What changed in this filing

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Item 1. Financial Statements

2020-08-03 compared with 2020-05-04 · 165 added, 111 removed, 426 unchanged (39% of the section changed)

37 unchanged sentences

Preferred stock, $ 0.001 par value, 50,000,000 shares authorized;

none issued and outstanding as of March 31, 2020 and December 31, 2019

none issued and outstanding as of June 30, 2020 and December 31, 2019

Common stock, $ 0.001 par value, 300,000,000 shares authorized;

19,226,665 shares issued and outstanding as of March 31, 2020;

19,411,404 shares issued and outstanding as of June 30, 2020;

19,152,715 shares issued and outstanding as of December 31, 2019

7 unchanged sentences

Condensed Consolidated Statements of Operations

Three Months Ended March 31,

Three Months Ended

Six Months Ended

(In thousands, except share and per share data)

13 unchanged sentences

Total operating expenses

Loss from operations

Loss before income taxes

Income tax benefit

(Loss) income from operations

(Loss) income before income taxes

Income tax expense (benefit)

Net (loss) income

4 unchanged sentences

Condensed Consolidated Statements of Comprehensive (Loss) Income

Three Months Ended March 31,

Three Months Ended

Six Months Ended

(In thousands)

Net (loss) income

Other comprehensive income:

Unrealized gain on marketable securities

Income tax related to items of other comprehensive income

Total other comprehensive income

Other comprehensive (loss) income:

Unrealized (loss) gain on marketable securities

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

Total other comprehensive (loss) income

Comprehensive (loss) income

5 unchanged sentences

(Loss) Income

Balances, December 31, 2018

Balances, March 31, 2020

Stock-based compensation

1 unchanged sentence

Taxes paid for net share settlement of restricted stock units

Comprehensive income for the period

Balances, March 31, 2019

Common shares issued for employee stock purchase plan

Comprehensive loss for the period

Balances, June 30, 2020

Balances, December 31, 2019

2 unchanged sentences

Taxes paid for net share settlement of restricted stock units

Common shares issued for employee stock purchase plan

Comprehensive (loss) income for the period

Balances, June 30, 2020

Balances, March 31, 2019

Stock-based compensation

Exercise of common stock options and vesting of restricted stock units

Taxes paid for net share settlement of restricted stock units

Common shares issued for employee stock purchase plan

Comprehensive income for the period

Balances, June 30, 2019

Balances, December 31, 2018

Stock-based compensation

Exercise of common stock options and vesting of restricted stock units

Taxes paid for net share settlement of restricted stock units

Common shares issued for employee stock purchase plan

Comprehensive income for the period

Balances, June 30, 2019

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

1 unchanged sentence

Condensed Consolidated Statements of Cash Flows

Three Months Ended March 31,

Six Months Ended June 30,

(In thousands)

1 unchanged sentence

Net (loss) income

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

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

Depreciation and amortization

2 unchanged sentences

Stock-based compensation expense

Gain on maturities of marketable securities

Impairment losses

Changes in assets and liabilities:

7 unchanged sentences

Accrued expenses and other liabilities

Net cash provided by operating activities

Net cash (used in) provided by operating activities

Cash flows from investing activities

Proceeds from maturities of securities available-for-sale

Purchases of securities available-for-sale

Purchases of property and equipment

4 unchanged sentences

Proceeds from exercise of common stock options

Net cash used in financing activities

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

Net cash provided by financing activities

Net increase in cash and cash equivalents

29 unchanged sentences

In the opinion of management, all adjustments (including those which are normal and recurring) considered necessary for a fair presentation of the interim financial information have been included.

The results for the three months ended March 31, 2020, are not necessarily indicative of results to be expected for the year ending December 31, 2020, or for any other interim period or for any future year.

The results for the six months ended June 30, 2020, are not necessarily indicative of results to be expected for the year ending December 31, 2020, or for any other interim period or for any future year.

The condensed consolidated interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019.

11 unchanged sentences

Part of our strategy includes changing many of our processes and practices in an effort to help mitigate the impact of COVID-19 on our business so that we can support our clinicians and safely make our at-home therapies available to patients.

These include, but are not limited to:

● Adjusting work and operations to keep employees safe while continuing to serve our clinicians and patients.

As an essential business under federal guidelines, we continue to manufacture product and we have implemented multiple, smaller rotational shifts and other best practices to help protect the health and safety of our workforce.

● Implementing remote and flexible work arrangements for employees wherever possible, including real-time, online training of our new sales representatives.

● Initiating employee travel and contact restrictions to reduce exposure.

Since the onset of COVID-19, we have remained proactive to ensure we continue to adapt to our employees, clinicians and patients needs.

These changes to our business include, but are not limited to:

● Initially, we modified our operations with the primary focus on keeping our employees safe while continuing to serve our clinicians and patients.

As an essential business under federal guidelines, we continued to manufacture product and implemented multiple, smaller rotational shifts and other best practices to help protect the health and safety of our workforce.

More recently, we have migrated closer to our pre-COVID work shifts, however we have implemented more stringent safety measures including mandatory use of face masks, social distancing and temperature checks for our employees.

● We have continued to incorporate remote and flexible work arrangements for employees whenever possible, including real-time, online training of our new sales representatives.

● Continuing employee travel and contact restrictions to reduce exposure.

● Collaborating with payers to modify coverage requirements by serving patients virtually.

● Postponing large medical education programs and conducting virtual meetings whenever possible, including virtual patient demonstrations and trainings.

● In concert with COVID-19 social distancing requirements and recommendations, we moved to a “no contact” virtual patient training model.

This new model substantially reduced the need for in-person contact and visits to patients’ homes and clinics in order to protect the health and limit the exposure of both our trainers and patients.

Accordingly in the second quarter of 2020, we inactivated our independent healthcare practitioners, who acted as at-home trainers to educate patients on the proper use of our systems, in order to allow these individuals to have access to specific COVID related financial relief.

● We continue to transition large, in-person medical education programs in favor of conducting virtual meetings whenever possible.

● When in-person visits are required, we are supporting clinicians and patients by using rigorous infection control practices.

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

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

1 unchanged sentence

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.

Comprehensive (Loss) Income

Comprehensive (loss) 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 (loss) income represents net (loss) income adjusted for unrealized gains and losses on available-for-sale marketable securities and the related taxes.

Summary of Significant Accounting Policies

Significant Accounting Policies

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

There were no material changes in our significant accounting policies during the six months ended June 30, 2020, except as set forth below.

See Note 3 – “Summary of Significant Accounting Policies” to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019, for information regarding our significant accounting policies.

Impairment of Long-Lived Assets

We review long-lived assets, including property and equipment and patents, for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be fully recoverable.

We assess long-lived assets used in operations for impairment indicators, including when undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount.

In the second quarter of 2020, we reevaluated the Airwear wrap go-to market plan, and determined to focus our strategy on more advanced solutions within our core, long-standing Flexitouch and Entre franchises.

Accordingly, we made the strategic decision to discontinue the Airwear wrap in the second quarter of 2020.

Due to the planned discontinuation of the product line, we recorded a $ 4.0 million non-cash impairment charge to fully write-off the inventory and long-lived assets of the Airwear wrap in the quarter ended June 30, 2020.

The majority of the impairment charge was comprised of the intangible assets and property and equipment, totaling $ 3.6 million, and was classified within the reimbursement, general and administrative line of the Condensed Consolidated Statements of Operations.

The inventory-related component of the impairment charge was $ 0.4 million, and was classified within the cost of revenue line of the Condensed Consolidated Statements of Operations.

Recently Adopted Accounting Pronouncements

4 unchanged sentences

We adopted ASU 2016-13 as of January 1, 2020, and it did not have an impact on the condensed consolidated financial statements.

Accounting Pronouncements Issued Not Yet Adopted

In December 2019, the FASB issued ASU No.

2019-12, “Income Taxes (Topic 740) — Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which is intended to simplify various aspects of the accounting for income taxes.

ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application.

This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted.

We are currently evaluating the applicability and impact of the standard on our condensed consolidated financial statements and related disclosures.

Marketable Securities

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

At March 31, 2020

Our investments in marketable securities, all of which have original contractual maturities of less than twelve months, are classified as available-for-sale and consist of the following:

At June 30, 2020

(In thousands)

7 unchanged sentences

Marketable securities

Net pre-tax unrealized gains for marketable securities at March 31, 2020, were recorded as a component of accumulated other comprehensive income in stockholders' equity.

There were no sales of marketable securities during the three months ended March 31, 2020.

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

Net pre-tax unrealized gains for marketable securities at June 30, 2020, were recorded as a component of accumulated other comprehensive income in stockholders' equity.

There were no sales of marketable securities during the six months ended June 30, 2020.

There were no marketable securities in an unrealized loss position at June 30, 2020.

At December 31, 2019, unrealized losses and the fair value of marketable securities aggregated by investment category and the length of time the securities were in a continuous loss position, were as follows:

8 unchanged sentences

(In thousands)

At March 31, 2020

At June 30, 2020

At December 31, 2019

4 unchanged sentences

Our patents and other intangible assets are summarized as follows:

At March 31, 2020

At June 30, 2020

(In thousands)

11 unchanged sentences

Total intangible assets

Amortization expense was $ 0.1 million for each of the three months ended March 31, 2020 and 2019.

Amortization expense was $ 0.1 million for each of the three months ended June 30, 2020 and 2019, and $ 0.3 million for each of the six months ended June 30, 2020 and 2019.

Future amortization expenses are expected as follows:

(In thousands)

2020 (April 1 - December 31)

2020 (July 1 - December 31)

Accrued Expenses

1 unchanged sentence

(In thousands)

At March 31, 2020

At June 30, 2020

At December 31, 2019

Lease termination costs

Travel and business

Legal and consulting

Travel and business

In-transit inventory

1 unchanged sentence

Clinical studies

Lease termination costs

Warranty Reserves

1 unchanged sentence

Three Months Ended

Six Months Ended

(In thousands)

9 unchanged sentences

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 March 31, 2020 , and the date on which we filed this report, we did not have any outstanding borrowings under the Credit Agreement.

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 June 30, 2020 , and the date on which we filed this report, we did not have any outstanding borrowings under the Credit Agreement.

Our obligations under the Credit Agreement are secured by a security interest in substantially all of our and our subsidiaries’ assets and are also guaranteed by our subsidiaries.

The Credit Agreement contains a number of restrictions and covenants, including that we maintain compliance with a maximum leverage ratio and a minimum liquidity covenant.

As of March 31, 2020, we were in compliance with all financial covenants under the Credit Agreement.

As of June 30, 2020, we were in compliance with all financial covenants under the Credit Agreement.

Commitments and Contingencies

3 unchanged sentences

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 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.

7 unchanged sentences

These leases are typically greater than one year with fixed, escalating rents over the noncancelable terms and, therefore, ROU operating lease assets and operating lease liabilities are recorded on the Condensed Consolidated Balance Sheet, with rent expense to be recognized on a straight-line basis over the term of the lease.

The remaining lease terms vary from approximately one to ten years as of March 31, 2020.

The remaining lease terms vary from approximately one to ten years as of June 30, 2020.

In March 2008, we entered into a noncancelable operating lease agreement for building space for our previous corporate headquarters that provided for monthly rent, real estate taxes and operating expenses that was subsequently extended to July 31, 2021.

Due to the move to our new headquarters in September 2019, we entered into a termination agreement for our former corporate headquarters on December 31, 2019.

We agreed to pay $ 1.2 million in order to terminate all further rights and obligations of the lease.

The lease was removed from our ROU operating lease assets and operating lease liabilities and the total net loss on termination of $ 1.1 million was recorded in the reimbursement, general and administrative line of our Consolidated Statements of Operations.

We agreed to pay $ 1.2 million in order to terminate all future rights and obligations of the lease.

We entered into a lease (“initial lease”) in October 2018, for approximately 80,000 square feet of office space for our new corporate headquarters in Minneapolis, Minnesota.

In December 2018, we amended the initial lease to add approximately 29,000 square feet of additional office space, which is accounted for as a separate lease (“second lease”) in accordance with ASC 842.

In December 2019, we further amended the lease which extended the expiration date of the initial lease, extended the expiration date of and added

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.

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 added approximately 4,000 square feet to the second lease, as well as added approximately 37,000 square feet of additional office space, accounted for as a separate lease (“third lease”) in accordance with ASC 842.

The portion of the space under the initial lease was placed in service in September 2019.

This portion was recognized as an operating lease and included in the ROU operating lease assets and operating lease liabilities on the Consolidated Balance Sheets.

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 Sheets.

The portion of the space covered under the second lease is expected to be occupied and commence in the second half of 2020 and the portion of the space covered under the third lease is expected to be occupied and commence in the second half of 2021.

1 unchanged sentence

Subsequent to the initial term, the lease becomes a month-to-month, cancelable lease.

As of March 31, 2020, we had approximately 84 vehicles with agreements within the initial, noncancelable lease term that are recorded as ROU operating lease assets and operating lease liabilities.

As of June 30, 2020, we had approximately 65 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.

2 unchanged sentences

We also have operating lease agreements for certain computer and office equipment.

The remaining lease terms as of March 31, 2020, ranged from less than one year to approximately four years with fixed monthly payments that are included in the ROU operating lease assets and operating lease liabilities.

The remaining lease terms as of June 30, 2020, ranged from less than one year to approximately four years with fixed monthly payments that are included in the ROU operating lease assets and operating lease liabilities.

The leases provide an option to purchase the related equipment at fair market value at the end of the lease.

3 unchanged sentences

(In thousands)

At March 31, 2020

At June 30, 2020

At December 31, 2019

4 unchanged sentences

Weighted average discount rate

Three Months Ended March 31,

Six Months Ended June 30,

Supplemental cash flow information for our operating leases:

1 unchanged sentence

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

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

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

(In thousands)

2020 (April 1 - December 31)

2020 (July 1 - December 31)

Total minimum lease payments

3 unchanged sentences

Non-current obligations under operating lease liabilities

As of March 31, 2020, we have additional lease commitments of $ 14.3 million related to amendments to existing building leases that have not yet commenced.

As of June 30, 2020, we have additional lease commitments of $ 13.9 million related to amendments to existing building leases that have not yet commenced.

As the lessee we are involved in providing guidance to the lessor for related improvements, however these improvements are managed and owned by the lessor.

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

Operating lease costs were $ 0.7 million and $ 0.4 million for the three months ended June 30, 2020 and 2019, respectively.

Operating lease costs were $ 1.4 million and $ 0.7 for the six months ended June 30, 2020 and 2019, respectively.

Major Vendors

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

We had purchases from two major vendors that accounted for 33 % and 32 % of our total purchases for the three and six months ended June 30, 2020, respectively.

We had purchases from two major vendors that accounted for 38 % and 33 % of our total purchases for the three and six months ended June 30, 2019, respectively.

Purchase Commitments

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

We issued purchase orders prior to June 30, 2020, totaling $ 24.4 million for goods that we expect to receive within the next year.

Retirement Plan

We maintain a 401(k) retirement plan for our employees in which eligible employees can contribute a percentage of their pre-tax compensation.

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

Discretionary contributions to the 401(k) plan totaled $ 0.1 million for each of the three and six months ended June 30, 2020 and 2019.

Stockholders' Equity

6 unchanged sentences

In addition, all awards granted under our 2007 Omnibus Stock Plan and our 2003 Stock Option Plan that were outstanding when the 2016 Plan became effective and that are forfeited, expired, cancelled, settled for cash or otherwise not issued, will become available for issuance under the 2016 Plan.

Pursuant to the automatic increase feature of the 2016 Plan, shares were added as

approved by the Board of Directors for each year since inception other than 2019, at which point, the Board exercised its prerogative to forgo the increase.

Pursuant to the automatic increase feature of the 2016 Plan, shares were added as approved by the Board of Directors for each year since inception other than 2019, at which point, the Board exercised its prerogative to forgo the increase.

On January 1, 2020, 952,697 shares were added as available for issuance thereunder.

As of March 31, 2020, 4,696,923 shares were available for future grant pursuant to the 2016 Plan.

As of June 30, 2020, 4,709,363 shares were available for future grant pursuant to the 2016 Plan.

Upon adoption and approval of the 2016 Plan, all of our previous equity incentive compensation plans were terminated.

However, existing awards under those plans continue to vest in accordance with the original vesting schedules and will expire at the end of their original terms.

We recorded stock-based compensation expense of $ 2.7 million and $ 2.8 million for the three months ended March 31, 2020 and 2019, respectively.

In the second fiscal quarter of 2020, our Board of Directors appointed a new President and Chief Executive Officer (“CEO”), effective June 8, 2020.

In conjunction with the acceptance of the written offer, our CEO will receive both restricted stock units and stock option awards under our 2016 Plan.

The awards will be granted during the third fiscal quarter of 2020, and a portion of the awards will vest on June 30, 2021, with the remaining portion of the awards vesting over a period of three years from the date of grant.

Further, all of the stock options included in these awards will require that our stock price exceed 110 % of the closing price of our common stock on the date of grant for 20 consecutive trading days during the term of the option in order to vest.

We recorded stock-based compensation expense of $ 2.4 million and $ 2.3 million for the three months ended June 30, 2020 and 2019, respectively, and $ 5.1 million for each of the six months ended June 30, 2020 and 2019.

This expense was allocated as follows:

Three Months Ended

Six Months Ended

(In thousands)

6 unchanged sentences

We have granted stock options to certain participants that vest over three or four years and typically have a contractual term of seven or ten years .

Stock-based compensation expense included in the Condensed Consolidated Statements of Operations for stock options was $ 0.9 million and $ 0.7 million for the three months ended March 31, 2020 and 2019, respectively.

At March 31, 2020, there was approximately $ 9.6 million of total unrecognized pre-tax stock option expense under our equity compensation plans, which is expected to be recognized on a straight-line basis over a weighted-average period of 2.5 years.

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

Stock-based compensation expense included in the Condensed Consolidated Statements of Operations for stock options was $ 1.0 million and $ 0.7 million for the three months ended June 30, 2020 and 2019, respectively, and $ 1.8 million and $ 1.4 million for the six months ended June 30, 2020 and 2019, respectively.

At June 30, 2020, there was approximately $ 8.5 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 2.3 years.

Our stock option activity for the six months ended June 30, 2020, was as follows:

Exercise Price

3 unchanged sentences

Balance at December 31, 2019

Balance at March 31, 2020

Options exercisable at March 31, 2020

Balance at June 30, 2020

Options exercisable at June 30, 2020

(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.

1 unchanged sentence

The aggregate intrinsic value of options outstanding represents the difference between the exercise price of the option and the closing stock price of our common stock on the last trading day of the period.

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

Options exercisable of 561,360 as of June 30, 2019, had a weighted-average exercise price of $ 4.27 per share.

Time-Based Restricted Stock Units

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

Time-based restricted stock units granted under the 2016 Plan vest over

one to three years .

Stock-based compensation expense included in the Condensed Consolidated Statements of Operations for time-based restricted stock units was $ 1.2 million and $ 0.8 million for the three months ended March 31, 2020 and 2019, respectively.

As of March 31, 2020, there was approximately $ 9.2 million of total unrecognized pre-tax compensation expense related to outstanding time-based restricted stock units that is expected to be recognized over a weighted-average period of 2.4 years.

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

Time-based restricted stock units granted under the 2016 Plan vest over one to three years .

Stock-based compensation expense included in the Condensed Consolidated Statements of Operations for time-based restricted stock units was $ 1.4 million and $ 1.0 million for the three months ended June 30, 2020 and 2019, respectively, and $ 2.6 million and $ 1.9 million for the six months ended June 30, 2020 and 2019, respectively.

As of June 30, 2020, there was approximately $ 8.6 million of total unrecognized pre-

tax compensation expense related to outstanding time-based restricted stock units that is expected to be recognized over a weighted-average period of 2.1 years.

Our time-based restricted stock unit activity for the six months ended June 30, 2020, was as follows:

Average Grant

2 unchanged sentences

Balance at December 31, 2019

Balance at March 31, 2020

Deferred and unissued at March 31, 2020 (2)

Balance at June 30, 2020

Deferred and unissued at June 30, 2020 (2)

(1) The aggregate intrinsic value of restricted stock units outstanding was based on our closing stock price on the last trading day of the period.

(2) For the three months ended March 31, 2020, there were 280 restricted stock units granted to non-employee directors in lieu of their quarterly cash retainer payments.

(2) For the six months ended June 30, 2020, there were 551 restricted stock units granted to non-employee directors in lieu of their quarterly cash retainer payments.

These restricted stock units were fully vested upon grant and represent the right to receive one share of common stock, per unit, upon the earlier of the director’s termination of service as a director of ours or the occurrence of a change of control of us.

These restricted stock units are included in the “Granted” line in the table above and are also included in the “Vested” line in the table above due to their being fully vested upon grant.

As of March 31, 2020, there were 6,389 outstanding restricted stock units that have been previously granted to non-employee directors in lieu of their quarterly director retainer payments.

As of June 30, 2020, there were 6,660 outstanding restricted stock units that have been previously granted to non-employee directors in lieu of their quarterly director retainer payments.

Performance-Based Restricted Stock Units

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All earned and vested PSUs will be settled in shares of common stock.

Stock-based compensation expense recognized for PSUs for the three months ended March 31, 2020 and 2019, was $ 0.4 million and $ 0.7 million , respectively.

As of March 31, 2020, there was approximately $ 3.2 million of total unrecognized pre-tax compensation expense related to outstanding PSUs that is expected to be recognized over a weighted average period of 2.2 years.

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

Stock-based compensation expense recognized for PSUs was a benefit of $ 0.3 million and an expense of $ 0.5 million , for the three months ended June 30, 2020 and 2019, respectively, and an expense of $ 0.1 million and $ 1.2 million for the six months ended June 30, 2020 and 2019, respectively.

The stock-based compensation expense for the three and six months ended June 30, 2020 reflects a $ 1.0 million benefit due to a change in the estimated payout associated with PSUs granted in 2019 being below the minimum performance target threshold level, as defined.

As of June 30, 2020, there was approximately $ 1.9 million of total unrecognized pre-tax compensation expense related to outstanding PSUs that is expected to be recognized over a weighted average period of 2.1 years.

Our performance-based restricted stock unit activity for the six months ended June 30, 2020, was as follows:

Average Grant

2 unchanged sentences

Balance at December 31, 2019

Balance at March 31, 2020

Balance at June 30, 2020

(1) The aggregate intrinsic value of performance-based restricted stock units outstanding was based on our closing stock price on the last trading day of the period.

8 unchanged sentences

On January 1, 2020, 190,539 shares were added as available for issuance thereunder.

As of March 31, 2020, 1,661,988 shares were available for future issuance under the ESPP.

We recognized stock-based compensation expense associated with the ESPP of $ 0.2 million and $ 0.3 million for the three months ended March 31, 2020 and 2019, respectively.

As of June 30, 2020, 1,618,335 shares were available for future issuance under the ESPP.

We recognized stock-based compensation expense associated with the ESPP of $ 0.3 million and $ 0.2 million for the three months ended June 30, 2020 and 2019, respectively, and $ 0.6 million and $ 0.5 million for the six months ended June 30, 2020 and 2019, respectively.

We derive our revenue from the sale and rental of our compression products to our customers in the United States.

1 unchanged sentence

Three Months Ended

Six Months Ended

(In thousands)

5 unchanged sentences

(1) The “other products” line primarily includes revenue from our Entre system.

The Actitouch system and the Airwear wrap contributed immaterial amounts of revenue for both of the three months ended March 31, 2020 and 2019.

Rental revenue for the three months ended March 31, 2020 and 2019, was primarily from private insurers.

Our revenue from third-party payers, inclusive of sales and rental revenue, for the three months ended March 31, 2020 and 2019, are summarized in the following table:

The Actitouch system and the Airwear wrap contributed immaterial amounts of revenue for each of the three and six months ended June 30, 2020 and 2019.

Rental revenue for the three and six months ended June 30, 2020 and 2019, was primarily from private insurers.

Our revenue from third-party payers, inclusive of sales and rental revenue, for the three and six months ended June 30, 2020 and 2019, are summarized in the following table:

Three Months Ended

Six Months Ended

(In thousands)

2 unchanged sentences

Our rental revenue is derived from rent-to-purchase arrangements that typically range from three to ten months.

Under ASC 840, our rental revenue was recognized as month-to-month, cancelable leases;

Under ASC 840 (the previous guidance for lease accounting), our rental revenue was recognized as month-to-month, cancelable leases;

however, because title transfers to the patient, with whom we have the contract, upon the termination of the lease term and because collectability is probable, under ASC 842, these are recognized as sales-type leases.

2 unchanged sentences

In 2019, in accordance with applicable guidance, we continued to recognize rental agreements commencing prior to December 31, 2018, on a month-to-month basis as an operating lease until they were completed.

These rental agreements will not have an impact on the revenue results in 2020.

Total rental revenue in the three months ended March 31, 2019 included both operating and sales-type lease revenue.

Operating lease revenue was $ 2.8 million for the three months ended March 31, 2019.

These rental agreements do not have an impact on the revenue results in 2020.

Total rental revenue for the three and six months ended June 30, 2019 included both operating and sales-type lease revenue.

Operating lease revenue was $ 1.4 million and $ 4.2 million for the three and six months ended June 30, 2019.

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.

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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.

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.

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Completion of these payments represents the fair market value of the equipment, and as such, interest income is not applicable.

Sales-type lease revenue and the associated cost of revenue for the three months ended March 31, 2020 and 2019, was:

Three Months Ended March 31,

Sales-type lease revenue and the associated cost of revenue for the three and six months ended June 30, 2020 and 2019, was:

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands)

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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 adjusting 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.

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, and deductions related to allowances for doubtful accounts receivable and inventory reserves.

Our provision 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 March 31, 2020 was a benefit of 68.8 % , compared to a benefit of 189.7 % for the three months ended March 31, 2019.

The primary driver of the change in our effective tax rate is attributable to a decrease in the tax benefits related to share-based compensation proportionate to pre-tax book income as compared to the prior year's reporting period.

We recorded an income tax benefit of $ 2.9 million and $ 3.1 million for the three months ended March 31, 2020 and 2019, respectively.

The effective tax rate for the three months ended June 30, 2020 was an expense of 75 % , compared to 14 % for the three months ended June 30, 2019.

The primary driver of the change in our effective tax rate is attributable to a change in projected taxable income, including proportionately lower benefits for stock based compensation as compared to the same period last year.

We recorded income tax expense of $ 5.9 million and an expense of $ 0.4 million for the three months ended June 30, 2020 and 2019, respectively.

The effective tax rate for the six months ended June 30, 2020 was an expense of 25 % , compared to a benefit of 172 % for the six months ended June 30, 2019.

We recorded income tax expense of $ 3.0 million and a benefit of $ 2.7 million for the six months ended June 30, 2020 and 2019, respectively.

We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority is more-likely-than-not to sustain the position following an audit.

For tax positions meeting the more-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 March 31, 2020, the Company has an unrecognized tax benefit of approximately $ 27,000 .

We are not currently under examination in any jurisdiction.

3 unchanged sentences

Three Months Ended

Six Months Ended

(In thousands, except share and per share data)

7 unchanged sentences

Three Months Ended

Six Months Ended

Restricted stock units

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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.

techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs.

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.

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The lowest priority is given to unobservable inputs (Level 3).

The following provides information regarding fair value measurements for our cash equivalents and marketable securities as of March 31, 2020, and December 31, 2019, according to the three-level fair value hierarchy:

At March 31, 2020

The following provides information regarding fair value measurements for our cash equivalents and marketable securities as of June 30, 2020, and December 31, 2019, according to the three-level fair value hierarchy:

At June 30, 2020

Quoted Prices

3 unchanged sentences

government and agency obligations

Corporate debt securities

At December 31, 2019

5 unchanged sentences

Corporate debt securities

During the three months ended March 31, 2020, there were no transfers within the three-level hierarchy.

During the three and six months ended June 30, 2020, 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.

3 unchanged sentences

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 three months ended March 31, 2020.

As of June 30, 2020, we re-measured the value of our intangible assets related to the Airwear wrap product line to their fair value, which was deemed to be $ 0 .

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements