TACTILE SYSTEMS TECHNOLOGY INC 10-Q

Item 1. Financial Statements ​ ​ ​ ​ ​ ​ ​ ​ Tactile Systems Technology, Inc. Condensed Consolidated Balance Sheets (Unaudited) ​ June 30, December 31, (In thousands, except share and per share data) 2021 2020 Assets ​ ​ ​ ​ ​ Current assets ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 49,007 ​ $ 47,855 Accounts receivable ​ 42,629 ​ 43,849 Net investment in leases ​ 11,741 ​ 10,708 Inventories ​ 21,153 ​ 18,563 Prepaid expenses and other current assets ​ 2,092 ​ 2,638 Total current assets ​ 126,622 ​ 123,613 Non-current assets ​ ​ ​ ​ ​ ​ Property and equipment, net ​ 6,399 ​ 6,957 Right of use operating lease assets ​ 19,138 ​ 20,132 Intangible assets, net ​ 1,702 ​ 1,680 Accounts receivable, non-current ​ 11,874 ​ 9,433 Deferred income taxes ​ 13,779 ​ 10,198 Other non-current assets ​ 2,118 ​ 2,074 Total non-current assets ​ 55,010 ​ 50,474 Total assets ​ $ 181,632 ​ $ 174,087 Liabilities and Stockholders' Equity ​ ​ ​ ​ ​ ​ Current liabilities ​ ​ ​ ​ ​ ​ Accounts payable ​ $ 5,060 ​ $ 4,197 Accrued payroll and related taxes ​ 10,303 ​ 11,588 Accrued expenses ​ 4,010 ​ 4,423 Income taxes payable ​ 1,530 ​ 2,658 Operating lease liabilities ​ 2,024 ​ 2,006 Other current liabilities ​ 3,716 ​ 1,842 Total current liabilities ​ 26,643 ​ 26,714 Non-current liabilities ​ ​ ​ ​ ​ ​ Accrued warranty reserve, non-current ​ 3,450 ​ 3,235 Income taxes payable, non-current ​ 348 ​ — Operating lease liabilities, non-current ​ ​ 18,475 ​ 19,388 Total non-current liabilities ​ 22,273 ​ 22,623 Total liabilities ​ 48,916 ​ 49,337 ​ ​ ​ ​ ​ ​ ​ Commitments and Contingencies (see Note 10) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stockholders’ equity: ​ ​ ​ ​ ​ ​ Preferred stock, $ 0.001 par value, 50,000,000 shares authorized; none issued and outstanding as of June 30, 2021 and December 31, 2020 ​ — ​ — Common stock, $ 0.001 par value, 300,000,000 shares authorized; 19,782,295 shares issued and outstanding as of June 30, 2021; 19,492,718 shares issued and outstanding as of December 31, 2020 ​ 20 ​ 19 Additional paid-in capital ​ 113,601 ​ 104,675 Retained earnings ​ 19,095 ​ 20,056 Total stockholders’ equity ​ 132,716 ​ 124,750 Total liabilities and stockholders’ equity ​ $ 181,632 ​ $ 174,087 ​ The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Tactile Systems Technology, Inc. Condensed Consolidated Statements of Operations (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Six Months Ended ​ ​ June 30, ​ June 30, (In thousands, except share and per share data) 2021 2020 2021 2020 Revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Sales revenue ​ $ 43,630 ​ $ 29,518 ​ $ 79,755 ​ $ 67,141 Rental revenue ​ 7,430 ​ 5,602 ​ 14,077 ​ 11,654 Total revenue ​ 51,060 ​ 35,120 ​ 93,832 ​ 78,795 Cost of revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cost of sales revenue ​ 12,638 ​ 8,388 ​ 23,329 ​ 19,310 Cost of rental revenue ​ 2,217 ​ 1,820 ​ 4,068 ​ 3,500 Total cost of revenue ​ 14,855 ​ 10,208 ​ 27,397 ​ 22,810 Gross profit ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Gross profit - sales revenue ​ 30,992 ​ 21,130 ​ 56,426 ​ 47,831 Gross profit - rental revenue ​ 5,213 ​ 3,782 ​ 10,009 ​ 8,154 Gross profit ​ 36,205 ​ 24,912 ​ 66,435 ​ 55,985 Operating expenses ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Sales and marketing ​ 20,933 ​ 17,398 ​ 39,718 ​ 40,368 Research and development ​ 1,206 ​ 1,105 ​ 2,476 ​ 2,789 Reimbursement, general and administrative ​ 14,142 ​ 14,372 ​ 28,401 ​ 25,242 Total operating expenses ​ 36,281 ​ 32,875 ​ 70,595 ​ 68,399 Loss from operations ​ ( 76 ) ​ ( 7,963 ) ​ ( 4,160 ) ​ ( 12,414 ) Other (expense) income ​ ( 24 ) ​ 36 ​ ( 34 ) ​ 302 Loss before income taxes ​ ( 100 ) ​ ( 7,927 ) ​ ( 4,194 ) ​ ( 12,112 ) Income tax (benefit) expense ​ ( 1,405 ) ​ 5,923 ​ ( 3,233 ) ​ 3,045 Net income (loss) ​ $ 1,305 ​ $ ( 13,850 ) ​ $ ( 961 ) ​ $ ( 15,157 ) Net income (loss) per common share ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ $ 0.07 ​ $ ( 0.72 ) ​ $ ( 0.05 ) ​ $ ( 0.79 ) Diluted ​ $ 0.07 ​ $ ( 0.72 ) ​ $ ( 0.05 ) ​ $ ( 0.79 ) Weighted-average common shares used to compute net income (loss) per common share ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ ​ 19,691,156 ​ ​ 19,337,644 ​ ​ 19,618,759 ​ ​ 19,255,612 Diluted ​ ​ 20,047,277 ​ ​ 19,337,644 ​ ​ 19,618,759 ​ ​ 19,255,612 ​ The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. ​ 5 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Tactile Systems Technology, Inc. Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) ​ ​ Three Months Ended ​ Six Months Ended ​ ​ June 30, ​ June 30, (In thousands) 2021 2020 2021 2020 Net income (loss) ​ $ 1,305 ​ $ ( 13,850 ) ​ $ ( 961 ) ​ $ ( 15,157 ) Other comprehensive income (loss): ​ ​ ​ ​ Unrealized loss on marketable securities ​ — ​ ( 36 ) ​ — ​ ( 7 ) Income tax related to items of other comprehensive loss ​ — ​ 27 ​ — ​ 10 Total other comprehensive income (loss) ​ — ​ ( 9 ) ​ — ​ 3 Comprehensive income (loss) ​ $ 1,305 ​ $ ( 13,859 ) ​ $ ( 961 ) ​ $ ( 15,154 ) ​ The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. ​ ​ 6 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Tactile Systems Technology, Inc. Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Additional ​ ​ ​ ​ Other ​ ​ ​ ​ ​ Common Stock ​ Paid-In ​ Retained ​ Comprehensive ​ ​ ​ (In thousands, except share data) Shares Par Value Capital Earnings (Loss) Income Total Balances, March 31, 2021 ​ 19,639,113 ​ $ 20 ​ $ 107,312 ​ $ 17,790 ​ $ — ​ $ 125,122 Stock-based compensation ​ — ​ ​ — ​ ​ 2,658 ​ ​ — ​ ​ — ​ ​ 2,658 Exercise of common stock options and vesting of performance and restricted stock units ​ 101,088 ​ ​ — ​ ​ 2,089 ​ ​ — ​ ​ — ​ ​ 2,089 Common shares issued for employee stock purchase plan ​ 42,094 ​ ​ — ​ ​ 1,542 ​ ​ — ​ ​ — ​ ​ 1,542 Comprehensive income for the period ​ — ​ ​ — ​ ​ — ​ ​ 1,305 ​ ​ — ​ ​ 1,305 Balances, June 30, 2021 ​ 19,782,295 ​ $ 20 ​ $ 113,601 ​ $ 19,095 ​ $ — ​ $ 132,716 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balances, December 31, 2020 ​ 19,492,718 ​ $ 19 ​ $ 104,675 ​ $ 20,056 ​ $ — ​ $ 124,750 Stock-based compensation ​ — ​ ​ — ​ ​ 5,115 ​ ​ — ​ ​ — ​ ​ 5,115 Exercise of common stock options and vesting of performance and restricted stock units ​ 268,463 ​ ​ 1 ​ ​ 3,384 ​ ​ — ​ ​ — ​ ​ 3,385 Taxes paid for net share settlement of performance and restricted stock units ​ ( 20,980 ) ​ ​ — ​ ​ ( 1,115 ) ​ ​ — ​ ​ — ​ ​ ( 1,115 ) Common shares issued for employee stock purchase plan ​ 42,094 ​ ​ — ​ ​ 1,542 ​ ​ — ​ ​ — ​ ​ 1,542 Comprehensive loss for the period ​ — ​ ​ — ​ ​ — ​ ​ ( 961 ) ​ ​ — ​ ​ ( 961 ) Balances, June 30, 2021 ​ 19,782,295 ​ $ 20 ​ $ 113,601 ​ $ 19,095 ​ $ — ​ $ 132,716 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balances, March 31, 2020 ​ 19,226,665 ​ $ 19 ​ $ 93,614 ​ $ 19,369 ​ $ 38 ​ $ 113,040 Stock-based compensation ​ — ​ ​ — ​ ​ 2,396 ​ ​ — ​ ​ — ​ ​ 2,396 Exercise of common stock options and vesting of performance and restricted stock units ​ 148,898 ​ ​ — ​ ​ 376 ​ ​ — ​ ​ — ​ ​ 376 Taxes paid for net share settlement of performance and restricted stock units ​ ( 7,812 ) ​ ​ — ​ ​ ( 393 ) ​ ​ — ​ ​ — ​ ​ ( 393 ) Common shares issued for employee stock purchase plan ​ 43,653 ​ ​ — ​ ​ 1,825 ​ ​ — ​ ​ — ​ ​ 1,825 Comprehensive loss for the period ​ — ​ ​ — ​ ​ — ​ ​ ( 13,850 ) ​ ​ ( 9 ) ​ ​ ( 13,859 ) Balances, June 30, 2020 ​ 19,411,404 ​ $ 19 ​ $ 97,818 ​ $ 5,519 ​ $ 29 ​ $ 103,385 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balances, December 31, 2019 ​ 19,152,715 ​ $ 19 ​ $ 91,874 ​ $ 20,676 ​ $ 26 ​ $ 112,595 Stock-based compensation ​ — ​ ​ — ​ ​ 5,124 ​ ​ — ​ ​ — ​ ​ 5,124 Exercise of common stock options and vesting of performance and restricted stock units ​ 245,084 ​ ​ — ​ ​ 548 ​ ​ — ​ ​ — ​ ​ 548 Taxes paid for net share settlement of performance and restricted stock units ​ ( 30,048 ) ​ ​ — ​ ​ ( 1,553 ) ​ ​ — ​ ​ — ​ ​ ( 1,553 ) Common shares issued for employee stock purchase plan ​ 43,653 ​ ​ — ​ ​ 1,825 ​ ​ — ​ ​ — ​ ​ 1,825 Comprehensive loss for the period ​ — ​ ​ — ​ ​ — ​ ​ ( 15,157 ) ​ ​ 3 ​ ​ ( 15,154 ) Balances, June 30, 2020 ​ 19,411,404 ​ $ 19 ​ $ 97,818 ​ $ 5,519 ​ $ 29 ​ $ 103,385 ​ The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. ​ 7 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ Tactile Systems Technology, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) ​ ​ ​ ​ ​ Six Months Ended June 30, (In thousands) 2021 2020 Cash flows from operating activities ​ ​ ​ ​ ​ ​ Net loss ​ $ ( 961 ) ​ $ ( 15,157 ) Adjustments to reconcile net loss to net cash used in operating activities: ​ ​ ​ ​ ​ ​ Depreciation and amortization ​ ​ 1,287 ​ ​ 1,450 Net amortization of premiums and discounts on securities available-for-sale ​ ​ — ​ ​ ( 89 ) Deferred income taxes ​ ​ ( 3,581 ) ​ ​ 4,282 Stock-based compensation expense ​ ​ 5,115 ​ ​ 5,124 Gain on other investments and maturities of marketable securities ​ ​ — ​ ​ 40 Impairment losses ​ ​ — ​ ​ 4,025 Changes in assets and liabilities: ​ ​ ​ ​ ​ ​ Accounts receivable ​ ​ 1,220 ​ ​ 2,892 Net investment in leases ​ ​ ( 1,033 ) ​ ​ ( 542 ) Inventories ​ ​ ( 2,590 ) ​ ​ ( 5,945 ) Income taxes ​ ​ ( 780 ) ​ ​ ( 1,646 ) Prepaid expenses and other assets ​ ​ 502 ​ ​ ( 317 ) Right of use operating lease assets ​ ​ 99 ​ ​ 135 Medicare accounts receivable, non-current ​ ​ ( 2,441 ) ​ ​ ( 1,697 ) Accounts payable ​ ​ 855 ​ ​ 1,602 Accrued payroll and related taxes ​ ​ ( 1,285 ) ​ ​ ( 3,127 ) Accrued expenses and other liabilities ​ ​ 1,676 ​ ​ 990 Net cash used in operating activities ​ ​ ( 1,917 ) ​ ​ ( 7,980 ) Cash flows from investing activities ​ ​ ​ ​ ​ ​ Proceeds from maturities of securities available-for-sale ​ ​ — ​ ​ 16,500 Purchases of property and equipment ​ ​ ( 603 ) ​ ​ ( 660 ) Intangible assets costs ​ ​ ( 140 ) ​ ​ ( 109 ) Net cash (used in) provided by investing activities ​ ​ ( 743 ) ​ ​ 15,731 Cash flows from financing activities ​ ​ ​ ​ ​ ​ Taxes paid for net share settlement of performance and restricted stock units ​ ​ ( 1,115 ) ​ ​ ( 1,553 ) Proceeds from exercise of common stock options ​ ​ 3,385 ​ ​ 548 Proceeds from the issuance of common stock from the employee stock purchase plan ​ ​ 1,542 ​ ​ 1,825 Net cash provided by financing activities ​ ​ 3,812 ​ ​ 820 Net increase in cash and cash equivalents ​ ​ 1,152 ​ ​ 8,571 Cash and cash equivalents – beginning of period ​ ​ 47,855 ​ ​ 22,770 Cash and cash equivalents – end of period ​ $ 49,007 ​ $ 31,341 ​ ​ ​ ​ ​ ​ ​ Supplemental cash flow disclosure ​ ​ ​ ​ ​ ​ Cash paid for taxes ​ $ 1,141 ​ $ 475 Capital expenditures incurred but not yet paid ​ $ 8 ​ $ 241 ​ The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. ​ 8 Table of Contents ​ Tactile Systems Technology, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) Note 1. Nature of Business and Operations Tactile Systems Technology, Inc. (“we,” “us,” and “our”) is the sole manufacturer and distributor of the Flexitouch® and Entre™ systems, medical devices that help control symptoms of lymphedema, a chronic and progressive medical condition. 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 our reincorporation as a Delaware corporation. The resulting corporation assumed the name Tactile Systems Technology, Inc. In September 2013, we began doing business as “Tactile Medical”. On August 2, 2016, we closed the initial public offering of our common stock, which resulted in the sale of 4,120,000 shares of our common stock at a public offering price of $ 10.00 per share. We received net proceeds from the initial public offering of approximately $ 35.4 million, after deducting underwriting discounts and approximately $ 2.9 million of transaction expenses. In connection with the closing of the initial public offering, all of our outstanding redeemable convertible preferred stock automatically converted to common stock on August 2, 2016. Our business is affected by seasonality. In the first quarter of each year, when most patients have started a new insurance year and have not yet met their annual out-of-pocket payment obligations, we experience substantially reduced demand for our products. We typically experience higher revenue in the third and fourth quarters of the year when patients have met their annual insurance deductibles, thereby reducing their out-of-pocket costs for our products, and because patients desire to exhaust their flexible spending accounts at year end. This seasonality applies only to purchases and rentals of our products by patients covered by commercial insurance and is not relevant to Medicare, Medicaid or the Veterans Administration, as those payers either do not have plans that have declining deductibles over the course of the plan year and/or do not have plans that include patient deductibles for purchases or rentals of our products. Further, seasonality trends in 2021 may be significantly different than in prior years as a result of the COVID-19 pandemic and related impacts . Note 2. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including those which are normal and recurring) considered necessary for a fair presentation of the interim financial information have been included. The results for the six months ended June 30, 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. Principles of Consolidation The accompanying unaudited condensed consolidated financial statements include the accounts of Tactile Systems Technology, Inc. and its wholly owned subsidiary, Swelling Solutions, Inc. All intercompany balances and transactions have been eliminated in consolidation. 9 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, particularly during 2020 and the first quarter of 2021. While we saw some level of recovery in the second quarter of 2021, there are no reliable estimates of how long the pandemic will last, whether any recovery will be sustained or will reverse course, the severity of any resurgence of COVID-19 or variant strains of the virus, the effectiveness of vaccines and attitudes towards receiving them, or what ultimate effects the pandemic will have. For that reason, we are unable to reasonably estimate the long-term impact of the pandemic on our business at this time. 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. We continue to evaluate and, if appropriate, will adopt other measures in the future related to the ongoing safety of our employees, clinicians and patients. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and to disclose contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Comprehensive 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 Significant Accounting Policies There were no material changes in our significant accounting policies during the six months ended June 30, 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. Recently Adopted Accounting Pronouncements 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. We adopted ASU 2019-12 as of January 1, 2021, and it did not have an impact on the condensed consolidated financial statements . Note 4. Marketable Securities There were no investments in marketable securities at June 30, 2021 and December 31, 2020. 10 Table of Contents There were no net pre-tax unrealized gains for marketable securities at June 30, 2021. There were no sales of marketable securities during the six months ended June 30, 2021. There were no marketable securities in an unrealized loss position at June 30, 2021 and December 31, 2020. Note 5. Inventories Inventories consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ (In thousands) At June 30, 2021 At December 31, 2020 Finished goods ​ $ 9,582 ​ $ 7,129 Component parts and work-in-process ​ 11,571 ​ 11,434 Total inventories ​ $ 21,153 ​ $ 18,563 ​ ​ ​ ​ Note 6. Intangible Assets Our patents and other intangible assets are summarized as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ At June 30, 2021 ​ ​ Average ​ Gross ​ ​ ​ ​ ​ ​ Amortization ​ Carrying ​ Accumulated ​ Net (In thousands) Period ​ Amount ​ Amortization ​ Amount Patents ​ 11 years ​ $ 489 ​ $ 85 ​ $ 404 Defensive intangible assets ​ 4 years ​ ​ 1,125 ​ ​ 506 ​ ​ 619 Customer accounts ​ 2 years ​ 125 ​ 76 ​ 49 Total amortizable intangible assets ​ ​ ​ ​ 1,739 ​ ​ 667 ​ ​ 1,072 Patents pending ​ ​ ​ ​ 630 ​ ​ — ​ ​ 630 Total intangible assets ​ ​ ​ $ 2,369 ​ $ 667 ​ $ 1,702 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 ​ Amortization expense was $ 0.1 million for each of the three months ended June 30, 2021 and 2020, and $ 0.1 million and $ 0.3 million for the six months ended June 30, 2021 and 2020, respectively. Future amortization expenses are expected as follows: ​ ​ ​ ​ ​ (In thousands) ​ ​ ​ 2021 (July 1 - December 31) ​ $ 120 2022 ​ ​ 240 2023 ​ 209 2024 ​ 188 2025 ​ 98 Thereafter ​ 217 Total ​ $ 1,072 ​ ​ 11 Table of Contents Note 7. Accrued Expenses Accrued expenses consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ (In thousands) At June 30, 2021 At December 31, 2020 Warranty ​ $ 1,667 ​ $ 1,606 Legal and consulting ​ ​ 676 ​ ​ 882 In-transit inventory ​ ​ 686 ​ ​ 634 Travel ​ 459 ​ 545 Sales and use tax ​ ​ 122 ​ ​ 193 Clinical studies ​ ​ 72 ​ ​ 67 Other ​ 328 ​ 496 Total ​ $ 4,010 ​ $ 4,423 ​ ​ Note 8. Warranty Reserves The activity in the warranty reserve during and as of the end of the reporting periods presented was as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Six Months Ended ​ ​ June 30, ​ June 30, (In thousands) 2021 2020 2021 2020 Beginning balance ​ $ 4,869 ​ $ 4,242 ​ $ 4,841 ​ $ 3,759 Warranty provision ​ 844 ​ 372 ​ 1,456 ​ 1,277 Processed warranty claims ​ ( 596 ) ​ ( 406 ) ​ ( 1,180 ) ​ ( 828 ) Ending balance ​ $ 5,117 ​ $ 4,208 ​ $ 5,117 ​ $ 4,208 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accrued warranty reserve, current ​ $ 1,667 ​ $ 1,347 ​ $ 1,667 ​ $ 1,347 Accrued warranty reserve, non-current ​ ​ 3,450 ​ ​ 2,861 ​ ​ 3,450 ​ ​ 2,861 Total accrued warranty reserve ​ $ 5,117 ​ $ 4,208 ​ $ 5,117 ​ $ 4,208 ​ ​ Note 9. Credit Agreement On August 3, 2018, we entered into a credit agreement with Wells Fargo Bank, National Association, which was amended by a First Amendment dated February 12, 2019, a Waiver and Second Amendment dated March 25, 2019, and a Third Amendment dated August 2, 2019 (collectively, the “2018 Credit Agreement”). On April 30, 2021, we entered into an Amended and Restated Credit Agreement (the “Restated Credit Agreement”) with the lenders from time to time party thereto, and Wells Fargo Bank, National Association, as Administrative Agent, which expires on April 30, 2024. The Restated Credit Agreement amended and restated in its entirety the 2018 Credit Agreement. The Restated Credit Agreement provides for a $ 25 million revolving credit facility, with the ability to increase the amount of the revolving loans available and/or add one or more term loan facilities not to exceed an incremental $ 30 million in the aggregate, subject to satisfaction of certain conditions. As of June 30, 2021, and the date on which we filed this report, we did no t have any outstanding borrowings under the Restated Credit Agreement. Our obligations under the Restated 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 Restated Credit Agreement contains a number of restrictions and covenants, including that we maintain compliance with a maximum leverage ratio and a minimum liquidity covenant. As of June 30, 2021, we were in compliance with all financial covenants under the Restated Credit Agreement. 12 Table of Contents Note 10. Commitments and Contingencies Lease Obligations We lease property and equipment under operating leases, typically with terms greater than 12 months , and determine if an arrangement contains a lease at inception. In general, an arrangement contains a lease if there is an identified asset and we have the right to direct the use of and obtain substantially all of the economic benefit from the use of the identified asset. We record an operating lease liability at the present value of lease payments over the lease term on the commencement date. The related right of use (“ROU”) operating lease asset reflects rental escalation clauses, as well as renewal options and/or termination options. The exercise of lease renewal and/or termination options are at our discretion and are included in the determination of the lease term and lease payment obligations when it is deemed reasonably certain that the option will be exercised. When available, we use the rate implicit in the lease to discount lease payments to present value; however, certain leases do not provide a readily determinable implicit rate. Therefore, we must estimate our incremental borrowing rate to discount the lease payments based on information available at lease commencement. We classify our leases as buildings, vehicles or computer and office equipment and do not separate lease and nonlease components of contracts for any of the aforementioned classifications. In accordance with applicable guidance, we do not record leases with terms that are less than one year on the Condensed Consolidated Balance Sheet. None of our lease agreements contain material restrictive covenants or residual value guarantees. Buildings We lease certain office and warehouse space at various locations in the United States where we provide services. These leases are typically greater than one year with fixed, escalating rents over the noncancelable terms and, therefore, ROU operating lease assets and operating lease liabilities are recorded on the Condensed Consolidated Balance Sheet, with rent expense to be recognized on a straight-line basis over the term of the lease. The remaining lease terms vary from approximately one to ten years as of June 30, 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. In December 2018, we amended the initial lease to add approximately 29,000 square feet of additional office space, which is accounted for as a separate lease (“second lease”) in accordance with ASU No. 2016-02, “Leases” (Topic 842) (“ASC 842”). In December 2019, we further amended the lease which extended the expiration date of the initial lease, extended the expiration date of and added approximately 4,000 square feet to the second lease, as well as added approximately 37,000 square feet of additional office space, accounted for as a separate lease (“third lease”) in accordance with ASC 842. The portion of the space 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. Finally, 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 June 30, 2021, we had approximately 55 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. 13 Table of Contents Computer and Office Equipment We also have operating lease agreements for certain computer and office equipment. The remaining lease terms as of June 30, 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. The leases will automatically renew as a month-to-month rental at the end of the lease if the equipment is not purchased or returned. Lease Position, Undiscounted Cash Flow and Supplemental Information The table below presents information related to our ROU operating lease assets and operating lease liabilities that we have recorded: ​ ​ ​ ​ ​ ​ ​ ​ (In thousands) At June 30, 2021 At December 31, 2020 Right of use operating lease assets ​ $ 19,138 ​ $ 20,132 ​ ​ ​ ​ ​ ​ ​ Operating lease liabilities: ​ ​ ​ ​ ​ ​ Current ​ $ 2,024 ​ $ 2,006 Non-current ​ 18,475 ​ 19,388 Total ​ $ 20,499 ​ $ 21,394 ​ ​ ​ ​ ​ ​ ​ Operating leases: ​ ​ ​ ​ ​ ​ Weighted average remaining lease term ​ 8.9 years ​ ​ 9.4 years Weighted average discount rate ​ ​ 4.4 % ​ ​ 4.4 % ​ ​ ​ ​ ​ ​ ​ ​ ​ Six Months Ended June 30, ​ ​ 2021 ​ 2020 Supplemental cash flow information for our operating leases: ​ ​ ​ ​ ​ ​ Cash paid for operating lease liabilities ​ $ 1,567 ​ $ 1,148 Non-cash right of use assets obtained in exchange for new operating lease obligations ​ $ 304 ​ $ 686 ​ The table below reconciles the undiscounted cash flows under the operating lease liabilities recorded on the Condensed Consolidated Balance Sheet for the periods presented: ​ ​ ​ ​ ​ (In thousands) ​ ​ ​ 2021 (July 1 - December 31) ​ $ 1,507 2022 ​ ​ 2,661 2023 ​ 2,615 2024 ​ 2,582 2025 ​ 2,660 Thereafter ​ 12,692 Total minimum lease payments ​ ​ 24,717 Less: Amount of lease payments representing interest ​ ​ ( 4,218 ) Present value of future minimum lease payments ​ ​ 20,499 Less: Current obligations under operating lease liabilities ​ ​ ( 2,024 ) Non-current obligations under operating lease liabilities ​ $ 18,475 ​ As of June 30, 2021, we have additional lease commitments of $ 7.6 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 $ 0.7 million for the three months ended June 30, 2021 and 2020, respectively. Operating lease costs were $ 1.7 million and $ 1.4 million for the six months ended June 30, 2021 and 2020, respectively. 14 Table of Contents Major Vendors We had purchases from two vendors that accounted for 33 % of our total purchases for each of the three and six months ended June 30, 2021. We had purchases from two vendors that accounted for 33 % and 32 % of our total purchases for the three and six months ended June 30, 2020, respectively. Purchase Commitments We issued purchase orders prior to June 30, 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. We recorded an expense related to our discretionary contributions to the 401(k) plan of $ 0.3 million and $ 0.1 million for the three months ended June 30, 2021 and 2020, respectively, and $ 0.6 million and $ 0.1 million for the six months ended June 30, 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 15 Table of Contents Section 20(a) of the Exchange Act because each defendant is a controlling person. On June 18, 2021, we and the individual defendants filed a motion to dismiss the Amended Complaint. The motion has not been decided yet. Note 11. Stockholders' Equity Stock-Based Compensation Our 2016 Equity Incentive Plan (the “2016 Plan”) authorizes us to grant stock options, stock appreciation rights, restricted stock, stock units and other stock-based awards to employees, non-employee directors and certain consultants and advisors. There were up to 4,800,000 shares of our common stock initially reserved for issuance pursuant to the 2016 Plan. The 2016 Plan provides that the number of shares reserved and available for issuance under the 2016 Plan will automatically increase annually on January 1 of each calendar year, commencing in 2017 and ending on and including January 1, 2026, by an amount equal to the lesser of: (a) 5 % of the number of common shares of stock outstanding as of December 31 of the immediately preceding calendar year, or (b) 2,500,000 shares; provided, however, that our Board of Directors may determine that any annual increase be a lesser number. In addition, all awards granted under our 2007 Omnibus Stock Plan and our 2003 Stock Option Plan that were outstanding when the 2016 Plan became effective and that are forfeited, expired, cancelled, settled for cash or otherwise not issued, will become available for issuance under the 2016 Plan. Pursuant to the automatic increase feature of the 2016 Plan, 972,591 and 952,697 shares were added as available for issuance thereunder on January 1, 2021 and 2020, respectively. As of June 30, 2021, 6,358,084 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 vested on June 30, 2021, with the remaining portion of the awards vesting over a period of three years from the date of grant. Further, the stock options were valued at the date of grant using the Monte Carlo Simulation model due to a market condition that required that our stock price exceed $ 40.15 for 20 consecutive trading days during the term of the option in order to vest. This condition was satisfied in the first quarter of 2021 . We recorded stock-based compensation expense of $ 2.7 million and $ 2.4 million for the three months ended June 30, 2021 and 2020, respectively, and $ 5.1 million for each of the six months ended June 30, 2021 and 2020. This expense was allocated as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Six Months Ended ​ ​ June 30, ​ June 30, (In thousands) 2021 2020 2021 2020 Cost of revenue ​ $ 173 ​ $ 105 ​ $ 284 ​ $ 187 Sales and marketing expenses ​ ​ 920 ​ ​ 1,233 ​ ​ 1,898 ​ ​ 2,479 Research and development expenses ​ ​ 59 ​ ​ 94 ​ ​ 156 ​ ​ 182 Reimbursement, general and administrative expenses ​ ​ 1,506 ​ ​ 964 ​ ​ 2,777 ​ ​ 2,276 Total stock-based compensation expense ​ $ 2,658 ​ $ 2,396 ​ $ 5,115 ​ $ 5,124 ​ 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 the Condensed Consolidated Statements of Operations for stock options was $ 1.1 million and $ 1.0 million for the three months ended June 30, 2021 and 2020, respectively, and $ 2.3 million and $ 1.8 million for the six months ended June 30, 2021 and 2020, respectively. At June 30, 2021, there was approximately $ 7.3 million 16 Table of Contents 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. Our stock option activity for the six months ended June 30, 2021, 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, 2020 ​ 1,039,709 ​ $ 36.43 ​ 5.6 years ​ $ 13,381 Granted ​ 149,366 ​ $ 51.88 ​ ​ ​ ​ ​ Exercised ​ ( 130,390 ) ​ $ 25.95 ​ ​ ​ $ 3,694 Forfeited ​ ( 52,693 ) ​ $ 48.97 ​ ​ ​ ​ ​ Cancelled/Expired ​ ( 7,362 ) ​ $ 49.14 ​ ​ ​ ​ ​ Balance at June 30, 2021 ​ 998,630 ​ $ 39.36 ​ 5.4 years ​ $ 14,399 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Options exercisable at June 30, 2021 ​ 509,575 ​ $ 31.20 ​ 4.6 years ​ $ 11,814 ​ (1) The exercise price of each option granted during the period shown was equal to the market price of the underlying stock on the date of grant. (2) The aggregate intrinsic value of options exercised represents the difference between the exercise price of the option and the closing stock price of our common stock on the date of exercise. The aggregate intrinsic value of options outstanding represents the difference between the exercise price of the option and the closing stock price of our common stock on the last trading day of the period. Options exercisable of 438,283 as of June 30, 2020, had a weighted-average exercise price of $ 21.86 per share. Time-Based Restricted Stock Units We have granted time-based restricted stock units to certain participants under the 2016 Plan that are stock-settled with common shares. Time-based restricted stock units granted under the 2016 Plan vest over one to three years . Stock-based compensation expense included in the Condensed Consolidated Statements of Operations for time-based restricted stock units was $ 1.2 million and $ 1.4 million for the three months ended June 30, 2021 and 2020, respectively, and $ 2.5 million and $ 2.6 million for the six months ended June 30, 2021 and 2020, respectively. At June 30, 2021, 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 2.0 years. Our time-based restricted stock unit activity for the six months ended June 30, 2021, 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, 2020 ​ 211,469 ​ $ 48.29 ​ $ 9,503 Granted ​ 82,657 ​ $ 52.22 ​ ​ ​ Vested ​ ( 86,347 ) ​ $ 48.00 ​ ​ ​ Cancelled ​ ( 21,391 ) ​ $ 52.17 ​ ​ ​ Balance at June 30, 2021 ​ 186,388 ​ $ 49.72 ​ $ 9,692 ​ ​ ​ ​ ​ ​ ​ ​ ​ Deferred and unissued at June 30, 2021 (2) ​ 6,469 ​ $ 38.94 ​ $ 336 ​ (1) The aggregate intrinsic value of restricted stock units outstanding was based on our closing stock price on the last trading day of the period. (2) For the six months ended June 30, 2021, there were no restricted stock units granted to non-employee directors in lieu of their quarterly cash retainer payments. As of June 30, 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. 17 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 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. The PSUs granted in 2021 will be earned if and to the extent performance goals based on revenue and adjusted EBITDA are achieved in 2022. The number of PSUs earned will depend on the level at which the performance targets are achieved and can range from 50 % of target if the minimum performance threshold is achieved and up to 150 % of target if maximum performance is achieved. One-third of the earned PSUs will vest on the date the Compensation and Organization Committee certifies the number of PSUs earned, and the remaining two-thirds of the earned PSUs will vest on the first anniversary of that certification date. All earned and vested PSUs will be settled in shares of common stock. Stock-based compensation expense recognized for PSUs was an expense of $ 0.2 million and a benefit of $ 0.3 million for the three months ended June 30, 2021 and 2020, respectively, and a benefit of $ 0.1 million and an expense of $ 0.1 million for the six months ended June 30, 2021 and 2020, respectively. The stock-based compensation benefit for the six months ended June 30, 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 $ 0.4 million related to the PSUs granted in 2018 and 2021. At June 30, 2021, there was approximately $ 1.7 million of total unrecognized pre-tax compensation expense related to outstanding PSUs that is expected to be recognized over a weighted average period of 2.7 years. Our performance-based restricted stock unit activity for the six months ended June 30, 2021, 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, 2020 ​ 79,303 ​ $ 47.83 ​ $ 3,564 Granted ​ 39,419 ​ $ 51.82 ​ ​ ​ Vested ​ ( 34,159 ) ​ $ 33.98 ​ ​ ​ Cancelled ​ ( 23,936 ) ​ $ 65.43 ​ ​ ​ Balance at June 30, 2021 ​ 60,627 ​ $ 51.28 ​ $ 3,153 ​ (1) The aggregate intrinsic value of performance-based restricted stock units outstanding was based on our closing stock price on the last trading day of the period. Employee Stock Purchase Plan Our employee stock purchase plan (“ESPP”), which was approved by our Board of Directors on April 27, 2016, and by our stockholders on June 20, 2016, allows participating employees to purchase shares of our common stock at a discount through payroll deductions. The ESPP is available to all of our employees and employees of participating subsidiaries. Participating employees may purchase common stock, on a voluntary after-tax basis, at a price equal to 85 % of the lower of the closing market price per share of our common stock on the first or last trading day of each stock purchase period. The ESPP provides for six-month purchase periods, beginning on May 16 and November 16 of each calendar year. A total of 1,600,000 shares of common stock was initially reserved for issuance under the ESPP. This share reserve will automatically be supplemented each January 1, commencing in 2017 and ending on and including January 1, 2026, by an amount equal to the least of (a) 1 % of the shares of our common stock outstanding on the immediately preceding December 31, (b) 500,000 shares or (c) such lesser amount as our Board of Directors may determine. Pursuant to the automatic increase feature of the ESPP, 194,518 and 18 Table of Contents 190,539 shares were added as available for issuance thereunder on January 1, 2021 and 2020, respectively. As of June 30, 2021, 1,740,328 shares were available for future issuance under the ESPP. We recognized stock-based compensation expense associated with the ESPP of $ 0.2 million and $ 0.3 million for the three months ended June 30, 2021 and 2020, respectively, and $ 0.4 million and $ 0.6 million for the six months ended June 30, 2021 and 2020, respectively. Note 12. Revenue We derive our revenue from the sale and rental of our compression products to our customers in the United States. The following table presents our revenue, inclusive of sales and rental revenue, disaggregated by product categories: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Six Months Ended ​ ​ June 30, ​ June 30, (In thousands) 2021 ​ 2020 ​ 2021 ​ 2020 Revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Flexitouch system ​ $ 45,093 ​ $ 31,127 ​ $ 82,530 ​ $ 69,713 Other products (1) ​ 5,967 ​ 3,993 ​ 11,302 ​ 9,082 Total ​ $ 51,060 ​ $ 35,120 ​ $ 93,832 ​ $ 78,795 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Percentage of total revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Flexitouch system ​ 88 % ​ 89 % ​ 88 % ​ 88 % Other products (1) ​ 12 % ​ 11 % ​ 12 % ​ 12 % Total ​ 100 % ​ 100 % ​ 100 % ​ 100 % ​ (1) The “other products” line primarily includes revenue from our Entre system. The Actitouch system and the Airwear wrap contributed immaterial amounts of revenue for each of the three and six months ended June 30, 2021 and 2020. Our revenue from third-party payers, inclusive of sales and rental revenue, for the three and six months ended June 30, 2021 and 2020, are summarized in the following table: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Six Months Ended ​ ​ June 30, ​ June 30, (In thousands) 2021 ​ 2020 ​ 2021 ​ 2020 Private insurers and other payers ​ $ 35,348 ​ $ 25,668 ​ $ 63,631 ​ $ 55,905 Veterans Administration ​ ​ 7,322 ​ ​ 4,322 ​ ​ 13,168 ​ ​ 11,380 Medicare ​ ​ 8,390 ​ ​ 5,130 ​ ​ 17,033 ​ ​ 11,510 Total ​ $ 51,060 ​ $ 35,120 ​ $ 93,832 ​ $ 78,795 ​ Our rental revenue is derived from rent-to-purchase arrangements that typically range from three to ten months. Under ASC 840 (the previous guidance for lease accounting), our rental revenue was recognized as month-to-month, cancelable leases; however, because title transfers to the patient, with whom we have the contract, upon the termination of the lease term and because collectability is probable, under ASC 842, these are recognized as sales-type leases. Each rental agreement contains two components, the controller and related garments, both of which are interdependent and recognized as one lease component. The revenue and associated cost of revenue of sales-type leases are recognized on the lease commencement date and a net investment in leases is recorded on the Condensed Consolidated Balance Sheet. We bill the patients’ insurance payers monthly over the duration of the rental term. We record the net investment in leases and recognize revenue upon commencement of the lease in the amount of the expected consideration to be received through the monthly payments. Similar to our sales revenue, the transaction price is impacted by multiple factors, including the terms and conditions contracted by third party payers. As the rental contract resides with the patients, we have elected the portfolio approach, at the payer level, to determine 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 19 Table of Contents 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. Rental revenue for the three and six months ended June 30, 2021 and 2020, was primarily from private insurers. Sales-type lease revenue and the associated cost of revenue for the three and six months ended June 30, 2021 and 2020, was: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended June 30, ​ Six Months Ended June 30, (In thousands) ​ 2021 ​ 2020 ​ 2021 ​ 2020 Sales-type lease revenue ​ $ 7,430 ​ $ 5,602 ​ $ 14,077 ​ $ 11,654 Cost of sales-type lease revenue ​ 2,217 ​ 1,820 ​ 4,068 ​ 3,500 Gross profit ​ $ 5,213 ​ $ 3,782 ​ $ 10,009 ​ $ 8,154 ​ ​ Note 13. Income Taxes We record our interim provision for income taxes by applying our estimated annual effective tax rate to our year-to-date pre-tax income and adjusting for discrete tax items recorded in the period. Deferred income taxes result from temporary differences between the reporting of amounts for financial statement purposes and income tax purposes. These differences relate primarily to different methods used for income tax reporting purposes, including for depreciation and amortization, warranty and vacation accruals, and deductions related to allowances for doubtful accounts receivable and inventory reserves. Our provision for income taxes included current federal and state income tax expense, as well as deferred federal and state income tax expense. The effective tax rate for the three months ended June 30, 2021, was a benefit of 1,405 % , compared to an expense of 75 % for the three months ended June 30, 2020. The primary driver of the change in our effective tax rate is attributable to recording a benefit in the three months ended June 30, 2021, to recognize a tax credit for a research and development credit study conducted for tax years 2017-2020. We recorded an income tax benefit of $ 1.4 million and an expense of $ 5.9 million for the three months ended June 30, 2021 and 2020, respectively. ​ The effective tax rate for the six months ended June 30, 2021, was a benefit of 77 % , compared to an expense of 25 % for the six months ended June 30, 2020. The primary driver of the change in our effective tax rate is attributable to recording a benefit in the six months ended June 30, 2021, to recognize a tax credit for a research and development credit study conducted for tax years 2017-2020. We recorded an income tax benefit of $ 3.2 million and an expense of $ 3.0 million for the six months ended June 30, 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. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the condensed consolidated financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. As of June 30, 2021, tax contingencies related to federal and state credits recorded within the Condensed Consolidated Balance Sheets were $ 0.5 million. Changes in tax laws, regulations, administrative practices, principles, and interpretations may impact our tax contingencies. The timing of the resolution of income tax controversies is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts accrued. We are currently under examination by the New York Department of Taxation and Finance for tax years 2017, 2018, and 2019. The examination may lead to proposed adjustments to our taxes or our net operating losses with respect to years under examination as well as subsequent periods. 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. 20 Table of Contents Note 14. Net Income (Loss) Per Share The following table sets forth the computation of our basic and diluted net income (loss) per share: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Six Months Ended ​ ​ June 30, ​ June 30, (In thousands, except share and per share data) 2021 2020 2021 2020 Net income (loss) ​ $ 1,305 ​ $ ( 13,850 ) ​ $ ( 961 ) ​ $ ( 15,157 ) Weighted-average shares outstanding ​ ​ 19,691,156 ​ ​ 19,337,644 ​ ​ 19,618,759 ​ ​ 19,255,612 Dilutive effect of stock-based awards ​ ​ 356,121 ​ ​ — ​ ​ — ​ ​ — Weighted-average shares used to compute diluted net income (loss) per share ​ ​ 20,047,277 ​ ​ 19,337,644 ​ ​ 19,618,759 ​ ​ 19,255,612 Net income (loss) per share - Basic ​ $ 0.07 ​ $ ( 0.72 ) ​ $ ( 0.05 ) ​ $ ( 0.79 ) Net income (loss) per share - Diluted ​ $ 0.07 ​ $ ( 0.72 ) ​ $ ( 0.05 ) ​ $ ( 0.79 ) ​ The following common stock equivalents were excluded from the computation of diluted net income (loss) per share for the periods presented because including them would have been anti-dilutive: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Six Months Ended ​ ​ June 30, ​ June 30, ​ 2021 2020 2021 2020 Restricted stock units ​ 17,287 ​ 217,137 ​ 192,857 ​ 217,137 Common stock options ​ 433,447 ​ 946,936 ​ 998,630 ​ 946,936 Performance stock units ​ — ​ 116,295 ​ 60,627 ​ 116,295 Employee stock purchase plan ​ 33,743 ​ 50,027 ​ 33,888 ​ 46,706 Total ​ 484,477 ​ 1,330,395 ​ 1,286,002 ​ 1,327,074 ​ ​ Note 15. Fair Value Measurements We determine the fair value of our assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. We use a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1). The next highest priority is based on quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in non-active markets or other observable inputs (Level 2). The lowest priority is given to unobservable inputs (Level 3). The following provides information regarding fair value measurements for our cash equivalents as of June 30, 2021, and December 31, 2020, according to the three-level fair value hierarchy: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At June 30, 2021 ​ 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 ​ $ 16,190 ​ $ — ​ $ — ​ $ 16,190 Total ​ $ 16,190 ​ $ — ​ $ — ​ $ 16,190 ​ 21 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 Total ​ $ 16,188 ​ $ — ​ $ — ​ $ 16,188 ​ During the three and six months ended June 30, 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 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. 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 . ​ 22 Table of Contents