What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-02-23 compared with 2021-02-23 · 317 added, 239 removed, 660 unchanged (46% of the section changed)

Financial Statements and Supplementary Data.

Index to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID Number 248 )

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Comprehensive (Loss) Income

Consolidated Statements of Stockholders’ Equity

Consolidated Statements of Cash Flows

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate.

Transaction Price Adjustment – Uncollected Flexitouch Product Sales

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Summary of Significant Accounting Policies – Revenue Recognition to the consolidated financial statements, revenue is recognized upon transfer of control of the product to the customer based on a transaction price determined to be the amount of expected consideration to be received for the product.

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

The transaction price is impacted by

multiple factors, including the terms and conditions contracted by third-party payers.

In most cases, there is a contracted third-party payer, such as a commercial insurer,

Medicare or the Veteran’s Administration involved with the transaction.

The transaction price is impacted by multiple factors, including the terms and conditions contracted by third-party payers.

Thus, payments from third-party payers typically are less than the Company’s standard charge and represent an implicit price concession, resulting in variable consideration.

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We identified the transaction price adjustment for uncollected Flexitouch product sales to commercial payers and Medicare as a critical audit matter.

The principal considerations for our determination of this critical audit matter are:

The principal considerations for our determination of this as a critical audit matter are:

● the transaction price adjustment is related to material accounts and disclosures that are important to the users of the consolidated financial statements,

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● for sales with Medicare as the payer, the future collection could significantly differ from those subjective estimates given the payment uncertainty due to the appeals process for claims initially denied.

Our audit procedures related to the transaction price adjustment for uncollected Flexitouch product sales included the following, among others:

● We tested the design and operating effectiveness of management’s key controls relating to their Medicare and commercial payer transaction price assessments and commercial payer lookback analysis through reperformance, observation of the control being performed, and inspection of supporting documentation providing evidence of control performance.

● For a sample of commercial payers, we recomputed management’s calculation of the historical collectability percentage by payer based on transactions that occurred during the year to evaluate the completeness and accuracy of underlying data used in the commercial transaction price adjustment and lookback analysis.

● For sales to patients insured by commercial payers, we assessed the reasonableness of management’s year-end analysis of the transaction price adjustment recorded in the prior year compared to actual pricing adjustments experienced in the current period by recomputing the results of management’s historical lookback analysis of collection rates by payer portfolio.

● For sales to patients covered by Medicare, we tested management’s estimate by evaluating the determination of collection percentage by claim year assumptions including the completeness and accuracy of the underlying data used .

Our audit procedures related to the Transaction Price Adjustment – Uncollected Flexitouch Product Sales included the following, among others:

● We tested the design and operating effectiveness of management’s key controls relating to their Medicare and commercial payer transaction price assessments and commercial payer lookback analysis through reperformance, observation of the controls being performed, and inspection of supporting documentation providing evidence of control performance.

● To test management’s estimate of the commercial payer transaction price adjustment, we:

(1) recomputed management’s calculation of the historical collection amount by payer based on transactions that occurred during the year for a sample of commercial payers and (2) tested the completeness and accuracy of the underlying data used in management’s calculation of the historical collection amount.

● For sales to patients covered by Medicare, we:

(1) tested management’s estimate by evaluating the determination of collection percentage by claim year assumptions, (2) recalculated the related transaction price adjustment based upon management’s assumptions and (3) tested the completeness and accuracy of the underlying data inputs for the collection percentage determination.

/s/ GRANT THORNTON LLP

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Cash and cash equivalents

Marketable securities

Accounts receivable

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Accounts payable

Earn-out, current

Accrued payroll and related taxes

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Non-current liabilities

Revolving line of credit, non-current

Note payable, non-current

Earn-out, non-current

Accrued warranty reserve, non-current

Income taxes, non-current

Income taxes payable, non-current

Operating lease liabilities, non-current

Deferred income taxes

Total non-current liabilities

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Retained earnings

Accumulated other comprehensive income

Total stockholders’ equity

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Reimbursement, general and administrative

Intangible asset amortization and earn-out

Total operating expenses

(Loss) income from operations

Other (expense) income

(Loss) income before income taxes

Income tax (benefit) expense

Income tax expense (benefit)

Net (loss) income

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Net (loss) income

Other comprehensive (loss) income:

Unrealized (loss) gain on marketable securities

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

Total other comprehensive (loss) income

Other comprehensive income (loss):

Unrealized gain (loss) on marketable securities

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

Total other comprehensive income (loss)

Comprehensive (loss) income

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Stock-based compensation

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

Exercise of common stock options and vesting of restricted stock units

Taxes paid for net share settlement of restricted stock units

Common shares issued for

employee stock purchase plan

Shares repurchased to cover taxes from restricted stock award vesting

Common shares issued for employee stock purchase plan

Comprehensive income for the period

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Stock-based compensation

Exercise of common stock options and vesting of restricted stock units

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

Taxes paid for net share settlement of restricted stock units

Treasury stock issued for option exercises

Common shares issued for employee stock purchase plan

Comprehensive income for the period

Comprehensive loss for the period

Balances, December 31, 2020

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Loss on termination of lease

Changes in assets and liabilities:

Loss on disposal of property and equipment

Change in fair value of earn-out liability

Changes in assets and liabilities, net of acquisition:

Accounts receivable

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Purchases of securities available-for-sale

Payments related to acquisition

Purchases of property and equipment

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Other investments

Net cash provided by (used in) investing activities

Net (used in) provided by investing activities

Cash flows from financing activities

Taxes paid for net share settlement of restricted stock units

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

Proceeds from exercise of common stock options

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Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents – beginning of period

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(“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 respiratory 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 September 2013, we began doing business as “Tactile Medical.”

On August 2, 2016, we closed the initial public offering of our common stock, which resulted in the sale of 4,120,000 shares of our common stock at a public offering price of $ 10.00 per share.

We received net proceeds from the initial public offering of approximately $ 35.4 million, after deducting underwriting discounts and approximately $ 2.9 million of transaction expenses.

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

Our business is affected by seasonality.

In the first quarter of each year, when most patients have started a new insurance year and have not yet met their annual out-of-pocket payment obligations, we experience substantially reduced demand for our products.

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

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

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

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

Basis of Presentation

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The United States economy in general and our business specifically have been negatively affected by the COVID-19 pandemic.

We have seen adverse impacts as it relates to the decline in the number of patients that healthcare facilities and clinics are able to treat due to enhanced safety protocols.

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

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, 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 temporarily moved to a “no contact” virtual patient training model.

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

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

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

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

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

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

We cannot assure you that these changes to our processes and practices will be successful in mitigating the impact of COVID-19 on our business.

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Cash and cash equivalents consist of all cash on hand, deposits and funds invested in available-for-sale securities with original maturities of three months or less at the time of purchase.

At December 31, 2020 and 2019, our cash was held primarily in checking and money market accounts.

Our cash was held primarily in checking accounts as of December 31, 2021, compared to money market and checking accounts as of December 31, 2020.

At times the amount of cash on deposit may exceed the federally insured limit of the bank.

Deposit accounts at each of the institutions are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC).

At December 31, 2021 and 2020, the Company exceeded FDIC limits at various institutions.

The Company has not experienced any losses in such accounts and believes there is little to no exposure to any significant credit risk.

Marketable Securities and Equity Investments

We determine the appropriate classification of our marketable securities as available-for-sale or held-to-maturity at the time of purchase and periodically reevaluate such classification.

Debt securities are classified as held - to - maturity when we have the positive intent and ability to hold the securities to maturity.

Debt securities are classified

as held - to - maturity when we have the positive intent and ability to hold the securities to maturity.

Debt securities for which we do not have the intent or ability to hold to maturity are classified as available-for-sale.

Debt securities not classified as held-to-maturity are classified as available-for-sale and are reported at fair value, with unrealized gains and losses included in the determination of comprehensive income, a component of stockholders' equity.

We review our available-for-sale securities for impairment to determine if the impairment is temporary or other-than-temporary.

A temporary impairment charge results in an unrealized loss being recorded in other comprehensive income.

Other-than-temporary impairments are recorded in net income in the period the impairment is determined to be other-than-temporary .

A temporary impairment charge results in an unrealized loss being recorded in other comprehensive income (loss).

Other-than-temporary impairments are recorded in net income (loss) in the period the impairment is determined to be other-than-temporary .

Realized gains and losses on the sale of marketable securities are determined using the specific-identification method.

Equity investments (including equity securities) with readily determinable fair value are reported at fair value, with unrealized gains and losses included in the determination of net income.

Equity investments (including equity securities) with readily determinable fair value are reported at fair value, with unrealized gains and losses included in the determination of net income (loss).

For equity investments with no readily determinable fair value, we measure these investments at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

Such observable price changes may include instances where the investee issues equity securities to new investors, thus creating a new indicator of fair value, as an example.

As of December 31, 2020 and 2019, the total carrying value of our equity investments, with no readily determinable fair value, were $ 0.3 million and $ 0.7 million, respectively, and are included in other non-current assets on our consolidated balance sheets.

On an annual basis, we perform a qualitative assessment considering impairment

indicators to evaluate whether these investments are impaired and also monitor for any observable price changes.

As of each of December 31, 2021 and 2020, the total carrying value of our equity investments, with no readily determinable fair value, were $ 0.3 million, and are included in other non-current assets on our Consolidated Balance Sheets.

On an annual basis, we perform a qualitative assessment considering impairment indicators to evaluate whether these investments are impaired and also monitor for any observable price changes.

During the years ended December 31, 2021 and 2020, we did not have any impairment loss on these investments.

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Maintenance, repairs and minor renewals are expensed as incurred.

When assets are retired or otherwise disposed of, their costs and related accumulated depreciation are removed from the accumulated depreciation accounts and the resulting gains or losses are included in income.

When assets are retired or otherwise disposed of, their costs and related accumulated depreciation are removed from the accumulated depreciation accounts and the resulting gains or

losses are included in income.

The value of demonstration equipment in the possession of our field sales representatives is capitalized and depreciated over the estimated useful life of the equipment.

Revenue Recognition

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

We derive revenue from the sales and rentals of our Flexitouch and Entre systems, and from the sales of our AffloVest.

Flexitouch and Entre

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.

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

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

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

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

In certain cases we receive payment from Medicare sales over a period

of time that may exceed one year .

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

In certain cases, we receive payment from Medicare sales over a period 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.

We commercially distribute these 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.

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

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

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

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

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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.

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We elected the practical expedient to not reassess the lease classification for leases in existence at December 31, 2018.

The AffloVest device is sold through durable medical equipment providers.

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.

Consequently, 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 applicable customers, 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.

We provide a warranty for the AffloVest products against defects in material and workmanship for a period of five years .

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 of these products represents a single performance obligation that is satisfied at a point in time and is short-term in nature.

Advertising costs are charged to operations when incurred.

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Shipping and Handling Costs

We do not charge any shipping and handling costs to our customers.

Shipping and handling costs incurred are included in cost of revenue.

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 total 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 in the accompanying Consolidated Statements of Operations.

Product Warranty

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

We 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.

If the assumptions used in calculating the provision were to materially change, resulting in more defects than anticipated, an additional provision may be required.

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.

Impairment of Long-Lived Assets

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

We will assess long-lived assets used in operations for impairment indicators, including when undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount (see Note 8 – “Intangible Assets”).

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 9 – “Goodwill and Intangible Assets” for additional information.

Stock-Based Compensation

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If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future.

We recognize compensation expense for these options on a straight-line basis over the requisite service period (see Note 13 – “Stockholders’ Equity”).

recognize compensation expense for these options on a straight-line basis over the requisite service period (see Note 14 – “Stockholders’ Equity”).

Income taxes are accounted for under the liability method.

Deferred income taxes are provided for temporary differences between the financial reporting and the tax bases of assets and liabilities.

If we determine in the future that it is more likely than not that we will not realize all or a portion of the deferred tax assets, we

will record a valuation allowance in the period the determination is made (see Note 15 – “Income Taxes”).

Deferred income taxes are provided for temporary differences between the financial reporting and the tax basis of assets and liabilities.

If we determine in the future that it is more likely than not that we will not realize all or a portion of the deferred tax assets, we will record a valuation allowance in the period the determination is made (see Note 16 – “Income Taxes”).

Changes in tax rates are reflected in the tax provision as they occur.

Net Income Per Common Share

Basic net income per common share is computed based on the weighted average number of shares of common stock outstanding during the period.

Diluted net income per common share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential stock-based awards outstanding during the period using the treasury stock method.

Net (Loss) Income Per Common Share

Basic net (loss) income per common share is computed based on the weighted average number of shares of common stock outstanding during the period.

Diluted net (loss) income per common share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential stock-based awards outstanding during the period using the treasury stock method.

Dilutive potential stock-based awards include outstanding common stock options, time- and performance-based restricted stock units and employee stock purchase plan shares.

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.

Accounting Pronouncement Not Yet Adopted

In March 2020, the Financial Accounting Standards Board (“FASB”) issued 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 consolidated financial statements.

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued 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.

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

We adopted ASU 2019-12 as of January 1, 2021, and it did not have an impact on the 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 replaces the previous incurred loss model for measuring expected credit losses and requires expected losses on available-for-sale debt securities to be recognized through an allowance for credit losses rather than as reductions in the amortized cost of the securities.

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

Marketable Securities

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

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

At December 31, 2019

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 that 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 (“IBC”).

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 million 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.

The fair value of the earn-out as of the acquisition date was $ 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 and the current versus non-current allocation will be remeasured at the end of each reporting period until the payment requirement ends, with any adjustments reported in income from operations (see Note 18 – “Fair Value Measurements”).

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 Consolidated Statements of Operations.

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

As the AffloVest business has been integrated with our existing operations, we are unable to determine the amount of AffloVest earnings from the acquisition date that’s included in the Consolidated Statements of Operations.

The following unaudited pro forma information for the years ended December 31, 2021 and 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.

(In thousands)

government and agency obligations

Corporate debt securities

Total revenue

Net (loss) income

These pro forma results include certain adjustments, primarily 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 December 31, 2021 and 2020.

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

There were no sales of marketable securities during the year ended December 31, 2021.

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

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

At December 31, 2019

Less than 12 months

12 months or more

(In thousands)

government and agency obligations

Corporate debt securities

Marketable securities

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

Accounts Receivable

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Construction in progress

Patient rental equipment

Demonstration equipment

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Depreciation expense was $ 2.3 million, $ 2.4 million and $ 3.0 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Goodwill and Intangible Assets

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

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

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(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

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The weighted-average remaining amortization period for these intangible assets was 12.0 years as of December 31, 2021.

As of December 31, 2018, indicators existed, including the calculation of an undiscounted cash flow in comparison to carrying amount, that indicated the patent-related intangible assets for our Actitouch system were impaired.

The primary valuation technique used in estimating the fair value of patent intangible assets is a discounted cash flow approach.

Specifically, we used a relief of royalty rate method which applies a royalty rate to estimated sales, with the resulting amounts then discounted using an appropriate market discount rate.

The relief of royalty rate is the estimated royalty rate a market participant would pay to acquire the right to market/produce the product.

If the resulting discounted cash flows are less than the book value of the intangible asset, impairment exists, and the asset value must be written down.

Based on impairment testing performed in the fourth quarter of 2018, the Actitouch assets were deemed to be fully impaired.

The impairment was due to an evaluation of projected future demand and sales volume in the context of results over the prior three years , which resulted in the determination this product would be discontinued.

As such, we wrote off $ 1.8 million of intangible assets book value, classified within the reimbursement, general and administrative expenses line of the Consolidated Statements of Operations, as well as $ 0.7 million in inventory related assets, classified within cost of revenue.

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

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

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

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Accrued expenses consisted of the following:

(In thousands)

At December 31,

At December 31, 2019

(In thousands)

Legal and consulting

In-transit inventory

Travel and business

Sales and use tax

Clinical studies

Lease termination costs

Sales and use tax

Warranty Reserves

The reserve for warranties was as follows:

The activity in the warranty reserve during and as of the end of the year presented was as follows:

(In thousands)

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Credit Agreement

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

The Credit Agreement provides for a $ 10.0 million revolving credit facility.

The revolving credit facility expires on August 3, 2021.

Subject to satisfaction of certain conditions, we may increase the amount of the revolving loans available under the Credit Agreement and/or add one or more term loan facilities in an amount not to exceed an incremental $ 25.0 million in the aggregate, such that the total aggregate principal amount of loans available under the Credit Agreement (including under the revolving credit facility) does not exceed $ 35.0 million.

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

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, 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 is reflected as a note payable on our Consolidated Balance Sheets.

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.

As of December 31, 2021, there was no availability under our Credit Agreement.

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

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.

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

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;

except that, pursuant to the Second Amendment,

during the period commencing on February 22, 2022 and ending on the last day of the fiscal quarter ending June 30, 2023, the applicable margin for LIBOR rate loans is 3.50 %.

At December 31, 2021, all outstanding borrowings were subject to interest at a rate calculated at LIBOR plus an applicable margin, for an interest rate of 2.87 %.

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.

As of December 31, 2020, we did no t have any outstanding borrowings under the Credit Agreement.

Maturities of the term loan for the next three years as of December 31, 2021, were as follows:

(In thousands)

These maturities as of December 31, 2021 do not take into account the $ 3.0 million principal repayment on the term loan that we made on February 22, 2022 in connection with the Second Amendment.

Such repayment had the effect of increasing the principal amount to be repaid in 2022, and decreasing the principal amount to repaid in 2024, by $ 3.0 million in each year.

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

The Credit Agreement limits our ability to make capital expenditures during a fiscal year in excess of the amounts set forth in the Credit Agreement, which are $ 5.0 million for 2018, $ 15.0 million for 2019, $ 15.0 million for 2020 and $ 9.0 million for 2021.

The Credit Agreement requires that we (i) not permit, as of the last day of each fiscal quarter, our consolidated total leverage ratio to exceed 3.00 to 1.00 and (ii) maintain minimum cash and cash equivalents, measured on the last day of each fiscal quarter, of not less than $ 7.5 million (subject to a temporary reduction to $ 5.0 million for the two fiscal quarters immediately following a permitted acquisition).

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.

The Credit Agreement also contains certain other restrictions and covenants, which, among other things, restrict our ability to acquire or merge with another entity, dispose of our assets, make investments, loans or guarantees, incur additional indebtedness, create liens or other encumbrances, or pay dividends or make other distributions.

Amounts due under the Credit Agreement may be accelerated upon an Event of Default (as defined in the Credit Agreement), such as breach of a representation, covenant or agreement of ours, defaults with respect to certain of our other material indebtedness or the occurrence of bankruptcy if not otherwise waived or cured.

We may use the proceeds from advances under the revolving credit facility (i) to finance capital expenditures, (ii) to pay fees, commissions and expenses in connection with the Credit Agreement and (iii) for working capital and general corporate purposes.

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.

Commitments and Contingencies

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We lease certain office and warehouse space at various locations in the United States where we provide services.

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

These leases are typically greater than one year with fixed, escalating rents over the noncancelable terms and, therefore, ROU operating lease assets and operating lease liabilities are recorded

on the Consolidated Balance Sheets, with rent expense recognized on a straight-line basis over the term of the lease.

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

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We entered into a lease (“initial lease”) in October 2018, for approximately 80,000 square feet of office space for our new corporate headquarters in Minneapolis, Minnesota.

In December 2018, we amended the initial lease to add approximately 29,000 square feet of additional office space, which is accounted for as a separate lease (“second lease”) in accordance with ASC 842.

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

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

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

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

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

The portion of the space covered under the second lease commenced in the second half of 2020 and the portion of the space covered under the third lease is expected to be occupied and commence in the second half of 2021.

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.

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

The remaining lease terms as of December 31, 2020, ranged from less than one year to approximately three years with fixed monthly payments that are included in the ROU operating lease assets and operating lease liabilities.

The remaining lease terms as of December 31, 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.

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Non-current obligations under operating lease liabilities

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

As the lessee, we are involved in providing guidance to the lessor for related improvements, however these improvements are managed and owned by the lessor.

Operating lease costs accounted for under ASC 842 for the years ended December 31, 2020 and 2019, was $ 3.0 million and $ 2.1 million, respectively.

Rent expense accounted for under ASC 840 for the year ended December 31, 2018, was $ 1.5 million.

Operating lease costs were $ 3.6 million, $ 3.0 million and $ 2.1 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Major Vendors

We had purchases from two vendors that accounted for 32 % of total purchases for the year ended December 31, 2020.

We had purchases from two vendors that accounted for 37 % of total purchases for the year ended December 31, 2019.

We had purchases from two vendors that accounted for 32 % of total purchases for each of the years ended December 31, 2021 and 2020.

Purchase Commitment

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

Discretionary contributions to the 401(k) plan totaled $ 0.3 million for each of the years ended December 31, 2020 and 2019, and $ 0.2 million for the year ended December 31, 2018.

We recorded an expense related to our discretionary contributions to the 401(k) plan of $ 1.2 million for the year ended December 31, 2021 and $ 0.3 million for each of the years ended December 31, 2020 and 2019.

Legal Proceedings

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On February 13, 2019, we were served with a sealed amended complaint venued in the United States District Court in the Southern District of Texas, Houston Division, captioned United States ex rel Veterans First Medical Supply, LLC vs.

Tactile Medical Systems Technology, Inc., Case No.

Tactile Medical Systems Technology, Inc.

18-2871, which had been filed on January 23, 2019.

The complaint is a qui tam action on behalf of the United States brought by one of our competitors.

The United States has declined to intervene in this action.

The complaint alleges that we violated the Federal Anti-Kickback Statute claiming that we submitted false claims and made false statements in connection with the Medicare and Medicaid programs, and that we engaged in unlawful retaliation in violation of the Federal False Claims Act.

The complaint seeks damages, statutory penalties, attorneys’ fees, treble damages and costs.

We filed a motion to dismiss on April 5, 2019.

This motion was denied on February 21, 2020.

On March 6, 2020, we filed our answer to the complaint and asserted counterclaims.

On May 7, 2020, the plaintiff filed a motion to dismiss our counterclaims.

On September 8, 2020, we filed a motion for Partial Summary Judgment.

On January 2, 2021, the plaintiff filed a motion for Partial Summary Judgment.

These motions are currently pending.

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

On September 29, 2020, a complaint in a purported securities class action lawsuit was filed against us and three of our present or former officers in the United States District Court for the District of Minnesota under the following caption:

Brian Mart, Individually and on Behalf of All Others Similarly Situated v.

Tactile Systems Technology, Inc., et al.

The complaint alleges, among other things, that the defendants made materially false and misleading statements regarding our business, operational and compliance policies, and financial results during the time period from May 7, 2018 through June 8, 2020 (“alleged class period”), in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder.

On February 1, 2021, the court appointed the St.

Clair County Employees’ Retirement System as the lead plaintiff.

Their amended complaint is due April 5, 2021.

Our response is due June 4, 2021.

We intend to move to dismiss the action.

The complaint was a qui tam action on behalf of the United States brought by one of our competitors.

The United States declined to intervene in this action.

The complaint alleged that we violated the Federal Anti-Kickback Statute claiming that we submitted false claims and made false statements in connection with the Medicare and Medicaid programs, and that we engaged in unlawful retaliation in violation of the Federal False Claims Act.

The complaint sought damages, statutory penalties, attorneys’ fees, treble damages and costs.

On February 18, 2022, the plaintiff filed a motion to dismiss, with prejudice, which the court granted that same day.

On that same date, we filed a motion to dismiss our counterclaims, which was also granted by the court that day.

We did not pay any damages, penalties or attorneys’ fees to the plaintiff.

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

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

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

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

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

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

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

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

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

and (4) that we and the individual defendants are liable under Section 20(a) of the Exchange Act because each defendant is a controlling person.

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

The motion has not been decided yet.

Stockholders' Equity

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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.

Our Board of Directors exercised its prerogative to forego the automatic increase on January 1, 2022.

As of December 31, 2021, 6,314,849 shares were available for future grant pursuant to the 2016 Plan.

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In conjunction with the acceptance of the written offer, our CEO received both restricted stock units and stock option awards under our 2016 Plan during the third fiscal quarter of 2020 and the stock options have a seven year term.

A portion of the awards will vest on June 30, 2021, with the remaining portion of the awards vesting over a period of three years from the date of grant.

Further, all of the stock options included in these awards require that our stock price exceed $ 40.15 for 20 consecutive trading days during the term of the option in order to vest.

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

The following table sets forth the estimated fair value of stock options granted and the assumptions on which the fair value was determined:

A portion of the awards vested on June 30, 2021, with the remaining portion of the awards vesting over a period of three years from the date of grant.

Further, the stock options were valued at the date of grant using the Monte Carlo Simulation model due to a market condition that required that our stock price exceed $ 40.15 for 20 consecutive trading days during the term of the option in order to vest.

This condition was satisfied in the first quarter of 2021.

The following table sets forth the estimated fair value of these stock options granted and the assumptions on which the fair value was determined:

Expected term

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Total stock-based compensation expense

Total stock-based compensation expense includes a modification of share-based awards held by a former executive resulting in a charge of $ 0.2 million and $ 1.0 million for the years ended December 31, 2019 and 2018, respectively.

Total stock-based compensation expense includes a modification of share-based awards held by a former executive resulting in a charge of $ 0.2 million for the year ended December 31, 2019.

At December 31, 2019, there was no remaining unrecognized pre-tax compensation expense related to this modification.

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To date, no dividend on common stock has been paid by us.

Expected volatility was estimated using the average historical volatility of public companies of similar size and industry over the similar period as the expected term assumption used for our options.

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.

The risk-free interest rate is based on the yields of U.S.

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Balance at December 31, 2018

Cancelled/Expired

Balance at December 31, 2019

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Non-vested options, end of the year

Vested options

Vested options, end of the year

Weighted-average grant date fair value of:

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Non-vested options, end of the year

Vested options

Forfeited options

Vested options, end of the year

Forfeited options, during the year

Time-Based Restricted Stock Unit s

We have granted time-based restricted stock units to certain participants under the 2016 Plan that are stock-settled with common shares.

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

Time-based restricted stock units granted under the 2016 Plan vest over

one to three years .

Stock-based compensation expense included in our Consolidated Statements of Operations for time-based restricted stock units was $ 4.9 million, $ 5.2 million and $ 4.0 million for the years ended December 31, 2021, 2020 and 2019, respectively.

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

(2) For the year ended December 31, 2020 , there were 1,108 restricted stock units granted to non-employee directors in lieu of their quarterly cash retainer payments.

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

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

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

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

On December 31, 2020, upon her departure from our board of directors, we issued 748 shares of common stock to Dr.

Pegus, which represented the settlement of restricted stock units that had been previously granted to her in lieu of her quarterly director retainer payments.

Excluding those restricted stock units, as of December 31, 2020 , there were 6,469 outstanding restricted stock units that had been previously granted to non-employee directors in lieu of their quarterly director retainer payments.

These restricted stock units are not included in the “Balance at December 31, 2020 ” line in the table above because they are fully vested.

These restricted stock units granted in the years ended December 31, 2020 and December 31, 2019 are included in the “Granted” lines in the table above and are also included in the “Vested” lines in the table above in those years, due to their being fully vested upon grant.

These restricted stock units are not included in any of the “Balance” lines in the table above because they are fully vested.

Performance-Based Restricted Stock Units

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

The PSUs granted in 2019 were earned to the extent performance goals based on revenue and adjusted EBITDA were achieved in 2020.

The PSUs granted in 2020 will be earned if and to the extent performance goals based on revenue and adjusted EBITDA are achieved in 2021.

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

Stock-based compensation expense included in our Consolidated Statements of Operations for PSUs was $ 0.5 million, $ 2.3 million, and $ 0.7 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Stock-based compensation expense included in our Consolidated Statements of Operations for PSUs was $ 0.2 million, $ 0.5 million, and $ 2.3 million for the years ended December 31, 2021, 2020 and 2019,

respectively.

The stock-based compensation expense for the year ended December 31, 2021 reflects 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 $ 0.7 million related to the PSUs granted in 2018 and 2021.

The stock-based compensation expense for the year ended December 31, 2020 reflects a $ 1.0 million benefit due to a change in the estimated payout associated with PSUs granted in 2019 being below the minimum performance target threshold level, as defined.

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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.

Our Board of Directors exercised its prerogative to forego the automatic increase on January 1, 2022.

As of December 31, 2021, 1,708,760 shares were available for future issuance under the ESPP.

We recognized $ 0.8 million, $ 0.9 million and $ 0.9 million in stock-based compensation expense related to the ESPP for the years ended December 31, 2021, 2020 and 2019, respectively.

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

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:

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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 years ended December 30, 2020, 2019 and 2018.

Rental revenue for the years ended December 31, 2020, 2019 and 2018, was primarily related to private insurers.

Our revenue from third-party payers, inclusive of sales and rental revenue, for the years ended December 31, 2020, 2019 and 2018 are summarized in the following table:

Our revenue by channel, inclusive of sales and rental revenue, for the years ended December 31, 2021, 2020 and 2019 are summarized in the following table:

(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, 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.

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

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

they were completed.

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

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

These rental agreements do not have an impact on the revenue results in 2021 and 2020.

Total rental revenue for the year ended December 31, 2019, includes both operating and sales-type lease revenue.

6 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.

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 years ended December 31, 2021, 2020 and 2019, was primarily related to private insurers.

Sales-type lease revenue and the associated cost of revenue for the years ended December 31, 2021, 2020 and 2019, was:

3 unchanged sentences

Cost of sales-type lease revenue

Sales-type lease gross profit

The provision (benefit) for income tax expense consisted of the following:

7 unchanged sentences

Unrecognized tax benefit, State

Total (benefit) provision for income taxes

Total provision (benefit) for income taxes

The components of our deferred tax assets and liabilities were as follows:

9 unchanged sentences

Intangible assets

Valuation allowance

Business credits

Total deferred tax assets

1 unchanged sentence

Right-of-use asset

Intangible assets

Prepaid expenses

Total deferred tax liabilities

Valuation allowance

Net deferred tax assets

7 unchanged sentences

Employee Stock Purchase Plan

Federal business credits

Valuation allowance

Return to provision

Research and development credits

Deferred reprice - state

9 unchanged sentences

Balance end of the year

As of December 31, 2020, we had approximately $ 0.8 million of state net operating loss (“NOL”) carry-forwards.

The state NOL carry-forward amounts expire beginning in tax years 2026 if not utilized.

We are subject to income tax examinations in the U.S.

federal jurisdiction as well as in various state jurisdictions.

federal and state tax years prior to 2017 are closed to examination as of December 31, 2020.

We are not currently under examination by any taxing authority.

In the event of any future tax assessments, we have elected to record the income taxes and any related interest and penalties as income tax expense on our statement of operations.

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

For tax positions meeting the more likely than not threshold, the amount recognized in our consolidated financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.

On December 22, 2017, the U.S.

government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”).

The Tax Act establishes new tax laws effective for tax years beginning after December 31, 2017, including, but not limited to, the reduction of the U.S.

federal corporate income tax rate to 21 %.

Deferred income taxes result from temporary differences between the reporting of amounts for financial statement purposes and income tax purposes.

These differences relate primarily to different methods used for income tax purposes including depreciation and amortization, warranty and vacation accruals, and deductions related to allowances for doubtful accounts receivable, and inventory reserves.

As of December 31, 2021, the Company had approximately $ 0.7 million of state net operating loss ("NOL") carryforwards.

The state NOL carryforward amounts expire beginning in tax years 2026 if not utilized.

The Company is subject to income tax examinations in the U.S.

federal jurisdiction as well as in various state jurisdictions.

federal and state tax years prior to 2018 are closed to examination.

We are currently under examination by the New York State Department of Taxation and Finance for tax years 2017-2019.

This examination may lead to ordinary course adjustments or proposed adjustments to our taxes or our net operating losses with respect to years under examination as well as subsequent periods.

In the event of any future tax assessments, we have elected to record the income taxes and any related interest and penalties as income tax expense on our Consolidated Statement of Operations.

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

For tax positions meeting the more likely than not threshold, the amount recognized in the 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.

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

On the basis of this evaluation, all deferred tax assets are expected to be realizable.

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

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 is 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.

Net (Loss) Income Per Common Share

7 unchanged sentences

Net (loss) income per share - Diluted

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

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

Restricted stock units

9 unchanged sentences

The lowest priority is given to unobservable inputs (Level 3).

The following provides information regarding fair value measurements for our cash equivalents and marketable securities as of December 31, 2020 and 2019, according to the three-level fair value hierarchy:

As of December 31, 2021, we no longer had any money market mutual funds.

The following provides information regarding fair value measurements for our earn-out liability as of December 31, 2021, according to the three-level fair value hierarchy:

At December 31, 2021

2 unchanged sentences

Recurring Fair Value Measurements:

Money market mutual funds

government and agency obligations

Earn-out liability

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

government and agency obligations

Corporate debt securities

During the year ended December 31, 2020, there were no transfers within the three-level hierarchy.

There were no transfers within the three-level hierarchy during either of the years ended December 31, 2021 and 2020.

A significant transfer is recognized when the inputs used to value a security have been changed, which merits a transfer between the disclosed levels of the valuation hierarchy.

The fair values for our money market mutual funds, U.S.

government and agency obligations and corporate debt securities are determined based on valuations provided by external investment managers who obtain them from a variety of industry standard data providers.

The fair values for our money market mutual funds are determined based on valuations provided by external investment managers who obtain them from a variety of industry standard data providers.

The carrying amounts of financial instruments such as cash equivalents, accounts receivable, other assets, accounts payable, accrued expenses and other liabilities approximate their related fair values due to the short-term maturities of these items.

Non-financial assets, such as equipment and leasehold improvements, and intangible assets are subject to non-recurring fair value measurements if they are deemed impaired.

As of June 30, 2020, we re-measured the value of our intangible assets related to the Airwear wrap product line to their fair value, which was deemed to be $ 0 .

Quarterly Financial Information (Unaudited)

The quarterly financial data presented below should be read in conjunction with the consolidated financial statements and related notes:

Three Months Ended

(In thousands, except per share data)

(Loss) income from operations

Net (loss) income

Net (loss) income per share - Basic (1)

Net (loss) income per share - Diluted (1)

Three Months Ended

(In thousands, except per share data)

(Loss) income from operations

Net income per share - Basic (1)

Net income per share - Diluted (1)

(1) The summation of quarterly per share amounts may not equal the calculation for the full year, as each quarterly calculation is performed discretely.

As of June 30, 2020, we remeasured 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 by employing a Monte Carlo Simulation model in a risk-neutral framework, which is a Level 3 input.

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.

The earn-out liability will be adjusted to fair value at each reporting date until settled.

Changes in fair value will be included in intangible asset amortization and earn-out expense s in our Consolidated Statements of Operations.

Changes in the earn-out liability measured at fair value using Level 3 inputs were as follows:

(In thousands)

Earn-out liability at December 31, 2020

Addition for acquisition

Fair value adjustments

Earn-out liability at December 31, 2021

As of December 31, 2021, the fair value of the earn-out liability totaled $ 6.2 million, of which $ 3.0 million was non-current.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

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-K

Item 8. Financial Statements and Supplementary Data