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 June 30, 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 August 4, 2017 there were 17,586,617 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 (unaudited)

 

3

Item 2. 

 

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

 

18

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

25

Item 4. 

 

Controls and Procedures

 

26

 

 

 

 

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

27

Item 1A. 

 

Risk Factors

 

27

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

27

Item 3. 

 

Defaults Upon Senior Securities

 

28

Item 4. 

 

Mine Safety Disclosures

 

28

Item 5. 

 

Other Information

 

28

Item 6. 

 

Exhibits

 

28

 

 

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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.

2


 

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PART I—FINANCIAL INFORMATION

Item 1.  Financial Statements.

Tactile Systems Technology, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

(In thousands, except share and per share data)

    

2017

    

2016

 

Assets

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

18,096

 

$

30,701

 

Marketable securities

 

 

21,002

 

 

10,994

 

Accounts receivable, net

 

 

12,910

 

 

15,003

 

Inventories

 

 

9,631

 

 

6,554

 

Income taxes receivable

 

 

4,440

 

 

 —

 

Prepaid expenses

 

 

708

 

 

981

 

Total current assets

 

 

66,787

 

 

64,233

 

Property and equipment, net

 

 

2,854

 

 

1,563

 

Other assets

 

 

 

 

 

 

 

Patent costs, net

 

 

2,292

 

 

2,394

 

Medicare accounts receivable, long-term

 

 

2,961

 

 

2,823

 

Deferred income taxes

 

 

2,798

 

 

2,785

 

Other non-current assets

 

 

201

 

 

137

 

Total other assets

 

 

8,252

 

 

8,139

 

Total assets

 

$

77,893

 

$

73,935

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

6,567

 

$

5,018

 

Accrued payroll and related taxes

 

 

3,118

 

 

6,692

 

Accrued expenses

 

 

1,371

 

 

1,193

 

Future product royalties

 

 

34

 

 

67

 

Income taxes payable

 

 

 —

 

 

823

 

Total current liabilities

 

 

11,090

 

 

13,793

 

Long-term liabilities

 

 

 

 

 

 

 

Accrued warranty reserve, long-term

 

 

610

 

 

503

 

Total liabilities

 

 

11,700

 

 

14,296

 

Stockholders’ equity

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 50,000,000 shares authorized; none issued and outstanding as of June 30, 2017 and December 31, 2016

 

 

 —

 

 

 —

 

Common stock, $0.001 par value, 300,000,000 shares authorized; 17,567,458 shares issued and 17,541,371 shares outstanding as of June 30, 2017; 16,833,737 shares issued and outstanding as of December 31, 2016

 

 

18

 

 

17

 

Additional paid-in capital

 

 

67,178

 

 

62,406

 

Accumulated deficit

 

 

(490)

 

 

(2,773)

 

Accumulated other comprehensive loss

 

 

(20)

 

 

(11)

 

Less: treasury stock, at cost — 26,087 shares as of June 30, 2017

 

 

(493)

 

 

 —

 

Total stockholders’ equity

 

 

66,193

 

 

59,639

 

Total liabilities and stockholders’ equity

 

$

77,893

 

$

73,935

 

See accompanying notes to the condensed consolidated financial statements.

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Table of Contents

Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(In thousands, except share and per share data)

    

2017

    

2016

    

2017

    

2016

 

Revenues, net

 

$

26,264

 

$

19,729

 

$

46,114

 

$

33,429

 

Cost of goods sold

 

 

7,034

 

 

5,324

 

 

12,658

 

 

9,135

 

Gross profit

 

 

19,230

 

 

14,405

 

 

33,456

 

 

24,294

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

10,645

 

 

7,598

 

 

20,811

 

 

14,879

 

Research and development

 

 

1,465

 

 

1,049

 

 

2,583

 

 

2,029

 

Reimbursement, general and administrative

 

 

6,390

 

 

3,966

 

 

12,264

 

 

7,380

 

Total operating expenses

 

 

18,500

 

 

12,613

 

 

35,658

 

 

24,288

 

Income (loss) from operations

 

 

730

 

 

1,792

 

 

(2,202)

 

 

 6

 

Other income

 

 

64

 

 

 5

 

 

119

 

 

10

 

Income (loss) before income taxes

 

 

794

 

 

1,797

 

 

(2,083)

 

 

16

 

Income tax (benefit) expense

 

 

(2,993)

 

 

809

 

 

(4,366)

 

 

 8

 

Net income

 

 

3,787

 

 

988

 

 

2,283

 

 

 8

 

Convertible preferred stock dividends

 

 

 —

 

 

509

 

 

 —

 

 

1,023

 

Allocation of undistributed earnings to preferred stockholders

 

 

 —

 

 

302

 

 

 —

 

 

 —

 

Net income (loss) attributable to common stockholders

 

$

3,787

 

$

177

 

$

2,283

 

$

(1,015)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.22

 

$

0.05

 

$

0.13

 

$

(0.30)

 

Diluted

 

$

0.20

 

$

0.04

 

$

0.12

 

$

(0.30)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

17,176,386

 

 

3,406,420

 

 

17,028,237

 

 

3,349,873

 

Diluted

 

 

18,814,565

 

 

4,846,327

 

 

18,713,421

 

 

3,349,873

 

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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(In thousands)

    

2017

    

2016

    

2017

    

2016

 

Net income

 

$

3,787

 

$

988

 

$

2,283

 

$

 8

 

Other comprehensive loss:

 

 

  

 

 

  

 

 

  

 

 

  

 

Unrealized losses on available-for-sale securities

 

 

(8)

 

 

 —

 

 

(21)

 

 

 —

 

Income tax related to items of other comprehensive loss

 

 

 6

 

 

 —

 

 

12

 

 

 —

 

Total other comprehensive loss

 

 

(2)

 

 

 —

 

 

(9)

 

 

 —

 

Comprehensive income

 

$

3,785

 

$

988

 

$

2,274

 

$

 8

 

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

 

Treasury

 

 

 

 

(In thousands, except share data)

 

Shares

 

Amount

 

Shares

 

Amount

 

 

Shares

 

Par Value

 

Capital

 

Deficit

 

Loss

 

Stock

 

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

 

 

 

 

 

 

 

 

 

 

 

 

150

 

 

 

 

 

 

 

 

150

 

Exercise of common stock options and warrants

 

 —

 

 

 

 —

 

 

 

 

191,235

 

 

 —

 

 

196

 

 

 

 

 

 

 

 

196

 

Preferred stock dividends

 

 —

 

 

371

 

 —

 

 

652

 

 

 —

 

 

 —

 

 

(346)

 

 

(677)

 

 

 —

 

 

 —

 

 

(1,023)

 

Comprehensive income for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 8

 

 

 —

 

 

 —

 

 

 8

 

Balances, June 30, 2016

 

2,733,468

 

$

12,970

 

3,061,488

 

$

20,980

 

 

3,414,137

 

$

 3

 

$

 —

 

$

(6,321)

 

$

 —

 

$

 —

 

$

(6,318)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2016

 

 —

 

$

 —

 

 —

 

$

 —

 

 

16,833,737

 

$

17

 

$

62,406

 

$

(2,773)

 

$

(11)

 

$

 —

 

$

59,639

 

Stock-based compensation

 

 

 

 

 

 

 

 

 —

 

 

 —

 

 

2,137

 

 

 

 

 

 

 

 

2,137

 

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

 

 —

 

 

 

 —

 

 

 

 

473,740

 

 

 1

 

 

578

 

 

 

 

 

 

 

 

579

 

Taxes paid for net share settlement of restricted stock units

 

 

 

 —

 

 

 

 —

 

 

 —

 

 

 

 

(153)

 

 

 

 

 

 

 

 

(153)

 

Common shares issued for employee stock purchase plan

 

 

 

 

 

 

 —

 

 

259,981

 

 

 

 

2,210

 

 

 

 

 

 

 —

 

 

2,210

 

Shares repurchased to cover taxes from restricted stock award vesting

 

 

 

 

 

 

 —

 

 

(26,087)

 

 

 

 

 

 

 

 

 

 

(493)

 

 

(493)

 

Comprehensive income for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,283

 

 

(9)

 

 

 —

 

 

2,274

 

Balances, June 30, 2017

 

 —

 

$

 —

 

 —

 

$

 —

 

 

17,541,371

 

$

18

 

$

67,178

 

$

(490)

 

$

(20)

 

$

(493)

 

$

66,193

 

See accompanying notes to the condensed consolidated financial statements.

 

 

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Table of Contents

Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30,

 

(In thousands)

    

2017

    

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

 

$

2,283

 

$

 8

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

664

 

 

437

 

Stock-based compensation expense

 

 

2,137

 

 

150

 

Change in allowance for doubtful accounts

 

 

(296)

 

 

300

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

2,389

 

 

1,245

 

Inventories

 

 

(3,077)

 

 

(164)

 

Income taxes

 

 

(5,263)

 

 

(904)

 

Prepaid expenses and other assets

 

 

354

 

 

(180)

 

Medicare accounts receivable – long-term

 

 

(138)

 

 

252

 

Accounts payable

 

 

1,255

 

 

936

 

Accrued payroll and related taxes

 

 

(3,574)

 

 

(1,368)

 

Accrued expenses

 

 

284

 

 

455

 

Future product royalties

 

 

(33)

 

 

(496)

 

Net cash (used in) provided by operating activities

 

 

(3,015)

 

 

671

 

Cash flows from investing activities

 

 

 

 

 

 

 

Proceeds from sales of marketable securities

 

 

1,000

 

 

 —

 

Purchases of marketable securities

 

 

(11,049)

 

 

 —

 

Purchases of property and equipment

 

 

(1,516)

 

 

(312)

 

Patent costs

 

 

(23)

 

 

(6)

 

Other investments

 

 

(145)

 

 

 —

 

Net cash used in investing activities

 

 

(11,733)

 

 

(318)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Taxes paid for net share settlement of restricted stock units

 

 

(153)

 

 

 —

 

Proceeds from exercise of common stock options and warrants

 

 

579

 

 

196

 

Proceeds from the issuance of common stock from the ESPP

 

 

2,210

 

 

 —

 

Shares repurchased to cover taxes from restricted stock award vesting

 

 

(493)

 

 

 —

 

Fees paid for IPO

 

 

 —

 

 

(890)

 

Net cash provided by (used in) financing activities

 

 

2,143

 

 

(694)

 

Net change in cash and cash equivalents

 

 

(12,605)

 

 

(341)

 

Cash and cash equivalents – beginning of period

 

 

30,701

 

 

7,060

 

Cash and cash equivalents – end of period

 

$

18,096

 

$

6,719

 

Supplemental cash flow disclosure

 

 

 

 

 

 

 

Cash paid for taxes

 

$

898

 

$

964

 

Non-cash investing activities:

 

 

 

 

 

 

 

Acquisition of assets included in accounts payable

 

$

294

 

$

81

 

See accompanying notes to the condensed consolidated financial statements.

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Table of Contents

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 Entre 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 a patient’s use in the home and sell them throughout the United States through referrals from clinicians diagnosing and treating lymphatic and vascular disorders. 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 and six months ended June 30, 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 payment 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, resulting in us being reincorporated as a Delaware corporation. The resulting corporation assumed the name Tactile Systems Technology, Inc. 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 six months ended June 30, 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 that 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 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 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.

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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 June 30, 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

    

 

 

    

Unrealized

    

Unrealized

    

 

 

 

(In thousands)

 

Cost

 

Gains

 

Losses

 

Fair Value

 

U.S. government and agency obligations

 

$

13,003

 

$

 1

 

$

34

 

$

12,970

 

Corporate debt securities and certificates of deposit

 

 

8,037

 

 

 1

 

 

 6

 

 

8,032

 

Marketable securities

 

$

21,040

 

$

 2

 

$

40

 

$

21,002

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 12 to 24 months from June 30, 2017. At June 30, 2017, marketable debt securities valued at $3.0 million were in an unrealized gain position totaling $2,000, and marketable debt securities valued at $18.0 million were in an unrealized loss position totaling $41,000 (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 $39,000 at June 30, 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 six months ended June 30, 2017 with no resulting gain or loss.

Note 3.  Patent Costs, Net

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

 

 

 

 

 

 

 

 

 

 

As of

 

As of

 

(In thousands)

    

June 30, 2017

    

December 31, 2016

 

Patents

 

$

3,485

 

$

3,462

 

Less: accumulated amortization

 

 

(1,193)

 

 

(1,068)

 

Net patents

 

$

2,292

 

$

2,394

 

 

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Amortization expense was $0.1 million for each of the three months ended June 30, 2017 and 2016 and $0.1 million for each of the six months ended June 30, 2017 and 2016. Future amortization expenses are expected as follows:

 

 

 

 

 

(In thousands)

 

 

 

 

2017 (July 1 - December 31)

    

$

125

 

2018

 

 

249

 

2019

 

 

249

 

2020

 

 

249

 

2021

 

 

249

 

Thereafter

 

 

1,171

 

Total

 

$

2,292

 

 

Note 4.  Accrued Expenses

Accrued expenses consisted of the following:

 

 

 

 

 

 

 

 

 

 

As of

 

As of

 

(In thousands)

    

June 30, 2017

    

December 31, 2016

 

Warranty

 

$

348

 

$

290

 

Travel and business

 

 

308

 

 

308

 

Legal and consulting

 

 

343

 

 

275

 

Deferred rent

 

 

162

 

 

159

 

Clinical

 

 

74

 

 

45

 

Other

 

 

136

 

 

116

 

Total

 

$

1,371

 

$

1,193

 

 

 

 

 

 

 

Note 5.  Line of Credit — Bank

At December 31, 2016 we had a $2.0 million line of credit with a bank that bore interest based on the prime rate. There was no outstanding balance on the line of credit as of December 31, 2016. The line of credit expired on May 11, 2017, and there was no outstanding balance on the line as of that date

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 June 30, 2017 and 2016, respectively, and $0.5 million and $0.4 million for the six months ended June 30, 2017 and 2016, respectively.

In July 2016, we entered into a fleet vehicle lease program for certain members of our field sales organization. At June 30, 2017, we had 50 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.

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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

 

Fleet Car

 

 

 

 

(In thousands)

    

Buildings

    

Equipment

    

Program

    

Total

 

2017 (July 1 - December 31)

 

$

347

 

$

30

 

$

103

 

$

480

 

2018

 

 

714

 

 

52

 

 

82

 

 

848

 

2019

 

 

733

 

 

39

 

 

 —

 

 

772

 

2020

 

 

752

 

 

22

 

 

 —

 

 

774

 

2021

 

 

526

 

 

 —

 

 

 —

 

 

526

 

Thereafter

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total

 

$

3,072

 

$

143

 

$

185

 

$

3,400

 

Major Vendors

We had purchases from three vendors that collectively accounted for 36% and 41% of total purchases for the three months ended June 30, 2017 and 2016, respectively, and 36% and 35% of total purchases for the six months ended June 30, 2017 and 2016, respectively.

Purchase Commitments

We issued purchase orders in January 2017 totaling $7.8 million, of which $6.7 million remained as of June 30, 2017, for inventory that we expect to receive between July 2017 and February 2018. We issued purchase orders in May 2017 totaling $1.3 million for inventory that we expect to receive in February and March of 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 $48,000 and $39,000 for the three months ended June 30, 2017 and 2016, respectively, and $93,000 and $75,000 for the six months ended June 30, 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 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.

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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 June 30, 2017, 4,826,044 shares were available for future grant pursuant to the 2016 Plan.

Upon adoption and approval of the 2016 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 $1.2 million and $0.1 million for the three months ended June 30, 2017 and 2016, respectively, and $2.1 million and $0.2 million for the six months ended June 30, 2017 and 2016, respectively. This expense was allocated as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(In thousands)

    

2017

    

2016

    

2017

    

2016

 

Cost of goods sold

 

$

49

 

$

19

 

$

98

 

$

38

 

Sales and marketing expenses

 

 

354

 

 

42

 

 

669

 

 

84

 

Research and development expenses

 

 

21

 

 

 —

 

 

44

 

 

 —

 

Reimbursement, general and administrative expenses

 

 

756

 

 

14

 

 

1,326

 

 

28

 

Total stock-based compensation expense

 

$

1,180

 

$

75

 

$

2,137

 

$

150

 

 

Stock Options

Stock options issued to participants other than non-employees vest over four years and typically have a contractual term of ten years. The stock options granted on July 27, 2016 to our non-employee directors vested in full on May 9, 2017, the date of our 2017 annual meeting of stockholders. New stock options were granted to our non-employee directors on that date. These options vest on the earlier of May 9, 2018 or the date of our 2018 annual meeting of stockholders. These options have a contractual term of seven years. Our stock option activity for the six months ended June 30, 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

 

39,755

 

 

21.42

 

 

 

 

 

 

Exercised

 

(416,310)

 

 

1.33

 

 

 

 

8,904

 

Forfeited

 

(19,203)

 

 

8.52

 

 

 

 

 

 

Balance at June 30, 2017

 

1,460,541

 

 

3.51

 

5.2 years

 

 

36,614

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at June 30, 2017

 

1,152,453

 

$

1.92

 

4.6 years

 

$

30,725

 

(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 1,329,260 as of June 30, 2016 had a weighted average exercise price of $1.01 per share.

Stock based compensation expense included in our Condensed Consolidated Statements of Operations for stock options was $0.3 million and $0.1 million for the three months ended June 30, 2017 and 2016, respectively, and $