 

Revenues, net

 

$

19,850

 

$

13,700

 

Cost of goods sold

 

 

5,624

 

 

3,811

 

Gross profit

 

 

14,226

 

 

9,889

 

Operating expenses

 

 

 

 

 

 

 

Sales and marketing

 

 

10,166

 

 

7,281

 

Research and development

 

 

1,118

 

 

980

 

Reimbursement, general and administrative

 

 

5,874

 

 

3,414

 

Total operating expenses

 

 

17,158

 

 

11,675

 

Loss from operations

 

 

(2,932)

 

 

(1,786)

 

Other income

 

 

55

 

 

 5

 

Loss before income taxes

 

 

(2,877)

 

 

(1,781)

 

Income tax benefit

 

 

(1,373)

 

 

(801)

 

Net loss

 

 

(1,504)

 

 

(980)

 

Convertible preferred stock dividends

 

 

 —

 

 

514

 

Net loss attributable to common stockholders

 

$

(1,504)

 

$

(1,494)

 

Net loss per common share attributable to common stockholders

 

 

 

 

 

 

 

Basic

 

$

(0.09)

 

$

(0.45)

 

Diluted

 

$

(0.09)

 

$

(0.45)

 

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

 

 

 

 

 

 

 

Basic

 

 

16,878,443

 

 

3,293,326

 

Diluted

 

 

16,878,443

 

 

3,293,326

 

See accompanying notes to the condensed consolidated financial statements.

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Table of Contents

 

Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In thousands)

    

2017

    

2016

 

Net loss

 

$

(1,504)

 

$

(980)

 

Other comprehensive income (loss):

 

 

  

 

 

  

 

Unrealized losses on available-for-sale securities

 

 

(13)

 

 

 —

 

Income tax related to items of other comprehensive loss

 

 

 6

 

 

 —

 

Total other comprehensive loss

 

 

(7)

 

 

 —

 

Comprehensive loss

 

$

(1,511)

 

$

(980)

 

See accompanying notes to the condensed consolidated financial statements.

 

 

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Table of Contents

Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Series B Preferred Stock

 

Series A Preferred Stock

 

 

Common Stock

 

Additional

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paid-In

 

Accumulated

 

Comprehensive

 

 

 

 

(In thousands, except share data)

    

Shares

    

Amount

    

Shares

    

Amount

    

    

Shares

    

Par Value

    

Capital

    

Deficit

    

Loss

    

Total

 

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

 

 

 

 

 

 

 

 

 

 

 

 

75

 

 

 

 

 

 

75

 

Exercise of common stock options and warrants

 

 —

 

 

 

 —

 

 

 

 

118,383

 

 

 —

 

 

128

 

 

 

 

 

 

128

 

Preferred stock dividends

 

 —

 

 

197

 

 —

 

 

317

 

 

 —

 

 

 —

 

 

(203)

 

 

(311)

 

 

 —

 

 

(514)

 

Comprehensive loss for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(980)

 

 

 —

 

 

(980)

 

Balances, March 31, 2016

 

2,733,468

 

$

12,796

 

3,061,488

 

$

20,645

 

 

3,341,285

 

$

 3

 

$

 —

 

$

(6,943)

 

$

 —

 

$

(6,940)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2016

 

 —

 

$

 —

 

 —

 

$

 —

 

 

16,833,737

 

$

17

 

$

62,406

 

$

(2,773)

 

$

(11)

 

$

59,639

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

957

 

 

 

 

 

 

957

 

Exercise of common stock options and warrants and vesting of restricted stock units

 

 —

 

 

 

 —

 

 

 

 

75,417

 

 

 —

 

 

100

 

 

 

 

 

 

100

 

Taxes paid for net share settlement of restricted stock units

 

 

 

 —

 

 

 

 —

 

 

 

 

 

 

(14)

 

 

 

 

 

 

(14)

 

Comprehensive loss for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,504)

 

 

(7)

 

 

(1,511)

 

Balances, March 31, 2017

 

 —

 

$

 —

 

 —

 

$

 —

 

 

16,909,154

 

$

17

 

$

63,449

 

$

(4,277)

 

$

(18)

 

$

59,171

 

See accompanying notes to the condensed consolidated financial statements.

 

 

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Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In thousands)

    

2017

    

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

 

$

(1,504)

 

$

(980)

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

298

 

 

211

 

Deferred income taxes

 

 

 —

 

 

(801)

 

Stock-based compensation expense

 

 

957

 

 

75

 

Change in allowance for doubtful accounts

 

 

(330)

 

 

 —

 

Changes in assets and liabilities

 

 

 

 

 

 

 

Accounts receivable

 

 

3,905

 

 

2,493

 

Inventories

 

 

(379)

 

 

553

 

Prepaid expenses and other assets

 

 

(358)

 

 

66

 

Medicare accounts receivable – long-term

 

 

(46)

 

 

228

 

Accounts payable

 

 

(394)

 

 

(331)

 

Accrued payroll and related taxes

 

 

(1,806)

 

 

(1,534)

 

Accrued expenses and income taxes payable

 

 

(640)

 

 

(588)

 

Future product royalties

 

 

(19)

 

 

(248)

 

Net cash used in operating activities

 

 

(316)

 

 

(856)

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

(9,049)

 

 

 —

 

Purchases of property and equipment

 

 

(700)

 

 

(112)

 

Patent costs

 

 

(8)

 

 

 —

 

Net cash used in investing activities

 

 

(9,757)

 

 

(112)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from exercise of common stock options and warrants

 

 

100

 

 

128

 

Taxes paid for net share settlement of restricted stock units

 

 

(14)

 

 

 —

 

Fees paid for IPO

 

 

 —

 

 

(433)

 

Net cash provided by (used in) financing activities

 

 

86

 

 

(305)

 

Net change in cash and cash equivalents

 

 

(9,987)

 

 

(1,273)

 

Cash and cash equivalents – beginning of period

 

 

30,701

 

 

7,060

 

Cash and cash equivalents – end of period

 

$

20,714

 

$

5,787

 

Supplemental cash flow disclosure

 

 

 

 

 

 

 

Cash paid for interest

 

$

 —

 

$

 —

 

Cash paid for taxes

 

$

 5

 

$

951

 

Non-cash investing activities

 

 

 

 

 

 

 

Acquisition of assets included in accounts payable

 

$

238

 

$

53

 

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, 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. We have reclassified certain prior-year amounts to conform to the current year’s presentation.

The results for the three months ended March 31, 2017 are not necessarily indicative of results to be expected for the year ending December 31, 2017, 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 yet met their annual out-of-pocket obligations, 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, and because patients often spend the remaining balances in their flexible spending accounts at that time.  This seasonality applies only to purchases of our products by patients covered by commercial insurance and is not relevant to Medicare, Medicaid, or Veterans Administration hospitals, as those payers do not have plans that include patient deductibles for purchases of our products.  The condensed consolidated interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 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 1-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 condensed consolidated 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 impacts the year-over-year comparability of our earnings per share calculations. 

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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.

Estimates

The preparation of 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.

Significant Accounting Policies

During the three months ended March 31, 2017 there were no material changes in our significant accounting policies. See Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016 for information regarding our significant accounting policies.

Recent Accounting Pronouncements

We are an “emerging growth company” as defined by the Jumpstart Our Business Startups (“JOBS”) Act of 2012. The JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can selectively delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption and, as a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies. Section 107 of the JOBS Act provides that we can elect to opt out of the extended transition period at any time, which election is irrevocable.

In May 2014, the Financial Accounting Standards Board (“FASB”), issued Accounting Standards Update (“ASU”) 2014-09, “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 U.S. practices and those of the rest of the world and to enhance disclosures related to disaggregated revenue information. The updated guidance is effective for interim and annual reporting periods beginning on or after December 15, 2018, for private companies; this effective date is applicable for us due to the JOBS Act exemption described above. Therefore, we plan to further evaluate the timing and anticipated impact of the adoption of this updated guidance on our consolidated financial statements in future periods.

In November 2015, the FASB issued ASU 2015-l7, “Income Taxes: Balance Sheet Classification of Deferred Taxes,” which requires entities to present deferred tax assets and deferred tax liabilities as non-current in a classified balance sheet. The ASU is effective for annual periods beginning after December l5, 20l7, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for all entities. We elected to adopt this new standard prospectively in the fourth quarter of 2016.

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 interim and annual periods beginning after December 15, 2019 for private companies; this effective date is applicable to us due to the JOBS Act exemption described above. 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 plan to further evaluate the timing and anticipated impact of the adoption of this ASU on our consolidated financial statements in future periods.

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

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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 elected to adopt this new standard in the fourth quarter of 2016, effective as of January 1, 2016.

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 interim and annual periods beginning after December 15, 2020, for private companies; this effective date is applicable to us due to the JOBS Act exemption described above. Therefore, we plan to further evaluate the timing and anticipated impact of the adoption of this ASU on our consolidated financial statements in future periods.

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 interim and annual periods beginning after December 15, 2018, for private companies; this effective date is applicable for us due to the JOBS Act exemption described above. Therefore, we plan to further evaluate the timing and anticipated impact of the adoption of this ASU on our consolidated financial statements in future periods.

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 March 31, 2017, our cash was held primarily in checking and money market accounts.

Note 2.  Marketable Securities

Our investments in marketable securities are classified as available-for-sale and consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

 

    

 

 

    

Unrealized

    

Unrealized

    

 

 

 

(In thousands)

 

Cost

 

Gains

 

Losses

 

Fair Value

 

U.S. government and agency obligations

 

$

12,006

 

$

 2

 

$

29

 

$

11,979

 

Corporate debt securities and certificates of deposit

 

 

8,047

 

 

 2

 

 

 5

 

 

8,044

 

Marketable securities

 

$

20,053

 

$

 4

 

$

34

 

$

20,023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

    

 

 

    

Unrealized

    

Unrealized

    

 

 

 

(In thousands)

 

Cost

 

Gains

 

Losses

 

Fair Value

 

U.S. government and agency obligations

 

$

9,011

 

$

 2

 

$

17

 

$

8,996

 

Corporate debt securities and certificates of deposit

 

 

2,000

 

 

 —

 

 

 2

 

 

1,998

 

Marketable securities

 

$

11,011

 

$

 2

 

$

19

 

$

10,994

 

Our investments in marketable debt securities all have contractual maturities of twelve to 24 months from March 31, 2017. At March 31, 2017, marketable debt securities valued at $4.0 million were in an unrealized gain position totaling $4,000, and marketable debt securities valued at $16.0 million were in an unrealized loss position totaling $34,000 (all had been in an unrealized loss position for less than 12 months). At December 31, 2016, marketable debt securities valued at $4.0 million were in an unrealized gain position totaling $2,000, and marketable debt securities valued at $7.0 million were in an unrealized loss position totaling $19,000 (all had been in an unrealized loss position for less than 12 months).

Net pre-tax unrealized losses for marketable debt securities of $13,000 at March 31, 2017 were recorded as a component of accumulated other comprehensive loss in stockholders' equity. Marketable debt securities valued at $1.0 million were sold during the three months ended March 31, 2017 with no resulting gain or loss.

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Note 3.  Patent Costs, Net

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

 

 

 

 

 

 

 

 

 

 

As of

 

As of

 

(In thousands)

    

March 31, 2017

    

December 31, 2016

 

Patents

 

$

3,470

 

$

3,462

 

Less: accumulated amortization

 

 

(1,130)

 

 

(1,068)

 

Net patents

 

$

2,340

 

$

2,394

 

 

Amortization expense was $0.1 million for each of the three months ended March 31, 2017 and 2016. Future amortization expenses are expected as follows:

 

 

 

 

 

(In thousands)

 

 

 

 

2017 (April 1 - December 31)

    

$

187

 

2018

 

 

249

 

2019

 

 

249

 

2020

 

 

249

 

2021

 

 

249

 

Thereafter

 

 

1,157

 

Total

 

$

2,340

 

 

Note 4.  Accrued Expenses

Accrued expenses consisted of the following:

 

 

 

 

 

 

 

 

 

 

As of

 

As of

 

(In thousands)

    

March 31, 2017

    

December 31, 2016

 

Accrued warranty

 

$

310

 

$

290

 

Accrued clinical

 

 

99

 

 

45

 

Other

 

 

909

 

 

858

 

Total

 

$

1,318

 

$

1,193

 

 

 

 

 

 

 

Note 5.  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 3.75% as of March 31, 2017, 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 March 31, 2017 or as of December 31, 2016.  

Note 6.  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.

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 November 2021 and provides for monthly rent, real estate taxes and operating expenses.

Rent expense was $0.3 million and $0.2 million for the three months ended March 31, 2017 and 2016, respectively.

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In July 2016, we entered into a fleet vehicle lease program for certain members of our field sales organization. At March 31, 2017, we had 46 leased vehicles under this program.

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.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Computer/Office

 

Fleet Car

 

 

 

 

(In thousands)

    

Buildings

    

Equipment

    

Program

    

Total

 

2017 (April 1 - December 31)

 

$

521

 

$

46

 

$

213

 

$

780

 

2018

 

 

714

 

 

52

 

 

69

 

 

835

 

2019

 

 

733

 

 

39

 

 

 —

 

 

772

 

2020

 

 

752

 

 

22

 

 

 —

 

 

774

 

2021

 

 

526

 

 

 —

 

 

 —

 

 

526

 

Thereafter

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total

 

$

3,246

 

$

159

 

$

282

 

$

3,687

 

Major Vendors

We had purchases from three vendors that collectively accounted for 35% and 31% of total purchases for the three months ended March 31, 2017 and 2016, respectively.

Purchase Commitments

We issued purchase orders in February 2016 totaling $8.2 million, of which $3.0 million remained as of March 31, 2017, for inventory that we expect to receive between April and July of 2017. We issued purchase orders in January 2017 totaling $7.8 million for inventory that we expect to receive between June 2017 and February 2018.

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.

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 $45,000 and $36,000 for the three months ended March 31, 2017 and 2016, respectively.

Note 7.  Stockholders' Equity

We completed an 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

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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 connection with the initial public offering, including $0.1 million of dividends paid to the holders of the common restricted shares.

Stock-Based Compensation

Our 2016 Equity Incentive Plan (the “2016 Plan”) authorizes us to grant stock options, stock appreciation rights, restricted stock, stock units and other stock-based awards to employees, non-employee directors and certain consultants and advisors. There were up to 4,800,000 shares of our common stock initially reserved for issuance pursuant to the 2016 Plan. The 2016 Plan provides that the number of shares reserved and available for issuance under the 2016 Plan will automatically increase annually on January 1 of each calendar year, commencing in 2017 and ending on and including January 1, 2026, by an amount equal to the lesser of: (a) 5% of the number of common shares of stock outstanding as of December 31 of the immediately preceding calendar year, or (b) 2,500,000 shares; provided, however, that our Board of Directors may determine that any annual increase be a lesser number. In addition, all awards granted under our 2007 Omnibus Stock Plan and our 2003 Stock Option Plan that were outstanding when the 2016 Plan became effective and that are forfeited, expire, are cancelled, are settled for cash or otherwise not issued, will become available for issuance under the 2016 Plan. Effective January 1, 2017, 841,686 shares were added to the 2016 Plan, as available for issuance thereunder, pursuant to the automatic increase feature of the 2016 Plan. As of March 31, 2017, 4,960,398 shares were available for future grant pursuant to the 2016 Plan.

Upon adoption and approval of the 2016 Equity Incentive Plan, all of our previous equity incentive compensation plans were terminated. However, existing awards under those plans continue to vest in accordance with the original vesting schedules and will expire at the end of their original terms.

We recorded stock-based compensation expense of $0.9 million and $0.1 million for the three months ended March 31, 2017 and 2016, respectively. This expense was allocated as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In thousands)

    

2017

    

2016

 

Cost of goods sold

 

$

49

 

$

19

 

Sales and marketing expenses

 

 

315

 

 

42

 

Research and development expenses

 

 

23

 

 

 —

 

Reimbursement, general and administrative expenses

 

 

570

 

 

14

 

Total stock-based compensation expense

 

$

957

 

$

75

 

 

Stock Options

Stock options issued to participants other than non-employees vest over four years and typically have a contractual term of 10 years. The stock options granted on July 27, 2016 to our non-employee directors vest in full on the earlier of one year after the date of grant or the date of the 2017 annual meeting of stockholders. These options have a contractual term of 7 years. Our stock option activity for the three months ended March 31, 2017 was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

Weighted Average

 

Weighted Average

Aggregate

  

 

 

Options

 

 

Exercise Price

 

Remaining

Intrinsic

 

(In thousands except share, per share and years data)

 

Outstanding

 

 

Per Share1

 

Contractual Life

Value2

 

Balance at December 31, 2016

 

1,856,299

 

$

2.69

 

5.5 years

 

$

25,467

 

Granted

 

7,800

 

 

20.33

 

 

 

 

 

 

Exercised

 

(68,591)

 

 

1.10

 

 

 

 

1,019

 

Forfeited

 

(10,609)

 

 

7.71

 

 

 

 

 

 

Balance at March 31, 2017

 

1,784,899

 

 

2.80

 

5.3 years

 

 

28,839

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at March 31, 2017

 

1,338,155

 

$

1.07

 

4.4 years

 

$

23,925

 

(1)

The exercise price of each option granted during the period shown was equal to the market price of the underlying stock on the date of grant.

(2)

The aggregate intrinsic value of options exercised represents the difference between the exercise price of the option and the closing stock price of our common stock on the date of exercise. The aggregate intrinsic value of options outstanding represents the difference between the exercise price of the option and the closing stock price of our common stock on the last day of the quarter.

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Options exercisable of 1,361,442 at March 31, 2016 had  a weighted average exercise price of $0.99.

Stock based compensation expense included in our Condensed Consolidated Statements of Operations for stock options was $0.2 million and $0.1 million for the three months ended March 31, 2017 and 2016, respectively.

At March 31, 2017, there was approximately $1.1 million of total unrecognized pre-tax 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 2.4 years.

Stock-Settled Restricted Stock Units

Stock-settled restricted stock units granted under the 2016 Plan vest over one to three years. These awards are stock-settled with common shares. Stock-based compensation expense included in our Condensed Consolidated Statement of Operations for stock-settled restricted stock units was $0.5 million for the three months ended March 31, 2017. No restricted stock units had been granted as of March 31, 2016. As of March 31, 2017, there was $3.5 million of total unrecognized pre-tax compensation expense related to outstanding stock-settled restricted stock units that is expected to be recognized over a weighted-average period of 1.5 years. Our stock-settled restricted stock unit activity for the three months ended March 31, 2017 was as follows:

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

Weighted

    

Aggregate

  

 

 

Units

 

 

Average Grant

 

Intrinsic

 

(In thousands except share and per share data)

 

Outstanding

 

 

Date Fair Value

 

Value2

 

Balance at December 31, 2016

 

324,863

 

$

10.39

 

$

5,331

 

Granted

 

65,741

 

 

20.31

 

 

 

 

Vested1

 

(5,786)

 

 

11.43

 

 

 

 

Cancelled

 

(865)

 

 

17.35

 

 

 

 

Balance at March 31, 2017

 

383,953

 

$

12.06

 

$

7,276

 

(1)

There were 922 restricted stock units that vested during the quarter which represent grants to non-employee directors in lieu of annual retainer installments. These restricted stock units were fully vested upon grant and represent the right to receive one share of common stock upon the earlier of the director’s termination of service as a director of ours or the occurrence of a change of control of us. The shares of common stock underlying these restricted stock units, as well as 1,726 previously granted restricted stock units with similar terms, are not issued or outstanding.

(2)

Intrinsic value of stock-settled restricted stock units outstanding was based on our closing stock price on the last trading day of the quarter.

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, commencing in 2017 and ending on and including January 1, 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. Effective January 1, 2017, 168,337 shares were added to the ESPP, as available for issuance thereunder, pursuant to the automatic increase feature of the plan. No purchases were made under the plan during the three months ended March 31, 2017. We recognized $0.2 million in stock-based compensation expense related to the ESPP for the three months ended March 31, 2017. We did not recognize any stock-based compensation expense related to the ESPP in the three months ended March 31, 2016.

Note 8.  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

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purposes. These differences relate primarily to different methods used for income tax reporting purposes, including for depreciation and amortization, warranty and vacation accruals, and deductions related to allowances for doubtful accounts receivable and inventory reserves.

The effective tax rate for the three months ended March 31, 2017 was 47.7%, compared to 43.3% in the three months ended March 31, 2016, an increase of 4.4 percentage points. The primary factor that increased our effective tax rate was an increase in non-deductible expenses related to statutory stock options.

We recorded an income tax benefit of $1.4 million and $0.8 million for the three months ended March 31, 2017 and 2016, 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 9.  Net Loss Per Share Attributable to Common Stockholders

We adopted ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” in the fourth quarter of 2016 on a retrospective basis, effective January 1, 2016. The following table sets forth the computation of our basic and diluted net loss per share attributable to common stockholders and reflects the adoption of ASU 2016-09:

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

(In thousands, except share and per share data)

    

2017

    

2016

 

Net loss

 

$

(1,504)

 

$

(980)

 

Convertible preferred stock dividends

 

 

 —

 

 

514

 

Net loss attributable to common stockholders

 

$

(1,504)

 

$

(1,494)

 

Weighted average shares outstanding

 

 

16,878,443

 

 

3,293,326

 

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

 

 

 —

 

 

 —

 

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

 

 

16,878,443

 

 

3,293,326

 

Net loss per share - Basic

 

$

(0.09)

 

$

(0.45)

 

Net loss per share - Diluted

 

$

(0.09)

 

$

(0.45)

 

The following potentially dilutive securities were excluded from the computation of weighted-average shares outstanding for the three months ended March 31, 2017 and 2016 because these securities would have had an anti-dilutive impact due to reported losses for these periods:

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

    

2017

    

2016

 

Convertible preferred stock outstanding

 

 —

 

5,794,957

 

Restricted stock units

 

449,963

 

 —

 

Common stock options

 

1,784,951

 

1,704,131

 

Common stock warrants

 

 —

 

5,800

 

Total

 

2,234,914

 

7,504,888

 

 

As of March 31, 2017, total common shares outstanding and the potentially dilutive shares totaled approximately 19.1 million shares.

 

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Note 10.  Fair Value Measurements

We determine the fair value of our assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. We use a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1). The next highest priority is based on quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in non-active markets or other observable inputs (Level 2). The lowest priority is given to unobservable inputs (Level 3). The following provides information regarding fair value measurements for our marketable securities as of March 31, 2017 and December 31, 2016 according to the three-level fair value hierarchy.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

March 31, 2017 Using:

 

    

Quoted Prices

    

 

 

    

 

 

    

 

 

 

 

in Active

 

Significant

 

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

 

Assets

 

Inputs

 

Inputs

 

 

(In thousands)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

Recurring Fair Value Measurements:

 

 

 

 

 

 

 

 

 

 

 

 

Currency

 

$

 —

 

$

 —

 

$

 

$

 —

Money market mutual funds

 

 

9,944

 

 

 —

 

 

 —

 

 

9,944

U.S. government and agency obligations

 

 

2,011

 

 

9,968

 

 

 —

 

 

11,979

Corporate debt securities and certificates of deposit

 

 

 

 

8,044