TCMD 10-Q

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

Commission File Number 001-37799


Tactile Systems Technology, Inc.

(Exact name of registrant as specified in its charter)


 

 

 

Delaware

1331 Tyler Street NE, Suite 200

41-1801204

(State or other jurisdiction of

incorporation or organization)

Minneapolis, Minnesota 55413

(I.R.S. employer

identification number)

 

(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

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, Par Value $0.001 Per Share

TCMD

The Nasdaq Stock Market

 

18,825,688 shares of common stock, par value $0.001 per share, were outstanding as of May 2, 2019.

 

 


 

Table of Contents

TABLE OF CONTENTS

 

 

 

 

 

 

   

PART I—FINANCIAL INFORMATION

   

 

 

 

 

 

 

Item 1. 

 

Financial Statements

 

3

Item 2. 

 

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

 

23

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

31

Item 4. 

 

Controls and Procedures

 

31

 

 

 

 

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

32

Item 1A. 

 

Risk Factors

 

32

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

32

Item 3. 

 

Defaults Upon Senior Securities

 

33

Item 4. 

 

Mine Safety Disclosures

 

33

Item 5. 

 

Other Information

 

33

Item 6. 

 

Exhibits

 

33

 

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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. These risks, uncertainties and other factors include, but are not limited to:

·

the adequacy of our liquidity to pursue our complete business objectives;

·

our ability to obtain reimbursement from third-party payers for our products;

·

loss or retirement of key executives;

·

adverse economic conditions or intense competition;

·

loss of a key supplier;

·

entry of new competitors and products;

·

adverse federal, state and local government regulation;

·

technological obsolescence of our products;

·

technical problems with our research and products;

·

our ability to expand our business through strategic acquisitions;

·

our ability to integrate acquisitions and related businesses;

·

price increases for supplies and components;

·

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

·

the inability to carry out research, development and commercialization plans.

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, 2018 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)

 

    

March 31,

    

December 31,

(In thousands, except share and per share data)

    

2019

    

2018

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

23,548

 

$

20,099

Marketable securities

 

 

21,384

 

 

25,786

Accounts receivable, net

 

 

21,661

 

 

24,332

Net investment in leases

 

 

3,362

 

 

 —

Inventories

 

 

11,321

 

 

11,189

Income taxes receivable

 

 

2,814

 

 

1,793

Prepaid expenses and other current assets

 

 

1,680

 

 

1,762

Total current assets

 

 

85,770

 

 

84,961

Non-current assets:

 

 

 

 

 

 

Property and equipment, net

 

 

4,616

 

 

4,810

Right of use operating lease assets

 

 

3,396

 

 

 —

Intangible assets, net

 

 

5,244

 

 

5,339

Medicare accounts receivable, long-term

 

 

2,172

 

 

1,884

Deferred income taxes

 

 

11,077

 

 

8,820

Other non-current assets

 

 

1,242

 

 

1,257

Total non-current assets

 

 

27,747

 

 

22,110

Total assets

 

$

113,517

 

$

107,071

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

5,832

 

$

5,110

Accrued payroll and related taxes

 

 

6,837

 

 

7,421

Accrued expenses

 

 

2,685

 

 

2,780

Future product royalties

 

 

 3

 

 

 5

Income taxes

 

 

 —

 

 

51

Right of use operating lease liabilities

 

 

1,147

 

 

 —

Other current liabilities

 

 

800

 

 

709

Total current liabilities

 

 

17,304

 

 

16,076

Non-current liabilities:

 

 

 

 

 

 

Accrued warranty reserve, non-current

 

 

1,854

 

 

1,725

Income taxes, non-current

 

 

42

 

 

 —

Right of use operating lease liabilities, non-current

 

 

2,318

 

 

 —

Total non-current liabilities

 

 

4,214

 

 

1,725

Total liabilities

 

 

21,518

 

 

17,801

Commitments and contingencies (see Note 10)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Preferred stock, $0.001 par value, 50,000,000 shares authorized; none issued and outstanding as of March 31, 2019 and December 31, 2018

 

 

 —

 

 

 —

Common stock, $0.001 par value, 300,000,000 shares authorized; 18,818,692 shares issued and outstanding as of March 31, 2019; 18,631,125 shares issued and outstanding as of December 31, 2018

 

 

19

 

 

19

Additional paid-in capital

 

 

80,788

 

 

79,554

Retained earnings

 

 

11,177

 

 

9,705

Accumulated other comprehensive income (loss)

 

 

15

 

 

(8)

Total stockholders’ equity

 

 

91,999

 

 

89,270

Total liabilities and stockholders’ equity

 

$

113,517

 

$

107,071

 

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

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Table of Contents

 

 

 

 

 

 

 

 

Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

 

Three Months Ended

 

 

March 31,

(In thousands, except share and per share data)

   

2019

   

2018

Revenue

 

 

 

 

 

 

Sales revenue

 

$

30,831

 

$

23,647

Rental revenue

 

 

6,786

 

 

3,201

Total revenue

 

 

37,617

 

 

26,848

Cost of revenue

 

 

 

 

 

 

Cost of sales revenue

 

 

9,412

 

 

6,409

Cost of rental revenue

 

 

1,947

 

 

900

Total cost of revenue

 

 

11,359

 

 

7,309

Gross profit

 

 

 

 

 

 

Gross profit - sales revenue

 

 

21,419

 

 

17,238

Gross profit - rental revenue

 

 

4,839

 

 

2,301

Gross profit

 

 

26,258

 

 

19,539

Operating expenses

 

 

 

 

 

 

Sales and marketing

 

 

17,391

 

 

12,557

Research and development

 

 

1,281

 

 

1,437

Reimbursement, general and administrative

 

 

9,388

 

 

7,372

Total operating expenses

 

 

28,060

 

 

21,366

Loss from operations

 

 

(1,802)

 

 

(1,827)

Other income

 

 

161

 

 

91

Loss before income taxes

 

 

(1,641)

 

 

(1,736)

Income tax benefit

 

 

(3,113)

 

 

(1,686)

Net income (loss)

 

$

1,472

 

$

(50)

Net income per common share

 

 

 

 

 

 

Basic

 

$

0.08

 

$

0.00

Diluted

 

$

0.08

 

$

0.00

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

 

 

 

 

 

 

Basic

 

 

18,746,751

 

 

17,996,672

Diluted

 

 

19,579,847

 

 

17,996,672

 

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

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Table of Contents

 

 

 

 

 

 

 

 

Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

Three Months Ended

 

 

March 31,

(In thousands)

   

2019

   

2018

Net income (loss)

 

$

1,472

 

$

(50)

Other comprehensive income (loss):

 

 

 

 

 

 

Unrealized gain (loss) on marketable securities

 

 

30

 

 

(7)

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

 

 

(7)

 

 

 1

Total other comprehensive income (loss)

 

 

23

 

 

(6)

Comprehensive income (loss)

 

$

1,495

 

$

(56)

 

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

 

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

 

 

Common Stock

 

Paid-In

 

Retained

 

Comprehensive

 

Treasury

 

 

 

(In thousands, except share data)

 

Shares

 

Par Value

 

Capital

 

Earnings

 

(Loss) Income

 

Stock

 

Total

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 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2018

 

18,631,125

 

 

19

 

 

79,554

 

 

9,705

 

 

(8)

 

 

 —

 

 

89,270

Stock-based compensation

 

 —

 

 

 —

 

 

2,783

 

 

 

 

 

 

 

 

2,783

Exercise of common stock options and vesting of restricted stock units

 

231,814

 

 

 —

 

 

861

 

 

 

 

 

 

 

 

861

Taxes paid for net share settlement of restricted stock units

 

(44,247)

 

 

 

 

(2,410)

 

 

 

 

 

 

 —

 

 

(2,410)

Comprehensive income for the period

 

 

 

 

 

 

 

1,472

 

 

23

 

 

 —

 

 

1,495

Balances, March 31, 2019

 

18,818,692

 

$

19

 

$

80,788

 

$

11,177

 

$

15

 

$

 —

 

$

91,999

 

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

 

 

 

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Table of Contents

 

 

 

 

 

 

 

 

Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

Three Months Ended

 

 

March 31,

(In thousands)

    

2019

    

2018

Cash flows from operating activities

 

 

 

 

 

 

Net income (loss)

 

$

1,472

 

$

(50)

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

 

 

 

 

 

 

Depreciation and amortization

 

 

996

 

 

463

Deferred income taxes

 

 

(2,264)

 

 

 —

Stock-based compensation expense

 

 

2,783

 

 

1,481

Changes in assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

2,671

 

 

3,414

Net investment in leases

 

 

(3,362)

 

 

 —

Inventories

 

 

(132)

 

 

(3,616)

Income taxes

 

 

(1,030)

 

 

(1,952)

Prepaid expenses and other assets

 

 

97

 

 

63

Right of use operating lease assets

 

 

(3,396)

 

 

 —

Medicare accounts receivable – long-term

 

 

(288)

 

 

(253)

Accounts payable

 

 

722

 

 

885

Accrued payroll and related taxes

 

 

(584)

 

 

(1,850)

Accrued expenses and other liabilities

 

 

125

 

 

(756)

Right of use operating lease liabilities

 

 

3,465

 

 

 —

Future product royalties

 

 

(2)

 

 

(2)

Net cash provided by (used in) operating activities

 

 

1,273

 

 

(2,173)

Cash flows from investing activities

 

 

 

 

 

 

Proceeds from sales of securities available-for-sale

 

 

 —

 

 

1,000

Proceeds from maturities of securities available-for-sale

 

 

4,500

 

 

4,000

Purchases of property and equipment

 

 

(731)

 

 

(432)

Intangible assets costs

 

 

(44)

 

 

 —

Net cash provided by investing activities

 

 

3,725

 

 

4,568

Cash flows from financing activities

 

 

 

 

 

 

Taxes paid for net share settlement of restricted stock units

 

 

(2,410)

 

 

(1,188)

Proceeds from exercise of common stock options

 

 

861

 

 

138

Net cash used in financing activities

 

 

(1,549)

 

 

(1,050)

Net increase in cash and cash equivalents

 

 

3,449

 

 

1,345

Cash and cash equivalents – beginning of period

 

 

20,099

 

 

23,968

Cash and cash equivalents – end of period

 

$

23,548

 

$

25,313

Supplemental cash flow disclosure

 

 

 

 

 

 

Cash paid for interest

 

$

 —

 

$

 —

Cash paid for taxes

 

$

181

 

$

284

Capital expenditures incurred but not yet paid

 

$

176

 

$

96

 

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, the Actitouch system, a medical device used to treat venous leg ulcers and chronic venous insufficiency, and the Airwear wrap, a medical device used for the management of venous insufficiency, venous hypertension, venous ulcerations and lymphedema. We provide our products for use in the home and sell or rent 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 revenues 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 and rentals 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 or rentals 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, 2019 are not necessarily indicative of results to be expected for the year ending December 31, 2019, 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, 2018.

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Principles of Consolidation

Our 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.

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 to disclose contingent assets and liabilities at the date of the 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

Prior to December 31, 2018, we were an “emerging growth company” as defined by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) and as a result we were 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 no longer qualified as an emerging growth company as of December 31, 2018 and are no longer able to take advantage of the extended transition period for adopting new or revised accounting standards. Therefore, beginning December 31, 2018, we were required to adopt new or revised accounting standards when they are applicable to public companies that are not emerging growth companies.

Note 3. Summary of Significant Accounting Policies

Significant Accounting Policies

Excluding the adoption of ASC 842 “Leases”, as described below, there were no material changes in our significant accounting policies during the three months ended March 31, 2019. 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, 2018 for information regarding our significant accounting policies.

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases” (Topic 842) (“ASC 842”), which supersedes the existing guidance for lease accounting, “Leases” (Topic 840) (“ASC 840”). ASC 842 requires lessees to recognize a lease liability and a right of use asset for all leases that extend beyond one year. As a result of our change in filing status, we adopted this standard using the modified retrospective transition approach at the adoption date of January 1, 2019. This approach does not require restatement of previous periods. We completed a qualitative and quantitative assessment of our leases from both a lessee and lessor perspective. As part of our process, we elected to utilize certain practical expedients that were provided for transition relief. Accordingly, we did not reassess expired or existing contracts, lease classifications or related initial direct costs as part of our assessment process for either lessee or lessor leases. Additionally, we elected the practical expedient to treat lease and nonlease components of fixed payments due to the lessor as one, and therefore no separate allocation was required on the initial implementation date of January 1, 2019, and thereafter. The adoption of

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this standard, from a lessee perspective, resulted in us recording Right of Use (“ROU”) operating lease assets and liabilities of approximately $3.1 million on the Condensed Consolidated Balance Sheet as of January 1, 2019, with no impact to retained earnings. In addition, we elected as an accounting policy, not to record leases with an initial term of less than 12 months. From a lessor perspective, the application of ASC 842 to our rental revenue, which was recognized as month-to-month, cancelable leases in accordance with ASC 840 through December 31, 2018, resulted in recognizing rental revenue as a sales-type lease under ASC 842 thereafter. Rental sales agreements that commenced prior to December 31, 2018, will continue to be recognized as month-to-month, cancelable leases until they are completed, as we elected the practical expedient to not reassess the lease classification for leases in existence upon adoption. As such, rental agreements commencing after January 1, 2019 were recorded as sales-type leases with the associated revenue and cost of revenue recognized on the lease commencement date and a corresponding net investment in leases on the Condensed Consolidated Balance Sheet. (See Note 10 – “Commitments and Contingencies” and Note 12 – “Revenue” for additional information and required disclosures.)

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 January 1, 2020. Therefore, we plan to further evaluate the anticipated impact of the adoption of this ASU on our condensed consolidated financial statements in future periods.

In July 2018, the FASB issued ASU No. 2018-07 “Improvements to Non-employee Share-Based Payment Accounting,” which expands the scope of ASC 718 – “Stock Based Compensation” to include share-based payment transactions for acquiring goods and services from non-employees. The ASU was effective for us beginning January 1, 2019, including interim periods within the fiscal year. We have early adopted ASU 2018-07 for the quarter ended March 31, 2019 and it did not have a material impact on our condensed consolidated financial statements.

Note 4. Marketable Securities

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At March 31, 2019

 

   

Amortized

   

Unrealized

   

Fair

(In thousands)

   

Cost

   

Gains

   

Losses

   

Value

U.S. government and agency obligations

 

$

17,391

 

$

13

 

$

 3

 

$

17,401

Corporate debt securities and certificates of deposit

 

 

3,973

 

 

11

 

 

 1

 

 

3,983

Marketable securities

 

$

21,364

 

$

24

 

$

 4

 

$

21,384

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2018

 

   

Amortized

   

Unrealized

   

Fair

(In thousands)

   

Cost

   

Gains

   

Losses

   

Value

U.S. government and agency obligations

 

$

19,332

 

$

 5

 

$

17

 

$

19,320

Corporate debt securities and certificates of deposit

 

 

6,464

 

 

 7

 

 

 5

 

 

6,466

Marketable securities

 

$

25,796

 

$

12

 

$

22

 

$

25,786

 

Net pre-tax unrealized gains for marketable securities at March 31, 2019, were recorded as a component of accumulated other comprehensive income in stockholders' equity. There were no sales of marketable securities during the three months ended March 31, 2019.

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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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At March 31, 2019

 

 

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

 

$

7,474

 

$

 2

 

$

999

 

$

 1

 

$

8,473

 

$

 3

Corporate debt securities and certificates of deposit

 

 

1,498

 

 

 1

 

 

 —

 

 

 —

 

 

1,498

 

 

 1

Marketable securities

 

$

8,972

 

$

 3

 

$

999

 

$

 1

 

$

9,971

 

$

 4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 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

 

$

11,884

 

$

11

 

$

2,993

 

$

 6

 

$

14,877

 

$

17

Corporate debt securities and certificates of deposit

 

 

2,993

 

 

 3

 

 

999

 

 

 2

 

 

3,992

 

 

 5

Marketable securities

 

$

14,877

 

$

14

 

$

3,992

 

$

 8

 

$

18,869

 

$

22

 

Note 5. Inventories

Inventories consisted of the following:

 

 

 

 

 

 

 

(In thousands)

   

At March 31, 2019

   

At December 31, 2018

Finished goods

 

$

4,656

 

$

5,318

Component parts and work-in-process

 

 

6,665

 

 

5,871

Total inventories

 

$

11,321

 

$

11,189

 

Note 6. Intangible Assets

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

At March 31, 2019

 

At December 31, 2018

 

 

Average

 

Gross

 

 

 

 

 

Gross

 

 

 

 

 

 

Amortization

 

Carrying

 

Accumulated

 

Net

 

Carrying

 

Accumulated

 

Net

(In thousands)

   

Period

 

Amount

 

Amortization

 

Amount

 

Amount

 

Amortization

 

Amount

Patents

 

11 years

 

$

4,298

 

$

157

 

$

4,141

 

$

4,253

 

$

71

 

$

4,182

Defensive intangible assets

 

5 years

 

 

1,126

 

 

130

 

 

996

 

 

1,126

 

 

82

 

 

1,044

Customer accounts

 

4 years

 

 

125

 

 

18

 

 

107

 

 

125

 

 

12

 

 

113

Total

 

 

 

$

5,549

 

$

305

 

$

5,244

 

$

5,504

 

$

165

 

$

5,339

 

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Amortization expense was $0.1 million for each of the three months ended March 31, 2019 and 2018. Future amortization expenses are expected as follows:

 

 

 

 

(In thousands)

 

 

 

2019 (April 1 - December 31)

   

$

419

2020

 

 

558

2021

 

 

558

2022

 

 

558

2023

 

 

491

Thereafter

 

 

2,660

Total

 

$

5,244

 

Note 7. Accrued Expenses

Accrued expenses consisted of the following:

 

 

 

 

 

 

 

(In thousands)

   

At March 31, 2019

   

At December 31, 2018

Warranty

 

$

873

 

$

841

Legal and consulting

 

 

710

 

 

319

Travel and business

 

 

622

 

 

557

Accrued taxes

 

 

262

 

 

115

Clinical studies

 

 

33

 

 

60

Acquisition earn-out

 

 

 —

 

 

375

Deferred rent

 

 

 —

 

 

155

Other

 

 

185

 

 

358

Total

 

$

2,685

 

$

2,780

 

Note 8. Warranty Reserves

The reserve for warranties was as follows:

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

(In thousands)

   

2019

   

2018

Beginning balance

 

$

2,566

 

$

1,672

Warranty provision

 

 

418

 

 

351

Processed warranty claims

 

 

(257)

 

 

(203)

Ending balance

 

$

2,727

 

$

1,820

 

 

 

 

 

 

 

Accrued warranty reserve, current

 

$

873

 

$

648

Accrued warranty reserve, non-current

 

 

1,854

 

 

1,172

Total accrued warranty reserve

 

$

2,727

 

$

1,820

 

Note 9. Credit Agreement

On August 3, 2018, we entered into a credit agreement with Wells Fargo Bank, National Association. On February 12, 2019, we entered into a first amendment to our credit agreement, which provided for an increase in our annual capital expenditure limitations. On March 25, 2019, we entered into a waiver and second amendment to our credit agreement, which provided that the business plan and budget required to be delivered annually be reduced to cover one year as opposed to the initial three-year coverage requirement. We refer to the credit agreement, as amended, as the “Credit Agreement.”

The Credit Agreement provides for a $10.0 million 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

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not to exceed an incremental $25.0 million 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 $35.0 million.

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 March 31, 2019, we did not have any outstanding borrowings under the Credit Agreement.

Note 10. Commitments and Contingencies

Lease Obligations

We lease property and equipment under operating leases, typically with terms greater than 12 months, and determine if an arrangement contains a lease at inception. In general, an arrangement contains a lease if there is an identified asset and we have the right to direct the use of and obtain substantially all of the economic benefit from the use of the identified asset.  We record a ROU operating lease liability at the present value of lease payments over the lease term on the commencement date. The related ROU operating lease asset reflects rental escalation clauses as well as renewal options and/or termination options. The exercise of lease renewal and/or termination options are at our discretion and are included in the determination of the lease term and lease payment obligations when it is deemed reasonably certain that the option will be exercised. When available, we use the rate implicit in the lease to discount lease payments to present value; however, certain leases do not provide a readily determinable implicit rate. Therefore, we must estimate our incremental borrowing rate to discount the lease payments based on information available at lease commencement.

We classify our leases as Buildings, Vehicles or Computer/Office Equipment and do not separate lease and nonlease components of contracts for any of the aforementioned classifications. In accordance with applicable guidance, we do not record leases with terms that are less than one year on the Condensed Consolidated Balance Sheet.

None of our lease agreements contain material restrictive covenants or residual value guarantees.

Buildings

We lease certain office and warehouse space at various locations in the United States where we provide services. These leases are typically greater than one year with fixed, escalating rents over the noncancelable terms and therefore, ROU operating lease assets and liabilities are recorded on the Condensed Consolidated Balance Sheet, with rent expense to be recognized on a straight-line basis over the term of the lease. The remaining lease terms vary from approximately 1 to 5 years as of the adoption date of January 1, 2019.

In March 2008, we entered into a noncancelable operating lease agreement for building space for our corporate headquarters that provides for monthly rent, real estate taxes and operating expenses that was subsequently extended to July 31, 2021. This space is included in our ROU operating lease assets and liabilities. We are looking to sub-lease this space for the remainder of our lease obligation due to our new headquarters lease described below.

We entered into a lease in October 2018 for office space for our future corporate headquarters in Minneapolis, Minnesota which will commence upon our move, which is expected to occur in the fourth quarter of 2019. As such, this lease is not included in either the ROU operating lease assets or liabilities. The initial lease term is through February 2030, with an option to renew for two periods of five years each.

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Vehicles

We lease vehicles for certain members of our field sales organization under a vehicle fleet program whereby the initial, noncancelable lease is for a term of 367 days, thus more than one year. Subsequent to the initial term, the lease becomes a month-to-month, cancelable lease. As of March 31, 2019, we had approximately 40 vehicles with agreements within the initial, noncancelable lease term that are recorded as ROU operating lease assets and liabilities. In addition to monthly rental fees specific to the vehicle, there are fixed monthly nonlease components that have been included in the ROU operating lease assets and liabilities. The nonlease components are not significant.

Computer and Office Equipment

We also have operating lease agreements for certain computer and office equipment. The remaining lease terms at the adoption date of January 1, 2019 range from seven months to approximately four and a half years with fixed monthly payments that are included in the ROU operating lease assets and liabilities. The leases provide an option to purchase the related equipment at fair market value at the end of the lease. The lease will automatically renew as a month-to-month rental at the end of the lease if the equipment is not purchased or returned.

Lease Position, Undiscounted Cash Flow and Supplemental Information

The table below presents the lease-related assets and liabilities recorded on our Condensed Consolidated Balance Sheet:

 

 

 

 

(In thousands)

   

At March 31, 2019

Right of use operating lease assets

 

$

3,396

 

 

 

 

Right of use operating lease liabilities:

 

 

 

Current

 

$

1,147

Non-current

 

 

2,318

Total

 

$

3,465

 

 

 

 

Operating leases:

 

 

 

Weighted average remaining lease term

 

 

3.5 years

Weighted average discount rate (1)

 

 

5.05%

 

(1)

Discount rates were established as of January 1, 2019, the adoption date

The table below reconciles the undiscounted cash flows under the operating leases recorded on the Condensed Consolidated Balance Sheet for each of the next five years and total of the remaining years:

 

 

 

 

(In thousands)

 

 

 

2019 (April 1 - December 31)

   

$

1,000

2020

 

 

1,082

2021

 

 

741

2022

 

 

456

2023

 

 

383

Thereafter

 

 

32

Total minimum lease payments

 

 

3,694

Less: amount of lease payments representing interest

 

 

(229)

Present value of future minimum lease payments

 

 

3,465

Less: current obligations under leases

 

 

(1,147)

Long-term lease obligations

 

$

2,318

 

As of March 31, 2019, we have additional lease commitments of $19.9 million related to our future headquarters that we anticipate will commence in the fourth quarter of 2019. As the lessee we are involved in

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providing guidance to the lessor for related improvements, however these improvements are managed and owned by the lessor.

Operating lease costs accounted for under ASC 842, for the three months ended March 31, 2019, were $0.3 million. Cash paid for the three months ended March 31, 2019 for operating lease liabilities included in the measurement of the lease liability was $0.3 million.

Rent expense accounted for under ASC 840, for the three months ended March 31, 2018 was $0.3 million.