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 September 30, 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 and Zip Code of Principal Executive Offices)

 

 

 

 

(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 every Interactive Data File required to be submitted 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 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 

 

 

 

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 1, 2018 there were 18,472,551 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

 

21

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

29

Item 4. 

 

Controls and Procedures

 

30

 

 

 

 

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

31

Item 1A. 

 

Risk Factors

 

31

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

35

Item 3. 

 

Defaults Upon Senior Securities

 

35

Item 4. 

 

Mine Safety Disclosures

 

35

Item 5. 

 

Other Information

 

35

Item 6. 

 

Exhibits

 

37

 

 

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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 effects of current U.S. and foreign trade policy and tariff actions; and

·

the volatility of our stock price.

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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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)

    

2018

    

2017

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

23,136

 

$

23,968

Marketable securities

 

 

22,800

 

 

19,944

Accounts receivable, net

 

 

20,179

 

 

17,623

Inventories

 

 

14,919

 

 

11,040

Income taxes receivable

 

 

5,798

 

 

2,119

Prepaid expenses and other current assets

 

 

2,370

 

 

2,178

Total current assets

 

 

89,202

 

 

76,872

Property and equipment, net

 

 

4,063

 

 

3,776

Other assets

 

 

 

 

 

 

Intangible assets, net

 

 

3,035

 

 

2,218

Medicare accounts receivable, long-term

 

 

1,011

 

 

2,718

Deferred income taxes

 

 

4,057

 

 

2,662

Other non-current assets

 

 

367

 

 

201

Total other assets

 

 

8,470

 

 

7,799

Total assets

 

$

101,735

 

$

88,447

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable

 

$

3,929

 

$

4,253

Accrued payroll and related taxes

 

 

8,292

 

 

6,706

Accrued expenses

 

 

2,290

 

 

2,598

Future product royalties

 

 

 6

 

 

17

Income taxes

 

 

1,801

 

 

212

Other current liabilities

 

 

439

 

 

733

Total current liabilities

 

 

16,757

 

 

14,519

Long-term liabilities

 

 

 

 

 

 

Accrued warranty reserve, long-term

 

 

1,560

 

 

1,141

Total liabilities

 

 

18,317

 

 

15,660

 

 

 

 

 

 

 

Commitments and Contingencies (see Note 9)

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

Preferred stock, $0.001 par value, 50,000,000 shares authorized; none issued and outstanding as of September 30, 2018 and December 31, 2017

 

 

 —

 

 

 —

Common stock, $0.001 par value, 300,000,000 shares authorized; 18,415,699 shares issued and outstanding as of September 30, 2018; 17,872,465 shares issued and 17,846,379 shares outstanding as of December 31, 2017

 

 

18

 

 

18

Additional paid-in capital

 

 

76,081

 

 

70,224

Retained earnings

 

 

7,350

 

 

3,082

Accumulated other comprehensive loss

 

 

(31)

 

 

(44)

Less: treasury stock, at cost — none as of September 30, 2018 and 26,086 shares as of December 31, 2017

 

 

 —

 

 

(493)

Total stockholders’ equity

 

 

83,418

 

 

72,787

Total liabilities and stockholders’ equity

 

$

101,735

 

$

88,447

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

(In thousands, except share and per share data)

    

2018

    

2017

    

2018

    

2017

Revenues, net

 

$

36,322

 

$

28,283

 

$

97,303

 

$

74,397

Cost of goods sold

 

 

10,141

 

 

7,528

 

 

27,060

 

 

20,186

Gross profit

 

 

26,181

 

 

20,755

 

 

70,243

 

 

54,211

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

15,632

 

 

10,915

 

 

42,641

 

 

31,726

Research and development

 

 

1,223

 

 

1,116

 

 

3,949

 

 

3,699

Reimbursement, general and administrative

 

 

7,956

 

 

7,551

 

 

22,799

 

 

19,815

Total operating expenses

 

 

24,811

 

 

19,582

 

 

69,389

 

 

55,240

Income (loss) from operations

 

 

1,370

 

 

1,173

 

 

854

 

 

(1,029)

Other income

 

 

128

 

 

85

 

 

351

 

 

204

Income (loss) before income taxes

 

 

1,498

 

 

1,258

 

 

1,205

 

 

(825)

Income tax benefit

 

 

(248)

 

 

(84)

 

 

(3,063)

 

 

(4,450)

Net income

 

$

1,746

 

$

1,342

 

$

4,268

 

$

3,625

Net income per common share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.10

 

$

0.08

 

$

0.23

 

$

0.21

Diluted

 

$

0.09

 

$

0.07

 

$

0.22

 

$

0.19

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

18,344,956

 

 

17,603,293

 

 

18,166,999

 

 

17,222,072

Diluted

 

 

19,525,686

 

 

19,083,975

 

 

19,328,947

 

 

18,818,609

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

(In thousands)

    

2018

    

2017

    

2018

    

2017

Net income

 

$

1,746

 

$

1,342

 

$

4,268

 

$

3,625

Other comprehensive income (loss):

 

 

  

 

 

  

 

 

  

 

 

  

Unrealized gain (loss) on marketable securities

 

 

10

 

 

 3

 

 

29

 

 

(18)

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

 

 

(3)

 

 

(1)

 

 

(16)

 

 

11

Total other comprehensive income (loss)

 

 

 7

 

 

 2

 

 

13

 

 

(7)

Comprehensive income

 

$

1,753

 

$

1,344

 

$

4,281

 

$

3,618

 

The accompanying notes are an integral part of these unaudited 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

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2017

 

17,846,379

 

 

18

 

 

70,224

 

 

3,082

 

 

(44)

 

 

(493)

 

 

72,787

Stock-based compensation

 

 —

 

 

 —

 

 

5,638

 

 

 

 

 

 

 

 

5,638

Exercise of common stock options and vesting of restricted stock units

 

479,656

 

 

 —

 

 

1,218

 

 

 

 

 

 

 

 

1,218

Taxes paid for net share settlement of restricted stock units

 

 —

 

 

 

 

(1,922)

 

 

 

 

 

 

 

 

(1,922)

Treasury stock issued for option exercises

 

26,086

 

 

 —

 

 

(493)

 

 

 

 

 

 

493

 

 

 —

Common shares issued for employee stock purchase plan

 

63,578

 

 

 

 

1,416

 

 

 

 

 

 

 —

 

 

1,416

Comprehensive income for the period

 

 

 

 

 

 

 

4,268

 

 

13

 

 

 —

 

 

4,281

Balances, September 30, 2018

 

18,415,699

 

$

18

 

$

76,081

 

$

7,350

 

$

(31)

 

$

 —

 

$

83,418

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

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Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30,

(In thousands)

    

2018

    

2017

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

4,268

 

$

3,625

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

 

 

 

 

 

 

Depreciation and amortization

 

 

2,474

 

 

1,073

Deferred income taxes

 

 

(1,411)

 

 

 —

Stock-based compensation expense

 

 

5,638

 

 

3,104

Change in allowance for doubtful accounts

 

 

414

 

 

(36)

Loss on disposal of equipment

 

 

 3

 

 

 —

Changes in assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(2,970)

 

 

460

Inventories

 

 

(3,879)

 

 

(3,821)

Income taxes

 

 

(2,090)

 

 

(5,373)

Prepaid expenses and other assets

 

 

(1,358)

 

 

130

Medicare accounts receivable – long-term

 

 

1,707

 

 

52

Accounts payable

 

 

(508)

 

 

87

Accrued payroll and related taxes

 

 

1,586

 

 

(812)

Accrued expenses and other liabilities

 

 

(179)

 

 

1,585

Future product royalties

 

 

(11)

 

 

(41)

Net cash provided by operating activities

 

 

3,684

 

 

33

Cash flows from investing activities

 

 

 

 

 

 

Proceeds from sales and maturities of marketable securities

 

 

13,000

 

 

1,000

Purchases of marketable securities

 

 

(14,792)

 

 

(12,051)

Purchases of property and equipment

 

 

(2,384)

 

 

(1,953)

Intangible asset costs

 

 

(1,052)

 

 

(44)

Other investments

 

 

 —

 

 

(145)

Net cash used in investing activities

 

 

(5,228)

 

 

(13,193)

Cash flows from financing activities

 

 

 

 

 

 

Taxes paid for net share settlement of restricted stock units

 

 

(1,922)

 

 

(278)

Proceeds from exercise of common stock options and warrants

 

 

1,218

 

 

673

Proceeds from the issuance of common stock from the employee stock purchase plan

 

 

1,416

 

 

2,210

Shares repurchased to cover taxes from restricted stock award vesting

 

 

 —

 

 

(493)

Net cash provided by financing activities

 

 

712

 

 

2,112

Net change in cash and cash equivalents

 

 

(832)

 

 

(11,048)

Cash and cash equivalents – beginning of period

 

 

23,968

 

 

30,701

Cash and cash equivalents – end of period

 

$

23,136

 

$

19,653

Supplemental cash flow disclosure

 

 

 

 

 

 

Cash paid for interest

 

$

 3

 

$

 1

Cash paid for taxes

 

$

448

 

$

923

Capital expenditures incurred but not yet paid

 

$

184

 

$

97

 

The accompanying notes are an integral part of these unaudited 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.”

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 either do not have plans that have declining deductibles over the course of the plan year or 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 nine months ended September 30, 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 currently 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 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. However, as of the last business day of our second fiscal quarter of 2018, the market value of our common stock that was held by non-affiliates exceeded $700 million, and as a result, we will no longer qualify as an emerging growth company as of December 31, 2018. Therefore, after that date, we will no longer be able to take advantage of the extended transition period for adopting new or revised accounting standards.

Note 3.  Summary of Significant Accounting Policies

Significant Accounting Policies

During the nine months ended September 30, 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.

Inventories

Inventories are valued at the lower of cost (first-in, first-out method) or net realizable value. Inventories consisted of 45% finished goods and 55% component parts and work-in-process as of September 30, 2018 and 39% finished goods and 61% component parts and work-in-process as of December 31, 2017.

Recent Accounting Pronouncements

We currently 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. In accordance with the JOBS Act, we elected to participate in the 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. However, as of the last business day of our second fiscal quarter of 2018, the market value of our common stock that was held by non-affiliates exceeded $700 million, and as a result, we will no longer qualify as an emerging growth company as of December 31, 2018 and will no longer be able to take advantage of the extended transition period. Therefore, as of December 31, 2018, we will be required to adopt new or revised accounting standards when they are applicable to public companies that are not emerging growth companies.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers.” The new section replaces Section 605, “Revenue

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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 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 will be effective for us for our annual reporting periods ending on December 31, 2018 and interim reporting periods thereafter due to the recent determination of our upcoming change in filing status. As a result, we commenced project planning for our implementation, which included engaging an accounting firm to assist us. Based on our qualitative assessment to date we have defined the contracts, determined the performance obligations, and assessed the use of the portfolio practical expedient under this standard. We will apply the portfolio approach in determining the transaction price as we have a large volume of contracts with similar characteristics. We are in the process of determining whether this standard will have a material impact on our financial statements. Should we determine an adjustment is required, we will apply the modified retrospective approach as our transition method, which involves recognizing the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings as of January 1, 2018.

In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842), which supersedes the existing guidance for lease accounting, “Leases” (Topic 840). ASU No. 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 will be effective for us for interim and annual periods beginning after December 15, 2018. ASU No. 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. Due to the recent determination of our upcoming change in filing status, which has accelerated our required implementation date of this standard, we have commenced project planning for our implementation, which has included engaging an accounting firm to assist us. We are currently evaluating whether this standard will have a material impact on our financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments — Credit Losses,” to require the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts. The ASU will be effective for us for interim and annual periods beginning after December 15, 2019. 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 will be effective for us for interim and annual periods beginning after December 15, 2018. We do not anticipate any material impact on our consolidated financial statements in future periods as a result of the adoption of this ASU.

In January 2017, the FASB issued ASU No. 2017-01 “Business Combinations (Topic 805) Clarifying the Definition of a Business,” to revise the definition of a business and provide new guidance to assist in the evaluation of transactions as either asset acquisitions (disposals) or business acquisitions (disposals). We currently are an “emerging growth company” as defined by the JOBS Act and this ASU will become effective for us on December 31, 2018 when we no longer qualify for that status. We have elected early adoption for interim transactions that have not previously been included in issued financial statements, which is permitted under this standard. The adoption of this standard did not have a material impact on our consolidated financial statements.

In July 2018, the FASB issued ASU No. 2018-07 “Improvements to Non-employee Share-Based Payment Accounting,” which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. The ASU will be effective for us for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. 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.  Asset Acquisition

On May 22, 2018, we acquired certain assets and the intellectual property of Wright Therapy Products, Inc. (“WTP”) for total consideration of approximately $875,000 plus a potential earn-out to be amortized on a straight-line basis over the life of the related asset. The earn-out is based on certain revenue metrics over the seven-month period beginning June 30, 2018 and is capitalized to intangible assets. The assets include the rights to a portfolio of thirty-one

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issued and pending patents that includes intellectual property related to WTP’s pneumatic compression therapy devices and five related trademarks, as well as certain customer accounts. Due to the nature of these patents and related trademarks, as well as our planned use, they have been classified as defensive intangible assets on the balance sheet. The acquisition was recorded as an asset acquisition, and an allocation of the purchase price, based on relative fair value, has been completed as reflected below:

 

 

 

 

 

 

 

 

Gross

 

Weighted-Average

(Dollars in thousands)

    

Carrying Amount

 

Amortization Period

Defensive intangible assets

 

$

788

 

7 years

Customer accounts

 

 

87

 

5 years

Total

 

$

875

 

 

 

 

Note 5.  Marketable Securities

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2018

 

    

 

 

    

Unrealized

    

Fair

(In thousands)

 

Cost

 

Gains

 

Losses

 

Value

U.S. government and agency obligations

 

$

18,849

 

$

 —

 

$

37

 

$

18,812

Corporate debt securities and certificates of deposit

 

 

3,992

 

 

 —

 

 

 4

 

 

3,988

Marketable securities

 

$

22,841

 

$

 —

 

$

41

 

$

22,800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 marketable securities aggregated by investment category and the length of time the securities were in a continuous loss position were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 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

 

$

12,828

 

$

21

 

$

5,984

 

$

16

 

$

18,812

 

$

37

Corporate debt securities and certificates of deposit

 

 

1,493

 

 

 1

 

 

997

 

 

 4

 

 

2,490

 

 

 5

Marketable securities

 

$

14,321

 

$

22

 

$

6,981

 

$

20

 

$

21,302

 

$

42

 

 

 

 

 

 

 

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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 6.  Intangible Assets

Our patents and other intangible assets, all of which are subject to amortization, are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2018

    

As of December 31, 2017

 

 

Weighted-Average

 

Gross

 

 

 

 

 

Gross

 

 

 

 

 

 

Amortization

 

Carrying

 

Accumulated

 

Net

 

Carrying

 

Accumulated

 

Net

(Dollars in thousands)

    

Period

 

Amount

 

Amortization

 

Amount

 

Amount

 

Amortization

 

Amount

Patents

 

8 years

 

$

3,554

 

$

1,504

 

$

2,050

 

$

3,536

 

$

1,318

 

$

2,218

Defensive intangible assets

 

6 years

 

 

930

 

 

42

 

 

888

 

 

 —

 

 

 —

 

 

 —

Customer accounts

 

5 years

 

 

103

 

 

 6

 

 

97

 

 

 —

 

 

 —

 

 

 —

Total

 

 

 

$

4,587

 

$

1,552

 

$

3,035

 

$

3,536

 

$

1,318

 

$

2,218

 

Amortization expense was $0.1 million for each of the three months ended September 30, 2018 and 2017, and $0.2 million for each of the nine months ended September 30, 2018 and 2017. Future amortization expenses are expected as follows:

 

 

 

 

(In thousands)

 

 

 

2018 (October 1 - December 31)

    

$

104

2019

 

 

417

2020

 

 

417

2021

 

 

417

2022

 

 

417

Thereafter

 

 

1,263

Total

 

$

3,035

 

 

Note 7.  Accrued Expenses

Accrued expenses consisted of the following:

 

 

 

 

 

 

 

(In thousands)

    

As of September 30, 2018

    

As of December 31, 2017

Warranty

 

$

726

 

$

531

Travel and business

 

 

553

 

 

453

Legal and consulting

 

 

481

 

 

317

Deferred rent

 

 

159

 

 

173

Accrued taxes

 

 

84

 

 

1,070

Clinical studies

 

 

70

 

 

15

Other

 

 

217

 

 

39

Total

 

$

2,290

 

$

2,598

 

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Note 8.  Credit Agreement

On August 3, 2018, we entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association.

The Credit Agreement provides for a new $10,000,000 revolving credit facility. The revolving credit facility expires on August 3, 2021. Subject to satisfaction of certain conditions, we may increase the amount of the revolving loans available under the Credit Agreement and/or add one or more term loan facilities in an amount not to exceed an incremental $25,000,000 in the aggregate, such that the total aggregate principal amount of loans available under the Credit Agreement (including under the revolving credit facility) does not exceed $35,000,000.

Amounts drawn under the revolving credit facility bear interest, at our option, at a rate equal to (a) the highest of (i) the prime rate, (ii) the federal funds rate plus 0.50% and (iii) LIBOR for an interest period of one month plus 1% (the “Base Rate”) plus an applicable margin or (b) LIBOR plus the applicable margin. The applicable margin is 0.40% to 1.15% on loans bearing interest at the Base Rate and 1.40% to 2.15% on loans bearing interest at LIBOR, in each case depending on our consolidated total leverage ratio. Undrawn portions of the revolving credit facility are subject to an unused line fee at a rate per annum from 0.200% to 0.275%, depending on our consolidated total leverage ratio.

As of September 30, 2018 and the date on which we filed this report, we did not have any outstanding borrowings under the Credit Agreement.

Our obligations under the Credit Agreement are secured by a security interest in substantially all of our and our subsidiaries’ assets and are also guaranteed by our subsidiaries.

The Credit Agreement limits our ability to make capital expenditures during a fiscal year in excess of the amounts set forth in the Credit Agreement, and requires that we (i) not permit, as of the last day of each fiscal quarter, our consolidated total leverage ratio to exceed 3.00 to 1.00 and (ii) maintain minimum cash and cash equivalents, measured on the last day of each fiscal quarter, of not less than $7,500,000 (subject to a temporary reduction to $5,000,000 for the two fiscal quarters immediately following a permitted acquisition). As of September 30, 2018, we were in compliance with all financial covenants under the Credit Agreement.

The Credit Agreement also contains certain other restrictions and covenants, which, among other things, restrict our ability to acquire or merge with another entity, dispose of our assets, make investments, loans or guarantees, incur additional indebtedness, create liens or other encumbrances, or pay dividends or make other distributions.

Amounts due under the Credit Agreement may be accelerated upon an Event of Default (as defined in the Credit Agreement), such as breach of a representation, covenant or agreement of ours, defaults with respect to certain of our other material indebtedness or the occurrence of bankruptcy if not otherwise waived or cured.

We may use the proceeds from advances under the revolving credit facility (i) to finance capital expenditures, (ii) to pay fees, commissions and expenses in connection with the Credit Agreement and (iii) for working capital and general corporate purposes.

Note 9.  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, engineering and research and development functions. This lease agreement extends through November 2023 and provides for monthly rent, real estate taxes and operating expenses.

Rent expense was $0.4 million for the each of three months ended September 30, 2018 and 2017, and $1.2 million and $1.1 million for the nine months ended September 30, 2018 and 2017, respectively.

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In July 2016, we entered into a fleet vehicle lease program for certain members of our field sales organization.

We also have operating lease agreements for certain computer and office equipment that expire in 2021. 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 (October 1 - December 31)

 

$

227

 

$

14

 

$

55

 

$

296

2019

 

 

948

 

 

51

 

 

85

 

 

1,084

2020

 

 

954

 

 

34

 

 

 —

 

 

988

2021

 

 

701

 

 

 3

 

 

 —

 

 

704

2022

 

 

352

 

 

 —

 

 

 —

 

 

352

Thereafter

 

 

268

 

 

 —

 

 

 —

 

 

268

Total

 

$

3,450

 

$

102

 

$

140

 

$

3,692

 

Major Vendors

We had purchases from two major vendors that accounted for 45% and 41% of our total purchases for the three and nine months ended September 30, 2018, respectively. We had purchases from three major vendors that accounted for 47% and 39% of our total purchases for the three and nine months ended September 30, 2017, respectively.

Purchase Commitments

We issued purchase orders in 2017 totaling $1.7 million for items that we expect to receive between October and December of 2018. We issued purchase orders in the nine months ended September 30, 2018 totaling $15.0 million for items that we expect to receive in 2019.

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 $63,000 and $42,000 for the three months ended September 30, 2018 and 2017, respectively, and $174,000 and $135,000 for the nine months ended September 30, 2018 and 2017, respectively.

Note 10.  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

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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 September 30, 2018, 5,226,592 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 $2.4 million and $1.0 million for the three months ended September 30, 2018 and 2017, respectively, and $5.6 million and $3.1 million for the nine months ended September 30, 2018 and 2017, respectively. This expense was allocated as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

(In thousands)

    

2018

    

2017

    

2018

    

2017

Cost of goods sold

 

$

69

 

$

 4

 

$

178

 

$

102

Sales and marketing expenses

 

 

834

 

 

361

 

 

2,272

 

 

1,030

Research and development expenses

 

 

52

 

 

29

 

 

146

 

 

73

Reimbursement, general and administrative expenses

 

 

1,425

 

 

573

 

 

3,042

 

 

1,899

Total stock-based compensation expense

 

$

2,380

 

$

967