TACTILE SYSTEMS TECHNOLOGY INC 10-Q

Item 1. Financial Statements ​ ​ ​ ​ ​ ​ ​ ​ Tactile Systems Technology, Inc. Condensed Consolidated Balance Sheets (Unaudited) ​ June 30, December 31, (In thousands, except share and per share data) 2020 2019 Assets ​ ​ ​ ​ ​ Current assets ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 31,341 ​ $ 22,770 Marketable securities ​ ​ 6,013 ​ ​ 22,464 Accounts receivable ​ 30,552 ​ 33,444 Net investment in leases ​ 8,689 ​ 8,147 Inventories ​ 24,826 ​ 19,059 Income taxes receivable ​ 960 ​ — Prepaid expenses and other current assets ​ 2,195 ​ 2,451 Total current assets ​ 104,576 ​ 108,335 Non-current assets ​ ​ ​ ​ ​ ​ Property and equipment, net ​ 7,009 ​ 7,408 Right of use operating lease assets ​ 15,126 ​ 15,885 Intangible assets, net ​ 1,674 ​ 5,312 Accounts receivable, non-current ​ 5,881 ​ 4,184 Deferred income taxes ​ 4,745 ​ 8,970 Other non-current assets ​ 2,519 ​ 1,658 Total non-current assets ​ 36,954 ​ 43,417 Total assets ​ $ 141,530 ​ $ 151,752 Liabilities and Stockholders' Equity ​ ​ ​ ​ ​ ​ Current liabilities ​ ​ ​ ​ ​ ​ Accounts payable ​ $ 5,686 ​ $ 3,843 Accrued payroll and related taxes ​ 6,971 ​ 10,098 Accrued expenses ​ 3,743 ​ 4,498 Income taxes payable ​ — ​ 632 Operating lease liabilities ​ 1,508 ​ 1,454 Other current liabilities ​ 2,578 ​ 903 Total current liabilities ​ 20,486 ​ 21,428 Non-current liabilities ​ ​ ​ ​ ​ ​ Accrued warranty reserve, non-current ​ 2,861 ​ 2,541 Income taxes, non-current ​ — ​ 54 Operating lease liabilities, non-current ​ ​ 14,798 ​ 15,134 Total non-current liabilities ​ 17,659 ​ 17,729 Total liabilities ​ 38,145 ​ 39,157 ​ ​ ​ ​ ​ ​ ​ Commitments and Contingencies (see Note 10) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stockholders’ equity: ​ ​ ​ ​ ​ ​ Preferred stock, $ 0.001 par value, 50,000,000 shares authorized; none issued and outstanding as of June 30, 2020 and December 31, 2019 ​ — ​ — Common stock, $ 0.001 par value, 300,000,000 shares authorized; 19,411,404 shares issued and outstanding as of June 30, 2020; 19,152,715 shares issued and outstanding as of December 31, 2019 ​ 19 ​ 19 Additional paid-in capital ​ 97,818 ​ 91,874 Retained earnings ​ 5,519 ​ 20,676 Accumulated other comprehensive income ​ ​ 29 ​ ​ 26 Total stockholders’ equity ​ 103,385 ​ 112,595 Total liabilities and stockholders’ equity ​ $ 141,530 ​ $ 151,752 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Tactile Systems Technology, Inc. Condensed Consolidated Statements of Operations (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Six Months Ended ​ ​ June 30, ​ June 30, (In thousands, except share and per share data) 2020 2019 2020 2019 Revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Sales revenue ​ $ 29,518 ​ $ 38,790 ​ $ 67,141 ​ $ 69,621 Rental revenue ​ 5,602 ​ 6,410 ​ 11,654 ​ 13,196 Total revenue ​ 35,120 ​ 45,200 ​ 78,795 ​ 82,817 Cost of revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cost of sales revenue ​ 8,388 ​ 11,586 ​ 19,310 ​ 20,998 Cost of rental revenue ​ 1,820 ​ 2,109 ​ 3,500 ​ 4,056 Total cost of revenue ​ 10,208 ​ 13,695 ​ 22,810 ​ 25,054 Gross profit ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Gross profit - sales revenue ​ 21,130 ​ 27,204 ​ 47,831 ​ 48,623 Gross profit - rental revenue ​ 3,782 ​ 4,301 ​ 8,154 ​ 9,140 Gross profit ​ 24,912 ​ 31,505 ​ 55,985 ​ 57,763 Operating expenses ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Sales and marketing ​ 17,398 ​ 18,418 ​ 40,368 ​ 35,809 Research and development ​ 1,105 ​ 1,234 ​ 2,789 ​ 2,515 Reimbursement, general and administrative ​ 14,372 ​ 8,811 ​ 25,242 ​ 18,205 Total operating expenses ​ 32,875 ​ 28,463 ​ 68,399 ​ 56,529 (Loss) income from operations ​ ( 7,963 ) ​ 3,042 ​ ( 12,414 ) ​ 1,234 Other income ​ 36 ​ 165 ​ 302 ​ 332 (Loss) income before income taxes ​ ( 7,927 ) ​ 3,207 ​ ( 12,112 ) ​ 1,566 Income tax expense (benefit) ​ 5,923 ​ 422 ​ 3,045 ​ ( 2,691 ) Net (loss) income ​ $ ( 13,850 ) ​ $ 2,785 ​ $ ( 15,157 ) ​ $ 4,257 Net (loss) income per common share ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ $ ( 0.72 ) ​ $ 0.15 ​ $ ( 0.79 ) ​ $ 0.23 Diluted ​ $ ( 0.72 ) ​ $ 0.14 ​ $ ( 0.79 ) ​ $ 0.22 Weighted-average common shares used to compute net (loss) income per common share ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ ​ 19,337,644 ​ ​ 18,881,526 ​ ​ 19,255,612 ​ ​ 18,814,511 Diluted ​ ​ 19,337,644 ​ ​ 19,591,129 ​ ​ 19,255,612 ​ ​ 19,619,213 ​ The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. ​ 6 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Tactile Systems Technology, Inc. Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited) ​ ​ Three Months Ended ​ Six Months Ended ​ ​ June 30, ​ June 30, (In thousands) 2020 2019 2020 2019 Net (loss) income ​ $ ( 13,850 ) ​ $ 2,785 ​ $ ( 15,157 ) ​ $ 4,257 Other comprehensive (loss) income: ​ ​ ​ ​ Unrealized (loss) gain on marketable securities ​ ( 36 ) ​ 34 ​ ( 7 ) ​ 64 Income tax related to items of other comprehensive (loss) income ​ 27 ​ ( 9 ) ​ 10 ​ ( 16 ) Total other comprehensive (loss) income ​ ( 9 ) ​ 25 ​ 3 ​ 48 Comprehensive (loss) income ​ $ ( 13,859 ) ​ $ 2,810 ​ $ ( 15,154 ) ​ $ 4,305 ​ The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. ​ ​ 7 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Tactile Systems Technology, Inc. Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Additional ​ ​ ​ ​ Other ​ ​ ​ ​ ​ Common Stock ​ Paid-In ​ Retained ​ Comprehensive ​ ​ ​ (In thousands, except share data) Shares Par Value Capital Earnings (Loss) Income Total Balances, March 31, 2020 ​ 19,226,665 ​ $ 19 ​ $ 93,614 ​ $ 19,369 ​ $ 38 ​ $ 113,040 Stock-based compensation ​ — ​ ​ — ​ ​ 2,396 ​ ​ — ​ ​ — ​ ​ 2,396 Exercise of common stock options and vesting of restricted stock units ​ 148,898 ​ ​ — ​ ​ 376 ​ ​ — ​ ​ — ​ ​ 376 Taxes paid for net share settlement of restricted stock units ​ ( 7,812 ) ​ ​ — ​ ​ ( 393 ) ​ ​ — ​ ​ — ​ ​ ( 393 ) Common shares issued for employee stock purchase plan ​ 43,653 ​ ​ — ​ ​ 1,825 ​ ​ — ​ ​ — ​ ​ 1,825 Comprehensive loss for the period ​ — ​ ​ — ​ ​ — ​ ​ ( 13,850 ) ​ ​ ( 9 ) ​ ​ ( 13,859 ) Balances, June 30, 2020 ​ 19,411,404 ​ $ 19 ​ $ 97,818 ​ $ 5,519 ​ $ 29 ​ $ 103,385 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balances, December 31, 2019 ​ 19,152,715 ​ $ 19 ​ $ 91,874 ​ $ 20,676 ​ $ 26 ​ $ 112,595 Stock-based compensation ​ — ​ ​ — ​ ​ 5,124 ​ ​ — ​ ​ — ​ ​ 5,124 Exercise of common stock options and vesting of restricted stock units ​ 245,084 ​ ​ — ​ ​ 548 ​ ​ — ​ ​ — ​ ​ 548 Taxes paid for net share settlement of restricted stock units ​ ( 30,048 ) ​ ​ — ​ ​ ( 1,553 ) ​ ​ — ​ ​ — ​ ​ ( 1,553 ) Common shares issued for employee stock purchase plan ​ 43,653 ​ ​ — ​ ​ 1,825 ​ ​ — ​ ​ — ​ ​ 1,825 Comprehensive (loss) income for the period ​ — ​ ​ — ​ ​ — ​ ​ ( 15,157 ) ​ ​ 3 ​ ​ ( 15,154 ) Balances, June 30, 2020 ​ 19,411,404 ​ $ 19 ​ $ 97,818 ​ $ 5,519 ​ $ 29 ​ $ 103,385 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balances, March 31, 2019 ​ 18,818,692 ​ $ 19 ​ $ 80,788 ​ $ 11,177 ​ $ 15 ​ $ 91,999 Stock-based compensation ​ — ​ ​ — ​ ​ 2,274 ​ ​ — ​ ​ — ​ ​ 2,274 Exercise of common stock options and vesting of restricted stock units ​ 105,830 ​ ​ — ​ ​ 681 ​ ​ — ​ ​ — ​ ​ 681 Taxes paid for net share settlement of restricted stock units ​ ( 10,996 ) ​ ​ — ​ ​ ( 608 ) ​ ​ — ​ ​ — ​ ​ ( 608 ) Common shares issued for employee stock purchase plan ​ 43,386 ​ ​ — ​ ​ 1,852 ​ ​ — ​ ​ — ​ ​ 1,852 Comprehensive income for the period ​ — ​ ​ — ​ ​ — ​ ​ 2,785 ​ ​ 25 ​ ​ 2,810 Balances, June 30, 2019 ​ 18,956,912 ​ $ 19 ​ $ 84,987 ​ $ 13,962 ​ $ 40 ​ $ 99,008 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balances, December 31, 2018 ​ 18,631,125 ​ ​ 19 ​ ​ 79,554 ​ ​ 9,705 ​ ​ ( 8 ) ​ ​ 89,270 Stock-based compensation ​ — ​ ​ — ​ ​ 5,057 ​ ​ — ​ ​ — ​ ​ 5,057 Exercise of common stock options and vesting of restricted stock units ​ 337,644 ​ ​ — ​ ​ 1,542 ​ ​ — ​ ​ — ​ ​ 1,542 Taxes paid for net share settlement of restricted stock units ​ ( 55,243 ) ​ ​ — ​ ​ ( 3,018 ) ​ ​ — ​ ​ — ​ ​ ( 3,018 ) Common shares issued for employee stock purchase plan ​ 43,386 ​ ​ — ​ ​ 1,852 ​ ​ — ​ ​ — ​ ​ 1,852 Comprehensive income for the period ​ — ​ ​ — ​ ​ — ​ ​ 4,257 ​ ​ 48 ​ ​ 4,305 Balances, June 30, 2019 ​ 18,956,912 ​ $ 19 ​ $ 84,987 ​ $ 13,962 ​ $ 40 ​ $ 99,008 ​ The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. ​ ​ 8 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ Tactile Systems Technology, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) ​ ​ ​ ​ ​ Six Months Ended June 30, (In thousands) 2020 2019 Cash flows from operating activities ​ ​ ​ ​ ​ ​ Net (loss) income ​ $ ( 15,157 ) ​ $ 4,257 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: ​ ​ ​ ​ ​ ​ Depreciation and amortization ​ ​ 1,450 ​ ​ 1,978 Net amortization of premiums and discounts on securities available-for-sale ​ ​ ( 89 ) ​ ​ ( 145 ) Deferred income taxes ​ ​ 4,282 ​ ​ ( 1,552 ) Stock-based compensation expense ​ ​ 5,124 ​ ​ 5,057 Gain on maturities of marketable securities ​ ​ 40 ​ ​ — Impairment losses ​ ​ 4,025 ​ ​ — Changes in assets and liabilities: ​ ​ ​ ​ ​ ​ Accounts receivable ​ ​ 2,892 ​ ​ ( 426 ) Net investment in leases ​ ​ ( 542 ) ​ ​ ( 5,869 ) Inventories ​ ​ ( 5,945 ) ​ ​ ( 1,976 ) Income taxes ​ ​ ( 1,646 ) ​ ​ ( 1,458 ) Prepaid expenses and other assets ​ ​ ( 317 ) ​ ​ 15 Right of use operating lease assets ​ ​ 135 ​ ​ ( 12 ) Medicare accounts receivable, non-current ​ ​ ( 1,697 ) ​ ​ ( 725 ) Accounts payable ​ ​ 1,602 ​ ​ 1,637 Accrued payroll and related taxes ​ ​ ( 3,127 ) ​ ​ ( 415 ) Accrued expenses and other liabilities ​ ​ 990 ​ ​ 485 Net cash (used in) provided by operating activities ​ ​ ( 7,980 ) ​ ​ 851 Cash flows from investing activities ​ ​ ​ ​ ​ ​ Proceeds from maturities of securities available-for-sale ​ ​ 16,500 ​ ​ 11,500 Purchases of securities available-for-sale ​ ​ — ​ ​ ( 5,929 ) Purchases of property and equipment ​ ​ ( 660 ) ​ ​ ( 1,760 ) Intangible assets costs ​ ​ ( 109 ) ​ ​ ( 97 ) Net cash provided by investing activities ​ ​ 15,731 ​ ​ 3,714 Cash flows from financing activities ​ ​ ​ ​ ​ ​ Taxes paid for net share settlement of restricted stock units ​ ​ ( 1,553 ) ​ ​ ( 3,018 ) Proceeds from exercise of common stock options ​ ​ 548 ​ ​ 1,542 Proceeds from the issuance of common stock from the employee stock purchase plan ​ ​ 1,825 ​ ​ 1,852 Net cash provided by financing activities ​ ​ 820 ​ ​ 376 Net increase in cash and cash equivalents ​ ​ 8,571 ​ ​ 4,941 Cash and cash equivalents – beginning of period ​ ​ 22,770 ​ ​ 20,099 Cash and cash equivalents – end of period ​ $ 31,341 ​ $ 25,040 ​ ​ ​ ​ ​ ​ ​ Supplemental cash flow disclosure ​ ​ ​ ​ ​ ​ Cash paid for taxes ​ $ 475 ​ $ 322 Capital expenditures incurred but not yet paid ​ $ 241 ​ $ 136 ​ The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. ​ 9 Table of Contents ​ Tactile Systems Technology, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) Note 1. Nature of Business and Operations Tactile Systems Technology, Inc. (“we,” “us,” and “our”) is the sole manufacturer and distributor of the Flexitouch® and Entre™ systems, medical devices that help control symptoms of lymphedema, a chronic and progressive medical condition, and the Airwear wrap, a medical device used for the management of venous insufficiency, venous hypertension, venous ulcerations and lymphedema. Our products are purchased or rented for at-home use and are recommended by vascular, wound and lymphedema clinics throughout the United States. We were originally incorporated in Minnesota under the name Tactile Systems Technology, Inc. on January 30, 1995. During 2006, we established a merger corporation and subsequently, on July 21, 2006, merged with and into this merger corporation, resulting in our reincorporation as a Delaware corporation. The resulting corporation assumed the name Tactile Systems Technology, Inc. In September 2013, we began doing business as “Tactile Medical”. On August 2, 2016, we closed the initial public offering of our common stock, which resulted in the sale of 4,120,000 shares of our common stock at a public offering price of $ 10.00 per share. We received net proceeds from the initial public offering of approximately $ 35.4 million, after deducting underwriting discounts and approximately $ 2.9 million of transaction expenses. In connection with the closing of the initial public offering, all of our outstanding redeemable convertible preferred stock automatically converted to common stock on August 2, 2016. As a result, at August 2, 2016, we did not have any redeemable convertible preferred stock issued or outstanding. Our business is affected by seasonality. In the first quarter of each year, when most patients have started a new insurance year and have not yet met their annual out-of-pocket payment obligations, we experience substantially reduced demand for our products. We typically experience higher revenue in the third and fourth quarters of the year when patients have met their annual insurance deductibles, thereby reducing their out-of-pocket costs for our products, and because patients desire to exhaust their flexible spending accounts at year end. This seasonality applies only to purchases and rentals of our products by patients covered by commercial insurance and is not relevant to Medicare, Medicaid or the Veterans Administration, as those payers either do not have plans that have declining deductibles over the course of the plan year and/or do not have plans that include patient deductibles for purchases or rentals of our products. Further, seasonality trends in 2020 may be significantly different than in prior years as a result of the COVID-19 pandemic and related impacts. Note 2. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including those which are normal and recurring) considered necessary for a fair presentation of the interim financial information have been included. The results for the 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. 10 Table of Contents Principles of Consolidation The accompanying unaudited condensed consolidated financial statements include the accounts of Tactile Systems Technology, Inc. and its wholly owned subsidiary, Swelling Solutions, Inc. All intercompany balances and transactions have been eliminated in consolidation. Risks and Uncertainties Coronavirus (COVID-19) The United States economy in general and our business specifically have been negatively affected by the COVID-19 pandemic. There are no reliable estimates of how long the pandemic will last or how many people are likely to be affected by it. For that reason, we are unable to reasonably estimate the long-term impact of the pandemic on our business at this time. Our first priority with regard to the COVID-19 pandemic is to ensure the safety and health of our employees, clinicians and patients. Subject to that, we are focusing our efforts on attempting to continue our business operations in this unprecedented environment. Part of our strategy includes changing many of our processes and practices in an effort to help mitigate the impact of COVID-19 on our business so that we can support our clinicians and safely make our at-home therapies available to patients. 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. ● 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. 11 Table of Contents 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 (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. Note 3. Summary of Significant Accounting Policies Significant Accounting Policies 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 In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments — Credit Losses” (“ASU 2016-13”), which introduced a new model for recognizing credit losses on financial instruments based on an estimate of the current expected credit losses. The new current expected credit losses (“CECL”) model generally calls for the immediate recognition of all expected credit losses and applies to financial instruments and other assets, including accounts receivable and other financial assets measured at amortized cost, debt securities and other financial assets. This guidance replaces the previous incurred loss model for measuring expected credit losses and requires expected losses on available-for-sale debt securities to be recognized through an allowance for credit losses rather than as reductions in the amortized cost of the securities. We adopted ASU 2016-13 as of January 1, 2020, and it did not have an impact on the condensed consolidated financial statements. 12 Table of Contents 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. Note 4. Marketable Securities 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 ​ Amortized Unrealized Fair (In thousands) Cost Gains Losses Value U.S. government and agency obligations ​ $ 5,999 ​ $ 14 ​ $ — ​ $ 6,013 Corporate debt securities ​ — ​ — ​ — ​ — Marketable securities ​ $ 5,999 ​ $ 14 ​ $ — ​ $ 6,013 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At December 31, 2019 ​ Amortized Unrealized Fair (In thousands) Cost Gains Losses Value U.S. government and agency obligations ​ $ 19,950 ​ $ 14 ​ $ 1 ​ $ 19,963 Corporate debt securities ​ 2,493 ​ 8 ​ — ​ 2,501 Marketable securities ​ $ 22,443 ​ $ 22 ​ $ 1 ​ $ 22,464 ​ Net pre-tax unrealized gains for marketable securities at 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At December 31, 2019 ​ ​ Less than 12 months ​ 12 months or more ​ Total ​ Fair Unrealized Fair Unrealized ​ Fair Unrealized (In thousands) Value Losses Value Losses Value Losses U.S. government and agency obligations ​ $ 5,997 ​ $ 1 ​ $ — ​ $ — ​ $ 5,997 ​ $ 1 Corporate debt securities ​ — ​ — ​ — ​ — ​ — ​ — Marketable securities ​ $ 5,997 ​ $ 1 ​ $ — ​ $ — ​ $ 5,997 ​ $ 1 ​ ​ 13 Table of Contents Note 5. Inventories Inventories consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ (In thousands) At June 30, 2020 At December 31, 2019 Finished goods ​ $ 9,730 ​ $ 6,508 Component parts and work-in-process ​ 15,096 ​ 12,551 Total inventories ​ $ 24,826 ​ $ 19,059 ​ ​ ​ ​ Note 6. Intangible Assets Our patents and other intangible assets are summarized as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ At June 30, 2020 ​ ​ Average ​ Gross ​ ​ ​ ​ ​ ​ Amortization ​ Carrying ​ Accumulated ​ Net (In thousands) Period ​ Amount ​ Amortization ​ Amount Patents ​ 12 years ​ $ 339 ​ $ 48 ​ $ 291 Defensive intangible assets ​ 5 years ​ ​ 1,125 ​ ​ 335 ​ ​ 790 Customer accounts ​ 3 years ​ 125 ​ 50 ​ 75 Total amortizable intangible assets ​ ​ ​ ​ 1,589 ​ ​ 433 ​ ​ 1,156 Patents pending ​ ​ ​ ​ 518 ​ ​ — ​ ​ 518 Total intangible assets ​ ​ ​ $ 2,107 ​ $ 433 ​ $ 1,674 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ At December 31, 2019 ​ ​ Average ​ Gross ​ ​ ​ ​ ​ ​ Amortization ​ Carrying ​ Accumulated ​ Net (In thousands) Period ​ Amount ​ Amortization ​ Amount Patents ​ 11 years ​ $ 4,386 ​ $ 447 ​ $ 3,939 Defensive intangible assets ​ 5 years ​ ​ 1,125 ​ ​ 250 ​ ​ 875 Customer accounts ​ 3 years ​ 125 ​ 37 ​ 88 Total amortizable intangible assets ​ ​ ​ ​ 5,636 ​ ​ 734 ​ ​ 4,902 Patents pending ​ ​ ​ ​ 410 ​ ​ — ​ ​ 410 Total intangible assets ​ ​ ​ $ 6,046 ​ $ 734 ​ $ 5,312 ​ 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 (July 1 - December 31) ​ $ 114 2021 ​ ​ 228 2022 ​ 228 2023 ​ 198 2024 ​ 177 Thereafter ​ 211 Total ​ $ 1,156 ​ ​ 14 Table of Contents Note 7. Accrued Expenses Accrued expenses consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ (In thousands) At June 30, 2020 At December 31, 2019 Warranty ​ $ 1,347 ​ $ 1,218 Legal and consulting ​ ​ 817 ​ ​ 617 Travel and business ​ 457 ​ 776 In-transit inventory ​ ​ 255 ​ ​ 106 Sales and use tax ​ ​ 158 ​ ​ 200 Clinical studies ​ ​ 51 ​ ​ 85 Lease termination costs ​ ​ — ​ ​ 1,200 Other ​ 658 ​ 296 Total ​ $ 3,743 ​ $ 4,498 ​ ​ Note 8. Warranty Reserves The activity in the warranty reserve during and as of the end of the reporting periods presented was as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Six Months Ended ​ ​ June 30, ​ June 30, (In thousands) 2020 2019 2020 2019 Beginning balance ​ $ 4,242 ​ $ 2,727 ​ $ 3,759 ​ $ 2,572 Warranty provision ​ 372 ​ 595 ​ 1,277 ​ 857 Processed warranty claims ​ ( 406 ) ​ ( 320 ) ​ ( 828 ) ​ ( 427 ) Ending balance ​ $ 4,208 ​ $ 3,002 ​ $ 4,208 ​ $ 3,002 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accrued warranty reserve, current ​ $ 1,347 ​ $ 958 ​ $ 1,347 ​ $ 958 Accrued warranty reserve, non-current ​ ​ 2,861 ​ ​ 2,044 ​ ​ 2,861 ​ ​ 2,044 Total accrued warranty reserve ​ $ 4,208 ​ $ 3,002 ​ $ 4,208 ​ $ 3,002 ​ ​ 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 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 June 30, 2020, we were in compliance with all financial covenants under the Credit Agreement. 15 Table of Contents 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 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 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 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 future 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 Condensed Consolidated Statements of Operations. We entered into a lease (“initial lease”) in October 2018, for approximately 80,000 square feet of office space for our new corporate headquarters in Minneapolis, Minnesota. In December 2018, we amended the initial lease to add approximately 29,000 square feet of additional office space, which is accounted for as a separate lease (“second lease”) in accordance with 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 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 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. 16 Table of Contents 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 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. The nonlease components are not significant. Computer and Office Equipment We also have operating lease agreements for certain computer and office equipment. The remaining lease terms as of 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. The leases will automatically renew as a month-to-month rental at the end of the lease if the equipment is not purchased or returned. Lease Position, Undiscounted Cash Flow and Supplemental Information The table below presents information related to our ROU operating lease assets and operating lease liabilities that we have recorded: ​ ​ ​ ​ ​ ​ ​ ​ (In thousands) At June 30, 2020 At December 31, 2019 Right of use operating lease assets ​ $ 15,126 ​ $ 15,885 ​ ​ ​ ​ ​ ​ ​ Operating lease liabilities: ​ ​ ​ ​ ​ ​ Current ​ $ 1,508 ​ $ 1,454 Non-current ​ 14,798 ​ 15,134 Total ​ $ 16,306 ​ $ 16,588 ​ ​ ​ ​ ​ ​ ​ Operating leases: ​ ​ ​ ​ ​ ​ Weighted average remaining lease term ​ 9.6 years ​ ​ 10.1 years Weighted average discount rate ​ ​ 4.7 % ​ ​ 4.6 % ​ ​ ​ ​ ​ ​ ​ ​ ​ Six Months Ended June 30, ​ ​ 2020 ​ 2019 Supplemental cash flow information for our operating leases: ​ ​ ​ ​ ​ ​ Cash paid for operating lease liabilities ​ $ 1,148 ​ $ 719 Non-cash right of use assets obtained in exchange for new operating lease obligations ​ $ 686 ​ $ 3,934 ​ 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 (July 1 - December 31) ​ $ 1,210 2021 ​ ​ 2,026 2022 ​ 1,985 2023 ​ 1,943 2024 ​ 1,953 Thereafter ​ 13,156 Total minimum lease payments ​ ​ 22,273 Less: Amount of lease payments representing interest ​ ​ ( 5,967 ) Present value of future minimum lease payments ​ ​ 16,306 Less: Current obligations under operating lease liabilities ​ ​ ( 1,508 ) Non-current obligations under operating lease liabilities ​ $ 14,798 ​ 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. 17 Table of Contents 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 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 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 and six months ended June 30, 2020 and 2019. Note 11. Stockholders' Equity Stock-Based Compensation Our 2016 Equity Incentive Plan (the “2016 Plan”) authorizes us to grant stock options, stock appreciation rights, restricted stock, stock units and other stock-based awards to employees, non-employee directors and certain consultants and advisors. There were up to 4,800,000 shares of our common stock initially reserved for issuance pursuant to the 2016 Plan. The 2016 Plan provides that the number of shares reserved and available for issuance under the 2016 Plan will automatically increase annually on January 1 of each calendar year, commencing in 2017 and ending on and including January 1, 2026, by an amount equal to the lesser of: (a) 5 % of the number of common shares of stock outstanding as of December 31 of the immediately preceding calendar year, or (b) 2,500,000 shares; provided, however, that our Board of Directors may determine that any annual increase be a lesser number. In addition, all awards granted under our 2007 Omnibus Stock Plan and our 2003 Stock Option Plan that were outstanding when the 2016 Plan became effective and that are forfeited, expired, cancelled, settled for cash or otherwise not issued, will become available for issuance under the 2016 Plan. Pursuant to the automatic increase feature of the 2016 Plan, shares were added as 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 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. 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. 18 Table of Contents 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 ​ ​ June 30, ​ June 30, (In thousands) 2020 2019 2020 2019 Cost of revenue ​ $ 105 ​ $ 76 ​ $ 187 ​ $ 174 Sales and marketing expenses ​ ​ 1,233 ​ ​ 1,067 ​ ​ 2,479 ​ ​ 2,233 Research and development expenses ​ ​ 94 ​ ​ 100 ​ ​ 182 ​ ​ 180 Reimbursement, general and administrative expenses ​ ​ 964 ​ ​ 1,031 ​ ​ 2,276 ​ ​ 2,470 Total stock-based compensation expense ​ $ 2,396 ​ $ 2,274 ​ $ 5,124 ​ $ 5,057 ​ Stock Options We have granted stock options to certain participants that vest over three or four years and typically have a contractual term of seven or ten years . Stock-based compensation expense included in the Condensed Consolidated Statements of Operations for stock options was $ 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ Weighted- ​ ​ ​ ​ ​ ​ ​ Average ​ Average ​ Aggregate ​ ​ Options ​ Exercise Price ​ Remaining ​ Intrinsic (In thousands except options and per share data) ​ Outstanding ​ Per Share (1) ​ Contractual Life ​ Value (2) Balance at December 31, 2019 ​ 866,955 ​ $ 28.76 ​ 6.1 years ​ $ 33,957 Granted ​ 230,009 ​ $ 50.31 ​ ​ ​ ​ ​ Exercised ​ ( 123,401 ) ​ $ 4.45 ​ ​ ​ $ 6,094 Forfeited ​ ( 24,003 ) ​ $ 52.92 ​ ​ ​ ​ ​ Expired ​ ( 2,624 ) ​ $ 62.68 ​ ​ ​ ​ ​ Balance at June 30, 2020 ​ 946,936 ​ $ 36.46 ​ 6.0 years ​ $ 11,208 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Options exercisable at June 30, 2020 ​ 438,283 ​ $ 21.86 ​ 5.0 years ​ $ 9,850 ​ (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 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 $ 1.4 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- 19 Table of Contents 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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, 2019 ​ 171,687 ​ $ 43.74 ​ $ 11,591 Granted ​ 128,075 ​ $ 50.12 ​ ​ ​ Modification ​ 2,288 ​ $ 21.85 ​ ​ ​ Vested ​ ( 89,521 ) ​ $ 37.02 ​ ​ ​ Forfeited ​ ( 2,052 ) ​ $ 73.14 ​ ​ ​ Balance at June 30, 2020 ​ 210,477 ​ $ 49.96 ​ $ 8,720 ​ ​ ​ ​ ​ ​ ​ ​ ​ Deferred and unissued at June 30, 2020 (2) ​ 6,660 ​ $ 40.44 ​ $ 276 ​ (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 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 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 We have granted performance-based restricted stock units (“PSUs”) to certain participants under the 2016 Plan. These PSUs have both performance-based and time-based vesting features. The PSUs granted in 2018 were earned to the extent performance goals based on revenue and adjusted EBITDA were achieved in 2019. The PSUs granted in 2019 will be earned if and to the extent performance goals based on revenue and adjusted EBITDA are achieved in 2020. The PSUs granted in 2020 will be earned if and to the extent performance goals based on revenue and adjusted EBITDA are achieved in 2021. 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 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. 20 Table of Contents Our performance-based restricted stock unit activity for the six months ended June 30, 2020, 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, 2019 ​ 91,151 ​ $ 44.63 ​ $ 6,154 Granted ​ 31,731 ​ $ 50.41 ​ ​ ​ Vested ​ ( 21,589 ) ​ $ 33.62 ​ ​ ​ Forfeited ​ ( 6,197 ) ​ $ 72.64 ​ ​ ​ Balance at June 30, 2020 ​ 95,096 ​ $ 47.24 ​ $ 3,940 ​ (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. 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 ESPP 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 ESPP provides for six-month purchase periods, beginning on May 16 and November 16 of each calendar year. A total of 1,600,000 shares of common stock was initially reserved for issuance under the ESPP. 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 (a) 1 % of the shares of our common stock outstanding on the immediately preceding December 31, (b) 500,000 shares or (c) such lesser amount as our Board of Directors may determine. Pursuant to the automatic increase feature of the ESPP, 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, 190,539 shares were added as available for issuance thereunder. 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. 21 Table of Contents Note 12. Revenue We derive our revenue from the sale and rental of our compression products to our customers in the United States. The following table presents our revenue, inclusive of sales and rental revenue, disaggregated by product categories: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Six Months Ended ​ ​ June 30, ​ June 30, (In thousands) 2020 ​ 2019 ​ 2020 ​ 2019 Revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Flexitouch system ​ $ 31,127 ​ $ 40,959 ​ $ 69,713 ​ $ 75,068 Other products (1) ​ 3,993 ​ 4,241 ​ 9,082 ​ 7,749 Total ​ $ 35,120 ​ $ 45,200 ​ $ 78,795 ​ $ 82,817 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Percentage of total revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Flexitouch system ​ 89 % ​ 91 % ​ 88 % ​ 91 % Other products (1) ​ 11 % ​ 9 % ​ 12 % ​ 9 % Total ​ 100 % ​ 100 % ​ 100 % ​ 100 % (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 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 ​ ​ June 30, ​ June 30, (In thousands) 2020 ​ 2019 ​ 2020 ​ 2019 Private insurers and other payers ​ $ 25,668 ​ $ 32,143 ​ $ 55,905 ​ $ 58,025 Veterans Administration ​ ​ 4,322 ​ ​ 8,255 ​ ​ 11,380 ​ ​ 15,925 Medicare ​ ​ 5,130 ​ ​ 4,802 ​ ​ 11,510 ​ ​ 8,867 Total ​ $ 35,120 ​ $ 45,200 ​ $ 78,795 ​ $ 82,817 ​ Our rental revenue is derived from rent-to-purchase arrangements that typically range from three to ten months. 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. Each rental agreement contains two components, the controller and related garments, both of which are interdependent and recognized as one lease component. Rental agreements initiated subsequent to January 1, 2019, are recorded as sales-type leases in accordance with ASC 842, whereby rental revenue and cost of rental revenue are recognized upon the lease commencement date. 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 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. 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 22 Table of Contents the expected consideration, which considers the impact of early terminations. While the contract is with the patient, in certain circumstances, the third party payer elects an initial rental period with an option to extend. We assess the likelihood of extending the lease at the onset of the lease to determine if the option is reasonably certain to be exercised. As the lease is short-term in nature, we anticipate collection of substantially all of the net investment within the first year of the lease agreement. Completion of these payments represents the fair market value of the equipment, and as such, interest income is not applicable. Sales-type lease revenue and the associated cost of revenue for the three and six months ended June 30, 2020 and 2019, was: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended June 30, ​ Six Months Ended June 30, (In thousands) ​ 2020 ​ 2019 ​ 2020 ​ 2019 Sales-type lease revenue ​ $ 5,602 ​ $ 5,035 ​ $ 11,654 ​ $ 9,000 Cost of sales-type lease revenue ​ 1,820 ​ 1,882 ​ 3,500 ​ 3,425 Gross profit ​ $ 3,782 ​ $ 3,153 ​ $ 8,154 ​ $ 5,575 ​ ​ Note 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 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. 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 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. 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 $ 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. We are not currently under examination in any 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. 23 Table of Contents Note 14. Net Income Per Share The following table sets forth the computation of our basic and diluted net (loss) income per share: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Six Months Ended ​ ​ June 30, ​ June 30, (In thousands, except share and per share data) 2020 2019 2020 2019 Net (loss) income ​ $ ( 13,850 ) ​ $ 2,785 ​ $ ( 15,157 ) ​ $ 4,257 Weighted-average shares outstanding ​ ​ 19,337,644 ​ ​ 18,881,526 ​ ​ 19,255,612 ​ ​ 18,814,511 Dilutive effect of stock-based awards ​ ​ — ​ ​ 709,603 ​ ​ — ​ ​ 804,702 Weighted-average shares used to compute diluted net (loss) income per share ​ ​ 19,337,644 ​ ​ 19,591,129 ​ ​ 19,255,612 ​ ​ 19,619,213 Net (loss) income per share - Basic ​ $ ( 0.72 ) ​ $ 0.15 ​ $ ( 0.79 ) ​ $ 0.23 Net (loss) income per share - Diluted ​ $ ( 0.72 ) ​ $ 0.14 ​ $ ( 0.79 ) ​ $ 0.22 ​ The following common stock equivalents were excluded from the computation of diluted net (loss) income per share for the periods presented because including them would have been anti-dilutive: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Six Months Ended ​ ​ June 30, ​ June 30, ​ 2020 2019 2020 2019 Restricted stock units ​ 217,137 ​ 64,930 ​ 217,137 ​ 51,330 Common stock options ​ 946,936 ​ 160,090 ​ 946,936 ​ 160,090 Performance stock units ​ 116,295 ​ — ​ 116,295 ​ — Employee stock purchase plan ​ 50,027 ​ 32,411 ​ 46,706 ​ 32,411 Total ​ 1,330,395 ​ 257,431 ​ 1,327,074 ​ 243,831 ​ ​ Note 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). 24 Table of Contents 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 ​ ​ ​ ​ ​ ​ ​ ​ 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 ​ $ 10,137 ​ $ — ​ $ — ​ $ 10,137 U.S. government and agency obligations ​ 6,013 ​ — ​ — ​ 6,013 Total ​ $ 16,150 ​ $ — ​ $ — ​ $ 16,150 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At December 31, 2019 ​ Quoted Prices ​ ​ ​ ​ ​ ​ ​ ​ in Active ​ Significant ​ ​ ​ ​ ​ ​ ​ ​ Markets for ​ Other ​ Significant ​ ​ ​ ​ Identical ​ Observable ​ Unobservable ​ ​ ​ ​ Assets ​ Inputs ​ Inputs ​ ​ (In thousands) ​ (Level 1) ​ (Level 2) ​ (Level 3) ​ Total Recurring Fair Value Measurements: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Money market mutual funds ​ $ 481 ​ $ — ​ $ — ​ $ 481 U.S. government and agency obligations ​ 25,954 ​ — ​ — ​ 25,954 Corporate debt securities ​ — ​ 2,501 ​ — ​ 2,501 Total ​ $ 26,435 ​ $ 2,501 ​ $ — ​ $ 28,936 ​ 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. The fair values for our money market mutual funds, U.S. government and agency obligations and corporate debt securities are determined based on valuations provided by external investment managers who obtain them from a variety of industry standard data providers. The carrying amounts of financial instruments such as cash equivalents, accounts receivable, other assets, accounts payable, accrued expenses and other liabilities approximate their related fair values due to the short-term maturities of these items. Non-financial assets, such as equipment and leasehold improvements, and intangible assets are subject to non-recurring fair value measurements if they are deemed impaired. As of 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 . 25 Table of Contents