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 Septemberended: June 30, 20172019
ORor
☐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: File Number 001-37799
Tactile Systems Technology, Inc.
(Exact Namename of Registrantregistrant as Specifiedspecified in Its Charter)its charter)
Delaware |
| |
|
| |
1331 Tyler Street NE, Suite 200
|
| |
( incorporation or organization) | Minneapolis, Minnesota55413 | (I.R.S. employer identification number) |
| (Address and Zip | |
| | |
| (612) 355-5100 | |
| (Registrant’s telephone number, including area code) | |
(612) 355-5100Securities 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 |
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒☑ No ☐◻
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒☑ No ☐◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | ||||||||
Large accelerated filer | ☑ | | Accelerated filer | ◻ | | Non-accelerated filer | ◻ | |||
|
| | | |
|
| | |||
|
|
| Smaller reporting company | ☐ | ||||||
| ||||||||||
Emerging growth company |
| | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒☑
As of November 03, 2017 there were 17,701,78618,968,162 shares of common stock, $0.001 par value $0.001 per share, outstanding.were outstanding as of August 1, 2019.
| | |||||
| | |||||
| | | | | ||
| | 3 | ||||
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| |||
| |
| ||||
| |
| ||||
| | | ||||
| | | ||||
| | |||||
| ||||||
| |
| ||||
| |
| ||||
| |
| ||||
| |
| ||||
| |
| ||||
| |
| ||||
| |
|
1
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 mayThese risks, uncertainties and other factors include, among other things, statements relatingbut are not limited to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| our ability to obtain |
● | 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 |
| technical problems with our research and products; |
● | our ability to |
| our ability to |
|
|
| the |
|
|
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, 20162018 and in this Quarterly Report on Form 10-Q. We cannot assure you that the forward-looking statements in this report will prove to be accurate and therefore you are encouraged not to place undue reliance on forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. You are urged to carefully review and consider the various disclosures made by us in this report and in other filings with the Securities and Exchange Commission (the “SEC”) that advise of the risks and factors that may affect our business. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we may make.
2
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.Statements
| | | | | | |
Tactile Systems Technology, Inc. | ||||||
Condensed Consolidated Balance Sheets | ||||||
(Unaudited) | ||||||
|
| June 30, |
| December 31, | ||
(In thousands, except share and per share data) |
| 2019 |
| 2018 | ||
Assets | | | | | | |
Current assets | | | | | | |
Cash and cash equivalents | | $ | 25,040 | | $ | 20,099 |
Marketable securities | | | 20,424 | | | 25,786 |
Accounts receivable, net | |
| 24,758 | |
| 24,332 |
Net investment in leases | |
| 5,869 | |
| — |
Inventories | |
| 13,165 | |
| 11,189 |
Income taxes receivable | |
| 3,253 | |
| 1,793 |
Prepaid expenses and other current assets | |
| 1,570 | |
| 1,762 |
Total current assets | |
| 94,079 | |
| 84,961 |
Non-current assets | | | | | | |
Property and equipment, net | |
| 4,978 | |
| 4,810 |
Right of use operating lease assets | |
| 3,298 | |
| — |
Intangible assets, net | |
| 5,157 | |
| 5,339 |
Medicare accounts receivable, non-current | |
| 2,609 | |
| 1,884 |
Deferred income taxes | |
| 10,357 | |
| 8,820 |
Other non-current assets | |
| 1,358 | |
| 1,257 |
Total non-current assets | |
| 27,757 | |
| 22,110 |
Total assets | | $ | 121,836 | | $ | 107,071 |
Liabilities and Stockholders' Equity | | | | | | |
Current liabilities | | | | | | |
Accounts payable | | $ | 6,855 | | $ | 5,110 |
Accrued payroll and related taxes | |
| 7,006 | |
| 7,421 |
Accrued expenses | |
| 2,696 | |
| 2,785 |
Operating lease liabilities | |
| 1,291 | |
| — |
Other current liabilities | |
| 810 | |
| 760 |
Total current liabilities | |
| 18,658 | |
| 16,076 |
Non-current liabilities | | | | | | |
Accrued warranty reserve, non-current | |
| 2,044 | |
| 1,725 |
Income taxes, non-current | |
| 53 | |
| — |
Operating lease liabilities, non-current | | | 2,073 | |
| — |
Total non-current liabilities | |
| 4,170 | |
| 1,725 |
Total liabilities | |
| 22,828 | |
| 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 June 30, 2019 and December 31, 2018 | |
| — | |
| — |
Common stock, $0.001 par value, 300,000,000 shares authorized; 18,956,912 shares issued and outstanding as of June 30, 2019; 18,631,125 shares issued and outstanding as of December 31, 2018 | |
| 19 | |
| 19 |
Additional paid-in capital | |
| 84,987 | |
| 79,554 |
Retained earnings | |
| 13,962 | |
| 9,705 |
Accumulated other comprehensive income (loss) | | | 40 | | | (8) |
Total stockholders’ equity | |
| 99,008 | |
| 89,270 |
Total liabilities and stockholders’ equity | | $ | 121,836 | | $ | 107,071 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
| | | | | | | | | | | | |
Tactile Systems Technology, Inc. | ||||||||||||
Condensed Consolidated Statements of Operations | ||||||||||||
(Unaudited) | ||||||||||||
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
(In thousands, except share and per share data) |
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Revenue | | | | | | | | | | | | |
Sales revenue | | $ | 38,790 | | $ | 30,572 | | $ | 69,621 | | $ | 54,219 |
Rental revenue | |
| 6,410 | |
| 3,561 | |
| 13,196 | |
| 6,762 |
Total revenue | |
| 45,200 | |
| 34,133 | |
| 82,817 | |
| 60,981 |
Cost of revenue | | | | | | | | | | | | |
Cost of sales revenue | |
| 11,586 | |
| 8,557 | |
| 20,998 | |
| 14,966 |
Cost of rental revenue | |
| 2,109 | |
| 1,053 | |
| 4,056 | |
| 1,953 |
Total cost of revenue | |
| 13,695 | |
| 9,610 | |
| 25,054 | |
| 16,919 |
Gross profit | | | | | | | | | | | | |
Gross profit - sales revenue | |
| 27,204 | |
| 22,015 | |
| 48,623 | |
| 39,253 |
Gross profit - rental revenue | |
| 4,301 | |
| 2,508 | |
| 9,140 | |
| 4,809 |
Gross profit | |
| 31,505 | |
| 24,523 | |
| 57,763 | |
| 44,062 |
Operating expenses | | | | | | | | | | | | |
Sales and marketing | |
| 18,418 | |
| 14,452 | |
| 35,809 | |
| 27,009 |
Research and development | |
| 1,234 | |
| 1,289 | |
| 2,515 | |
| 2,726 |
Reimbursement, general and administrative | |
| 8,805 | |
| 7,471 | |
| 18,193 | |
| 14,843 |
Total operating expenses | |
| 28,457 | |
| 23,212 | |
| 56,517 | |
| 44,578 |
Income (loss) from operations | |
| 3,048 | |
| 1,311 | |
| 1,246 | |
| (516) |
Other income | |
| 159 | |
| 132 | |
| 320 | |
| 223 |
Income (loss) before income taxes | |
| 3,207 | |
| 1,443 | |
| 1,566 | |
| (293) |
Income tax expense (benefit) | |
| 422 | |
| (1,129) | |
| (2,691) | |
| (2,815) |
Net income | | $ | 2,785 | | $ | 2,572 | | $ | 4,257 | | $ | 2,522 |
Net income per common share | | | | | | | | | | | | |
Basic | | $ | 0.15 | | $ | 0.14 | | $ | 0.23 | | $ | 0.14 |
Diluted | | $ | 0.14 | | $ | 0.13 | | $ | 0.22 | | $ | 0.13 |
Weighted-average common shares used to compute net income per common share | | | | | | | | | | | | |
Basic | | | 18,881,526 | | | 18,155,543 | | | 18,814,511 | | | 18,076,546 |
Diluted | | | 19,591,129 | | | 19,313,156 | | | 19,619,213 | | | 19,204,100 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
| | | | | | | | | | | | |
Tactile Systems Technology, Inc. | ||||||||||||
Condensed Consolidated Statements of Comprehensive Income | ||||||||||||
(Unaudited) | ||||||||||||
| | Three Months Ended | | Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
(In thousands) |
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Net income | | $ | 2,785 | | $ | 2,572 | | $ | 4,257 | | $ | 2,522 |
Other comprehensive income: | |
|
| |
|
| |
|
| |
|
|
Unrealized gain on marketable securities | |
| 34 | |
| 26 | |
| 64 | |
| 19 |
Income tax related to items of other comprehensive income | |
| (9) | |
| (14) | |
| (16) | |
| (13) |
Total other comprehensive income | |
| 25 | |
| 12 | |
| 48 | |
| 6 |
Comprehensive income | | $ | 2,810 | | $ | 2,584 | | $ | 4,305 | | $ | 2,528 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
5
| | | | | | | | | | | | | | | | | | | | |
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 | | — | | | — | | | 3,258 | | | — | | | — | | | — | | | 3,258 |
Exercise of common stock options and vesting of restricted stock units | | 430,951 | | | — | | | 571 | | | — | | | — | | | — | | | 571 |
Taxes paid for net share settlement of restricted stock units | | (53,933) | | | — | | | (1,791) | | | — | | | — | | | — | | | (1,791) |
Common shares issued for employee stock purchase plan | | 63,578 | | | — | | | 1,416 | | | — | | | — | | | — | | | 1,416 |
Comprehensive income for the period | | — | | | — | | | — | | | 2,522 | | | 6 | | | — | | | 2,528 |
Balances, June 30, 2018 | | 18,286,975 | | $ | 18 | | $ | 73,678 | | $ | 5,604 | | $ | (38) | | $ | (493) | | $ | 78,769 |
| | | | | | | | | | | | | | | | | | | | |
Balances, December 31, 2018 | | 18,631,125 | | | 19 | | | 79,554 | | | 9,705 | | | (8) | | | — | | | 89,270 |
Stock-based compensation | | — | | | — | | | 5,057 | | | — | | | — | | | — | | | 5,057 |
Exercise of common stock options and vesting of restricted stock units | | 337,644 | | | — | | | 1,542 | | | — | | | — | | | — | | | 1,542 |
Taxes paid for net share settlement of restricted stock units | | (55,243) | | | — | | | (3,018) | | | — | | | — | | | — | | | (3,018) |
Common shares issued for employee stock purchase plan | | 43,386 | | | — | | | 1,852 | | | — | | | — | | | — | | | 1,852 |
Comprehensive income for the period | | — | | | — | | | — | | | 4,257 | | | 48 | | | — | | | 4,305 |
Balances, June 30, 2019 | | 18,956,912 | | $ | 19 | | $ | 84,987 | | $ | 13,962 | | $ | 40 | | $ | — | | $ | 99,008 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
| | | | | | |
Tactile Systems Technology, Inc. | ||||||
Condensed Consolidated Statements of Cash Flows | ||||||
(Unaudited) | ||||||
| | Six Months Ended | ||||
| | June 30, | ||||
(In thousands) |
| 2019 |
| 2018 | ||
Cash flows from operating activities | | | | | | |
Net income | | $ | 4,257 | | $ | 2,522 |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | |
Depreciation and amortization | | | 1,833 | | | 1,687 |
Deferred income taxes | | | (1,552) | | | — |
Stock-based compensation expense | | | 5,057 | | | 3,258 |
Loss on disposal of equipment | | | — | | | 3 |
Changes in assets and liabilities: | | | | | | |
Accounts receivable | | | (426) | | | 94 |
Net investment in leases | | | (5,869) | | | — |
Inventories | | | (1,976) | | | (5,397) |
Income taxes | | | (1,458) | | | (3,241) |
Prepaid expenses and other assets | | | 15 | | | 231 |
Right of use operating lease assets | | | (12) | | | — |
Medicare accounts receivable, non-current | | | (725) | | | 1,070 |
Accounts payable | | | 1,637 | | | 309 |
Accrued payroll and related taxes | | | (415) | | | (1,186) |
Accrued expenses and other liabilities | | | 485 | | | (749) |
Net cash provided by (used in) operating activities | | | 851 | | | (1,399) |
Cash flows from investing activities | | | | | | |
Proceeds from sales of securities available-for-sale | | | — | | | 1,000 |
Proceeds from maturities of securities available-for-sale | | | 11,500 | | | 8,000 |
Purchases of securities available-for-sale | | | (5,929) | | | (11,844) |
Purchases of property and equipment | | | (1,760) | | | (1,700) |
Intangible assets costs | | | (97) | | | (901) |
Net cash provided by (used in) investing activities | | | 3,714 | | | (5,445) |
Cash flows from financing activities | | | | | | |
Taxes paid for net share settlement of restricted stock units | | | (3,018) | | | (1,791) |
Proceeds from exercise of common stock options | | | 1,542 | | | 571 |
Proceeds from the issuance of common stock from the employee stock purchase plan | | | 1,852 | | | 1,416 |
Net cash provided by financing activities | | | 376 | | | 196 |
Net increase (decrease) in cash and cash equivalents | | | 4,941 | | | (6,648) |
Cash and cash equivalents – beginning of period | | | 20,099 | | | 23,968 |
Cash and cash equivalents – end of period | | $ | 25,040 | | $ | 17,320 |
| | | | | | |
Supplemental cash flow disclosure | | | | | | |
Cash paid for taxes | | $ | 322 | | $ | 436 |
Capital expenditures incurred but not yet paid | | $ | 136 | | $ | 87 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
Tactile Systems Technology, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| ||
(In thousands, except share and per share data) |
| 2017 |
| 2016 |
| ||
Assets |
|
|
|
|
|
| |
Current assets |
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 19,653 |
| $ | 30,701 |
|
Marketable securities |
|
| 21,993 |
|
| 10,994 |
|
Accounts receivable, net |
|
| 14,579 |
|
| 15,003 |
|
Inventories |
|
| 9,784 |
|
| 6,554 |
|
Income taxes receivable |
|
| 4,768 |
|
| — |
|
Prepaid expenses |
|
| 932 |
|
| 981 |
|
Total current assets |
|
| 71,709 |
|
| 64,233 |
|
Property and equipment, net |
|
| 3,353 |
|
| 1,563 |
|
Other assets |
|
|
|
|
|
|
|
Patent costs, net |
|
| 2,251 |
|
| 2,394 |
|
Medicare accounts receivable, long-term |
|
| 2,771 |
|
| 2,823 |
|
Deferred income taxes |
|
| 2,797 |
|
| 2,785 |
|
Other non-current assets |
|
| 201 |
|
| 137 |
|
Total other assets |
|
| 8,020 |
|
| 8,139 |
|
Total assets |
| $ | 83,082 |
| $ | 73,935 |
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
Accounts payable |
| $ | 5,485 |
| $ | 5,018 |
|
Accrued payroll and related taxes |
|
| 5,880 |
|
| 6,692 |
|
Accrued expenses |
|
| 2,357 |
|
| 1,193 |
|
Future product royalties |
|
| 26 |
|
| 67 |
|
Income taxes payable |
|
| — |
|
| 823 |
|
Other current liabilities |
|
| 218 |
|
| — |
|
Total current liabilities |
|
| 13,966 |
|
| 13,793 |
|
Long-term liabilities |
|
|
|
|
|
|
|
Accrued warranty reserve, long-term |
|
| 643 |
|
| 503 |
|
Total liabilities |
|
| 14,609 |
|
| 14,296 |
|
Stockholders’ equity |
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 50,000,000 shares authorized; none issued and outstanding as of September 30, 2017 and December 31, 2016 |
|
| — |
|
| — |
|
Common stock, $0.001 par value, 300,000,000 shares authorized; 17,677,078 shares issued and 17,650,992 shares outstanding as of September 30, 2017; 16,833,737 shares issued and outstanding as of December 31, 2016 |
|
| 18 |
|
| 17 |
|
Additional paid-in capital |
|
| 68,114 |
|
| 62,406 |
|
Retained earnings (accumulated deficit) |
|
| 852 |
|
| (2,773) |
|
Accumulated other comprehensive loss |
|
| (18) |
|
| (11) |
|
Less: treasury stock, at cost — 26,086 shares as of September 30, 2017 |
|
| (493) |
|
| — |
|
Total stockholders’ equity |
|
| 68,473 |
|
| 59,639 |
|
Total liabilities and stockholders’ equity |
| $ | 83,082 |
| $ | 73,935 |
|
See accompanying notes to the condensed consolidated financial statements.
3
Tactile Systems Technology, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
(In thousands, except share and per share data) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Revenues, net |
| $ | 28,283 |
| $ | 22,635 |
| $ | 74,397 |
| $ | 56,064 |
|
Cost of goods sold |
|
| 7,528 |
|
| 6,282 |
|
| 20,186 |
|
| 15,417 |
|
Gross profit |
|
| 20,755 |
|
| 16,353 |
|
| 54,211 |
|
| 40,647 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
| 10,915 |
|
| 8,979 |
|
| 31,726 |
|
| 23,858 |
|
Research and development |
|
| 1,116 |
|
| 1,285 |
|
| 3,699 |
|
| 3,314 |
|
Reimbursement, general and administrative |
|
| 7,551 |
|
| 5,115 |
|
| 19,815 |
|
| 12,495 |
|
Total operating expenses |
|
| 19,582 |
|
| 15,379 |
|
| 55,240 |
|
| 39,667 |
|
Income (loss) from operations |
|
| 1,173 |
|
| 974 |
|
| (1,029) |
|
| 980 |
|
Other income |
|
| 85 |
|
| 10 |
|
| 204 |
|
| 20 |
|
Income (loss) before income taxes |
|
| 1,258 |
|
| 984 |
|
| (825) |
|
| 1,000 |
|
Income tax (benefit) expense |
|
| (84) |
|
| 492 |
|
| (4,450) |
|
| 500 |
|
Net income |
|
| 1,342 |
|
| 492 |
|
| 3,625 |
|
| 500 |
|
Convertible preferred stock dividends |
|
| — |
|
| 224 |
|
| — |
|
| 1,247 |
|
Allocation of undistributed earnings to preferred stockholders |
|
| — |
|
| 99 |
|
| — |
|
| — |
|
Net income (loss) attributable to common stockholders |
| $ | 1,342 |
| $ | 169 |
| $ | 3,625 |
| $ | (747) |
|
Net income (loss) per common share attributable to common stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.08 |
| $ | 0.01 |
| $ | 0.21 |
| $ | (0.12) |
|
Diluted |
| $ | 0.07 |
| $ | 0.01 |
| $ | 0.19 |
| $ | (0.12) |
|
Weighted-average common shares used to compute net income (loss) per common share attributable to common stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 17,603,293 |
|
| 12,253,877 |
|
| 17,222,072 |
|
| 6,317,875 |
|
Diluted |
|
| 19,083,975 |
|
| 13,982,799 |
|
| 18,818,609 |
|
| 6,317,875 |
|
See accompanying notes to the condensed consolidated financial statements.
4
Tactile Systems Technology, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
(In thousands) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Net income |
| $ | 1,342 |
| $ | 492 |
| $ | 3,625 |
| $ | 500 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on available-for-sale securities |
|
| 3 |
|
| — |
|
| (18) |
|
| — |
|
Income tax related to items of other comprehensive income (loss) |
|
| (1) |
|
| — |
|
| 11 |
|
| — |
|
Total other comprehensive income (loss) |
|
| 2 |
|
| — |
|
| (7) |
|
| — |
|
Comprehensive income |
| $ | 1,344 |
| $ | 492 |
| $ | 3,618 |
| $ | 500 |
|
See accompanying notes to the condensed consolidated financial statements.
5
Tactile Systems Technology, Inc.
Condensed Consolidated Statements of Stockholders’ Equity (Deficit)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Retained |
| Accumulated |
|
|
|
|
|
| |||
|
| Series B Preferred Stock |
| Series A Preferred Stock |
|
| Common Stock |
| Additional |
| Earnings |
| Other |
|
|
|
|
|
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Paid-In |
| (Accumulated |
| Comprehensive |
| Treasury |
|
|
|
| ||||
(In thousands, except share data) |
| Shares |
| Amount |
| Shares |
| Amount |
|
| Shares |
| Par Value |
| Capital |
| Deficit) |
| Loss |
| Stock |
| Total |
| ||||||||
Balances, December 31, 2015 |
| 2,733,468 |
| $ | 12,599 |
| 3,061,488 |
| $ | 20,328 |
|
| 3,222,902 |
| $ | 3 |
| $ | — |
| $ | (5,652) |
| $ | — |
| $ | — |
| $ | (5,649) |
|
Stock-based compensation |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| 902 |
|
| — |
|
| — |
|
| — |
|
| 902 |
|
Exercise of common stock options and warrants |
| — |
|
| — |
| — |
|
| — |
|
| 234,135 |
|
| 1 |
|
| 223 |
|
| — |
|
| — |
|
| — |
|
| 224 |
|
Preferred stock dividends |
| — |
|
| 436 |
| — |
|
| 811 |
|
| — |
|
| — |
|
| (1,247) |
|
| — |
|
| — |
|
| — |
|
| (1,247) |
|
Sale of common stock from initial public offering, net of offering expenses |
| — |
|
| — |
| — |
|
| — |
|
| 4,120,000 |
|
| 4 |
|
| 35,378 |
|
| — |
|
| — |
|
| — |
|
| 35,382 |
|
Preferred stock dividends paid in cash |
| — |
|
| — |
| — |
|
| (8,207) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Common stock issued in lieu of series B preferred stock dividend |
| — |
|
| — |
| — |
|
| — |
|
| 956,842 |
|
| 1 |
|
| (1) |
|
| — |
|
| — |
|
| — |
|
| — |
|
Conversion of series B preferred stock to common stock |
| (2,733,468) |
|
| (13,035) |
| — |
|
| — |
|
| 2,733,468 |
|
| 3 |
|
| 13,032 |
|
| — |
|
| — |
|
| — |
|
| 13,035 |
|
Conversion of series A preferred stock to common stock |
| — |
|
| — |
| (3,061,488) |
|
| (12,932) |
|
| 3,190,985 |
|
| 3 |
|
| 12,929 |
|
| — |
|
| — |
|
| — |
|
| 12,932 |
|
Common stock issued for series A & B preferred stock liquidation preference |
| — |
|
| — |
| — |
|
| — |
|
| 2,354,323 |
|
| 2 |
|
| (2) |
|
| — |
|
| — |
|
| — |
|
| — |
|
Comprehensive income for the period |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 500 |
|
| — |
|
| — |
|
| 500 |
|
Balances, September 30, 2016 |
| — |
| $ | — |
| — |
| $ | — |
|
| 16,812,655 |
| $ | 17 |
| $ | 61,214 |
| $ | (5,152) |
| $ | — |
| $ | — |
| $ | 56,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2016 |
| — |
| $ | — |
| — |
| $ | — |
|
| 16,833,737 |
| $ | 17 |
| $ | 62,406 |
| $ | (2,773) |
| $ | (11) |
| $ | — |
| $ | 59,639 |
|
Stock-based compensation |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| 3,104 |
|
| — |
|
| — |
|
| — |
|
| 3,104 |
|
Exercise of common stock options and warrants and vesting of restricted stock units |
| — |
|
| — |
| — |
|
| — |
|
| 583,360 |
|
| 1 |
|
| 672 |
|
| — |
|
| — |
|
| — |
|
| 673 |
|
Taxes paid for net share settlement of restricted stock units |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (278) |
|
| — |
|
| — |
|
| — |
|
| (278) |
|
Common shares issued for employee stock purchase plan |
| — |
|
| — |
| — |
|
| — |
|
| 259,981 |
|
| — |
|
| 2,210 |
|
| — |
|
| — |
|
| — |
|
| 2,210 |
|
Shares repurchased to cover taxes from restricted stock award vesting |
| — |
|
| — |
| — |
|
| — |
|
| (26,086) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (493) |
|
| (493) |
|
Comprehensive income for the period |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 3,625 |
|
| (7) |
|
| — |
|
| 3,618 |
|
Balances, September 30, 2017 |
| — |
| $ | — |
| — |
| $ | — |
|
| 17,650,992 |
| $ | 18 |
| $ | 68,114 |
| $ | 852 |
| $ | (18) |
| $ | (493) |
| $ | 68,473 |
|
See accompanying notes to the condensed consolidated financial statements.
6
Tactile Systems Technology, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
| Nine Months Ended |
| ||||
|
| September 30, |
| ||||
(In thousands) |
| 2017 |
| 2016 |
| ||
Cash flows from operating activities |
|
|
|
|
|
|
|
Net income |
| $ | 3,625 |
| $ | 500 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 1,073 |
|
| 675 |
|
Stock-based compensation expense |
|
| 3,104 |
|
| 859 |
|
Change in allowance for doubtful accounts |
|
| (36) |
|
| 465 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
Accounts receivable |
|
| 460 |
|
| 665 |
|
Inventories |
|
| (3,821) |
|
| (467) |
|
Income taxes |
|
| (5,591) |
|
| (732) |
|
Prepaid expenses and other assets |
|
| 130 |
|
| 499 |
|
Medicare accounts receivable – long-term |
|
| 52 |
|
| 395 |
|
Accounts payable |
|
| 370 |
|
| 1,695 |
|
Accrued payroll and related taxes |
|
| (812) |
|
| 895 |
|
Accrued expenses |
|
| 1,520 |
|
| (387) |
|
Future product royalties |
|
| (41) |
|
| (726) |
|
Net cash provided by operating activities |
|
| 33 |
|
| 4,336 |
|
Cash flows from investing activities |
|
|
|
|
|
|
|
Proceeds from sales of marketable securities |
|
| 1,000 |
|
| — |
|
Purchases of marketable securities |
|
| (12,051) |
|
| — |
|
Purchases of property and equipment |
|
| (1,953) |
|
| (518) |
|
Patent costs |
|
| (44) |
|
| (24) |
|
Other investments |
|
| (145) |
|
| — |
|
Net cash used in investing activities |
|
| (13,193) |
|
| (542) |
|
Cash flows from financing activities |
|
|
|
|
|
|
|
Taxes paid for net share settlement of restricted stock units |
|
| (278) |
|
| — |
|
Proceeds from exercise of common stock options and warrants |
|
| 673 |
|
| 224 |
|
Proceeds from the issuance of common stock from the ESPP |
|
| 2,210 |
|
| — |
|
Shares repurchased to cover taxes from restricted stock award vesting |
|
| (493) |
|
| — |
|
Dividends paid on preferred stock |
|
| — |
|
| (8,207) |
|
Proceeds from IPO |
|
| — |
|
| 41,200 |
|
Fees paid for IPO |
|
| — |
|
| (4,777) |
|
Net cash provided by financing activities |
|
| 2,112 |
|
| 28,440 |
|
Net change in cash and cash equivalents |
|
| (11,048) |
|
| 32,234 |
|
Cash and cash equivalents – beginning of period |
|
| 30,701 |
|
| 7,060 |
|
Cash and cash equivalents – end of period |
| $ | 19,653 |
| $ | 39,294 |
|
Supplemental cash flow disclosure |
|
|
|
|
|
|
|
Cash paid for interest |
| $ | 1 |
| $ | — |
|
Cash paid for taxes |
| $ | 923 |
| $ | 1,261 |
|
Non-cash investing activities: |
|
|
|
|
|
|
|
Acquisition of assets included in accounts payable |
| $ | 97 |
| $ | 37 |
|
See accompanying notes to the condensed consolidated financial statements.
7
Tactile Systems Technology, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Nature of OperationsBusiness and Basis of PresentationOperations
Nature of Operations
Tactile Systems Technology, Inc. (“we,” “us,” and “our”) is the sole manufacturer and distributor of the FlexitouchFlexitouch® and EntreEntre™ systems, medical devices that help control symptoms of lymphedema, a chronic and progressive medical condition, and the ActitouchActitouch® system, a medical device used to treat venous leg ulcers and chronic venous insufficiency. We provide ourinsufficiency, 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 a patient’shome use in the home and sell themare recommended by vascular, wound and lymphedema clinics throughout the United States through referrals from clinicians diagnosingStates.
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 treating lymphaticsubsequently, on July 21, 2006, merged with and vascular disorders. We dointo 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 revenues in the third and fourth quarters 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 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.
Note 2. Basis of Presentation
OurThe accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including those which are normal and recurring) considered necessary for a fair presentation of the interim financial information have been included. We have reclassified certain prior year amounts to conform to the current year’s presentation.
The results for the three and ninesix months ended SeptemberJune 30, 20172019, are not necessarily indicative of results to be expected for the year ending December 31, 2017,2019, or for any other interim period or for any future year. Our business is affected by seasonality. In the first quarter of each year, when most patients have started a new insurance year and have not yet met their annual out-of-pocket payment obligations, we experience substantially reduced demand for our products. We typically experience higher sales in the third and fourth quarters as a result of patients having paid their annual insurance deductibles in full, thereby reducing their out-of-pocket costs for our products, and because patients often spend the remaining balances in their flexible spending accounts at that time. This seasonality applies only to purchases of our products by patients covered by commercial insurance and is not relevant to Medicare, Medicaid, or Veterans Administration hospitals, as those payers do not have plans that include patient deductibles for purchases of our products. The condensed consolidated interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016.
We were originally incorporated in Minnesota under the name Tactile Systems Technology, Inc. on January 30, 1995. During 2006, we established a merger corporation and subsequently, on July 21, 2006, merged with and into this merger corporation, resulting in us being reincorporated as a Delaware corporation. The resulting corporation assumed the name Tactile Systems Technology, Inc. In September 2013, we began doing business as “Tactile Medical.”
In connection with preparing for our initial public offering, our board of directors and stockholders approved a 1-for-2.820044 reverse stock split of our capital stock. The reverse stock split became effective in June 2016. All share and per share amounts in these condensed consolidated financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to this reverse stock split, including reclassifying an amount equal to the reduction in par value of common stock to additional paid-in capital.
On August 2, 2016 we closed the initial public offering of our common stock, which resulted in the sale of 4,120,000 shares of our common stock at a public offering price of $10.00 per share. We received net proceeds from the initial public offering of approximately $35.4 million, after deducting underwriting discounts and approximately $2.9 million of transaction expenses. In connection with the closing of the initial public offering, all of our outstanding redeemable convertible preferred stock automatically converted to common stock on August 2, 2016. At August 2, 2016, we did not have any redeemable convertible preferred stock issued or outstanding. The significant increase in common stock outstanding in connection with the initial public offering impacts the year-over-year comparability of our earnings per share calculations.
8
2018.
8
BasisPrinciples 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., after elimination All intercompany balances and transactions have been eliminated in consolidation.
Use of intercompany accounts and transactions.Estimates
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 ofto disclose 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 and the related taxes.
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”). 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 would otherwise 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 $700.0 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
DuringSignificant Accounting Policies
Excluding the nine months ended September 30, 2017adoption of Accounting Standards Codification (“ASC”) 842 – Leases, as described below, there were no material changes in our significant accounting policies.policies during the six months ended June 30, 2019. See Note 13 - “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, 20162018, for information regarding our significant accounting policies.
Recent Accounting Pronouncements
We are an “emerging growth company” as defined by the Jumpstart Our Business Startups (“JOBS”) Act of 2012. The JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, (the “Securities Act”), for complying with new or revised accounting standards. In other words, an emerging growth company can selectively delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption and, as a result, our financial statements may not be comparable to the financial statements of issuers that are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies. Section 107 of the JOBS Act provides that we can elect to opt out of the extended transition period at any time, which election is irrevocable.
In May 2014,February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” The new section will replace Section 605, “Revenue Recognition,” and creates modifications to various other revenue accounting standards for specialized transactions and industries. The section is intended to conform revenue accounting principles with a concurrently issued International Financial Reporting Standards to reconcile previously differing treatment between U.S. practices and those of the rest of the world and to enhance disclosures related to disaggregated revenue information. The updated guidance is effective for interim and annual reporting periods beginning on or after December 15, 2018, for private companies; this effective date is applicable for us due to the JOBS Act exemption described above. Therefore, we plan to further evaluate the timing and anticipated impact of the adoption of this updated guidance on our consolidated financial statements in future periods.
In February 2016, the FASB issued ASUNo. 2016-02, “Leases”“Leases” (Topic 842) (“ASC 842”), which supersedes the existingthen-existing guidance for lease accounting, “Leases”“Leases” (Topic 840) (“ASC 840”). ASU 2016-02ASC 842 requires lessees to recognize a lease liability and a right-of-useright 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
9
assessment process for either lessee or lessor leases. Lessor accounting remains largely unchanged. The amendments in this ASU are effective for interimAdditionally, we elected the practical expedient to treat lease and annual periods beginning after December 15, 2019 for private companies; this effective date is applicable to usnonlease components of fixed payments due to the JOBS Act exemption described above. Early adoption is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after,lessor as one, and therefore no separate allocation was required on the initial implementation date of initial adoption, with an option to elect to use certain transition relief. We plan to further evaluate the timingJanuary 1, 2019, and anticipated impact of thethereafter. The adoption of this ASUstandard, from a lessee perspective, resulted in us recording right of use (“ROU”) operating lease assets and operating lease 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 consolidated financial statementsrental revenue, which was recognized as month-to-month, cancelable leases in future periods.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 iswill be effective for us for interim and annual periods beginning after December 15, 2020, for private companies; this effective date is applicable to us due to the JOBS Act exemption described above.January 1, 2020. Therefore, we plan to further evaluate the timing and anticipated impact of the adoption of this ASU on ourthe condensed consolidated financial statements in future periods.
9
In August 2016,July 2018, the FASB issued ASU No. 2016-15, 2018-07, Improvements to Non-employee Share-Based Payment Accounting (“StatementASU 2018-07”), which expands the scope of Cash Flows (Topic 230) — Classification of Certain Cash Receipts and Cash Payments,”ASC 718 – Stock Based Compensation to provide clarity on how certain cash receipt and cashinclude share-based payment transactions are presentedfor acquiring goods and classifiedservices from non-employees. The ASU was effective for us beginning January 1, 2019, including interim periods within the statement of cash flows. Thefiscal year. We adopted ASU is effective2018-07 for interimthe quarter ended March 31, 2019, and annual periods beginning after December 15, 2018 for private companies; this effective date is applicable for us due toit did not have a material impact on the JOBS Act exemption described above. Therefore, we plan to further evaluate the timing and anticipated impact of the adoption of this ASU on ourcondensed consolidated financial statements in future periods.statements.
Cash and Cash Equivalents
Cash and cash equivalents consist of all cash on hand, deposits and funds invested in available-for-sale securities with original maturities of three months or less at the time of purchase. At September 30, 2017, our cash was held primarily in checking and money market accounts.
Note 2.4. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 |
| ||||||||||
|
|
|
|
| Unrealized |
| Unrealized |
|
|
|
| ||
(In thousands) |
| Cost |
| Gains |
| Losses |
| Fair Value |
| ||||
U.S. government and agency obligations |
| $ | 13,000 |
| $ | 1 |
| $ | 33 |
| $ | 12,968 |
|
Corporate debt securities |
|
| 9,028 |
|
| — |
|
| 3 |
|
| 9,025 |
|
Marketable securities |
| $ | 22,028 |
| $ | 1 |
| $ | 36 |
| $ | 21,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2016 |
| ||||||||||
|
|
|
|
| Unrealized |
| Unrealized |
|
|
|
| ||
(In thousands) |
| Cost |
| Gains |
| Losses |
| Fair Value |
| ||||
U.S. government and agency obligations |
| $ | 9,011 |
| $ | 2 |
| $ | 17 |
| $ | 8,996 |
|
Corporate debt securities |
|
| 2,000 |
|
| — |
|
| 2 |
|
| 1,998 |
|
Marketable securities |
| $ | 11,011 |
| $ | 2 |
| $ | 19 |
| $ | 10,994 |
|
Our investments in marketable debt securities all have contractual maturities of 12 to 25 months from September 30, 2017. At September 30, 2017, marketable debt securities valued at $2.0 million were in an unrealized gain position totaling $1,000, and marketable debt securities valued at $20.0 million were in an unrealized loss position totaling $36,000 (all had been in an unrealized loss position for less than 12 months). At December 31, 2016, marketable debt securities valued at $4.0 million were in an unrealized gain position totaling $2,000 and marketable debt securities valued at $7.0 million were in an unrealized loss position totaling $19,000 (all had been in an unrealized loss position for less than 12 months).
| | | | | | | | | | | | |
| | At June 30, 2019 | ||||||||||
| | Amortized | | Unrealized | | Fair | ||||||
(In thousands) | | Cost | | Gains | | Losses | | Value | ||||
U.S. government and agency obligations | | $ | 17,890 | | $ | 36 | | $ | — | | $ | 17,926 |
Corporate debt securities and certificates of deposit | |
| 2,480 | |
| 18 | |
| — | |
| 2,498 |
Marketable securities | | $ | 20,370 | | $ | 54 | | $ | — | | $ | 20,424 |
| | | | | | | | | | | | |
| | 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 lossesgains for marketable debt securities of $35,000 at SeptemberJune 30, 20172019, were recorded as a component of accumulated other comprehensive lossincome in stockholders' equity. Marketable debtThere were no sales of marketable securities valued at $1.0 million were sold during the ninesix months ended SeptemberJune 30, 2017, with no resulting gain or loss.2019.
10
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 June 30, 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 | | $ | 1,499 | | $ | — | | $ | — | | $ | — | | $ | 1,499 | | $ | — |
Corporate debt securities and certificates of deposit | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
Marketable securities | | $ | 1,499 | | $ | — | | $ | — | | $ | — | | $ | 1,499 | | $ | — |
| | | | | | | | | | | | | | | | | | |
| | 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 3. Patent Costs, Net5. Inventories
Inventories consisted of the following:
| | | | | | |
(In thousands) | | At June 30, 2019 | | At December 31, 2018 | ||
Finished goods | | $ | 5,099 | | $ | 5,318 |
Component parts and work-in-process | |
| 8,066 | |
| 5,871 |
Total inventories | | $ | 13,165 | | $ | 11,189 |
Note 6. Intangible Assets
Our patents and other intangible assets, all of which are subject to amortization, are summarized as follows:
|
|
|
|
|
|
|
|
|
| As of |
| As of |
| ||
(In thousands) |
| September 30, 2017 |
| December 31, 2016 |
| ||
Patents |
| $ | 3,506 |
| $ | 3,462 |
|
Less: accumulated amortization |
|
| (1,255) |
|
| (1,068) |
|
Net patents |
| $ | 2,251 |
| $ | 2,394 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Weighted- | | At June 30, 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 | | $ | 4,350 | | $ | 242 | | $ | 4,108 | | $ | 4,253 | | $ | 71 | | $ | 4,182 |
Defensive intangible assets | | 5 years | | | 1,126 | | | 177 | | | 949 | | | 1,126 | | | 82 | | | 1,044 |
Customer accounts | | 4 years | |
| 125 | |
| 25 | |
| 100 | |
| 125 | |
| 12 | |
| 113 |
Total | | | | $ | 5,601 | | $ | 444 | | $ | 5,157 | | $ | 5,504 | | $ | 165 | | $ | 5,339 |
10
11
Amortization expense was $0.1 million for each of the three months ended SeptemberJune 30, 20172019 and 20162018, and $0.2$0.3 million and $0.1 million for each of the ninesix months ended SeptemberJune 30, 20172019 and 2016.2018, respectively. Future amortization expenses are expected as follows:
|
|
|
|
|
(In thousands) |
|
|
|
|
2017 (October 1 - December 31) |
| $ | 62 |
|
2018 |
|
| 249 |
|
2019 |
|
| 249 |
|
2020 |
|
| 249 |
|
2021 |
|
| 249 |
|
Thereafter |
|
| 1,193 |
|
Total |
| $ | 2,251 |
|
| | | |
(In thousands) | | | |
2019 (July 1 - December 31) | | $ | 279 |
2020 | | | 558 |
2021 | |
| 558 |
2022 | |
| 558 |
2023 | |
| 490 |
Thereafter | |
| 2,714 |
Total | | $ | 5,157 |
Note 4.7. Accrued Expenses
Accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
| As of |
| As of |
| ||
(In thousands) |
| September 30, 2017 |
| December 31, 2016 |
| ||
Warranty |
| $ | 345 |
| $ | 290 |
|
Travel and business |
|
| 268 |
|
| 308 |
|
Legal and consulting |
|
| 633 |
|
| 275 |
|
Deferred rent |
|
| 174 |
|
| 159 |
|
Accrued taxes |
|
| 876 |
|
| — |
|
Clinical |
|
| 16 |
|
| 45 |
|
Other |
|
| 45 |
|
| 116 |
|
Total |
| $ | 2,357 |
| $ | 1,193 |
|
| | | | | | |
(In thousands) |
| At June 30, 2019 |
| At December 31, 2018 | ||
Warranty | | $ | 958 | | $ | 841 |
Legal and consulting | | | 644 | | | 319 |
Travel and business | |
| 492 | |
| 557 |
Sales and use tax | | | 246 | | | 115 |
Acquisition earn-out | | | — | | | 375 |
Deferred rent | | | — | | | 155 |
Other | |
| 356 | |
| 423 |
Total | | $ | 2,696 | | $ | 2,785 |
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 | | Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
(In thousands) |
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Beginning balance | | $ | 2,727 | | $ | 1,820 | | $ | 2,566 | | $ | 1,672 |
Warranty provision | |
| 595 | |
| 506 | |
| 1,013 | |
| 857 |
Processed warranty claims | |
| (320) | |
| (224) | |
| (577) | |
| (427) |
Ending balance | | $ | 3,002 | | $ | 2,102 | | $ | 3,002 | | $ | 2,102 |
| | | | | | | | | | | | |
Accrued warranty reserve, current | | $ | 958 | | $ | 665 | | $ | 958 | | $ | 665 |
Accrued warranty reserve, non-current | | | 2,044 | | | 1,437 | | | 2,044 | | | 1,437 |
Total accrued warranty reserve | | $ | 3,002 | | $ | 2,102 | | $ | 3,002 | | $ | 2,102 |
Note 5. Line9. 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, and a Waiver and Second Amendment dated March 25, 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 — BankAgreement and/or add one or more term loan facilities in an amount not to exceed an incremental $25.0 million in the
12
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 June 30, 2019, and the date on which we filed this report, we did not have any outstanding borrowings under the Credit Agreement.
At December 31, 2016Our 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 had a $2.0 million line of creditmaintain compliance with a bank that bore interest based onmaximum leverage ratio and a minimum liquidity covenant. As of June 30, 2019, we were in compliance with all financial covenants under the prime rate. There was no outstanding balance on the line of credit as of December 31, 2016. The line of credit expired on May 11, 2017, and there was no outstanding balance on the line as of that date.Credit Agreement.
Note 6.10. 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 five years as of June 30, 2019.
In March 2008, we entered into a non-cancelablenoncancelable 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 operating lease liabilities. We are looking to sub-lease this space for the remainder of our lease obligation due to our new headquarters lease described below.
In July 2016, weWe entered into a non-cancelablelease in October 2018 for office space for our future corporate headquarters in Minneapolis, Minnesota which will commence upon our move, scheduled to occur in the fourth quarter of 2019. As such, this lease is not included in either the ROU operating lease agreementassets or the operating lease liabilities as of June 30, 2019. The initial lease term is through February 2030, with an option to renew for building space to accommodate the relocationtwo periods of our manufacturing, quality, and research and development functions. Thefive years each.
13
Vehicles
We lease agreement extends through November 2021 and provides for monthly rent, real estate taxes and operating expenses.
Rent expense was $0.4 million and $0.2 million for the three months ended September 30, 2017 and 2016, respectively, and $1.1 million and $0.6 million for the nine months ended September 30, 2017 and 2016, respectively.
In July 2016, we entered into a fleet vehicle lease programvehicles for certain members of our field sales organization. At Septemberorganization 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 June 30, 2017,2019, we had 26approximately 60 vehicles with futureagreements within the initial, noncancelable lease obligations under this program.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 equipmentequipment. The remaining lease terms at the ASC 842 adoption date of January 1, 2019, range from less than one year to approximately five years with fixed monthly payments that expireare included in 2020.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 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 information related to our ROU operating lease assets and operating lease liabilities that we have recorded:
11
| | | |
(In thousands) |
| At June 30, 2019 | |
Right of use operating lease assets | | $ | 3,298 |
| | | |
Operating lease liabilities: | | | |
Current | | $ | 1,291 |
Non-current | |
| 2,073 |
Total | | $ | 3,364 |
| | | |
Operating leases: | | | |
Weighted average remaining lease term | |
| 3.2 years |
Weighted average discount rate (1) | | | 5.07% |
| | | |
| | Six Months Ended | |
| | June 30, 2019 | |
Supplemental cash flow information for our operating leases: | | | |
Cash paid for operating lease liabilities | | $ | 719 |
Non-cash right of use assets obtained in exchange for new operating lease obligations | | $ | 3,934 |
(1) Discount rates were established as of January 1, 2019, the adoption date.
14
The table below reconciles the undiscounted cash flows under the operating lease liabilities recorded on the Condensed Consolidated Balance Sheet for each of the next five years and total of the remaining years:
Future base minimum
| | | |
(In thousands) | | | |
2019 (July 1 - December 31) | | $ | 770 |
2020 | | | 1,176 |
2021 | |
| 741 |
2022 | |
| 456 |
2023 | |
| 383 |
Thereafter | |
| 32 |
Total minimum lease payments | | | 3,558 |
Less: Amount of lease payments representing interest | | | (194) |
Present value of future minimum lease payments | | | 3,364 |
Less: Current obligations under operating lease liabilities | | | (1,291) |
Non-current obligations under operating lease liabilities | | $ | 2,073 |
As of June 30, 2019, we have additional lease paymentscommitments 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 providing guidance to the lessor for allrelated improvements, however these improvements are managed and owned by the lessor.
Operating lease obligations are expected to be as followscosts accounted for under ASC 842 were $0.4 million and $0.7 million for the years ending December 31:three and six months ended June 30, 2019, respectively. Rent expense accounted for under ASC 840 was $0.4 million and $0.7 million for the three and six months ended June 30, 2018, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Computer/Office |
| Fleet Car |
|
|
|
| ||
(In thousands) |
| Buildings |
| Equipment |
| Program |
| Total |
| ||||
2017 (October 1 - December 31) |
| $ | 174 |
| $ | 15 |
| $ | 5 |
| $ | 194 |
|
2018 |
|
| 714 |
|
| 76 |
|
| 28 |
|
| 818 |
|
2019 |
|
| 733 |
|
| 39 |
|
| — |
|
| 772 |
|
2020 |
|
| 752 |
|
| 22 |
|
| — |
|
| 774 |
|
2021 |
|
| 526 |
|
| — |
|
| — |
|
| 526 |
|
Thereafter |
|
| — |
|
| — |
|
| — |
|
| — |
|
Total |
| $ | 2,899 |
| $ | 152 |
| $ | 33 |
| $ | 3,084 |
|
Major Vendors
We had purchases from threetwo major vendors that collectively accounted for 47%38% and 35%33% of our total purchases for the three and six months ended SeptemberJune 30, 2017 and 2016, respectively,2019, respectively. We had purchases from two major vendors that accounted for 44% and 39% and 36% of our total purchases for the ninethree and six months ended SeptemberJune 30, 2017 and 2016,2018, respectively.
Employment AgreementsPurchase Commitments
We have entered into employment agreements with certain of our officers. The agreements provideissued purchase orders prior to June 30, 2019, totaling $46.4 million for payment of severance ranging from 9goods that we expect to 15 months of then-current annualized base salary inreceive within the event of termination by us without cause or by the employee for good reason or, in the case of two of the officers, death, disability, or as a result of a qualifying termination after a change in control. The agreements also provide for payment of an amount equal to 9 to 15 months of the then-current annual target bonus in the event of termination by us without cause or by the employee for good reason, or, in the case of two of the officers, death, disability, or as a result of a qualifying termination after a change in control. In addition, the agreements provide for the vesting of certain equity compensation through the date of termination in the event of termination by us without cause or by the employee for good reason.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. We may also make discretionaryDiscretionary contributions to the 401(k) plan. We made contributionsplan totaled $0.1 million for each of $42,000the three and $45,000 for the threesix months ended SeptemberJune 30, 20172019 and 2016, respectively, and $135,000 and $120,000 for the nine months ended September 30, 2017 and 2016,2018, respectively.
Note 7.11. Stockholders' Equity
We completed an initial public offering of our common stock on August 2, 2016, in which we sold 4,120,000 shares of our common stock at a public offering price of $10.00 per share. Immediately prior to the completion of the initial public offering, all then-outstanding shares of our Series A and Series B preferred stock were converted into 5,924,453 shares of our common stock. Our Series A preferred stock converted to common stock at a ratio of 1-for-1.03 and our Series B preferred stock converted to common stock at a ratio of 1-for-1. In addition, immediately prior to the completion of the initial public offering, we issued 2,354,323 additional shares of our common stock that our Series A and Series B preferred stockholders were entitled to receive in connection with the conversion of the preferred stock, and we issued 956,842 shares of our common stock to pay accrued dividends on our Series B preferred stock. We also paid $8.2 million in cumulative accrued dividends to our Series A convertible preferred stockholders in connection with the initial public offering, including $0.1 million of dividends paid to the holders of the common restricted shares.
Stock-Based Compensation
Our 2016 Equity Incentive Plan (the “2016 Plan”) authorizes us to grant stock options, stock appreciation rights, restricted stock, stock units and other stock-based awards to employees, non-employee directors and certain consultants and advisors. There were up to 4,800,000 shares of our common stock initially reserved for issuance pursuant to the 2016 Plan. The 2016 Plan provides that the number of shares reserved and available for issuance under the 2016 Plan will automatically increase annually on January 1 of each calendar year, commencing in 2017 and ending
12
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
15
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, pursuantPursuant to the automatic increase feature of the 2016 Plan.Plan, 892,318 and 841,686 shares were added as available for issuance thereunder on January 1, 2018 and 2017, respectively. Our Board of Directors exercised its prerogative to forego the automatic increase on January 1, 2019. As of SeptemberJune 30, 2017, 4,870,5322019, 5,133,203 shares were available for future grant pursuant to the 2016 Plan.
Upon adoption and approval of the 2016 Plan, all of our previous equity incentive compensation plans were terminated. However, existing awards under those plans continue to vest in accordance with the original vesting schedules and will expire at the end of their original terms.
We recorded stock-based compensation expense of $1.0$2.3 million and $0.7$1.8 million for the threemonths ended SeptemberJune 30, 20172019 and 2016,2018, respectively, and $3.1$5.1 million and $0.9$3.3 million for the nine six months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. This expense was allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
(In thousands) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Cost of goods sold |
| $ | 4 |
| $ | 33 |
| $ | 102 |
| $ | 71 |
|
Sales and marketing expenses |
|
| 361 |
|
| 188 |
|
| 1,030 |
|
| 272 |
|
Research and development expenses |
|
| 29 |
|
| 14 |
|
| 73 |
|
| 14 |
|
Reimbursement, general and administrative expenses |
|
| 573 |
|
| 474 |
|
| 1,899 |
|
| 502 |
|
Total stock-based compensation expense |
| $ | 967 |
| $ | 709 |
| $ | 3,104 |
| $ | 859 |
|
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
(In thousands) |
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Cost of revenue | | $ | 76 | | $ | 69 | | $ | 174 | | $ | 109 |
Sales and marketing expenses | | | 1,067 | | | 786 | | | 2,233 | | | 1,438 |
Research and development expenses | | | 100 | | | 26 | | | 180 | | | 95 |
Reimbursement, general and administrative expenses | | | 1,031 | | | 896 | | | 2,470 | | | 1,616 |
Total stock-based compensation expense | | $ | 2,274 | | $ | 1,777 | | $ | 5,057 | | $ | 3,258 |
Stock Options
Stock options issued to participants other than non-employees vest over three or four years and typically have a contractual term of seven or ten years. The stock options granted on July 27, 2016 to our non-employee directors vested in full on May 9,In each of 2018 and 2017, the date of our 2017 annual meeting of stockholders. New stock options were granted to our non-employee directors on the date of the annual meeting of stockholders in that date. These options vestyear and vested in full on the earlier of May 9, 2018 orone year after the date of our 2018grant or on the date of the next year’s annual meeting of stockholders. These options have a contractual term of seven years.
Stock-based compensation expense included in the Condensed Consolidated Statements of Operations for stock options was $0.7 million and $0.5 million for the three months ended June 30, 2019 and 2018, respectively, and $1.3 million and $1.0 million for the six months ended June 30, 2019 and 2018, respectively.
At June 30, 2019, there was approximately $6.2 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 2.7 years.
16
Our stock option activity for the ninesix months ended SeptemberJune 30, 20172019, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted Average |
| Weighted Average |
| Aggregate |
| |
|
| Options |
|
| Exercise Price |
| Remaining |
| Intrinsic |
| |
(In thousands except share, per share and years data) |
| Outstanding |
|
| Per Share1 |
| Contractual Life |
| Value2 |
| |
Balance at December 31, 2016 |
| 1,856,299 |
| $ | 2.69 |
| 5.5 years |
| $ | 25,467 |
|
Granted |
| 63,066 |
|
| 25.69 |
|
|
|
|
|
|
Exercised |
| (517,283) |
|
| 1.25 |
|
|
|
| 12,001 |
|
Forfeited |
| (50,656) |
|
| 7.86 |
|
|
|
|
|
|
Balance at September 30, 2017 |
| 1,351,426 |
|
| 4.12 |
| 5.3 years |
|
| 36,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at September 30, 2017 |
| 1,098,882 |
| $ | 2.12 |
| 4.6 years |
| $ | 31,619 |
|
| | | | | | | | | | |
| | | | 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, 2018 | | 1,076,535 | | $ | 17.94 | | 6.5 years | | $ | 31,172 |
Granted | | 73,948 | | $ | 72.64 | | | | | |
Exercised | | (170,174) | | $ | 9.06 | | | | $ | 8,713 |
Forfeited | | (41,772) | | $ | 26.87 | | | | | |
Balance at June 30, 2019 | | 938,537 | | $ | 23.46 | | 6.3 years | | $ | 32,987 |
| | | | | | | | | | |
Options exercisable at June 30, 2019 | | 561,360 | | $ | 4.27 | | 5.2 years | | $ | 26,140 |
(1) |
| The exercise price of each option granted during the period shown was equal to the market price of the underlying stock on the date of grant. |
(2) |
| The aggregate intrinsic value of options exercised represents the difference between the exercise price of the option and the closing stock price of our common stock on the date of exercise. The aggregate intrinsic value of options outstanding represents the difference between the exercise price of the option and the closing stock price of our common stock on the last trading day of the period. |
Options exercisable of 1,283,036806,689 as of SeptemberJune 30, 20162018, had a weighted averageweighted-average exercise price of $1.02$3.67 per share.
Stock based compensation expense included in our Condensed Consolidated Statements of Operations for stock options was $0.3 million and $0.2 million for the three months ended September 30, 2017 and 2016, respectively, and $0.8 million and $0.2 million for the nine months ended September 30, 2017 and 2016, respectively.
13
At September 30, 2017, there was approximately $1.2 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 2.4 years.
Stock-SettledTime-Based Restricted Stock Units
Stock-settledWe 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 one to three years. These awards are stock-settled with common shares. Stock-based compensation expense included in ourthe Condensed Consolidated StatementStatements of Operations for stock-settledtime-based restricted stock units was $0.6$1.0 million and $0.3$0.9 million for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively, and $1.8$1.9 million and $0.3$1.7 million for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. As of SeptemberJune 30, 2017,2019, there was approximately $4.5$6.4 million of total unrecognized pre-tax compensation expense related to outstanding stock-settledtime-based restricted stock units that is expected to be recognized over a weighted-average period of 2.11.9 years.
Our stock-settledtime-based restricted stock unit activity for the ninesix months ended SeptemberJune 30, 20172019, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
|
|
|
|
|
|
| Average Grant |
| Aggregate |
| |
|
| Units |
|
| Date Fair Value |
| Intrinsic |
| |
(In thousands except share and per share data) |
| Outstanding |
|
| Per Share |
| Value(1) |
| |
Balance at December 31, 2016 |
| 324,863 |
| $ | 10.39 |
| $ | 5,331 |
|
Granted |
| 187,902 |
|
| 21.40 |
|
|
|
|
Vested |
| (75,821) |
|
| 11.47 |
|
|
|
|
Cancelled |
| (35,887) |
|
| 15.17 |
|
|
|
|
Balance at September 30, 2017 |
| 401,057 |
| $ | 15.13 |
| $ | 12,413 |
|
|
|
|
|
|
|
|
|
|
|
Deferred and unissued at September 30, 2017 (2) |
| 1,912 |
| $ | 21.51 |
| $ | 59 |
|
| | | | | | | | |
| | | | Weighted- | | | | |
| | | | Average Grant | | Aggregate | ||
| | Units | | Date Fair Value | | Intrinsic | ||
(In thousands except unit and per unit data) | | Outstanding | | Per Unit | | Value (1) | ||
Balance at December 31, 2018 | | 309,632 | | $ | 23.69 | | $ | 14,104 |
Granted | | 56,707 | | $ | 68.96 | | | |
Vested | | (168,560) | | $ | 18.33 | | | |
Cancelled | | (12,251) | | $ | 32.10 | | | |
Balance at June 30, 2019 | | 185,528 | | $ | 41.84 | | $ | 10,560 |
| | | | | | | | |
Deferred and unissued at June 30, 2019(2) | | 4,957 | | $ | 37.71 | | $ | 282 |
(1) |
|
|
(2) |
| For the |
17
Performance-Based Restricted Stock Units
We have granted performance-based restricted stock units (“PSUs”) to certain participants under the 2016 Plan. These PSUs have both performance-based and time-based vesting features. The PSUs granted in 2018 will be earned if and to the extent performance goals based on revenue and adjusted EBITDA are achieved in 2019. The PSUs granted in 2019 will be earned if and to the extent performance goals based on revenue and adjusted EBITDA are achieved in 2020. The number of PSUs earned will depend on the level at which the performance targets are achieved and can range from 50% of target if the minimum performance threshold is achieved and up to 150% of target if maximum performance is achieved. One-third of the earned PSUs will vest on the date the Compensation and Organization Committee certifies the number of PSUs earned, and the remaining two-thirds of the earned PSUs will vest on the first anniversary of that certification date. All earned and vested PSUs will be settled in shares of common stock. Stock-based compensation expense included in the Condensed Consolidated Statements of Operations for PSUs was $0.5 million and $0.2 million for the three months ended June 30, 2019 and 2018, respectively, and $1.2 million and $0.3 million for the six months ended June 30, 2019 and 2018, respectively. The stock-based compensation expense for the six months ended June 30, 2019 reflects a $0.6 million charge due to a change in the estimated payout to 150% of target for those PSUs granted in 2018. As of June 30, 2019, there was approximately $3.3 million of total unrecognized pre-tax compensation expense related to outstanding PSUs that is expected to be recognized over a weighted average period of 2.2 years.
Our performance-based restricted stock unit activity reflected at the estimated payout of 150% of target for the six months ended June 30, 2019, was as follows:
| | | | | | | | |
| | Performance- | | Weighted- | | | | |
| | Based | | Average Grant | | Aggregate | ||
| | Units | | Date Fair Value | | Intrinsic | ||
(In thousands except unit and per unit data) | | Outstanding | | Per Unit | | Value (1) | ||
Balance at December 31, 2018 | | 65,427 | | $ | 33.62 | | $ | 2,980 |
Granted | | 25,724 | | $ | 72.64 | | | |
Vested | | — | | $ | — | | | |
Cancelled | | — | | $ | — | | | |
Balance at June 30, 2019 | | 91,151 | | $ | 44.63 | | $ | 5,188 |
(1) | The aggregate intrinsic value of performance-based restricted stock units |
Employee Stock Purchase Plan
Our employee stock purchase plan (“ESPP”), which was approved by our Board of Directors on April 27, 2016, and by our stockholders on June 20, 2016, allows participating employees to purchase shares of our common stock at a discount through payroll deductions. The planESPP is available to all of our employees and employees of participating subsidiaries. Participating employees may purchase common stock, on a voluntary after-tax basis, at a price equal to 85% of the lower of the closing market price per share of our common stock on the first or last trading day of each stock purchase period. The plan ordinarily consists ofESPP provides for six-month purchase periods, beginning on May 16 and November 16 of each calendar year, but the initial purchase period began on July 27, 2016 and ended on May 15, 2017. As of May 15, 2017, 259,981 shares were purchased utilizing $2.2 million of employee contributions in the initial purchase period. year.
A total of 1.6 million shares of common stock werewas initially reserved for issuance under the plan, and thisESPP. This share reserve will automatically be supplemented each January 1, commencing in 2017 and ending on and including January 1, 2026, by an amount equal to the least of (1)(a) 1% of the shares of our common stock outstanding on the immediately preceding December 31, (2)(b) 500,000 shares or (3)(c) such lesser amount as our Board of Directors may determine. Effective January 1, 2017,Pursuant to the automatic increase feature of the ESPP, 178,463 and 168,337 shares were added to the ESPP as available for issuance thereunder, pursuanton January 1, 2018 and 2017, respectively. Our Board of Directors exercised its prerogative to forego the automatic increase feature of the plan.on January 1, 2019. As of SeptemberJune 30, 2017, 1,508,3562019, 1,499,190 shares were available for future issuance under the ESPP. We recognized $0.1 million and $0.5 million in stock-based compensation expense related to the ESPP for the three and nine months ended September 30, 2017, respectively. We recognized stock based compensation expense related toassociated with the ESPP of $0.2 million and $0.1 million for eachthe three months ended June 30, 2019 and 2018, respectively, and $0.5 million and $0.3 million for the six months ended June 30, 2019 and 2018, respectively.
18
Note 12. Revenue
We derive our revenues from the sale and rental of our Flexitouch, Entre and Actitouch systems to our customers in the United States. While our primary source of revenue is from the sale of our products, a portion of our revenues are derived from patients who obtain our products under rental arrangements. (See description below for additional information on rental revenue as it relates to ASC 842.) These arrangements are primarily for rentals of the Flexitouch system and arise from transactions with private insurers and the Veterans Administration.
The following table presents our revenue, inclusive of sales and rental revenue, disaggregated by product:
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
(In thousands) |
| 2019 | | 2018 | | 2019 | | 2018 | ||||
Revenues | | | | | | | | | | | | |
Flexitouch system | | $ | 40,959 | | $ | 31,356 | | $ | 75,068 | | $ | 55,886 |
Entre/Actitouch systems | |
| 4,241 | |
| 2,777 | |
| 7,749 | |
| 5,095 |
Total | | $ | 45,200 | | $ | 34,133 | | $ | 82,817 | | $ | 60,981 |
| | | | | | | | | | | | |
Percentage of total revenues | | | | | | | | | | | | |
Flexitouch system | |
| 91 % | |
| 92 % | |
| 91 % | |
| 92 % |
Entre/Actitouch systems | |
| 9 % | |
| 8 % | |
| 9 % | |
| 8 % |
Total | |
| 100 % | |
| 100 % | |
| 100 % | |
| 100 % |
Our revenues from third party payers, inclusive of sales and rental revenue, for the three and ninesix months ended SeptemberJune 30, 2016.2019 and 2018, are summarized in the following table:
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
(In thousands) |
| 2019 | | 2018 | | 2019 | | 2018 | ||||
Private insurers and other payers | | $ | 32,143 | | $ | 25,266 | | $ | 58,025 | | $ | 43,366 |
Veterans Administration | | | 8,255 | | | 6,836 | | | 15,925 | | | 13,015 |
Medicare | | | 4,802 | | | 2,031 | | | 8,867 | | | 4,600 |
Total | | $ | 45,200 | | $ | 34,133 | | $ | 82,817 | | $ | 60,981 |
14Our rental revenue is derived from rent-to-purchase arrangements that typically range from three to ten months. Under ASC 840, our rental revenue was recognized as month-to-month, cancelable leases; however, because title transfers to the patient, with whom we have the contract, upon the termination of the lease term and because collectability is probable, under ASC 842, these are recognized as sales-type leases. Each rental agreement contains two components, the controller and related garments, both of which are interdependent and recognized as one lease component.
In accordance with applicable guidance, we will continue to recognize rental agreements commencing prior to December 31, 2018, on a month-to-month basis as an operating lease until they are completed, which we anticipate to be in the fourth quarter of this fiscal year. Those rental agreements initiated subsequent to January 1, 2019, are recorded as sales-type leases in accordance with ASC 842, whereby rental revenue and cost of rental revenue are recognized upon the lease commencement date. Total rental revenue in the three and six months ended June 30, 2019 includes both operating and sales-type lease revenue. Operating lease revenue was $1.4 million and $4.2 million for the three and six months ended June 30, 2019, respectively. Rental revenue related to operating leases under ASC 840 includes garment revenue of approximately $0.3 million and $0.5 million previously included as sales revenue for the three and six months ended June 30, 2018, respectively.
The revenue and associated cost of revenue of sales-type leases are recognized on the lease commencement date and a net investment in leases is recorded on the Condensed Consolidated Balance
19
Sheet. We bill the patients’ insurance payers monthly over the duration of the rental term. We record the net investment in leases and recognize revenue upon commencement of the lease in the amount of the expected consideration to be received through the monthly payments. Similar to our sales revenue, the transaction price is impacted by multiple factors, including the terms and conditions contracted by various third party payers. As the rental contract resides with the patients, we have elected the portfolio approach, at the payer level, to determine the expected consideration, which considers the impact of early terminations. While the contract is with the patient, in certain circumstances, the third party payer elects an initial rental period with an option to extend. We assess the likelihood of extending the lease at the onset of the lease to determine if the option is reasonably certain to be exercised. As the lease is short-term in nature, we anticipate collection of substantially all of the net investment within the first year of the lease agreement. Completion of these payments represents the fair market value of the equipment, and as such, interest income is not applicable.
Sales-type lease revenue and the associated cost of revenue for the three and six months ended June 30, 2019, was:
| | | | | | |
| | Three Months Ended | | Six Months Ended | ||
| | June 30, | | June 30, | ||
(In thousands) |
| 2019 | | 2019 | ||
Sales-type lease revenue | | $ | 5,035 | | $ | 9,000 |
Cost of sales-type lease revenue | |
| 1,882 | |
| 3,425 |
Gross profit | | $ | 3,153 | | $ | 5,575 |
Note 8.13. Income Taxes
We record our interim provision for income taxes by applying our estimated annual effective tax rate to our year-to-date pre-tax income and adjust the provisionadjusting for discrete tax items recorded in the period. Deferred income taxes result from temporary differences between the reporting of amounts for financial statement purposes and income tax purposes. These differences relate primarily to different methods used for income tax reporting purposes, including for depreciation and amortization, warranty and vacation accruals, share-based compensation and deductions related to allowances for doubtful accounts receivable and inventory reserves.
The effective tax rate for the three months ended September 30, 2017 was (6.7)%, compared to 50.0% for the three months ended September 30, 2016. The primary driver of the change in our effective tax rate was a significant increase in tax benefits related to tax-deductible share-based compensation activity as compared to the prior year period. The significant tax deductions related to tax benefits with respect to the vesting of restricted stock units, exercises of non-qualified stock options, and disqualifying dispositions of incentive stock options and ESPP shares. We recorded an income tax benefit of $0.1 million and an income tax expense of $0.5 million for the three months ended September 30, 2017 and 2016, respectively. The significant tax benefits in the current year period related to the share-based compensation activity resulted in an aggregate tax benefit despite the fact that we generated pre-tax income of $1.3 million for the quarter ended September 30, 2017, driving the effective tax rate for the period to a negative rate. Our provisionsprovision for income taxes included current federal and state income tax expense, as well as deferred federal and state income tax expense.
The effective tax rate for the ninethree months ended SeptemberJune 30, 20172019, was 539.1%an expense of 14%, compared to 50.0%a benefit of 78% for the ninethree months ended SeptemberJune 30, 2016.2018. The primary driver of the change in our effective tax rate was attributable to a significant increasedecrease in the tax benefits related to tax-deductible share-based compensation proportionate to pre-tax book income as compared to the prior yearyear's reporting period. We recorded an income tax expense of $0.4 million for the three months ended June 30, 2019, compared to an income tax benefit of $1.1 million for the three months ended June 30, 2018.
The significanteffective tax deductionsrate for the six months ended June 30, 2019, was a benefit of 172%, compared to a benefit of 959% for the six months ended June 30, 2018. The primary driver of the change in our effective tax rate was attributable to a decrease in the tax benefits related to tax benefits with respectshare-based compensation proportionate to pre-tax book income as compared to the vesting of restricted stock awards and restricted stock units, exercises of non-qualified stock options, and disqualifying dispositions of incentive stock options and ESPP shares. Largely as a result of this activity, weprior year's reporting period. We recorded an income tax benefit of $4.5$2.7 million and $2.8 million for the ninesix months ended SeptemberJune 30, 2017, compared to income tax expense of $0.5 million for the nine months ended September 30, 2016. The tax benefit of $4.5 million in the current year period on a pre-tax loss of $0.8 million resulted in the 539.1% effective tax rate for the nine months ended September 30, 2017. Our provisions for income taxes included current federal2019 and state income tax expense, as well as deferred federal and state income tax expense.2018, respectively.
We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than notis more-likely-than-not to sustain the position following an audit. For tax positions meeting the more likely than notmore-likely-than-not threshold, the amount recognized in the condensed consolidated financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. As of SeptemberJune 30, 2017,2019, we had an unrecognized tax benefit ("UTB") with respect to state income taxes of approximately $0.2 million. The UTB represents tax, interest, and penalties related to unfiled and unpaid income taxes in several state jurisdictions. We are pursuing actions to settle outstanding$0.1 million classified within non-current liabilities and reviewing compliance in all relevant tax jurisdictions.on the Condensed Consolidated Balance Sheet.
We are not currently under examination byin any taxing jurisdiction. In the event of any future tax assessments, we have elected to record the income taxes and any related interest and penalties as income tax expense on our statementthe Condensed Consolidated Statement of operations.
15
Operations.
20
Note 9.14. Net Income (Loss) Per Share Attributable to Common Stockholders
We adopted ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” in the fourth quarter of 2016 on a retrospective basis, effective January 1, 2016. The following table sets forth the computation of our basic and diluted net income (loss) per share attributable to common stockholders and reflects the adoption of ASU 2016-09:share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
(In thousands, except share and per share data) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Net income |
| $ | 1,342 |
| $ | 492 |
| $ | 3,625 |
| $ | 500 |
|
Convertible preferred stock dividends |
|
| — |
|
| 224 |
|
| — |
|
| 1,247 |
|
Allocation of undistributed earnings to preferred stockholders |
|
| — |
|
| 99 |
|
| — |
|
| — |
|
Net income (loss) attributable to common stockholders |
| $ | 1,342 |
| $ | 169 |
| $ | 3,625 |
| $ | (747) |
|
Weighted-average shares outstanding |
|
| 17,603,293 |
|
| 12,253,877 |
|
| 17,222,072 |
|
| 6,317,875 |
|
Effect of convertible preferred stock outstanding, restricted stock units, common stock options, warrants, and employee stock purchase plan shares |
|
| 1,480,682 |
|
| 1,728,922 |
|
| 1,596,537 |
|
| — |
|
Weighted-average shares used to compute diluted net income (loss) per share |
|
| 19,083,975 |
|
| 13,982,799 |
|
| 18,818,609 |
|
| 6,317,875 |
|
Net income (loss) per share - Basic |
| $ | 0.08 |
| $ | 0.01 |
| $ | 0.21 |
| $ | (0.12) |
|
Net income (loss) per share - Diluted |
| $ | 0.07 |
| $ | 0.01 |
| $ | 0.19 |
| $ | (0.12) |
|
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
(In thousands, except share and per share data) |
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Net income | | $ | 2,785 | | $ | 2,572 | | $ | 4,257 | | $ | 2,522 |
Weighted-average shares outstanding | | | 18,881,526 | | | 18,155,543 | | | 18,814,511 | | | 18,076,546 |
Effect of restricted stock units, common stock options, and employee stock purchase plan shares | | | 709,603 | | | 1,157,613 | | | 804,702 | | | 1,127,554 |
Weighted-average shares used to compute diluted net income per share | | | 19,591,129 | | | 19,313,156 | | | 19,619,213 | | | 19,204,100 |
Net income per share - Basic | | $ | 0.15 | | $ | 0.14 | | $ | 0.23 | | $ | 0.14 |
Net income per share - Diluted | | $ | 0.14 | | $ | 0.13 | | $ | 0.22 | | $ | 0.13 |
The following common stock equivalents were excluded from the computation of diluted net income per share for the periods presented because including them would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
Convertible preferred stock outstanding |
| — |
| 5,924,453 |
| — |
| 5,924,453 |
|
Restricted stock units |
| — |
| — |
| 1,184 |
| — |
|
Common stock options |
| 23,311 |
| — |
| 63,066 |
| 1,628,754 |
|
Common stock warrants |
| — |
| — |
| — |
| 5,800 |
|
Total |
| 23,311 |
| 5,924,453 |
| 64,250 |
| 7,559,007 |
|
As of September 30, 2017, total common shares outstanding and the potentially dilutive shares totaled approximately 19.2 million shares.
| | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||
| | June 30, | | June 30, | ||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
Restricted stock units | | 64,930 | | 8,238 | | 51,330 | | 8,238 |
Common stock options | | 160,090 | | 110,521 | | 160,090 | | 120,521 |
Employee stock purchase plan | | 32,411 | | 28,996 | | 32,411 | | 28,996 |
Total | | 257,431 | | 147,755 | | 243,831 | | 157,755 |
16
Note 10.15. Fair Value Measurements
We determine the fair value of our assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. We use a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1). The next highest priority is based on quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in non-active markets or other observable inputs (Level 2). The lowest priority is given to unobservable inputs (Level 3).
21
The following provides information regarding fair value measurements for our cash equivalents and marketable securities as of SeptemberJune 30, 20172019, and December 31, 20162018, according to the three-level fair value hierarchy.hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurements at | ||||||||||
|
| September 30, 2017 Using: | ||||||||||
|
| Quoted Prices |
|
|
|
|
|
|
|
|
| |
|
| in Active |
| Significant |
|
|
|
|
|
| ||
|
| Markets for |
| Other |
| Significant |
|
| ||||
|
| Identical |
| Observable |
| Unobservable |
|
| ||||
|
| Assets |
| Inputs |
| Inputs |
|
| ||||
(In thousands) |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Total | ||||
Recurring Fair Value Measurements: |
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual funds |
| $ | 8,110 |
| $ | — |
| $ | — |
| $ | 8,110 |
U.S. government and agency obligations |
|
| 2,003 |
|
| 10,965 |
|
| — |
|
| 12,968 |
Corporate debt securities |
|
| — |
|
| 9,025 |
|
| — |
|
| 9,025 |
Total |
| $ | 10,113 |
| $ | 19,990 |
| $ | — |
| $ | 30,103 |
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Fair Value Measurements at | ||||||||||||||||||||||
|
| December 31, 2016 Using: | ||||||||||||||||||||||
|
| Quoted Prices |
|
|
|
|
|
|
|
|
| |||||||||||||
|
| in Active |
| Significant |
|
|
|
|
|
| ||||||||||||||
|
| Markets for |
| Other |
| Significant |
|
| ||||||||||||||||
|
| Identical |
| Observable |
| Unobservable |
|
| ||||||||||||||||
|
| Assets |
| Inputs |
| Inputs |
|
| ||||||||||||||||
| | | | | | | | | | | | | ||||||||||||
| | At June 30, 2019 | ||||||||||||||||||||||
|
| Quoted Prices |
| | |
| | |
| | | |||||||||||||
| | in Active | | Significant | | | | | | | ||||||||||||||
| | Markets for | | Other | | Significant | | | ||||||||||||||||
| | Identical | | Observable | | Unobservable | | | ||||||||||||||||
| | Assets | | Inputs | | Inputs | | | ||||||||||||||||
(In thousands) |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Total | | (Level 1) | | (Level 2) | | (Level 3) | | Total | ||||||||
Recurring Fair Value Measurements: |
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | |
Currency |
| $ | 14 |
| $ | — |
| $ | — |
| $ | 14 | ||||||||||||
Money market mutual funds |
| 18,976 |
|
| — |
|
| — |
|
| 18,976 | | $ | 5,245 | | $ | — | | $ | — | | $ | 5,245 | |
U.S. government and agency obligations |
| 2,017 |
|
| 6,979 |
|
| — |
|
| 8,996 | |
| 20,926 | |
| — | |
| — | |
| 20,926 | |
Corporate debt securities |
|
| — |
|
| 1,998 |
|
| — |
|
| 1,998 | |
| — | |
| 2,498 | |
| — | |
| 2,498 |
Total |
| $ | 21,007 |
| $ | 8,977 |
| $ | — |
| $ | 29,984 | | $ | 26,171 | | $ | 2,498 | | $ | — | | $ | 28,669 |
| | | | | | | | | | | | |
| | At December 31, 2018 | ||||||||||
|
| Quoted Prices |
| | |
| | |
| | | |
| | in Active | | Significant | | | | | | | ||
| | Markets for | | Other | | Significant | | | ||||
| | Identical | | Observable | | Unobservable | | | ||||
| | Assets | | Inputs | | Inputs | | | ||||
(In thousands) | | (Level 1) | | (Level 2) | | (Level 3) | | Total | ||||
Recurring Fair Value Measurements: | | | | | | | | | | | | |
Money market mutual funds | | $ | 2,447 | | $ | — | | $ | — | | $ | 2,447 |
U.S. government and agency obligations | |
| 16,326 | |
| 2,994 | |
| — | |
| 19,320 |
Corporate debt securities | |
| — | |
| 6,466 | |
| — | |
| 6,466 |
Total | | $ | 18,773 | | $ | 9,460 | | $ | — | | $ | 28,233 |
During the ninesix months ended SeptemberJune 30, 2017,2019, there were no transfers within the three-level hierarchy. A significant transfer is recognized when the inputs used to value a security have been changed, which merits a transfer between the disclosed levels of the valuation hierarchy.
The fair values for our currency, money market mutual funds, U.S. government and agency obligations and corporate debt securities are determined based on valuations provided by external investment managers who obtain them from a variety of industry standard data providers.
The carrying amounts of financial instruments such as cash equivalents, accounts receivable, other assets, accounts payable, accrued expenses and other liabilities approximate their related fair values due to the short-term maturities of these items. Non-financial assets, such as equipment and leasehold improvements, and intangible assets are subject to non-recurring fair value measurements if they are deemed impaired. As of December 31, 2018, we re-measured the value of our intangible assets related to the Actitouch product line to their fair value, which was deemed to be $0 using Level 3 measurements. We had no re-measurements of non-financial assets to fair value in the ninesix months ended SeptemberJune 30, 2017.2019.
1722
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with ourthe condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this report.
Overview
Overview
We are a medical technology company that develops and provides innovative medical devices for the treatment of chronic diseases. Our mission is to help people suffering from chronic diseases live better and care for themselves at home. We focus our efforts on advancing the standard of care in treating chronic diseases in the home setting to improve patient outcomes and quality of life and help control rising healthcare expenditures. Our initial area of therapeutic focus is vascular disease, with a goal of advancing the standard of care in treating lymphedema and chronic venous insufficiency. We possess a unique, scalable platform to deliver at-home healthcare solutions throughout the United States. This evolving home care delivery model is recognized by policy-makers and insurance payers as a key for controlling rising healthcare costs. Our solutions deliver cost-effective, clinically proven, long-term treatment for patientspeople with these chronic diseases.
Our proprietary products are the Flexitouch, Entre and Actitouch systems. A predecessor to our Flexitouch system received 510(k) clearance from the U.S. Food and Drug Administration (the “FDA”) in July 2002, and we introduced the system to address the many limitations of self-administered home-based manual lymphatic drainage therapy. We began selling our more advanced Flexitouch system after receiving 510(k) clearance from the FDA in October 2006. In September 2016, we received 510(k) clearance from the FDA for the Flexitouch system in treating lymphedema of the head and neck. In June 2017, we announced that we received 510(k) clearance from the FDA for the Flexitouch Plus, the third-generation version of our Flexitouch system. We derive the vast majority of our revenues from our Flexitouch system. For the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, sales and rentals of our Flexitouch system represented 91% and 86%92% of our revenues, respectively.
In September 2012, we acquired our second proprietary product, the Actitouch system. The system received 510(k) clearance from the FDA in June 2013, and we began selling the product in September 2013, to address the many limitations of multilayered bandages that are worn by patients suffering from venous leg ulcers. We also introduced our Entre system in the United States in February 2013. The Entre system is sold to patients who need a more basic pump or who do not yet qualify for insurance reimbursement for an advanced compression device such as our Flexitouch system. For the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, sales and rentals of our Entre and Actitouch systems combined represented 9% and 14%8% of our revenues, respectively. During fiscal year 2018, we recorded a $2.5 million non-cash impairment charge to fully impair the inventory and intangible assets related to our Actitouch system. We intend to discontinue this product line in the fourth quarter of 2019. See Note 3 – “Summary of Significant Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2018, for more information regarding this impairment charge and discontinuation.
In October 2018, we licensed the intellectual property rights related to the Airwear Gradient Compression Wrap, or the Airwear wrap, in the U.S. and Canada, for use in all medical applications, including but not limited to swelling/edema and ulcers (including lymphedema and chronic venous insufficiency conditions), but excluding the use of the intellectual property in the field of prophylaxis for deep vein thrombosis. The Airwear wrap is indicated for the management of venous insufficiency, venous hypertension, venous ulcerations and lymphedema. We plan to begin selling the Airwear wrap in the fourth quarter of 2019.
To support the growth of our business, we invest heavily in our commercial infrastructure, consisting of our direct sales force,salesforce, home training resources, reimbursement capabilities and clinical expertise. We market our products in the United States using a direct-to-patient and -provider model. Our direct sales forcesalesforce has grown from three representatives in March 2005 to a team of over 150 people215 employees as of SeptemberJune 30, 2017.2019, compared to over 170 employees as of June 30, 2018. This model allows us to directly approach patients and clinicians, whereby we disintermediate the traditional durable medical equipment channel, allowing us to capture both the manufacturer and distributor margins. We also utilize over 400500 licensed, independent healthcare practitioners as home trainers who educate patients on the proper use of our systems. We invest substantial resources in our reimbursement operations groupReimbursement Department, which was
23
reorganized in 2018 to improve operational efficiencies and enhance individual payer expertise, while continuing our strategic focus of payer development. The Reimbursement Department, composed of over 80 people that focusesemployees, now consists of our Payer Development and Reimbursement Operations groups. Our Payer Development group is composed of both strategic and analytical teams, with focus on verifying case-by-case benefits, obtaining prior authorization, billingpayer decision-maker relationships and collecting payments from payers,education, payer policy development and providing customer support services.revision, payer contract negotiations, and payer data analysis. Our payer relationsexperienced Reimbursement Operations group of 34 people is responsible for developing relationships withverifying patient insurance payer decision-makers to educate them on our product efficacy, develop overall payer coverage policiesbenefits, individual patient case development, prior authorization submissions, case follow-up, and reimbursement criteria, manage Medicare patient claims and contracts with payers, and serve as an advocacy liaison between patients, clinicians and payers throughout the appeals process.when necessary. We also have a clinical team, consisting of a scientific advisory board, as well as in-house therapists and nurses, and a medical director (part-time), that serves as a resource to clinicians and patients and guides the development of clinical evidence in support of our products.
Our patients are reimbursed by government and private payers for the purchase of our products pursuant to established rates with each payer. We rely on third-partythird party contract manufacturers for the sourcing of parts, the assembly of our controllers and the manufacturing of the garments used with our systems. We conduct final assembly of the garments used with our Flexitouch system, perform quality assurance and ship our products from our facility in Minneapolis, Minnesota.
18
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 this standard, from a lessee perspective, resulted in us recording ROU operating lease assets and operating lease 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” to the condensed consolidated financial statements in this report for additional information and required disclosures.)
As a result of our adoption of ASC 842, beginning with the three months ended March 31, 2019, our rental revenue, cost of rental revenue and gross profit – rental revenue are presented as line items separate from our sales revenue, cost of sales revenue and gross profit – sales revenue, respectively, in the Condensed Consolidated Statements of Operations. Our adoption of ASC 842 under the modified retrospective transition approach did not require restatement of previous periods, and therefore rental revenue, cost of rental revenue and gross profit – rental revenue for the three and six months ended June 30, 2018, were determined under ASC 840, inclusive of rental garments, but have been presented as separate line items in this report to conform to the current year presentation.
For the three months ended SeptemberJune 30, 2017,2019, we generated revenues of $28.3$45.2 million and had net income of $1.3$2.8 million, compared to revenues of $22.6$34.1 million and net income of $0.5$2.6 million for the three months ended SeptemberJune 30, 2016.2018. For the ninesix months ended SeptemberJune 30, 2017,2019, we generated revenues of $74.4$82.8 million and had net income of $3.6$4.3 million, compared to revenues of $56.1$61.0 million and net income of $0.5$2.5 million for the ninesix months ended SeptemberJune 30, 2016.2018. Our primary sources of capital to date have been from operating income, private placements of our capital stock and capital raised in our initial public offering, which closed on August 2, 2016.
24
We operate in one segment for financial reporting purposes.
Results of Operations
Comparison of the Three and NineSix Months Ended SeptemberJune 30, 20172019 and 20162018
The following tables present our results of operations for the periods indicated.indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
|
| Three Months Ended September 30, |
| Change |
|
| |||||||||||||||||||||||||||||
(In thousands, except percentages) |
| 2017 |
| 2016 |
| $ |
| % |
|
| |||||||||||||||||||||||||
Condensed Consolidated Statement of Operations Data: |
|
|
|
| % of revenue |
|
|
|
| % of revenue |
|
|
|
|
|
|
| ||||||||||||||||||
Revenues |
| $ | 28,283 |
| 100 | % | $ | 22,635 |
| 100 | % | $ | 5,648 |
| 25 | % |
| ||||||||||||||||||
Cost of goods sold |
|
| 7,528 |
| 27 |
|
| 6,282 |
| 28 |
|
| 1,246 |
| 20 |
|
| ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | |||||||||||||||||
| | Three Months Ended | | | | | | | |||||||||||||||||||||||||||
| | June 30, | | Change | |||||||||||||||||||||||||||||||
(In thousands) | | 2019 | | 2018 | | $ | | % | |||||||||||||||||||||||||||
Condensed Consolidated Statement | | | | | % of | | | | | % of | | | | | | | |||||||||||||||||||
of Operations Data: | | | | | revenue | | | | | revenue | | | | | | | |||||||||||||||||||
Revenue | | | | | | | | | | | | | | | | | | | |||||||||||||||||
Sales revenue | | $ | 38,790 | | 86 | % | | $ | 30,572 | | 90 | % | | $ | 8,218 | | 27 | % | |||||||||||||||||
Rental revenue | | | 6,410 | | 14 | % | | | 3,561 | | 10 | % | | | 2,849 | | 80 | % | |||||||||||||||||
Total revenue | | | 45,200 | | 100 | % | | | 34,133 | | 100 | % | | | 11,067 | | 32 | % | |||||||||||||||||
Cost of revenue | | | | | | | | | | | | | | | | | | | |||||||||||||||||
Cost of sales revenue | | | 11,586 | | 25 | % | | | 8,557 | | 25 | % | | | 3,029 | | 35 | % | |||||||||||||||||
Cost of rental revenue | | | 2,109 | | 5 | % | | | 1,053 | | 3 | % | | | 1,056 | | 100 | % | |||||||||||||||||
Total cost of revenue | | | 13,695 | | 30 | % | | | 9,610 | | 28 | % | | | 4,085 | | 43 | % | |||||||||||||||||
Gross profit | | | | | | | | | | | | | | | | | | | |||||||||||||||||
Gross profit - sales revenue | | | 27,204 | | 61 | % | | | 22,015 | | 65 | % | | | 5,189 | | 24 | % | |||||||||||||||||
Gross profit - rental revenue | | | 4,301 | | 9 | % | | | 2,508 | | 7 | % | | | 1,793 | | 71 | % | |||||||||||||||||
Gross profit |
|
| 20,755 |
| 73 |
|
| 16,353 |
| 72 |
|
| 4,402 |
| 27 |
|
| | | 31,505 | | 70 | % | | | 24,523 | | 72 | % | | | 6,982 | | 28 | % |
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | |
Sales and marketing |
|
| 10,915 |
| 38 |
|
| 8,979 |
| 40 |
|
| 1,936 |
| 22 |
|
| | | 18,418 | | 41 | % | | | 14,452 | | 42 | % | | | 3,966 | | 27 | % |
Research and development |
|
| 1,116 |
| 4 |
|
| 1,285 |
| 6 |
|
| (169) |
| (13) |
|
| | | 1,234 | | 3 | % | | | 1,289 | | 4 | % | | | (55) | | (4) | % |
Reimbursement, general and administrative |
|
| 7,551 |
| 26 |
|
| 5,115 |
| 22 |
|
| 2,436 |
| 48 |
|
| | | 8,805 | | 19 | % | | | 7,471 | | 22 | % | | | 1,334 | | 18 | % |
Total operating expenses |
|
| 19,582 |
| 68 |
|
| 15,379 |
| 68 |
|
| 4,203 |
| 27 |
|
| | | 28,457 | | 63 | % | | | 23,212 | | 68 | % | | | 5,245 | | 23 | % |
Income from operations |
|
| 1,173 |
| 5 |
|
| 974 |
| 4 |
|
| 199 |
| 20 |
|
| | | 3,048 | | 7 | % | | | 1,311 | | 4 | % | | | 1,737 | | 132 | % |
Other income |
|
| 85 |
| — |
|
| 10 |
| — |
|
| 75 |
| 750 |
|
| | | 159 | | — | % | | | 132 | | — | % | | | 27 | | 20 | % |
Income before income taxes |
|
| 1,258 |
| 5 |
|
| 984 |
| 4 |
|
| 274 |
| 28 |
|
| | | 3,207 | | 7 | % | | | 1,443 | | 4 | % | | | 1,764 | | 122 | % |
Income tax (benefit) expense |
|
| (84) |
| — |
|
| 492 |
| 2 |
|
| (576) |
| (117) |
|
| ||||||||||||||||||
Income tax expense (benefit) | | | 422 | | 1 | % | | | (1,129) | | (4) | % | | | 1,551 | | (137) | % | |||||||||||||||||
Net income |
| $ | 1,342 |
| 5 |
| $ | 492 |
| 2 |
| $ | 850 |
| 173 |
|
| | $ | 2,785 | | 6 | % | | $ | 2,572 | | 8 | % | | $ | 213 | | 8 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, |
| Change |
|
| |||||||||||
(In thousands, except percentages) |
| 2017 |
| 2016 |
| $ |
| % |
|
| |||||||
Condensed Consolidated Statement of Operations Data: |
|
|
|
| % of revenue |
|
|
|
| % of revenue |
|
|
|
|
|
|
|
Revenues |
| $ | 74,397 |
| 100 | % | $ | 56,064 |
| 100 | % | $ | 18,333 |
| 33 | % |
|
Cost of goods sold |
|
| 20,186 |
| 27 |
|
| 15,417 |
| 27 |
|
| 4,769 |
| 31 |
|
|
Gross profit |
|
| 54,211 |
| 73 |
|
| 40,647 |
| 73 |
|
| 13,564 |
| 33 |
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
| 31,726 |
| 42 |
|
| 23,858 |
| 43 |
|
| 7,868 |
| 33 |
|
|
Research and development |
|
| 3,699 |
| 5 |
|
| 3,314 |
| 6 |
|
| 385 |
| 12 |
|
|
Reimbursement, general and administrative |
|
| 19,815 |
| 27 |
|
| 12,495 |
| 22 |
|
| 7,320 |
| 59 |
|
|
Total operating expenses |
|
| 55,240 |
| 74 |
|
| 39,667 |
| 71 |
|
| 15,573 |
| 39 |
|
|
(Loss) income from operations |
|
| (1,029) |
| (1) |
|
| 980 |
| 2 |
|
| (2,009) |
| (205) |
|
|
Other income |
|
| 204 |
| — |
|
| 20 |
| — |
|
| 184 |
| 920 |
|
|
(Loss) income before income taxes |
|
| (825) |
| (1) |
|
| 1,000 |
| 2 |
|
| (1,825) |
| (183) |
|
|
Income tax (benefit) expense |
|
| (4,450) |
| (6) |
|
| 500 |
| 1 |
|
| (4,950) |
| (990) |
|
|
Net income |
| $ | 3,625 |
| 5 |
| $ | 500 |
| 1 |
| $ | 3,125 |
| 625 |
|
|
19
25
| | | | | | | | | | | | | | | | | | |
| | Six Months Ended | | | | | | | ||||||||||
| | June 30, | | Change | ||||||||||||||
(In thousands) | | 2019 | | 2018 | | $ | | % | ||||||||||
Condensed Consolidated Statement | | | | | % of | | | | | % of | | | | | | | ||
of Operations Data: | | | | | revenue | | | | | revenue | | | | | | | ||
Revenue | | | | | | | | | | | | | | | | | | |
Sales revenue | | $ | 69,621 | | 84 | % | | $ | 54,219 | | 89 | % | | $ | 15,402 | | 28 | % |
Rental revenue | | | 13,196 | | 16 | % | | | 6,762 | | 11 | % | | | 6,434 | | 95 | % |
Total revenue | | | 82,817 | | 100 | % | | | 60,981 | | 100 | % | | | 21,836 | | 36 | % |
Cost of revenue | | | | | | | | | | | | | | | | | | |
Cost of sales revenue | | | 20,998 | | 25 | % | | | 14,966 | | 25 | % | | | 6,032 | | 40 | % |
Cost of rental revenue | | | 4,056 | | 5 | % | | | 1,953 | | 3 | % | | | 2,103 | | 108 | % |
Total cost of revenue | | | 25,054 | | 30 | % | | | 16,919 | | 28 | % | | | 8,135 | | 48 | % |
Gross profit | | | | | | | | | | | | | | | | | | |
Gross profit - sales revenue | | | 48,623 | | 59 | % | | | 39,253 | | 64 | % | | | 9,370 | | 24 | % |
Gross profit - rental revenue | | | 9,140 | | 11 | % | | | 4,809 | | 8 | % | | | 4,331 | | 90 | % |
Gross profit | | | 57,763 | | 70 | % | | | 44,062 | | 72 | % | | | 13,701 | | 31 | % |
Operating expenses | | | | | | | | | | | | | | | | | | |
Sales and marketing | | | 35,809 | | 43 | % | | | 27,009 | | 45 | % | | | 8,800 | | 33 | % |
Research and development | | | 2,515 | | 3 | % | | | 2,726 | | 4 | % | | | (211) | | (8) | % |
Reimbursement, general and administrative | | | 18,193 | | 22 | % | | | 14,843 | | 24 | % | | | 3,350 | | 23 | % |
Total operating expenses | | | 56,517 | | 68 | % | | | 44,578 | | 73 | % | | | 11,939 | | 27 | % |
Income (loss) from operations | | | 1,246 | | 2 | % | | | (516) | | (1) | % | | | 1,762 | | N.M. | % |
Other income | | | 320 | | — | % | | | 223 | | — | % | | | 97 | | 43 | % |
Income (loss) before income taxes | | | 1,566 | | 2 | % | | | (293) | | (1) | % | | | 1,859 | | N.M. | % |
Income tax benefit | | | (2,691) | | (3) | % | | | (2,815) | | (5) | % | | | 124 | | (4) | % |
Net income | | $ | 4,257 | | 5 | % | | $ | 2,522 | | 4 | % | | $ | 1,735 | | 69 | % |
“N.M.” Not Meaningful
Revenues
Revenues increased $5.7$11.1 million, or 25%32%, to $28.3$45.2 million in the three months ended SeptemberJune 30, 2017,2019, compared to $22.6$34.1 million in the three months ended SeptemberJune 30, 2016.2018. Revenues increased $18.3$21.8 million, or 33%36%, to $74.4$82.8 million in the ninesix months ended SeptemberJune 30, 2017,2019, compared to $56.1$61.0 million in the ninesix months ended SeptemberJune 30, 2016.2018. The growth in revenues was attributable to an increase of approximately $6.8$9.6 million, or 35%31%, in sales and rentals of our Flexitouch system forin the three months ended SeptemberJune 30, 20172019, and an increase of approximately $19.9$19.2 million, or 42%34%, in sales of our Flexitouch system for the ninesix months ended SeptemberJune 30, 2017. These increases2019. The increase in Flexitouch system sales wereand rentals was largely driven by expansion of our sales force andsalesforce, increased physician and patient awareness of the treatment options for lymphedema, as well as increasedexpanded contractual coverage with national and regional insurance payers.payers and growth in the Medicare channel. The increasesgrowth in revenues was also attributable to an increase of approximately $1.5 million, or 53%, in sales of our Flexitouch system were partially offset by decreases of 36% and 20% in salesrentals of our Entre and Actitouch systemssystem in the three and nine months ended September 30, 2017 compared to the same periods in 2016, respectively.
Revenues from Veterans Administration hospitals represented 20% and 13% of total revenues for the three months ended SeptemberJune 30, 20172019, and 2016,an increase of $2.7 million, or 52%, for the six months ended June 30, 2019. The increase in Entre system sales and rentals was largely driven by the continued benefit from managing orders in-house and expanded contractual coverage with payers. The effect of the adoption of ASC 842 contributed five percentage points and seven percentage points to our year-over-year total revenue growth for the three and six months ended June 30, 2019, respectively.
Revenues from the Veterans Administration represented 18% and 20% of total revenues in the three months ended June 30, 2019 and 2018, respectively. Revenues from the Veterans Administration hospitals represented 19% and 16%21% of total revenues forin the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. Revenues from Medicare represented 6%11% and 13%6% of total revenues forin the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. Revenues from Medicare represented 9%11% and 13%8% of total revenues forin the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively.
26
The following tables summarize our revenues by product for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, both in dollars and percentage of total revenues:
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
| Three Months Ended September 30, |
| Change |
|
| |||||||||||||||
(In thousands, except percentages) |
| 2017 |
| 2016 |
| % |
|
| |||||||||||||
| | | | | | | | | | | | ||||||||||
| | Three Months Ended | | | | | | ||||||||||||||
| | June 30, | | Change | |||||||||||||||||
(In thousands) | | 2019 | | 2018 | | $ | | % | |||||||||||||
Revenues |
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | |
Flexitouch system |
| $ | 26,202 |
| $ | 19,387 |
| 35 | % |
| | $ | 40,959 | | $ | 31,356 | | $ | 9,603 | | 31 % |
Entre/Actitouch systems |
|
| 2,081 |
|
| 3,248 |
| (36) | % |
| |
| 4,241 | |
| 2,777 | |
| 1,464 | | 53 % |
Total |
| $ | 28,283 |
| $ | 22,635 |
| 25 | % |
| | $ | 45,200 | | $ | 34,133 | | $ | 11,067 | | 32 % |
|
|
|
|
|
|
|
|
|
|
| |||||||||||
| | | | | | | | | | | | ||||||||||
Percentage of total revenues |
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | |
Flexitouch system |
|
| 93 | % |
| 86 | % |
|
|
| |
| 91 % | |
| 92 % | |
| | | |
Entre/Actitouch systems |
|
| 7 | % |
| 14 | % |
|
|
| |
| 9 % | |
| 8 % | |
| | | |
Total |
|
| 100 | % |
| 100 | % |
|
|
| |
| 100 % | |
| 100 % | |
| | | |
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| Nine Months Ended September 30, |
| Change |
| ||||||||||||||||
(In thousands, except percentages) |
| 2017 |
| 2016 |
| % |
| ||||||||||||||
| | | | | | | | | | | | ||||||||||
| | Six Months Ended | | | | | | ||||||||||||||
| | June 30, | | Change | |||||||||||||||||
(In thousands) |
| 2019 | | 2018 | | $ | | % | |||||||||||||
Revenues |
|
|
|
|
|
|
|
|
| | | | | | | | | | | | |
Flexitouch system |
| $ | 67,936 |
| $ | 47,988 |
| 42 | % |
| | $ | 75,068 | | $ | 55,886 | | $ | 19,182 | | 34 % |
Entre/Actitouch systems |
|
| 6,461 |
|
| 8,076 |
| (20) | % |
| |
| 7,749 | |
| 5,095 | |
| 2,654 | | 52 % |
Total |
| $ | 74,397 |
| $ | 56,064 |
| 33 | % |
| | $ | 82,817 | | $ | 60,981 | | $ | 21,836 | | 36 % |
|
|
|
|
|
|
|
|
|
| ||||||||||||
| | | | | | | | | | | | ||||||||||
Percentage of total revenues |
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | |
Flexitouch system |
|
| 91 | % |
| 86 | % |
|
| |
| 91 % | |
| 92 % | |
| | | | |
Entre/Actitouch systems |
|
| 9 | % |
| 14 | % |
|
|
| |
| 9 % | |
| 8 % | |
| | | |
Total |
|
| 100 | % |
| 100 | % |
|
| |
| 100 % | |
| 100 % | |
| | | |
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 salesrevenues in the third and fourth quarters as a result of the year when patients having paidhave met their annual insurance deductibles, in full, thereby reducing their out-of-pocket costs for our products, and because patients often spend the remaining balances indesire to exhaust their flexible spending accounts at that time.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
20
Medicaid, or the Veterans Administration, hospitals, 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.
Cost of Goods SoldRevenue and Gross Margin
Cost of goods soldrevenue increased $1.2$4.1 million, or 20%43%, to $7.5$13.7 million forin the three months ended SeptemberJune 30, 2017,2019, compared to $6.3$9.6 million forin the three months ended SeptemberJune 30, 2016.2018. Cost of goods soldrevenue increased $4.8$8.1 million, or 31%48%, to $20.2$25.1 million forin the ninesix months ended SeptemberJune 30, 2017,2019, compared to $15.4$17.0 million forin the ninesix months ended SeptemberJune 30, 2016.2018. The increase in cost of goods sold for each of the three and nine months ended September 30, 2017 compared to the samerevenue in both periods in 2016 was primarily attributable to an increase in the number of Flexitouch systems sold and rented, as well as additional manufacturing headcount to support increased volumes. Additionally, cost of rental revenue increased due to the adoption of ASC 842, whereby rental revenue and cost of rental revenue are recognized upon the lease commencement date.
GrossSales gross margin was 73%70% of sales revenue in each of the three and six months ended June 30, 2019, compared to 72% of sales forrevenue in each of the three and six months ended SeptemberJune 30, 2017 and 2016, respectively. Gross2018. Rental gross margin was 73%67% and 69% of rental revenue in the three and six months ended June 30, 2019, respectively, compared to 70% and 71% of rental revenue in the three and six months ended June 30, 2018, respectively. The gross margin decreases were primarily attributable to negative pricing effects related to the
27
new large private insurer contract that became effective in July 2018, the composition of sales for both ofmix by payer and by product in comparison to the nine months ended September 30, 2017prior year and 2016.amortization expense related to the assets licensed from Sun Scientific, Inc. in October 2018.
Sales and Marketing Expenses
Sales and marketing expenses increased $1.9$4.0 million, or 22%27%, to $10.9$18.4 million forin the three months ended SeptemberJune 30, 2017,2019, compared to $9.0$14.5 million forin the three months ended SeptemberJune 30, 2016. This2018. The increase was largelyprimarily driven by a $0.6 million increase in variable sales compensation, a $0.5$3.0 million increase in personnel-related compensation expensesexpense due to increased sales and marketing headcount, and $0.2including $0.3 million of incremental stock-based compensation expense. In addition, other sales and marketing expenses increased $0.6$1.0 million, due todriven by increased spending associated with field sales meetings, travel consulting, recruitment and training expenses, as well as increasedentertainment, recruiting and patient training costs.expenses.
Sales and marketing expenses increased $7.8$8.8 million, or 33%, to $31.7$35.8 million forin the ninesix months ended SeptemberJune 30, 2017,2019, compared to $23.9$27.0 million forin the ninesix months ended SeptemberJune 30, 2016.2018. The increase was primarily driven by a $2.0$6.3 million increase in personnel-related compensation expensesexpense due to increased sales and marketing headcount, a $1.9including $0.8 million increase in variable sales compensation and $0.8 millionof incremental stock-based compensation expense. In addition, other sales and marketing expenses increased $3.1$2.5 million, due todriven by increased spending associated with field sales meetings, travel consulting, recruitment, and training expenses, as well as increasedentertainment, recruiting and patient training costs.expenses.
Research and Development Expenses
Research and development (“R&D”) expenses decreased $0.1 million, or 4%, to $1.2 million in the three months ended June 30, 2019, compared to $1.3 million in the three months ended June 30, 2018. R&D expenses decreased $0.2 million, or 13%8%, to $2.5 million in the six months ended June 30, 2019, compared to $2.7 million in the six months ended June 30, 2018. The decreases in both periods were primarily attributable to the timing of clinical studies projects.
Reimbursement, General and Administrative Expenses
Reimbursement, general and administrative expenses increased $1.3 million, or 18%, to $8.8 million in the three months ended June 30, 2019, compared to $7.5 million in the three months ended June 30, 2018. This increase was primarily attributable to a $1.0 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer development and corporate functions, including $0.1 million of incremental stock-based compensation expense. The increase in reimbursement, general and administrative expenses was also attributable to a $0.2 million increase in professional fees, legal expenses, facilities and depreciation, as well as $0.1 million in legal expenses specifically related to the defense of the ongoing lawsuit described in “Legal Proceedings” in this report.
Reimbursement, general, and administrative expenses increased $3.4 million, or 23%, to $18.2 million in the six months ended June 30, 2019, compared to $14.8 million in the six months ended June 30, 2018. This increase was primarily attributable to a $2.2 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer development and corporate functions, including $0.9 million of incremental stock-based compensation expense. The increase in reimbursement, general and administrative expenses was also attributable to a $0.9 million increase in professional fees, legal expenses, facilities and depreciation, as well as $0.2 million in legal expenses specifically related to the defense of the ongoing lawsuit described in “Legal Proceedings” in this report.
Other Income, Net
Other income, net, was $0.2 million and $0.1 million for the three months ended June 30, 2019 and 2018, respectively, and $0.3 million and $0.2 million for the six months ended June 30, 2019 and 2018, respectively. The increases in other income in both periods were primarily due to the interest income realized on marketable securities.
28
Income Taxes
We recorded an income tax expense of $0.4 million and an income tax benefit of $1.1 million for the three months ended SeptemberJune 30, 2017, compared to $1.3 million for the three months ended September 30, 2016. The decrease primarily related to a decline in personnel-related expenses.
R&D expenses increased $0.4 million, or 12%, to $3.7 million for the nine months ended September 30, 2017, compared to $3.3 million for the nine months ended September 30, 2016. The increase in R&D expenses was due to a $0.2 million increase in personnel-related expenses2019 and a $0.2 million increase in product development and consulting expense.
Reimbursement, General and Administrative Expenses
Reimbursement, general and administrative expenses increased $2.5 million, or 48%, to $7.6 million for the three months ended September 30, 2017, compared to $5.1 million for the three months ended September 30, 2016. This increase was primarily attributable to an increase of $0.9 million in professional fees including legal, accounting and audit expenses, including approximately $0.5 million of expenses associated with the secondary offering of shares of our common stock by certain selling stockholders in September 2017, which expenses we paid on behalf of the selling stockholders pursuant to an investors’ rights agreement. Additionally, the increase in reimbursement, general and administrative expenses included an increase of $0.8 million related to accrued sales and use and franchise taxes, a $0.4 million increase in personnel-related expenses resulting from increased headcount in our reimbursement operations, payer relations, and corporate functions, and a $0.1 million increase in stock-based compensation expense.
Reimbursement, general and administrative expenses increased $7.3 million, or 59%, to $19.8 million for the nine months ended September 30, 2017, compared to $12.5 million for the nine months ended September 30, 2016. The
21
increase in reimbursement, general and administrative expenses for the nine months ended September 30, 2017 was primarily attributable to a $2.0 million increase in personnel-related expenses resulting from increased headcount in our reimbursement operations, payer relations, and corporate functions, an increase of $1.9 million in professional fees including legal, accounting and audit expenses associated with public company requirements and $0.5 million of expenses associated with the September 2017 secondary offering, a $1.4 million increase in stock-based compensation expense and an increase of $1.0 million related to accrued sales and use and franchise taxes.
Other Income, Net
Other income was $85,000 and $10,000 for the three months ended September 30, 2017 and 2016, respectively, and $0.2 million and $20,000 for the nine months ended September 30, 2017 and 2016,2018, respectively. The increase in other income in both periods was due to investment income earned on our invested capital derived from our initial public offering proceeds.
Income Taxes
We recorded an income tax benefit of $0.1$2.7 million and income tax expense of $0.5$2.8 million for the threesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. The current periodprimary driver of the changes in our income tax expense/benefit in both periods was primarily due to a significant increasedecrease in the tax benefits related to tax-deductible share-based compensation activity recognized in the current quarterproportionate to pre-tax book income as compared to the previousprior year's reporting period. Significant tax deductions resulted from windfall benefits with respect to the vesting of restricted stock units, excess tax benefits associated with exercises of non-qualified stock options, and disqualifying dispositions of incentive stock options and ESPP shares. These income tax benefits in the current reporting period resulted in a significant increase in our earnings per share for the period.
We recorded an income tax benefit of $4.5 million and income tax expense of $0.5 million for the nine months ended September 30, 2017 and 2016, respectively. The current period tax benefit was primarily due to a significant increase in tax benefits related to tax-deductible share-based compensation activity as compared to the previous reporting period. This activity included vesting of restricted stock awards and restricted stock units, excess tax benefits associated with exercises of non-qualified stock options, and disqualifying dispositions of incentive stock options and ESPP shares. These income tax benefits in the current year resulted in a significant increase in our earnings per share for the nine months ended September 30, 2017.
Liquidity and Capital Resources
Cash Flows
At SeptemberJune 30, 2017,2019, our principal sources of liquidity were cash and cash equivalents of $19.7$25.0 million, marketable securities of $22.0$20.4 million and net accounts receivable of $14.6 million.$24.8 million, and the borrowing capacity available under our Credit Agreement.
The following table summarizes our cash flows for the periods indicated:
|
|
|
|
|
|
|
| ||||||
|
| Nine Months Ended |
| ||||||||||
|
| September 30, |
| ||||||||||
| | | | | | | |||||||
| | Six Months Ended | |||||||||||
| | June 30, | |||||||||||
(In thousands) |
| 2017 |
| 2016 |
| | 2019 | | 2018 | ||||
Net cash provided by (used in): |
|
|
|
|
|
|
| | | | | | |
Operating activities |
| $ | 33 |
| $ | 4,336 |
|
| $ | 851 | | $ | (1,399) |
Investing activities |
|
| (13,193) |
|
| (542) |
| | | 3,714 | | | (5,445) |
Financing activities |
|
| 2,112 |
|
| 28,440 |
| | | 376 | | | 196 |
Net (decrease) increase in cash and cash equivalents |
| $ | (11,048) |
| $ | 32,234 |
| ||||||
Net increase (decrease) in cash and cash equivalents |
| $ | 4,941 | | $ | (6,648) |
Net Cash Provided by
Operating Activities
Net cash provided by operating activities during the ninesix months ended SeptemberJune 30, 20172019, was $33,000. This source of cash was primarily$0.9 million, resulting from net income of $3.6$4.3 million and non-cash net income adjustments of $4.1$5.3 million, including $3.1which were offset by a net increase in operating assets and liabilities of $8.7 million. The non-cash net income adjustments consisted of $5.1 million of stock-based compensation expense and $1.1$1.8 million of depreciation and amortization expense, partially offset by deferred income tax changes of $1.6 million. The uses of cash related to changes in operating assets primarily consisted of increases in net investment in leases of $5.9 million, inventory of $2.0 million, income taxes receivable of $1.5 million, and increase in accounts receivable of $1.2 million. The changes in operating liabilities consisted of increases in accounts payable of $1.6 million and accrued expense of $0.5 million, partially offset by a decrease in accrued payroll and related taxes of $0.4 million.
Net cash used in operating activities during the six months ended June 30, 2018, was $1.4 million, resulting from net income of $2.5 million and non-cash net income adjustments of $5.0 million, which were more than offset by a net increase in operating assets and liabilities of $8.9 million. The non-cash net income adjustments primarily consisted of $3.3 million of stock-based compensation expense and $1.7 million of depreciation and amortization expense. This source was partially offset by a $7.7 million increaseThe changes in net operating assets and liabilities were primarily relateddue to increasesa $5.4 million increase in inventories, associated with the commercial launch of our Flexitouch Plus system, and a $3.2 million increase in income taxes receivable, of $5.6 million and inventory of $3.8 million. The increase in income taxes
22
receivable was a result ofdriven by the significantcurrent period tax benefits recognized in the periodbenefit associated with tax-deductible share-baesdstock-based compensation activity. The increase in inventory was driven largely by the increased sales volume as well as purchases associated with product development and new product introductions.
Investing Activities
Net cash provided by operatinginvesting activities during the ninesix months ended SeptemberJune 30, 20162019, was $4.3 million. This source$3.7 million, primarily consisting of cash primarily resulted from$5.6 million in net income of $0.5 million, amarketable securities activity partially offset by $1.8 million decrease in net operating assetspurchases of product tooling and liabilities, including a $1.7 million increase in accounts payable on increased inventory purchasescomputer and other operating expenses,manufacturing equipment, leasehold improvements and $2.0 millionfurniture and fixtures.
29
Net Cash Used in Investing Activities
Net cash used in investing activities during the ninesix months ended SeptemberJune 30, 20172018, was $13.2$5.4 million, consisting primarily of $11.1$2.8 million in net purchases of marketable securities, $0.9 million in purchases of rental and $2.0demonstration equipment, $0.9 million related to the acquisition of patents and other intangible assets and $0.8 million in purchases of product tooling computer and manufacturing equipment, and leasehold improvements.
Net cash used in investing activities during the nine months ended September 30, 2016 was $0.5 million, consisting primarily of purchases of product tooling, computer and manufacturing equipment.
Net Cash Provided by Financing Activities
Net cash provided by financing activities during the ninesix months ended SeptemberJune 30, 20172019, was $2.1$0.4 million, consisting of proceeds from the issuance of common stock under the ESPP of $2.2$1.9 million and exercises of common stock options of $1.5 million, partially offset by $3.0 million in taxes paid for the net share settlement of restricted stock units.
Net cash provided by financing activities during the six months ended June 30, 2018, was $0.2 million, consisting of proceeds from the issuance of common stock under the ESPP of $1.4 million and proceeds from exercises of common stock options and warrants of $0.7$0.6 million, partially offset by the purchase of treasury stock to fund taxes from restricted stock award vesting of $0.5$1.8 million andin taxes paid for the net share settlement of stock-settled restricted stock unitsunits.
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, and a Waiver and Second Amendment dated March 25, 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 $0.3 million.
Net cash provided by financing activities duringcertain conditions, we may increase the nine months ended September 30, 2016 was $28.4 million, generated by gross proceedsamount of $41.2 million from our initial public offering, partially offset by $8.2the revolving loans available under the Credit Agreement and/or add one or more term loan facilities in an amount not to exceed an incremental $25.0 million in paymentsthe aggregate, such that the total aggregate principal amount of accrued dividendsloans available under the Credit Agreement (including under the revolving credit facility) does not exceed $35.0 million. As of June 30, 2019, and the date on preferred stockwhich we filed this report, we did not have any outstanding borrowings and $4.8 million of underwriting discounts and expenses associatedwere in compliance with all financial covenants under the initial public offering.
Credit Line
At December 31, 2016 we had a $2.0 million line of credit with a bank that bore interest basedAgreement. For additional information on the prime rate. There was no outstanding balance onCredit Agreement, see Note 9 – “Credit Agreement” to the line of credit as of December 31, 2016.The line of credit expired on May 11, 2017, and there was no outstanding balance on the line as of that date.condensed consolidated financial statements in this report.
Adequacy of Capital Resources
Our future capital requirements may vary significantly from those now planned and will depend on many factors, including:
| sales and marketing resources needed to further penetrate our market; |
| expansion of our operations domestically and/or internationally; |
|
|
| costs associated with clinical research activities; |
| costs to develop and implement new products; and |
| use of capital for acquisitions or licenses, if any. |
23
Historically, we have experienced increases in our expenditures consistent with the growth in our revenues, operations and personnel, and we anticipate that our expenditures will continue to increase as we expand our business.
We believe our cash, cash equivalents, marketable securities and any cash flows from operations together with the Credit Agreement will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months. We expect continued increased expenses in connection with meeting our obligations as a public company.
30
Inflation and changing prices did not have a material effect on our business during the ninesix months ended SeptemberJune 30, 2017,2019, and we do not expect that inflation or changing prices will materially affect our business infor at least the foreseeable future.next twelve months.
In August 2017, we filed a shelf registration statement on Form S-3 with the SEC. Under the shelf registration statement, we may offer and sell from time to time up to $200$200.0 million of common stock, preferred stock, debt securities, warrants, rights or units. The shelf registration statement also registered for resale from time to time up to 5,703,534 shares of our common stock held by the selling stockholders named therein. In September 2017, certain of the selling stockholders completed a secondary offering of 3,795,000 shares of our common stock at a public offering price of $33.00 per share. We did not receive any proceeds from the sale of the shares by the selling stockholders.
Contractual and Commercial Commitments Summary
Our contractual obligations and commercial commitments as of SeptemberJune 30, 20172019, are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
|
| Payments Due By Period |
| ||||||||||||||||||||||||||||
|
|
|
| Less Than |
|
|
|
|
| More Than |
| ||||||||||||||||||||
| | | | | | | | | | | | | | | | ||||||||||||||||
| | Payments Due By Period | |||||||||||||||||||||||||||||
|
| |
| Less Than |
| |
| |
| More Than | |||||||||||||||||||||
(In thousands) |
| Total |
| 1 Year |
| 1-3 Years |
| 3-5 Years |
| 5 Years |
|
| Total |
| 1 Year |
| 1-3 Years |
| 3-5 Years |
| 5 Years | ||||||||||
Operating lease obligations (1) |
| $ | 3,084 |
| $ | 807 |
| $ | 1,557 |
| $ | 720 |
| $ | — |
| |||||||||||||||
Purchase commitments (2) |
|
| 15,719 |
|
| 15,719 |
|
| — |
|
| — |
|
| — |
| |||||||||||||||
Purchase commitments (1) | | $ | 46,386 | | $ | 46,386 | | $ | — | | $ | — | | $ | — | ||||||||||||||||
Operating lease obligations (2) | | | 3,558 | | | 1,423 | | | 1,504 | | | 631 | | | — | ||||||||||||||||
Future product royalties (3) | | | 2 | | | 2 | | | — | | | — | | | — | ||||||||||||||||
Total |
| $ | 18,803 |
| $ | 16,526 |
| $ | 1,557 |
| $ | 720 |
| $ | — |
| | $ | 49,946 | | $ | 47,811 | | $ | 1,504 | | $ | 631 | | $ | — |
(1) |
|
(2) | We currently lease approximately 52,000 square feet of office space |
(3) |
|
|
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt. Additionally, we are not a party to any derivative contracts or synthetic leases.
Recent Accounting Pronouncements
Refer to Note 1 - “Nature3 – “Summary of Operations and BasisSignificant Accounting Policies” of Presentation” of ourthe condensed consolidated financial statements contained in this report for a description of recently issued accounting pronouncements that are applicable to our business.
JOBS Act
We arePrior to December 31, 2018, we were an “emerging growth company” as defined by the JOBS Act. The JOBSJumpstart Our Business Startups Act providesof 2012 (the “JOBS Act”). As a result, we were eligible to take advantage of certain exemptions from various reporting requirements that an are applicable to other public companies that are not
31
emerging growth company cancompanies. We elected to take advantage of the extended transition period for complying withadopting new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards that have different effective dates for public and private companies until such time as those standards would otherwise apply to private companies. We have elected to avail ourselvesHowever, as of this exemptionthe last business day of our second fiscal quarter of 2018, the market value of our common stock that was held by non-affiliates exceeded $700.0 million, and as a result, our financial statements may not be comparablewe no longer qualified as an emerging growth company as of December 31, 2018 and are no longer able to take advantage of certain exemptions including, the financial statements of issuers who are required to comply with the effective datesextended transition period for adopting 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.
24
Subject to certain conditions, as an emerging growth company, we are relying on certain of the exemptions and reduced reporting requirements of the JOBS Act, including without limitation,our exemption from providing an auditor'sour auditor’s attestation report on our system of internal controlscontrol over financial reporting, pursuant to Section 404(b) ofwhich was included for the Sarbanes-Oxley Act of 2002 and from complying with any requirement that may be adopted byfirst time our Annual Report on Form 10-K for the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an emerging growth company until the earliest of: (a) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; (b) the last day of 2021; (c) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (d) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.ended December 31, 2018.
Critical Accounting Policies and Estimates
A “critical accounting policy” is one that is both important to the portrayal of our financial condition and results and requires management’s most subjective or complex judgments, often as a result of the need to make estimates about the effect of items that are inherently uncertain. For additional information, please see the discussion of our significant accounting policies under “Critical Accounting Policies and Significant Estimates”Estimates” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2016.2018.
Item 3. Quantitative and Qualitative Disclosures aboutAbout Market Risk
Interest RateFor a discussion on our market risks, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,
We are exposed to market risk from changes in interest rates, primarily related to our investment activities. The principal objectives of our investment activities are to preserve principal, provide liquidity and maximize income consistent with minimizing risk of material loss. The recorded carrying amounts of cash and cash equivalents approximate fair value due to their short maturities. Our interest income is sensitive to changes in the general level of interest rates in the United States, particularly since our investments are generally short-term in nature. Based on the nature of our short-term investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our portfolio.
Inflation
Inflationary factors, such as increases” included in our cost of goods sold, sales and marketing expenses and reimbursement expenses, may adversely affect our operating results. Although we do not believe that inflation has had a material impactAnnual Report on our financial condition or results of operations to date, a high rate of inflation inForm 10-K for the future may have an adverse effect on our ability to maintain and increase our gross margin, and on our sales and marketing and reimbursement expenses as a percentage of our revenues if the selling prices of our products do not increase as much or more than these increased costs.
Credit Risk
As of September 30, 2017 andyear ended December 31, 2016, our cash, cash equivalents and marketable securities were maintained with two financial institutions in the United States. We have reviewed the financial statements of these institutions and believe they have sufficient assets and liquidity to conduct their operations in the ordinary course of business with little or no credit risk to us.
Our accounts receivable primarily relate to revenues from the sale of our products to patients in the United States. As of September 30, 2017 and 2016, our accounts receivable were $17.4 million and $14.7 million, respectively. We had accounts receivable from three insurance companies representing approximately 28%, 17% and 6% of accounts receivable as of September 30, 2017, and we had accounts receivable from three insurance companies representing approximately 23%, 12% and 6% of accounts receivable as of September 30, 2016.
25
Foreign Currency Risk
Our business is conducted in U.S. dollars and international transactions2018. There have been minimal. As we begin building relationships to commercialize our products internationally, our results of operations and cash flows may become increasingly subject tono material changes in foreign exchange rates.since December 31, 2018.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of SeptemberJune 30, 2017.2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of SeptemberJune 30, 2017,2019, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There werewas no material changeschange in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that occurred during the three monthsquarter ended SeptemberJune 30, 20172019 that havehas materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting.
2632
PART II—OTHER INFORMATION
From time to time, we may beare subject to various claims and legal proceedings arising in the ordinary course of business. We are not currently a party to any legal proceedings that, in the opinion of our management, are likely to have a material adverse effect on our business. Regardless of outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.
On February 13, 2019, we were served with a sealed amended complaint venued in the United States District Court in the Southern District of Texas, Houston Division, captioned United States ex rel Veterans First Medical Supply, LLC vs. Tactile Medical Systems Technology, Inc., Case No. 18-2871, which had been filed on January 23, 2019. The complaint was unsealed on March 20, 2019. The complaint is a qui tam action on behalf of the United States brought by one of our competitors. The United States has declined to intervene in this action. The complaint alleges that we violated the Federal Anti-Kickback Statute claiming that we submitted false claims and made false statements in connection with the Medicare and Medicaid programs, and that we engaged in unlawful retaliation in violation of the Federal False Claims Act. The complaint seeks damages, statutory penalties, attorneys’ fees, treble damages and costs. We filed a motion to dismiss on April 5, 2019. This motion is currently pending decision. We believe that the allegations in the lawsuit are without merit and we intend to continue to vigorously defend against the lawsuit.
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016,2018, which could materially affect our business, financial condition or future results. Except as set forth below, thereThere have been no material changes in our risk factors from those disclosed in that report. The following risk factors are added:
Healthcare reform measures could hinder or prevent the commercial success of our products and product candidates.
In the United States, there have been, and we expect there will continue to be, a number of legislative and regulatory changes to the healthcare system that could affect our future revenues and profitability and the future revenues and profitability of our customers. Federal and state lawmakers regularly propose and, at times, enact legislation that results in significant changes to the healthcare system, some of which are intended to contain or reduce the costs of medical products and services. The new presidential administration and U.S. Congress have sought, and we expect that they will continue to seek, to modify, repeal, or otherwise invalidate all, or certain provisions of, the Patient Protection and Affordable Care Act and Health Care Education Reconciliation Act (the “Affordable Care Act”). There is still uncertainty with respect to the impact that the current administration and legislative action may have, if any, and any changes will likely take time to unfold and could have an impact on coverage and reimbursement for healthcare items and services covered by plans that were authorized by the Affordable Care Act. Such uncertainty and any changes could negatively impact our ability to successfully commercialize our products or product candidates, and could result in reduced demand for our products and additional pricing pressures.
We may be adversely affected by natural disasters and other catastrophic events, and by man-made problems such as terrorism, that could disrupt our business operations.
Natural disasters or other catastrophic events may cause damage or disruption to our operations, including causing delays in completing sales, continuing production or performing other critical functions of our business, which could have an adverse effect on our business, operating results and financial condition. Our business operations are subject to interruption by natural disasters, fire, power shortages, pandemics, and other events beyond our control. In addition, acts of terrorism and other geo-political unrest could cause disruptions in our business or the businesses of our partners or the economy as a whole. In the event of a natural disaster, including a major earthquake, blizzard or hurricane, or a catastrophic event such as a fire, power loss, or telecommunications failure, we may be unable to continue our operations for a period of time in the affected area, which could have an adverse effect on our future operating results. For example, recent and impending hurricanes, such as Hurricane Harvey and Hurricane Irma, may disrupt orders for our products and our ability to fulfill orders for a period of time.
We may be subject to liabilities related to state income, sales and use taxes, which could adversely affect our financial condition and results of operations and could decrease demand for our products.
State income tax and sales and use tax laws, statutes, rules and regulations vary greatly by jurisdiction and are complex and subject to uncertainty. We are in the process of reviewing the various requirements related to these types of taxes, but at this time we cannot predict the outcome of that review. If it is determined that certain of these tax rules apply to us, we could be required to pay substantial tax amounts, and significant penalties and interest for past amounts that may have been due, in addition to taxes going forward. These tax assessments, penalties and interest, and future requirements, may adversely affect our financial condition and results of operations. In addition, the imposition of sales and use taxes on our products going forward would effectively increase the cost of our products to our customers and may adversely affect demand for our products.
27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Securities
(a) | Issuances of Preferred Stock |
None.
(b) | Issuances of Common Stock |
None.
Use of Proceeds from Registered Securities
On August 2, 2016, we issued and sold 4,120,000 shares of our common stock in the initial public offering at a public offering price of $10.00 per share, for aggregate gross proceeds of $41.2 million. All of the shares issued and sold in the initial public offering were registered under the Securities Act of 1933, as amended, pursuant to a Registration Statement on Form S-1 (File No. 333-209115), which was declared effective by the SEC on July 27, 2016. The offering terminated on August 2, 2016.
TheWe received net proceeds from the initial public offering proceeds to us,of approximately $35.4 million, after deducting underwriting discounts ofand approximately $2.9 million andof transaction expenses. In connection with the closing of the initial public offering, expenses paid by us totaling approximately $2.9 million, were approximately $35.4 million.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. No offering expenses were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning 10.0%10% or more of any class of our equity securities or to any other affiliates. We also paid $8.2 million in cumulative accrued dividends to our Series A preferred stockholders from the issuance proceeds.
33
At SeptemberJune 30, 2017,2019, the net proceeds from our initial public offering were held in a diversified portfolio of bank deposits, government money market funds, government securities (U.S. Treasury and U.S. government agency securities), and high-grade short-term corporate bonds. All investments were in compliance with our Investment Policy and are highly liquid, with liquidity and capital preservation being the primary investment objectives. There has been no material change in our planned uses of the net proceeds from those described in the Prospectus dated July 27, 2016.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Notapplicable.
Not applicable.
Item 5. Other Information.
None.
None.
The exhibits filed as part of this Quarterly Report on Form 10-Q are set forth on the Exhibit Index below.
2834
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Exhibit |
| Description of Exhibit |
| Incorporated by Reference |
| Filed | ||||||||||||||||||
|
|
|
| Form |
| File Number |
| Date of Filing |
| Exhibit |
|
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
| | | | | | | | | | | | | ||||||||||||
| | | | Incorporated by Reference | | | ||||||||||||||||||
Exhibit | | | | | | File | | |
| Exhibit |
| Filed | ||||||||||||
Number | | Description of Exhibit | | Form |
| Number |
| Date of Filing | | Number | | Herewith | ||||||||||||
3.1 |
|
| S-1 |
| 333-209115 |
| 06/09/2016 |
| 3.1 |
|
| | Amended and Restated Certificate of Incorporation, as amended through May 9, 2019 | | 8-K | | 001-37799 | | 05/09/2019 | | 3.2 | | | |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
3.2 |
|
| S-1 |
| 333-209115 |
| 05/06/2016 |
| 3.2 |
|
| | | 8-K | | 001-37799 | | 05/09/2019 | | 3.3 | | | ||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
4.1 |
|
| S-3 |
| 333-220132 |
| 08/23/2017 |
| 4.6 |
|
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
4.2 |
|
| S-3 |
| 333-220132 |
| 08/23/2017 |
| 4.7 |
|
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
| | | | | | | | | | | | | ||||||||||||
10.1 | | Letter Agreement between Tactile Systems Technology, Inc. and Mary Thompson, dated July 16, 2019 | | 8-K | | 001-37799 | | 07/22/2019 | | 10.1 | | | ||||||||||||
| | | | | | | | | | | | | ||||||||||||
31.1 |
|
|
|
|
|
|
|
|
|
| X | | | | | | | | | | | X | ||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
| | | | | | | | | | | | | ||||||||||||
31.2 |
|
|
|
|
|
|
|
|
|
| X | | | | | | | | | | | X | ||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
| | | | | | | | | | | | | ||||||||||||
32.1 |
|
|
|
|
|
|
|
|
|
| X | | | | | | | | | | | X | ||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
| | | | | | | | | | | | | ||||||||||||
32.2 |
|
|
|
|
|
|
|
|
|
| X | | | | | | | | | | | X | ||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
| | | | | | | | | | | | | ||||||||||||
101.1 |
| The following condensed consolidated financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, formatted in XBRL: (i) Balance Sheets (unaudited), (ii) Statements of Operations (unaudited), (iii) Statements of Comprehensive Income (unaudited); (iv) Statements of Stockholders’ Equity (Deficit) (unaudited), (v) Statements of Cash Flows (unaudited), and (vi) Notes to the Condensed Consolidated Financial Statements. |
|
|
|
|
|
|
|
|
| X | | The following condensed consolidated financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, formatted in Inline XBRL: (i) Balance Sheets (unaudited), (ii) Statements of Operations (unaudited), (iii) Statements of Comprehensive Income (unaudited); (iv) Statements of Stockholders’ Equity (unaudited), (v) Statements of Cash Flows (unaudited), and (vi) Notes to the Condensed Consolidated Financial Statements. | | | | | | | | | | X |
| | | | | | | | | | | | | ||||||||||||
104.1 | | The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, formatted in Inline XBRL | | | | | | | | | | X | ||||||||||||
| | | | | | | | | | | | |
2935
SIGNATURES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | ||||
| |||||
Tactile Systems Technology, Inc. | |||||
| | | |||
Date: | | By: | /s/ | ||
|
| ||||
| Chief Financial Officer | ||||
| (Principal financial and accounting officer) |
3036