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Item 7. Management’s Discussion and Analysis

2022-02-23 compared with 2021-02-23 · 188 added, 267 removed, 175 unchanged (72% of the section changed)

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The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the accompanying notes thereto included elsewhere in this report.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations focuses on discussion of year-over-year comparisons between 2021 and 2020.

Discussion of 2019 results and year-over-year comparisons between 2020 and 2019 that are not included in this Annual Report on Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 23, 2021.

Coronavirus (COVID-19)

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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.

There are no reliable estimates of how long the pandemic will last or how many people are likely to be affected by it.

While we saw some level of recovery in the second quarter of 2021, the second half of 2021 was negatively impacted by the prolonged recovery from COVID-19 and increased variant cases during the period, which extended and expanded 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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We have since reactivated a small number of healthcare

practitioners in the same capacity as trainers who educate patients on the proper use of our solutions.

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

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

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.

For a detailed listing of the changes to our business practices since the onset of the pandemic, refer to previous reports filed with the Securities and Exchange Commission.

Continued modifications to our business include, but are not limited to:

● Incorporating remote and flexible work arrangements for employees whenever possible, including real-time, online training of our new sales representatives.

In addition, we are monitoring pandemic conditions to assess whether our in-office and remote work strategy remains both productive and competitive.

● Eliminating employee travel restrictions in alignment with the opening of healthcare facilities and clinics while also continuing to maintain social distancing contact restrictions to reduce exposure.

● Utilizing a mix of employee trainers and independent healthcare practitioners to educate patients on the proper use of our solutions virtually or in-person.

● Continuing to host large virtual medical education programs, while also beginning to schedule smaller in-person meetings and restoring attendance at key professional congresses.

● Supporting clinicians and patients by using rigorous infection control practices when in-person visits are required.

● Following government guidelines related to vaccinations of our staff in light of customer vaccination requirements and our focus on safe interactions with patients and customers.

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.

Additional information related to the COVID-19 pandemic is included in the MD&A sections below.

We are a medical technology company that develops and provides innovative medical devices for the treatment of chronic diseases.

We are a medical technology company that develops and provides innovative medical devices for the treatment of underserved chronic diseases.

Our mission is to help people suffering from chronic diseases live better and care for themselves at home.

We focus our efforts on advancing the standard of care in treating chronic diseases in the home setting to improve patient outcomes and quality of life and help control rising healthcare expenditures.

Our initial area of therapeutic focus is vascular disease, with a goal of advancing the standard of care in treating lymphedema and chronic venous insufficiency.

We focus our efforts on advancing the standard of care in treating underserved chronic diseases in the home setting to improve patient outcomes and quality of life and help control rising healthcare expenditures.

Our areas of therapeutic focus are (1) vascular disease, with a goal of advancing the standard of care in treating lymphedema and chronic venous insufficiency, (2) oncology, where lymphedema is a common consequence among cancer survivors and (3) providing airway clearance therapy for those suffering from chronic respiratory conditions.

We possess a unique, scalable platform to deliver at-home healthcare solutions throughout the United States.

This evolving home care delivery model is recognized by policy-makers and insurance payers as a key for controlling rising healthcare costs.

This evolving home care delivery model is recognized by policymakers and insurance payers as a key for controlling rising healthcare costs.

Our solutions deliver cost-effective, clinically proven, long-term treatment for people with these chronic diseases.

Our proprietary products are the Flexitouch and Entre systems.

Our current products are the Flexitouch system, Entre system and AffloVest.

A predecessor to our Flexitouch system received 510(k) clearance from the U.S.

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We introduced our Entre system in the United States in February 2013.

The Entre system is sold or rented to patients who need a more basic pump or who do not yet qualify for insurance reimbursement for an advanced compression device such as our Flexitouch system.

For the years ended December 31, 2020 and 2019, sales and rentals of our Entre system and other products (that have since been discontinued) represented 12% and 10% of our revenue, respectively.

The Entre system is sold or rented to patients who need a simple pump or who do not yet qualify for insurance reimbursement for an advanced compression device such as our Flexitouch system.

For the years ended December 31, 2021 and 2020, sales and rentals of our Entre system represented 13% and 12% of our revenue, respectively.

We previously sold and rented another proprietary product, the Actitouch system.

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We formally discontinued this product line in the first quarter of 2020.

See Note 8 - “Intangible Assets” to the consolidated financial statements in this report for more information regarding this impairment charge and discontinuation.

See Note 9 - “Goodwill and Intangible Assets” to the consolidated financial statements in this report for more information regarding this impairment charge and discontinuation.

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

AffloVest is a portable, wearable vest that provides airway clearance to treat patients with chronic respiratory conditions such as bronchiectasis or conditions resulting from neuromuscular disorders.

For the year ended December 31, 2021, sales of AffloVest represented 2% our revenue.

In October 2018, we licensed the intellectual property rights related to the Airwear Gradient Compression Wrap, or the Airwear wrap, in the U.S.

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We began selling the Airwear wrap in a limited market in the fourth quarter of 2019.

We subsequently made the strategic decision to discontinue the Airwear wrap in the second quarter of

2020 and, effective July 31, 2020, Sun Scientific, Inc.

We subsequently made the strategic decision to discontinue the Airwear wrap in the second quarter of 2020 and, effective July 31, 2020, Sun Scientific, Inc.

terminated the license agreement with us related to the Airwear wrap.

See Note 8 - “Intangible Assets” to the consolidated financial statements in this report for more information regarding the related impairment charge.

See Note 9 - “Goodwill and Intangible Assets” to the consolidated financial statements in this report for more information regarding the related impairment charge.

To support the growth of our business, we invest heavily in our commercial infrastructure, consisting of our direct sales force, training resources, reimbursement capabilities and clinical expertise.

We market our products in the United States using a direct-to-patient and -provider model.

Our direct sales force has grown to a team of over 250 employees as of December 31, 2020, compared to over 240 employees as of December 31, 2019.

This model allows us to directly approach patients and clinicians, whereby we disintermediate the traditional durable medical equipment channel, allowing us to capture both the manufacturer and distributor margins.

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

We have since reactivated a small number of healthcare practitioners in the same capacity as trainers who educate patients on the proper use of our solutions.

We invest substantial resources in our reimbursement department, which was reorganized in 2018 to improve operational efficiencies and enhance individual payer expertise, while continuing our strategic focus of payer development.

Our reimbursement function includes payer relations and reimbursement operations.

We market our Flexitouch and Entre products in the United States using a direct-to-patient and -provider model.

Our field commercial team consists of our direct sales force and a team of Field Support Specialists.

The AffloVest device is sold through respiratory durable medical equipment providers throughout the United States.

Our collective field commercial team, including our respiratory sales force, has grown to over 346 employees as of December 31, 2021, compared to 285 employees as of December 31, 2020.

As it relates to the impact of COVID-19 on our commercial processes, in the first half of 2021, we continued to see restrictions loosen, in line with the applicable governmental regulations.

Conversely, in the second half of 2021, we were adversely impacted by the resurgence due to variants, resulting in renewed patient cancellations, absenteeism of staff and access limitations implemented by clinics and health systems.

As a result, we continue to engage in virtual interactions if possible.

We expect these virtual interactions with clinicians and patients to continue into the future until the pandemic subsides, and perhaps as a best practice in the future.

Additionally, with respect to sales force staffing, our results in the second half of 2021 were negatively impacted by the challenging labor market, which, in combination with some reluctance around our vaccination policy among both existing representatives and potential new hires, impacted recruiting and retention.

We invest substantial resources in our reimbursement function to improve operational efficiencies and enhance individual payer expertise, while continuing our strategic focus of payer development.

Our payer relations function focuses on payer policy development, education, contract negotiations, and data analysis.

Our reimbursement operations function is responsible for verifying patient insurance benefits, individual patient case development, prior authorization submissions, case follow-up, and appeals when necessary.

Our clinical function, consisting of a scientific advisory board, in-house therapists and nurses, and our Chief Medical Officer (part-time), serves as a resource to clinicians and patients and guides our development of clinical evidence in support of our products.

We believe these investments are critical to driving payer, clinician and patient adoption of our technologies, and together with our commercial infrastructure, represent a significant competitive advantage.

We rely on third-party contract manufacturers for the sourcing of parts, the assembly of our controllers and the manufacturing of the garments used with our systems.

We conduct final assembly of the garments used with our Flexitouch system, perform quality assurance, and ship our products from our facility in Minneapolis, Minnesota.

For the year ended December 31, 2020, we generated revenue of $187.1 million and had net loss of $0.6 million, compared to revenue of $189.5 million and net income of $11.0 million for the year ended December 31, 2019, and revenue of $143.8 million and net income of $6.6 million for the year ended December 31, 2018.

Our primary sources of capital to date have been from operating income and private placements of our capital stock, as well as our initial public offering, which closed on August 2, 2016.

In August 2017, we filed a shelf registration statement on Form S-3 with the SEC.

Under the shelf registration statement, we may offer and sell from time to time up to $200 million of common stock, preferred stock, debt securities, warrants, rights or units.

The shelf registration statement also registered for resale from time to time up to 5,703,534 shares of our common stock held by the selling stockholders named therein.

In September 2017, certain of the selling stockholders completed a secondary offering of 3,795,000 shares of our common stock at a public offering price of $33.00 per share.

We did not receive any proceeds from the sale of the shares by the selling stockholders.

Since the onset of COVID-19, our reimbursement function has been actively working with Medicare and a broad base of private payers to understand the ever-changing reimbursement criteria being introduced.

We have seen increased flexibility in coverage criteria with select payers in which they now allow the use of virtual patient interactions in place of the previously required in-person interactions.

However, as these circumstances are ever-changing, the extent to which these changes will remain in place and the impact on our business in the future are not determinable at this time.

We also have a clinical team, consisting of a scientific advisory board, in-house therapists and nurses, and a Chief Medical Officer, that serves as a resource to clinicians and patients and guides the development of clinical evidence in support of our products.

Most clinical studies require observation and interaction with clinicians and patients to monitor results and progress.

Given the impact of COVID-19, patient recruitment for our clinical studies involving our products and clinical outcomes had previously been suspended in 2020.

In 2021, all of our clinical trials have resumed research activities, including study visits and new patient enrollments, albeit more slowly than the targeted enrollment rates.

We rely on third party contract manufacturers for the sourcing of parts, the assembly of our controllers and the manufacturing of the garments used with our Flexitouch and Entre systems.

We conduct final assembly of the garments used with our Flexitouch system, perform quality assurance and ship our Flexitouch and Entre products from our facility in Minneapolis, Minnesota.

The AffloVest device is currently manufactured by a third party, IBC, pursuant to a Transition Services Agreement.

We plan for IBC to continue to manufacture the product on our behalf through the first half of 2022.

To date, our supply chain has not been materially impacted by COVID-19.

We continue to receive our product on time and believe that we have enough safety stock to meet our short and mid-term demand.

However, we cannot assure you that our supply chain will not be materially impacted in the future.

For the year ended December 31, 2021, we generated revenue of $208.1 million and had a net loss of $11.8 million, compared to revenue of $187.1 million and a net loss of $0.6 million for the year ended December 31, 2020, and revenue of $189.5 million and net income of $11.0 million for the year ended December 31, 2019.

Our primary sources of capital since our initial public offering in 2016 have been from operating income and bank financing.

We operate in one segment for financial reporting purposes.

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However, any reversal in these recent trends could have a negative impact on our future revenue.

Our revenue has fluctuated, and we expect our revenue to continue to fluctuate, from quarter to quarter due to a variety of factors.

For instance, our fourth quarter is consistently our strongest quarter of the year.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations – Seasonality” for a further discussion of factors contributing to our seasonality.

Further, our revenue is impacted by fluctuations in the mix of products being sold and rented during each period and changes in the mix of our payers and contract pricing.

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

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

We bill payers, such as private insurers, Medicare, or Medicaid, on behalf of our patients and bill patients directly for their cost-sharing amounts, including any portion of an unsatisfied deductible and any copayments or co-insurance.

We bill the Veterans Administration directly for the purchase or lease of our product on behalf of the patient.

Approximately 13% of our revenue in 2020 and 17% of our revenue in 2019 came from the Veterans Administration.

Approximately 13% of our revenue in each of 2021 and 2020 came from the Veterans Administration.

Approximately 17% of our revenue in 2021 and 16% of our revenue in 2020 came from Medicare patients.

Changes to the level of Medicare coverage for our products, including the 2015 LCD modification to the criteria for Medicare coverage, could reduce the number of Medicare patients who have access to our products.

Changes to the level of Medicare coverage for our products could reduce the number of Medicare patients who have access to our products.

Our products currently are not subject to the competitive bidding process for supplying covered items to Medicare recipients.

We expect our revenue to continue to increase in the future as a result of increased awareness of our solutions, expansion of our direct sales force, enhanced marketing and customer support efforts, continued focus on developing clinical and economic outcomes data, efforts related to expanded third-party reimbursement and longer term, potential introduction of our solutions outside the United States.

We derive revenue from sales of our AffloVest product to accredited DME providers.

These respiratory DME providers provide a full range of solutions for these patients with complex diseases, and represent a large, developed channel.

Respiratory DME partners serve the role of receiving prescriptions, verifying coverage criteria, shipping, billing and training the patient.

We intend to expand and support our respiratory DME partners, in an effort to help demonstrate HFCWO as a staple among the host of treatments they bring to chronic respiratory patients, thereby allowing us to continue to grow revenue from this product offering.

Our revenue has fluctuated, and we expect our revenue to continue to fluctuate, from quarter to quarter due to a variety of factors, including seasonality.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations – Seasonality” for a further discussion of factors contributing to our seasonality.

Further, our revenue is impacted by fluctuations in the mix of products being sold and rented during each period and changes in the mix of our payers and contract pricing.

Furthermore, we expect our revenue to continue to increase in the future as a result of increased awareness of our solutions, expansion of our direct sales force, our DME partners, enhanced marketing and customer support efforts, continued focus on developing clinical and economic outcomes data, efforts related to expanded third-party reimbursement and longer term, potential introduction of our solutions outside the United States.

We also anticipate pricing pressure from private insurers, which will result in continued downward pressure on our revenue growth rate.

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We expect cost of revenue to increase in absolute dollars primarily if, and to the extent, our revenue grows.

We provide a warranty on our device controllers ranging from one to two years for commercially insured patients and five years for Medicare patients, as required by Centers for Medicare and Medicaid Services.

We also provide replacement garments to our patients for up to five years after purchase.

We establish a reserve for warranty claims based on historical warranty replacement costs incurred.

Provisions for warranty obligations, which are included in cost of revenue, are recorded at the time of shipment.

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

We record a liability for future warranty claims at the time of sale for the warranty period offered to a customer in cost of revenue.

If the assumptions used in calculating the provision were to materially change, such as incurring higher than anticipated warranty claims, an additional provision may be required.

We calculate gross margin as gross profit divided by revenue.

Our gross margin has been and will continue to be affected by a variety of factors, including product and payer mix, production volumes, manufacturing costs and cost-reduction strategies.

We expect our gross margin to decrease slightly over the

near term as we experience pricing pressure from third-party payers.

We continue to work to reduce product manufacturing cost through enhanced product design efforts as well as supply chain initiatives in an effort to offset anticipated price erosion.

We continue to work to reduce product manufacturing costs through enhanced product design efforts as well as supply chain initiatives in an effort to offset anticipated price erosion.

Our gross margin will likely fluctuate from quarter to quarter.

Sales and Marketing Expenses

Our sales and marketing expenses support our direct-to-patient and -provider model.

These expenses consist primarily of personnel-related expenses, including salaries, bonuses, commissions and benefits for employees.

Our sales and marketing expenses consist primarily of personnel-related expenses, including salaries, bonuses, commissions and benefits for employees.

They also include expenses for patient training, social media and advertising, informational kits, public relations and other promotional and marketing activities, field sales travel and entertainment expenses, trade shows and conferences, stock-based compensation, as well as customer service.

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Reimbursement expenses also include consulting, travel to payer case manager seminars, professional development and training, and certification expenses.

General and administrative expenses also include professional services such as legal, consulting and accounting services, stock-based compensation, travel expenses and insurance costs.

General and administrative expenses also include professional services such as legal, consulting and accounting services, stock-based compensation, travel expenses, insurance and acquisition costs.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest income related to investment income earned on our invested capital portfolio.

Other income (expense), net consists primarily of interest income related to investment income earned on our invested capital portfolio and interest expense related to our debt obligations.

Income Tax Expense (Benefit)

Our income tax expense (benefit) consists primarily of permanent differences related to share-based compensation activity, as well as deferred income taxes resulting from temporary differences between the reporting of amounts for financial statement purposes and income tax purposes.

Critical Accounting Policies and Significant Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles

in the United States, or GAAP.

Critical Accounting Estimates

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, and related disclosure of contingent assets and liabilities, revenue and expenses at the date of the financial statements.

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Actual results may differ from these estimates and such differences could be material to our financial position and results of operations.

While our significant accounting policies are more fully described in Note 3 to our consolidated financial statements included elsewhere in this report, we believe the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective and complex judgments.

Critical accounting estimates are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations.

While our significant accounting policies are more fully described in Note 3 to our consolidated financial statements included elsewhere in this report, we believe the following discussion addresses our most critical accounting estimates, which involve significant subjectivity and judgment, and changes to such estimates or assumptions could have a material impact on our financial condition or operating results.

Therefore, we consider an understanding of the variability and judgment required in making these estimates and assumptions to be critical in fully understanding and evaluating our reported financial results.

Revenue Recognition

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

We derive revenue from the sales and rentals of our proprietary line of Flexitouch and Entre systems, and from our sales of our recently acquired AffloVest product.

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

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

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

In accordance with applicable accounting guidance, we have determined these were assurance warranties and therefore not considered a performance obligation.

In addition, we did not evaluate immaterial promised goods or services in the context of the contract.

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

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

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

Rather, the extended payment terms occur as a result of an initial claim denial, which subsequently enters the Medicare appeals process as noted below.

We commercially distribute our products directly to patients, who are referred to us by physicians, therapists or nurses.

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

Our contractual relationship resides with the patient when the third-party payer is either a commercial insurer or Medicare, and with the Veterans Administration if the patient is covered under their services.

Revenue is recognized from such sales upon transfer of control of the product to the customer at a transaction price determined by collection history.

As a result, the transaction price is impacted by multiple factors, including the terms and conditions contracted by various third-party payers, and therefore payments from third-party payers typically are less than our standard charge and represent an implicit price concession, resulting in variable consideration.

As most contracts are with each individual sale to a patient, we have elected the portfolio approach to determine the transaction price, and ultimately the expected consideration.

The portfolios used to determine transaction price are at the payer level, with pricing for each payer assessed based on the underlying similar characteristics.

For any of our products sold to patients covered by private payers, such as commercial insurance companies, revenue is recognized upon shipment.

A product is not shipped until we have received a prescription from a physician for our products and, as applicable, receipt of prior authorization from payers.

At shipment, we invoice the payer for the total product price and we recognize revenue in the amount of cash consideration anticipated to be received based on the transaction price.

After the insurance payer has remitted payment, we separately invoice the patient for their portion of the payment obligation, such as copayments and deductibles.

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

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

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

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

We assess the variable consideration for each of these claims as a percentage of the total invoice price based on ultimate approval and collection history.

For our products sold to the Veterans Administration on behalf of the patient, our contract is with the Veterans Administration rather than the patient.

We enter into individual sales contracts with the Veterans Administration on behalf of each patient.

These contracts determine the amount of consideration, which is typically paid in full within 2-3 days of shipment, and therefore there is no implicit price concession.

In addition, the contracts provide for the right of control to transfer to the Veterans Administration upon delivery of the product to the patient, at which time revenue is recognized.

We incur incremental costs that directly relate to the sales of our products;

however, as the amortization period would be less than one year, we have elected the practical expedient to expense these costs as incurred.

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

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

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

We bill these patients’ insurance payers monthly over the duration of the rental term.

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

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

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

As we elected the practical expedient to not reassess the lease classification for leases in existence at December 31, 2018, rental agreements commencing after January 1, 2019, are recorded as sales-type leases in accordance with Accounting Standards Update (“ASU”) No.

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

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

Accounts Receivable

The majority of our accounts receivable and revenue are from commercial insurance payers and government payers, such as Medicare, the Veterans Administration and Medicaid.

Accounts receivable are recorded at management’s assessment of the expected consideration to be received, based on a detailed review of historical pricing adjustments and collections.

Management relies on the results of the assessment, which includes payment history of the applicable payer as well as historical patient collections, as a primary source of information in estimating the collectability of our accounts receivable.

We update our assessment on a quarterly basis, which to date has not resulted in any material adjustments to the valuation of our accounts receivable.

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

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

After final adjudication of all claims, approximately 90% of the claims submitted are approved (this is on a number of claims, not a dollars claimed, basis across all our products).

The appeals process can be lengthy, lasting more than a year in most cases.

Accordingly, we classify

a portion of our Medicare accounts receivable as non-current based on our experience with Medicare collections.

Expected consideration is estimated as follows:

● Flexitouch and Entre systems.

Expected consideration to be received is estimated based on a detailed review of historical pricing adjustments and collections.

Specifically, payment history of the applicable payer, as well as historical patient collections serve as a primary source of information in estimating expected consideration.

● AffloVest products.

Management’s assessment of the expected consideration to be received is based on agreed upon contractual pricing, assessment of the likelihood of available volume-based rebates being achieved and payment history of the applicable DME partner.

We update our assessment of collectability on a quarterly basis, with any adjustments for Flexitouch and Entre systems being reflected as sales and rental revenue and AffloVest products being reflected as bad debt expense within reimbursement, general and administrative expenses in the Consolidated Statements of Operations in the period of adjustment.

If in the future we determine that another method is more reasonable, or if another method for calculating these input assumptions is prescribed by authoritative guidance, the expected consideration associated with the sales and rentals of our products could change significantly.

Changes in contractual pricing, payment trends and rebate structures would impact, either positively or negatively, our sales and rental revenue.

Stock-Based Compensation

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We recognize the fair value of each award as an expense on a straight-line basis over the requisite service period, which is generally the vesting period of the equity grant.

The Monte Carlo Simulation and Black-Scholes valuation models require the input of highly subjective assumptions, including the expected term of the option, the expected volatility of the price of our common stock, the risk-free interest rate and the expected dividend yield.

the risk-free interest rate and the expected dividend yield.

These estimates involve inherent uncertainties and the significant application of management's judgment.

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● Expected volatility .

Our expected volatility is derived using the average historical volatility of public companies of similar size and industry because we believe the expected volatility will approximate historical volatility, due to the fact that we had no trading history prior to our initial public offering.

Expected volatility for grants issued in and prior to the first fiscal quarter of 2021 was estimated using the average historical volatility of public companies of similar size and industry over a similar period as the expected term assumption used for our options.

Beginning in the second fiscal quarter of 2021, we had sufficient historical data to transition to utilizing our average historical volatility over a similar period as the expected term assumption used for our options as the expected volatility.

● Risk-free interest rate .

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Reimbursement, general and administrative

Total operating expenses

(Loss) income from operations

(Loss) income before income taxes

Income tax (benefit) expense

Net (loss) income

Revenue decreased $2.4 million, or 1%, to $187.1 million in the year ended December 31, 2020, compared to $189.5 million in the year ended December 31, 2019.

The decrease in revenue was attributable to a decrease of approximately $7.4 million, or 4%, in sales and rentals of our Flexitouch system partially offset by an increase of approximately $5.0 million, or 28%, in sales and rentals of our other products, primarily our Entre system, in the year ended December 31, 2020, compared to the year ended December 31, 2019.

Beginning in March 2020 and continuing through the fourth quarter, revenue was impacted by the COVID-19 pandemic, which limited our ability to access our clinician customers and their patients.

Specifically, we saw healthcare facilities and clinics restricting access to their clinicians, reducing patient consultations, or closing temporarily due to COVID-19.

The following table summarizes our revenue by product for the years ended December 31, 2020 and 2019, both in dollars and percentage of total revenue:

(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 the years ended December 31, 2020 and 2019.

Cost of Revenue and Gross Margin

Cost of revenue decreased $0.9 million, or 2%, to $54.3 million during the year ended December 31, 2020, compared to $55.3 million during the year ended December 31, 2019.

The decrease in cost of revenue was primarily attributable to a decrease in the number of Flexitouch systems sold or rented slightly offset by an increase in other products sales and rentals, and the $0.4 million inventory impairment charge recorded in the second quarter of 2020 related to discontinuing the Airwear wrap product line.

Gross margin was 71% for both of the years ended December 31, 2020 and 2019.

Sales and Marketing Expenses

Sales and marketing expenses increased $0.7 million, or 1%, to $79.6 million during the year ended December 31, 2020, compared to $78.9 million during the year ended December 31, 2019.

The increase was primarily attributable to our continued investment in our field sales team and marketing initiatives to increase clinician awareness, resulting in an increase of $9.2 million in personnel-related compensation expenses, including $0.7 million of incremental stock-based compensation expense, partially offset by a reduction of $4.3 million in our external patient training expense as a result of moving to increased virtual patient trainings, $2.3 million in reduced travel and entertainment expense due to decreased travel activities and a $1.8 million decrease from reduced tradeshows, professional services and other sales expense.

Research and Development Expenses

R&D expenses increased $0.1 million, or 2%, to $5.3 million during the year ended December 31, 2020, compared to $5.2 million during the year ended December 31, 2019.

The increase in R&D expenses was primarily attributable to investments in our R&D team and clinical studies projects.

Reimbursement, General and Administrative Expenses

Reimbursement, general and administrative expenses increased $11.9 million, or 30%, to $51.5 million during the year ended December 31, 2020, compared to $39.6 million during the year ended December 31, 2019.

The increase in reimbursement, general and administrative expenses for the year ended December 31, 2020, was primarily attributable to a $4.1 million increase in personnel-related expenses, resulting from increased headcount in our reimbursement operations, payer relations, patient services and corporate functions, an increase of $4.8 million in other operating expenses, including facilities, depreciation and service charge and an increase of $2.4 million in litigation defense costs and other professional fees.

Our reimbursement, general and administrative expenses in the year ended December 31, 2020, included a $3.6 million non-cash impairment charge related to the write-off of our Airwear wrap-related long-lived assets

compared to a $1.1 million lease termination charge for our former corporate headquarters in the year ended December 31, 2019.

Other Income, Net

Other income, net was $1.4 million for the year ended December 31, 2020, compared to $0.6 million for the year ended December 31, 2019.

The increase in other income was primarily due to $1.2 million received under the CARES Act Provider Relief Fund to compensate us for lost revenues from the COVID-19 public health emergency (PHE) which was recognized in the period based on our interpretation of guidance issued by the Department of Health and Human Services through January 2021.

Income Tax (Benefit) Expense

We recorded an income tax benefit of $1.6 million and an income tax expense of $0.2 million for the years ended December 31, 2020 and 2019, respectively.

The current year tax benefit was primarily due to a decrease in income tax recognized related to tax-deductible share-based compensation activity, as compared to the previous year.

This activity included lower expense related to vesting of restricted stock units, excess tax benefits associated with exercises of non-qualified stock options, and disqualifying dispositions of incentive stock options and employee stock purchase plan, or ESPP, shares.

Comparison of the Years Ended December 31, 2019 and 2018

The following table presents our results of operations for the periods indicated:

(In thousands)

Consolidated Statement

of Operations Data:

Sales revenue

Rental revenue

Total revenue

Cost of revenue

Cost of sales revenue

Cost of rental revenue

Total cost of revenue

Gross profit - sales revenue

Gross profit - rental revenue

Operating expenses

Sales and marketing

Research and development

Reimbursement, general and administrative

Intangible asset amortization and earn-out

Total operating expenses

Income from operations

Income before income taxes

Loss from operations

Other (expense) income

Loss before income taxes

Income tax expense (benefit)

(not meaningful)

Revenue increased $20.9 million, or 11%, to $208.1 million in the year ended December 31, 2021, compared to $187.1 million in the year ended December 31, 2020.

The growth in revenue was attributable to an increase of approximately $39.4 million, or 30%, in sales and rentals of our Flexitouch system and an increase of approximately $6.4 million, or 54%, in sales and rentals of our Entre and Actitouch systems in the year ended December 31, 2019, compared to the year ended December 31, 2018.

The increase in Flexitouch system sales was largely driven by expansion of our sales force, increased physician and patient awareness of the treatment options for lymphedema, broad in-network coverage with national and regional insurance payers and growth in the number of Medicare patients served.

The increase in Entre and Actitouch systems sales was largely driven by managing these orders in-house with our internal team of specialists.

These specialists are dedicated to selling the Entre system, allowing us to focus on marketing and distributing this system more efficiently.

The increase in revenue was attributable to an increase of approximately $12.3 million, or 8%, in sales and rentals of our Flexitouch system, an increase of approximately $3.5 million, or 15%, in sales and rentals of our Entre system and $5.1 million in sales of the recently-acquired AffloVest product in the year ended December 31, 2021, compared to the year ended December 31, 2020.

Beginning in March 2020 and continuing through 2020, revenue was negatively impacted by the COVID-19 pandemic, which limited our ability to access our clinician customers and their patients.

Specifically, we saw healthcare facilities and clinics restricting access to their clinicians, reducing patient consultations, or closing temporarily due to COVID-19.

Revenue for the first half of 2021 benefited from the initial stages of recovery from the COVID-19 pandemic, with a portion of healthcare facilities and clinics relaxing restrictions and increasing patient throughput, as well as an expanded prescriber base.

Fiscal 2021 revenue also benefited from effective virtual education events and an increase in Medicare patients served.

However, revenue in the second half of 2021 was negatively impacted by the prolonged recovery from COVID-19 and the resurgence due to variants, which extended and expanded restricted access to clinics and hospitals and disrupted the recovery in patient visits versus the pre-COVID environment.

In addition, the challenging labor

market coupled with our vaccine policy impacted our ability to recruit and retain quality candidates for our direct sales force.

The following table summarizes our revenue by product for the years ended December 31, 2021 and 2020, both in dollars and percentage of total revenue:

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Flexitouch system

Other products (1)

Percentage of total revenues

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 the years ended December 31, 2019 and 2018.

Cost of Revenue and Gross Margin

Cost of revenue increased $5.5 million, or 10%, to $59.8 million during the year ended December 31, 2021, compared to $54.3 million during the year ended December 31, 2020.

The increase in cost of revenue was primarily attributable to an increase in the number of systems sold or rented and additional manufacturing headcount and higher related manufacturing costs to support increased volumes.

The increase in cost of revenue was primarily attributable to an increase in the number of Flexitouch and Entre systems sold and rented, the additional contribution of AffloVest, and an increase in inbound freight costs.

Gross margin was 71% for both of the years ended December 31, 2021 and 2020.

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Sales and marketing expenses increased $7.1 million, or 9%, to $86.8 million during the year ended December 31, 2021, compared to $79.6 million during the year ended December 31, 2020.

The increase was primarily attributable to our continued investment in our field sales team, patient training and marketing initiatives to increase clinician awareness, resulting in an increase of $13.1 million in personnel-related compensation expenses, including $1.1 million of incremental stock-based compensation expense, as well as a $5.4 million increase in associated expenses.

The increase was primarily attributable to a:

● $7.4 million increase in personnel-related compensation expense as a result of the increased headcount in the collective field commercial team;

● $2.9 million increase in travel and entertainment expense due to eased restrictions on travel;

● $0.7 million increase in demonstration equipment expense.

These increases were partially offset by a:

● $2.4 million decrease in expenses due to reduced sales meetings, tradeshows and professional services;

● $1.5 million decrease in external patient training expense as a result of transitioning to employee trainers.

Research and Development Expenses

R&D expenses decreased $0.1 million, or 2%, to $5.2 million during the year ended December 31, 2019, compared to $5.3 million during the year ended December 31, 2018.

The decrease in R&D expenses was primarily attributable to a $0.1 million decrease of post launch related product support costs of our Flexitouch Plus launched in 2018.

Research and development (“R&D”) expenses increased $0.4 million, or 8%, to $5.7 million during the year ended December 31, 2021, compared to $5.3 million during the year ended December 31, 2020, which was primarily attributable to an increase in professional services.

Reimbursement, General and Administrative Expenses

Reimbursement, general and administrative expenses increased $5.5 million, or 11%, to $56.8 million during the year ended December 31, 2021, compared to $51.3 million during the year ended December 31, 2020.

The increase in reimbursement, general and administrative expenses for the year ended December 31, 2019, was primarily attributable to a $2.8 million increase in personnel-related expenses, resulting from increased headcount in our reimbursement operations, payer relations, patient services and corporate functions, a $0.5 million increase in stock-based compensation expense, an increase of $1.2 million in professional fees, legal, accounting, audit and tax expenses and software fees and a $2.0 million increase in other operating expenses, including facilities, depreciation and service charges.

Facilities expenses include a $1.1 million one-time lease termination charge and associated costs for our former corporate headquarters.

Other Income, Net

Other income, net was $0.6 million for the year ended December 31, 2019, compared to $0.5 million for the year ended December 31, 2018.

The increase in other income was due to investment income earned on the capital derived from our initial public offering proceeds.

The increase was primarily attributable to a:

● $5.0 million increase in occupancy costs, depreciation expense, and legal and professional fees;

● $3.3 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer relations and corporate functions;

● $0.8 million increase in transaction-related costs related to the acquisition of AffloVest.

These increases were partially offset by a:

● $3.6 million impairment charge related to the write-off of our Airwear wrap-related long-lived assets recorded in the second quarter of 2020.

Intangible Asset Amortization and Earn-out

Intangible asset amortization and earn-out expenses increased $0.5 million to $0.7 million during the year ended December 31, 2021, compared to $0.2 million during the year ended December 31, 2020.

The increase in intangible asset amortization and earn-out expense was primarily attributable to the increase in amortization related to the assets acquired in the AffloVest acquisition, partially offset by a reduction in the estimated fair value of our earn-out liability.

Other (Expense) Income, Net

Other (expense) income, net was an expense of $0.5 million for the year ended December 31, 2021, compared to income of $1.4 million for the year ended December 31, 2020.

The decrease in other income was primarily due to $1.2 million received in 2020 under the CARES Act Provider Relief Fund to compensate us for lost revenues from the COVID-19 public health emergency (PHE) which was recognized in the period based on our interpretation of guidance issued by the Department of Health and Human Services through January 2021.

Income Tax Expense (Benefit)

We recorded an income tax expense of $9.5 million and an income tax benefit of $1.6 million for the years ended December 31, 2021 and 2020, respectively.

The 2019 tax expense was primarily due to a significant decrease in the benefit related to tax-deductible share-based compensation activity, as compared to the previous year.

This activity included vesting of restricted stock units, excess tax benefits associated with exercises of non-qualified stock options, and disqualifying dispositions of incentive stock options and employee stock purchase plan, or ESPP, shares.

The current year tax expense was driven by the recording of a full valuation allowance against our deferred tax assets based on an assessment of existing positive and negative evidence which indicated these deferred tax assets would not be realizable.

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

Based on this evaluation, as of December 31, 2021, a valuation allowance of $12.0 million was recorded to recognize only the residual portion of the existing deferred tax asset that are more likely than not to be realized and which comprises the assets that will not be offset by the reversal of deferred tax liabilities.

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

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.

In the first quarter of each year, when most patients have started a new insurance year and have not yet met their annual out-of-pocket payment obligations, we

experience substantially reduced demand for our products.

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

This seasonality applies only to purchases and rentals of our products by patients covered by commercial insurance and is not relevant to Medicare, Medicaid or the Veterans Administration, as those payers either do not have plans that have declining deductibles over the course of the plan year and/or do not have plans that include patient deductibles for purchases or rentals of our products.

Further, seasonality trends have been, and may continue to be, significantly different than historical trends as a result of the COVID-19 pandemic and related impacts.

Liquidity and Capital Resources

As of December 31, 2020, we had cash and cash equivalents of $47.9 million with no marketable securities, compared with cash and cash equivalents of $22.8 million and marketable securities of $22.5 million as of December 31, 2019.

Our primary sources of capital to date have been from operating income and private placements of our capital stock, as well as proceeds from our initial public offering, which closed on August 2, 2016.

As of December 31, 2021, we had cash and cash equivalents of $28.2 million and net accounts receivable of $62.3 million compared to cash and cash equivalents of $47.9 million and net accounts receivable of $53.3 million as of December 31, 2020.

Our primary sources of capital since our initial public offering in 2016 have been from operating income and bank financing.

The following table summarizes our cash flows for the periods indicated:

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Financing activities

Net increase (decrease) in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Net Cash Provided by Operating Activities

Net cash provided by operating activities during the year ended December 31, 2021, was $2.6 million, resulting from a net loss of $11.8 million and non-cash net income adjustments of $23.9 million, which were offset by an increase in net operating assets of $8.5 million.

The non-cash net income adjustments primarily consisted of $10.2 million of stock-based compensation expense, $10.2 million of deferred income tax expense and $3.7 million of depreciation and amortization expense.

Changes in operating assets and liabilities, net of the acquisition in the current year, reflected stronger cash flow as compared to the prior year due primarily to improved collections in 2021, which were offset, in part, by continued investment in inventory designed to meet future projected demand, as well as payment of income tax obligations.

Net cash provided by operating activities during the year ended December 31, 2020, was $2.8 million, resulting from net loss of $0.6 million and non-cash net income adjustments of $16.2 million, which were offset by an increase in net operating assets of $12.8 million.

The non-cash net income adjustments primarily

consisted of $10.7 million of stock-based compensation expense, a $4.0 million non-cash adjustment for impairment losses and $2.8 million of depreciation and amortization.

The uses of cash related to changes in operating assets primarily consisted of increases in accounts receivable and net investment in leases.

The changes in operating liabilities primarily consisted of increases in accrued payroll and related taxes and accrued expenses and other liabilities and income taxes payable.

Net cash provided by operating activities during the year ended December 31, 2019, was $2.5 million, resulting from net income of $11.0 million and non-cash net income adjustments of $14.1 million, which were offset by an increase in net operating assets of $22.5 million.

The non-cash net income adjustments primarily consisted of $9.8 million of stock-based compensation expense, $3.5 million of depreciation and amortization and a $1.1 million non-cash adjustment for the loss on lease termination.

The uses of cash related to changes in operating assets primarily consisted of increases in accounts receivable, net investment in leases, and inventories.

The changes in operating liabilities primarily consisted of increases in accrued payroll and related taxes and accrued expenses and other liabilities, partially offset by a decrease in accounts payables.

These changes generally were driven by our increased business volume year-over-year, which resulted in increases to customer accounts receivable and other expenditures, including compensation and personnel-related costs.

Net cash provided by operating activities during the year ended December 31, 2018, was $9.0 million, resulting from net income of $6.6 million and non-cash net income adjustments of $8.0 million, which were partially offset by an increase in net operating assets of $5.6 million.

The non-cash net income adjustments primarily consisted of $8.0 million of stock-based compensation expense, $3.7 million of depreciation and amortization and a $2.5 million non-cash impairment charge to fully write off the inventory and intangible assets related to our Actitouch product, partially offset by an increase of $6.2 million in deferred tax assets driven by the current period tax benefit associated with tax-deductible stock-based compensation activity.

The uses of cash related to changes in operating assets primarily consisted of an increase in accounts receivable.

The changes in operating liabilities primarily consisted of increases in accounts payable and other liabilities.

Net Cash Provided by (Used in) Investing Activities

The non-cash net income adjustments primarily consisted of $10.7 million of stock-based compensation expense, a $4.0 million non-cash adjustment for impairment losses and $2.8 million of depreciation and amortization expense.

Changes in operating assets and liabilities in 2020, reflected stronger cash flow as compared to the prior year, due primarily to improved collections in 2020, offset in part by continued investment in inventory designed to return the Company to standard stocking levels.

Net Cash (Used in) Provided by Investing Activities

Net cash used in investing activities during the year ended December 31, 2021, was $82.2 million, primarily consisting of acquisition-related payments of $79.8 million associated with the acquisition of the AffloVest business and $2.1 million in purchases of property and equipment primarily related to office equipment, production tooling and tenant improvements and $0.3 million related to the acquisition of patents and other intangible assets.

Net cash provided by investing activities during the year ended December 31, 2020, was $20.2 million, consisting primarily of $22.5 million in net proceeds from maturities of securities available-for-sale, offset by $2.1 million in purchases of property and equipment primarily related to IT infrastructure, production tooling and office equipment and $0.2 million related to the acquisition of patents and other intangible assets.

Net cash used in investing activities during the year ended December 31, 2019, was $2.3 million, consisting primarily of $3.7 million in net proceeds from securities available-for-sale, offset by $5.4 million in purchases of property and equipment primarily related to IT infrastructure, production tooling and office equipment and $0.5 million related to the acquisition of patents and other intangible assets.

Net cash used in investing activities during the year ended December 31, 2018, was $14.7 million, consisting primarily of $5.4 million related to the acquisition of patents and other intangible assets, $4.7 million in net purchases of securities available-for-sale, $2.1 million in purchases of rental and demonstration equipment, $2.0 million in purchases of product tooling and computer and manufacturing equipment, leasehold improvements and furniture and fixtures and $0.5 million of other investments.

Net Cash Provided by Financing Activities

Net cash provided by financing activities during the year ended December 31, 2020, was $2.1 million, consisting of proceeds from the issuance of common stock under the ESPP of $2.9 million and proceeds from exercises of common stock options of $1.1 million, partially offset by $1.9 million in taxes paid for the net share settlement of restricted stock units.

Net cash provided by financing activities during the year ended December 31, 2019, was $2.5 million, consisting of proceeds from the issuance of common stock under the ESPP of $3.1 million and proceeds from

exercises of common stock options of $2.8 million, partially offset by $3.4 million in taxes paid for the net share settlement of restricted stock units.

Net cash provided by financing activities during the year ended December 31, 2018, was $1.9 million, consisting of proceeds from the issuance of common stock under the ESPP of $2.7 million and proceeds from exercises of common stock options of $1.5 million, partially offset by $2.4 million in taxes paid for the net share settlement of restricted stock units.

Net cash provided by financing activities during the year ended December 31, 2021, was $59.9 million, primarily consisting of borrowings of $54.8 million net of debt issuance costs incurred and $6.3 million in proceeds from exercises of common stock options and the issuance of common stock under the ESPP, partially offset by $1.2 million in taxes paid for the net share settlement of performance and restricted stock units.

Credit Agreement

On August 3, 2018, we entered into a credit agreement with Wells Fargo Bank, National Association, which was amended by a First Amendment dated February 12, 2019, a Waiver and Second Amendment dated March 25, 2019, and a Third Amendment dated August 2, 2019 (collectively, the “Credit Agreement”), which expires on August 3, 2021.

The Credit Agreement provides for a $10.0 million revolving credit facility, 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 $25.0 million, subject to satisfaction of certain conditions.

As of December 31, 2020, and the date on which we filed this report, we did not have any outstanding borrowings under the 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.

The Restated Credit Agreement amended and restated in its entirety the 2018 Credit Agreement.

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

The First 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 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.

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 and a minimum liquidity covenant.

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 December 31, 2021, we were in compliance with all financial covenants under the Credit Agreement.

For additional information on the Credit Agreement, see Note 11 – “Credit Agreement” to the consolidated financial statements in this report.

Adequacy of Capital Resources

Our future capital requirements may vary significantly from those now planned and will depend on many factors, including:

On September 8, 2021, in connection with the closing of the acquisition of the AffloVest business, 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 .

As of December 31, 2021, we had outstanding borrowings of $55.0 million under the Credit Agreement, comprised of $30.0 million under the term loan and $25.0 million under the revolving credit facility.

On February 22, 2022, we entered into a Second Amendment Agreement (the “Second Amendment”), which further amends the Credit Agreement.

The Second Amendment modifies the maximum leverage ratio, the minimum fixed charge coverage ratio and the minimum consolidated EBITDA covenants under the Credit Agreement, and adds a minimum liquidity covenant.

The Second Amendment also increases the applicable margin for LIBOR rate loans under the Credit Agreement during the period commencing on the date of the Second Amendment and ending on the last day of the fiscal quarter ending June 30, 2023.

Pursuant to the Second Amendment, on February 22, 2022, we made a mandatory principal prepayment of the term loan under the Credit Agreement of $3.0 million.

Following such payment, as of February 22, 2022, we had outstanding borrowings of $51.3 million under the Credit Agreement, comprised of $26.3 million under the term loan and $25.0 million under the revolving credit facility.

For additional information regarding the Credit Agreement, including interest rates, fees and maturities, see Note 12 – “Credit Agreement” of the consolidated financial statements contained in this report.

Future Cash Requirements

Our material estimated future cash requirements under our contractual obligations and commercial commitments as of December 31, 2021, in total and disaggregated into current (payable in 2022) and long-term (payable after 2022) obligations, are summarized as follows:

Payments Due By Period

(In thousands)

Purchase commitments (1)

Operating lease obligations (2)

Note payable payments (3)

Revolving line of credit payments (4)

Interest payments (5)

Earn-out obligation (6)

(1) We issued purchase orders in 2021 totaling $15.1 million for goods that we expect to receive and pay for in 2022.

(2) We currently lease approximately 150,000 square feet of office space for our corporate headquarters in Minneapolis, Minnesota, under a lease that expires in February 2031 and approximately 63,000 square feet of office, assembly and warehouse space at another facility in Minneapolis, Minnesota, under a lease that expires in March 2027.

We entered into a fleet vehicle program for certain members of our field sales organization in 2016.

At December 31, 2021, we had 39 vehicles under this program with current lease commitments.

Furthermore, we lease office equipment from time-to-time based on our needs and these commitments are classified as operating leases.

(3) Reflects principal payment obligations under our term loan.

Refer to Note 12 ‘‘Credit Agreement’’ to our consolidated financial statements included in this report for additional information regarding the maturities of debt principal.

(4) Reflects re payment of the principal of outstanding borrowings under our revolving line of credit based on the scheduled maturity date.

(5) Interest payment amounts on long-term debt are calculated using outstanding balances and interest rates in effect on December 31, 2021.

(6) In connection with the acquisition of AffloVest, we are liable for earn-out payments, aggregating up to $20.0 million in cash if certain future financial results of the AffloVest business are met.

The fair value of this obligation at December 31, 2021 was $6.2 million, which is reflected on our Consolidated Balance Sheets.

Adequacy of Resources

Our future cash requirements may vary significantly from those now planned and will depend on many factors, including:

● the impact of the COVID-19 pandemic on our business;

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● costs associated with clinical research activities;

● increases in interest rates;

● labor shortages and wage inflation;

● costs to develop and implement new products;

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Historically, we have experienced increases in our expenditures consistent with the growth in our revenue, operations and personnel, and we anticipate that our expenditures will continue to increase as we expand our business.

Although the impact of the COVID-19 pandemic is difficult to predict, we believe our cash, cash equivalents and cash flows from operations, together with the Credit Agreement, will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months.

Although the impact of the COVID-19 pandemic and other factors such as inflation and rising interest rates are difficult to predict, we believe our cash, cash equivalents and cash flows from operations will be sufficient to meet our working capital, capital expenditure, debt repayment and related interest, and other cash requirements for at least the next twelve months.

Inflation and changing prices did not have a material effect on our business during the year ended December 31, 2021, and we do not expect that inflation or changing prices will materially affect our business for at least the next twelve months.

In August 2017 we filed a shelf registration statement on Form S-3 with the SEC.

Under the shelf registration statement, we may offer and sell from time to time up to $200 million of common stock, preferred stock, debt securities, warrants, rights or units.

The shelf registration statement also registered for resale from time to time up to 5,703,534 shares of our common stock held by the selling stockholders named therein.

In September 2017 certain of the selling stockholders completed a secondary offering of 3,795,000 shares of our common stock at a public offering price of $33.00 per share.

We did not receive any proceeds from the sale of the shares by the selling stockholders.

Coronavirus Aid, Relief, and Economic Security (CARES) Act

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The CARES Act includes several tax provisions that, among other things, allow businesses to carry back net operating losses (“NOLs”) arising in 2018, 2019, and 2020 to the prior five tax years.

In the third quarter, we collected $2.9 million related to the carry back of our NOLs arising from these prior tax years.

In the third quarter of 2020, we collected $2.9 million related to the carry back of our NOLs arising from these prior tax years.

In addition, the CARES Act provided $100 billion in relief funds to hospitals and other healthcare providers on the front lines of the COVID-19 pandemic.

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On April 10, 2020, we received $1.2 million of the initial allotment to all facilities and providers which was determined to be our proportionate share.

Within 45 days of each reporting period end, we are required to comply with reporting requirements confirming funds were utilized in a manner described within the terms and conditions outlined by the U.S.

Within 45 days of each reporting period end, we complied with the reporting requirements confirming funds were utilized in a manner described within the terms and conditions outlined by the U.S.

Department of Health & Human Services.

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We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under the applicable regulations.

Contractual and Commercial Commitments Summary

Our contractual obligations and commercial commitments as of December 31, 2020, are summarized as follows:

Payments Due By Period

(In thousands)

Purchase commitments (1)

Operating lease obligations (2)

Product royalties (3)

(1) We issued purchase orders in 2020 totaling $19.5 million for goods that we expect to receive in 2021.

(2) We currently lease approximately 113,000 square feet of office space for our corporate headquarters in Minneapolis, Minnesota, under a lease that expires in February 2031 and approximately 57,000 square feet of office, assembly and warehouse space at another facility in Minneapolis, Minnesota, under a lease that expires in March 2027.

As of December 31, 2020, we had additional lease commitments of $7.1 million related to amendments to existing building leases that have not commenced.

We entered into a fleet vehicle program for certain members of our field sales organization in 2016.

At December 31, 2020, we had 59 vehicles under this program with current lease commitments.

Furthermore, we lease office equipment from time-to-time based on our needs and these commitments are classified as operating leases.

(3) We are required to make quarterly royalty payments to a third-party for our Actitouch system revenue through August 2023.

Beginning in September 2017, the payments are equal to 6% of our quarterly revenue attributable to our Actitouch system.

In any year that this revenue exceeds $40.0 million, we are required to pay 7% on revenue over $40.0 million and 6% on revenue of $40.0 million and

Because our revenue attributable to our Actitouch system, and therefore the amount of royalty payments we will be required to pay in the future, are unknown, this amount only reflects royalties due associated with a portion of our 2020 Actitouch revenue.

We discontinued the current Actitouch product line in 2020.

Recent Accounting Pronouncements

1 unchanged sentence

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What changed 10-K

Item 7. Management’s Discussion and Analysis