What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-05-03 compared with 2020-11-02 · 165 added, 231 removed, 375 unchanged (51% of the section changed)

2 unchanged sentences

Condensed Consolidated Balance Sheets

September 30,

(In thousands, except share and per share data)

1 unchanged sentence

Cash and cash equivalents

Marketable securities

Accounts receivable

21 unchanged sentences

Accrued warranty reserve, non-current

Income taxes, non-current

Operating lease liabilities, non-current

4 unchanged sentences

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

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

none issued and outstanding as of March 31, 2021 and December 31,

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

19,424,679 shares issued and outstanding as of September 30, 2020;

19,639,113 shares issued and outstanding as of March 31, 2021;

19,492,718 shares issued and outstanding as of December 31, 2020

1 unchanged sentence

Retained earnings

Accumulated other comprehensive income

Total stockholders’ equity

4 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

(In thousands, except share and per share data)

13 unchanged sentences

Total operating expenses

Income (loss) from operations

Loss from operations

Other (expense) income

Income (loss) before income taxes

Income tax (benefit) expense

Net income (loss)

Net income (loss) per common share

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

Loss before income taxes

Income tax benefit

Net loss per common share

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

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

Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

Condensed Consolidated Statements of Comprehensive Loss

Three Months Ended

Nine Months Ended

September 30,

(In thousands)

Net income (loss)

Other comprehensive (loss) income:

Unrealized (loss) gain on marketable securities

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

Total other comprehensive (loss) income

Comprehensive income (loss)

Other comprehensive income:

Unrealized gain on marketable securities

Income tax related to items of other comprehensive income

Total other comprehensive income

Comprehensive loss

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

4 unchanged sentences

(Loss) Income

Balances, June 30, 2020

Stock-based compensation

Exercise of common stock options and vesting of restricted stock units

Taxes paid for net share settlement of restricted stock units

Comprehensive income (loss) for the period

Balances, September 30, 2020

Balances, December 31, 2020

Stock-based compensation

Exercise of common stock options and vesting of restricted stock units

Taxes paid for net share settlement of restricted stock units

Common shares issued for employee stock purchase plan

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

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

Comprehensive loss for the period

Balances, September 30, 2020

Balances, June 30, 2019

Stock-based compensation

Exercise of common stock options and vesting of restricted stock units

Taxes paid for net share settlement of restricted stock units

Comprehensive income (loss) for the period

Balances, September 30, 2019

Balances, March 31, 2021

Balances, December 31, 2019

Stock-based compensation

Exercise of common stock options and vesting of restricted stock units

Taxes paid for net share settlement of restricted stock units

Common shares issued for employee stock purchase plan

Comprehensive income for the period

Balances, September 30, 2019

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

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

Comprehensive loss for the period

Balances, March 31, 2020

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

1 unchanged sentence

Condensed Consolidated Statements of Cash Flows

Nine Months Ended September 30,

Three Months Ended March 31,

(In thousands)

Cash flows from operating activities

Net (loss) income

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

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

Depreciation and amortization

2 unchanged sentences

Stock-based compensation expense

Gain on other investments and maturities of marketable securities

Impairment losses

Changes in assets and liabilities:

10 unchanged sentences

Proceeds from maturities of securities available-for-sale

Purchases of securities available-for-sale

Purchases of property and equipment

Intangible assets costs

Other investments

Net cash provided by (used in) investing activities

Net (used in) provided by investing activities

Cash flows from financing activities

Taxes paid for net share settlement of restricted stock units

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

Proceeds from exercise of common stock options

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

Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents

Net cash provided by (used in) financing activities

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents – beginning of period

9 unchanged sentences

(“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.

Our products are purchased or rented for at-home use and are recommended by vascular, wound and lymphedema clinics throughout the United States.

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.

6 unchanged sentences

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

As a result, at August 2, 2016, we did not have any redeemable convertible preferred stock issued or outstanding.

Our business is affected by seasonality.

7 unchanged sentences

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

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

The results for the three months ended March 31, 2021, are not necessarily indicative of results to be expected for the year ending December 31, 2021, or for any other interim period or for any future year.

The condensed consolidated interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020.

9 unchanged sentences

For that reason, we are unable to reasonably estimate the long-term impact of the pandemic on our business at this time.

Our first priority with regard to the COVID-19 pandemic is to ensure the safety and health of our employees, clinicians and patients.

Subject to that, we are focusing our efforts on attempting to continue our business operations in this unprecedented environment.

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

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

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

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

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

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

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

● Continuing employee travel and contact restrictions to reduce exposure.

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

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

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

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

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

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

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

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.

3 unchanged sentences

Actual results could differ from those estimates.

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 .

Comprehensive Loss

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

Summary of Significant Accounting Policies

Significant Accounting Policies

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

There were no material changes in our significant accounting policies during the three months ended March 31, 2021.

See Note 3 – “Summary of Significant Accounting Policies” to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020, for information regarding our significant accounting policies.

Impairment of Long-Lived Assets

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

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

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

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

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

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

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

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2016-13, “Financial Instruments — Credit Losses” (“ASU 2016-13”), which introduced a new model for recognizing credit losses on financial instruments based on an estimate of the current expected credit losses.

The new current expected credit losses (“CECL”) model generally calls for the immediate recognition of all expected credit losses and applies to financial instruments and other assets, including accounts receivable and other financial assets measured at amortized cost, debt securities and other financial assets.

This guidance replaces the previous incurred loss model for measuring expected credit losses and requires expected losses on available-for-sale debt securities to be recognized through an allowance for credit losses rather than as reductions in the amortized cost of the securities.

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

Accounting Pronouncements Issued Not Yet Adopted

In December 2019, the FASB issued ASU No.

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

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

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

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

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

Marketable Securities

There were no investments in marketable securities at September 30, 2020.

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

At December 31, 2019

(In thousands)

government and agency obligations

Corporate debt securities

Marketable securities

There were no net pre-tax unrealized gains for marketable securities at September 30, 2020.

There were no sales of marketable securities during the nine months ended September 30, 2020.

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

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

At December 31, 2019

Less than 12 months

12 months or more

(In thousands)

government and agency obligations

Corporate debt securities

We adopted ASU 2019-12 as of January 1, 2021, and it did not have an impact on the condensed consolidated financial statements .

Marketable Securities

There were no investments in marketable securities at March 31, 2021 and December 31, 2020.

There were no net pre-tax unrealized gains for marketable securities at March 31, 2021.

There were no sales of marketable securities during the three months ended March 31, 2021.

There were no marketable securities in an unrealized loss position at March 31, 2021 and December 31, 2020.

Inventories consisted of the following:

(In thousands)

At September 30, 2020

At March 31, 2021

At December 31, 2020

4 unchanged sentences

Our patents and other intangible assets are summarized as follows:

At September 30, 2020

At March 31, 2021

(In thousands)

11 unchanged sentences

Total intangible assets

Amortization expense was $ 0.1 million for each of the three months ended September 30, 2020 and 2019, and $ 0.3 million and $ 0.4 million for the nine months ended September 30, 2020 and 2019, respectively.

Amortization expense was $ 0.1 million for each of the three months ended March 31, 2021 and 2020.

Future amortization expenses are expected as follows:

(In thousands)

2020 (October 1 - December 31)

2021 (April 1 - December 31)

Accrued Expenses

1 unchanged sentence

(In thousands)

At September 30, 2020

At March 31, 2021

At December 31, 2020

Legal and consulting

Travel and business

In-transit inventory

Travel and business

Sales and use tax

Clinical studies

Lease termination costs

Warranty Reserves

1 unchanged sentence

Three Months Ended

Nine Months Ended

September 30,

(In thousands)

10 unchanged sentences

Subject to satisfaction of certain conditions, we may increase the amount of the revolving loans available under the 2018 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 2018 Credit Agreement (including under the revolving credit facility) does not exceed $ 35.0 million.

As of September 30, 2020, and the date on which we filed this report, we did no t have any outstanding borrowings under the Credit Agreement.

As of March 31, 2021, and the date on which we filed this report, we did no t have any outstanding borrowings under the 2018 Credit Agreement.

Our obligations under the 2018 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 2018 Credit Agreement contains a number of restrictions and covenants, including that we maintain compliance with a maximum leverage ratio and a minimum liquidity covenant.

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

As of March 31, 2021, we were in compliance with all financial covenants under the 2018 Credit Agreement.

On April 30, 2021, we entered into an Amended and Restated Credit Agreement (the “Restated Credit Agreement”) with Wells Fargo Bank, National Association.

The Restated Credit Agreement amends and

restates in its entirety the 2018 Credit Agreement.

For additional information on the Restated Credit Agreement, see Note 16 – “Subsequent Event”.

Commitments and Contingencies

13 unchanged sentences

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

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

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

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

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

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

The remaining lease terms vary from approximately one to ten years as of March 31, 2021.

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.

2 unchanged sentences

In December 2019, we further amended the lease which extended the expiration date of the initial lease, extended the expiration date of and added approximately 4,000 square feet to the second lease, as well as added approximately 37,000 square feet of additional office space, accounted for as a separate lease (“third lease”) in accordance with ASC 842.

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

This portion was recognized as an operating lease and included in the ROU operating lease assets and operating lease liabilities on the Condensed Consolidated Balance Sheets beginning as of September 30, 2019.

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

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

The portion of the space covered under the second lease commenced on September 1, 2020.

This portion was recognized as an operating lease and included in the ROU operating lease assets and operating lease liabilities on the Condensed Consolidated Balance Sheets as of September 30, 2020.

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

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

We lease vehicles for certain members of our field sales organization under a vehicle fleet program whereby the initial, noncancelable lease is for a term of 367 days , thus more than one year.

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

As of September 30, 2020, we had approximately 69 vehicles with agreements within the initial, noncancelable lease term that are recorded as ROU operating lease assets and operating lease liabilities.

As of March 31, 2021, we had approximately 50 vehicles with agreements within the initial, noncancelable lease term that are recorded as ROU operating lease assets and operating lease liabilities.

In addition to monthly rental fees specific to the vehicle, there are fixed monthly nonlease components that have been included in the ROU operating lease assets and operating lease liabilities.

2 unchanged sentences

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

The remaining lease terms as of September 30, 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 remaining lease terms as of March 31, 2021, ranged from less than one year to approximately five years with fixed monthly payments that are included in the ROU operating lease assets and operating lease liabilities.

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

3 unchanged sentences

(In thousands)

At September 30, 2020

At March 31, 2021

At December 31, 2020

4 unchanged sentences

Weighted average discount rate

Nine Months Ended September 30,

Three Months Ended March 31,

Supplemental cash flow information for our operating leases:

3 unchanged sentences

(In thousands)

2020 (October 1 - December 31)

2021 (April 1 - December 31)

Total minimum lease payments

3 unchanged sentences

Non-current obligations under operating lease liabilities

As of September 30, 2020, we have additional lease commitments of $ 7.1 million related to amendments to existing building leases that have not yet commenced.

As of March 31, 2021, 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 were $ 0.8 million and $ 0.6 million for the three months ended September 30, 2020 and 2019, respectively.

Operating lease costs were $ 2.1 million and $ 1.3 for the nine months ended September 30, 2020 and 2019, respectively.

Operating lease costs were $ 0.8 million and $ 0.7 million for the three months ended March 31, 2021 and 2020, respectively.

Major Vendors

We had purchases from two major vendors that accounted for 31 % and 33 % of our total purchases for the three and nine months ended September 30, 2020, respectively.

We had purchases from two major vendors that accounted for 42 % and 37 % of our total purchases for the three and nine months ended September 30, 2019, respectively.

We had purchases from two vendors that accounted for 33 % of our total purchases for the three months ended March 31, 2021, and from two vendors that accounted for 32 % of our total purchases for the three months ended March 31, 2020.

Purchase Commitments

We issued purchase orders prior to September 30, 2020, totaling $ 20.5 million for goods that we expect to receive within the next year.

We issued purchase orders prior to March 31, 2021, totaling $ 19.8 million for goods that we expect to receive within the next year.

Retirement Plan

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

Discretionary contributions to the 401(k) plan totaled $ 0.1 million for each of the three ended September 30, 2020 and 2019, and $ 0.2 million for each of the nine months ended September 30, 2020 and 2019.

We recorded an expense related to our discretionary contr ibutions to the 401(k) plan of $0.3 million and $ 0.1 million for the three months ended March 31, 2021 and 2020, respectively.

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 for 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 and the Federal False Claims Act, 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 were decided on March 29, 2021, wherein the court denied plaintiff’s motion to dismiss our counterclaims;

granted our motion for Partial Summary Judgment and dismissed Counts I (standalone/direct violation of the Federal Anti-Kickback Statute) and III (violation of the retaliation provision of the Federal False Claims Act) of the complaint;

and denied plaintiff’s motion for Partial Summary Judgment.

As a result, the remaining allegations consist of those in Count II (violations of the Federal False Claims Act) of the complaint.

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

We and certain of our present or former officers were sued in a purported securities class action lawsuit that was filed in the United States District Court for the District of Minnesota on September 29, 2020, and that is pending under the caption Brian Mart v.

Tactile Systems Technology, Inc., et al., File No.

0:20-cv-02074-NEB-BRT.

On April 19, 2021, the plaintiff filed an Amended Complaint against us and eight of our present and former officers and directors.

Plaintiff seeks to represent a class consisting of investors who purchased our common stock in the market during the time period from May 7, 2018 through June 8, 2020 (“alleged class period”).

The Amended Complaint alleges the following claims under the Securities Exchange Act of 1934, as amended (the “Exchange Act”):

(1) that we and certain officer defendants made materially false or misleading public statements about our business, operational and compliance policies, and results during the alleged class period in violation of Section 10(b) of the Exchange Act;

(2) that we and the individual defendants engaged in a scheme to defraud investors in order to allow the individual defendants to sell our stock in violation of Section 10(b) of the Exchange Act;

(3) that the individual defendants engaged in improper insider trading of our stock in violation of Section 20A of the Exchange Act;

and (4) that we and the individual defendants are liable under

Section 20(a) of the Exchange Act because each defendant is a controlling person.

Defendants’ response to the Amended Complaint is due on June 18, 2021.

We intend to move to dismiss the action.

Stockholders' Equity

4 unchanged sentences

(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.

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

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

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

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

As of September 30, 2020, 4,658,176 shares were available for future grant pursuant to 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 March 31, 2021, 6,345,847 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.

3 unchanged sentences

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.

We recorded stock-based compensation expense of $ 3.2 million and $ 2.3 million for the three months ended September 30, 2020 and 2019, respectively, and $ 8.3 million and $ 7.4 million for the nine months ended September 30, 2020 and 2019, respectively.

Further, all of the stock options included in these awards required that our stock price exceeded $ 40.15 for 20 consecutive trading days during the term of the option in order to vest, which was met in the first quarter of 2021 .

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

We recorded stock-based compensation expense of $ 2.5 million and $ 2.7 million for the three months ended March 31, 2021 and 2020, respectively.

This expense was allocated as follows:

Three Months Ended

Nine Months Ended

September 30,

(In thousands)

5 unchanged sentences

Stock Options

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

Stock-based compensation expense included in the Condensed Consolidated Statements of Operations for stock options was $ 1.1 million and $ 0.6 million for the three months ended September 30, 2020 and 2019, respectively, and $ 3.0 million and $ 2.0 million for the nine months ended September 30, 2020 and 2019, respectively.

At September 30, 2020, there was approximately $ 7.9 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 2.1 years.

Our stock option activity for the nine months ended September 30, 2020, was as follows:

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 the Condensed Consolidated Statements of Operations for stock options was $ 1.2 million and $ 0.9 million for the three months ended March 31, 2021 and 2020, respectively.

At March 31, 2021, there was approximately $ 8.8 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 2.1 years.

Our stock option activity for the three months ended March 31, 2021, was as follows:

Exercise Price

3 unchanged sentences

Balance at December 31, 2020

Balance at September 30, 2020

Options exercisable at September 30, 2020

Cancelled/Expired

Balance at March 31, 2021

Options exercisable at March 31, 2021

(1) The exercise price of each option granted during the period shown was equal to the market price of the underlying stock on the date of grant.

1 unchanged sentence

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

Options exercisable of 539,487 as of September 30, 2019, had a weighted-average exercise price of $ 5.15 per share.

Options exercisable of 529,219 as of March 31, 2020, had a weighted-average exercise price of $ 17.88 per share.

Time-Based Restricted Stock Units

1 unchanged sentence

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

Stock-based compensation expense included in the Condensed Consolidated Statements of Operations for time-based restricted stock units was $ 1.4 million and $ 1.0 million for the three months ended September 30, 2020 and 2019, respectively, and $ 4.0 million and $ 2.9 million for the nine months ended September 30, 2020 and 2019, respectively.

As of September 30, 2020, there was approximately $ 7.5 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 1.9 years.

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

Stock-based compensation expense included in the Condensed Consolidated Statements of Operations for time-based restricted stock units was $ 1.3 million and $ 1.2 million for the three months ended March 31, 2021 and 2020, respectively.

As of March 31, 2021, there was approximately $ 7.9 million of total unrecognized pre-tax compensation expense related to outstanding time-based restricted stock units that is expected to be recognized over a weighted-average period of 2.1 years.

Our time-based restricted stock unit activity for the three months ended March 31, 2021, was as follows:

Average Grant

2 unchanged sentences

Balance at December 31, 2020

Balance at September 30, 2020

Deferred and unissued at September 30, 2020 (2)

Balance at March 31, 2021

Deferred and unissued at March 31, 2021 (2)

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

(2) For the nine months ended September 30, 2020, there were 858 restricted stock units granted to non-employee directors in lieu of their quarterly cash retainer payments.

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

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

As of September 30, 2020, there were 6,967 outstanding restricted stock units that have been previously granted to non-employee directors in lieu of their quarterly director retainer payments.

(2) For the three months ended March 31, 2021, there were no restricted stock units granted to non-employee directors in lieu of their quarterly cash retainer payments.

As of March 31, 2021, there were 6,469 outstanding restricted stock units that had been previously granted to non-employee directors in lieu of their quarterly cash retainer payments.

Performance-Based Restricted Stock Units

1 unchanged sentence

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

2018 were earned to the extent performance goals based on revenue and adjusted EBITDA were achieved in 2019.

The PSUs granted in 2019 would have been earned to the extent performance goals based on revenue and adjusted EBITDA were achieved in 2020, but none were so earned.

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.

3 unchanged sentences

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

Stock-based compensation expense recognized for PSUs was $ 0.4 million and $ 0.5 million for the three months ended September 30, 2020 and 2019, respectively, and $ 0.5 million and $ 1.7 million for the nine months ended September 30, 2020 and 2019, respectively.

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

As of September 30, 2020, there was approximately $ 1.4 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 for the nine months ended September 30, 2020, was as follows:

Stock-based compensation expense recognized for PSUs was a benefit of $ 0.3 million and an expense of $ 0.4 million for the three months ended March 31, 2021 and 2020, respectively.

The stock-based compensation benefit for the three months ended March 31, 2021 reflected a $ 0.5 million benefit due to a change in the estimated payout associated with PSUs granted in 2020 being below the minimum performance target threshold level, as defined, partially offset by an expense of $ 0.2 million related to the PSUs granted in 2018 and 2021.

As of March 31, 2021, there was approximately $ 1.8 million of total unrecognized pre-tax compensation expense related to outstanding PSUs that is expected to be recognized over a weighted average period of 2.9 years.

Our performance-based restricted stock unit activity for the three months ended March 31, 2021, was as follows:

Average Grant

2 unchanged sentences

Balance at December 31, 2020

Balance at September 30, 2020

Balance at March 31, 2021

(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.

6 unchanged sentences

This share reserve will automatically be supplemented each January 1, commencing in 2017 and ending on and including January 1, 2026, by an amount equal to the least of (a) 1 % of the shares of our common stock outstanding on the immediately preceding December 31, (b) 500,000 shares or (c) such lesser amount as our Board of Directors may determine.

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

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

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

We recognized stock-based compensation expense associated with the ESPP of $ 0.3 million and $ 0.2 million for the three months ended September 30, 2020 and 2019, respectively, and $ 0.8 million and $ 0.7 million for the nine months ended September 30, 2020 and 2019, respectively.

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 March 31, 2021, 1,782,422 shares were available for future issuance under the ESPP.

We recognized stock-based compensation expense associated with the ESPP of $ 0.3 million and $ 0.2 million for the three months ended March 31, 2021 and 2020, respectively.

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

1 unchanged sentence

Three Months Ended

Nine Months Ended

September 30,

(In thousands)

5 unchanged sentences

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

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

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

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

The Actitouch system and the Airwear wrap contributed immaterial amounts of revenue for each of the three months ended March 31, 2021 and 2020.

Rental revenue for the three months ended March 31, 2021 and 2020, was primarily from private insurers.

Our revenue from third-party payers, inclusive of sales and rental revenue, for the three months ended March 31, 2021 and 2020, are summarized in the following table:

Three Months Ended

Nine Months Ended

September 30,

(In thousands)

5 unchanged sentences

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

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

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

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

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

Operating lease revenue was $ 0.6 million and $ 4.8 million for the three and nine months ended September 30, 2019.

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

2 unchanged sentences

Similar to our sales revenue, the transaction price is impacted by multiple factors, including the terms and conditions contracted by third party payers.

As the rental contract resides with the patients, we have elected the portfolio approach, at the payer level, to determine

the expected consideration, which considers the impact of early terminations.

As the rental contract resides with the patients, we have elected the portfolio approach, at the payer level, to determine the expected consideration, which considers the impact of early terminations.

While the contract is with the patient, in certain circumstances, the third party payer elects an initial rental period with an option to extend.

2 unchanged sentences

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

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

Three Months Ended September 30,

Nine Months Ended September 30,

Sales-type lease revenue and the associated cost of revenue for the three months ended March 31, 2021 and 2020, was:

Three Months Ended March 31,

(In thousands)

5 unchanged sentences

Our provision for income taxes included current federal and state income tax expense, as well as deferred federal and state income tax expense.

The effective tax rate for the three months ended September 30, 2020 was a benefit of 55 % , compared to an expense of 27 % for the three months ended September 30, 2019.

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

We recorded an income tax benefit of $ 0.8 million and an expense of $ 0.9 million for the three months ended September 30, 2020 and 2019, respectively.

The effective tax rate for the nine months ended September 30, 2020 was an expense of 17 % , compared to a benefit of 36 % for the nine months ended September 30, 2019.

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

We recorded an income tax expense of $ 2.3 million and a benefit of $ 1.8 million for the nine months ended September 30, 2020 and 2019, respectively.

The effective tax rate for the three months ended March 31, 2021 was a benefit of 44.7 % , compared to a benefit of 68.8 % for the three months ended March 31, 2020.

The primary drivers of the change in our effective tax rate is attributable to a change in the deductibility of business meals to 100 % in 2021 from 50 % in 2020.

We also recorded additional tax benefit in the first quarter of 2020 related to a tax refund for a net operating loss carryback claim.

We recorded an income tax benefit of $ 1.8 million and a benefit of $ 2.9 million for the three months ended March 31, 2021 and 2020, respectively.

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

2 unchanged sentences

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.

Net Income Per Share

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

Net Loss Per Share

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

Three Months Ended

Nine Months Ended

September 30,

(In thousands, except share and per share data)

Net income (loss)

Weighted-average shares outstanding

Dilutive effect of stock-based awards

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

Net income (loss) per share - Basic

Net income (loss) per share - Diluted

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

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

Net loss per share - Basic

Net loss per share - Diluted

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

Three Months Ended

Nine Months Ended

September 30,

Restricted stock units

9 unchanged sentences

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 September 30, 2020, and December 31, 2019, according to the three-level fair value hierarchy:

At September 30, 2020

The following provides information regarding fair value measurements for our cash equivalents as of March 31, 2021, and December 31, 2020, according to the three-level fair value hierarchy:

At March 31, 2021

Quoted Prices

2 unchanged sentences

Money market mutual funds

government and agency obligations

At December 31, 2020

3 unchanged sentences

Money market mutual funds

government and agency obligations

Corporate debt securities

During the three and nine months ended September 30, 2020, there were no transfers within the three-level hierarchy.

During the three months ended March 31, 2021, 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 fair value of our money market mutual funds is 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.

1 unchanged sentence

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 .

Subsequent Event

On April 30, 2021, we entered into the Restated Credit Agreement with the lenders from time to time party thereto, and Wells Fargo Bank, National Association, as Administrative Agent.

The Restated Credit Agreement amends and restates in its entirety the 2018 Credit Agreement.

The Restated Credit Agreement provides for a $ 25 million revolving credit facility.

The revolving credit facility matures on April 30, 2024.

Subject to satisfaction of certain conditions, we may increase the amount of the revolving loans available under the Restated Credit Agreement and/or add one or more term loan facilities in an amount not to exceed $ 30 million in the aggregate, such that the total aggregate principal amount of loans available under the Restated Credit Agreement (including under the revolving credit facility) does not exceed $ 55 million.

Amounts drawn under the revolving credit facility will 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 0.65 % to 1.40 % on loans bearing interest at the Base Rate and 1.65 % to 2.40 % 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 0.300 % to 0.375 % , depending on our consolidated total leverage ratio.

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

The Restated Credit Agreement limits our ability to make capital expenditures during a fiscal year in excess of the amounts set forth in the Restated Credit Agreement, and 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 $ 5 million.

The Restated 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 Restated Credit Agreement may be accelerated upon an Event of Default (as defined in the Restated 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 Restated Credit Agreement and (iii) for working capital and general corporate purposes.

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

What changed 10-Q

Item 1. Financial Statements