What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-02-23 compared with 2020-02-26 · 240 added, 257 removed, 659 unchanged (43% of the section changed)

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We have audited the accompanying consolidated balance sheets of Tactile Systems Technology, Inc.

(a Delaware corporation) and its subsidiary (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”).

(a Delaware corporation) and its subsidiary (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive (loss) income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 23, 2021 expressed an unqualified opinion.

Change in accounting principle

As discussed in Note 3 to the consolidated financial statements, the Company has changed its method for accounting for leases in 2019 due to the adoption of Financial Accounting Standards Board Accounting Standards Codification Topic No.

842 – Leases.

Basis for opinion

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Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

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The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Transaction price

Transaction Price Adjustment – Uncollected Flexitouch Product Sales

As described further in Note 3.

Summary of Significant Accounting Policies – Revenue Recognition to the consolidated financial statements, Management applies judgment in determining the transaction price for both sales revenue and rental revenue based on the ultimate approval amount with the payer and collections history.

The transaction price is impacted by multiple factors, including the terms and conditions contracted by various third-party payers, and therefore payments from third-party payers typically are less than the Company’s standard charge and represent an implicit price concession, a form of variable consideration.

The subjectivity involved with determining the transaction price is primarily related to sales of its products and differs based on the ultimate payer which is typically Medicare or a commercial payer (there is not variable consideration with the Veterans Administration payer).

The primary assumption related to this estimate is the collectability percentage determined for each payer.

Management records a separate quarterly transaction price adjustment for Medicare and commercial payer sales based on management’s current computation of historical collection percentages by payer.

The results of the variable consideration assessment is the primary source of information in estimating the recognition of net revenue and the valuation of the related accounts receivable.

We identified the determination of the transaction price as a critical audit matter.

The principal considerations for our determination that the transaction price is a critical audit matter are:

● the transaction price is related to material accounts and disclosures that are important to the users of the consolidated financial statements,

Summary of Significant Accounting Policies – Revenue Recognition to the consolidated financial statements, revenue is recognized upon transfer of control of the product to the customer based on a transaction price determined to be the amount of expected consideration to be received for the product.

In most cases, there is a contracted third-party payer, such as a commercial insurer, Medicare or the Veteran’s Administration involved with the transaction.

The transaction price is impacted by

multiple factors, including the terms and conditions contracted by third-party payers.

Thus, payments from third-party payers typically are less than the Company’s standard charge and represent an implicit price concession, resulting in variable consideration.

The transaction price for commercial payers is determined based on the payment history of the payer drawn from actual write-off and collections experience over a rolling 12-month period, as well as historical patient collections by payer.

The Company assesses the variable consideration for each Medicare claim as a percentage of the total invoice price based on ultimate approval and collection history.

There is not variable consideration with sales to the Veterans Administration.

The results of the variable consideration assessment are the primary source of information in estimating the recognition of net revenue and the net valuation of the related accounts receivable.

We identified the transaction price adjustment for uncollected Flexitouch product sales to commercial payers and Medicare as a critical audit matter.

The principal considerations for our determination of this critical audit matter are:

● the transaction price adjustment is related to material accounts and disclosures that are important to the users of the consolidated financial statements,

● significant judgment is required to estimate the expected amount of cash consideration to be collected, which is a key input into management’s transaction price assessment.

● for sales with Medicare as the payer, the future collection could significantly differ from those subjective estimates given the payment uncertainty due to the appeals process for claims initially denied.

Our audit procedures related to the determination of the transaction price included the following, among others:

● We tested the design and operating effectiveness of management’s key controls relating to their Medicare and commercial payer transaction price assessment through reperformance.

● For sales to patients insured by commercial payers, we assessed the reasonableness of management’s transaction price adjustments by assessing computations in management’s historical lookback analysis of collection rates.

● For a sample of commercial payers, we recomputed management’s calculation of the historical collectability percentage based on transactions that occurred during the year to evaluate the completeness and accuracy of underlying data used in the historical lookback analysis.

● For sales to patients covered by Medicare, we tested management’s estimate by evaluating the significant assumptions and the completeness and accuracy of the underlying data used to determine the collection percentage by claim year.

Our audit procedures related to the transaction price adjustment for uncollected Flexitouch product sales included the following, among others:

● We tested the design and operating effectiveness of management’s key controls relating to their Medicare and commercial payer transaction price assessments and commercial payer lookback analysis through reperformance, observation of the control being performed, and inspection of supporting documentation providing evidence of control performance.

● For a sample of commercial payers, we recomputed management’s calculation of the historical collectability percentage by payer based on transactions that occurred during the year to evaluate the completeness and accuracy of underlying data used in the commercial transaction price adjustment and lookback analysis.

● For sales to patients insured by commercial payers, we assessed the reasonableness of management’s year-end analysis of the transaction price adjustment recorded in the prior year compared to actual pricing adjustments experienced in the current period by recomputing the results of management’s historical lookback analysis of collection rates by payer portfolio.

● For sales to patients covered by Medicare, we tested management’s estimate by evaluating the determination of collection percentage by claim year assumptions including the completeness and accuracy of the underlying data used .

/s/ GRANT THORNTON LLP

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Net investment in leases

Income taxes receivable

Prepaid expenses and other current assets

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Retained earnings

Accumulated other comprehensive income (loss)

Accumulated other comprehensive income

Total stockholders’ equity

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Consolidated Statements of Operations

Year Ended December 31,

(In thousands, except share and per share data)

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Total operating expenses

Income from operations

Income before income taxes

Income tax expense (benefit)

Net income per common share

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

(Loss) income from operations

(Loss) income before income taxes

Income tax (benefit) expense

Net (loss) income

Net (loss) income per common share

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

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

Tactile Systems Technology, Inc.

Consolidated Statements of Comprehensive Income

Year Ended December 31,

Consolidated Statements of Comprehensive (Loss) Income

(In thousands)

Other comprehensive income (loss):

Unrealized gain (loss) on marketable securities

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

Total other comprehensive income (loss)

Comprehensive income

Net (loss) 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

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

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employee stock purchase plan

Shares repurchased to cover taxes

from restricted stock award

Shares repurchased to cover taxes from restricted stock award vesting

Comprehensive income for the period

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Stock-based compensation

Exercise of common stock options and vesting of restricted stock units

Taxes paid for net share settlement of restricted stock units

Exercise of common stock options and vesting of performance and restricted stock units

Taxes paid for net share settlement of performance and restricted stock units

Common shares issued for employee stock purchase plan

Comprehensive income for the period

Comprehensive loss for the period

Balances, December 31, 2020

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Cash flows from operating activities

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

Net (loss) income

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

Depreciation and amortization

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Stock-based compensation expense

Gain on other investments and maturities of marketable securities

Impairment losses

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Other investments

Net cash used in investing activities

Net cash provided by (used in) investing activities

Cash flows from financing activities

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

Shares repurchased to cover taxes from restricted stock award vesting

Net cash provided by financing activities

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Tactile Systems Technology, Inc.

(“we,” “us,” and “our”) is the sole manufacturer and distributor of the Flexitouch and Entre systems, medical devices that help control symptoms of lymphedema, a chronic and progressive medical condition, the Actitouch system, a medical device used to treat venous leg ulcers and chronic venous insufficiency, and the Airwear wrap, a medical device used for the management of venous insufficiency, venous hypertension, venous ulcerations and lymphedema.

We provide our products for use in the home and sell or rent them through vascular, wound and lymphedema clinics throughout the United States.

We do business as “Tactile Medical.”

We were originally incorporated in Minnesota under the name Tactile Systems Technology, Inc.

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In connection with the closing of the initial public offering, all of our outstanding redeemable convertible preferred stock automatically converted to common stock on August 2, 2016.

At August 2, 2016, we did not have any redeemable convertible preferred stock issued or outstanding.

Our business is affected by seasonality.

In the first quarter of each year, when most patients have started a new insurance year and have not yet met their annual out-of-pocket payment obligations, we experience substantially reduced demand for our products.

We typically experience higher revenue in the third and fourth quarters when patients have met their annual insurance deductibles, thereby reducing their out-of-pocket costs for our products, and because patients desire to exhaust their flexible spending accounts at year end.

We typically experience higher revenue in the third and fourth quarters of the year when more 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.

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All intercompany balances and transactions have been eliminated in consolidation.

Risks and Uncertainties

Coronavirus (COVID-19)

The United States economy in general and our business specifically have been negatively affected by the COVID-19 pandemic.

We have seen adverse impacts as it relates to the decline in the number of patients that healthcare facilities and clinics are able to treat due to enhanced safety protocols.

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.

● We have continued to limit employee travel and contact restrictions to reduce exposure.

● We have continued to collaborate with payers to modify coverage requirements by serving patients virtually.

● In concert with COVID-19 social distancing requirements and recommendations, we temporarily 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 have since reactivated a small number of healthcare practitioners in the same capacity as trainers who educate patients on the proper use of our solutions.

● 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

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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.

JOBS Act Accounting Election

Prior to December 31, 2018, we were an emerging growth company under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and as a result we were eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies.

We elected to take advantage of the extended transition period for adopting new or revised accounting standards that have different effective dates for public and private companies until such time as those standards apply to private companies.

However, as of the last business day of our second fiscal quarter of 2018, the market value of our common stock that was held by non-affiliates exceeded $ 700 million, and as a result, we no longer qualified as an emerging growth company as of December 31, 2018.

Therefore we no longer are able to take advantage of the extended transition period for adopting new or revised accounting standards.

Coronavirus Aid, Relief, and Economic Security Act

We may receive cash payments from the government during a public health emergency (PHE).

We consider the nature and substance of the government funds received and record the cash payment in accordance with the terms and conditions of the funds.

In the year ended December 31, 2020, we received a grant of $ 1.2 million from the Public Health and Social Services Emergency Fund (Relief Fund), which was among the provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) signed into law on March 27, 2020.

During the year ended December 31, 2020, we recorded $ 1.2 million in other income, which was associated with lost revenues from the COVID-19 PHE incurred in the period based on our interpretation of guidance issued by the Department of Health and Human Services through January 2021.

Comprehensive Income (Loss)

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

Summary of Significant Accounting Policies

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Such observable price changes may include instances where the investee issues equity securities to new investors, thus creating a new indicator of fair value, as an example.

As of December 31, 2019 and 2018, the total carrying value of our equity investments, with no readily determinable fair value, were $ 0.65 million and $ 0.65 million, respectively, and are included in other non-current assets on

our consolidated balance sheets.

On an annual basis, we perform a qualitative assessment considering impairment indicators to evaluate whether these investments are impaired and also monitor for any observable price changes.

As of December 31, 2020 and 2019, the total carrying value of our equity investments, with no readily determinable fair value, were $ 0.3 million and $ 0.7 million, respectively, and are included in other non-current assets on our consolidated balance sheets.

On an annual basis, we perform a qualitative assessment considering impairment

indicators to evaluate whether these investments are impaired and also monitor for any observable price changes.

During the years ended December 31, 2020 and 2019, we did not have any impairment loss on these investments.

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We believe the assessment provides reasonable estimates of our accounts receivable valuation, and therefore we believe that substantially all accounts receivable are fully collectible.

As such, effective December 31, 2018, management reclassified certain related accounts which impacted the presentation of accounts receivable on the Consolidated Statements of Cash Flows.

We have reclassified prior year amounts to conform with the current presentation.

As a result of this reclassification, the reserves for uncollectible schedule, previously disclosed in the Summary of Significant Accounting Policies, is no longer included in the Notes to the Consolidated Financial Statements.

A portion of our claims to Medicare are initially denied and enter the appeals process, where many are ultimately reviewed by an Administrative Law Judge.

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Leasehold improvements are depreciated over the remaining life of the respective building lease agreement.

Patient rental equipment is depreciated over the multiple month rental period.

Major expenditures for property and equipment are capitalized.

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When assets are retired or otherwise disposed of, their costs and related accumulated depreciation are removed from the accumulated depreciation accounts and the resulting gains or losses are included in income.

The value of equipment for patients who obtain our products through a multiple month rental arrangement is capitalized and depreciated over the term of the rental period, after which time title to this equipment passes to the patient.

The value of demonstration equipment in the possession of our field sales representatives is capitalized and depreciated over the estimated useful life of the equipment.

Revenue Recognition

We derive revenue from the sales and rentals of our products, which consist of our proprietary line of Flexitouch, Entre and Actitouch systems as well as the Airwear wrap.

We derive revenue from the sales and rentals of our products, which consist of our proprietary line of Flexitouch and Entre systems.

We recognize revenue when control of the product has been transferred to our customer, in the amount of the expected consideration to be received for the product.

In general, revenue from the sale or rental of a

product is recognized upon shipment, unless circumstances dictate that control has not yet passed to the customer.

In general, revenue from the sale or rental of a product is recognized upon shipment, unless circumstances dictate that control has not yet passed to the customer.

We provide a warranty for our products against defects in material and workmanship for a period of one to five years on garments and one to two years on controllers.

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As a result, the sale or rental of our products represent a single performance obligation that is satisfied at a point in time and is short-term in nature.

In certain cases we receive payment from Medicare sales over a period of time that may exceed one year .

In certain cases we receive payment from Medicare sales over a period

of time that may exceed one year .

Despite these extended payment terms, no significant financing component is deemed to exist as the terms are not for the benefit of the patient with whom we have the contract.

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For our products sold to Medicare patients, we recognize revenue from such sales upon shipment of our products, which can occur only after we have received a prescription from a physician and all applicable patient documentation is obtained.

The transaction price for our Actitouch and Entre systems is determined based on the payment history using the same methodology as our private insurers.

The transaction price for our Entre systems is determined based on the payment history using the same methodology as our private insurers.

A portion of our claims for our Flexitouch system are initially denied, and enter the appeals process, which can be lengthy.

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We sell and rent our products either directly to patients or the Veterans Administration on behalf of patients, who are referred to us by physicians, therapists or nurses.

We bill private insurers and other payers,

Medicare, and the Veterans Administration directly for purchases or rentals of our product on behalf of a patient and bill patients directly for their cost-sharing amounts, including any portion of an unsatisfied deductible and any copayments or co-insurance obligation.

We bill private insurers and other payers, Medicare, and the Veterans Administration directly for purchases or rentals of our product on behalf of a patient and bill patients directly for their cost-sharing amounts, including any portion of an unsatisfied deductible and any copayments or co-insurance obligation.

A portion of our revenue is derived from patients who obtain our products under multiple-month rental arrangements.

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Title to these products passes to the patients at the end of the rental period.

Patients may return the product before the end of the rental period, and as such these arrangements are deemed to be month-to-month cancelable leases in accordance with Accounting Standards Codification (“ASC”), or ASC 840, “Leases,” if they commenced prior to December 31, 2018.

commenced prior to December 31, 2018.

Accordingly, we recognized the related revenue for these rental arrangements monthly, on a pro rata basis, over the lesser of the duration of the rental period or the period during which the patient possesses the product.

Rental agreements commencing after January 1, 2019, are recorded as sales-type leases in accordance with ASC 842.

Rental agreements commencing after January 1, 2019, are recorded as sales-type leases in accordance with Accounting Standards Update (“ASU”) No.

2016-02, “Leases” (Topic 842) (“ASC 842”).

Accordingly, as sales-type leases, the transaction price for the entire rental term is recognized upon transfer of control.

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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 will 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.

As of December 31, 2018, indicators existed, including the calculation of an undiscounted cash flow in comparison to carrying amount, that indicated the patent-related intangible assets for our Actitouch system were impaired.

The primary valuation technique used in estimating the fair value of patent intangible assets is a discounted cash flow approach.

Specifically, we used a relief of royalty rate method which applies a royalty rate to estimated sales, with the resulting amounts then discounted using an appropriate market discount rate.

The relief of royalty rate is the estimated royalty rate a market participant would pay to acquire the right to market/produce the product.

If the resulting discounted cash flows are less than the book value of the intangible asset, impairment exists, and the asset value must be written down.

Based on impairment testing performed in the fourth quarter of 2018, the Actitouch assets were deemed to be fully impaired.

The impairment was due to an evaluation of projected future demand and sales volume in the context of results over the past three years , which resulted in the determination this product would be discontinued.

As such, we wrote off $ 1.8 million of

intangible assets book value, classified within the reimbursement, general and administrative line of the Consolidated Statements of Operations, as well as $ 0.7 million in inventory related assets, classified within cost of revenue.

Stock-Based Compensation

The valuation of stock options involves the use of the Black-Scholes option-pricing model, which requires the input of highly subjective assumptions.

Stock options are valued using the Black-Scholes option-pricing model, except that the valuation of certain “CEO” related stock options subject to a market condition involve the use of the Monte Carlo Simulation model.

The Monte Carlo Simulation and the Black-Scholes valuation models require the input of highly subjective assumptions.

The assumptions include the expected term of the option, the expected volatility of the price of our common stock, expected dividend yield and the risk-free interest rate.

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If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future.

We recognize compensation expense for these options on a straight-line basis over the requisite service period (see Note 14).

We recognize compensation expense for these options on a straight-line basis over the requisite service period (see Note 13 – “Stockholders’ Equity”).

Income taxes are accounted for under the liability method.

Deferred income taxes are provided for temporary differences between the financial reporting and the tax bases of assets and liabilities.

If we determine in the future that it is more likely than not that we will not realize all or a portion of the deferred tax assets, we will record a valuation allowance in the period the determination is made (see Note 16).

If we determine in the future that it is more likely than not that we will not realize all or a portion of the deferred tax assets, we

will record a valuation allowance in the period the determination is made (see Note 15 – “Income Taxes”).

Changes in tax rates are reflected in the tax provision as they occur.

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Dilutive potential stock-based awards include outstanding common stock options, time- and performance-based restricted stock units and employee stock purchase plan shares.

Recent Accounting Pronouncements

Prior to December 31, 2018, we were an “emerging growth company” as defined by the JOBS Act.

The JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, (the “Securities Act”), for complying with new or revised accounting standards.

In other words, an emerging growth company can selectively delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

In accordance with the JOBS Act, we elected to participate in the exemption and, as a result, our financial statements may not have been comparable to the financial statements of issuers that are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies.

As of the last business day of our second fiscal quarter of 2018, the market value of our common stock that was held by non-affiliates exceeded $ 700 million, and as a result, we no longer qualified as an emerging growth company as of December 31, 2018 and were no longer able to take advantage of the extended transition period.

Therefore, as of December 31, 2018, we were required to adopt new or revised accounting standards when they are applicable to public companies that are not emerging growth companies.

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2014-09, “Revenue from Contracts with Customers.” The new standard replaces Section 605, “Revenue Recognition,” and creates modifications to various other revenue accounting standards for specialized transactions and industries.

The new standard is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The new standard also requires additional disclosures about the nature, amount, timing, and uncertainty of revenue, cash flows arising from customer contracts, and enhanced disclosures related to disaggregated revenue information.

We adopted this

standard for our annual reporting period ended on December 31, 2018, and for interim reporting periods thereafter, due to the determination of our change in filing status.

The adoption of this standard using the modified retrospective approach did not have a material or significant impact on our consolidated financial statements, and as such, no adjustment was required to the opening balance of retained earnings as of January 1, 2018.

(See above in this Note 3 - Summary of Significant Accounting Policies and Note 15 - Revenue for additional information and disclosures.)

In February 2016, the FASB issued ASU No.

2016-02, “Leases” (Topic 842) (“ASC 842”), which supersedes the then-existing guidance for lease accounting, “Leases” (Topic 840) (“ASC 840”).

ASC 842 requires lessees to recognize a lease liability and a right of use asset for all leases that extend beyond one year.

As a result of our change in filing status, we adopted this standard using the modified retrospective transition approach at the adoption date of January 1, 2019.

This approach did not require restatement of previous periods.

We completed a qualitative and quantitative assessment of our leases from both a lessee and lessor perspective.

As part of our process, we elected to utilize certain practical expedients that were provided for transition relief.

Accordingly, we did not reassess expired or existing contracts, lease classifications or related initial direct costs as part of our assessment process for either lessee or lessor leases.

Additionally, we elected the practical expedient to treat lease and nonlease components of fixed payments due to the lessor as one, and therefore no separate allocation was required on the initial implementation date of January 1, 2019, and thereafter.

The adoption of this standard, from a lessee perspective, resulted in us recording right of use (“ROU”) operating lease assets and operating lease liabilities of approximately $ 3.1 million on the Consolidated Balance Sheet as of January 1, 2019, with no impact to retained earnings.

In addition, we elected as an accounting policy, not to record leases with an initial term of less than 12 months.

From a lessor perspective, the application of ASC 842 to our rental revenue, which was recognized as month-to-month, cancelable leases in accordance with ASC 840 if they commenced prior to December 31, 2018, resulted in recognizing rental revenue as a sales-type lease under ASC 842 for leases that commenced thereafter.

Rental sales agreements that commenced prior to December 31, 2018, continued to be recognized as month-to-month, cancelable leases until they were completed, as we elected the practical expedient to not reassess the lease classification for leases in existence upon adoption.

As such, rental agreements commencing after January 1, 2019, were recorded as sales-type leases with the associated revenue and cost of revenue recognized on the lease commencement date and a corresponding net investment in leases on the Consolidated Balance Sheet.

(See Note 13 – “Commitments and Contingencies” and Note 15 – “Revenue” for additional information and required disclosures.)

In July 2018, the FASB issued ASU No.

2018-07, “Improvements to Non-employee Share-Based Payment Accounting” (“ASU 2018-07”), which expands the scope of ASC 718 – Stock Based Compensation to include share-based payment transactions for acquiring goods and services from non-employees.

The ASU was effective for us beginning January 1, 2019, including interim periods within the fiscal year.

We adopted ASU 2018-07 for the quarter ended March 31, 2019, and it did not have a material impact on the consolidated financial statements.

In August 2018, the FASB issued ASU No.

2018-15, “Intangibles – Goodwill and Other – Internal-Use Software” (“ASU 2018-15”), which aligns the accounting for implementation costs incurred in a cloud computing arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software.

We early adopted this ASU effective January 1, 2019, and it did not have a material impact on the consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU No.

2016-13, “Financial Instruments — Credit Losses”, to require the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts.

The ASU will be effective for us for interim and annual periods beginning January 1, 2020.

We have began to further evaluate the anticipated impact of the adoption of this ASU on our consolidated financial statements and do not believe the adoption will have a material impact.

On May 22, 2018, we acquired certain assets and the intellectual property of Wright Therapy Products, Inc.

(“WTP”) for total consideration of approximately $ 875,000 plus a potential earn-out to be amortized on a straight-line basis over the life of the related asset.

The earn-out is based on certain revenue metrics over the seven-month period beginning June 30, 2018, and will be capitalized to intangible assets if and when it is probable the earn-out will be achieved.

As of December 31, 2018, the earn-out period had ended and the total amount accrued and capitalized as an intangible asset was $ 375,000 .

The assets include the rights to a portfolio of thirty-one issued and pending patents that includes intellectual property related to WTP’s pneumatic compression therapy devices and five related trademarks, as well as certain customer accounts.

Due to the nature of these patents and related trademarks, as well as our planned use, they have been classified as defensive intangible assets on the balance sheet.

The acquisition was recorded as an asset acquisition, and an allocation of the purchase price, based on relative fair value, has been completed as reflected below:

Weighted-Average

(In thousands)

Carrying Amount

Amortization Period

Defensive intangible assets

Customer accounts

On October 15, 2018, we entered into a license agreement (the “License Agreement”) with Sun Scientific, Inc.

(“Sun Scientific”), pursuant to which we licensed certain intellectual property of Sun Scientific, including related to its Aero-Wrap product, in the United States and Canada for use in all medical applications, including but not limited to swelling/edema and ulcers (including the lymphedema and chronic venous insufficiency conditions), but excluding the use of the intellectual property in the field of prophylaxis for deep vein thrombosis.

Pursuant to the License Agreement, we paid Sun Scientific an initiation fee of $ 4.0 million.

We have also agreed to pay Sun Scientific a royalty in a range of high single digits to low double digits as a percentage of the net sales of the products containing the licensed intellectual property and a contingent payment if the net sales of the Airwear wrap exceed $ 80.0 million within the first seven years of the term of the License Agreement.

We have concluded as of December 31, 2019 that it is not probable the contingent payment threshold will be achieved, and it will be subsequently reassessed at each quarter-end.

The contingent payment may be made, at our option, in cash or shares of our common stock.

The License Agreement will continue until the date of expiration of the last to expire or be invalidated of the licensed patents, subject to earlier termination under certain circumstances.

The license rights to the patents are to be amortized on a straight-line basis over the life of the License Agreement.

The License Agreement was recorded as an asset acquisition, and an allocation of the purchase price, based on relative fair value, has been completed as reflected below:

Weighted-Average

(In thousands)

Carrying Amount

Amortization Period

Marketable Securities

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

At December 31, 2019

(In thousands)

government and agency obligations

Corporate debt securities

Marketable securities

At December 31, 2018

(In thousands)

government and agency obligations

Corporate debt securities

In June 2016, the Financial Accounting Standards Board (“FASB”) issued 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 consolidated financial statements.

Marketable Securities

Net pre-tax unrealized losses for marketable securities of $ 1 thousand at December 31, 2019, were recorded as a component of accumulated other comprehensive income in stockholders' equity.

Marketable securities valued at $ 1.5 million were sold during the year ended December 31, 2019, at a loss of $ 7 thousand.

Unrealized losses and fair value of securities available-for-sale aggregated by investment category and the length of time the securities were in a continuous loss position were as follows:

There were no investments in marketable securities at December 31, 2020.

At December 31, 2019 investments in marketable securities were classified as available-for-sale and consisted of the following :

At December 31, 2019

Less than 12 months

12 months or more

(In thousands)

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Marketable securities

There were no net pre-tax unrealized gains for marketable securities at December 31, 2020.

There were no sales of marketable securities during the year ended December 31, 2020.

There were no marketable securities in an unrealized loss position at December 31, 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

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We had accounts receivable from two insurers representing approximately 37 % and 22 % of accounts receivable as of December 31, 2020.

We had accounts receivable from one insurer representing approximately 11 % of accounts receivable as of December 31, 2018.

Revenue from these insurers accounted for 11 % and 8 % of our total revenue for the year ended December 31, 2019, and 9 % for the year ended December 31, 2018.

We had accounts receivable from two insurers representing approximately 17 % and 13 % of accounts receivable as of December 31, 2019.

Revenue from these insurers accounted for 16 % and 10 % of our total revenue for the year ended December 31, 2020, and 11 % and 8 % for the year ended December 31, 2019.

The credit risks associated with customers which for these purposes are insurers considers aggregation for entities that are known to be under common control.

Inventories consisted of the following:

(In thousands)

At December 31,

At December 31, 2018

(In thousands)

Finished goods

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Leasehold improvements

Patient rental equipment

Construction in Progress

Patient rental equipment

Demonstration equipment

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At December 31, 2020

(In thousands)

Defensive intangible assets

Customer accounts

Total amortizable intangible assets

Patents pending

Total intangible assets

At December 31, 2019

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The weighted-average remaining amortization period for these intangible assets was 6.3 years as of December 31, 2020.

The primary valuation technique used in estimating the fair value of patent intangible assets is a discounted cash flow approach.

Specifically, we used a relief of royalty rate method which applies a royalty rate to estimated sales, with the resulting amounts then discounted using an appropriate market discount rate.

The relief of royalty rate is the estimated royalty rate a market participant would pay to acquire the right to market/produce the product.

If the resulting discounted cash flows are less than the book value of the intangible asset, impairment exists, and the asset value must be written down.

Based on impairment testing performed in the fourth quarter of 2018, the Actitouch assets were deemed to be fully impaired.

The impairment was due to an evaluation of projected future demand and sales volume in the context of results over the prior three years , which resulted in the determination this product would be discontinued.

As such, we wrote off $ 1.8 million of intangible assets book value, classified within the reimbursement, general and administrative expenses line of the Consolidated Statements of Operations, as well as $ 0.7 million in inventory related assets, classified within cost of revenue.

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 patent intangible assets and property and equipment, totaling $ 3.6 million, and was classified within the reimbursement, general and administrative expenses line of the 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 Consolidated Statements of Operations.

Accrued Expenses

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At December 31, 2019

Lease termination costs

Travel and business

Legal and consulting

In-transit inventory

Travel and business

Sales and use tax

Clinical studies

Acquisition earn-out

Deferred rent

Lease termination costs

Warranty Reserves

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The applicable margin is 0.40 % to 1.15 % on loans bearing interest at the Base Rate and 1.40 % to 2.15 % on loans bearing interest at LIBOR, in each case depending on our consolidated total leverage ratio.

Undrawn portions

of the revolving credit facility are subject to an unused line fee at a rate per annum from 0.200 % to 0.275 %, depending on our consolidated total leverage ratio.

As of December 31, 2019 and 2018, we did not have any outstanding borrowings under the Credit Agreement.

Undrawn portions of the revolving credit facility are subject to an unused line fee at a rate per annum from 0.200 % to 0.275 %, depending on our consolidated total leverage ratio.

As of December 31, 2020, we did no t 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.

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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.

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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 Consolidated Balance Sheets, with rent expense to be recognized on a straight-line basis over the term of the lease.

The remaining lease terms vary from approximately one to eleven years as of December 31, 2019.

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

On December 31, 2019, we entered into a termination agreement for these premises due to the move to our new headquarters in September 2019.

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

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 Consolidated Balance Sheets, with rent expense recognized on a straight-line basis over the term of the lease.

The remaining lease terms vary from approximately two to ten years as of December 31, 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 Consolidated Statements of Operations.

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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.

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.

The portion of the space covered under the second lease commenced 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.

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.

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

The remaining lease terms at the ASC 842 adoption date of January 1, 2019, ranged from less than one year to approximately 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 December 31, 2020, ranged from less than one year to approximately three 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.

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At December 31, 2020

At December 31, 2019

Right of use operating lease assets

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Weighted average discount rate

December 31, 2019

Year Ended December 31,

Supplemental cash flow information for our operating leases:

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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 the new headquarters lease modification.

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

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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 accounted for under ASC 842 for the year ended December 31, 2019, was $ 2.1 million.

Rent expense accounted for under ASC 840 for the years ended December 31, 2018 and 2017, was $ 1.5 million and $ 1.1 million, respectively.

As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous lease accounting, maturities of lease liabilities were as follows as of December 31, 2018:

Computer/Office

Fleet Vehicle

(In thousands)

Operating lease costs accounted for under ASC 842 for the years ended December 31, 2020 and 2019, was $ 3.0 million and $ 2.1 million, respectively.

Rent expense accounted for under ASC 840 for the year ended December 31, 2018, was $ 1.5 million.

Major Vendors

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

Discretionary contributions to the 401(k) plan totaled $ 0.3 million for the year ended December 31, 2019, and $ 0.2 million for each of the years ended December 31, 2018 and 2017.

Discretionary contributions to the 401(k) plan totaled $ 0.3 million for each of the years ended December 31, 2020 and 2019, and $ 0.2 million for the year ended December 31, 2018.

Legal Proceedings

From time to time, we are subject to various claims and legal proceedings arising in the ordinary course of business.

Regardless of outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

On February 13, 2019, we were served with a sealed amended complaint venued in the United States District Court in the Southern District of Texas, Houston Division, captioned United States ex rel Veterans First Medical Supply, LLC vs.

Tactile Medical Systems Technology, Inc., Case No.

18-2871, which had been filed on January 23, 2019.

The complaint is a qui tam action on behalf of the United States brought by one of our competitors.

The United States has declined to intervene in this action.

The complaint alleges that we violated the Federal Anti-Kickback Statute claiming that we submitted false claims and made false statements in connection with the Medicare and Medicaid programs, and that we engaged in unlawful retaliation in violation of the Federal False Claims Act.

The complaint seeks damages, statutory penalties, attorneys’ fees, treble damages and costs.

We filed a motion to dismiss on April 5, 2019.

This motion was denied on February 21, 2020.

On March 6, 2020, we filed our answer to the complaint and asserted counterclaims.

On May 7, 2020, the plaintiff filed a motion to dismiss our counterclaims.

On September 8, 2020, we filed a motion for Partial Summary Judgment.

On January 2, 2021, the plaintiff filed a motion for Partial Summary Judgment.

These motions are currently pending.

We believe that the plaintiff’s allegations are without merit and we intend to continue to vigorously defend against the lawsuit.

On September 29, 2020, a complaint in a purported securities class action lawsuit was filed against us and three of our present or former officers in the United States District Court for the District of Minnesota under the following caption:

Brian Mart, Individually and on Behalf of All Others Similarly Situated v.

Tactile Systems Technology, Inc., et al.

The complaint alleges, among other things, that the defendants made materially false and misleading statements regarding our business, operational and compliance policies, and financial results during the time period from May 7, 2018 through June 8, 2020 (“alleged class period”), in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder.

On February 1, 2021, the court appointed the St.

Clair County Employees’ Retirement System as the lead plaintiff.

Their amended complaint is due April 5, 2021.

Our response is due June 4, 2021.

We intend to move to dismiss the action.

Stockholders' Equity

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provided, however, that our Board of Directors may determine that any annual increase be a lesser number.

In addition, all awards granted under our 2007 Omnibus

Stock Plan and our 2003 Stock Option Plan that were outstanding when the 2016 Plan became effective and that are forfeited, expire, are cancelled, are settled for cash or otherwise not issued, will become available for issuance under the 2016 Plan.

In addition, all awards granted under our 2007 Omnibus Stock Plan and our 2003 Stock Option Plan that were outstanding when the 2016 Plan became effective and that are forfeited, expire, are cancelled, are 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, 972,591 and 952,697 shares were added as available for issuance thereunder on January 1, 2021 and 2020, respectively.

Our Board of Directors exercised its prerogative to forego the automatic increase on January 1, 2019.

As of December 31, 2020, 5,538,891 shares were available for future grant pursuant to the 2016 Plan.

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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 $ 9.8 million, $ 8.0 million and $ 4.2 million for the years ended December 31, 2019, 2018 and 2017, 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 received both restricted stock units and stock option awards under our 2016 Plan during the third fiscal quarter of 2020 and the stock options have a seven year term.

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 require that our stock price exceed $ 40.15 for 20 consecutive trading days during the term of the option in order to vest.

The fair value of stock options subject to the market condition was estimated, at the date of grant, using the Monte Carlo Simulation model.

The following table sets forth the estimated fair value of stock options granted and the assumptions on which the fair value was determined:

Expected term

Expected volatility

Risk-free interest rate

Expected dividend yield

Fair value on the date of grant

$ 13.60 - $ 14.70

We recorded total stock-based compensation expense of $ 10.7 million, $ 9.8 million and $ 8.0 million for the years ended December 31, 2020, 2019 and 2018, respectively.

This expense was allocated as follows:

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Total stock-based compensation expense

Total stock-based compensation expense includes a modification of share-based awards held by a former executive resulting in a charge of $ 0.2 million and $ 1.0 for the years ended December 31, 2019 and 2018, respectively.

Total stock-based compensation expense includes a modification of share-based awards held by a former executive resulting in a charge of $ 0.2 million and $ 1.0 million for the years ended December 31, 2019 and 2018, respectively.

At December 31, 2019, there was no remaining unrecognized pre-tax compensation expense related to this modification.

Stock Options

Stock options issued to participants other than non-employees vest over three or four years and typically have a contractual term of seven or ten years .

In each of 2018 and 2017, stock options were granted to our non-employee directors on the date of the annual meeting of stockholders and vested in full on the earlier of one year after the date of grant or on the date of the next year’s annual meeting of stockholders.

These options have a contractual term of seven years .

Stock options issued to participants other than non-employees typically vest over three or four years and typically have a contractual term of seven or ten years .

Stock-based compensation expense included in our Consolidated Statements of Operations for stock options was $ 4.0 million, $ 2.7 million and $ 2.1 million for the years ended December 31, 2020, 2019 and 2018 , respectively.

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At December 31, 2020 , there was approximately $ 7.7 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 2.0 years.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model, other than options that have a market-based vesting condition, which are valued using the Monte Carlo Simulation model.

Annually, we make predictive assumptions regarding future stock price volatility, dividend yield, expected term and forfeiture rate.

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Treasury securities with maturities similar to the expected term of the options for each option group.

the “simplified method” to determine the expected term of the stock option grants.

We use the “simplified method” to determine the expected term of the stock option grants.

We utilize this method because we do not have sufficient public company exercise data in which to make a reasonable estimate.

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Balance at December 31, 2018

Cancelled/Expired

Balance at December 31, 2019

Cancelled/Expired

Balance at December 31, 2020

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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 December 31, 2019, there were 6,109 outstanding restricted stock units that had been previously granted to non-employee directors in lieu of their quarterly director retainer payments.

On December 31, 2020, upon her departure from our board of directors, we issued 748 shares of common stock to Dr.

Pegus, which represented the settlement of restricted stock units that had been previously granted to her in lieu of her quarterly director retainer payments.

Excluding those restricted stock units, as of December 31, 2020 , there were 6,469 outstanding restricted stock units that had been previously granted to non-employee directors in lieu of their quarterly director retainer payments.

These restricted stock units are not included in the “Balance at December 31, 2020 ” line in the table above because they are fully vested.

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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.

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

Stock-based compensation expense included in our Consolidated Statements of Operations for PSUs was $ 2.3 million and $ 0.7 million for the years ended December 31, 2019 and 2018, respectively.

Stock-based compensation expense included in our Consolidated Statements of Operations for PSUs was $ 0.5 million, $ 2.3 million, and $ 0.7 million for the years ended December 31, 2020, 2019 and 2018, respectively.

The stock-based compensation expense for the year ended December 31, 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 December 31, 2020, there was approximately $ 1.1 million of total unrecognized pre-tax compensation expense related to outstanding PSUs that is expected to be recognized over a weighted average period of 2.0 years.

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Balance at December 31, 2019

Balance at December 31, 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

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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 plan is available to all our employees and employees of participating subsidiaries.

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 plan provides for six-month purchase periods, beginning on May 16 and November 16 of each calendar year.

The initial purchase period began on July 27, 2016 and ended on May 15, 2017.

A total of 1.6 million shares of common stock were initially reserved for issuance under the plan, and this share reserve will automatically be supplemented each January 1, commencing in 2017 and ending on and including January 1, 2026, by an amount equal to the least of (1) 1 % of the shares of our common stock outstanding on the immediately preceding December 31, (2) 500,000 shares or (3) such lesser amount as our Board of Directors may determine.

Pursuant to the automatic increase feature of the plan, 178,463 shares were added to the ESPP on January 1, 2018.

Our Board of Directors exercised its prerogative to forego the automatic increase on January 1, 2019.

On May 15, 2017, 259,981 shares were purchased, utilizing $ 2.2 million of

employee contributions in the initial purchase period.

On November 15, 2017, 47,151 shares were purchased, utilizing $ 0.9 million of employee contributions in the May 16, 2017 to November 15, 2017 purchase period.

On May 15, 2018, 63,578 shares were purchased under the ESPP, utilizing $ 1.4 million of employee contributions in the November 16, 2017 to May 15, 2018 purchase period.

On November 15, 2018, 33,514 shares were purchased, utilizing $ 1.3 million of employee contributions in the May 16, 2018 to November 15, 2018 purchase period.

On May 15, 2019, 43,386 shares were purchased under the ESPP, utilizing $ 1.9 million of employee contributions in the November 16, 2018 to May 15, 2019 purchase period.

On November 15, 2019, 27,741 shares were purchased, utilizing $ 1.2 million of employee contributions in the May 16, 2019 to November 15, 2019 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, 194,518 and 190,539 shares were added as available for issuance thereunder on January 1, 2021 and 2020, respectively.

As of December 31, 2020, 1,587,904 shares were available for future issuance under the ESPP.

We recognized $ 0.9 million, $ 0.9 million and $ 0.7 million in stock-based compensation expense related to the ESPP for the years ended December 31, 2020, 2019 and 2018, respectively.

We derive our revenue from the sale and rental of our Flexitouch, Entre and Actitouch systems to our customers in the United States.

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:

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Flexitouch system

Entre/Actitouch systems

Other products (1)

Percentage of total revenue

Flexitouch system

Entre/Actitouch systems

Other products (1)

(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 years ended December 30, 2020, 2019 and 2018.

Rental revenue for the years ended December 31, 2020, 2019 and 2018, was primarily related to private insurers.

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Each rental agreement contains two components, the controller and related garments, both of which are interdependent and recognized as one lease component.

In accordance with applicable guidance, we 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.

Those rental agreements initiated subsequent to January 1, 2019, are recorded as sales-type leases in accordance with ASC 842, whereby rental revenue and cost of rental revenue are recognized upon the lease commencement date.

Total rental revenue for the year ended December 31, 2019, includes both operating and

sales-type lease revenue.

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 year ended December 31, 2019, includes both operating and sales-type lease revenue.

Operating lease revenue was $ 5.0 million for the year ended December 31, 2019.

Rental revenue related to operating leases under ASC 840 includes garment revenue of approximately $ 1.4 million and $ 1.5 million previously included as sales revenue for the years ended December 31, 2018 and 2017, respectively.

The revenue and associated cost of revenue of sales-type leases are recognized on the lease commencement date and a net investment in leases is recorded on the Consolidated Balance Sheet.

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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 year ended December 31, 2019, was:

Sales-type lease revenue and the associated cost of revenue for the years ended December 31, 2020 and 2019, was:

Year Ended December 31,

(In thousands)

December 31, 2019

Sales-type lease revenue

Cost of sales-type lease revenue

Sales-type lease gross profit

The provision (benefit) for income tax expense consisted of the following:

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Unrecognized tax benefit, State

Total provision (benefit) for income taxes

Total (benefit) provision for income taxes

The components of our deferred tax assets and liabilities were as follows:

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Warranty reserves

Intangible assets

Valuation allowance

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Net deferred tax assets

A reconciliation of income tax expense (benefit) to the statutory federal tax rate is as follows:

A reconciliation of income tax (benefit) expense to the statutory federal tax rate is as follows:

Year Ended December 31,

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Employee Stock Purchase Plan

Transaction costs

Valuation allowance

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Deferred reprice - state

Deferred true-up

Deferred reprice - federal

Federal carryback claim deferred rate differential

Unrecognized tax benefits

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Balance beginning of the year

Gross increases — tax positions in prior year

Gross change — tax positions in prior year

Balance end of the year

As of December 31, 2019, we had $ 11.5 million of U.S.

federal net operating loss (“NOL”) carry-forwards and approximately $ 0.8 million of state NOLs.

As of December 31, 2020, we had approximately $ 0.8 million of state net operating loss (“NOL”) carry-forwards.

The state NOL carry-forward amounts expire beginning in tax years 2026 if not utilized.

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For tax positions meeting the more likely than not threshold, the amount recognized in our 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 December 31, 2019, we had a UTB with respect to state income taxes of approximately $ 0.1 million that, if recognized, would affect the effective tax rate.

We recognize interest and penalties related to unrecognized tax benefits in tax expense.

On December 22, 2017, the U.S.

4 unchanged sentences

These differences relate primarily to different methods used for income tax purposes including depreciation and amortization, warranty and vacation accruals, and deductions related to allowances for doubtful accounts receivable and inventory reserves.

Net Income Per Common Share

We adopted ASU 2016-09, “ Improvements to Employee Share-Based Payment Accounting ,” in the fourth quarter of 2016 on a retrospective basis, effective January 1, 2016.

The following table sets forth the computation of our basic and diluted net income (loss) per common share and reflects the adoption of ASU 2016-09:

Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets.

On the basis of this evaluation, all deferred tax assets are expected to be realizable.

The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth.

Net (Loss) Income Per Common Share

The following table sets forth the computation of our basic and diluted net (loss) income per share:

(In thousands, except share and per share data)

Net (loss) income

Weighted-average shares outstanding

Dilutive effect of stock-based awards

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

Net income per share - Basic

Net income per share - Diluted

The following common stock-based awards were excluded from the computation of diluted net income per common share for the periods presented because including them would have been anti-dilutive:

Weighted-average shares used to compute diluted net (loss) income per share

Net (loss) income per share - Basic

Net (loss) income per share - Diluted

The following common stock-based awards were excluded from the computation of diluted net (loss) income per common share for the periods presented because including them would have been anti-dilutive:

Restricted stock units

16 unchanged sentences

government and agency obligations

Corporate debt securities

At December 31, 2019

11 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 year ended December 31, 2019.

As of December 31, 2018, we re-measured the value of our intangible assets related to the Actitouch product line to their fair value, which was deemed to be $ 0 using level 3 measurements.

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 .

Quarterly Financial Information (Unaudited)

3 unchanged sentences

(Loss) income from operations

Net income per share - Basic (1)

Net income per share - Diluted (1)

Net (loss) income

Net (loss) income per share - Basic (1)

Net (loss) income per share - Diluted (1)

Three Months Ended

1 unchanged sentence

(Loss) income from operations

Net (loss) income

Net income per share - Basic (1)

3 unchanged sentences

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-K

Item 8. Financial Statements and Supplementary Data