0001558370-19-009809.txt : 20191104 0001558370-19-009809.hdr.sgml : 20191104 20191104161146 ACCESSION NUMBER: 0001558370-19-009809 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 76 CONFORMED PERIOD OF REPORT: 20190930 FILED AS OF DATE: 20191104 DATE AS OF CHANGE: 20191104 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TACTILE SYSTEMS TECHNOLOGY INC CENTRAL INDEX KEY: 0001027838 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-37799 FILM NUMBER: 191189918 BUSINESS ADDRESS: STREET 1: 1331 TYLER STREET NE STE 200 CITY: MINNEAPOLIS STATE: MN ZIP: 55413 BUSINESS PHONE: 866-435-3948 MAIL ADDRESS: STREET 1: 1331 TYLER STREET NE STE 200 CITY: MINNEAPOLIS STATE: MN ZIP: 55413 10-Q 1 tcmd-20190930x10q79f39f.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: September 30, 2019

or

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

For the transition period from to

Commission File Number 001-37799

Tactile Systems Technology, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

3701 Wayzata Blvd, Suite 300

41-1801204

(State or other jurisdiction of

incorporation or organization)

Minneapolis, Minnesota 55416

(I.R.S. employer

identification number)

(Address and Zip Code of principal executive offices)

(612) 355-5100

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, Par Value $0.001 Per Share

TCMD

The Nasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer 

Smaller reporting company 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No

19,028,450 shares of common stock, par value $0.001 per share, were outstanding as of October 31, 2019.

Forward-Looking Information

All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business, operations and financial performance and condition, are forward-looking statements. In some cases, you can identify forward-looking statements by the following words: "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "might," "target," "ongoing," "plan," "potential," "predict," "project," "should," "will," "would," or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance or achievements to be materially different from the information expressed or implied by the forward-looking statements in this Quarterly Report on Form 10-Q. These risks, uncertainties and other factors include, but are not limited to:

the adequacy of our liquidity to pursue our business objectives;
our ability to obtain reimbursement from third party payers for our products;
loss or retirement of key executives;
adverse economic conditions or intense competition;
loss of a key supplier;
entry of new competitors and products;
adverse federal, state and local government regulation;
technological obsolescence of our products;
technical problems with our research and products;
our ability to expand our business through strategic acquisitions;
our ability to integrate acquisitions and related businesses;
price increases for supplies and components;
the effects of current and future U.S. and foreign trade policy and tariff actions; and
the inability to carry out research, development and commercialization plans.

You should read the matters described in "Risk Factors" and the other cautionary statements made in our Annual Report on Form 10-K for the year ended December 31, 2018 and in this Quarterly Report on Form 10-Q. We cannot assure you that the forward-looking statements in this report will prove to be accurate and therefore you are encouraged not to place undue reliance on forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. You are urged to carefully review and consider the various disclosures made by us in this report and in other filings with the Securities and Exchange Commission (the “SEC”) that advise of the risks and factors that may affect our business. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we may make.

3

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Tactile Systems Technology, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

    

September 30,

    

December 31,

(In thousands, except share and per share data)

    

2019

    

2018

Assets

Current assets

Cash and cash equivalents

$

19,814

$

20,099

Marketable securities

24,920

25,786

Accounts receivable, net

 

27,681

 

24,332

Net investment in leases

 

7,628

 

Inventories

 

16,882

 

11,189

Income taxes receivable

 

3,847

 

1,793

Prepaid expenses and other current assets

 

1,956

 

1,762

Total current assets

 

102,728

 

84,961

Non-current assets

Property and equipment, net

 

7,499

 

4,810

Right of use operating lease assets

 

15,204

 

Intangible assets, net

 

5,074

 

5,339

Medicare accounts receivable, non-current

 

3,025

 

1,884

Deferred income taxes

 

8,840

 

8,820

Other non-current assets

 

1,405

 

1,257

Total non-current assets

 

41,047

 

22,110

Total assets

$

143,775

$

107,071

Liabilities and Stockholders' Equity

Current liabilities

Accounts payable

$

6,289

$

5,110

Accrued payroll and related taxes

 

11,336

 

7,421

Accrued expenses

 

3,696

 

2,785

Operating lease liabilities

 

1,990

 

Other current liabilities

 

817

 

760

Total current liabilities

 

24,128

 

16,076

Non-current liabilities

Accrued warranty reserve, non-current

 

2,227

 

1,725

Income taxes, non-current

 

54

 

Operating lease liabilities, non-current

13,399

 

Total non-current liabilities

 

15,680

 

1,725

Total liabilities

 

39,808

 

17,801

Commitments and Contingencies (see Note 10)

Stockholders’ equity:

Preferred stock, $0.001 par value, 50,000,000 shares authorized; none issued and outstanding as of September 30, 2019 and December 31, 2018

 

 

Common stock, $0.001 par value, 300,000,000 shares authorized; 19,016,032 shares issued and outstanding as of September 30, 2019; 18,631,125 shares issued and outstanding as of December 31, 2018

 

19

 

19

Additional paid-in capital

 

87,524

 

79,554

Retained earnings

 

16,393

 

9,705

Accumulated other comprehensive income (loss)

31

(8)

Total stockholders’ equity

 

103,967

 

89,270

Total liabilities and stockholders’ equity

$

143,775

$

107,071

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

4

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)

    

2019

    

2018

    

2019

    

2018

Revenue

Sales revenue

$

42,882

$

32,969

$

112,503

$

87,731

Rental revenue

 

6,730

 

3,353

 

19,926

 

9,572

Total revenue

 

49,612

 

36,322

 

132,429

 

97,303

Cost of revenue

Cost of sales revenue

 

12,233

 

9,153

 

33,231

 

24,275

Cost of rental revenue

 

2,006

 

988

 

6,062

 

2,785

Total cost of revenue

 

14,239

 

10,141

 

39,293

 

27,060

Gross profit

Gross profit - sales revenue

 

30,649

 

23,816

 

79,272

 

63,456

Gross profit - rental revenue

 

4,724

 

2,365

 

13,864

 

6,787

Gross profit

 

35,373

 

26,181

 

93,136

 

70,243

Operating expenses

Sales and marketing

 

20,737

 

15,632

 

56,546

 

42,641

Research and development

 

1,467

 

1,223

 

3,982

 

3,949

Reimbursement, general and administrative

 

9,966

 

7,956

 

28,159

 

22,799

Total operating expenses

 

32,170

 

24,811

 

88,687

 

69,389

Income from operations

 

3,203

 

1,370

 

4,449

 

854

Other income

 

160

 

128

 

480

 

351

Income before income taxes

 

3,363

 

1,498

 

4,929

 

1,205

Income tax expense (benefit)

 

932

 

(248)

 

(1,759)

 

(3,063)

Net income

$

2,431

$

1,746

$

6,688

$

4,268

Net income per common share

Basic

$

0.13

$

0.10

$

0.35

$

0.23

Diluted

$

0.12

$

0.09

$

0.34

$

0.22

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

Basic

18,981,015

18,344,956

18,870,622

18,166,999

Diluted

19,641,853

19,525,686

19,630,721

19,328,947

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

5

Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

Three Months Ended

Nine Months Ended

September 30,

September 30,

(In thousands)

    

2019

    

2018

    

2019

    

2018

Net income

$

2,431

$

1,746

$

6,688

$

4,268

Other comprehensive (loss) income:

 

  

 

  

 

  

 

  

Unrealized (loss) gain on marketable securities

 

(13)

 

10

 

51

 

29

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

 

4

 

(3)

 

(12)

 

(16)

Total other comprehensive (loss) income

 

(9)

 

7

 

39

 

13

Comprehensive income

$

2,422

$

1,753

$

6,727

$

4,281

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

6

Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

Accumulated

Additional

Other

Common Stock

Paid-In

Retained

Comprehensive

Treasury

(In thousands, except share data)

 

Shares

 

Par Value

 

Capital

 

Earnings

 

(Loss) Income

 

Stock

 

Total

Balances, December 31, 2017

17,846,379

$

18

$

70,224

$

3,082

$

(44)

$

(493)

$

72,787

Stock-based compensation

5,638

5,638

Exercise of common stock options and vesting of restricted stock units

536,125

1,218

1,218

Taxes paid for net share settlement of restricted stock units

(56,469)

(1,922)

(1,922)

Treasury stock issued for option exercises

26,086

(493)

493

Common shares issued for employee stock purchase plan

63,578

1,416

1,416

Comprehensive income for the period

4,268

13

4,281

Balances, September 30, 2018

18,415,699

$

18

$

76,081

$

7,350

$

(31)

$

$

83,418

Balances, December 31, 2018

18,631,125

19

79,554

9,705

(8)

89,270

Stock-based compensation

7,387

7,387

Exercise of common stock options and vesting of restricted stock units

398,477

1,838

1,838

Taxes paid for net share settlement of restricted stock units

(56,956)

(3,107)

(3,107)

Common shares issued for employee stock purchase plan

43,386

1,852

1,852

Comprehensive income for the period

6,688

39

6,727

Balances, September 30, 2019

19,016,032

$

19

$

87,524

$

16,393

$

31

$

$

103,967

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

7

Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Nine Months Ended

September 30,

(In thousands)

    

2019

    

2018

Cash flows from operating activities

Net income

$

6,688

$

4,268

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

Depreciation and amortization

2,583

2,474

Deferred income taxes

(31)

(1,411)

Stock-based compensation expense

7,387

5,638

Loss on disposal of equipment

3

Changes in assets and liabilities:

Accounts receivable

(3,349)

(2,556)

Net investment in leases

(7,628)

Inventories

(5,693)

(3,879)

Income taxes

(2,051)

(2,090)

Prepaid expenses and other assets

(418)

(1,358)

Right of use operating lease assets

107

Medicare accounts receivable, non-current

(1,141)

1,707

Accounts payable

979

(508)

Accrued payroll and related taxes

3,915

1,586

Accrued expenses and other liabilities

1,073

(190)

Net cash provided by operating activities

2,421

3,684

Cash flows from investing activities

Proceeds from sales of securities available-for-sale

2,000

Proceeds from maturities of securities available-for-sale

16,000

11,000

Purchases of securities available-for-sale

(14,859)

(14,792)

Purchases of property and equipment

(4,276)

(2,384)

Intangible assets costs

(154)

(1,052)

Net cash used in investing activities

(3,289)

(5,228)

Cash flows from financing activities

Taxes paid for net share settlement of restricted stock units

(3,107)

(1,922)

Proceeds from exercise of common stock options

1,838

1,218

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

1,852

1,416

Net cash provided by financing activities

583

712

Net decrease in cash and cash equivalents

(285)

(832)

Cash and cash equivalents – beginning of period

20,099

23,968

Cash and cash equivalents – end of period

$

19,814

$

23,136

Supplemental cash flow disclosure

Cash paid for interest

$

$

3

Cash paid for taxes

$

326

$

448

Capital expenditures incurred but not yet paid

$

801

$

184

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

8

Tactile Systems Technology, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Note 1. Nature of Business and Operations

Tactile Systems Technology, Inc. (“we,” “us,” and “our”) is the sole manufacturer and distributor of the Flexitouch® and Entre™ systems, medical devices that help control symptoms of lymphedema, a chronic and progressive medical condition, the Actitouch® system, a medical device used to treat venous leg ulcers and chronic venous insufficiency, and the Airwear wrap, a medical device used for the management of venous insufficiency, venous hypertension, venous ulcerations and lymphedema. Our products are purchased or rented for home use and are recommended by vascular, wound and lymphedema clinics throughout the United States.

We were originally incorporated in Minnesota under the name Tactile Systems Technology, Inc. on January 30, 1995. During 2006, we established a merger corporation and subsequently, on July 21, 2006, merged with and into this merger corporation, resulting in our reincorporation as a Delaware corporation. The resulting corporation assumed the name Tactile Systems Technology, Inc. In September 2013, we began doing business as “Tactile Medical.”

On August 2, 2016, we closed the initial public offering of our common stock, which resulted in the sale of 4,120,000 shares of our common stock at a public offering price of $10.00 per share. We received net proceeds from the initial public offering of approximately $35.4 million, after deducting underwriting discounts and approximately $2.9 million of transaction expenses. In connection with the closing of the initial public offering, all of our outstanding redeemable convertible preferred stock automatically converted to common stock on August 2, 2016. As a result, at August 2, 2016, we did not have any redeemable convertible preferred stock issued or outstanding.

Our business is affected by seasonality. In the first quarter of each year, when most patients have started a new insurance year and have not yet met their annual out-of-pocket payment obligations, we experience substantially reduced demand for our products. We typically experience higher revenue in the third and fourth quarters when patients have met their annual insurance deductibles, thereby reducing their out-of-pocket costs for our products, and because patients desire to exhaust their flexible spending accounts at year end. This seasonality applies only to purchases and rentals of our products by patients covered by commercial insurance and is not relevant to Medicare or the Veterans Administration, as those payers either do not have plans that have declining deductibles over the course of the plan year and/or do not have plans that include patient deductibles for purchases or rentals of our products.

Note 2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including those which are normal and recurring) considered necessary for a fair presentation of the interim financial information have been included. We have reclassified certain prior year amounts to conform to the current year’s presentation.

The results for the nine months ended September 30, 2019, are not necessarily indicative of results to be expected for the year ending December 31, 2019, or for any other interim period or for any future year. The condensed consolidated interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018.

9

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of Tactile Systems Technology, Inc. and its wholly owned subsidiary, Swelling Solutions, Inc. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and to disclose contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Comprehensive Income

Comprehensive income reflects the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Our comprehensive income represents net income adjusted for unrealized gains and losses on available-for-sale marketable securities and the related taxes.

JOBS Act Accounting Election

Prior to December 31, 2018, we were an “emerging growth company” as defined by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As a result, we were eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. We elected to take advantage of the extended transition period for adopting new or revised accounting standards that have different effective dates for public and private companies until such time as those standards would otherwise apply to private companies. However, as of the last business day of our second fiscal quarter of 2018, the market value of our common stock that was held by non-affiliates exceeded $700.0 million, and as a result, we no longer qualified as an emerging growth company as of December 31, 2018, and are no longer able to take advantage of certain exemptions, including, the extended transition period for adopting new or revised accounting standards and our exemption from providing our auditor’s attestation on our system of internal control over financial reporting, which was included for the first time in our Annual Report on Form 10-K for the year ended December 31, 2018.

Note 3. Summary of Significant Accounting Policies

Significant Accounting Policies

Excluding the adoption of Accounting Standards Codification (“ASC”) 842 – Leases, as described below, there were no material changes in our significant accounting policies during the nine months ended September 30, 2019. See Note 3 – “Summary of Significant Accounting Policies” to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018, for information regarding our significant accounting policies.

Recent Accounting Pronouncements

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

10

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

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses, to require the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts. The ASU will be effective for us for interim and annual periods beginning January 1, 2020. Therefore, we plan to further evaluate the anticipated impact of the adoption of this ASU on the condensed consolidated financial statements in future periods.

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

In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (“ASU 2018-15”), which aligns the accounting for implementation costs incurred in a cloud computing arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software. We early adopted this ASU effective January 1, 2019, and it did not have a material impact on the condensed consolidated financial statements.

Note 4. Marketable Securities

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

At September 30, 2019

Amortized

Unrealized

Fair

(In thousands)

Cost

Gains

Losses

Value

U.S. government and agency obligations

$

22,392

$

26

$

$

22,418

Corporate debt securities

 

2,487

 

15

 

 

2,502

Marketable securities

$

24,879

$

41

$

$

24,920

11

At December 31, 2018

Amortized

Unrealized

Fair

(In thousands)

Cost

Gains

Losses

Value

U.S. government and agency obligations

$

19,332

$

5

$

17

$

19,320

Corporate debt securities

 

6,464

 

7

 

5

 

6,466

Marketable securities

$

25,796

$

12

$

22

$

25,786

Net pre-tax unrealized gains for marketable securities at September 30, 2019, were recorded as a component of accumulated other comprehensive income in stockholders' equity. There were no sales of marketable securities during the nine months ended September 30, 2019.

There were no marketable securities in an unrealized loss position at September 30, 2019.  

At December 31, 2018, unrealized losses and the fair value of marketable securities aggregated by investment category and the length of time the securities were in a continuous loss position, were as follows:

At December 31, 2018

Less than 12 months

12 months or more

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

(In thousands)

Value

Losses

Value

Losses

Value

Losses

U.S. government and agency obligations

$

11,884

$

11

$

2,993

$

6

$

14,877

$

17

Corporate debt securities

 

2,993

 

3

 

999

 

2

 

3,992

 

5

Marketable securities

$

14,877

$

14

$

3,992

$

8

$

18,869

$

22

Note 5. Inventories

Inventories consisted of the following:

(In thousands)

    

At September 30, 2019

    

At December 31, 2018

Finished goods

$

6,261

$

5,318

Component parts and work-in-process

 

10,621

 

5,871

Total inventories

$

16,882

$

11,189

Note 6. Intangible Assets

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

Weighted-

At September 30, 2019

At December 31, 2018

Average

Gross

Gross

Amortization

Carrying

Accumulated

Net

Carrying

Accumulated

Net

(In thousands)

Period

Amount

Amortization

Amount

Amount

Amortization

Amount

Patents

11 years

$

4,406

$

328

$

4,078

$

4,253

$

71

$

4,182

Defensive intangible assets

5 years

1,126

224

902

1,126

82

1,044

Customer accounts

4 years

 

125

 

31

 

94

 

125

 

12

 

113

Total

$

5,657

$

583

$

5,074

$

5,504

$

165

$

5,339

12

Amortization expense was $0.1 million for each of the three months ended September 30, 2019 and 2018, and $0.4 million and $0.2 million for the nine months ended September 30, 2019 and 2018, respectively. Future amortization expenses are expected as follows:

(In thousands)

2019 (October 1 - December 31)

$

140

2020

558

2021

 

558

2022

 

558

2023

 

490

Thereafter

 

2,770

Total

$

5,074

Note 7. Accrued Expenses

Accrued expenses consisted of the following:

(In thousands)

    

At September 30, 2019

    

At December 31, 2018

Warranty

$

1,053

$

841

Legal and consulting

636

319

Travel and business

 

662

 

557

Headquarter related costs

482

Sales and use tax

223

115

Acquisition earn-out

375

Deferred rent

155

Other

 

640

 

423

Total

$

3,696

$

2,785

13

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)

    

2019

    

2018

    

2019

    

2018

Beginning balance

$

3,002

$

2,102

$

2,566

$

1,672

Warranty provision

 

664

 

429

 

1,677

 

1,286

Processed warranty claims

 

(386)

 

(245)

 

(963)

 

(672)

Ending balance

$

3,280

$

2,286

$

3,280

$

2,286

Accrued warranty reserve, current

$

1,053

$

726

$

1,053

$

726

Accrued warranty reserve, non-current

2,227

1,560

2,227

1,560

Total accrued warranty reserve

$

3,280

$

2,286

$

3,280

$

2,286

Note 9. Credit Agreement

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

The Credit Agreement provides for a $10.0 million revolving credit facility. Subject to satisfaction of certain conditions, we may increase the amount of the revolving loans available under the Credit Agreement and/or add one or more term loan facilities in an amount not to exceed an incremental $25.0 million in the aggregate, such that the total aggregate principal amount of loans available under the Credit Agreement (including under the revolving credit facility) does not exceed $35.0 million. As of September 30, 2019, and the date on which we filed this report, we did not have any outstanding borrowings under the Credit Agreement.

Our obligations under the Credit Agreement are secured by a security interest in substantially all of our and our subsidiaries’ assets and are also guaranteed by our subsidiaries. The Credit Agreement contains a number of restrictions and covenants, including that we maintain compliance with a maximum leverage ratio and a minimum liquidity covenant. As of September 30, 2019, we were in compliance with all financial covenants under the Credit Agreement.

Note 10. Commitments and Contingencies

Lease Obligations

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

We classify our leases as buildings, vehicles or computer and office equipment and do not separate lease and nonlease components of contracts for any of the aforementioned classifications. In accordance with

14

applicable guidance, we do not record leases with terms that are less than one year on the Condensed Consolidated Balance Sheet.

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

Buildings

We lease certain office and warehouse space at various locations in the United States where we provide services. These leases are typically greater than one year with fixed, escalating rents over the noncancelable terms and, therefore, ROU operating lease assets and operating lease liabilities are recorded on the Condensed Consolidated Balance Sheet, with rent expense to be recognized on a straight-line basis over the term of the lease. The remaining lease terms vary from approximately one to ten years as of September 30, 2019.

In March 2008, we entered into a noncancelable operating lease agreement for building space for our previous corporate headquarters that provides for monthly rent, real estate taxes and operating expenses that was subsequently extended to July 31, 2021. This space is included in our ROU operating lease assets and operating lease liabilities. We are in the process of negotiating a buy-out of the lease for these premises due to our move in September to our new headquarters.

We entered into a lease (“initial lease”) in October 2018 for approximately 80,000 square feet of office space for our new corporate headquarters in Minneapolis, Minnesota. In December 2018, we amended the initial lease to add 29,000 square feet of additional office space, which is accounted for as a separate lease (“second lease”) in accordance with ASC 842. The initial and second leases expire in February 2030. The portion of the space under the initial lease was placed in service in September 2019. This portion was recognized as an operating lease and included in the ROU operating lease assets and operating lease liabilities on the Condensed Consolidated Balance Sheet.  The portion of the space covered under the second lease is expected to be occupied and commence in the second half of 2020.

Vehicles

We lease vehicles for certain members of our field sales organization under a vehicle fleet program whereby the initial, noncancelable lease is for a term of 367 days, thus more than one year. Subsequent to the initial term, the lease becomes a month-to-month, cancelable lease. As of September 30, 2019, we had approximately 75 vehicles with agreements within the initial, noncancelable lease term that are recorded as ROU operating lease assets and operating lease liabilities. In addition to monthly rental fees specific to the vehicle, there are fixed monthly nonlease components that have been included in the ROU operating lease assets and operating lease liabilities. The nonlease components are not significant.

Computer and Office Equipment

We also have operating lease agreements for certain computer and office equipment. The remaining lease terms at the ASC 842 adoption date of January 1, 2019, ranged from less than one year to approximately five years with fixed monthly payments that are included in the ROU operating lease assets and operating lease liabilities. The leases provide an option to purchase the related equipment at fair market value at the end of the lease. The lease will automatically renew as a month-to-month rental at the end of the lease if the equipment is not purchased or returned.

15

Lease Position, Undiscounted Cash Flow and Supplemental Information

The table below presents information related to our ROU operating lease assets and operating lease liabilities that we have recorded:

(In thousands)

    

At September 30, 2019

Right of use operating lease assets

$

15,204

Operating lease liabilities:

Current

$

1,990

Non-current

 

13,399

Total

$

15,389

Operating leases:

Weighted average remaining lease term

 

8.8 years

Weighted average discount rate (1)

5.10%