What changed in this filing

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Item 1. Financial Statements

2021-11-08 compared with 2021-08-02 · 277 added, 139 removed, 424 unchanged (50% of the section changed)

2 unchanged sentences

Condensed Consolidated Balance Sheets

September 30,

(In thousands, except share and per share data)

23 unchanged sentences

Non-current liabilities

Revolving line of credit, non-current

Note payable, non-current

Earn-out, non-current

Accrued warranty reserve, non-current

6 unchanged sentences

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

none issued and outstanding as of June 30, 2021 and December 31,

none issued and outstanding as of September 30, 2021 and December 31,

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

19,782,295 shares issued and outstanding as of June 30, 2021;

19,797,723 shares issued and outstanding as of September 30, 2021;

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

7 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In thousands, except share and per share data)

12 unchanged sentences

Reimbursement, general and administrative

Intangible asset amortization

Total operating expenses

Loss from operations

(Loss) income from operations

Other (expense) 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) income before income taxes

Income tax expense (benefit)

Net (loss) income

Net (loss) income per common share

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

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

Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

Condensed Consolidated Statements of Comprehensive (Loss) Income

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In thousands)

Net income (loss)

Other comprehensive income (loss):

Net (loss) income

Other comprehensive loss

Unrealized loss on marketable securities

Income tax related to items of other comprehensive loss

Total other comprehensive income (loss)

Comprehensive income (loss)

Total other comprehensive loss

Comprehensive (loss) income

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

4 unchanged sentences

(Loss) Income

Balances, March 31, 2021

Balances, June 30, 2021

Stock-based compensation

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

Common shares issued for employee stock purchase plan

Comprehensive income for the period

Balances, June 30, 2021

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

Comprehensive loss for the period

Balances, September 30, 2021

Balances, December 31, 2020

4 unchanged sentences

Comprehensive loss for the period

Balances, September 30, 2021

Balances, June 30, 2020

Balances, March 31, 2020

Stock-based compensation

1 unchanged sentence

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

Common shares issued for employee stock purchase plan

Comprehensive loss for the period

Balances, June 30, 2020

Comprehensive income for the period

Balances, September 30, 2020

Balances, December 31, 2019

4 unchanged sentences

Comprehensive loss for the period

Balances, June 30, 2020

Balances, September 30, 2020

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

1 unchanged sentence

Condensed Consolidated Statements of Cash Flows

Six Months Ended June 30,

Nine Months Ended September 30,

(In thousands)

7 unchanged sentences

Impairment losses

Changes in assets and liabilities:

Loss on disposal of property and equipment

Changes in assets and liabilities, net of acquisition:

Accounts receivable

9 unchanged sentences

Proceeds from maturities of securities available-for-sale

Payments related to acquisition

Purchases of property and equipment

Intangible assets costs

Other investments

Net cash (used in) provided by investing activities

Cash flows from financing activities

Proceeds from issuance of note payable

Proceeds from revolving line of credit

Payment of deferred debt issuance costs

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

2 unchanged sentences

Net cash provided by financing activities

Net increase in cash and cash equivalents

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.

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

On September 8, 2021, we acquired the assets of the AffloVest respiratory therapy business (“AffloVest Acquisition”) from International Biophysics Corporation (“IBC”), a privately-held company which developed and manufactures AffloVest.

AffloVest is a portable, wearable vest that treats patients with chronic respiratory conditions.

The device is sold through home medical equipment and durable medical equipment providers throughout the United States.

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

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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 results for the nine months ended September 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.

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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.

While we saw some level of recovery in the second quarter of 2021, the third quarter was negatively impacted by the prolonged recovery from COVID-19 and increased Delta variant cases during the period, which resulted in restricted access to clinics and hospitals and disrupted the recovery in patient visits versus the pre-COVID environment.

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.

2 unchanged sentences

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.

In addition, we are closely monitoring mandatory vaccination requirements and related evolving guidance that is or may be applicable to us, including in our capacity as a U.S.

government contractor.

See See Part II, I tem 1A.

“ Risk Factors” in this Form 10-Q for additional information about vaccine mandates and potential risks related thereto.

Use of Estimates

1 unchanged sentence

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) Income

Comprehensive (loss) income reflects the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.

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

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.

There were no material changes in our significant accounting policies during the nine months ended September 30, 2021, except as set forth below.

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

Business Segments

We operate and report in only one operating and reportable segment.

Our chief operating decision maker does not use financial information below revenue to allocate resources.

Goodwill represents the excess of the purchase price paid over the estimated fair value of the net assets acquired and liabilities assumed in the acquisition of a business.

Goodwill is not amortized, but is tested for impairment at least annually or on an interim basis if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.

We plan to perform our annual assessment of goodwill for impairment as of July 1st of each fiscal year.

See Note 7 – “Goodwill and Intangible Assets” for additional information.

Revenue Recognition for AffloVest

The AffloVest device is sold through home medical equipment and durable medical equipment providers (collectively, "distributors").

Revenue is recognized when control of the promised goods or services is transferred to the distributors, in an amount that reflects the consideration we expect to be entitled to in exchange for transferring those goods or providing services.

We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

When determining whether the distributor has obtained control of the goods or services, we consider any future performance obligations.

Generally, there is no post-shipment obligation on products sold other than warranty obligations in the normal and ordinary course of business.

In general, revenue from the sale of the AffloVest product is recognized at shipment, unless circumstances dictate that control has not yet passed to the distributor.

Certain of our contracts include volume-based incentives which involve rebates that are negotiated at or prior to the time of sale with the customer and are redeemable only if the customer achieves a specified cumulative level of sales or sales increase.

Under these incentive programs, at the time of sale, we determine the most likely amount of the rebate to be paid based on forecasted sales levels.

These forecasts are updated at least quarterly for each customer, and the transaction price is reduced for the anticipated cost of the rebate.

If the forecasted sales for a customer change, the accrual for rebates is adjusted to reflect the new rebates expected to be earned by the customer.

Amounts billed to customers for shipping and handling activities after the customer obtains control are treated as a promised service performance obligation and recorded in revenue in the accompanying Consolidated Statements of Operations.

Shipping and handling costs incurred for the delivery of goods to customers are considered a cost to fulfill the contract and are included in cost of revenue sold in the accompanying Consolidated Statements of Operations.

For a description of our revenue recognition policies related to our Flexitouch and Entre systems, see Note 3 – “Summary of Significant Accounting Policies” to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020.

Accounting Pronouncement Not Yet Adopted

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2020-04, “Reference Rate Reform (Topic 848) — Facilitation of the Effect of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”), addressing the discontinuation of LIBOR, a widely used reference rate for pricing financial products.

The ASU is intended to provide optional expedients and exceptions if certain criteria are met when accounting for contracts, hedging relationships and other transactions that reference LIBOR, or another reference rate expected to be discontinued because of reference rate reform.

The application and adoption requirements of ASU 2020-04 are optional until December 31, 2022 and vary based on expedients elected.

We have not elected any expedients to date and are currently evaluating any potential future impacts on the condensed consolidated financial statements.

Recently Adopted Accounting Pronouncements

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

In December 2019, the FASB issued ASU No.

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

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

In June 2016, the FASB issued ASU No.

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

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

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

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

In connection with the AffloVest Acquisition, it was determined CECL did not have a material financial impact on the receivables related to the durable medical equipment channel.

On September 8, 2021, we entered into an Asset Purchase Agreement (“AffloVest APA”) to acquire the AffloVest therapy business from International Biophysics Corporation.

Under the terms of the AffloVest APA, we agreed to pay IBC a total of up to $ 100.0 million for the purchase of substantially all of the assets related to its branded high frequency chest wall oscillation vest therapy business, other than specifically identified excluded assets.

We acquired AffloVest to further expand our position as a leader in treating patients with underserved chronic conditions in the home.

The acquired assets included inventory, tooling, intellectual property, permits and approvals, data and records, and customer and supplier information.

At closing, $ 80.0 million of the purchase price was paid, of which a total of $ 0.5 million was deposited into an escrow account at closing for purposes of satisfying certain post-closing purchase price adjustments and indemnification claims.

Subsequent to closing, $ 0.2 milion was returned to us as a result of working capital adjustments.

The AffloVest acquisition was funded through a combination of cash on hand and proceeds from borrowings.

Two earn-out payments of up to $ 10.0 million each are potentially due to IBC under the AffloVest APA depending on the achievement of specified revenue targets, as follows:

● Initial Earn-Out:

Equal to 1.5 times the amount by which the AffloVest business’ U.S.

revenues in the period from October 1, 2021 to September 30, 2022 (the “Initial Earn-Out Period”) exceed a specified amount;

provided that in no event will the payment exceed $ 10.0 million;

● Second Earn-Out:

Equal to 1.5 times the amount by which the AffloVest business’ U.S.

revenues in the period from October 1, 2022 to September 30, 2023 exceed the revenues recognized during the Initial Earn-Out Period;

provided that in no event will the payment exceed $ 10.0 million.

This liability was recorded on the Condensed Consolidated Balance Sheet at September 30, 2021 in the line item Earn-out, non-current, at an acquisition-date fair value of $ 6.4 million.

The fair value of the earn-out, reflecting management’s estimate of the likelihood of achieving these targets, was determined by employing a Monte Carlo Simulation model.

This amount will be re-measured at the end of each reporting period until the payment requirement ends, with any adjustments reported in income from operations.

On the date of AffloVest Acquisition, we allocated the assets acquired based on an estimate of their fair values.

The following table summarizes the purchase price allocation:

(In millions)

Allocated Fair Value

Property and equipment (1)

Intangible assets

Purchase price

(1) The purchase price included less than $ 0.1 million of property and equipment.

The goodwill reflects expected synergies of combining the acquired products and customer information with our existing operations, and is deductible for tax purposes over 15 years .

The following table reflects the allocation of purchase price to the acquired intangible assets and related estimated useful lives:

(In millions)

Allocated Fair Value

Estimated Useful Life

Customer relationships

Developed technology

Total intangible assets

The weighted-average amortization period of the acquired intangible assets was 12.3 years.

The fair market valuations associated with the assets acquired fall within Level 3 of the fair value hierarchy, due to the use of significant unobservable inputs to determine fair value.

The fair value measurements were calculated using unobservable inputs, primarily using the income approach, specifically the discounted cash flow method.

The amount and timing of future cash flows within our analysis was based on our due diligence models, most recent operational budgets, long-range strategic plans and other estimates.

Transaction costs, such as legal and other costs, related to the acquisition aggregated approximately $ 0.8 million.

These costs have been expensed as incurred and are included in reimbursement, general and administrative expenses in our Condensed Consolidated Statements of Operations.

The Condensed Consolidated Statements of Operations reflect the AffloVest operations beginning September 9, 2021.

The following unaudited pro forma information for the three and nine months ended September 30, 2021 and the three and nine months ended September 30, 2020 presents the revenues and net income assuming the acquisition of AffloVest had occurred as of January 1, 2020.

This information has been prepared for comparative purposes only and is not indicative of what actual results would have been if the acquisition had taken place at the beginning of fiscal 2020, or of future results.

Three Months Ended

Nine Months Ended

September 30,

(In thousands)

Total revenue

Net income (loss)

These pro forma results include certain adjustments, primarly due to increases in amortization expense due to fair value adjustments of intangible assets, increases in interest expense due to additional borrowings incurred to finance the acquisition and amortization of debt issuance costs incurred to finance the transaction, acquisition related costs including transaction costs such as legal, accounting, valuation and other professional services, and related tax effects.

Marketable Securities

There were no investments in marketable securities at June 30, 2021 and December 31, 2020.

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.

There were no investments in marketable securities at September 30, 2021 and December 31, 2020.

There were no net pre-tax unrealized gains for marketable securities at September 30, 2021.

There were no sales of marketable securities during the nine months ended September 30, 2021.

There were no marketable securities in an unrealized loss position at September 30, 2021 and December 31, 2020.

Inventories consisted of the following:

(In thousands)

At June 30, 2021

At September 30, 2021

At December 31, 2020

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Total inventories

Goodwill and Intangible Assets

In the third quarter of fiscal 2021, we completed the AffloVest Acqusition.

The purchase price of the AffloVest business exceeded the net acquisition-date estimated fair value amounts of the identifiable assets acquired and the liabilities assumed by $ 31.1 million, which was assigned to goodwill.

Intangible Assets

Our patents and other intangible assets are summarized as follows:

At June 30, 2021

At September 30, 2021

(In thousands)

Definite-lived intangible assets:

Defensive intangible assets

Customer accounts

Total amortizable intangible assets

Customer relationships

Developed technology

Unamortized intangible assets:

Patents pending

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(In thousands)

Definite-lived intangible assets:

Defensive intangible assets

Customer accounts

Total amortizable intangible assets

Unamortized intangible assets:

Patents pending

Total intangible assets

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.

Amortization expense was $ 0.3 million and $ 0.1 million for the three months ended September 30, 2021 and 2020, respectively, and $ 0.4 million and $ 0.3 million for the nine months ended September 30, 2021 and 2020, respectively.

Future amortization expenses are expected as follows:

(In thousands)

2021 (July 1 - December 31)

2021 (October 1 - December 31)

Accrued Expenses

1 unchanged sentence

(In thousands)

At June 30, 2021

At September 30, 2021

At December 31, 2020

Legal and consulting

In-transit inventory

Sales and use tax

Legal and consulting

Clinical studies

Sales and use tax

Warranty Reserves

1 unchanged sentence

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In thousands)

8 unchanged sentences

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.

On September 8, 2021, we entered into a First Amendment Agreement (the “Amendment”), which amends the Restated Credit Agreement (as amended by the Amendment, the “Credit Agreement”) with the lenders from time to time party thereto and Wells Fargo Bank, National Association, as administrative agent.

The Amendment, among other things, adds a $ 30.0 million incremental term loan to the $ 25.0 million revolving credit facility provided by the Restated Credit Agreement.

The term loan is reflected on our condensed consolidated financial statements as a note payable.

The term loan and the revolving credit facility mature on September 8, 2024.

The Credit Agreement provides that, subject to satisfaction of certain conditions, we may increase the amount of the revolving loans available under the Credit Agreement and/or add one or more term loan facilities in an amount not to exceed $ 25.0 million in the aggregate, such that the total aggregate principal amount of loans available under the Credit Agreement (including under the revolving credit facility) does not exceed $ 80.0 million.

On September 8, 2021, in connection with the closing of the AffloVest Acquisition, we borrowed the $ 30.0 million term loan and utilized that borrowing, together with a draw of $ 25.0 million under the revolving credit facility and cash on hand, to fund the purchase price.

The principal of the term loan is required to be repaid in quarterly installments of $ 750,000 commencing January 7, 2022, through July 8, 2024, with the remaining outstanding balance due on September 8, 2024 .

The term loan and amounts drawn under the revolving credit facility bear interest, at our option, at a rate equal to (a) the highest of (i) the prime rate, (ii) the federal funds rate plus 0.50 % and (iii) LIBOR for an interest period of one month plus 1 % (the “Base Rate”) plus an applicable margin or (b) LIBOR for an interest period of one, three or six months, at our option, plus the applicable margin.

The applicable margin is 0.75 % to 2.25 % on loans bearing interest at the Base Rate and 1.75 % to 3.25 % on loans bearing interest at LIBOR, in each case depending on our consolidated total leverage ratio.

At September 30, 2021, all outstanding borrowings were subject to interest at a rate calculated at LIBOR plus an applicable margin equaling 2.8 % .

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.

Maturities of the term loan for the next three years as of September 30, 2021, are as follows:

(In thousands)

2021 (October 1 - December 31)

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

The Credit Agreement contains a number of restrictions and covenants, including that we maintain compliance with a maximum leverage ratio, minimum fixed charge coverage ratio and a minimum consolidated EBITDA covenant.

As of September 30, 2021, we were in compliance with all financial covenants under the Credit Agreement.

Commitments and Contingencies

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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.

The remaining lease terms vary from approximately one to nine years as of September 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.

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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.

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 in September 2020.

Finally, the portion of the space covered under the third lease commenced in September 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 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.

As of September 30, 2021, we had approximately 45 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.

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

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

3 unchanged sentences

(In thousands)

At June 30, 2021

At September 30, 2021

At December 31, 2020

4 unchanged sentences

Weighted average discount rate

Six Months Ended June 30,

Nine Months Ended September 30,

Supplemental cash flow information for our operating leases:

3 unchanged sentences

(In thousands)

2021 (July 1 - December 31)

2021 (October 1 - December 31)

Total minimum lease payments

3 unchanged sentences

Non-current obligations under operating lease liabilities

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 of September 30, 2021, we have additional lease commitments of $ 0.8 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.

Operating lease costs were $ 0.9 million and $ 0.8 million for the three months ended September 30, 2021 and 2020, respectively.

Operating lease costs were $ 2.6 million and $ 2.1 million for the nine months ended September 30, 2021 and 2020, respectively.

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.

We had purchases from two vendors that accounted for 36 % of our total purchases for the three months ended September 30, 2021.

We had purchases from one vendor that accounted for 24 % of our total purchases for the nine months ended September 30, 2021.

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

We issued purchase orders prior to September 30, 2021, totaling $ 28.4 million for goods that we expect to receive within the next year.

Retirement Plan

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

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.

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 September 30, 2021 and 2020, respectively, and $ 0.9 million and $ 0.2 million for the nine months ended September 30, 2021 and 2020, respectively.

Legal Proceedings

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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 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.

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

On August 13, 2021, we filed a motion for summary judgement on the remaining Count II.

Plaintiff filed a motion for summary judgement on the counterclaims.

These motions are currently pending.

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

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(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.

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.

On June 18, 2021, we and the individual defendants filed a motion to dismiss the Amended Complaint.

9 unchanged sentences

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.

As of September 30, 2021, 6,366,806 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.

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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.

We recorded stock-based compensation expense of $ 2.6 million and $ 3.2 million for the three months ended September 30, 2021 and 2020, respectively, and $ 7.7 million and $ 8.3 million for the nine months ended September 30, 2021 and 2020, respectively.

This expense was allocated as follows:

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In thousands)

6 unchanged sentences

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

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:

Stock-based compensation expense included in the Condensed Consolidated Statements of Operations for stock options was $ 1.0 million and $ 1.1 million for the three months ended September 30, 2021 and 2020, respectively, and $ 3.3 million and $ 3.0 million for the nine months ended September 30, 2021 and 2020, respectively.

At September 30, 2021, there was approximately $ 6.4 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 1.9 years.

Our stock option activity for the nine months ended September 30, 2021, was as follows:

Exercise Price

4 unchanged sentences

Cancelled/Expired

Balance at June 30, 2021

Options exercisable at June 30, 2021

Balance at September 30, 2021

Options exercisable at September 30, 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 438,283 as of June 30, 2020, had a weighted-average exercise price of $ 21.86 per share.

Options exercisable of 461,138 as of September 30, 2020, had a weighted-average exercise price of $ 23.35 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 $ 1.2 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:

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 September 30, 2021 and 2020, respectively, and $ 3.7 million and $ 4.0 million for the nine months ended September 30, 2021 and 2020, respectively.

At September 30, 2021, there was approximately $ 6.6 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, 2021, was as follows:

Average Grant

2 unchanged sentences

Balance at December 31, 2020

Balance at June 30, 2021

Deferred and unissued at June 30, 2021 (2)

Balance at September 30, 2021

Deferred and unissued at September 30, 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 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.

(2) For the nine months ended September 30, 2021, there were no restricted stock units granted to non-employee directors in lieu of their quarterly cash retainer payments.

As of September 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.

Performance-Based Restricted Stock Units

8 unchanged sentences

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:

Stock-based compensation expense recognized for PSUs was an expense of $ 0.2 million and $ 0.4 million for the three months ended September 30, 2021 and 2020, respectively, and less than $ 0.1 million and $ 0.5 million for the nine months ended September 30, 2021 and 2020, respectively.

The stock-based compensation expense for the nine months ended September 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 $ 0.5 million related to the PSUs granted in 2018 and 2021.

At September 30, 2021, there was approximately $ 1.5 million of total unrecognized pre-tax compensation expense related to outstanding PSUs that is expected to be recognized over a weighted average period of 2.4 years.

Our performance-based restricted stock unit activity for the nine months ended September 30, 2021, was as follows:

Average Grant

2 unchanged sentences

Balance at December 31, 2020

Balance at June 30, 2021

Balance at September 30, 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, 194,518 and

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.

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

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 September 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 September 30, 2021 and 2020, respectively, and $ 0.6 million and $ 0.8 million for the nine months ended September 30, 2021 and 2020, respectively.

We derive our revenue from the sale and rental of our 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

Nine Months Ended

September 30,

(In thousands)

Flexitouch system

Other products (1)

Percentage of total revenue

Flexitouch system

Other products (1)

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

The Actitouch system and the Airwear wrap contributed immaterial amounts of revenue for each of the 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:

Our revenue by channel, inclusive of sales and rental revenue, for the three and nine months ended September 30, 2021 and 2020, are summarized in the following table:

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In thousands)

1 unchanged sentence

Veterans Administration

Durable medical equipment distributors

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.

As 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.

5 unchanged sentences

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

We assess the likelihood of extending the lease at the onset of the lease to determine if the option is reasonably

certain to be exercised.

We assess the likelihood of extending the lease at the onset of the lease to determine if the option is reasonably certain to be exercised.

As the lease is short-term in nature, we anticipate collection of substantially all of the net investment within the first year of the lease agreement.

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

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,

Rental revenue for the three and nine months ended September 30, 2021 and 2020, was primarily from private insurers.

Sales-type lease revenue and the associated cost of revenue for the three and nine months ended September 30, 2021 and 2020, was:

Three Months Ended September 30,

Nine Months Ended September 30,

(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 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.

The effective tax rate for the three months ended September 30, 2021, was an expense of 126 % , compared to a benefit of 55 % for the three months ended September 30, 2020.

The primary driver of the change in our effective tax rate is primarily attributable to a change in projected taxable income.

We recorded an income tax expense of $ 1.9 million and a benefit of $ 0.8 million for the three months ended September 30, 2021 and 2020, respectively.

The effective tax rate for the nine months ended September 30, 2021, was a benefit of 24 % , compared to an expense of 17 % for the nine months ended September 30, 2020.

The primary driver of the change in our effective tax rate is attributable to recording a benefit in the nine months ended September 30, 2021, to recognize a tax credit for a research and development credit study conducted for tax years 2017-2020 as well as a change in deductibility of business meals to 100 % in 2021 compared to 50 % in 2020.

We recorded an income tax benefit of $ 1.4 million and an expense of $ 2.3 million for the nine months ended September 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.

As of September 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.

3 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 (Loss) Per Share

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

Net (Loss) Income Per Share

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

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In thousands, except share and per share data)

Net income (loss)

Net (loss) income

Weighted-average shares outstanding

Dilutive effect of stock-based awards

Weighted-average shares used to compute diluted net income (loss) 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 income (loss) per share for the periods presented because including them would have been anti-dilutive:

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

Net (loss) income per share - Basic

Net (loss) income per share - Diluted

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

Three Months Ended

Six Months Ended

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 as of June 30, 2021, and December 31, 2020, according to the three-level fair value hierarchy:

At June 30, 2021

Quoted Prices

(In thousands)

Recurring Fair Value Measurements:

Money market mutual funds

As of September 30, 2021, we no longer had any money market mutal funds.

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

At December 31, 2020

3 unchanged sentences

Money market mutual funds

During the three and six months ended June 30, 2021, there were no transfers within the three-level hierarchy.

During the three and nine months ended September 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.

3 unchanged sentences

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 .

We have obligations to pay up to $ 20.0 million in earn-out payments in cash if certain future financial results of the AffloVest business are met.

The earn-out liability was valued using Level 3 inputs.

The fair value of the earn-out was determined by employing a Monte Carlo Simulation model in a risk-neutral framework.

The underlying simulated variable includes recognized revenue.

The recognized revenue volatility estimate was based on a study of historical asset volatility for a set of comparable public companies.

The model includes other assumptions including the market price of risk, which was calculated as the weighted average cost of capital less the long-term risk free rate.

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