TACTILE SYSTEMS TECHNOLOGY INC 10-K

Item 8. Financial Statements and Supplementary Data. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Tactile Systems Technology, Inc. Opinion on the financial statements 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, 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. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. 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 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. We believe that our audits provide a reasonable basis for our opinion. ​ Critical audit matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. 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 Adjustment – Uncollected Flexitouch Product Sales As described further in Note 3. 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 89 Table of Contents 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 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 We have served as the Company’s auditor since 2015. Minneapolis, Minnesota February 23, 2021 90 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ Tactile Systems Technology, Inc. Consolidated Balance Sheets ​ ​ December 31, December 31, (In thousands, except share and per share data) 2020 2019 Assets ​ ​ ​ ​ ​ Current assets ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 47,855 ​ $ 22,770 Marketable securities ​ ​ — ​ ​ 22,464 Accounts receivable ​ 43,849 ​ 33,444 Net investment in leases ​ 10,708 ​ 8,147 Inventories ​ 18,563 ​ 19,059 Prepaid expenses and other current assets ​ 2,638 ​ 2,451 Total current assets ​ 123,613 ​ 108,335 Non-current assets ​ ​ ​ ​ ​ ​ Property and equipment, net ​ 6,957 ​ 7,408 Right of use operating lease assets ​ 20,132 ​ 15,885 Intangible assets, net ​ 1,680 ​ 5,312 Accounts receivable, non-current ​ 9,433 ​ 4,184 Deferred income taxes ​ 10,198 ​ 8,970 Other non-current assets ​ 2,074 ​ 1,658 Total non-current assets ​ 50,474 ​ 43,417 Total assets ​ $ 174,087 ​ $ 151,752 Liabilities and Stockholders' Equity ​ ​ ​ ​ ​ ​ Current liabilities ​ ​ ​ ​ ​ ​ Accounts payable ​ $ 4,197 ​ $ 3,843 Accrued payroll and related taxes ​ 11,588 ​ 10,098 Accrued expenses ​ 4,423 ​ 4,498 Income taxes payable ​ 2,658 ​ 632 Operating lease liabilities ​ 2,006 ​ 1,454 Other current liabilities ​ 1,842 ​ 903 Total current liabilities ​ 26,714 ​ 21,428 Non-current liabilities ​ ​ ​ ​ ​ ​ Accrued warranty reserve, non-current ​ 3,235 ​ 2,541 Income taxes, non-current ​ — ​ 54 Operating lease liabilities, non-current ​ ​ 19,388 ​ 15,134 Total non-current liabilities ​ 22,623 ​ 17,729 Total liabilities ​ 49,337 ​ 39,157 ​ ​ ​ ​ ​ ​ ​ Commitments and Contingencies (see Note 12) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stockholders’ equity: ​ ​ ​ ​ ​ ​ Preferred stock, $ 0.001 par value, 50,000,000 shares authorized; none issued and outstanding as of December 31, 2020 and December 31, 2019 ​ — ​ — Common stock, $ 0.001 par value, 300,000,000 shares authorized; 19,492,718 shares issued and outstanding as of December 31, 2020; 19,152,715 shares issued and outstanding as of December 31, 2019 ​ 19 ​ 19 Additional paid-in capital ​ 104,675 ​ 91,874 Retained earnings ​ 20,056 ​ 20,676 Accumulated other comprehensive income ​ ​ — ​ ​ 26 Total stockholders’ equity ​ 124,750 ​ 112,595 Total liabilities and stockholders’ equity ​ $ 174,087 ​ $ 151,752 ​ The accompanying notes are an integral part of these consolidated financial statements . 91 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Tactile Systems Technology, Inc. Consolidated Statements of Operations ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ December 31, (In thousands, except share and per share data) 2020 2019 2018 Revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ Sales revenue ​ $ 161,497 ​ $ 162,904 ​ $ 128,786 Rental revenue ​ 25,633 ​ 26,588 ​ 14,965 Total revenue ​ 187,130 ​ 189,492 ​ 143,751 Cost of revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ Cost of sales revenue ​ 45,309 ​ 47,034 ​ 36,969 Cost of rental revenue ​ 9,011 ​ 8,222 ​ 4,524 Total cost of revenue ​ 54,320 ​ 55,256 ​ 41,493 Gross profit ​ ​ ​ ​ ​ ​ ​ ​ ​ Gross profit - sales revenue ​ 116,188 ​ 115,870 ​ 91,817 Gross profit - rental revenue ​ 16,622 ​ 18,366 ​ 10,441 Gross profit ​ 132,810 ​ 134,236 ​ 102,258 Operating expenses ​ ​ ​ ​ ​ ​ ​ ​ ​ Sales and marketing ​ 79,634 ​ 78,920 ​ 60,371 Research and development ​ 5,264 ​ 5,174 ​ 5,289 Reimbursement, general and administrative ​ 51,540 ​ 39,644 ​ 33,608 Total operating expenses ​ 136,438 ​ 123,738 ​ 99,268 (Loss) income from operations ​ ( 3,628 ) ​ 10,498 ​ 2,990 Other income ​ 1,367 ​ 631 ​ 486 (Loss) income before income taxes ​ ( 2,261 ) ​ 11,129 ​ 3,476 Income tax (benefit) expense ​ ( 1,641 ) ​ 158 ​ ( 3,147 ) Net (loss) income ​ $ ( 620 ) ​ $ 10,971 ​ $ 6,623 Net (loss) income per common share ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ $ ( 0.03 ) ​ $ 0.58 ​ $ 0.36 Diluted ​ $ ( 0.03 ) ​ $ 0.56 ​ $ 0.34 Weighted-average common shares used to compute net (loss) income per common share ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ ​ 19,346,929 ​ ​ 18,919,007 ​ ​ 18,252,689 Diluted ​ ​ 19,346,929 ​ ​ 19,641,143 ​ ​ 19,347,632 ​ The accompanying notes are an integral part of these consolidated financial statements . ​ ​ ​ ​ ​ ​ ​ 92 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Tactile Systems Technology, Inc. Consolidated Statements of Comprehensive (Loss) Income ​ ​ ​ Year Ended ​ ​ December 31, (In thousands) 2020 2019 2018 Net (loss) income ​ $ ( 620 ) ​ $ 10,971 ​ $ 6,623 Other comprehensive (loss) income: ​ ​ ​ Unrealized (loss) gain on marketable securities ​ ( 21 ) ​ 31 ​ 60 Income tax related to items of other comprehensive (loss) income ​ ( 5 ) ​ 3 ​ ( 24 ) Total other comprehensive (loss) income ​ ( 26 ) ​ 34 ​ 36 Comprehensive (loss) income ​ $ ( 646 ) ​ $ 11,005 ​ $ 6,659 ​ The accompanying notes are an integral part of these consolidated financial statements. ​ ​ ​ 93 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Tactile Systems Technology, Inc. Consolidated Statements of Stockholders’ Equity ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Additional ​ ​ ​ ​ Other ​ ​ ​ ​ ​ ​ ​ Common Stock ​ Paid-In ​ Retained ​ Comprehensive ​ Treasury ​ ​ ​ (In thousands, except share data) Shares Par Value Capital Earnings (Loss) Income Stock Total Balances, December 31, 2017 ​ 17,846,379 ​ $ 18 ​ $ 70,224 ​ $ 3,082 ​ $ ( 44 ) ​ $ ( 493 ) ​ $ 72,787 Stock-based compensation ​ — ​ ​ — ​ ​ 7,974 ​ ​ — ​ ​ — ​ ​ — ​ ​ 7,974 Exercise of common stock options and warrants and vesting of restricted stock units ​ 725,370 ​ ​ 1 ​ ​ 1,514 ​ ​ — ​ ​ — ​ ​ — ​ ​ 1,515 Taxes paid for net share settlement of restricted stock units ​ ( 63,800 ) ​ ​ — ​ ​ ( 2,379 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 2,379 ) Common shares issued for employee stock purchase plan ​ 26,086 ​ ​ — ​ ​ ( 493 ) ​ ​ — ​ ​ — ​ ​ 493 ​ ​ — Shares repurchased to cover taxes from restricted stock award vesting ​ 97,092 ​ ​ — ​ ​ 2,714 ​ ​ — ​ ​ — ​ ​ — ​ ​ 2,714 Comprehensive income for the period ​ — ​ ​ — ​ ​ — ​ ​ 6,623 ​ ​ 36 ​ ​ — ​ ​ 6,659 Balances, December 31, 2018 ​ 18,631,127 ​ $ 19 ​ $ 79,554 ​ $ 9,705 ​ $ ( 8 ) ​ $ — ​ $ 89,270 Stock-based compensation ​ — ​ ​ — ​ ​ 9,824 ​ ​ — ​ ​ — ​ ​ — ​ ​ 9,824 Exercise of common stock options and vesting of restricted stock units ​ 512,901 ​ ​ — ​ ​ 2,834 ​ ​ — ​ ​ — ​ ​ — ​ ​ 2,834 Taxes paid for net share settlement of restricted stock units ​ ( 62,440 ) ​ ​ — ​ ​ ( 3,391 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 3,391 ) Treasury stock issued for option exercises ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Common shares issued for employee stock purchase plan ​ 71,127 ​ ​ — ​ ​ 3,053 ​ ​ — ​ ​ — ​ ​ — ​ ​ 3,053 Comprehensive income for the period ​ — ​ ​ — ​ ​ — ​ ​ 10,971 ​ ​ 34 ​ ​ — ​ ​ 11,005 Balances, December 31, 2019 ​ 19,152,715 ​ $ 19 ​ $ 91,874 ​ $ 20,676 ​ $ 26 ​ $ — ​ $ 112,595 Stock-based compensation ​ — ​ ​ — ​ ​ 10,689 ​ ​ — ​ ​ — ​ ​ — ​ ​ 10,689 Exercise of common stock options and vesting of performance and restricted stock units ​ 303,709 ​ ​ — ​ ​ 1,068 ​ ​ — ​ ​ — ​ ​ — ​ ​ 1,068 Taxes paid for net share settlement of performance and restricted stock units ​ ( 37,790 ) ​ ​ — ​ ​ ( 1,854 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 1,854 ) Common shares issued for employee stock purchase plan ​ 74,084 ​ ​ — ​ ​ 2,898 ​ ​ — ​ ​ — ​ ​ — ​ ​ 2,898 Comprehensive loss for the period ​ — ​ ​ — ​ ​ — ​ ​ ( 620 ) ​ ​ ( 26 ) ​ ​ — ​ ​ ( 646 ) Balances, December 31, 2020 ​ 19,492,718 ​ $ 19 ​ $ 104,675 ​ $ 20,056 ​ $ — ​ $ — ​ $ 124,750 ​ The accompanying notes are an integral part of these consolidated financial statements. ​ 94 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Tactile Systems Technology, Inc. Consolidated Statements of Cash Flows ​ ​ ​ ​ ​ ​ Year Ended December 31, (In thousands) 2020 2019 2018 Cash flows from operating activities ​ ​ ​ ​ ​ ​ ​ ​ ​ Net (loss) income ​ $ ( 620 ) ​ $ 10,971 ​ $ 6,623 Adjustments to reconcile net (loss) income to net cash provided by operating activities: ​ ​ ​ ​ ​ ​ ​ ​ ​ Depreciation and amortization ​ ​ 2,794 ​ ​ 3,538 ​ ​ 3,737 Net amortization of premiums and discounts on securities available-for-sale ​ ​ ( 91 ) ​ ​ ( 307 ) ​ ​ ( 102 ) Deferred income taxes ​ ​ ( 1,233 ) ​ ​ ( 146 ) ​ ​ ( 6,182 ) Stock-based compensation expense ​ ​ 10,689 ​ ​ 9,824 ​ ​ 7,974 Gain on other investments and maturities of marketable securities ​ ​ ( 11 ) ​ ​ 7 ​ ​ 4 Impairment losses ​ ​ 4,025 ​ ​ — ​ ​ 2,534 Loss on termination of lease ​ ​ — ​ ​ 1,148 ​ ​ — Changes in assets and liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ Accounts receivable ​ ​ ( 10,405 ) ​ ​ ( 9,112 ) ​ ​ ( 6,709 ) Net investment in leases ​ ​ ( 2,561 ) ​ ​ ( 8,147 ) ​ ​ — Inventories ​ ​ 318 ​ ​ ( 7,870 ) ​ ​ ( 870 ) Income taxes ​ ​ 1,972 ​ ​ 2,428 ​ ​ 165 Prepaid expenses and other assets ​ ​ ( 528 ) ​ ​ ( 1,166 ) ​ ​ ( 1,140 ) Right of use operating lease assets ​ ​ 559 ​ ​ 625 ​ ​ — Medicare accounts receivable, non-current ​ ​ ( 5,249 ) ​ ​ ( 2,300 ) ​ ​ 834 Accounts payable ​ ​ 337 ​ ​ ( 1,389 ) ​ ​ 690 Accrued payroll and related taxes ​ ​ 1,490 ​ ​ 2,677 ​ ​ 715 Accrued expenses and other liabilities ​ ​ 1,308 ​ ​ 1,729 ​ ​ 734 Net cash provided by operating activities ​ ​ 2,794 ​ ​ 2,510 ​ ​ 9,007 Cash flows from investing activities ​ ​ ​ ​ ​ ​ ​ ​ ​ Proceeds from sales of securities available-for-sale ​ ​ — ​ ​ 1,493 ​ ​ 2,000 Proceeds from maturities of securities available-for-sale ​ ​ 22,500 ​ ​ 25,000 ​ ​ 15,000 Purchases of securities available-for-sale ​ ​ — ​ ​ ( 22,840 ) ​ ​ ( 21,680 ) Purchases of property and equipment ​ ​ ( 2,059 ) ​ ​ ( 5,446 ) ​ ​ ( 4,196 ) Intangible assets costs ​ ​ ( 232 ) ​ ​ ( 542 ) ​ ​ ( 5,350 ) Other investments ​ ​ ( 30 ) ​ ​ — ​ ​ ( 500 ) Net cash provided by (used in) investing activities ​ ​ 20,179 ​ ​ ( 2,335 ) ​ ​ ( 14,726 ) Cash flows from financing activities ​ ​ ​ ​ ​ ​ ​ ​ ​ Taxes paid for net share settlement of restricted stock units ​ ​ ( 1,854 ) ​ ​ ( 3,391 ) ​ ​ ( 2,379 ) Proceeds from exercise of common stock options ​ ​ 1,068 ​ ​ 2,834 ​ ​ 1,515 Proceeds from the issuance of common stock from the employee stock purchase plan ​ ​ 2,898 ​ ​ 3,053 ​ ​ 2,714 Net cash provided by financing activities ​ ​ 2,112 ​ ​ 2,496 ​ ​ 1,850 Net increase (decrease) in cash and cash equivalents ​ ​ 25,085 ​ ​ 2,671 ​ ​ ( 3,869 ) Cash and cash equivalents – beginning of period ​ ​ 22,770 ​ ​ 20,099 ​ ​ 23,968 Cash and cash equivalents – end of period ​ $ 47,855 ​ $ 22,770 ​ $ 20,099 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Supplemental cash flow disclosure ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash paid for interest ​ $ — ​ $ — ​ $ 9 Cash paid for taxes ​ $ 543 ​ $ 344 ​ $ 2,883 Capital expenditures incurred but not yet paid ​ $ 17 ​ $ 122 ​ $ 167 ​ The accompanying notes are an integral part of these consolidated financial statements . 95 Table of Contents Tactile Systems Technology, Inc. Notes to the Consolidated Financial Statements 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. 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 were originally incorporated in Minnesota under the name Tactile Systems Technology, Inc. on January 30, 1995. During 2006, we established a merger corporation and subsequently, on July 21, 2006, merged with and into this merger corporation, resulting in us being reincorporated as a Delaware corporation. The resulting corporation assumed the name Tactile Systems Technology, Inc. In September 2013, we began doing business as “Tactile Medical.” 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. 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 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. Note 2. Basis of Presentation Our accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the SEC. We have reclassified certain prior year amounts to conform to the current year’s presentation. The results for the year ended December 31, 2020, are not necessarily indicative of results to be expected for any future year. Principles of Consolidation Our accompanying 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. 96 Table of Contents 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. 97 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. ​ 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. ​ Note 3. Summary of Significant Accounting Policies Cash and Cash Equivalents Cash and cash equivalents consist of all cash on hand, deposits and funds invested in available-for-sale securities with original maturities of three months or less at the time of purchase. At December 31, 2020 and 2019, our cash was held primarily in checking and money market accounts. Marketable Securities and Equity Investments We determine the appropriate classification of our marketable securities as available-for-sale or held-to-maturity at the time of purchase and periodically reevaluate such classification. Debt securities are classified as held - to - maturity when we have the positive intent and ability to hold the securities to maturity. Debt securities for which we do not have the intent or ability to hold to maturity are classified as available-for-sale. Debt securities not classified as held-to-maturity are classified as available-for-sale and are reported at fair value, with unrealized gains and losses included in the determination of comprehensive income, a component of stockholders' equity. We review our available-for-sale securities for impairment to determine if the impairment is temporary or other-than-temporary. A temporary impairment charge results in an unrealized loss being recorded in other comprehensive income. Other-than-temporary impairments are recorded in net income in the period the impairment is determined to be other-than-temporary . Realized gains and losses on the sale of marketable securities are determined using the specific-identification method. Equity investments (including equity securities) with readily determinable fair value are reported at fair value, with unrealized gains and losses included in the determination of net income. For equity investments with no readily determinable fair value, we measure these investments at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. 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, 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 98 Table of Contents 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. Accounts Receivable The majority of our accounts receivable and revenue are from commercial insurance payers and government payers, such as Medicare, the Veterans Administration and Medicaid. Accounts receivable are recorded based on management’s assessment of the expected consideration to be received, based on a detailed review of historical pricing adjustments and collections. Management relies on the results of the assessment, which includes payment history of the applicable payer as well as historical patient collections, as a primary source of information in estimating the collectability of our accounts receivable. We update our assessment on a quarterly basis, which to date has not resulted in any material adjustments to the valuation of our accounts receivable. We believe the assessment provides reasonable estimates of our accounts receivable valuation, and therefore we believe that substantially all accounts receivable are fully collectible. 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. After final adjudication of all claims, approximately 90 % of the claims submitted are approved (this is on a number of claims, not a dollars claimed, basis across all our products). The appeals process can be lengthy, lasting more than a year in most cases. Accordingly, we classify a portion of our Medicare accounts receivable as non-current based on our experience with Medicare collections. Inventories Inventories are valued at the lower of cost (first-in, first-out method) or net realizable value. Property and Equipment Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives of three to seven years . Leasehold improvements are depreciated over the remaining life of the respective building lease agreement. Major expenditures for property and equipment are capitalized. Maintenance, repairs and minor renewals are expensed as incurred. 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 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 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. 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. In accordance with applicable accounting guidance, we have determined these were assurance warranties and therefore not considered a performance obligation. In addition, we did not evaluate immaterial promised goods or services in the context of the contract. 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 99 Table of Contents 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. Rather, the extended payment terms occur as a result of an initial claim denial, which subsequently enters the Medicare appeals process as noted below. We commercially distribute our products directly to patients who are referred to us by physicians, therapists or nurses. In most cases, there is a third-party payer, such as a commercial insurer, Medicare or the Veterans Administration involved with the transaction. Our contractual relationship resides with the patient when the third-party payer is either a commercial insurer or Medicare and with the Veterans Administration if the patient is covered under their services. Revenue is recognized from such sales upon transfer of control of the product to the customer at a transaction price determined by collection history. As a result, 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 our standard charge and represent an implicit price concession, resulting in variable consideration. As most contracts are with each individual sale to a patient, we have elected the portfolio approach to determine the transaction price, and ultimately the expected consideration. The portfolios used to determine transaction price are at the payer level, with pricing for each payer assessed based on the underlying similar characteristics. For any of our products sold to patients covered by private payers, such as commercial insurance companies, revenue is recognized upon shipment. A product is not shipped until we have received a prescription from a physician for our products and, as applicable, receipt of prior authorization from payers. At shipment, we invoice the payer for the total product price, and we recognize revenue in the amount of cash consideration anticipated to be received based on the transaction price. After the insurance payer has remitted payment, we separately invoice the patient for their portion of the payment obligation, such as copayments and deductibles. The transaction price is determined based on the payment history of the applicable payer drawn from actual write-off and collections experience from the payer over a rolling 12-month period, as well as historical patient collections. 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 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. We assess the variable consideration for each of these claims as a percentage of the total invoice price based on ultimate approval and collection history. For our products sold to the Veterans Administration on behalf of the patient, our contract is with the Veterans Administration rather than the patient. We enter into individual sales contracts with the Veterans Administration on behalf of each patient. These contracts determine the amount of consideration, which is typically paid in full within 2 - 3 days of shipment, and therefore there is no implicit price concession. In addition, the contracts provide for the right of control to transfer to the Veterans Administration upon delivery of the product to the patient, at which time revenue is recognized. We incur incremental costs that directly relate to the sales of our products; however, as the amortization period would be less than one year , we have elected the practical expedient to expense these costs as incurred. 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. A portion of our revenue is derived from patients who obtain our products under multiple-month rental arrangements. We bill these patients’ insurance payers monthly over the duration of the rental term. 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 100 Table of Contents 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 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. We elected the practical expedient to not reassess the lease classification for leases in existence at December 31, 2018. Advertising Advertising costs are charged to operations when incurred. Advertising expense was $ 0.1 million for each of the years ended December 31, 2020, 2019 and 2018. Research and Development Costs We expense research and development costs as incurred, including expenses associated with clinical research studies and development. Shipping and Handling Costs We do not charge any shipping and handling costs to our customers. Shipping and handling costs incurred are included in cost of revenue. Product Warranty 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. We record a liability for future warranty claims at the time of sale for the warranty period offered to a customer. If the assumptions used in calculating the provision were to materially change, resulting in more defects than anticipated, an additional provision may be required. 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 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 (see Note 8 – “Intangible Assets”). Stock-Based Compensation 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. These estimates involve inherent uncertainties and the significant application of management’s judgment. 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 13 – “Stockholders’ Equity”). Income Taxes 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 101 Table of Contents 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. Net Income Per Common Share Basic net income per common share is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted net income per common share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential stock-based awards outstanding during the period using the treasury stock method. Dilutive potential stock-based awards include outstanding common stock options, time- and performance-based restricted stock units and employee stock purchase plan shares. Recently Adopted Accounting Pronouncements 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. Note 4. Marketable Securities 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 ​ 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 ​ 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 ​ ​ 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 ​ ​ 102 Table of Contents Note 5. Accounts Receivable 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 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. Note 6. Inventories Inventories consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At December 31, (In thousands) 2020 2019 Finished goods ​ $ 7,129 ​ $ 6,508 Component parts and work-in-process ​ 11,434 ​ 12,551 Total inventories ​ $ 18,563 ​ $ 19,059 ​ ​ Note 7. Property and Equipment Property and equipment consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At December 31, (In thousands) 2020 2019 Equipment ​ $ 6,909 ​ $ 6,224 Tooling ​ 2,774 ​ 2,615 Furniture and fixtures ​ 1,958 ​ 1,925 Leasehold improvements ​ 1,282 ​ 1,135 Construction in Progress ​ ​ 778 ​ ​ 97 Patient rental equipment ​ ​ — ​ ​ 91 Demonstration equipment ​ ​ 632 ​ ​ 632 Subtotal ​ 14,333 ​ 12,719 Less: accumulated depreciation ​ ( 7,376 ) ​ ( 5,311 ) Property and equipment, net ​ $ 6,957 ​ $ 7,408 ​ Depreciation expense was $ 2.4 million, $ 3.0 million and $ 3.3 million for the years ended December 31, 2020, 2019 and 2018, respectively. 103 Table of Contents Note 8. Intangible Assets Our patents and other intangible assets are summarized as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ At December 31, 2020 ​ ​ Average ​ Gross ​ ​ ​ ​ ​ ​ Amortization ​ Carrying ​ Accumulated ​ Net (In thousands) Period ​ Amount ​ Amortization ​ Amount Patents ​ 11 years ​ $ 413 ​ $ 65 ​ $ 348 Defensive intangible assets ​ 4 years ​ ​ 1,125 ​ ​ 421 ​ ​ 704 Customer accounts ​ 2 years ​ 125 ​ 63 ​ 62 Total amortizable intangible assets ​ ​ ​ ​ 1,663 ​ ​ 549 ​ ​ 1,114 Patents pending ​ ​ ​ ​ 566 ​ ​ — ​ ​ 566 Total intangible assets ​ ​ ​ $ 2,229 ​ $ 549 ​ $ 1,680 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 $ 0.4 million, $ 0.5 million, and $ 0.4 million for the years ended December 31, 2020, 2019 and 2018, respectively. Future amortization expenses are expected as follows: ​ ​ ​ ​ ​ (In thousands) ​ ​ ​ 2021 $ 236 2022 ​ ​ 236 2023 ​ 205 2024 ​ 184 2025 ​ 94 Thereafter ​ 159 Total ​ $ 1,114 ​ The weighted-average remaining amortization period for these intangible assets was 6.3 years as of December 31, 2020. 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 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. 104 Table of Contents 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. Note 9. Accrued Expenses Accrued expenses consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ (In thousands) At December 31, 2020 At December 31, 2019 Warranty ​ $ 1,606 ​ $ 1,218 Legal and consulting ​ ​ 882 ​ ​ 617 In-transit inventory ​ 634 ​ 106 Travel and business ​ ​ 545 ​ ​ 776 Sales and use tax ​ ​ 193 ​ ​ 200 Clinical studies ​ ​ 67 ​ ​ 85 Lease termination costs ​ ​ — ​ ​ 1,200 Other ​ 496 ​ 296 Total ​ $ 4,423 ​ $ 4,498 ​ ​ Note 10. Warranty Reserves The reserve for warranties was as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ December 31, (In thousands) 2020 2019 Beginning balance ​ $ 3,759 ​ $ 2,566 Warranty provision ​ 2,957 ​ 2,576 Processed warranty claims ​ ( 1,875 ) ​ ( 1,383 ) Ending balance ​ $ 4,841 ​ $ 3,759 ​ ​ ​ ​ ​ ​ ​ Accrued warranty reserve, current ​ $ 1,606 ​ $ 1,218 Accrued warranty reserve, non-current ​ ​ 3,235 ​ ​ 2,541 Total accrued warranty reserve ​ $ 4,841 ​ $ 3,759 ​ ​ Note 11. 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. The revolving credit facility expires on August 3, 2021. 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. 105 Table of Contents Amounts drawn under the revolving credit facility bear interest, at our option, at a rate equal to (a) the highest of (i) the prime rate, (ii) the federal funds rate plus 0.50 % and (iii) LIBOR for an interest period of one month plus 1 % (the “Base Rate”) plus an applicable margin or (b) LIBOR plus the applicable margin. 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, 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. The Credit Agreement limits our ability to make capital expenditures during a fiscal year in excess of the amounts set forth in the Credit Agreement, which are $ 5.0 million for 2018, $ 15.0 million for 2019, $ 15.0 million for 2020 and $ 9.0 million for 2021. The Credit Agreement requires that we (i) not permit, as of the last day of each fiscal quarter, our consolidated total leverage ratio to exceed 3.00 to 1.00 and (ii) maintain minimum cash and cash equivalents, measured on the last day of each fiscal quarter, of not less than $ 7.5 million (subject to a temporary reduction to $ 5.0 million for the two fiscal quarters immediately following a permitted acquisition). As of December 31, 2020, we were in compliance with all financial covenants under the Credit Agreement. The Credit Agreement also contains certain other restrictions and covenants, which, among other things, restrict our ability to acquire or merge with another entity, dispose of our assets, make investments, loans or guarantees, incur additional indebtedness, create liens or other encumbrances, or pay dividends or make other distributions. Amounts due under the Credit Agreement may be accelerated upon an Event of Default (as defined in the Credit Agreement), such as breach of a representation, covenant or agreement of ours, defaults with respect to certain of our other material indebtedness or the occurrence of bankruptcy if not otherwise waived or cured. We may use the proceeds from advances under the revolving credit facility (i) to finance capital expenditures, (ii) to pay fees, commissions and expenses in connection with the Credit Agreement and (iii) for working capital and general corporate purposes. Note 12. 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 Consolidated Balance Sheets. None of our lease agreements contain material restrictive covenants or residual value guarantees. 106 Table of Contents 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 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. We entered into a lease (“initial lease”) in October 2018, for approximately 80,000 square feet of office space for our new corporate headquarters in Minneapolis, Minnesota. In December 2018, we amended the initial lease to add approximately 29,000 square feet of additional office space, which is accounted for as a separate lease (“second lease”) in accordance with ASC 842. In December 2019, we further amended the lease which extended the expiration date of the initial lease, extended the expiration date of and added approximately 4,000 square feet to the second lease, as well as added approximately 37,000 square feet of additional office space, accounted for as a separate lease (“third lease”). The portion of the space under the initial lease was placed in service in September 2019. This portion was recognized as an operating lease and included in the ROU operating lease assets and operating lease liabilities on the Consolidated Balance Sheets. 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. 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 December 31, 2020, we had approximately 59 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 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. 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. 107 Table of Contents 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 December 31, 2020 At December 31, 2019 Right of use operating lease assets ​ $ 20,132 ​ $ 15,885 ​ ​ ​ ​ ​ ​ ​ Operating lease liabilities: ​ ​ ​ ​ ​ ​ Current ​ $ 2,006 ​ $ 1,454 Non-current ​ 19,388 ​ 15,134 Total ​ $ 21,394 ​ $ 16,588 ​ ​ ​ ​ ​ ​ ​ Operating leases: ​ ​ ​ ​ ​ ​ Weighted average remaining lease term ​ 9.4 years ​ ​ 10.1 years Weighted average discount rate ​ ​ 4.4 % ​ ​ 4.6 % ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ ​ 2020 ​ 2019 Supplemental cash flow information for our operating leases: ​ ​ ​ ​ ​ ​ Cash paid for operating lease liabilities ​ $ 2,646 ​ $ 1,799 Non-cash right of use assets obtained in exchange for new operating lease obligations ​ $ 6,789 ​ $ 18,891 ​ The table below reconciles the undiscounted cash flows under the operating lease liabilities recorded on the Consolidated Balance Sheets for the periods presented: ​ ​ ​ ​ ​ (In thousands) ​ ​ ​ 2021 $ 2,894 2022 ​ ​ 2,643 2023 ​ 2,605 2024 ​ 2,575 2025 ​ 2,654 Thereafter ​ 15,345 Total minimum lease payments ​ ​ 28,716 Less: Amount of lease payments representing interest ​ ​ ( 7,322 ) Present value of future minimum lease payments ​ ​ 21,394 Less: Current obligations under operating lease liabilities ​ ​ ( 2,006 ) Non-current obligations under operating lease liabilities ​ $ 19,388 ​ As of December 31, 2020, we have additional lease commitments of $ 7.1 million related to amendments to existing building leases that have not yet commenced. As the lessee, we are involved in providing guidance to the lessor for related improvements, however these improvements are managed and owned by the lessor. Operating lease costs 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 We had purchases from two vendors that accounted for 32 % of total purchases for the year ended December 31, 2020. We had purchases from two vendors that accounted for 37 % of total purchases for the year ended December 31, 2019. 108 Table of Contents Purchase Commitment We issued purchase orders in 2020 totaling $ 19.5 million for goods that we expect to receive within the next year. Retirement Plan 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 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. Note 13. Stockholders' Equity We completed an initial public offering of our common stock on August 2, 2016, in which we sold 4,120,000 shares of our common stock at a public offering price of $ 10.00 per share. Immediately prior to the completion of the initial public offering, all then-outstanding shares of our Series A and Series B preferred stock were converted into 5,924,453 shares of our common stock. Our Series A preferred stock converted to common stock at a ratio of 1-for- 1.03 and our Series B preferred stock converted to common stock at a ratio of 1-for- 1 . In addition, immediately prior to the completion of the initial public offering, we issued 2,354,323 additional shares of our common stock that our Series A and Series B preferred stockholders were entitled to receive in connection with the conversion of the preferred stock, and we issued 956,842 shares of our common stock to pay accrued dividends on our Series B preferred stock. We also paid $ 8.2 million in cumulative accrued dividends to our Series A convertible preferred stockholders in connection with the initial public offering, including $ 0.1 million of dividends paid to the holders of the common restricted shares. 109 Table of Contents 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, 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. As of December 31, 2020, 5,538,891 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 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: ​ ​ ​ ​ 2020 Expected term 4.5 years Expected volatility 45.39 % Risk-free interest rate 0.4 % Expected dividend yield 0 % 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ December 31, (In thousands) 2020 2019 2018 Cost of revenue ​ $ 539 ​ $ 329 ​ $ 160 Sales and marketing expenses ​ ​ 5,058 ​ ​ 4,331 ​ ​ 3,255 Research and development expenses ​ ​ 360 ​ ​ 372 ​ ​ 242 Reimbursement, general and administrative expenses ​ ​ 4,732 ​ ​ 4,792 ​ ​ 4,317 Total stock-based compensation expense ​ $ 10,689 ​ $ 9,824 ​ $ 7,974 ​ 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. 110 Table of Contents Stock Options 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. The total grant date fair value of options vested during the year was $ 3.0 million, $ 2.3 million and $ 1.5 million for the years ended December 31, 2020, 2019 and 2018 , respectively. 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, 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. The dividend yield assumption is based on expected annual dividend yield on the grant date. To date, no dividend on common stock has been paid by us. Expected volatility was estimated using the average historical volatility of public companies of similar size and industry over the similar period as the expected term assumption used for our options. The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option group. 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. 111 Table of Contents The following table sets forth the estimated fair values of our stock options granted in each of the years indicated, and the assumptions on which the fair values were determined: ​ ​ ​ ​ ​ ​ ​ ​ 2020 ​ 2019 2018 Expected term 4.5 years ​ 4 - 6 years ​ 4 - 6 years Expected volatility 44.1 - 46.4 % ​ 43.2 - 44.6 % ​ 42.7 - 43.4 % Risk-free interest rate 0.2 - 0.9 % ​ 1.6 - 2.6 % ​ 2.6 - 3.1 % Expected dividend yield 0 % ​ 0 % ​ 0 % Fair value on the date of grant $ 13.45 - $ 18.64 ​ $ 19.57 - $ 33.12 ​ $ 12.46 - $ 29.07 ​ Our stock option activity for the three years ended December 31, 2020, 2019 and 2018, 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, 2017 ​ 1,487,720 ​ $ 8.41 ​ 6.2 years ​ $ 29,611 Granted ​ 203,614 ​ $ 47.25 ​ ​ ​ ​ ​ Exercised ​ ( 553,375 ) ​ $ 2.74 ​ ​ ​ $ 25,393 Forfeited ​ ( 61,424 ) ​ $ 21.27 ​ ​ ​ ​ ​ Balance at December 31, 2018 ​ 1,076,535 ​ $ 17.94 ​ 6.5 years ​ $ 31,172 Granted ​ 189,076 ​ $ 59.52 ​ ​ ​ ​ ​ Exercised ​ ( 321,806 ) ​ $ 8.81 ​ ​ ​ $ 16,026 Forfeited ​ ( 76,322 ) ​ $ 36.50 ​ ​ ​ ​ ​ Cancelled/Expired ​ ( 528 ) ​ $ 19.64 ​ ​ ​ ​ ​ Balance at December 31, 2019 ​ 866,955 ​ $ 28.76 ​ 6.3 years ​ $ 33,957 Granted ​ 378,695 ​ $ 44.84 ​ ​ ​ ​ ​ Exercised ​ ( 147,741 ) ​ $ 7.24 ​ ​ ​ $ 6,540 Forfeited ​ ( 54,824 ) ​ $ 50.25 ​ ​ ​ ​ ​ Cancelled/Expired ​ ( 3,376 ) ​ $ 63.61 ​ ​ ​ ​ ​ Balance at December 31, 2020 ​ 1,039,709 ​ $ 36.43 ​ 5.6 years ​ $ 13,381 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Options exercisable at December 31, 2020 ​ 489,866 ​ $ 25.39 ​ 4.8 years ​ $ 11,099 ​ (1) The exercise price of each option granted during the periods 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 473,222 at December 31, 2019, and 622,675 at December 31, 2018 had weighted average exercise prices of $ 14.14 and $ 6.75 , respectively. The following summarizes additional information about our stock options: ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ December 31, Number of: ​ 2020 ​ 2019 Non-vested options beginning of the year ​ ​ 393,733 ​ ​ 453,860 Non-vested options end of the year ​ ​ 549,843 ​ ​ 393,733 Vested options ​ ​ 489,866 ​ ​ 473,222 112 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ December 31, Weighted-average grant date fair value of: ​ 2020 ​ 2019 Non-vested options beginning of the year ​ $ 19.55 ​ $ 14.80 Non-vested options end of the year ​ ​ 18.03 ​ ​ 19.55 Vested options ​ ​ 10.67 ​ ​ 6.01 Forfeited options ​ ​ 20.54 ​ ​ 16.66 ​ Time-Based Restricted Stock Unit s 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 our Consolidated Statements of Operations for time-based restricted stock units was $ 5.2 million, $ 4.0 million and $ 3.5 million for the years ended December 31, 2020, 2019 and 2018 , respectively. As of December 31, 2020 , there was approximately $ 6.8 million of total unrecognized pre-tax compensation expense related to outstanding time-based restricted stock units that is expected to be recognized over a weighted-average period of 2.0 years. Our time-based restricted stock unit activity for the years ended December 31, 2020, 2019 and 2018 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, 2017 ​ 441,507 ​ $ 16.38 ​ $ 12,795 Granted ​ 103,417 ​ $ 38.13 ​ ​ ​ Vested ​ ( 199,733 ) ​ $ 15.53 ​ ​ ​ Cancelled ​ ( 35,559 ) ​ $ 20.74 ​ ​ ​ Balance at December 31, 2018 ​ 309,632 ​ $ 23.69 ​ $ 14,104 Granted ​ 73,920 ​ $ 64.82 ​ ​ ​ Vested ​ ( 193,339 ) ​ $ 20.21 ​ ​ ​ Cancelled ​ ( 18,526 ) ​ $ 38.36 ​ ​ ​ Balance at December 31, 2019 ​ 171,687 ​ $ 43.74 ​ $ 11,591 Granted ​ 175,582 ​ $ 46.42 ​ ​ ​ Modification ​ 2,288 ​ $ 21.85 ​ ​ ​ Vested ​ ( 118,014 ) ​ $ 37.57 ​ ​ ​ Cancelled ​ ( 20,074 ) ​ $ 53.03 ​ ​ ​ Balance at December 31, 2020 ​ 211,469 ​ $ 48.29 ​ $ 9,503 ​ ​ ​ ​ ​ ​ ​ ​ ​ Deferred and unissued at December 31, 2020 (2) ​ 6,469 ​ $ 38.94 ​ $ 291 ​ (1) The aggregate intrinsic value of time-based restricted stock units outstanding was based on our closing stock price on the last trading day of the period. (2) For the year ended December 31, 2020 , there were 1,108 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. 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. 113 Table of Contents 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 threshold performance 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 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. ​ Our performance-based restricted stock unit activity at the estimated payout of 150 % of target for the years ended December 31, 2020, 2019 and 2018, 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, 2017 ​ — ​ $ — ​ $ — Granted ​ 70,680 ​ $ 33.53 ​ ​ ​ Vested ​ — ​ $ — ​ ​ ​ Cancelled ​ ( 5,253 ) ​ $ 32.36 ​ ​ ​ Balance at December 31, 2018 ​ 65,427 ​ $ 33.62 ​ $ 2,980 Granted ​ 25,724 ​ $ 72.64 ​ ​ ​ Vested ​ — ​ $ — ​ ​ ​ Cancelled ​ — ​ $ — ​ ​ ​ Balance at December 31, 2019 ​ 91,151 ​ $ 44.63 ​ $ 6,154 Granted ​ 31,731 ​ $ 50.41 ​ ​ ​ Vested ​ ( 26,204 ) ​ $ 33.58 ​ ​ ​ Cancelled ​ ( 17,375 ) ​ $ 52.87 ​ ​ ​ Balance at December 31, 2020 ​ 79,303 ​ $ 47.83 ​ $ 3,564 ​ (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. 114 Table of Contents 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. Note 14. 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ December 31, (In thousands) 2020 ​ 2019 ​ 2018 Revenue ​ ​ ​ ​ ​ ​ ​ ​ Flexitouch system $ 163,914 ​ $ 171,323 ​ $ 131,935 Other products (1) 23,216 ​ 18,169 ​ 11,816 Total $ 187,130 ​ $ 189,492 ​ $ 143,751 ​ ​ ​ ​ ​ ​ ​ ​ ​ Percentage of total revenue ​ ​ ​ ​ ​ ​ ​ ​ Flexitouch system 88 % ​ 90 % ​ 92 % Other products (1) 12 % ​ 10 % ​ 8 % Total 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 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. Our revenue from third-party payers, inclusive of sales and rental revenue, for the years ended December 31, 2020, 2019 and 2018 are summarized in the following table: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ December 31, (In thousands) 2020 ​ 2019 ​ 2018 Private insurers and other payers $ 132,789 ​ $ 136,397 ​ $ 102,172 Veterans Administration ​ 24,485 ​ ​ 31,275 ​ ​ 28,043 Medicare ​ 29,856 ​ ​ 21,820 ​ ​ 13,536 Total $ 187,130 ​ $ 189,492 ​ $ 143,751 ​ Our rental revenue is derived from rent-to-purchase arrangements that typically range from three to ten months. Under ASC 840, our rental revenue was recognized as month-to-month, cancelable leases; 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 115 Table of Contents 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. 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. 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 various third party payers. As the rental contract resides with the patients, we have elected the portfolio approach, at the payer level, to determine the expected consideration, which considers the impact of early terminations. While the contract is with the patient, in certain circumstances, the third party payer elects an initial rental period with an option to extend. We assess the likelihood of extending the lease at the onset of the lease to determine if the option is reasonably certain to be exercised. As the lease is short-term in nature, we anticipate collection of substantially all of the net investment within the first year of the lease agreement. Completion of these payments represents the fair market value of the equipment, and as such, interest income is not applicable. 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) ​ 2020 ​ 2019 Sales-type lease revenue ​ $ 25,633 ​ $ 21,570 Cost of sales-type lease revenue ​ 9,011 ​ 7,510 Sales-type lease gross profit ​ $ 16,622 ​ $ 14,060 ​ ​ ​ Note 15. Income Taxes The provision (benefit) for income tax expense consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, (In thousands) 2020 2019 2018 Current income taxes, Federal ​ $ ( 653 ) ​ $ 205 ​ $ 2,416 Current income taxes, State ​ ​ 294 ​ ​ 100 ​ ​ 778 ​ ​ ​ ( 359 ) ​ ​ 305 ​ ​ 3,194 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Deferred income taxes, Federal ​ ( 833 ) ​ ( 303 ) ​ ( 4,804 ) Deferred income taxes, State ​ ​ ( 395 ) ​ ​ 153 ​ ​ ( 1,537 ) ​ ​ ​ ( 1,228 ) ​ ​ ( 150 ) ​ ​ ( 6,341 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Unrecognized tax benefit, Federal ​ — ​ — ​ — Unrecognized tax benefit, State ​ ​ ( 54 ) ​ ​ 3 ​ ​ — ​ ​ ​ ( 54 ) ​ ​ 3 ​ ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total (benefit) provision for income taxes ​ $ ( 1,641 ) ​ $ 158 ​ $ ( 3,147 ) ​ 116 Table of Contents The components of our deferred tax assets and liabilities were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At December 31, (In thousands) 2020 2019 Deferred tax assets: ​ ​ ​ ​ ​ ​ Operating lease liability ​ $ 5,329 ​ $ 4,137 Net operating loss carryforwards ​ ​ 312 ​ ​ 3,179 Accounts receivable and inventory reserves ​ ​ 3,887 ​ ​ 2,589 Stock-based compensation ​ ​ 3,558 ​ ​ 2,393 Accrued liabilities ​ 1,489 ​ 1,239 Warranty reserves ​ ​ 1,206 ​ ​ 936 Intangible assets ​ ​ 612 ​ ​ — Valuation allowance ​ ​ — ​ ​ ( 185 ) Other ​ 107 ​ 108 Total deferred tax assets ​ $ 16,500 ​ $ 14,396 ​ ​ ​ ​ ​ ​ ​ Deferred tax liabilities: ​ ​ ​ ​ ​ ​ Right of use asset ​ ( 5,016 ) ​ ( 3,962 ) Fixed assets ​ ​ ( 1,286 ) ​ ​ ( 1,292 ) Intangible assets ​ ​ — ​ ​ ( 172 ) Total deferred tax liabilities ​ $ ( 6,302 ) ​ $ ( 5,426 ) ​ ​ ​ ​ ​ ​ ​ Net deferred tax assets ​ $ 10,198 ​ $ 8,970 ​ A reconciliation of income tax (benefit) expense to the statutory federal tax rate is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ 2020 ​ 2019 ​ 2018 Tax expense at statutory rate 21.0 % ​ 21.0 % ​ 21.0 % State income taxes, net of federal benefit ​ ( 7.9 ) ​ ​ 7.3 ​ ​ 11.9 ​ Executive compensation ​ ( 5.5 ) ​ ​ 9.1 ​ ​ 11.8 ​ Meals and entertainment ​ ( 10.6 ) ​ ​ 2.6 ​ ​ 7.6 ​ Incentive stock options ( 0.4 ) ​ 0.2 ​ 1.9 ​ Employee Stock Purchase Plan ​ ( 8.6 ) ​ ​ 1.7 ​ ​ 4.5 ​ Valuation allowance ​ 8.0 ​ ​ 1.7 ​ ​ — ​ Return to provision ​ 3.6 ​ ​ ( 0.4 ) ​ ​ 3.6 ​ IRS Exam 2.5 ​ ​ — ​ ​ 23.3 ​ Deferred reprice - state — ​ ( 0.1 ) ​ ( 0.3 ) ​ Federal carryback claim deferred rate differential ​ 38.5 ​ ​ — ​ ​ — ​ Unrecognized tax benefits ​ 2.3 ​ ​ — ​ ​ ( 4.6 ) ​ Excess benefit on non-qualified stock options and RSUs ​ 28.0 ​ ​ ( 41.5 ) ​ ​ ( 177.6 ) ​ Interest and penalties ​ 1.9 ​ ​ ( 0.2 ) ​ ​ 6.3 ​ Other ( 0.2 ) ​ — ​ 0.1 ​ Net effective rate 72.6 % ​ 1.4 % ​ ( 90.5 ) % ​ A reconciliation of unrecognized tax benefits (“UTB”) is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, (In thousands) 2020 2019 2018 Balance beginning of the year ​ $ 54 ​ $ 51 ​ $ 212 Gross change — tax positions in prior year ​ ​ ( 54 ) ​ ​ 3 ​ ​ 3,477 Settlement ​ — ​ — ​ ( 3,638 ) Balance end of the year ​ $ — ​ $ 54 ​ $ 51 ​ 117 Table of Contents 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. We are subject to income tax examinations in the U.S. federal jurisdiction as well as in various state jurisdictions. U.S. federal and state tax years prior to 2017 are closed to examination as of December 31, 2020. We are not currently under examination by any taxing authority. 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. We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. 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. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act establishes new tax laws effective for tax years beginning after December 31, 2017, including, but not limited to, the reduction of the U.S. federal corporate income tax rate to 21 %. 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 purposes including depreciation and amortization, warranty and vacation accruals, and deductions related to allowances for doubtful accounts receivable and inventory reserves. 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. Note 16. Net (Loss) Income Per Common Share The following table sets forth the computation of our basic and diluted net (loss) income per share: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ December 31, (In thousands, except share and per share data) 2020 2019 2018 Net (loss) income $ ( 620 ) ​ $ 10,971 ​ $ 6,623 Weighted-average shares outstanding ​ 19,346,929 ​ ​ 18,919,007 ​ ​ 18,252,689 Dilutive effect of stock-based awards ​ — ​ ​ 722,136 ​ ​ 1,094,943 Weighted-average shares used to compute diluted net (loss) income per share ​ 19,346,929 ​ ​ 19,641,143 ​ ​ 19,347,632 Net (loss) income per share - Basic $ ( 0.03 ) ​ $ 0.58 ​ $ 0.36 Net (loss) income per share - Diluted $ ( 0.03 ) ​ $ 0.56 ​ $ 0.34 ​ 118 Table of Contents 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ December 31, ​ 2020 2019 2018 Restricted stock units ​ 218,686 ​ 38,103 ​ 16,283 Common stock options ​ 1,039,709 ​ 278,363 ​ 111,565 Performance stock units ​ 96,383 ​ 25,724 ​ — Employee stock purchase plan ​ 53,205 ​ 45,182 ​ — Total ​ 1,407,983 ​ 387,372 ​ 127,848 ​ ​ ​ Note 17. 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). The following provides information regarding fair value measurements for our cash equivalents and marketable securities as of December 31, 2020 and 2019, according to the three-level fair value hierarchy: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At December 31, 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 ​ $ 16,188 ​ $ — ​ $ — ​ $ 16,188 U.S. government and agency obligations ​ — ​ — ​ — ​ — Total ​ $ 16,188 ​ $ — ​ $ — ​ $ 16,188 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 ​ 119 Table of Contents During the year ended December 31, 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 . Note 18. Quarterly Financial Information (Unaudited) The quarterly financial data presented below should be read in conjunction with the consolidated financial statements and related notes: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ Mar. 31, Jun. 30, Sep. 30, Dec. 31, (In thousands, except per share data) 2020 2020 2020 2020 Revenue ​ $ 43,675 ​ $ 35,120 ​ $ 49,092 ​ $ 59,243 Gross profit ​ 31,073 ​ 24,912 ​ 34,972 ​ 41,853 (Loss) income from operations ​ ( 4,451 ) ​ ( 7,963 ) ​ 1,794 ​ 6,991 Net (loss) income ​ ( 1,307 ) ​ ( 13,850 ) ​ 2,424 ​ 12,113 Net (loss) income per share - Basic (1) ​ $ ( 0.07 ) ​ $ ( 0.72 ) ​ $ 0.12 ​ $ 0.62 Net (loss) income per share - Diluted (1) ​ $ ( 0.07 ) ​ $ ( 0.72 ) ​ $ 0.12 ​ $ 0.61 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ Mar. 31, Jun. 30, Sep. 30, Dec. 31, (In thousands, except per share data) ​ 2019 2019 2019 2019 Revenues ​ $ 37,617 ​ $ 45,200 ​ $ 49,612 ​ $ 57,063 Gross profit ​ 26,258 ​ 31,505 ​ 35,373 ​ 41,100 (Loss) income from operations ​ ( 1,802 ) ​ 3,048 ​ 3,203 ​ 6,049 Net income ​ 1,472 ​ 2,785 ​ 2,431 ​ 4,283 Net income per share - Basic (1) ​ $ 0.08 ​ $ 0.15 ​ $ 0.13 ​ $ 0.23 Net income per share - Diluted (1) ​ $ 0.08 ​ $ 0.14 ​ $ 0.12 ​ $ 0.22 ​ (1) The summation of quarterly per share amounts may not equal the calculation for the full year, as each quarterly calculation is performed discretely. ​ 120 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.