TCMD 10-Q

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, 2018

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 3, 2018 there were 18,074,207 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

 

19

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

25

Item 4. 

 

Controls and Procedures

 

25

 

 

 

 

 

 

 

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

 

27

Item 4. 

 

Mine Safety Disclosures

 

27

Item 5. 

 

Other Information

 

28

Item 6. 

 

Exhibits

 

28

 

 

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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, 2017 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)

    

2018

    

2017

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

25,313

 

$

23,968

Marketable securities

 

 

15,928

 

 

19,944

Accounts receivable, net

 

 

14,209

 

 

17,623

Inventories

 

 

14,656

 

 

11,040

Income taxes receivable

 

 

3,947

 

 

2,119

Prepaid expenses and other current assets

 

 

1,116

 

 

2,178

Total current assets

 

 

75,169

 

 

76,872

Property and equipment, net

 

 

3,912

 

 

3,776

Other assets

 

 

 

 

 

 

Patent costs, net

 

 

2,157

 

 

2,218

Medicare accounts receivable, long-term

 

 

2,971

 

 

2,718

Deferred income taxes

 

 

2,664

 

 

2,662

Other non-current assets

 

 

200

 

 

201

Total other assets

 

 

7,992

 

 

7,799

Total assets

 

$

87,073

 

$

88,447

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable

 

$

5,234

 

$

4,253

Accrued payroll and related taxes

 

 

4,856

 

 

6,706

Accrued expenses

 

 

2,031

 

 

2,598

Future product royalties

 

 

15

 

 

17

Other current liabilities

 

 

603

 

 

945

Total current liabilities

 

 

12,739

 

 

14,519

Long-term liabilities

 

 

 

 

 

 

Accrued warranty reserve, long-term

 

 

1,172

 

 

1,141

Total liabilities

 

 

13,911

 

 

15,660

 

 

 

 

 

 

 

Commitments and Contingencies (see Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

Preferred stock, $0.001 par value, 50,000,000 shares authorized; none issued and outstanding as of March 31, 2018 and December 31, 2017

 

 

 —

 

 

 —

Common stock, $0.001 par value, 300,000,000 shares authorized; 18,062,795 shares issued and 18,036,709 shares outstanding as of March 31, 2018; 17,872,465 shares issued and 17,846,379 shares outstanding as of December 31, 2017

 

 

18

 

 

18

Additional paid-in capital

 

 

70,655

 

 

70,224

Retained earnings

 

 

3,032

 

 

3,082

Accumulated other comprehensive loss

 

 

(50)

 

 

(44)

Less: treasury stock, at cost — 26,086 shares as of March 31, 2018 and December 31, 2017

 

 

(493)

 

 

(493)

Total stockholders’ equity

 

 

73,162

 

 

72,787

Total liabilities and stockholders’ equity

 

$

87,073

 

$

88,447

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)

    

2018

    

2017

Revenues, net

 

$

26,848

 

$

19,850

Cost of goods sold

 

 

7,309

 

 

5,624

Gross profit

 

 

19,539

 

 

14,226

Operating expenses

 

 

 

 

 

 

Sales and marketing

 

 

12,557

 

 

10,166

Research and development

 

 

1,437

 

 

1,118

Reimbursement, general and administrative

 

 

7,372

 

 

5,874

Total operating expenses

 

 

21,366

 

 

17,158

Loss from operations

 

 

(1,827)

 

 

(2,932)

Other income

 

 

91

 

 

55

Loss before income taxes

 

 

(1,736)

 

 

(2,877)

Income tax benefit

 

 

(1,686)

 

 

(1,373)

Net loss

 

$

(50)

 

$

(1,504)

Net loss per common share

 

 

 

 

 

 

Basic

 

$

0.00

 

$

(0.09)

Diluted

 

$

0.00

 

$

(0.09)

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

 

 

 

 

 

 

Basic

 

 

17,996,672

 

 

16,878,443

Diluted

 

 

17,996,672

 

 

16,878,443

See accompanying notes to the condensed consolidated financial statements.

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Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

(In thousands)

    

2018

    

2017

Net loss

 

$

(50)

 

$

(1,504)

Other comprehensive loss

 

 

  

 

 

  

Unrealized loss on available-for-sale securities

 

 

(7)

 

 

(13)

Income tax related to items of other comprehensive loss

 

 

 1

 

 

 6

Total other comprehensive loss

 

 

(6)

 

 

(7)

Comprehensive loss

 

$

(56)

 

$

(1,511)

See accompanying notes to the condensed consolidated financial statements.

 

 

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Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Earnings

 

Other

 

 

 

 

 

 

 

Common Stock

 

Paid-In

 

(Accumulated

 

Comprehensive

 

Treasury

 

 

 

(In thousands, except share data)

 

Shares

 

Par Value

 

Capital

 

Deficit)

 

Loss

 

Stock

 

Total

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2017

 

17,846,379

 

 

18

 

 

70,224

 

 

3,082

 

 

(44)

 

 

(493)

 

 

72,787

Stock-based compensation

 

 —

 

 

 —

 

 

1,481

 

 

 

 

 

 

 

 

1,481

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

 

230,532

 

 

 —

 

 

138

 

 

 

 

 

 

 

 

138

Taxes paid for net share settlement of restricted stock units

 

(40,202)

 

 

 

 

(1,188)

 

 

 

 

 

 

 

 

(1,188)

Comprehensive loss for the period

 

 

 

 

 

 

 

(50)

 

 

(6)

 

 

 —

 

 

(56)

Balances, March 31, 2018

 

18,036,709

 

$

18

 

$

70,655

 

$

3,032

 

$

(50)

 

$

(493)

 

$

73,162

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)

    

2018

    

2017

Cash flows from operating activities

 

 

 

 

 

 

Net loss

 

$

(50)

 

$

(1,504)

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

 

 

 

 

 

 

Depreciation and amortization

 

 

463

 

 

298

Stock-based compensation expense

 

 

1,481

 

 

957

Change in allowance for doubtful accounts

 

 

(198)

 

 

(330)

Changes in assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

3,612

 

 

4,044

Inventories

 

 

(3,616)

 

 

(379)

Income taxes

 

 

(1,828)

 

 

(1,378)

Prepaid expenses and other assets

 

 

63

 

 

197

Medicare accounts receivable – long-term

 

 

(253)

 

 

(46)

Accounts payable

 

 

885

 

 

(533)

Accrued payroll and related taxes

 

 

(1,850)

 

 

(1,806)

Accrued expenses and other liabilities

 

 

(880)

 

 

183

Future product royalties

 

 

(2)

 

 

(19)

Net cash used in operating activities

 

 

(2,173)

 

 

(316)

Cash flows from investing activities

 

 

 

 

 

 

Proceeds from sales and maturities of marketable securities

 

 

5,000

 

 

1,000

Purchases of marketable securities

 

 

 —

 

 

(10,049)

Purchases of property and equipment

 

 

(432)

 

 

(700)

Patent costs

 

 

 —

 

 

(8)

Net cash provided by (used in) investing activities

 

 

4,568

 

 

(9,757)

Cash flows from financing activities

 

 

 

 

 

 

Taxes paid for net share settlement of restricted stock units

 

 

(1,188)

 

 

(14)

Proceeds from exercise of common stock options and warrants

 

 

138

 

 

100

Net cash (used in) provided by financing activities

 

 

(1,050)

 

 

86

Net change in cash and cash equivalents

 

 

1,345

 

 

(9,987)

Cash and cash equivalents – beginning of period

 

 

23,968

 

 

30,701

Cash and cash equivalents – end of period

 

$

25,313

 

$

20,714

Supplemental cash flow disclosure

 

 

 

 

 

 

Cash paid for taxes

 

$

284

 

$

 5

Capital expenditures incurred but not yet paid

 

$

96

 

$

238

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 Business and 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 use in the home and sell them through vascular, wound and lymphedema clinics throughout the United States. We do business as “Tactile Medical.”

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.

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.

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 healthcare 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 the Veterans Administration, as those payers do not have plans that include patient deductibles for purchases of our products.

Note 2.  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, 2018 are not necessarily indicative of results to be expected for the year ending December 31, 2018, or for any other interim period or for any future year. 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, 2017.

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of Tactile Systems Technology, Inc. and its wholly owned subsidiary, Swelling Solutions, Inc. All intercompany balances and transactions have been eliminated in consolidation.

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Use of 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.

Comprehensive Income

Comprehensive income reflects the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Our comprehensive income represents net income adjusted for unrealized gains and losses on available-for-sale marketable securities.

JOBS Act Accounting Election

As an emerging growth company under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. We have elected to take advantage of the extended transition period for adopting new or revised accounting standards that have different effective dates for public and private companies until such time as those standards apply to private companies.

Note 3.  Summary of Significant Accounting Policies

Significant Accounting Policies

During the three months ended March 31, 2018 there were no material changes in our significant accounting policies. See Note 3 - “Summary of Significant Accounting Policies” to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017 for information regarding our significant accounting policies.

Recent Accounting Pronouncements

We are an “emerging growth company” as defined by the JOBS Act. 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 to us due to the JOBS Act exemption described above. Prior to adoption of the new guidance, we will evaluate the anticipated impact of the adoption of this updated guidance on our consolidated financial statements, using external technical resources to assist us in performing this assessment prior to December 31, 2018.

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

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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 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 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 to us due to the JOBS Act exemption described above. We do not anticipate any material impact on our consolidated financial statements in future periods as a result of the adoption of this ASU.

Note 4.  Marketable Securities

Our investments in marketable securities, all of which have original contractual maturities of 12 to 25 months, are classified as available-for-sale and consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

March 31, 2018

 

    

 

 

    

Unrealized

    

Fair

(In thousands)

 

Cost

 

Gains

 

Losses

 

Value

U.S. government and agency obligations

 

$

10,998

 

$

 —

 

$

53

 

$

10,945

Corporate debt securities and certificates of deposit

 

 

5,007

 

 

 —

 

 

24

 

 

4,983

Marketable securities

 

$

16,005

 

$

 —

 

$

77

 

$

15,928

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

December 31, 2017

 

    

 

 

    

Unrealized

    

Fair

(In thousands)

 

Cost

 

Gains

 

Losses

 

Value

U.S. government and agency obligations

 

$

11,997

 

$

 —

 

$

56

 

$

11,941

Corporate debt securities and certificates of deposit

 

 

8,017

 

 

 —

 

 

14

 

 

8,003

Marketable securities

 

$

20,014

 

$

 —

 

$

70

 

$

19,944

Unrealized losses and fair value of securities available for sale aggregated by investment category and the length of time the securities were in a continuous loss position were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

March 31, 2018

 

 

Less than 12 months

 

12 months or more

 

Total

 

    

Fair

    

Unrealized

    

Fair

    

Unrealized

 

Fair

    

Unrealized

(In thousands)

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

U.S. government and agency obligations

 

$

3,972

 

$

27

 

$

6,973

 

$

26

 

$

10,945

 

$

53

Corporate debt securities and certificates of deposit

 

 

3,988

 

 

20

 

 

995

 

 

 4

 

 

4,983

 

 

24

Marketable securities

 

$

7,960

 

$

47

 

$

7,968

 

$

30

 

$

15,928

 

$

77

 

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As of

 

 

December 31, 2017

 

 

Less than 12 months

 

12 months or more

 

Total

 

    

Fair

    

Unrealized

    

Fair

    

Unrealized

 

Fair

    

Unrealized

(In thousands)

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

U.S. government and agency obligations

 

$

5,974

 

$

25

 

$

5,967

 

$

31

 

$

11,941

 

$

56

Corporate debt securities and certificates of deposit

 

 

7,005

 

 

13

 

 

998

 

 

 1

 

 

8,003

 

 

14

Marketable securities

 

$

12,979

 

$

38

 

$

6,965

 

$

32

 

$

19,944

 

$

70

 

 

Note 5.  Patent Costs, Net

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

 

 

 

 

 

 

 

 

 

As of

 

As of

(In thousands)

    

March 31, 2018

    

December 31, 2017

Patents

 

$

3,537

 

$

3,536

Less: accumulated amortization

 

 

(1,380)

 

 

(1,318)

Net patents

 

$

2,157

 

$

2,218

 

Amortization expense was $0.1 million for each of the three months ended March 31, 2018 and 2017. Future amortization expenses are expected as follows:

 

 

 

 

(In thousands)

 

 

 

2018 (April 1 - December 31)

    

$

187

2019

 

 

249

2020

 

 

249

2021

 

 

249

2022

 

 

249

Thereafter

 

 

974

Total

 

$

2,157

 

The weighted-average remaining amortization period for these patents was nine years as of March 31, 2018.

Note 6.  Accrued Expenses

Accrued expenses consisted of the following:

 

 

 

 

 

 

 

 

 

As of

 

As of

(In thousands)

    

March 31, 2018

    

December 31, 2017

Accrued taxes

 

$

101

 

$

1,070

Warranty

 

 

648

 

 

531

Travel and business

 

 

558

 

 

453

Legal and consulting

 

 

486

 

 

317

Deferred rent

 

 

169

 

 

173

Clinical studies

 

 

27

 

 

15

Other

 

 

42

 

 

39

Total

 

$

2,031

 

$

2,598

 

 

 

 

 

 

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Note 7.  Line of Credit — Bank

At March 31, 2017 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 March 31, 2017. The line of credit expired on May 11, 2017, and there was no outstanding balance on the line as of that date.

Note 8.  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. This lease 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. This lease agreement extends through November 2021 and provides for monthly rent, real estate taxes and operating expenses.

Rent expense was $0.3 million for each of the three months ended March 31, 2018 and 2017.

In July 2016, we entered into a fleet vehicle lease program for certain members of our field sales organization. At March 31, 2018, we had 12 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.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Computer/Office

 

Fleet Vehicle

 

 

 

(In thousands)

    

Buildings

    

Equipment

    

Program

    

Total

2018 (April 1 - December 31)

 

$

583

 

$

46

 

$

57

 

$

686

2019

 

 

799

 

 

51

 

 

 3

 

 

853

2020

 

 

801

 

 

34

 

 

 —

 

 

835

2021

 

 

526

 

 

 —

 

 

 —

 

 

526

Thereafter

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Total

 

$

2,709

 

$

131

 

$

60

 

$

2,900

Major Vendors

We had purchases from two major vendors that accounted for 33% of our total purchases for the three months ended March 31, 2018. We had purchases from three major vendors that accounted for 35% of our total purchases for the three months ended March 31, 2017.

Purchase Commitments

We issued purchase orders in 2017 totaling $10.7 million for items that we expect to receive between April and December of 2018.

Employment Agreements

We have entered into employment agreements with certain of our officers. The agreements provide for payment of severance ranging from 9 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 9 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,

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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 $53,000 and $45,000 for the three months ended March 31, 2018 and 2017, respectively.

Note 9.  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.

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. Effective January 1, 2018, 892,318 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, 2018, 5,234,358 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 $1.5 million and $1.0 million for the three months ended March 31, 2018 and 2017, respectively. This expense was allocated as follows:

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

(In thousands)

    

2018

    

2017

Cost of goods sold

 

$

40

 

$

49

Sales and marketing expenses

 

 

652

 

 

315

Research and development expenses

 

 

69

 

 

23

Reimbursement, general and administrative expenses

 

 

720

 

 

570

Total stock-based compensation expense

 

$

1,481

 

$

957

 

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Stock Options

Stock options issued to participants other than non-employees vest over three or four years and typically have a contractual term of seven or ten years. Annually, stock options are granted to our non-employee directors on the date of the annual meeting of stockholders and vest in full on the earlier of one year after the date of grant or on the date of the next year’s annual meeting of stockholders. These options have a contractual term of seven years.

Stock-based compensation expense included in our Condensed Consolidated Statements of Operations for stock options was $0.5 million and $0.2 million for the three months ended March 31, 2018 and 2017, respectively.

At March 31, 2018, there was approximately $5.0 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 3.2 years.

Stock option activity for the three months ended March 31, 2018 is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

Weighted-

 

Weighted-

 

 

 

 

 

 

 

Average

 

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, 2017

 

1,487,720

 

$

8.41

 

6.2 years

 

$

29,611

Granted

 

88,243

 

$

32.36

 

 

 

 

 

Exercised

 

(116,177)

 

$

1.19

 

 

 

$

3,351

Forfeited

 

(14,697)

 

$

19.02

 

 

 

 

 

Balance at March 31, 2018

 

1,445,089

 

$

10.35

 

6.3 years

 

$

31,065

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at March 31, 2018

 

906,063

 

$

2.75

 

4.9 years

 

$

26,321

(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 trading day of the period.

Options exercisable of 1,338,155 as of March 31, 2017 had a weighted average exercise price of $1.07 per share.

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Stock-Settled Restricted Stock Units

We have granted both time-based and performance-based stock-settled restricted stock units to certain participants under the 2016 Plan.

Time-based 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 Statements of Operations for time-based stock-settled restricted stock units was $0.8 million and $0.5 million for the three months ended March 31, 2018 and 2017, respectively. As of March 31, 2018, there was approximately $6.6 million of total unrecognized pre-tax compensation expense related to outstanding time-based stock-settled restricted stock units that is expected to be recognized over a weighted-average period of 2.3 years. Our time-based stock-settled restricted stock unit activity for the three months ended March 31, 2018 was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

    

 

    

Average Grant

    

Aggregate

 

 

Units

 

Date Fair Value

 

Intrinsic

(In thousands except unit and per unit data)

 

Outstanding

 

Per Unit

 

Value(1)

Balance at December 31, 2017

 

441,507

 

$

16.38

 

$

12,795

Granted

 

77,794

 

$

32.36

 

 

 

Vested

 

(114,905)

 

$

12.00

 

 

 

Cancelled

 

(9,350)

 

$

24.24

 

 

 

Balance at March 31, 2018

 

395,046

 

$

20.61

 

$

12,562

 

 

 

 

 

 

 

 

 

Deferred and unissued at March 31, 2018 (2)

 

2,763

 

$

24.37

 

$

88

(1)

The aggregate intrinsic value of stock-settled restricted stock units outstanding was based on our closing stock price on the last trading day of the period.

(2)

For the three months ended March 31, 2018, there were 550 restricted stock units granted to non-employee directors in lieu of their quarterly cash retainer payments. These restricted stock units were fully vested upon grant and represent the right to receive one share of common stock, per unit, upon the earlier of the directors’ termination of service as a director of ours or the occurrence of a change of control of us. These restricted stock units are included in the “Granted” line in the table above and are also included in the “Vested” line in the table above due to their being fully vested upon grant. As of March 31, 2018, there were 2,763 outstanding restricted stock units that had been previously granted to non-employee directors in lieu of their quarterly director retainer payments. These restricted stock units are not included in the “Balance at March 31, 2018” line in the table above because they are fully vested.

In February 2018, we granted 67,982 performance-based stock-settled restricted stock units (“PSUs”), which represents the target number of PSUs under these awards, to certain participants under the 2016 Plan. These PSUs have both performance-based and time-based vesting features. The PSUs will be earned if and to the extent performance goals based on revenue and adjusted EBITDA are achieved in 2019. The number of PSUs earned will depend on the level at which the performance targets are achieved, and can range from 50% of target if threshold performance is achieved and up to 150% of target if maximum performance is achieved. One third of the earned PSUs will vest on the date the Compensation and Organization Committee certifies the number of PSUs earned, and the remaining two thirds of the earned PSUs will vest on the first anniversary of that certification date. All earned and vested PSUs will be settled in shares of common stock. Stock-based compensation expense included in our Condensed Consolidated Statements of Operations for PSUs was $72,517 and $0 for the three months ended March 31, 2018 and 2017, respectively. As of March 31, 2018, there was $2.1 million of total unrecognized pre-tax compensation expense related to the PSUs that is expected to be recognized over a weighted average period of 2.9 years.

Employee Stock Purchase Plan

Our employee stock purchase plan (“ESPP”), which was approved by our Board of Directors on April 27, 2016 and by our stockholders on June 20, 2016, allows participating employees to purchase shares of our common stock at a discount through payroll deductions. The plan is available to all 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 provides for six-month purchase periods, beginning on May 16 and November 16 of each calendar year.

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A total of 1.6 million shares of common stock were initially reserved for issuance under the ESPP, 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, 2018, 178,463 shares were added to the ESPP, as available for issuance thereunder, pursuant to the automatic increase feature of the plan. As of March 31, 2018, 1,639,668 shares were available for future issuance under the ESPP. We recognized $0.2 million in stock-based compensation expense associated with the ESPP in each of the three months ended March 31, 2018 and 2017.

Note 10.  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 adjusting for discrete tax items recorded in the period. Deferred income taxes result from temporary differences between the reporting of amounts for financial statement purposes and income tax purposes. These differences relate primarily to different methods used for income tax reporting purposes, including for depreciation and amortization, warranty and vacation accruals, and deductions related to allowances for doubtful accounts receivable and inventory reserves. We recorded an income tax benefit of $1.7 million and $1.4 million for the three months ended March 31, 2018 and 2017, respectively.

The effective tax rate for the three months ended March 31, 2018 was a benefit of 97.1%, compared to a benefit of 47.7% for the three months ended March 31, 2017. The primary driver of the change in the effective tax rate was an increase in the tax benefits related to tax-deductible stock-based compensation activity, as well as a decrease in the quarterly book loss as compared to the same prior year period. Significant tax deductions included benefits with respect to the vesting of restricted stock units, exercises of non-qualified stock options, and disqualifying dispositions of incentive stock options and ESPP shares.

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. As of March 31, 2018 we had an unrecognized tax benefit ("UTB") with respect to state income taxes of approximately $88,000. The UTB represents tax, interest, and penalties related to un-filed and unpaid income taxes in several state jurisdictions. We are currently pursuing actions to settle these outstanding liabilities. To date, we have settled a significant portion of our outstanding liabilities  through voluntary settlements with various state taxing authorities.

We are currently under examination by the Internal Revenue Service for our 2016 federal tax return. We are not currently under examination by any other taxing jurisdictions. 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.

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Note 11.  Net Loss Per Share

The following table sets forth the computation of our basic and diluted net loss:

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

(In thousands, except share and per share data)

    

2018

    

2017

Net loss

 

$

(50)

 

$

(1,504)

Weighted-average shares outstanding

 

 

17,996,672

 

 

16,878,443

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

 

 

 —

 

 

 —

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

 

 

17,996,672

 

 

16,878,443

Net loss per share - Basic

 

$

0.00

 

$

(0.09)

Net loss per share - Diluted

 

$

0.00

 

$

(0.09)

The following common stock equivalents were excluded from the computation of diluted net loss per share for the periods presented because including them would have been anti-dilutive:

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

    

2018

    

2017

Restricted stock units

 

395,046

 

449,963

Common stock options

 

1,445,089

 

1,784,951

Employee stock purchase plan

 

68,114

 

 —

Total

 

1,908,249

 

2,234,914

 

Note 12.  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 cash equivalents and marketable securities as of March 31, 2018 and December 31, 2017 according to the three-level fair value hierarchy:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

March 31, 2018

 

    

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:

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds

 

$

19,335

 

$

 —

 

$

 —

 

$

19,335

U.S. government and agency obligations

 

 

 —

 

 

10,945

 

 

 —

 

 

10,945

Corporate debt securities