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 endedended: September 30, 20172022
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 | 3701 Wayzata Blvd, Suite 300 | 41-1801204 |
incorporation or organization) | Minneapolis, Minnesota55416 |
Identification No.) |
| (Address and zip code of principal executive offices) |
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| (612) 355-5100 |
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| (Registrant’s telephone number, including area code) |
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(612) 355-5100
(Registrant’s Telephone Number, Including Area Code)Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, Par Value $0.001 Per Share | TCMD | The Nasdaq Stock Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒☑ No ☐◻
Indicate by check mark whether the registrant has submitted electronically 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.
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Large accelerated filer | ☑ | | Accelerated filer | ◻ | | Non-accelerated filer | ◻ | |||
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| Smaller reporting company | ☐ | ||||||
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Emerging growth company |
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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 17,701,78620,154,703 shares of common stock, $0.001 par value $0.001 per share, outstanding.
were outstanding as of November 4, 2022.
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Forward-Looking Information
All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business, operations and financial performance and condition, are forward-looking statements. In some cases, you can identify forward-looking statements by the following words: "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "might," "target," "ongoing," "plan," "potential," "predict," "project," "should," "target," "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:
| the impacts of the COVID-19 pandemic on our business, financial condition and results of operations, and our inability to mitigate such impacts; |
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● | loss or retirement of key executives, including prior to identifying a successor; |
● | adverse economic conditions or intense competition; |
● | loss of a key supplier; |
● | entry of new competitors and products; |
● | adverse federal, state and local government regulation; |
● | technological obsolescence of our |
| technical problems with our research and products; |
● | our ability to |
| our ability to |
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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, 20162021, and in this Quarterly Report on Form 10-Q. We cannot assure you that the forward-looking statements in this report will prove to be accurate and therefore you are encouraged not to place undue reliance on forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. You are urged to carefully review and consider the various disclosures made by us in this report and in other filings with the Securities and Exchange Commission (the “SEC”) that advise of the risks and factors that may affect our business. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we may make.
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3
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.Statements
| | | | | | |
Tactile Systems Technology, Inc. | ||||||
Condensed Consolidated Balance Sheets | ||||||
(Unaudited) | ||||||
|
| September 30, |
| December 31, | ||
(In thousands, except share and per share data) |
| 2022 |
| 2021 | ||
Assets | | | | | | |
Current assets | | | | | | |
Cash and cash equivalents | | $ | 23,426 | | $ | 28,229 |
Accounts receivable | |
| 51,814 | |
| 49,478 |
Net investment in leases | |
| 15,052 | |
| 12,482 |
Inventories | |
| 23,020 | |
| 19,217 |
Prepaid expenses and other current assets | |
| 3,484 | |
| 4,141 |
Total current assets | |
| 116,796 | |
| 113,547 |
Non-current assets | | | | | | |
Property and equipment, net | |
| 6,677 | |
| 6,750 |
Right of use operating lease assets | |
| 21,975 | |
| 23,984 |
Intangible assets, net | |
| 51,308 | |
| 54,081 |
Goodwill | | | 31,063 | | | 31,063 |
Accounts receivable, non-current | |
| 17,703 | |
| 12,847 |
Other non-current assets | |
| 3,004 | |
| 1,998 |
Total non-current assets | |
| 131,730 | |
| 130,723 |
Total assets | | $ | 248,526 | | $ | 244,270 |
Liabilities and Stockholders' Equity | | | | | | |
Current liabilities | | | | | | |
Accounts payable | | $ | 11,171 | | $ | 5,023 |
Note payable | | | 2,968 | | | 2,960 |
Earn-out, current | | | 10,000 | | | 3,250 |
Accrued payroll and related taxes | |
| 13,575 | |
| 12,139 |
Accrued expenses | |
| 6,953 | |
| 5,262 |
Income taxes payable | |
| 11 | |
| 16 |
Operating lease liabilities | |
| 2,486 | |
| 2,506 |
Other current liabilities | |
| 8,497 | |
| 3,305 |
Total current liabilities | |
| 55,661 | |
| 34,461 |
Non-current liabilities | | | | | | |
Revolving line of credit, non-current | | | 24,904 | | | 24,857 |
Note payable, non-current | | | 21,721 | | | 26,933 |
Earn-out, non-current | | | 7,098 | | | 2,950 |
Accrued warranty reserve, non-current | |
| 2,892 | |
| 3,108 |
Income taxes payable, non-current | |
| 298 | |
| 348 |
Operating lease liabilities, non-current | | | 21,506 | |
| 23,354 |
Deferred income taxes | | | 49 | | | 32 |
Total non-current liabilities | |
| 78,468 | |
| 81,582 |
Total liabilities | |
| 134,129 | |
| 116,043 |
| | | | | | |
Stockholders’ equity: | | | | | | |
Preferred stock, $0.001 par value, 50,000,000 shares authorized; none issued and outstanding as of September 30, 2022 and December 31, | |
| — | |
| — |
Common stock, $0.001 par value, 300,000,000 shares authorized; 20,155,704 shares issued and outstanding as of September 30, 2022; 19,877,786 shares issued and outstanding as of December 31, 2021 | |
| 20 | |
| 20 |
Additional paid-in capital | |
| 128,619 | |
| 119,962 |
(Accumulated deficit) retained earnings | |
| (14,242) | |
| 8,245 |
Total stockholders’ equity | |
| 114,397 | |
| 128,227 |
Total liabilities and stockholders’ equity | | $ | 248,526 | | $ | 244,270 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
4
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Tactile Systems Technology, Inc. | ||||||||||||
Condensed Consolidated Statements of Operations | ||||||||||||
(Unaudited) | ||||||||||||
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
(In thousands, except share and per share data) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Revenue | | | | | | | | | | | | |
Sales revenue | | $ | 55,545 | | $ | 44,460 | | $ | 147,980 | | $ | 124,215 |
Rental revenue | |
| 9,717 | |
| 8,037 | |
| 24,905 | |
| 22,114 |
Total revenue | |
| 65,262 | |
| 52,497 | |
| 172,885 | |
| 146,329 |
Cost of revenue | | | | | | | | | | | | |
Cost of sales revenue | |
| 15,476 | |
| 13,096 | |
| 41,366 | |
| 36,425 |
Cost of rental revenue | |
| 2,992 | |
| 2,433 | |
| 7,640 | |
| 6,501 |
Total cost of revenue | |
| 18,468 | |
| 15,529 | |
| 49,006 | |
| 42,926 |
Gross profit | | | | | | | | | | | | |
Gross profit - sales revenue | |
| 40,069 | |
| 31,364 | |
| 106,614 | |
| 87,790 |
Gross profit - rental revenue | |
| 6,725 | |
| 5,604 | |
| 17,265 | |
| 15,613 |
Gross profit | |
| 46,794 | |
| 36,968 | |
| 123,879 | |
| 103,403 |
Operating expenses | | | | | | | | | | | | |
Sales and marketing | |
| 26,583 | |
| 22,231 | |
| 79,335 | |
| 61,949 |
Research and development | |
| 1,581 | |
| 1,409 | |
| 4,949 | |
| 3,885 |
Reimbursement, general and administrative | |
| 16,257 | |
| 14,500 | |
| 47,369 | |
| 42,802 |
Intangible asset amortization and earn-out | | | 3,993 | | | 195 | | | 12,834 | | | 294 |
Total operating expenses | |
| 48,414 | |
| 38,335 | |
| 144,487 | |
| 108,930 |
Loss from operations | |
| (1,620) | |
| (1,367) | |
| (20,608) | |
| (5,527) |
Other expense | |
| (736) | |
| (120) | |
| (1,765) | |
| (154) |
Loss before income taxes | |
| (2,356) | |
| (1,487) | |
| (22,373) | |
| (5,681) |
Income tax (benefit) expense | |
| (77) | |
| 1,868 | |
| 114 | |
| (1,365) |
Net loss | | $ | (2,279) | | $ | (3,355) | | $ | (22,487) | | $ | (4,316) |
Net loss per common share | | | | | | | | | | | | |
Basic | | $ | (0.11) | | $ | (0.17) | | $ | (1.12) | | $ | (0.22) |
Diluted | | $ | (0.11) | | $ | (0.17) | | $ | (1.12) | | $ | (0.22) |
Weighted-average common shares used to compute net loss per common share | | | | | | | | | | | | |
Basic | | | 20,139,944 | | | 19,790,838 | | | 20,021,966 | | | 19,676,749 |
Diluted | | | 20,139,944 | | | 19,790,838 | | | 20,021,966 | | | 19,676,749 |
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 | | Deficit) | | | | ||
| | Common Stock | | Paid-In | | Retained | | | | |||||
(In thousands, except share data) |
| Shares |
| Par Value |
| Capital |
| Earnings |
| Total | ||||
Balances, June 30, 2022 | | 20,132,145 | | $ | 20 | | $ | 126,059 | | $ | (11,963) | | $ | 114,116 |
Stock-based compensation | | — | | | — | | | 2,560 | | | — | | | 2,560 |
Exercise of common stock options and vesting of performance and restricted stock units | | 23,559 | | | — | | | — | | | — | | | — |
Net loss for the period | | — | | | — | | | — | | | (2,279) | | | (2,279) |
Balances, September 30, 2022 | | 20,155,704 | | $ | 20 | | $ | 128,619 | | $ | (14,242) | | $ | 114,397 |
| | | | | | | | | | | | | | |
Balances, December 31, 2021 | | 19,877,786 | | $ | 20 | | $ | 119,962 | | $ | 8,245 | | $ | 128,227 |
Stock-based compensation | | — | | | — | | | 7,681 | | | — | | | 7,681 |
Exercise of common stock options and vesting of performance and restricted stock units | | 192,644 | | | — | | | 152 | | | — | | | 152 |
Common shares issued for employee stock purchase plan | | 85,274 | | | — | | | 824 | | | — | | | 824 |
Net loss for the period | | — | | | — | | | — | | | (22,487) | | | (22,487) |
Balances, September 30, 2022 | | 20,155,704 | | $ | 20 | | $ | 128,619 | | $ | (14,242) | | $ | 114,397 |
| | | | | | | | | | | | | | |
Balances, June 30, 2021 | | 19,782,295 | | $ | 20 | | $ | 113,601 | | $ | 19,095 | | $ | 132,716 |
Stock-based compensation | | — | | | — | | | 2,588 | | | — | | | 2,588 |
Exercise of common stock options and vesting of performance and restricted stock units | | 16,366 | | | — | | | 199 | | | — | | | 199 |
Taxes paid for net share settlement of performance and restricted stock units | | (938) | | | — | | | (42) | | | — | | | (42) |
Net loss for the period | | — | | | — | | | — | | | (3,355) | | | (3,355) |
Balances, September 30, 2021 | | 19,797,723 | | $ | 20 | | $ | 116,346 | | $ | 15,740 | | $ | 132,106 |
| | | | | | | | | | | | | | |
Balances, December 31, 2020 | | 19,492,718 | | $ | 19 | | $ | 104,675 | | $ | 20,056 | | $ | 124,750 |
Stock-based compensation | | — | | | — | | | 7,703 | | | — | | | 7,703 |
Exercise of common stock options and vesting of performance and restricted stock units | | 284,829 | | | 1 | | | 3,583 | | | — | | | 3,584 |
Taxes paid for net share settlement of performance and restricted stock units | | (21,918) | | | — | | | (1,157) | | | — | | | (1,157) |
Common shares issued for employee stock purchase plan | | 42,094 | | | — | | | 1,542 | | | — | | | 1,542 |
Net loss for the period | | — | | | — | | | — | | | (4,316) | | | (4,316) |
Balances, September 30, 2021 | | 19,797,723 | | $ | 20 | | $ | 116,346 | | $ | 15,740 | | $ | 132,106 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
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Tactile Systems Technology, Inc. | ||||||
Condensed Consolidated Statements of Cash Flows | ||||||
(Unaudited) | ||||||
| | | ||||
| | Nine Months Ended September 30, | ||||
(In thousands) |
| 2022 |
| 2021 | ||
Cash flows from operating activities | | | | | | |
Net loss | | $ | (22,487) | | $ | (4,316) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | �� | | |
Depreciation and amortization | | | 4,670 | | | 2,150 |
Deferred income taxes | | | 17 | | | (1,709) |
Stock-based compensation expense | | | 7,681 | | | 7,703 |
Loss on disposal of property and equipment and intangibles | | | 20 | | | 7 |
Change in fair value of earn-out liability | | | 10,898 | | | — |
Changes in assets and liabilities, net of acquisition: | | | | | | |
Accounts receivable | | | (2,336) | | | (408) |
Net investment in leases | | | (2,570) | | | (1,677) |
Inventories | | | (3,803) | | | (3,641) |
Income taxes | | | (55) | | | (1,181) |
Prepaid expenses and other assets | | | (349) | | | (1,133) |
Right of use operating lease assets | | | 141 | | | 588 |
Accounts receivable, non-current | | | (4,856) | | | (2,989) |
Accounts payable | | | 6,148 | | | 1,995 |
Accrued payroll and related taxes | | | 1,436 | | | (1,266) |
Accrued expenses and other liabilities | | | 6,799 | | | 2,902 |
Net cash provided by (used in) operating activities | | | 1,354 | | | (2,975) |
Cash flows from investing activities | | | | | | |
Payments related to acquisition | | | — | | | (79,829) |
Purchases of property and equipment | | | (1,731) | | | (1,221) |
Intangible assets expenditures | | | (113) | | | (187) |
Net cash used in investing activities | | | (1,844) | | | (81,237) |
Cash flows from financing activities | | | | | | |
Proceeds from issuance of note payable | | | — | | | 30,000 |
Proceeds from revolving line of credit | | | — | | | 25,000 |
Payments on note payable | | | (5,250) | | | — |
Payments of deferred debt issuance costs | | | (39) | | | (211) |
Taxes paid for net share settlement of performance and restricted stock units | | | — | | | (1,157) |
Proceeds from exercise of common stock options | | | 152 | | | 3,584 |
Proceeds from the issuance of common stock from the employee stock purchase plan | | | 824 | | | 1,542 |
Net cash (used in) provided by financing activities | | | (4,313) | | | 58,758 |
Net decrease in cash and cash equivalents | | | (4,803) | | | (25,454) |
Cash and cash equivalents – beginning of period | | | 28,229 | | | 47,855 |
Cash and cash equivalents – end of period | | $ | 23,426 | | $ | 22,401 |
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Supplemental cash flow disclosure | | | | | | |
Cash paid for interest | | $ | 1,433 | | $ | — |
Cash paid for taxes | | $ | 29 | | $ | 1,541 |
Capital expenditures incurred but not yet paid | | $ | 16 | | $ | — |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
Tactile Systems Technology, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
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|
| September 30, |
| December 31, |
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(In thousands, except share and per share data) |
| 2017 |
| 2016 |
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Assets |
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Current assets |
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Cash and cash equivalents |
| $ | 19,653 |
| $ | 30,701 |
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Marketable securities |
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| 21,993 |
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| 10,994 |
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Accounts receivable, net |
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| 14,579 |
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| 15,003 |
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Inventories |
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| 9,784 |
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| 6,554 |
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Income taxes receivable |
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| 4,768 |
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| — |
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Prepaid expenses |
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| 932 |
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| 981 |
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Total current assets |
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| 71,709 |
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| 64,233 |
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Property and equipment, net |
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| 3,353 |
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| 1,563 |
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Other assets |
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Patent costs, net |
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| 2,251 |
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| 2,394 |
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Medicare accounts receivable, long-term |
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| 2,771 |
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| 2,823 |
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Deferred income taxes |
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| 2,797 |
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| 2,785 |
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Other non-current assets |
|
| 201 |
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| 137 |
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Total other assets |
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| 8,020 |
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| 8,139 |
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Total assets |
| $ | 83,082 |
| $ | 73,935 |
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Liabilities and Stockholders’ Equity |
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Current liabilities |
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Accounts payable |
| $ | 5,485 |
| $ | 5,018 |
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Accrued payroll and related taxes |
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| 5,880 |
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| 6,692 |
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Accrued expenses |
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| 2,357 |
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| 1,193 |
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Future product royalties |
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| 26 |
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| 67 |
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Income taxes payable |
|
| — |
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| 823 |
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Other current liabilities |
|
| 218 |
|
| — |
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Total current liabilities |
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| 13,966 |
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| 13,793 |
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Long-term liabilities |
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Accrued warranty reserve, long-term |
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| 643 |
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| 503 |
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Total liabilities |
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| 14,609 |
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| 14,296 |
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Stockholders’ equity |
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Preferred stock, $0.001 par value, 50,000,000 shares authorized; none issued and outstanding as of September 30, 2017 and December 31, 2016 |
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| — |
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| — |
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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 |
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| 17 |
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Additional paid-in capital |
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| 68,114 |
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| 62,406 |
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Retained earnings (accumulated deficit) |
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| 852 |
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| (2,773) |
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Accumulated other comprehensive loss |
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| (18) |
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| (11) |
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Less: treasury stock, at cost — 26,086 shares as of September 30, 2017 |
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| (493) |
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| — |
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Total stockholders’ equity |
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| 68,473 |
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| 59,639 |
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Total liabilities and stockholders’ equity |
| $ | 83,082 |
| $ | 73,935 |
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See accompanying notes to the condensed consolidated financial statements.
3
Tactile Systems Technology, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
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| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
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(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 |
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Gross profit |
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| 20,755 |
|
| 16,353 |
|
| 54,211 |
|
| 40,647 |
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Operating expenses |
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Sales and marketing |
|
| 10,915 |
|
| 8,979 |
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| 31,726 |
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| 23,858 |
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Research and development |
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| 1,116 |
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| 1,285 |
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| 3,699 |
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| 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 manufacturermanufactures and distributor of the Flexitouch and Entre systems,distributes medical devices thatfor the treatment of patients with underserved chronic diseases at home. We provide our Flexitouch® and Entre™ systems, which help control symptoms of lymphedema, a chronic and progressive medical condition, and the Actitouch system, a medical device used to treat venous leg ulcers and chronic venous insufficiency. We providethrough our productsdirect sales force for a patient’s use in the home and sell or rent them through vascular, wound and lymphedema clinics throughout the United StatesStates.
On September 8, 2021, we acquired the assets of the AffloVest airway clearance business (“AffloVest Acquisition”) from International Biophysics Corporation (“IBC”), a privately-held company which developed and manufactured AffloVest. AffloVest is a portable, wearable vest that treats patients with chronic respiratory conditions. We sell this device through referrals from clinicians diagnosinghome medical equipment and treating lymphaticdurable medical equipment (“DME”) providers throughout the United States.
We were originally incorporated in Minnesota under the name Tactile Systems Technology, Inc. on January 30, 1995. During 2006, we established a merger corporation and vascular disorders. We dosubsequently, on July 21, 2006, merged with and into this merger corporation, resulting in our reincorporation as a Delaware corporation. The resulting corporation assumed the name Tactile Systems Technology, Inc. In September 2013, we began doing business as “Tactile Medical.”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.
Our business is affected by seasonality. In the first quarter of each year, when most patients have started a new insurance year and have not yet met their annual out-of-pocket payment obligations, we experience substantially reduced demand for our products. We typically experience higher revenue in the third and fourth quarters of the year when patients have met their annual insurance deductibles, thereby reducing their out-of-pocket costs for our products, and because patients desire to exhaust their flexible spending accounts at year end. This seasonality applies only to purchases and rentals of our products by patients covered by commercial insurance and is not relevant to Medicare, Medicaid or the Veterans Administration, as those payers either do not have plans that have declining deductibles over the course of the plan year and/or do not have plans that include patient deductibles for purchases or rentals of our products. Further, seasonality trends have been, and may continue to be, significantly different than historical trends as a result of the COVID-19 pandemic and related impacts.
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 nine months ended September 30, 20172022, are not necessarily indicative of results to be expected for the year ending December 31, 2017,2022, 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
2021.
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.
Risks and Uncertainties
Coronavirus (COVID-19)
The United States economy in general and our business specifically have been negatively affected by the COVID-19 pandemic. We have seen adverse impacts as it relates to the decline in the number of intercompany accountspatients that healthcare facilities and transactions.clinics are able to treat due to enhanced safety protocols, particularly during most of 2021 and during the first quarter of 2022. We have also seen staffing challenges, both in our organization and at the clinics we serve, as another lingering consequence of the COVID-19 pandemic. While we saw some level of recovery in the second and third quarters of 2022, ongoing consequences of the pandemic remain uncertain. There are no reliable estimates of how long the pandemic will last, whether any recovery will be sustained or will reverse course, the severity of any resurgence of COVID-19 or variant strains of the virus, the effectiveness of vaccines and attitudes towards receiving them, or what ultimate effects the pandemic will have. For that reason, we are unable to reasonably estimate the long-term impact of the pandemic on our business at this time.
EstimatesSince the onset of COVID-19, we have remained proactive to ensure we continue to adapt to the needs of our employees, clinicians and patients. We cannot assure you these changes to our processes and practices will be successful in mitigating the impact of COVID-19 on our business. We continue to evaluate and, if appropriate, will adopt other measures in the future related to the ongoing safety of our employees, clinicians and patients.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure ofto disclose contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenuesrevenue and expenses during the reporting period. Actual results could differ from those estimates.
Note 3. Summary of Significant Accounting Policies
During the nine months ended September 30, 2017 thereSignificant Accounting Policies
There were no material changes in our significant accounting policies.policies during the nine months ended September 30, 2022. 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, 20162021, for information regarding our significant accounting policies.
Recent Accounting PronouncementsPronouncement Not Yet Adopted
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,March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.”No. 2020-04, “Reference Rate Reform (Topic 848) — Facilitation of the Effect of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”), addressing the discontinuation of LIBOR, a widely used reference rate for pricing financial products. The new section will replace Section 605, “Revenue Recognition,” and creates modifications to various other revenue accounting standards for specialized transactions and industries. The sectionASU is intended to conform revenueprovide optional expedients and exceptions if certain criteria are met when accounting principles with a concurrently issued International Financial Reporting Standardsfor contracts, hedging relationships and other transactions that reference LIBOR, or another reference rate expected to reconcile previously differing treatment between U.S. practicesbe discontinued because of reference rate reform. The application and thoseadoption requirements of ASU 2020-04 are optional until December 31, 2022 and vary based on expedients elected. We have not elected any expedients to date and are currently evaluating any potential future impacts on the condensed consolidated financial statements.
9
Note 4. Acquisitions
On September 8, 2021, we entered into an Asset Purchase Agreement (“AffloVest APA”) to acquire the AffloVest airway clearance business from IBC. Under the terms of the restAffloVest APA, we agreed to pay IBC a total of up to $100.0 million for the purchase of substantially all of the world and to enhance disclosuresassets related to disaggregated revenueits branded high frequency chest wall oscillation vest therapy business, other than specifically identified excluded assets. We acquired AffloVest to further expand our position as a leader in treating patients with underserved chronic conditions in the home. The acquired assets included inventory, tooling, intellectual property, permits and approvals, data and records, and customer and supplier information. At closing, $80.0 million of the purchase price was paid, of which a total of $0.5 million was deposited into an escrow account at closing for purposes of satisfying certain post-closing purchase price adjustments and indemnification claims. Subsequent to closing, $0.2 million was returned to us as a result of working capital adjustments. The updated guidanceAffloVest acquisition was funded through a combination of cash on hand and proceeds from borrowings.
On November 4, 2022, we entered into an Amendment to the AffloVest APA (the “APA Amendment”) with IBC, which modifies the terms of the earn-out arrangement under the AffloVest APA, as follows:
● | Initial Earn-Out: The AffloVest APA provided for an initial earn-out equal to 1.5 times the amount by which the AffloVest U.S. revenues in the period from October 1, 2021 to September 30, 2022 (the “Initial Earn-Out Period”) exceed a specified amount; provided that in no event will the payment exceed $10.0 million. |
o | The APA Amendment provides that the calculated amount of the initial earn-out payment is $10.0 million, of which the Company will pay $5.0 million on or before November 28, 2022, and of which the Company will pay $5.0 million, plus an imputed interest payment of $250,000, on or before May 26, 2023. |
● | Second Earn-Out: The AffloVest APA provided for a second earn-out equal to 1.5 times the amount by which the AffloVest U.S. revenues in the period from October 1, 2022 to September 30, 2023 exceed the revenues recognized during the Initial Earn-Out Period; provided that in no event will the payment exceed $10.0 million. |
o | The APA Amendment changes the 1.5 times multiplier to 3.0 times, but still provides that in no event will the second earn-out payment exceed $10.0 million. |
The fair value of the earn-out as of the acquisition date was $6.4 million. The fair value of the earn-out, reflecting management’s estimate of the likelihood of achieving these targets, was determined by employing a Monte Carlo Simulation model. This amount and the current versus non-current allocation is effectiveremeasured at the end of each reporting period until the payment requirement ends, with any adjustments reported in income from operations (see Note 15 – “Fair Value Measurements”).
On the date of AffloVest Acquisition, we allocated the assets acquired based on an estimate of their fair values. The following table summarizes the purchase price allocation:
| | | |
(In millions) |
| Allocated Fair Value | |
Inventories | | $ | 1.6 |
Property and equipment(1) | | | — |
Intangible assets | | | 53.5 |
Goodwill | | | 31.1 |
Purchase price | | $ | 86.2 |
(1) | The purchase price included less than $0.1 million of property and equipment. |
The goodwill reflects expected synergies of combining the acquired products and customer information with our existing operations, and is deductible for interimtax purposes over 15 years.
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The following table reflects the allocation of the purchase price to the acquired intangible assets and annual reporting periods beginning on or after December 15, 2018, for private companies; this effective date is applicable for usrelated estimated useful lives:
| | | | | |
| | | | | |
(In millions) |
| Allocated Fair Value | | Estimated Useful Life | |
Customer relationships | | $ | 31.0 | | 13 years |
Developed technology | | | 13.0 | | 11 years |
Tradenames | |
| 9.5 | | Indefinite |
Total intangible assets | | $ | 53.5 | | |
The weighted-average amortization period of the acquired definite-lived intangible assets was 12.3 years.
The fair market valuations associated with the assets acquired fall within Level 3 of the fair value hierarchy, due to the JOBS Act exemption described above. Therefore, we planuse of significant unobservable inputs to further evaluatedetermine fair value. The fair value measurements were calculated using unobservable inputs, primarily using the income approach, specifically the discounted cash flow method. The amount and timing of future cash flows within our analysis was based on our due diligence models, most recent operational budgets, long-range strategic plans and anticipated impactother estimates.
Note 5. Inventories
Inventories consisted of the adoptionfollowing:
| | | | | | |
(In thousands) |
| At September 30, 2022 |
| At December 31, 2021 | ||
Finished goods | | $ | 7,060 | | $ | 8,242 |
Component parts and work-in-process | |
| 15,960 | |
| 10,975 |
Total inventories | | $ | 23,020 | | $ | 19,217 |
Note 6. Goodwill and Intangible Assets
Goodwill
In the third quarter of this updated guidance on our consolidated financial statements in future periods.
In February 2016,fiscal 2021, we completed the FASB issued ASU 2016-02, “Leases” (Topic 842), which supersedes the existing guidance for lease accounting, “Leases” (Topic 840). ASU 2016-02 requires lessees to recognize a lease liability and a right-of-use asset for all leases. Lessor accounting remains largely unchanged.AffloVest Acquisition. The amendments in this ASU are effective for interim and annual periods beginning after December 15, 2019 for private companies; this effective date is applicable to us due to the JOBS Act exemption described above. Early adoption is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial adoption, with an option to elect to use certain transition relief. We plan to further evaluate the timing and anticipated impactpurchase price of the adoption of this ASU on our consolidated financial statements in future periods.
In June 2016,AffloVest product line exceeded the FASB issued ASU No. 2016-13, “Financial Instruments — Credit Losses,” to require the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts. The ASU is effective for interim and annual periods beginning after December 15, 2020, for private companies; this effective date is applicable to us due to the JOBS Act exemption described above. Therefore, we plan to further evaluate the timing and anticipated impactnet acquisition-date estimated fair value amounts of the adoption of this ASU on our consolidated financial statements in future periods.identifiable assets acquired and the liabilities assumed by $31.1 million, which was assigned to goodwill.
Intangible Assets
Our patents and other intangible assets are summarized as follows:
9
| | | | | | | | | | | |
| | Weighted- | | At September 30, 2022 | |||||||
| | Average | | Gross | | | | | |||
| | Amortization | | Carrying | | Accumulated | | Net | |||
(In thousands) |
| Period | | Amount | | Amortization | | Amount | |||
Definite-lived intangible assets: | | | | | | | | | | | |
Patents | | 12 years | | $ | 829 | | $ | 157 | | $ | 672 |
Defensive intangible assets | | 3 years | | | 1,125 | | | 721 | | | 404 |
Customer accounts | | 1 year | | | 125 | | | 108 | | | 17 |
Customer relationships | | 12 years | | | 31,000 | | | 2,530 | | | 28,470 |
Developed technology | | 10 years | | | 13,000 | | | 1,254 | | | 11,746 |
Subtotal | | | | | 46,079 | | | 4,770 | | | 41,309 |
Unamortized intangible assets: | | | | | | | | | | | |
Tradenames | | | | | 9,500 | | | — | | | 9,500 |
Patents pending | | | | | 499 | | | — | | | 499 |
Total intangible assets | | | | $ | 56,078 | | $ | 4,770 | | $ | 51,308 |
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| | | | | | | | | | | | |
| | Weighted- | | | At December 31, 2021 | |||||||
| | Average | | | Gross | | | | | |||
| | Amortization | | | Carrying | | Accumulated | | Net | |||
(In thousands) |
| Period | | | Amount | | Amortization | | Amount | |||
Definite-lived intangible assets: | | | | | | | | | | | | |
Patents | | 12 years | | | $ | 666 | | $ | 109 | | $ | 557 |
Defensive intangible assets | | 3 years | | | | 1,125 | | | 592 | | | 533 |
Customer accounts | | 1 year | | |
| 125 | |
| 89 | |
| 36 |
Customer relationships | | 13 years | | | | 31,000 | | | 742 | | | 30,258 |
Developed technology | | 11 years | | | | 13,000 | | | 368 | | | 12,632 |
Subtotal | | | | | | 45,916 | | | 1,900 | | | 44,016 |
Unamortized intangible assets: | | | | | | | | | | | | |
Tradenames | | | | | | 9,500 | | | — | | | 9,500 |
Patents pending | | | | | | 565 | | | — | | | 565 |
Total intangible assets | | | | | $ | 55,981 | | $ | 1,900 | | $ | 54,081 |
In August 2016,Amortization expense was $1.0 million and $0.3 million for the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230) — Classification of Certain Cash Receipts and Cash Payments,” to provide clarity on how certain cash receipt and cash payment transactions are presented and classified within the statement of cash flows. The ASU is effective for interim and annual periods beginning after December 15, 2018 for private companies; this effective date is applicable 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 ASU on our consolidated financial statements in future periods.
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. Atended September 30, 2017, our cash was held primarily in checking2022 and money market accounts.
Note 2. Marketable Securities
Our investments in marketable securities are classified as available-for-sale2021, respectively, 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$2.9 million were in an unrealized gain position totaling $1,000, and marketable debt securities valued at $20.0$0.4 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).
Net pre-tax unrealized losses for marketable debt securities of $35,000 at September 30, 2017 were recorded as a component of accumulated other comprehensive loss in stockholders' equity. Marketable debt securities valued at $1.0 million were sold during the nine months ended September 30, 2017, with no resulting gain or loss.
Note 3. Patent Costs, Net
Our patents, 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 |
|
10
Amortization expense was $0.1 million for each of the three months ended September 30, 20172022 and 2016 and $0.2 million for each of the nine months ended September 30, 2017 and 2016.2021, 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) | | | |
2022 (October 1 - December 31) |
| $ | 958 |
2023 | | | 3,801 |
2024 | |
| 3,780 |
2025 | |
| 3,690 |
2026 | |
| 3,626 |
Thereafter | |
| 25,454 |
Total | | $ | 41,309 |
In the third quarter of 2022, we performed our annual goodwill impairment test utilizing both the qualitative and quantitative approach described in FASB ASU No. 2021-03, “Intangibles—Goodwill and Other (Topic 350) – Accounting Alternative for Evaluating Triggering Events. Based on the testing using the qualitative approach, it was determined that it was not more likely than not that the fair value of the reporting unit was less than the carrying value. As a result, it was not deemed necessary to proceed to the quantitative test and no impairment was recognized.
Note 4.7. Accrued Expenses
Accrued expenses consisted of the following:
| | | | | | |
(In thousands) |
| At September 30, 2022 |
| At December 31, 2021 | ||
Legal and consulting | | $ | 1,835 | | $ | 1,371 |
Warranty | | | 1,732 | | | 1,851 |
Travel | | | 918 | | | 661 |
In-transit inventory | |
| 589 | |
| 416 |
Clinical studies | | | 165 | | | 113 |
Sales and use tax | | | 110 | | | 106 |
Other | |
| 1,604 | |
| 744 |
Total | | $ | 6,953 | | $ | 5,262 |
|
|
|
|
|
|
|
|
|
| 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 |
|
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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 | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
(In thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Beginning balance | | $ | 4,818 | | $ | 5,117 | | $ | 4,959 | | $ | 4,841 |
Warranty provision | |
| 589 | |
| 624 | |
| 1,586 | |
| 2,080 |
Processed warranty claims | |
| (783) | |
| (604) | |
| (1,921) | |
| (1,784) |
Ending balance | | $ | 4,624 | | $ | 5,137 | | $ | 4,624 | | $ | 5,137 |
| | | | | | | | | | | | |
Accrued warranty reserve, current | | $ | 1,732 | | $ | 1,779 | | $ | 1,732 | | $ | 1,779 |
Accrued warranty reserve, non-current | | | 2,892 | | | 3,358 | | | 2,892 | | | 3,358 |
Total accrued warranty reserve | | $ | 4,624 | | $ | 5,137 | | $ | 4,624 | | $ | 5,137 |
Note 9. Credit Agreement
On April 30, 2021, we entered into an Amended and Restated Credit Agreement (the “Restated Credit Agreement”) with the lenders from time to time party thereto, and Wells Fargo Bank, National Association, as Administrative Agent. The Restated Credit Agreement amended and restated in its entirety our prior credit agreement.
On September 8, 2021, we entered into a First Amendment Agreement (the “Amendment”), which amends the Restated Credit Agreement (as amended by the Amendment, the “Credit Agreement”) with the lenders from time to time party thereto and Wells Fargo Bank, National Association, as administrative agent. The Amendment, among other things, adds a $30.0 million incremental term loan to the $25.0 million revolving credit facility provided by the Restated Credit Agreement. The term loan is reflected on our condensed consolidated financial statements as a note payable. The term loan and the revolving credit facility mature on September 8, 2024. The Credit Agreement provides that, subject to satisfaction of certain conditions, we may increase the amount of the revolving loans available under the Credit Agreement and/or add one or more term loan facilities in an amount not to exceed $25.0 million in the aggregate, such that the total aggregate principal amount of loans available under the Credit Agreement (including under the revolving credit facility) does not exceed $80.0 million.
Note 5. LineOn September 8, 2021, in connection with the closing of Credit — Bank
At December 31, 2016the AffloVest Acquisition, we had a $2.0borrowed the $30.0 million line of creditterm loan and utilized that borrowing, together with a bank that bore interest baseddraw of $25.0 million under the revolving credit facility and cash on hand, to fund the prime rate. There was nopurchase price.
On February 22, 2022, we entered into a Second Amendment Agreement (the “Second Amendment”), which further amended the Credit Agreement, including with respect to the financial covenants.
The principal of the term loan is required to be repaid in quarterly installments of $750,000 commencing January 7, 2022, through July 8, 2024, with the remaining outstanding balance due on September 8, 2024. Pursuant to the lineSecond Amendment, we made a mandatory principal prepayment of the term loan of $3.0 million on February 22, 2022.
As of September 30, 2022, the outstanding balance of the term loan was $24.8 million and the outstanding balance under the revolving credit asfacility was $25.0 million. As of December 31, 2016. The line of credit expired on May 11, 2017, andSeptember 30, 2022, there was no outstanding balanceavailability under our Credit Agreement.
The term loan and amounts drawn under the revolving credit facility bear interest, at our option, at a rate equal to (a) the highest of (i) the prime rate, (ii) the federal funds rate plus 0.50% and (iii) LIBOR for an interest period of one month plus 1% (the “Base Rate”) plus an applicable margin or (b) LIBOR for an interest period of
13
one, three or six months, at our option, plus the applicable margin. The applicable margin is 0.75% to 2.25% on loans bearing interest at the Base Rate and 1.75% to 3.25% on loans bearing interest at LIBOR, in each case depending on our consolidated total leverage ratio; except that, pursuant to the Second Amendment, during the period commencing on February 22, 2022 and ending on the last day of the fiscal quarter ending June 30, 2023, the applicable margin for LIBOR rate loans is 3.50%. At September 30, 2022, all outstanding borrowings were subject to interest at a rate calculated at LIBOR plus an applicable margin, for an interest rate of 5.93%. Undrawn portions of the revolving credit facility are subject to an unused line fee at a rate per annum from 0.300% to 0.375%, depending on our consolidated total leverage ratio.
Maturities of the term loan for the next three years as of September 30, 2022, are as follows:
| | | |
(In thousands) |
| Amount | |
2022 (October 1 - December 31) | | $ | 750 |
2023 | | | 3,000 |
2024 | | | 21,000 |
Total | | $ | 24,750 |
Our obligations under the Credit Agreement are secured by a security interest in substantially all of our and our subsidiaries’ assets and are also guaranteed by our subsidiaries. The Credit Agreement contains a number of restrictions and covenants, including that date.we maintain compliance with a maximum leverage ratio, a minimum fixed charge coverage ratio, a minimum consolidated EBITDA covenant, and a minimum liquidity covenant. As of September 30, 2022, we were in compliance with all financial covenants under the 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 March 2008,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 right of use (“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 Sheets.
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 Sheets, 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 eight years as of September 30, 2022.
14
We entered into a non-cancelable operating lease agreement(“initial lease”) in October 2018, for buildingapproximately 80,000 square feet of office space for our new corporate headquarters that providesin Minneapolis, Minnesota. In December 2018, we amended the initial lease to add approximately 29,000 square feet of additional office space, which is accounted for monthly rent, real estate taxesas a separate lease (“second lease”) in accordance with ASU No. 2016-02, “Leases” (Topic 842) (“ASC 842”). In December 2019, we further amended the lease which extended the expiration date of the initial lease, extended the expiration date of and operating expenses thatadded approximately 4,000 square feet to the second lease, as well as added approximately 37,000 square feet of additional office space, accounted for as a separate lease (“third lease”) in accordance with ASC 842. The portion of the space covered under the initial lease was subsequently extended to July 31,placed in service in September 2019. The portion of the space covered under the second lease commenced in September 2020. Finally, the portion of the space covered under the third lease commenced in September 2021.
In July 2016, we entered into a non-cancelable operatingVehicles
We lease agreement for building space to accommodate the relocation of our manufacturing, quality, and research and development functions. The 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. Atorganization 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 September 30, 2017,2022, we had 26approximately nine 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 as of September 30, 2022, ranged from less than one year to approximately four 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 leases will automatically renew as a month-to-month rental at the end of the lease if the equipment is not purchased or returned.
11
15
Lease Position, Undiscounted Cash Flow and Supplemental Information
Future base minimumThe table below presents information related to our ROU operating lease payments for allassets and operating lease obligations are expected to be as followsliabilities that we have recorded:
| | | | | | |
(In thousands) |
| At September 30, 2022 |
| At December 31, 2021 | ||
Right of use operating lease assets | | $ | 21,975 | | $ | 23,984 |
| | | | | | |
Operating lease liabilities: | | | | | | |
Current | | $ | 2,486 | | $ | 2,506 |
Non-current | |
| 21,506 | |
| 23,354 |
Total | | $ | 23,992 | | $ | 25,860 |
| | | | | | |
Operating leases: | | | | | | |
Weighted average remaining lease term | |
| 7.9 years | | | 8.6 years |
Weighted average discount rate | | | 4.2% | | | 4.2% |
| | | | | | |
| | Nine Months Ended September 30, | ||||
| | 2022 | | 2021 | ||
Supplemental cash flow information for our operating leases: | | | | | | |
Cash paid for operating lease liabilities | | $ | 2,703 | | $ | 2,411 |
Non-cash right of use assets obtained in exchange for new operating lease obligations | | $ | 49 | | $ | 6,146 |
The table below reconciles the undiscounted cash flows for the years ending December 31:periods presented to the operating lease liabilities recorded on the Condensed Consolidated Balance Sheet for the periods presented:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
|
| | | |
(In thousands) | | | |
2022 (October 1 - December 31) | | $ | 874 |
2023 | | | 3,428 |
2024 | |
| 3,418 |
2025 | |
| 3,518 |
2026 | |
| 3,615 |
Thereafter | |
| 13,249 |
Total minimum lease payments | | | 28,102 |
Less: Amount of lease payments representing interest | | | (4,110) |
Present value of future minimum lease payments | | | 23,992 |
Less: Current obligations under operating lease liabilities | | | (2,486) |
Non-current obligations under operating lease liabilities | | $ | 21,506 |
Operating lease costs were $0.9 million for each of the three months ended September 30, 2022 and 2021. Operating lease costs were $2.8 million and $2.6 million for the nine months ended September 30, 2022 and 2021, respectively.
Major Vendors
We had purchases from three vendorsone vendor that collectively accounted for 47% and 35%24% of our total purchases for the three months ended September 30, 20172022 and 2016, respectively, and 39% and 36%purchases from two vendors that accounted for 44% of our total purchases for the nine months ended September 30, 2017 and 2016, respectively.
Employment Agreements
2022. We have entered into employment agreements with certainhad purchases from two vendors that accounted for 36% of our officers. The agreements provide for payment of severance ranging from 9 to 15 months of then-current annualized base salary in the event of termination by us without cause or by the employee for good reason or, in the case of two of the officers, death, disability, or as a result of a qualifying termination after a change in control. The agreements also provide for payment of an amount equal to 9 to 15 months of the then-current annual target bonus in the event of termination by us without cause or by the employee for good reason, 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 providetotal purchases for the vestingthree months ended September 30, 2021 and purchases from one vendor that accounted for 24% of certain equity compensation throughour total purchases for the datenine months ended September 30, 2021.
16
Purchase Commitments
We issued purchase orders prior to September 30, 2022, totaling $36.3 million for goods that we expect to receive within 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 makerecorded an expense related to our discretionary contributions to the 401(k) plan. We made contributionsplan of $42,000$0.4 million and $45,000$0.3 million for the threemonths ended September 30, 20172022 and 2016,2021, respectively, and $135,000$1.1 million and $120,000$0.9 million for the nine months ended September 30, 20172022 and 2016,2021, respectively.
Legal Proceedings
From time to time, we are subject to various claims and legal proceedings arising in the ordinary course of 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.
We and certain of our present or former officers have been sued in a purported securities class action lawsuit that was filed in the United States District Court for the District of Minnesota on September 29, 2020, and that is pending under the caption Brian Mart v. Tactile Systems Technology, Inc., et al., File No. 0:20-cv-02074-NEB-BRT (the “Mart lawsuit”). On April 19, 2021, the plaintiff filed an Amended Complaint against us and eight of our present and former officers and directors. Plaintiff seeks to represent a class consisting of investors who purchased our common stock in the market during the time period from May 7, 2018 through June 8, 2020 (“alleged class period”). The Amended Complaint alleges the following claims under the Securities Exchange Act of 1934, as amended (the “Exchange Act”): (1) that we and certain officer defendants made materially false or misleading public statements about our business, operational and compliance policies, and results during the alleged class period in violation of Section 10(b) of the Exchange Act; (2) that we and the individual defendants engaged in a scheme to defraud investors in order to allow the individual defendants to sell our stock in violation of Section 10(b) of the Exchange Act; (3) that the individual defendants engaged in improper insider trading of our stock in violation of Section 20A of the Exchange Act; and (4) that we and the individual defendants are liable under Section 20(a) of the Exchange Act because each defendant is a controlling person. On June 18, 2021, we and the individual defendants filed a motion to dismiss the Amended Complaint. On March 31, 2022, the court granted in part, and denied in part, the defendants’ motion to dismiss. All claims against three individual defendants were dismissed, and most claims against four other individual defendants were dismissed. The Company remains a defendant on alleged Sections 10(b) and 20(a) claims. We are defending the action as it proceeds.
On May 24, 2022, a stockholder derivative lawsuit was filed in the United States District Court for the District of Minnesota, purportedly on behalf of the Company against certain present and former officers and directors and the Company (as a nominal defendant), captioned Jack Weaver v. Moen, et al., File No. 0:22-cv-01403-NEB-BRT. This complaint generally arises out of the same subject matter as the Mart lawsuit and alleges the following claims under the Exchange Act and common law: (1) that the director defendants made materially false or misleading public statements in proxy statements in violation of Section 14(a) of the Exchange Act; (2) that the director defendants’ stock and option awards should be rescinded under Section 29(b) of the Exchange Act; (3) that the officer defendants’ employment contract compensation should be rescinded under Section 29(b) of the Exchange Act; (4) that certain officer defendants are liable for contribution arising out of any liability incurred in the Mart lawsuit, under Sections 10(b) and 21D of the Exchange Act; (5) that the individual defendants breached their fiduciary duties; and (6) that the individual defendants were unjustly enriched. The lawsuit seeks unspecified damages. In August 2022, the matter was transferred to the United States District Court for the District of Delaware by order granting the Parties Stipulation to Transfer. It is now captioned Jack Weaver v. Moen, et al., File No. 1:22-cv-01063-GBW. We are defending the action as it proceeds.
17
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 that are forfeited, expire, areexpired, 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, 972,591 shares were added as available for issuance thereunder on January 1, 2021. Our Board of Directors exercised its prerogative to forego the automatic increase on January 1, 2022. As of September 30, 2017, 4,870,5322022, 5,916,065 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 million and $0.7$2.6 million for each of the threemonths ended September 30, 20172022 and 2016, respectively,2021, and $3.1 million and $0.9$7.7 million for each of the nine months ended September 30, 20172022 and 2016, respectively.2021. 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 | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
(In thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Cost of revenue | | $ | 67 | | $ | 171 | | $ | 281 | | $ | 455 |
Sales and marketing expenses | | | 1,101 | | | 1,081 | | | 3,352 | | | 2,979 |
Research and development expenses | | | 54 | | | 68 | | | 175 | | | 224 |
Reimbursement, general and administrative expenses | | | 1,338 | | | 1,268 | | | 3,873 | | | 4,045 |
Total stock-based compensation expense | | $ | 2,560 | | $ | 2,588 | | $ | 7,681 | | $ | 7,703 |
Stock Options
Stock options issued to participants other than non-employees typically vest overthree or four years and typically have a contractual term of seven or ten years. TheStock-based compensation expense included in the Condensed Consolidated Statements of Operations for stock options grantedwas $0.6 million and $1.0 million for the three months ended September 30, 2022 and 2021, respectively, and $2.0 million and $3.3 million for the nine months ended September 30, 2022 and 2021, respectively. At September 30, 2022, there was approximately $2.2 million of total unrecognized pre-tax stock option expense under our equity compensation plans, which is expected to be recognized on July 27, 2016 to our non-employee directors vested in full on May 9, 2017, the datea straight-line basis over a weighted-average period of our 2017 annual meeting1.2 years.
18
Our stock option activity for the nine months ended September 30, 20172022, was as follows:
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|
|
|
|
|
| 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 |
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|
|
|
|
|
|
|
|
|
|
|
|
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, 2021 | | 915,224 | | $ | 39.33 | | 5.0 years | | $ | 2,068 |
Granted | | — | | $ | — | | | | | |
Exercised | | (90,878) | | $ | 1.68 | | | | $ | 916 |
Forfeited | | (58,115) | | $ | 46.93 | | | | | |
Cancelled/Expired | | (152,448) | | $ | 36.62 | | | | | |
Balance at September 30, 2022 | | 613,783 | | $ | 44.86 | | 4.8 years | | $ | 44 |
| | | | | | | | | | |
Options exercisable at September 30, 2022 | | 402,979 | | $ | 44.18 | | 4.7 years | | $ | 44 |
(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 1,283,036508,184 as of September 30, 20162021, had a weighted averageweighted-average exercise price of $1.02$30.45 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$1.5 million and $0.3$1.2 million for the three months ended September 30, 20172022 and 2016,2021, respectively, and $1.8$4.5 million and $0.3$3.7 million for the nine months ended September 30, 20172022 and 2016,2021, respectively. As ofAt September 30, 2017,2022, there was approximately $4.5$9.4 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 2.12.0 years.
Our stock-settledtime-based restricted stock unit activity for the nine months ended September 30, 20172022, was as follows:
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|
| 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 |
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|
|
|
|
|
|
|
|
|
|
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, 2021 | | 259,147 | | $ | 42.32 | | $ | 4,932 |
Granted | | 496,302 | | $ | 15.64 | | | |
Vested | | (93,444) | | $ | 46.84 | | | |
Cancelled | | (54,299) | | $ | 29.98 | | | |
Balance at September 30, 2022 | | 607,706 | | $ | 20.94 | | $ | 4,734 |
(1) |
|
|
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 2020 would have been earned to the extent performance goals based on revenue and adjusted EBITDA were achieved in 2021, but none were so earned. The PSUs granted in 2021 will be earned if and to the extent performance goals based on revenue and adjusted EBITDA are achieved in 2022. The PSUs granted in 2022 will be earned if and to the extent performance goals based on revenue change and adjusted EBITDA margin
19
are achieved in 2023. 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 recognized for PSUs was $0.3 million and $0.2 million for the three months ended September 30, 2022 and 2021, respectively, and $0.5 million and less than $0.1 million for the nine months ended September 30, 2022 and 2021, respectively. At September 30, 2022, there was approximately $2.2 million of total unrecognized pre-tax compensation expense related to outstanding PSUs that is expected to be recognized over a weighted average period of 2.3 years.
Our performance-based restricted stock unit activity for the nine months ended September 30, 2022, 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, 2021 | | 54,317 | | $ | 50.22 | | $ | 1,034 |
Granted | | 131,710 | | $ | 18.54 | | | |
Vested | | (1,853) | | $ | 19.03 | | | |
Cancelled | | (20,147) | | $ | 23.18 | | | |
Balance at September 30, 2022 | | 164,027 | | $ | 25.11 | | $ | 1,278 |
(1) |
|
|
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 million1,600,000 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, 168,337 shares were added to the ESPP, as available for issuance thereunder, pursuantPursuant to the automatic increase feature of the plan.ESPP, 194,518 shares were added as available for issuance thereunder on January 1, 2021. Our Board of Directors exercised its prerogative to forego the automatic increase on January 1, 2022. As of September 30, 2017, 1,508,3562022, 1,623,486 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 for each of the three months ended September 30, 2022 and 2021, and $0.7 million and $0.6 million for the nine months ended September 30, 2022 and 2021, respectively.
Note 12. Revenue
We derive our revenue from the sale and rental of our products to our customers in the United States. The following table presents our revenue, inclusive of sales and rental revenue, disaggregated by product line:
20
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
(In thousands) |
| 2022 | | 2021 | | 2022 | | 2021 | ||||
Revenue | | | | | | | | | | | | |
Lymphedema products | | $ | 54,214 | | $ | 51,636 | | $ | 146,502 | | $ | 145,468 |
Airway clearance products | | | 11,048 | | | 861 | | | 26,383 | | | 861 |
Total | | $ | 65,262 | | $ | 52,497 | | $ | 172,885 | | $ | 146,329 |
| | | | | | | | | | | | |
Percentage of total revenue | | | | | | | | | | | | |
Lymphedema products | |
| 83% | |
| 98% | |
| 85% | |
| 99% |
Airway clearance products | | | 17% | | | 2% | | | 15% | | | 1% |
Total | |
| 100% | |
| 100% | |
| 100% | |
| 100% |
Our revenue by channel, inclusive of sales and rental revenue, for the three and nine months ended September 30, 2016.2022 and 2021, are summarized in the following table:
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
(In thousands) |
| 2022 | | 2021 | | 2022 | | 2021 | ||||
Private insurers and other payers | | $ | 36,188 | | $ | 36,034 | | $ | 97,726 | | $ | 99,665 |
Veterans Administration | | | 6,755 | | | 6,737 | | | 19,118 | | | 19,905 |
Medicare | | | 11,271 | | | 8,865 | | | 29,658 | | | 25,898 |
Durable medical equipment distributors | | | 11,048 | | | 861 | | | 26,383 | | | 861 |
Total | | $ | 65,262 | | $ | 52,497 | | $ | 172,885 | | $ | 146,329 |
14Our rental revenue is derived from rent-to-purchase arrangements that typically range from three to ten months. As 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.
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 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 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.
21
Rental revenue for the three and nine months ended September 30, 2022 and 2021, was primarily from private insurers. Sales-type lease revenue and the associated cost of revenue for the three and nine months ended September 30, 2022 and 2021, was:
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
(In thousands) | | 2022 | | 2021 | | 2022 | | 2021 | ||||
Sales-type lease revenue | | $ | 9,717 | | $ | 8,037 | | $ | 24,905 | | $ | 22,114 |
Cost of sales-type lease revenue | |
| 2,992 | |
| 2,433 | |
| 7,640 | |
| 6,501 |
Gross profit | | $ | 6,725 | | $ | 5,604 | | $ | 17,265 | | $ | 15,613 |
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 three months ended September 30, 2022, was a benefit of 3.3%, compared to an expense of 126% for the three months ended September 30, 2021. The primary driver of the change in the Company’s effective tax rate is attributable to a full valuation allowance being recorded for net deferred tax assets for the current period, whereas no valuation allowance was recorded for 2021. We recorded an income tax benefit of $77 thousand and an expense of $1.9 million for the three months ended September 30, 2022 and 2021, respectively.
The effective tax rate for the nine months ended September 30, 20172022, was 539.1%an expense of 0.5%, compared to 50.0%a benefit of 24% for the nine months ended September 30, 2016.2021. The primary driver of the change in ourthe Company’s effective tax rate is attributable to a full valuation allowance being recorded for net deferred tax assets for the current period, whereas no valuation allowance was a significant increase in tax benefits related to tax-deductible share-based compensation as compared to the prior year period. The significant tax deductions related to tax benefits with respect 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, werecorded for 2021. We recorded an income tax expense of $0.1 million and a benefit of $4.5$1.4 million for the nine months ended September 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 federal2022 and state income tax expense, as well as deferred federal and state income tax expense.2021, 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 September 30, 2017, 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 liabilities and reviewing compliance in all relevant tax jurisdictions.
We areCompany currently is 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 statement of operations.
15
jurisdictions.
22
Note 9.14. Net Income (Loss)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)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 | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
(In thousands, except share and per share data) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Net loss | | $ | (2,279) | | $ | (3,355) | | $ | (22,487) | | $ | (4,316) |
Weighted-average shares outstanding | | | 20,139,944 | | | 19,790,838 | | | 20,021,966 | | | 19,676,749 |
Dilutive effect of stock-based awards | | | — | | | — | | | — | | | — |
Weighted-average shares used to compute diluted net loss per share | | | 20,139,944 | | | 19,790,838 | | | 20,021,966 | | | 19,676,749 |
Net loss per share - Basic | | $ | (0.11) | | $ | (0.17) | | $ | (1.12) | | $ | (0.22) |
Net loss per share - Diluted | | $ | (0.11) | | $ | (0.17) | | $ | (1.12) | | $ | (0.22) |
The following common stock equivalents were excluded from the computation of diluted net incomeloss 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 | | Nine Months Ended | ||||
| | September 30, | | September 30, | ||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
Restricted stock units | | 607,706 | | 190,261 | | 607,706 | | 190,261 |
Common stock options | | 613,783 | | 977,076 | | 613,783 | | 977,076 |
Performance stock units | | 164,027 | | 60,627 | | 164,027 | | 60,627 |
Employee stock purchase plan | | 143,526 | | 38,325 | | 93,592 | | 33,931 |
Total | | 1,529,042 | | 1,266,289 | | 1,479,108 | | 1,261,895 |
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).
We have obligations to pay up to $20.0 million in earn-out payments in cash if certain future U.S. revenues of the AffloVest are met. The earn-out liability was valued by employing a Monte Carlo Simulation model in a risk-neutral framework, which is a Level 3 input. The underlying simulated variable includes recognized revenue. The recognized revenue volatility estimate was based on a study of historical asset volatility for a set of comparable public companies. The model includes other assumptions including the market price of risk, which was calculated as the weighted average cost of capital less the long-term risk-free rate. The earn-out liability is adjusted to fair value at each reporting date until settled. Changes in fair value are included in intangible asset amortization and earn-out expenses in our Condensed Consolidated Statements of Operations.
23
Changes in the earn-out liability measured at fair value using Level 3 inputs were as follows:
| | | |
(In thousands) | | | |
Earn-out liability at December 31, 2021 | | $ | 6,200 |
Addition for acquisition | | | — |
Fair value adjustments | | | 10,898 |
Earn-out liability at September 30, 2022 | | $ | 17,098 |
As of September 30, 2022, the earn-out liability totaled $17.1 million, $7.1 million of which was non-current and $10.0 million of which had been earned and is a current liability.
The following provides information regarding fair value measurements for our cash equivalents and marketable securitiesremaining contingent earn-out liability as of September 30, 20172022, and December 31, 20162021, according to the three-level fair value 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 |
|
| ||||
(In thousands) |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Total | ||||
Recurring Fair Value Measurements: |
|
|
|
|
|
|
|
|
|
|
|
|
Currency |
| $ | 14 |
| $ | — |
| $ | — |
| $ | 14 |
Money market mutual funds |
|
| 18,976 |
|
| — |
|
| — |
|
| 18,976 |
U.S. government and agency obligations |
|
| 2,017 |
|
| 6,979 |
|
| — |
|
| 8,996 |
Corporate debt securities |
|
| — |
|
| 1,998 |
|
| — |
|
| 1,998 |
Total |
| $ | 21,007 |
| $ | 8,977 |
| $ | — |
| $ | 29,984 |
During the nine months ended September 30, 2017, 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.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.
| | | | | | | | | | | | |
| | At September 30, 2022 | ||||||||||
|
| 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: | | | | | | | | | | | | |
Earn-out liability | | $ | — | |
| — | | $ | 7,098 | | $ | 7,098 |
Total | | $ | — | | $ | — | | $ | 7,098 | | $ | 7,098 |
| | | | | | | | | | | | |
| | At December 31, 2021 | ||||||||||
|
| 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: | | | | | | | | | | | | |
Earn-out liability | | $ | — | | $ | — | | $ | 6,200 | | $ | 6,200 |
Total | | $ | — | | $ | — | | $ | 6,200 | | $ | 6,200 |
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. We had no re-measurements of non-financial assets to fair value in the nine months ended September 30, 2017.
17
24
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.
OverviewCoronavirus (COVID-19)
The United States economy in general and our business specifically have been negatively affected by the COVID-19 pandemic. We have seen adverse impacts as it relates to the decline in the number of patients that healthcare facilities and clinics are able to treat due to enhanced safety protocols, particularly during most of 2021 and during the first quarter of 2022. We have also seen staffing challenges, both in our organization and at the clinics we serve, as another lingering consequence of the COVID-19 pandemic. While we saw some level of recovery in the second and third quarters of 2022, ongoing consequences of the pandemic remain uncertain. There are no reliable estimates of how long the pandemic will last, whether any recovery will be sustained or will reverse course, the severity of any resurgence of COVID-19 or variant strains of the virus, the effectiveness of vaccines and attitudes towards receiving them, or what ultimate effects the pandemic will have. For that reason, we are unable to reasonably estimate the long-term impact of the pandemic on our business at this time.
Since the onset of COVID-19, we have remained proactive to ensure we continue to adapt to the needs of our employees, clinicians and patients. However, we cannot assure you these changes to our processes and practices will be successful in mitigating the impact of COVID-19 on our business. We continue to evaluate and, if appropriate, will adopt other measures in the future related to the ongoing safety of our employees, clinicians and patients.
Overview
We are a medical technology company that develops and provides innovative medical devices for the treatment of underserved 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 underserved chronic diseases in the home setting to improve patient outcomes and quality of life and help control rising healthcare expenditures. Our initial areaareas of therapeutic focus isare (1) vascular disease, with a goal of advancing the standard of care in treating lymphedema and chronic venous insufficiency.insufficiency, (2) oncology, where lymphedema is a common consequence among cancer survivors and (3) providing airway clearance therapy for those suffering from chronic respiratory conditions. 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-makerspolicymakers 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 proprietarycurrent lymphedema products are the Flexitouch and Entre systems and Actitouch systems.our airway clearance product is the AffloVest. 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 nine months ended September 30, 2017 and 2016, sales of our Flexitouch system represented 91% and 86% of our revenues, respectively.
In September 2012,December 2020, we acquired our second proprietary product, the Actitouch system. The system received 510(k) clearance from the FDA in June 2013,for two new indications for our Flexitouch Plus system: phlebolymphedema 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.lipedema. We also introduced our Entre system in the United States in February 2013. The Entre system is sold or rented to patients who need a more basicsimple pump or who do not yet qualify for insurance reimbursement for an advanced compression device such as our Flexitouch system. Sales and rentals of our lymphedema products represented 85% and 99% of our revenue in the nine months ended September 30, 2022 and 2021, respectively.
On September 8, 2021, we acquired the assets of the AffloVest airway clearance product line from IBC, a privately-held company which developed and manufactured AffloVest. AffloVest is a portable, wearable vest
25
that provides airway clearance to treat patients with chronic respiratory conditions such as bronchiectasis or conditions resulting from neuromuscular disorders. For the nine months ended September 30, 20172022 and 2016,2021 sales of our EntreAffloVest represented 15% and Actitouch systems combined represented 9% and 14%1% of our revenues,revenue, respectively.
To support the growth of our business, we continue to invest heavily in our commercial infrastructure, consisting of our direct sales force, home training resources, reimbursement capabilities and clinical expertise. We market our lymphedema products in the United States using a direct-to-patient and -provider model. Our directThe AffloVest device is sold through respiratory durable medical equipment providers throughout the United States that service patients and bill third-party payers for the product. We also employ a small group of respiratory specialists, who educate DME representatives, provide product demonstrations for targeted clinicians and support technical questions related to the AffloVest. As of September 30, 2022, we employed a field staff of 297 Tactile employees, made up of sales force has grown from three representatives, in March 2005as well as managers, who provide support throughout the United States for our lymphedema and respiratory therapies. This compares to a team of over 150 people249 as of September 30, 2017. 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 400 licensed, independent healthcare practitioners as home trainers who educate patients on the proper use of our systems. 2021.
We invest substantial resources in our reimbursement operations groupfunction to improve operational efficiencies and enhance individual payer expertise, while continuing our strategic focus of over 80 people that focuses on verifying case-by-case benefits, obtaining prior authorization, billing and collecting payments from payers, and providing customer support services.payer development. Our payer relations group of 34 peoplefunction focuses on payer policy development, education, contract negotiations, and data analysis. Our reimbursement operations function is responsible for developing relationshipsverifying patient insurance benefits, individual patient case development, prior authorization submissions, case follow-up, and appeals when necessary. Since the onset of COVID-19, our reimbursement function has been actively working with insurance payer decision-makersMedicare and a broad base of private payers to educate themunderstand the ever-changing reimbursement criteria being introduced. While the U.S. government’s declaration of a public health emergency (PHE) related to the COVID-19 pandemic has relaxed some Medicare criteria for respiratory patients, these circumstances are ever-changing, and the extent to which these changes will remain in place and the impact on our product efficacy, develop overall payer coverage policies and reimbursement criteria, manage Medicare patient claims and contracts with payers, and serve as an advocacy liaison between patients, clinicians and payers throughoutbusiness in the appeals process. future are not determinable at this time.
We also have a clinical team, consisting of a scientific advisory board, as well as in-house therapists and nurses, and a Chief Medical Officer, that serves as a resource to clinicians and patients and guides the development of clinical evidence in support of our products.
Our Most clinical studies require observation and interaction with clinicians and patients are reimbursed by governmentto monitor results and private payersprogress. Given the impact of COVID-19, patient recruitment for the purchaseour clinical studies involving our products and clinical outcomes had previously been suspended in 2020. In 2021, all of our products pursuant to established rates with each payer. clinical trials resumed research activities, including study visits and new patient enrollments, albeit more slowly than the targeted enrollment rates.
We rely on third-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,products, perform quality assurance and ship our products from our facility in Minneapolis, Minnesota. The AffloVest device continued to be manufactured and shipped by IBC on our behalf pursuant to a Transition Services Agreement through April 30, 2022. On May 1,2022, we began manufacturing and shipping the AffloVest device from our Minnesota-based facility.
18
To date, our supply chain has not been materially impacted by COVID-19. We continue to receive our product on time and believe that we have enough safety stock to meet our short and mid-term demand. However, we cannot assure you that our supply chain will not be materially impacted in the future or that we will be able to meet any increased demand.
In July 2022, we launched Kylee™ a free mobile app that makes it easier for patients to manage their conditions by tracking treatments and symptoms, as well as having direct access to educational resources.
For the three months ended September 30, 2017,2022, we generated revenuesrevenue of $28.3$65.3 million and had a net incomeloss of $1.3$2.3 million, compared to revenuesrevenue of $22.6$52.5 million and a net incomeloss of $0.5$3.4 million for the three months ended September 30, 2016.2021. For the nine months ended September 30, 2017,2022, we generated revenuesrevenue of $74.4$172.9 million and had a net incomeloss of $3.6$22.5 million, compared to revenuesrevenue of $56.1$146.3 million and a net incomeloss of $0.5$4.3 million for the nine months ended September 30, 2016.2021. Our primary sources of capital to datesince our initial public offering in 2016 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. bank financing.
We operate in one segment for financial reporting purposes.
26
Results of Operations
Comparison of the Three and Nine Months Ended September 30, 20172022 and 20162021
The following tables presenttable presents 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 |
|
|
Gross profit |
|
| 20,755 |
| 73 |
|
| 16,353 |
| 72 |
|
| 4,402 |
| 27 |
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
| 10,915 |
| 38 |
|
| 8,979 |
| 40 |
|
| 1,936 |
| 22 |
|
|
Research and development |
|
| 1,116 |
| 4 |
|
| 1,285 |
| 6 |
|
| (169) |
| (13) |
|
|
Reimbursement, general and administrative |
|
| 7,551 |
| 26 |
|
| 5,115 |
| 22 |
|
| 2,436 |
| 48 |
|
|
Total operating expenses |
|
| 19,582 |
| 68 |
|
| 15,379 |
| 68 |
|
| 4,203 |
| 27 |
|
|
Income from operations |
|
| 1,173 |
| 5 |
|
| 974 |
| 4 |
|
| 199 |
| 20 |
|
|
Other income |
|
| 85 |
| — |
|
| 10 |
| — |
|
| 75 |
| 750 |
|
|
Income before income taxes |
|
| 1,258 |
| 5 |
|
| 984 |
| 4 |
|
| 274 |
| 28 |
|
|
Income tax (benefit) expense |
|
| (84) |
| — |
|
| 492 |
| 2 |
|
| (576) |
| (117) |
|
|
Net income |
| $ | 1,342 |
| 5 |
| $ | 492 |
| 2 |
| $ | 850 |
| 173 |
|
|
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | | | ||||||||||
| | September 30, | | Change | ||||||||||||||
(In thousands) | | 2022 | | 2021 | | $ | | % | ||||||||||
Condensed Consolidated Statement | | | | | % of | | | | | % of | | | | | | | ||
of Operations Data: | | | | | revenue | | | | | revenue | | | | | | | ||
Revenue | | | | | | | | | | | | | | | | | | |
Sales revenue | | $ | 55,545 | | 85 | % | | $ | 44,460 | | 85 | % | | $ | 11,085 | | 25 | % |
Rental revenue | | | 9,717 | | 15 | % | | | 8,037 | | 15 | % | | | 1,680 | | 21 | % |
Total revenue | | | 65,262 | | 100 | % | | | 52,497 | | 100 | % | | | 12,765 | | 24 | % |
Cost of revenue | | | | | | | | | | | | | | | | | | |
Cost of sales revenue | | | 15,476 | | 24 | % | | | 13,096 | | 25 | % | | | 2,380 | | 18 | % |
Cost of rental revenue | | | 2,992 | | 4 | % | | | 2,433 | | 5 | % | | | 559 | | 23 | % |
Total cost of revenue | | | 18,468 | | 28 | % | | | 15,529 | | 30 | % | | | 2,939 | | 19 | % |
Gross profit | | | | | | | | | | | | | | | | | | |
Gross profit - sales revenue | | | 40,069 | | 61 | % | | | 31,364 | | 60 | % | | | 8,705 | | 28 | % |
Gross profit - rental revenue | | | 6,725 | | 11 | % | | | 5,604 | | 10 | % | | | 1,121 | | 20 | % |
Gross profit | | | 46,794 | | 72 | % | | | 36,968 | | 70 | % | | | 9,826 | | 27 | % |
Operating expenses | | | | | | | | | | | | | | | | | | |
Sales and marketing | | | 26,583 | | 41 | % | | | 22,231 | | 42 | % | | | 4,352 | | 20 | % |
Research and development | | | 1,581 | | 2 | % | | | 1,409 | | 3 | % | | | 172 | | 12 | % |
Reimbursement, general and administrative | | | 16,257 | | 25 | % | | | 14,500 | | 28 | % | | | 1,757 | | 12 | % |
Intangible asset amortization and earn-out | | | 3,993 | | 6 | % | | | 195 | | — | % | | | 3,798 | | N.M. | % |
Total operating expenses | | | 48,414 | | 74 | % | | | 38,335 | | 73 | % | | | 10,079 | | 26 | % |
Loss from operations | | | (1,620) | | (2) | % | | | (1,367) | | (3) | % | | | (253) | | 19 | % |
Other expense | | | (736) | | (2) | % | | | (120) | | — | % | | | (616) | | N.M. | % |
Loss before income taxes | | | (2,356) | | (4) | % | | | (1,487) | | (3) | % | | | (869) | | 58 | % |
Income tax (benefit) expense | | | (77) | | — | % | | | 1,868 | | 3 | % | | | (1,945) | | (104) | % |
Net loss | | $ | (2,279) | | (4) | % | | $ | (3,355) | | (6) | % | | $ | 1,076 | | (32) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
|
|
“N.M.” Not Meaningful
19
27
| | | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | | | | | | ||||||||||
| | September 30, | | Change | ||||||||||||||
(In thousands) | | 2022 | | 2021 | | $ | | % | ||||||||||
Consolidated Statement | | | | | % of | | | | | % of | | | | | | | ||
of Operations Data: | | | | | revenue | | | | | revenue | | | | | | | ||
Revenue | | | | | | | | | | | | | | | | | | |
Sales revenue | | $ | 147,980 | | 86 | % | | $ | 124,215 | | 85 | % | | $ | 23,765 | | 19 | % |
Rental revenue | | | 24,905 | | 14 | % | | | 22,114 | | 15 | % | | | 2,791 | | 13 | % |
Total revenue | | | 172,885 | | 100 | % | | | 146,329 | | 100 | % | | | 26,556 | | 18 | % |
Cost of revenue | | | | | | | | | | | | | | | | | | |
Cost of sales revenue | | | 41,366 | | 24 | % | | | 36,425 | | 25 | % | | | 4,941 | | 14 | % |
Cost of rental revenue | | | 7,640 | | 4 | % | | | 6,501 | | 4 | % | | | 1,139 | | 18 | % |
Total cost of revenue | | | 49,006 | | 28 | % | | | 42,926 | | 29 | % | | | 6,080 | | 14 | % |
Gross profit | | | | | | | | | | | | | | | | | | |
Gross profit - sales revenue | | | 106,614 | | 62 | % | | | 87,790 | | 60 | % | | | 18,824 | | 21 | % |
Gross profit - rental revenue | | | 17,265 | | 10 | % | | | 15,613 | | 11 | % | | | 1,652 | | 11 | % |
Gross profit | | | 123,879 | | 72 | % | | | 103,403 | | 71 | % | | | 20,476 | | 20 | % |
Operating expenses | | | | | | | | | | | | | | | | | | |
Sales and marketing | | | 79,335 | | 46 | % | | | 61,949 | | 42 | % | | | 17,386 | | 28 | % |
Research and development | | | 4,949 | | 3 | % | | | 3,885 | | 3 | % | | | 1,064 | | 27 | % |
Reimbursement, general and administrative | | | 47,369 | | 27 | % | | | 42,802 | | 30 | % | | | 4,567 | | 11 | % |
Intangible asset amortization and earn-out | | | 12,834 | | 8 | % | | | 294 | | — | % | | | 12,540 | | N.M. | % |
Total operating expenses | | | 144,487 | | 84 | % | | | 108,930 | | 75 | % | | | 35,557 | | 33 | % |
Loss from operations | | | (20,608) | | (12) | % | | | (5,527) | | (4) | % | | | (15,081) | | N.M. | % |
Other expense | | | (1,765) | | (1) | % | | | (154) | | — | % | | | (1,611) | | N.M. | % |
Loss before income taxes | | | (22,373) | | (13) | % | | | (5,681) | | (4) | % | | | (16,692) | | N.M. | % |
Income tax expense (benefit) | | | 114 | | — | % | | | (1,365) | | (1) | % | | | 1,479 | | (108) | % |
Net loss | | $ | (22,487) | | (13) | % | | $ | (4,316) | | (3) | % | | $ | (18,171) | | N.M. | % |
“N.M.” Not Meaningful
28
Revenue
Revenues
RevenuesRevenue increased $5.7$12.8 million, or 25%24%, to $28.3$65.3 million in the three months ended September 30, 2017,2022, compared to $22.6$52.5 million in the three months ended September 30, 2016. Revenues increased $18.32021. The increase in total revenue was attributable to an increase of $10.2 million in sales of the airway clearance product line, which includes the AffloVest product acquired on September 8, 2021, and an increase of $2.6 million, or 33%5%, in sales and rentals of the lymphedema product line in the quarter ended September 30, 2022, compared to the 2021 third quarter.
Revenue increased $26.6 million, or 18%, to $74.4$172.9 million in the nine months ended September 30, 2017,2022, compared to $56.1$146.3 million in the nine months ended September 30, 2016.2021. The growthincrease in revenuestotal revenue was attributable to an increase of approximately $6.8$25.5 million or 35%, in sales of our Flexitouch system for the three months ended airway clearance product line, which includes the AffloVest product acquired onSeptember 30, 20178, 2021, and an increase of approximately $19.9$1.0 million, or 42%1%, in sales and rentals of our Flexitouch systemthe lymphedema product line for the nine months ended September 30, 2017. These increases2022. The first nine months of 2022 revenue from the lymphedema product line was adversely affected by the fact that first quarter 2022 revenue was negatively impacted by the prolonged recovery from COVID-19, including the resurgence due to the Omicron variant during the period, which resulted in Flexitouch system sales were largely driven by expansion ofrestricted access to clinics and hospitals and disrupted the recovery in patient visits versus the pre-COVID environment. In addition, the challenging labor market continued to impact our ability to recruit and retain quality candidates for our direct sales force, and increased physician and patient awarenessparticularly during the first quarter of the treatment options for lymphedema, as well as increased contractual coverage with national and regional insurance payers. The increases in sales of our Flexitouch system were partially offset by decreases of 36% and 20% in sales of our Entre and Actitouch systems in the three and nine months ended September 30, 2017 compared to the same periods in 2016, respectively.2022.
Revenues
Revenue from the Veterans Administration hospitals represented 20%10% and 13% of total revenues forrevenue in the three months ended September 30, 20172022 and 2016,2021, respectively. RevenuesRevenue from the Veterans Administration hospitals represented 19%11% and 16%14% of total revenues forrevenue in the nine months ended September 30, 20172022 and 2016,2021, respectively. RevenuesRevenue from Medicare represented 6% and 13%17% of total revenues forrevenue in each of the three months ended September 30, 20172022 and 2016, respectively. Revenues2021. Revenue from Medicare represented 9%17% and 13%18% of total revenues forrevenue in the nine months ended September 30, 20172022 and 2016,2021, respectively.
The following tables summarizetable summarizes our revenuesrevenue by product line for the three and nine months ended September 30, 20172022 and 2016,2021, both in dollars and percentage of total revenues:revenue:
| | | | | | | | | | | |
| | Three Months Ended | | | | | | ||||
| | September 30, | | Change | |||||||
(In thousands) |
| 2022 | | 2021 | | $ | | % | |||
Revenue | | | | | | | | | | | |
Lymphedema products | | $ | 54,214 | | $ | 51,636 | | $ | 2,578 | | 5% |
Airway clearance products | | | 11,048 | | | 861 | | | 10,187 | | N.M. |
Total | | $ | 65,262 | | $ | 52,497 | | $ | 12,765 | | 24% |
| | | | | | | | | | | |
Percentage of total revenue | | | | | | | | | | | |
Lymphedema products | |
| 83% | |
| 98% | |
| | | |
Airway clearance products | | | 17% | | | 2% | | | | | |
Total | |
| 100% | |
| 100% | |
| | | |
“N.M.” Not Meaningful
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Change |
|
| ||||
(In thousands, except percentages) |
| 2017 |
| 2016 |
| % |
|
| ||
Revenues |
|
|
|
|
|
|
|
|
|
|
Flexitouch system |
| $ | 26,202 |
| $ | 19,387 |
| 35 | % |
|
Entre/Actitouch systems |
|
| 2,081 |
|
| 3,248 |
| (36) | % |
|
Total |
| $ | 28,283 |
| $ | 22,635 |
| 25 | % |
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues |
|
|
|
|
|
|
|
|
|
|
Flexitouch system |
|
| 93 | % |
| 86 | % |
|
|
|
Entre/Actitouch systems |
|
| 7 | % |
| 14 | % |
|
|
|
Total |
|
| 100 | % |
| 100 | % |
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, |
| Change |
|
| ||||
(In thousands, except percentages) |
| 2017 |
| 2016 |
| % |
|
| ||
Revenues |
|
|
|
|
|
|
|
|
|
|
Flexitouch system |
| $ | 67,936 |
| $ | 47,988 |
| 42 | % |
|
Entre/Actitouch systems |
|
| 6,461 |
|
| 8,076 |
| (20) | % |
|
Total |
| $ | 74,397 |
| $ | 56,064 |
| 33 | % |
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues |
|
|
|
|
|
|
|
|
|
|
Flexitouch system |
|
| 91 | % |
| 86 | % |
|
|
|
Entre/Actitouch systems |
|
| 9 | % |
| 14 | % |
|
|
|
Total |
|
| 100 | % |
| 100 | % |
|
|
|
| | | | | | | | | | | |
| | Nine Months Ended | | | | | | ||||
| | September 30, | | Change | |||||||
(In thousands) |
| 2022 | | 2021 | | $ | | % | |||
Revenue | | | | | | | | | | | |
Lymphedema products | | $ | 146,502 | | $ | 145,468 | | $ | 1,034 | | 1% |
Airway clearance products | | | 26,383 | | | 861 | | | 25,522 | | N.M. |
Total | | $ | 172,885 | | $ | 146,329 | | $ | 26,556 | | 18% |
| | | | | | | | | | | |
Percentage of total revenues | | | | | | | | | | | |
Lymphedema products | |
| 85% | |
| 99% | |
| | | |
Airway clearance products | | | 15% | | | 1% | | | | | |
Total | |
| 100% | |
| 100% | |
| | | |
“N.M.” Not Meaningful
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 salesrevenue 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. Further, seasonality trends have been, and may continue to be, significantly different than historical trends as a result of the COVID-19 pandemic and related impacts.
Cost of Goods SoldRevenue and Gross Margin
Cost of goods soldrevenue increased $1.2$3.0 million, or 19%, to $18.5 million in the three months ended September 30, 2022, compared to $15.5 million in the three months ended September 30, 2021. Cost of revenue increased $6.1 million, or 14%, to $49.0 million in the nine months ended September 30, 2022, compared to $42.9 million in the nine months ended September 30, 2021. The increase in cost of revenue in both periods was primarily attributable to the additional contribution of AffloVest sales and an increase in inbound freight costs.
The total gross margin was 72% and 70% of revenue in the three months ended September 30, 2022 and 2021, respectively, and 72% and 71% of revenue in the nine months ended September 30, 2022 and 2021, respectively.
Sales and Marketing Expenses
Sales and marketing expenses increased $4.4 million, or 20%, to $7.5$26.6 million in the three months ended September 30, 2022, compared to $22.2 million in the three months ended September 30, 2021. The increase was primarily attributable to a:
● | $4.3 million increase in personnel-related compensation expense as a result of the increased headcount in the collective field commercial team; |
● | $0.5 million increase in travel and entertainment expense; and |
● | $0.1 million increase related to sales meetings and tradeshows. |
These increases were partially offset by a $0.5 million decrease in expenses for new product introduction.
30
Sales and marketing expenses increased $17.4 million, or 28%, to $79.3 million in the nine months ended September 30, 2022, compared to $61.9 million in the nine months ended September 30, 2021. The increase was primarily attributable to a:
● | $12.7 million increase in personnel-related compensation expense as a result of the increased headcount in the collective field commercial team; |
● | $2.6 million increase in travel and entertainment expense; |
● | $1.2 million increase related to our annual national sales training meeting; |
● | $0.5 million increase related to sales meetings and tradeshows; and |
● | $0.4 million increase in expenses for new product introduction. |
Research and Development Expenses
Research and development (“R&D”) expenses increased $0.2 million, or 12%, to $1.6 million in the three months ended September 30, 2022, compared to $1.4 million in the three months ended September 30, 2021, which was primarily attributable to an increase in personnel-related compensation expense and R&D supplies.
R&D expenses increased $1.1 million, or 27%, to $5.0 million in the nine months ended September 30, 2022, compared to $3.9 million in the nine months ended September 30, 2021, which was primarily attributable to an increase in personnel-related compensation expense, R&D supplies, and professional services.
Reimbursement, General and Administrative Expenses
Reimbursement, general and administrative expenses increased $1.8 million, or 12%, to $16.3 million in the three months ended September 30, 2022, compared to $14.5 million in the three months ended September 30, 2021. This increase was primarily attributable to a:
● | $1.3 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer relations and corporate functions; and |
● | $1.3 million increase in occupancy costs, depreciation expense, and legal and professional fees. |
These increases were partially offset by a $0.8 million decrease in acquisition costs.
Reimbursement, general and administrative expenses increased $4.6 million, or 11%, to $47.4 million in the nine months ended September 30, 2022, compared to $42.8 million in the nine months ended September 30, 2021. This increase was primarily attributable to a:
● | $2.7 million increase in occupancy costs, depreciation expense, and legal and professional fees; |
● | $2.6 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer relations and corporate functions; and |
● | $0.1 million increase in travel and entertainment expenses. |
These increases were partially offset by a $0.8 million decrease in acquisition costs.
Intangible Asset Amortization and Earn-out Expense
Intangible asset amortization and earn-out expense increased $3.8 million to $4.0 million in the three months ended September 30, 2022, compared to $0.2 million in the three months ended September 30, 2021. The increase in intangible asset amortization and earn-out expense was partially attributable to the increase in the estimated fair value of our earn-out liability and partially attributable to a full quarter of amortization in the 2022 period versus a half month of amortization in the 2021 period.
31
Intangible asset amortization and earn-out expense increased $12.5 million to $12.8 million in the nine months ended September 30, 2022, compared to $0.3 million in the nine months ended September 30, 2021. The increase in intangible asset amortization and earn-out expense was primarily attributable to the increase in the estimated fair value of our earn-out liability.
Other Expense, Net
Other expense, net was $0.7 million and $0.1 million for the three months ended September 30, 2017, compared2022 and 2021, respectively, and was $1.8 million and $0.2 million for the nine months ended September 30, 2022 and 2021, respectively. The increase in both periods was primarily attributable to $6.3an increase in interest expense.
Income Taxes
We recorded an income tax benefit of $77 thousand and an income tax expense of $1.9 million for the three months ended September 30, 2016. Cost2022 and 2021, respectively. We recorded an income tax expense of goods sold increased $4.8$0.1 million or 31%, to $20.2and an income tax benefit of $1.4 million for the nine months ended September 30, 2017, compared to $15.4 million for the nine months ended September 30, 2016.2022 and 2021, respectively. The increase in cost of goods sold for each of the three and nine months ended September 30, 2017 compared to the same periods in 2016 was primarily attributable to an increase in the number of systems sold and additional manufacturing headcount to support increased volumes.
Gross margin was 73% and 72% of sales for the three months ended September 30, 2017 and 2016, respectively. Gross margin was 73% of sales for both of the nine months ended September 30, 2017 and 2016.
Sales and Marketing Expenses
Sales and marketing expenses increased $1.9 million, or 22%, to $10.9 million for the three months ended September 30, 2017, compared to $9.0 million for the three months ended September 30, 2016. This increase was largely driven by a $0.6 million increase in variable sales compensation, a $0.5 million increase in personnel-related compensation expenses due to increased sales and marketing headcount and $0.2 million of incremental stock-based compensation expense. In addition, other sales and marketing expenses increased $0.6 million due to increased travel, consulting, recruitment and training expenses, as well as increased patient training costs.
Sales and marketing expenses increased $7.8 million, or 33%, to $31.7 million for the nine months ended September 30, 2017, compared to $23.9 million for the nine months ended September 30, 2016. The increase was primarily driven by a $2.0 million increase in personnel-related compensation expenses due to increased sales and marketing headcount, a $1.9 million increase in variable sales compensation and $0.8 million incremental stock-based compensation expense. In addition, sales and marketing expenses increased $3.1 million due to increased travel, consulting, recruitment, and training expenses, as well as increased patient training costs.
Research and Development Expenses
Research and development (“R&D”) expenses decreased $0.2 million, or 13%, to $1.1 million for the three months ended September 30, 2017, compared to $1.3 million for the three months ended September 30, 2016. The decrease primarily relateddifferences relate to a decline in personnel-related expenses.
R&D expenses increased $0.4 million, or 12%, to $3.7 millionfull valuation allowance being recorded for the nine months ended September 30, 2017, compared to $3.3 millionnet deferred tax assets 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 expenses 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, 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 million and income tax expense of $0.5 million for the three 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 recognized in the current quarter as compared to the previous 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 shareperiods, whereas no valuation allowance was recorded for the nine months ended September 30, 2017.2021 periods.
Liquidity and Capital Resources
Cash Flows
At September 30, 2017,2022, our principal sources of liquidity were cash and cash equivalents of $19.7 million, marketable securities of $22.0$23.4 million and net accounts receivable of $14.6$69.5 million. This compares to cash and cash equivalents of $22.4 million and net accounts receivable of $44.3 million at September 30, 2021.
The following table summarizes our cash flows for the periods indicated:
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| Nine Months Ended |
| ||||||||||
|
| September 30, |
| ||||||||||
| | | | | | | |||||||
| | Nine Months Ended | |||||||||||
| | September 30, | |||||||||||
(In thousands) |
| 2017 |
| 2016 |
|
| 2022 |
| 2021 | ||||
Net cash provided by (used in): |
|
|
|
|
|
|
| | | | | | |
Operating activities |
| $ | 33 |
| $ | 4,336 |
|
| $ | 1,354 | | $ | (2,975) |
Investing activities |
|
| (13,193) |
|
| (542) |
| | | (1,844) | | | (81,237) |
Financing activities |
|
| 2,112 |
|
| 28,440 |
| | | (4,313) | | | 58,758 |
Net (decrease) increase in cash and cash equivalents |
| $ | (11,048) |
| $ | 32,234 |
| ||||||
Net decrease in cash and cash equivalents |
| $ | (4,803) | | $ | (25,454) |
Net Cash Provided by
Operating Activities
Net cash provided by operating activities during the nine months ended September 30, 20172022 was $33,000. This source of cash was$1.4 million, primarily resulting from net income of $3.6 million and non-cash net (loss) income adjustments of $4.1$23.3 million including $3.1and a net increase in operating assets and liabilities of $0.6 million, partially offset by a net loss of $22.5 million. The non-cash net (loss) income adjustments consisted primarily of $10.9 million related to a change in fair value of earn-out liability, $7.7 million of stock-based compensation expense and $1.1$4.7 million of depreciation and amortization expense. This source was partially offset by a $7.7 million increaseThe uses of cash related to changes in operating assets primarily consisted of increases in net investment in leases of $2.6 million, accounts receivable of $2.3 million, inventories of $3.8 million, and prepaid expenses and other assets of $0.3 million. The changes in operating assets and liabilities primarily related toconsisted of increases in income taxes receivableaccrued expenses and other liabilities of $5.6$6.8 million, accounts payable of $6.1 million, and inventoryaccrued payroll and related taxes of $3.8$1.4 million. The increase in income taxes
22
receivable was a result of the significant tax benefits recognized in the period associated with tax-deductible share-baesd 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.
Net cash provided byused in operating activities during the nine months ended September 30, 20162021, was $3.0 million, resulting from a net loss of $4.3 million. This source of cash primarily resulted frommillion and a net income of $0.5 million, a $1.8 million decrease in net operating assets and liabilities, includingnet of acquisition, of $6.8 million, which was partially offset by non-cash net income (loss) adjustments of $8.1 million. The non-cash net income (loss) adjustments consisted primarily of $7.7 million of stock-based compensation
32
expense, $2.1 million of depreciation and amortization expense and a $1.7 million increase in deferred taxes. The uses of cash related to changes in operating assets primarily consisted of increases in inventories of $3.6 million, in accounts receivable of $3.4 million, in net investment in leases of $1.7 million, in income taxes of $1.2 million, and in prepaid expenses and other assets of $1.1 million. The changes in operating liabilities consisted of increases in accrued expenses and other liabilities of $2.9 million and accounts payable on increased inventory purchases and other operating expenses, andof $2.0 million, partially offset by a decrease in accrued payroll and related taxes of non-cash expense items, including $0.9 million of stock-based compensation expense and $0.7 million of depreciation and amortization expense.$1.3 million.
Net Cash Used in Investing Activities
Net cash used in investing activities during the nine months ended September 30, 20172022, was $13.2$1.8 million, consisting primarily of $11.1 million in net purchases of marketable securitiesproperty and $2.0 million in purchases of product tooling, computer and manufacturing equipment, and leasehold improvements.patent costs.
Net cash used in investing activities during the nine months ended September 30, 20162021, was $0.5$81.2 million, primarily consisting primarily of acquisition-related payments of $79.8 million associated with the purchase of the AffloVest business and $1.4 million in purchases of product tooling, computerproperty and manufacturing equipment.equipment, and patent costs.
Net Cash Provided by Financing Activities
Net cash used in financing activities during the nine months ended September 30, 2022, was $4.3 million, primarily consisting of payments of $5.3 million made on our term loan, slightly offset by $1.0 million in proceeds from exercise of common stock options and the issuance of common stock under the ESPP.
Net cash provided by financing activities during the nine months ended September 30, 20172021, was $2.1$58.8 million, primarily consisting of borrowings of $54.8 million net of debt issuance costs incurred and $5.1 million in proceeds from the exercise of common stock options and the issuance of common stock under the ESPP, of $2.2 million and proceeds from exercises of common stock options and warrants of $0.7 million, partially offset by the purchase of treasury stock to fund taxes from restricted stock award vesting of $0.5$1.2 million andin taxes paid for the net share settlement of stock-settledperformance and restricted stock units of $0.3 million.units.
Net cash
Credit Agreement
On April 30, 2021, we entered into an Amended and Restated Credit Agreement (the “Restated Credit Agreement”) with the lenders from time to time party thereto, and Wells Fargo Bank, National Association, as Administrative Agent. The Restated Credit Agreement amended and restated in its entirety our prior credit agreement.
On September 8, 2021, we entered into a First Amendment Agreement (the “Amendment”), which amends the Restated Credit Agreement (as amended by the Amendment, the “Credit Agreement”) with the lenders from time to time party thereto and Wells Fargo Bank, National Association, as administrative agent. The Amendment, among other things, adds a $30.0 million incremental term loan to the $25.0 million revolving credit facility provided by financing activities during the nine months endedRestated Credit Agreement. The term loan is reflected on our condensed consolidated financial statements as a note payable. The term loan and the revolving credit facility mature on September 8, 2024. The Credit Agreement provides that, subject to satisfaction of certain conditions, we may increase the amount of the revolving loans available under the Credit Agreement and/or add one or more term loan facilities in an amount not to exceed $25.0 million in the aggregate, such that the total aggregate principal amount of loans available under the Credit Agreement (including under the revolving credit facility) does not exceed $80.0 million.
On September 8, 2021, in connection with the closing of the AffloVest Acquisition, we borrowed the $30.0 million term loan and utilized that borrowing, together with a draw of $25.0 million under the revolving credit facility and cash on hand, to fund the purchase price.
On February 22, 2022, we entered into a Second Amendment Agreement (the “Second Amendment”), which further amends the Credit Agreement, including with respect to the financial covenants.
The principal of the term loan is required to be repaid in quarterly installments of $750,000 commencing January 7, 2022, through July 8, 2024, with the remaining outstanding balance due on September
33
8, 2024. Pursuant to the Second Amendment, we made a mandatory principal prepayment of the term loan of $3.0 million on February 22, 2022.
As of September 30, 2016 was $28.4 million, generated by gross proceeds of $41.2 million from our initial public offering, partially offset by $8.2 million in payments of accrued dividends on preferred stock and $4.8 million of underwriting discounts and expenses associated with2022, 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 based on the prime rate. There was no outstanding balance onof the lineterm loan was $24.8 million and the outstanding balance under the revolving credit facility was $25.0 million. As of credit as of December 31, 2016.The line of credit expired on May 11, 2017, andSeptember 30, 2022, there was no outstanding balanceavailability under our Credit Agreement.
Our obligations under the Credit Agreement are secured by a security interest in substantially all of our and our subsidiaries’ assets and are also guaranteed by our subsidiaries. The Credit Agreement contains a number of restrictions and covenants, including that we maintain compliance with a maximum leverage ratio, a minimum fixed charge coverage ratio, a minimum consolidated EBITDA covenant and a minimum liquidity covenant. As of September 30, 2022, we were in compliance with all financial covenants under the Credit Agreement.
For additional information regarding the Credit Agreement, including interest rates, fees and maturities, see Note 9 – “Credit Agreement” of the condensed consolidated financial statements contained in this report.
Future Cash Requirements
For a discussion of our material estimated future cash requirements under our contractual obligations and commercial commitments, in total and disaggregated into current and long-term, see “Future Cash Requirements” included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the line asyear ended December 31, 2021. There have been no material changes since December 31, 2021.
As discussed in Note 4 – “Acquisitions” of that date.the condensed consolidated financial statements contained in this report, the initial earn-out payment under the AffloVest Acquisition is $10.0 million, of which we will pay $5.0 million on or before November 28, 2022, and of which we will pay $5.0 million, plus an imputed interest payment of $250,000, on or before May 26, 2023.
Adequacy of Capital Resources
Our future capitalcash requirements may vary significantly from those now planned and will depend on many factors, including:
| the impact and duration of the COVID-19 pandemic on our business; |
● | sales and marketing resources needed to further penetrate our market; |
| expansion of our operations domestically and/or internationally; |
| response of competitors to our solutions and applications; |
| costs associated with clinical research activities; |
| increases in interest rates; |
● | labor shortages and wage inflation; |
● | component price inflation; |
● | costs to develop and implement new products; and |
| use of capital for acquisitions or licenses, if any. |
2334
Historically, we have experienced increases in our expenditures consistent with the growth in our revenues,revenue, operations and personnel, and we anticipate that our expenditures will continue to increase as we expand our business.
WeAlthough the impact of the COVID-19 pandemic and other factors such as inflation and rising interest rates are difficult to predict, we believe our cash, cash equivalents marketable securities and any cash flows from operations will be sufficient to meet our working capital, and capital expenditure, debt repayment and related interest, and other cash requirements for at least the next twelve months. We expect continued increased expenses in connection with meeting our obligations as a public company.
Inflation and changing prices did not have a material effect on our business during the nine months ended September 30, 2017, and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.
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 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 September 30, 2017 are summarized below:
|
|
|
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|
|
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|
|
|
|
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|
| Payments Due By Period |
| |||||||||||||
|
|
|
| Less Than |
|
|
|
|
| More Than |
| |||||
(In thousands) |
| 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 |
|
| — |
|
| — |
|
| — |
|
Total |
| $ | 18,803 |
| $ | 16,526 |
| $ | 1,557 |
| $ | 720 |
| $ | — |
|
|
|
|
|
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 are an “emerging growth company” as defined by the JOBS Act. The JOBS Act provides that an emerging growth company can take advantage of the extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to 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 who 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.
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, from providing an auditor's attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 and from complying with any requirement that may be adopted by 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.
Critical Accounting PoliciesEstimates
Critical accounting estimates are those that involve a significant level of estimation uncertainty and Estimates
A “critical accounting policy” is one that is both importanthave had or are reasonably likely to the portrayal ofhave a material impact on 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.operations. For additional information, please see the discussion of our significantmost critical accounting policiesestimates 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, 2016.2021.
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 transactions2021. 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, 2021.
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 September 30, 2017.2022. 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 September 30, 2017,2022, 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 September 30, 20172022, that havehas materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting.
26
35
PART II—OTHER INFORMATION
From timeInformation pertaining to time, we may be subject to various claims andcertain legal proceedings arising in the ordinary coursewhich we are involved can be found in Note 10 – “Commitments and Contingencies” to our condensed consolidated financial statements included in Part I, Item 1 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 defensethis report and settlement costs, diversion of management resources, and other factors.is incorporated herein by reference.
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, 2016,2021, 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 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.
The net offering proceeds to us, after deducting underwriting discounts of approximately $2.9 million and offering expenses paid by us totaling approximately $2.9 million, were approximately $35.4 million. No offering expenses were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning 10.0% 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.
At September 30, 2017, 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.
28
36
EXHIBIT INDEX
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Exhibit |
| Description of Exhibit |
| Incorporated by Reference |
| Filed | ||||||
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| Form |
| File Number |
| Date of Filing |
| Exhibit |
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3.1 |
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| S-1 |
| 333-209115 |
| 06/09/2016 |
| 3.1 |
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| |
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3.2 |
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| S-1 |
| 333-209115 |
| 05/06/2016 |
| 3.2 |
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4.1 |
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| S-3 |
| 333-220132 |
| 08/23/2017 |
| 4.6 |
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4.2 |
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| S-3 |
| 333-220132 |
| 08/23/2017 |
| 4.7 |
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31.1 |
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| X | |
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31.2 |
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| X | |
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32.1 |
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| X | |
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32.2 |
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| X | |
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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. |
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| X |
| | | | | | | | | | |
| | | | Incorporated by Reference | | | ||||
Exhibit | | | | | | |
| Exhibit |
| Filed |
Number | | Description of Exhibit | | Form |
| Date of Filing | | Number | | Herewith |
| | | | | | | | | | |
2.1 | | | | | | | | | X | |
| | | | | | | | | | |
3.1 | | Amended and Restated Certificate of Incorporation, as amended through May 9, 2019 | | 8-K | | 05/09/2019 | | 3.2 | | |
| | | | | | | | | | |
3.2 | | | 8-K | | 03/12/2021 | | 3.1 | | | |
| | | | | | | | | | |
31.1 | | | | | | | | | X | |
| | | | | | | | | | |
31.2 | | | | | | | | | X | |
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32.1 | | | | | | | | | X | |
| | | | | | | | | | |
32.2 | | | | | | | | | X | |
| | | | | | | | | | |
101.1 | | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline XBRL: (i) Balance Sheets, (ii) Statements of Operations, (iii) Statements of Stockholders’ Equity, (iv) Statements of Cash Flows, and (v) Notes to the Condensed Consolidated Financial Statements | | | | | | | | X |
| | | | | | | | | | |
104.1 | | Cover page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101.1) | | | | | | | | X |
| | | | | | | | | | |
29
37
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.
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Tactile Systems Technology, Inc. | |||||
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Date: November 7, | | By: | /s/ | ||
|
| ||||
| Chief Financial Officer | ||||
| (Principal financial and accounting officer) |
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