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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, 2020

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

3701 Wayzata Blvd, Suite 300

41-1801204

(State or other jurisdiction of

incorporation or organization)

Minneapolis, Minnesota 55416

(I.R.S. Employer

Identification No.)

(Address and zip code of principal executive offices)

(612) 355-5100

(Registrant’s telephone number, including area code)

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

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

19,233,043 shares of common stock, par value $0.001 per share, were outstanding as of April 30, 2020.

Table of Contents

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

5

Item 2.

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

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32

Item 4.

Controls and Procedures

32

 

PART II—OTHER INFORMATION

 

Item 1.

Legal Proceedings

33

Item 1A.

Risk Factors

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34

Item 3.

Defaults Upon Senior Securities

35

Item 4.

Mine Safety Disclosures

35

Item 5.

Other Information

35

Item 6.

Exhibits

35

2

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

the impacts of the COVID-19 pandemic on our business, financial condition and results of operations, and our inability to mitigate such impacts;
the adequacy of our liquidity to pursue our business objectives;
our ability to obtain reimbursement from third party payers for our products;
our Chief Executive Officer transition, including disruptions and uncertainties related thereto, our ability to appoint a successor with the desired level of experience and expertise in a timely manner, the potential impact on our business and future strategic direction resulting from the transition to a new Chief Executive Officer and our ability to retain other key members of senior management;
loss or retirement of other key executives, including prior to identifying a successor;
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, 2019 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

3

Table of Contents

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.

4

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)

    

2020

    

2019

Assets

Current assets

Cash and cash equivalents

$

32,297

$

22,770

Marketable securities

12,537

22,464

Accounts receivable

 

30,781

 

33,444

Net investment in leases

 

8,882

 

8,147

Inventories

 

22,363

 

19,059

Income taxes receivable

 

3,495

 

Prepaid expenses and other current assets

 

1,966

 

2,451

Total current assets

 

112,321

 

108,335

Non-current assets

Property and equipment, net

 

7,334

 

7,408

Right of use operating lease assets

 

15,289

 

15,885

Intangible assets, net

 

5,206

 

5,312

Accounts receivable, non-current

 

5,157

 

4,184

Deferred income taxes

 

7,973

 

8,970

Other non-current assets

 

2,239

 

1,658

Total non-current assets

 

43,198

 

43,417

Total assets

$

155,519

$

151,752

Liabilities and Stockholders' Equity

Current liabilities

Accounts payable

$

8,739

$

3,843

Accrued payroll and related taxes

 

8,294

 

10,098

Accrued expenses

 

5,030

 

4,498

Income taxes payable

 

 

632

Operating lease liabilities

 

1,585

 

1,454

Other current liabilities

 

1,073

 

903

Total current liabilities

 

24,721

 

21,428

Non-current liabilities

Accrued warranty reserve, non-current

 

2,884

 

2,541

Income taxes, non-current

 

28

 

54

Operating lease liabilities, non-current

14,846

 

15,134

Total non-current liabilities

 

17,758

 

17,729

Total liabilities

 

42,479

 

39,157

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, 2020 and December 31, 2019

 

 

Common stock, $0.001 par value, 300,000,000 shares authorized; 19,226,665 shares issued and outstanding as of March 31, 2020; 19,152,715 shares issued and outstanding as of December 31, 2019

 

19

 

19

Additional paid-in capital

 

93,614

 

91,874

Retained earnings

 

19,369

 

20,676

Accumulated other comprehensive income

38

26

Total stockholders’ equity

 

113,040

 

112,595

Total liabilities and stockholders’ equity

$

155,519

$

151,752

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

5

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)

    

2020

    

2019

Revenue

Sales revenue

$

37,623

$

30,831

Rental revenue

 

6,052

 

6,786

Total revenue

 

43,675

 

37,617

Cost of revenue

Cost of sales revenue

 

10,922

 

9,412

Cost of rental revenue

 

1,680

 

1,947

Total cost of revenue

 

12,602

 

11,359

Gross profit

Gross profit - sales revenue

 

26,701

 

21,419

Gross profit - rental revenue

 

4,372

 

4,839

Gross profit

 

31,073

 

26,258

Operating expenses

Sales and marketing

 

22,970

 

17,391

Research and development

 

1,684

 

1,281

Reimbursement, general and administrative

 

10,870

 

9,388

Total operating expenses

 

35,524

 

28,060

Loss from operations

 

(4,451)

 

(1,802)

Other income

 

266

 

161

Loss before income taxes

 

(4,185)

 

(1,641)

Income tax benefit

 

(2,878)

 

(3,113)

Net (loss) income

$

(1,307)

$

1,472

Net (loss) income per common share

Basic

$

(0.07)

$

0.08

Diluted

$

(0.07)

$

0.08

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

Basic

19,173,580

18,746,751

Diluted

19,173,580

19,579,847

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

6

Table of Contents

Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Comprehensive (Loss) Income

(Unaudited)

Three Months Ended March 31, 

(In thousands)

    

2020

    

2019

Net (loss) income

$

(1,307)

$

1,472

Other comprehensive income:

 

  

 

  

Unrealized gain on marketable securities

 

30

 

30

Income tax related to items of other comprehensive income

 

(18)

 

(7)

Total other comprehensive income

 

12

 

23

Comprehensive (loss) income

$

(1,295)

$

1,495

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

7

Table of Contents

Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

Accumulated

Additional

Other

Common Stock

Paid-In

Retained

Comprehensive

(In thousands, except share data)

 

Shares

 

Par Value

 

Capital

 

Earnings

 

(Loss) Income

 

Total

Balances, December 31, 2018

18,631,127

$

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

231,812

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

Balances, December 31, 2019

19,152,715

19

91,874

20,676

26

112,595

Stock-based compensation

2,728

2,728

Exercise of common stock options and vesting of restricted stock units

96,186

172

172

Taxes paid for net share settlement of restricted stock units

(22,236)

(1,160)

(1,160)

Comprehensive (loss) income for the period

(1,307)

12

(1,295)

Balances, March 31, 2020

19,226,665

$

19

$

93,614

$

19,369

$

38

$

113,040

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

8

Table of Contents

Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Three Months Ended March 31, 

(In thousands)

    

2020

    

2019

Cash flows from operating activities

Net (loss) income

$

(1,307)

$

1,472

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

Depreciation and amortization

730

1,064

Net amortization of premiums and discounts on securities available-for-sale

(43)

(68)

Deferred income taxes

979

(2,264)

Stock-based compensation expense

2,728

2,783

Changes in assets and liabilities:

Accounts receivable

2,663

2,671

Net investment in leases

(735)

(3,362)

Inventories

(3,304)

(132)

Income taxes

(4,153)

(1,030)

Prepaid expenses and other assets

192

21

Right of use operating lease assets

151

(9)

Medicare accounts receivable, non-current

(973)

(288)

Accounts payable

4,741

722

Accrued payroll and related taxes

(1,804)

(584)

Accrued expenses and other liabilities

1,044

277

Net cash provided by operating activities

909

1,273

Cash flows from investing activities

Proceeds from maturities of securities available-for-sale

10,000

4,500

Purchases of property and equipment

(358)

(731)

Intangible assets costs

(36)

(44)

Net cash provided by investing activities

9,606

3,725

Cash flows from financing activities

Taxes paid for net share settlement of restricted stock units

(1,160)

(2,410)

Proceeds from exercise of common stock options

172

861

Net cash used in financing activities

(988)

(1,549)

Net increase in cash and cash equivalents

9,527

3,449

Cash and cash equivalents – beginning of period

22,770

20,099

Cash and cash equivalents – end of period

$

32,297

$

23,548

Supplemental cash flow disclosure

Cash paid for taxes

$

311

$

181

Capital expenditures incurred but not yet paid

$

155

$

176

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 Airwear wrap, a medical device used for the management of venous insufficiency, venous hypertension, venous ulcerations and lymphedema. Our products are purchased or rented for at-home use and are recommended by vascular, wound and lymphedema clinics throughout the United States.

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 our reincorporation 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. As a result, 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 revenue in the third and fourth quarters of the year when patients have met their annual insurance deductibles, thereby reducing their out-of-pocket costs for our products, and because patients desire to exhaust their flexible spending accounts at year end. 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 and/or do not have plans that include patient deductibles for purchases or rentals of our products. Further, seasonality trends in 2020 may be significantly different than in prior years as a result of the COVID-19 pandemic and related impacts.

Note 2. Basis of Presentation

The 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.

The results for the three months ended March 31, 2020, are not necessarily indicative of results to be expected for the year ending December 31, 2020, 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, 2019.

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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.

Risks and Uncertainties

Coronavirus (COVID-19)

The United States economy in general and our business specifically have been negatively affected by the COVID-19 pandemic. There are no reliable estimates of how long the pandemic will last or how many people are likely to be affected by it. For that reason, we are unable to reasonably estimate the long-term impact of the pandemic on our business at this time. Our first priority with regard to the COVID-19 pandemic is to ensure the safety and health of our employees, clinicians and patients. Subject to that, we are focusing our efforts on attempting to continue our business operations in this unprecedented environment. Part of our strategy includes changing many of our processes and practices in an effort to help mitigate the impact of COVID-19 on our business so that we can support our clinicians and safely make our at-home therapies available to patients.  These include, but are not limited to:

Adjusting work and operations to keep employees safe while continuing to serve our clinicians and patients. As an essential business under federal guidelines, we continue to manufacture product and we have implemented multiple, smaller rotational shifts and other best practices to help protect the health and safety of our workforce.
Implementing remote and flexible work arrangements for employees wherever possible, including real-time, online training of our new sales representatives.
Initiating employee travel and contact restrictions to reduce exposure.
Collaborating with payers to modify coverage requirements by serving patients virtually.
Postponing large medical education programs and conducting virtual meetings whenever possible, including virtual patient demonstrations and trainings.
When in-person visits are required, we are supporting clinicians and patients by using rigorous infection control practices.

We cannot assure you that these changes to our processes and practices will be successful in mitigating the impact of COVID-19 on our business.

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 revenue 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 and the related taxes.

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Note 3. Summary of Significant Accounting Policies

Significant Accounting Policies

There were no material changes in our significant accounting policies during the three months ended March 31, 2020. 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, 2019, for information regarding our significant accounting policies.

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments — Credit Losses” (“ASU 2016-13”), which introduced a new model for recognizing credit losses on financial instruments based on an estimate of the current expected credit losses. The new current expected credit losses (“CECL”) model generally calls for the immediate recognition of all expected credit losses and applies to financial instruments and other assets, including accounts receivable and other financial assets measured at amortized cost, debt securities and other financial assets. This guidance replaces the previous incurred loss model for measuring expected credit losses and requires expected losses on available-for-sale debt securities to be recognized through an allowance for credit losses rather than as reductions in the amortized cost of the securities. We adopted ASU 2016-13 as of January 1, 2020, and it did not have an impact on the 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, 2020

    

Amortized

    

Unrealized

    

Fair

(In thousands)

    

Cost

    

Gains

    

Losses

    

Value

U.S. government and agency obligations

$

10,988

$

51

$

$

11,039

Corporate debt securities

 

1,498

 

 

 

1,498

Marketable securities

$

12,486

$

51

$

$

12,537

At December 31, 2019

    

Amortized

    

Unrealized

    

Fair

(In thousands)

    

Cost

    

Gains

    

Losses

    

Value

U.S. government and agency obligations

$

19,950

$

14

$

1

$

19,963

Corporate debt securities

 

2,493

 

8

 

 

2,501

Marketable securities

$

22,443

$

22

$

1

$

22,464

Net pre-tax unrealized gains for marketable securities at March 31, 2020, 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, 2020.

There were no marketable securities in an unrealized loss position at March 31, 2020.

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At December 31, 2019, unrealized losses and the 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 December 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

$

5,997

$

1

$

$

$

5,997

$

1

Corporate debt securities

 

 

 

 

 

 

Marketable securities

$

5,997

$

1

$

$

$

5,997

$

1

Note 5. Inventories

Inventories consisted of the following:

(In thousands)

    

At March 31, 2020

    

At December 31, 2019

Finished goods

$

8,178

$

6,508

Component parts and work-in-process

 

14,185

 

12,551

Total inventories

$

22,363

$

19,059

Note 6. Intangible Assets

Our patents and other intangible assets are summarized as follows:

Weighted-

At March 31, 2020

Average

Gross

Amortization

Carrying

Accumulated

Net

(In thousands)

    

Period

Amount

Amortization

Amount

Patents

11 years

$

4,386

$

539

$

3,847

Defensive intangible assets

5 years

1,125

292

833

Customer accounts

3 years

 

125

 

44

 

81

Total amortizable intangible assets

5,636

875

4,761

Patents pending

445

445

Total intangible assets

$

6,081

$

875

$

5,206

Weighted-

At December 31, 2019

Average

Gross

Amortization

Carrying

Accumulated

Net

(In thousands)

    

Period

Amount

Amortization

Amount

Patents

11 years

$

4,386

$

447

$

3,939

Defensive intangible assets

5 years

1,125

250

875

Customer accounts

3 years

 

125

 

37

 

88

Total amortizable intangible assets

5,636

734

4,902

Patents pending

410

410

Total intangible assets

$

6,046

$

734

$

5,312

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Amortization expense was $0.1 million for each of the three months ended March 31, 2020 and 2019. Future amortization expenses are expected as follows:

(In thousands)

2020 (April 1 - December 31)

$

430

2021

567

2022

 

567

2023

 

537

2024

 

529

Thereafter

 

2,131

Total

$

4,761

Note 7. Accrued Expenses

Accrued expenses consisted of the following:

(In thousands)

    

At March 31, 2020

    

At December 31, 2019

Warranty

$

1,358

$

1,218

Lease termination costs

1,200

1,200

Travel and business

 

629

 

776

Legal and consulting

812

617

In-transit inventory

352

106

Sales and use tax

177

200

Clinical studies

142

85

Other

 

360

 

296

Total

$

5,030

$

4,498

Note 8. Warranty Reserves

The activity in the warranty reserve during and as of the end of the reporting periods presented was as follows:

Three Months Ended

March 31, 

(In thousands)

    

2020

    

2019

Beginning balance

$

3,759

$

2,566

Warranty provision

 

905

 

418

Processed warranty claims

 

(422)

 

(257)

Ending balance

$

4,242

$

2,727

Accrued warranty reserve, current

$

1,358

$

873

Accrued warranty reserve, non-current

2,884

1,854

Total accrued warranty reserve

$

4,242

$

2,727

Note 9. Credit Agreement

On August 3, 2018, we entered into a credit agreement with Wells Fargo Bank, National Association, which was amended by a First Amendment dated February 12, 2019, a Waiver and Second Amendment dated March 25, 2019, and a Third Amendment dated August 2, 2019 (collectively, the “Credit Agreement”), which expires on August 3, 2021.

The Credit Agreement provides for a $10.0 million revolving credit facility. Subject to satisfaction of certain conditions, we may increase the amount of the revolving loans available under the Credit Agreement

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and/or add one or more term loan facilities in an amount 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. As of March 31, 2020, 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 contains a number of restrictions and covenants, including that we maintain compliance with a maximum leverage ratio and a minimum liquidity covenant. As of March 31, 2020, we were in compliance with all financial covenants 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 an 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 and 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 operating lease 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 one to ten years as of March 31, 2020.

In March 2008, we entered into a noncancelable operating lease agreement for building space for our previous corporate headquarters that provided for monthly rent, real estate taxes and operating expenses that was subsequently extended to July 31, 2021. Due to the move to our new headquarters in September 2019, we entered into a termination agreement for our former corporate headquarters on December 31, 2019. We agreed to pay $1.2 million in order to terminate all further rights and obligations of the lease. The lease was removed from our ROU operating lease assets and operating lease liabilities and the total net loss on termination of $1.1 million was recorded in the reimbursement, general and administrative line of our Consolidated Statements of Operations.

We entered into a lease (“initial lease”) in October 2018, for approximately 80,000 square feet of office space for our new corporate headquarters in Minneapolis, Minnesota. In December 2018, we amended the initial lease to add approximately 29,000 square feet of additional office space, which is accounted for as a separate lease (“second lease”) in accordance with ASC 842. In December 2019, we further amended the lease which extended the expiration date of the initial lease, extended the expiration date of and added

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approximately 4,000 square feet to the second lease, as well as added approximately 37,000 square feet of additional office space, accounted for as a separate lease (“third lease”) in accordance with ASC 842. The portion of the space under the initial lease was placed in service in September 2019. This portion was recognized as an operating lease and included in the ROU operating lease assets and operating lease liabilities on the Consolidated Balance Sheets. The portion of the space covered under the second lease is expected to be occupied and commence in the second half of 2020 and the portion of the space covered under the third lease is expected to be occupied and commence in the second half of 2021.

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, 2020, we had approximately 84 vehicles with agreements within the initial, noncancelable lease term that are recorded as ROU operating lease assets and operating lease 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 operating lease 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 as of March 31, 2020, ranged from less than one year to approximately four years with fixed monthly payments that are included in the ROU operating lease assets and operating lease liabilities. The leases provide an option to purchase the related equipment at fair market value at the end of the lease. The leases 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 information related to our ROU operating lease assets and operating lease liabilities that we have recorded:

(In thousands)

    

At March 31, 2020

    

At December 31, 2019

Right of use operating lease assets

$

15,289

$

15,885

Operating lease liabilities:

Current

$

1,585

$

1,454

Non-current

 

14,846

 

15,134

Total

$

16,431

$

16,588

Operating leases:

Weighted average remaining lease term

 

9.8 years

10.1 years

Weighted average discount rate (1)

4.6%

4.6%

Three Months Ended March 31,

2020

2019

Supplemental cash flow information for our operating leases:

Cash paid for operating lease liabilities

$

463

$

341

Non-cash right of use assets obtained in exchange for new operating lease obligations

$

295

$

553

(1) Discount rates were established as of January 1, 2019, the adoption date of ASC 842, September 16, 2019, the commencement date of the initial lease for our new headquarters and December 31, 2019, the date of our new headquarters lease modification.

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The table below reconciles the undiscounted cash flows under the operating lease liabilities recorded on the Condensed Consolidated Balance Sheet for the periods presented:

(In thousands)

2020 (April 1 - December 31)

$

1,793

2021

1,939

2022

 

1,936

2023

 

1,893

2024

 

1,901

Thereafter

 

11,025

Total minimum lease payments

20,487

Less: Amount of lease payments representing interest

(4,056)

Present value of future minimum lease payments

16,431

Less: Current obligations under operating lease liabilities

(1,585)

Non-current obligations under operating lease liabilities

$

14,846

As of March 31, 2020, we have additional lease commitments of $14.3 million related to amendments to existing building leases that have not yet commenced. As the lessee we are involved in providing guidance to the lessor for related improvements, however these improvements are managed and owned by the lessor.

Operating lease costs were $0.7 million and $0.3 million for the three months ended March 31, 2020 and 2019, respectively.

Major Vendors

We had purchases from two major vendors that accounted for 32% of our total purchases for the three months ended March 31, 2020, and from three major vendors that accounted for 40% of our total purchases for the three months ended March 31, 2019.

Purchase Commitments

We issued purchase orders prior to March 31, 2020, totaling $33.8 million for goods that we expect to receive within the next year.

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. Discretionary contributions to the 401(k) plan totaled $0.1 million for each of the three months ended March 31, 2020 and 2019, respectively.

Note 11. Stockholders' Equity

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, expired, cancelled, settled for cash or otherwise not issued, will become available for issuance under the 2016 Plan. Pursuant to the automatic increase feature of the 2016 Plan, shares were added as

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approved by the Board of Directors for each year since inception other than 2019, at which point, the Board exercised its prerogative to forgo the increase. On January 1, 2020, 952,697 shares were added as available for issuance thereunder.  As of March 31, 2020, 4,696,923 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 $2.7 million and $2.8 million for the three months ended March 31, 2020 and 2019, respectively. This expense was allocated as follows:

Three Months Ended

March 31, 

(In thousands)

    

2020

    

2019

Cost of revenue

$

82

$

98

Sales and marketing expenses

1,246

1,166

Research and development expenses

88

80

Reimbursement, general and administrative expenses

1,312

1,439

Total stock-based compensation expense

$

2,728

$

2,783

Stock Options

We have granted stock options to certain participants that vest over three or four years and typically have a contractual term of seven or ten years. Stock-based compensation expense included in the Condensed Consolidated Statements of Operations for stock options was $0.9 million and $0.7 million for the three months ended March 31, 2020 and 2019, respectively. At March 31, 2020, there was approximately $9.6 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 2.5 years.

Our stock option activity for the three months ended March 31, 2020, was as follows:

    

Weighted-

Weighted-

Average

Average

Aggregate

Options

Exercise Price

Remaining

Intrinsic

(In thousands except options and per share data)

Outstanding

Per Share (1)

Contractual Life

Value (2)

Balance at December 31, 2019

866,955

$

28.76

6.1 years

$

33,957

Granted

221,983

$

50.41

Exercised

(13,117)

$

13.09

$

390

Forfeited

(7,331)

$

61.63

Cancelled

(1,388)

$

62.40

Balance at March 31, 2020

1,067,102

$

33.19

6.0 years

$

14,740

Options exercisable at March 31, 2020

529,219

$

17.88

4.9 years

$

13,095

(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 586,039 as of March 31, 2019, had a weighted-average exercise price of $8.57 per share.

Time-Based Restricted Stock Units

We have granted time-based restricted stock units to certain participants under the 2016 Plan that are stock-settled with common shares. Time-based restricted stock units granted under the 2016 Plan vest over

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one to three years. Stock-based compensation expense included in the Condensed Consolidated Statements of Operations for time-based restricted stock units was $1.2 million and $0.8 million for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, there was approximately $9.2 million of total unrecognized pre-tax compensation expense related to outstanding time-based restricted stock units that is expected to be recognized over a weighted-average period of 2.4 years.

Our time-based restricted stock unit activity for the three months ended March 31, 2020, was as follows: