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 September 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 November 03, 2017 there were 17,701,786 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

 

28

Item 3. 

 

Defaults Upon Senior Securities

 

28

Item 4. 

 

Mine Safety Disclosures

 

28

Item 5. 

 

Other Information

 

28

Item 6. 

 

Exhibits

 

28

 

 

1


 

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


 

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1.  Financial Statements.

Tactile Systems Technology, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

(In thousands, except share and per share data)

    

2017

    

2016

 

Assets

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

19,653

 

$

30,701

 

Marketable securities

 

 

21,993

 

 

10,994

 

Accounts receivable, net

 

 

14,579

 

 

15,003

 

Inventories

 

 

9,784

 

 

6,554

 

Income taxes receivable

 

 

4,768

 

 

 —

 

Prepaid expenses

 

 

932

 

 

981

 

Total current assets

 

 

71,709

 

 

64,233

 

Property and equipment, net

 

 

3,353

 

 

1,563

 

Other assets

 

 

 

 

 

 

 

Patent costs, net

 

 

2,251

 

 

2,394

 

Medicare accounts receivable, long-term

 

 

2,771

 

 

2,823

 

Deferred income taxes

 

 

2,797

 

 

2,785

 

Other non-current assets

 

 

201

 

 

137

 

Total other assets

 

 

8,020

 

 

8,139

 

Total assets

 

$

83,082

 

$

73,935

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

5,485

 

$

5,018

 

Accrued payroll and related taxes

 

 

5,880

 

 

6,692

 

Accrued expenses

 

 

2,357

 

 

1,193

 

Future product royalties

 

 

26

 

 

67

 

Income taxes payable

 

 

 —

 

 

823

 

Other current liabilities

 

 

218

 

 

 —

 

Total current liabilities

 

 

13,966

 

 

13,793

 

Long-term liabilities

 

 

 

 

 

 

 

Accrued warranty reserve, long-term

 

 

643

 

 

503

 

Total liabilities

 

 

14,609

 

 

14,296

 

Stockholders’ equity

 

 

 

 

 

 

 

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

 

 

 —

 

 

 —

 

Common stock, $0.001 par value, 300,000,000 shares authorized; 17,677,078 shares issued and 17,650,992 shares outstanding as of September 30, 2017; 16,833,737 shares issued and outstanding as of December 31, 2016

 

 

18

 

 

17

 

Additional paid-in capital

 

 

68,114

 

 

62,406

 

Retained earnings (accumulated deficit)

 

 

852

 

 

(2,773)

 

Accumulated other comprehensive loss

 

 

(18)

 

 

(11)

 

Less: treasury stock, at cost — 26,086 shares as of September 30, 2017

 

 

(493)

 

 

 —

 

Total stockholders’ equity

 

 

68,473

 

 

59,639

 

Total liabilities and stockholders’ equity

 

$

83,082

 

$

73,935

 

See accompanying notes to the condensed consolidated financial statements.

3


 

Table of Contents

Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(In thousands, except share and per share data)

    

2017

    

2016

    

2017

    

2016

 

Revenues, net

 

$

28,283

 

$

22,635

 

$

74,397

 

$

56,064

 

Cost of goods sold

 

 

7,528

 

 

6,282

 

 

20,186

 

 

15,417

 

Gross profit

 

 

20,755

 

 

16,353

 

 

54,211

 

 

40,647

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

10,915

 

 

8,979

 

 

31,726

 

 

23,858

 

Research and development

 

 

1,116

 

 

1,285

 

 

3,699

 

 

3,314

 

Reimbursement, general and administrative

 

 

7,551

 

 

5,115

 

 

19,815

 

 

12,495

 

Total operating expenses

 

 

19,582

 

 

15,379

 

 

55,240

 

 

39,667

 

Income (loss) from operations

 

 

1,173

 

 

974

 

 

(1,029)

 

 

980

 

Other income

 

 

85

 

 

10

 

 

204

 

 

20

 

Income (loss) before income taxes

 

 

1,258

 

 

984

 

 

(825)

 

 

1,000

 

Income tax (benefit) expense

 

 

(84)

 

 

492

 

 

(4,450)

 

 

500

 

Net income

 

 

1,342

 

 

492

 

 

3,625

 

 

500

 

Convertible preferred stock dividends

 

 

 —

 

 

224

 

 

 —

 

 

1,247

 

Allocation of undistributed earnings to preferred stockholders

 

 

 —

 

 

99

 

 

 —

 

 

 —

 

Net income (loss) attributable to common stockholders

 

$

1,342

 

$

169

 

$

3,625

 

$

(747)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.08

 

$

0.01

 

$

0.21

 

$

(0.12)

 

Diluted

 

$

0.07

 

$

0.01

 

$

0.19

 

$

(0.12)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

17,603,293

 

 

12,253,877

 

 

17,222,072

 

 

6,317,875

 

Diluted

 

 

19,083,975

 

 

13,982,799

 

 

18,818,609

 

 

6,317,875

 

See accompanying notes to the condensed consolidated financial statements.

4


 

Table of Contents

Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(In thousands)

    

2017

    

2016

    

2017

    

2016

 

Net income

 

$

1,342

 

$

492

 

$

3,625

 

$

500

 

Other comprehensive income (loss):

 

 

  

 

 

  

 

 

  

 

 

  

 

Unrealized gain (loss) on available-for-sale securities

 

 

 3

 

 

 —

 

 

(18)

 

 

 —

 

Income tax related to items of other comprehensive income (loss)

 

 

(1)

 

 

 —

 

 

11

 

 

 —

 

Total other comprehensive income (loss)

 

 

 2

 

 

 —

 

 

(7)

 

 

 —

 

Comprehensive income

 

$

1,344

 

$

492

 

$

3,618

 

$

500

 

See accompanying notes to the condensed consolidated financial statements.

 

 

5


 

Table of Contents

Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

Accumulated

 

 

 

 

 

 

 

 

Series B Preferred Stock

 

Series A Preferred Stock

 

 

Common Stock

 

Additional

 

Earnings

 

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

 

 

 

 

 

 

 

 

 

 

 

 

902

 

 

 

 

 

 

 

 

902

 

Exercise of common stock options and warrants

 

 —

 

 

 

 —

 

 

 

 

234,135

 

 

 1

 

 

223

 

 

 

 

 

 

 

 

224

 

Preferred stock dividends

 

 

 

436

 

 

 

811

 

 

 

 

 

 

(1,247)

 

 

 

 

 

 

 —

 

 

(1,247)

 

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

 

 

 

 

 

 

 

 

4,120,000

 

 

 4

 

 

35,378

 

 

 

 

 

 

 —

 

 

35,382

 

Preferred stock dividends paid in cash

 

 

 

 

 

 

(8,207)

 

 

 

 

 

 

 —

 

 

 

 

 

 

 —

 

 

 —

 

Common stock issued in lieu of series B preferred stock dividend

 

 

 

 

 

 

 

 

956,842

 

 

 1

 

 

(1)

 

 

 

 

 

 

 —

 

 

 —

 

Conversion of series B preferred stock to common stock

 

(2,733,468)

 

 

(13,035)

 

 

 

 

 

2,733,468

 

 

 3

 

 

13,032

 

 

 

 

 

 

 —

 

 

13,035

 

Conversion of series A preferred stock to common stock

 

 

 

 

(3,061,488)

 

 

(12,932)

 

 

3,190,985

 

 

 3

 

 

12,929

 

 

 

 

 

 

 —

 

 

12,932

 

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

 

 

 

 

 

 

 

 

2,354,323

 

 

 2

 

 

(2)

 

 

 

 

 

 

 —

 

 

 —

 

Comprehensive income for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

500

 

 

 —

 

 

 —

 

 

500

 

Balances, September 30, 2016

 

 —

 

$

 —

 

 —

 

$

 —

 

 

16,812,655

 

$

17

 

$

61,214

 

$

(5,152)

 

$

 —

 

$

 —

 

$

56,079

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2016

 

 —

 

$

 —

 

 —

 

$

 —

 

 

16,833,737

 

$

17

 

$

62,406

 

$

(2,773)

 

$

(11)

 

$

 —

 

$

59,639

 

Stock-based compensation

 

 

 

 

 

 

 

 

 —

 

 

 —

 

 

3,104

 

 

 

 

 

 

 

 

3,104

 

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

 

 —

 

 

 

 —

 

 

 

 

583,360

 

 

 1

 

 

672

 

 

 

 

 

 

 

 

673

 

Taxes paid for net share settlement of restricted stock units

 

 

 

 —

 

 

 

 —

 

 

 —

 

 

 

 

(278)

 

 

 

 

 

 

 

 

(278)

 

Common shares issued for employee stock purchase plan

 

 

 

 

 

 

 —

 

 

259,981

 

 

 

 

2,210

 

 

 

 

 

 

 —

 

 

2,210

 

Shares repurchased to cover taxes from restricted stock award vesting

 

 

 

 

 

 

 —

 

 

(26,086)

 

 

 

 

 

 

 

 

 

 

(493)

 

 

(493)

 

Comprehensive income for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,625

 

 

(7)

 

 

 —

 

 

3,618

 

Balances, September 30, 2017

 

 —

 

$

 —

 

 —

 

$

 —

 

 

17,650,992

 

$

18

 

$

68,114

 

$

852

 

$

(18)

 

$

(493)

 

$

68,473

 

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)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

(In thousands)

    

2017

    

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

 

$

3,625

 

$

500

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,073

 

 

675

 

Stock-based compensation expense

 

 

3,104

 

 

859

 

Change in allowance for doubtful accounts

 

 

(36)

 

 

465

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

460

 

 

665

 

Inventories

 

 

(3,821)

 

 

(467)

 

Income taxes

 

 

(5,591)

 

 

(732)

 

Prepaid expenses and other assets

 

 

130

 

 

499

 

Medicare accounts receivable – long-term

 

 

52

 

 

395

 

Accounts payable

 

 

370

 

 

1,695

 

Accrued payroll and related taxes

 

 

(812)

 

 

895

 

Accrued expenses

 

 

1,520

 

 

(387)

 

Future product royalties

 

 

(41)

 

 

(726)

 

Net cash provided by operating activities

 

 

33

 

 

4,336

 

Cash flows from investing activities

 

 

 

 

 

 

 

Proceeds from sales of marketable securities

 

 

1,000

 

 

 —

 

Purchases of marketable securities

 

 

(12,051)

 

 

 —

 

Purchases of property and equipment

 

 

(1,953)

 

 

(518)

 

Patent costs

 

 

(44)

 

 

(24)

 

Other investments

 

 

(145)

 

 

 —

 

Net cash used in investing activities

 

 

(13,193)

 

 

(542)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Taxes paid for net share settlement of restricted stock units

 

 

(278)

 

 

 —

 

Proceeds from exercise of common stock options and warrants

 

 

673

 

 

224

 

Proceeds from the issuance of common stock from the ESPP

 

 

2,210

 

 

 —

 

Shares repurchased to cover taxes from restricted stock award vesting

 

 

(493)

 

 

 —

 

Dividends paid on preferred stock

 

 

 —

 

 

(8,207)

 

Proceeds from IPO

 

 

 —

 

 

41,200

 

Fees paid for IPO

 

 

 —

 

 

(4,777)

 

Net cash provided by financing activities

 

 

2,112

 

 

28,440

 

Net change in cash and cash equivalents

 

 

(11,048)

 

 

32,234

 

Cash and cash equivalents – beginning of period

 

 

30,701

 

 

7,060

 

Cash and cash equivalents – end of period

 

$

19,653

 

$

39,294

 

Supplemental cash flow disclosure

 

 

 

 

 

 

 

Cash paid for interest

 

$

 1

 

$

 —

 

Cash paid for taxes

 

$

923

 

$

1,261

 

Non-cash investing activities:

 

 

 

 

 

 

 

Acquisition of assets included in accounts payable

 

$

97

 

$

37

 

See accompanying notes to the condensed consolidated financial statements.

7


 

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 nine months ended September 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 nine months ended September 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 of 1933, as amended, (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 September 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

    

 

 

    

Unrealized

    

Unrealized

    

 

 

 

(In thousands)

 

Cost

 

Gains

 

Losses

 

Fair Value

 

U.S. government and agency obligations

 

$

13,000

 

$

 1

 

$

33

 

$

12,968

 

Corporate debt securities

 

 

9,028

 

 

 —

 

 

 3

 

 

9,025

 

Marketable securities

 

$

22,028

 

$

 1

 

$

36

 

$

21,993

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

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 25 months from September 30, 2017. At September 30, 2017, marketable debt securities valued at $2.0 million were in an unrealized gain position totaling $1,000, and marketable debt securities valued at $20.0 million were in an unrealized loss position totaling $36,000 (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 $35,000 at September 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 nine months ended September 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)

    

September 30, 2017

    

December 31, 2016

 

Patents

 

$

3,506

 

$

3,462

 

Less: accumulated amortization

 

 

(1,255)

 

 

(1,068)

 

Net patents

 

$

2,251

 

$

2,394

 

 

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Amortization expense was $0.1 million for each of the three months ended September 30, 2017 and 2016 and $0.2 million for each of the nine months ended September 30, 2017 and 2016. Future amortization expenses are expected as follows:

 

 

 

 

 

(In thousands)

 

 

 

 

2017 (October 1 - December 31)

    

$

62

 

2018

 

 

249

 

2019

 

 

249

 

2020

 

 

249

 

2021

 

 

249

 

Thereafter

 

 

1,193

 

Total

 

$

2,251

 

 

Note 4.  Accrued Expenses

Accrued expenses consisted of the following:

 

 

 

 

 

 

 

 

 

 

As of

 

As of

 

(In thousands)

    

September 30, 2017

    

December 31, 2016

 

Warranty

 

$

345

 

$

290

 

Travel and business

 

 

268

 

 

308

 

Legal and consulting

 

 

633

 

 

275

 

Deferred rent

 

 

174

 

 

159

 

Accrued taxes

 

 

876

 

 

 —

 

Clinical

 

 

16

 

 

45

 

Other

 

 

45

 

 

116

 

Total

 

$

2,357

 

$

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 subsequently 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 $0.4 million and $0.2 million for the three months ended September 30, 2017 and 2016, respectively, and $1.1 million and $0.6 million for the nine months ended September 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 September 30, 2017, we had 26 vehicles with future lease obligations 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 (October 1 - December 31)

 

$

174

 

$

15

 

$

 5

 

$

194

 

2018

 

 

714

 

 

76

 

 

28

 

 

818

 

2019

 

 

733

 

 

39

 

 

 —

 

 

772

 

2020

 

 

752

 

 

22

 

 

 —

 

 

774

 

2021

 

 

526