What changed in this filing

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Item 1. Financial Statements

2022-05-02 compared with 2021-11-08 · 151 added, 285 removed, 416 unchanged (51% of the section changed)

2 unchanged sentences

Condensed Consolidated Balance Sheets

September 30,

(In thousands, except share and per share data)

10 unchanged sentences

Accounts receivable, non-current

Deferred income taxes

Other non-current assets

3 unchanged sentences

Accounts payable

Earn-out, current

Accrued payroll and related taxes

11 unchanged sentences

Operating lease liabilities, non-current

Deferred income taxes

Total non-current liabilities

3 unchanged sentences

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

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

none issued and outstanding as of March 31, 2022 and December 31,

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

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

19,939,843 shares issued and outstanding as of March 31, 2022;

19,877,786 shares issued and outstanding as of December 31, 2021

Additional paid-in capital

Retained earnings

(Accumulated deficit) retained earnings

Total stockholders’ equity

4 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

(In thousands, except share and per share data)

12 unchanged sentences

Reimbursement, general and administrative

Intangible asset amortization

Intangible asset amortization and earn-out

Total operating expenses

(Loss) income from operations

Other (expense) income

(Loss) income before income taxes

Loss from operations

Other expense

Loss before income taxes

Income tax expense (benefit)

Net (loss) income

Net (loss) income per common share

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

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

Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Comprehensive (Loss) Income

Three Months Ended

Nine Months Ended

September 30,

(In thousands)

Net (loss) income

Other comprehensive loss

Unrealized loss on marketable securities

Income tax related to items of other comprehensive loss

Total other comprehensive loss

Comprehensive (loss) income

Net loss per common share

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

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

1 unchanged sentence

Condensed Consolidated Statements of Stockholders’ Equity

Comprehensive

(In thousands, except share data)

(Loss) Income

Balances, June 30, 2021

Stock-based compensation

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

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

Comprehensive loss for the period

Balances, September 30, 2021

Balances, December 31, 2021

1 unchanged sentence

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

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

Common shares issued for employee stock purchase plan

Comprehensive loss for the period

Balances, September 30, 2021

Balances, June 30, 2020

Stock-based compensation

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

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

Comprehensive income for the period

Balances, September 30, 2020

Balances, March 31, 2022

Balances, December 31, 2020

2 unchanged sentences

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

Common shares issued for employee stock purchase plan

Comprehensive loss for the period

Balances, September 30, 2020

Balances, March 31, 2021

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

1 unchanged sentence

Condensed Consolidated Statements of Cash Flows

Nine Months Ended September 30,

Three Months Ended March 31,

(In thousands)

2 unchanged sentences

Depreciation and amortization

Net amortization of premiums and discounts on securities available-for-sale

Deferred income taxes

Stock-based compensation expense

Gain on other investments and maturities of marketable securities

Impairment losses

Loss on disposal of property and equipment

Change in fair value of earn-out liability

Changes in assets and liabilities, net of acquisition:

9 unchanged sentences

Cash flows from investing activities

Proceeds from maturities of securities available-for-sale

Payments related to acquisition

Purchases of property and equipment

Intangible assets costs

Other investments

Net cash (used in) provided by investing activities

Intangible assets expenditures

Net cash used in investing activities

Cash flows from financing activities

Proceeds from issuance of note payable

Proceeds from revolving line of credit

Payment on note payable

Payment of deferred debt issuance costs

1 unchanged sentence

Proceeds from exercise of common stock options

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

Net cash provided by financing activities

Net (decrease) increase in cash and cash equivalents

Net cash (used in) provided by financing activities

Net decrease in cash and cash equivalents

Cash and cash equivalents – beginning of period

1 unchanged sentence

Supplemental cash flow disclosure

Cash paid for interest

Cash paid for taxes

5 unchanged sentences

Tactile Systems Technology, Inc.

(“we,” “us,” and “our”) is the sole manufacturer and distributor of the Flexitouch® and Entre™ systems, medical devices that help control symptoms of lymphedema, a chronic and progressive medical condition.

We provide 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.

(“we,” “us,” and “our”) manufactures and distributes medical devices that help control symptoms of lymphedema, a chronic and progressive medical condition.

We provide our Flexitouch® and Entre™ systems 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 airway clearance business (“AffloVest Acquisition”) from International Biophysics Corporation (“IBC”), a privately-held company which developed and manufactures AffloVest.

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

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

We sell this device through home medical equipment and durable medical equipment providers throughout the United States.

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

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In 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.

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

Further, seasonality trends in 2021 may be significantly different than in prior years as a result of the COVID-19 pandemic and related impacts .

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

2 unchanged sentences

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

The results for the nine months ended September 30, 2021, are not necessarily indicative of results to be expected for the year ending December 31, 2021, or for any other interim period or for any future year.

The results for the three months ended March 31, 2022, are not necessarily indicative of results to be expected for the year ending December 31, 2022, or for any other interim period or for any future year.

The condensed consolidated interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021.

6 unchanged sentences

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

We have seen adverse impacts as it relates to the decline in the number of patients that healthcare facilities and clinics are able to treat due to enhanced safety protocols, particularly during 2020 and the first quarter of 2021.

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

There are no reliable estimates of how long the pandemic will last, whether any recovery will be sustained or will reverse course, the severity of any resurgence of COVID-19 or variant strains of the virus, the effectiveness of vaccines and attitudes towards receiving them, or what ultimate effects the pandemic will have.

In the first quarter of 2022, the continued prolonged recovery from COVID-19 and increased Omicron variant cases resulted in restricted access to clinics and hospitals and disrupted the recovery in patient visits versus the pre-COVID environment.

The adverse impacts in the first quarter of 2022 were similar to those we experienced during the first quarter of 2021.

At this time, there are no reliable estimates of how long the pandemic will last, whether any recovery will be sustained or will reverse course, the severity of any resurgence of COVID-19 or variant strains of the virus, the effectiveness of vaccines and attitudes towards receiving them, or what ultimate effects the pandemic will have.

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

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

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

We cannot assure you 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.

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

government contractor.

See See Part II, I tem 1A.

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

Use of Estimates

3 unchanged sentences

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

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

Summary of Significant Accounting Policies

Significant Accounting Policies

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

There were no material changes in our significant accounting policies during the three months ended March 31, 2022, except as set forth below.

See Note 3 – “Summary of Significant Accounting Policies” to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021, for information regarding our significant accounting policies.

Business Segments

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

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

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

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

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

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

Revenue Recognition for AffloVest

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

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

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

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

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

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

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

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

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

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

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

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

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

Accounting Pronouncement Not Yet Adopted

4 unchanged sentences

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

Recently Adopted Accounting Pronouncements

In December 2019, the 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 condensed consolidated financial statements.

In June 2016, the FASB issued ASU No.

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

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

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

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

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

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

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

2 unchanged sentences

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

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

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.

1 unchanged sentence

● Initial Earn-Out:

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

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

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

1 unchanged sentence

● Second Earn-Out:

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

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

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

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

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

The fair value of the earn-out 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 will be re-measured at the end of each reporting period until the payment requirement ends, with any adjustments reported in income from operations.

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 15 – “Fair Value Measurements”).

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

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

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

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

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

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

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

Three Months Ended

Nine Months Ended

September 30,

(In thousands)

Total revenue

Net income (loss)

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

Marketable Securities

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

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

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

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

Inventories consisted of the following:

(In thousands)

At September 30, 2021

At March 31, 2022

At December 31, 2021

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Goodwill and Intangible Assets

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

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

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

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

Intangible Assets

Our patents and other intangible assets are summarized as follows:

At September 30, 2021

At March 31, 2022

(In thousands)

12 unchanged sentences

Customer accounts

Customer relationships

Developed technology

Unamortized intangible assets:

1 unchanged sentence

Total intangible assets

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

Amortization expense was $ 1.0 million and $ 0.1 million for the three months ended March 31, 2022 and 2021, respectively.

Future amortization expenses are expected as follows:

(In thousands)

2021 (October 1 - December 31)

2022 (April 1 - December 31)

Accrued Expenses

1 unchanged sentence

(In thousands)

At September 30, 2021

At March 31, 2022

At December 31, 2021

In-transit inventory

Legal and consulting

In-transit inventory

Clinical studies

3 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

(In thousands)

7 unchanged sentences

Credit Agreement

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

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

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

The Restated Credit Agreement amended and restated in its entirety our prior credit agreement.

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

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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.

On February 22, 2022, we entered into a Second Amendment Agreement (the “Second Amendment”), which further amended the Credit Agreement, including with respect to the financial covenants.

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.

As of March 31, 2022, the outstanding balance of the term loan was $ 26.3 million and the outstanding balance under the revolving credit facility was $ 25.0 million.

As of March 31, 2022, there was no availability under our Credit Agreement.

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

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

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

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 March 31, 2022, all outstanding borrowings were subject to interest at a rate calculated at LIBOR plus an applicable margin, for an interest rate of 3.70 % .

Undrawn portions of the revolving credit facility are subject to an unused line fee at a rate per annum from 0.300 % to 0.375 % , depending on our consolidated total leverage ratio.

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

Maturities of the term loan for the next three years as of March 31, 2022, are as follows:

(In thousands)

2021 (October 1 - December 31)

2022 (April 1 - December 31)

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

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

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

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

As of March 31, 2022, we were in compliance with all financial covenants under the Credit Agreement.

Commitments and Contingencies

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We classify our leases as buildings, vehicles or computer and office equipment and do not separate lease and nonlease components of contracts for any of the aforementioned classifications.

In accordance with applicable guidance, we do not record leases with terms that are less than one year on the Condensed Consolidated Balance Sheet.

In accordance with

applicable guidance, we do not record leases with terms that are less than one year on the Condensed Consolidated Balance Sheets.

None of our lease agreements contain material restrictive covenants or residual value guarantees.

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

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

The remaining lease terms vary from approximately one to nine years as of September 30, 2021.

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

The remaining lease terms vary from approximately one to eight years as of March 31, 2022.

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.

3 unchanged sentences

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

This portion was recognized as an operating lease and included in the ROU operating lease

assets and operating lease liabilities on the Condensed Consolidated Balance Sheets.

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

The portion of the space covered under the second lease commenced in September 2020.

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

As of September 30, 2021, we had approximately 45 vehicles with agreements within the initial, noncancelable lease term that are recorded as ROU operating lease assets and operating lease liabilities.

As of March 31, 2022, we had approximately 32 vehicles with agreements within the initial, noncancelable lease term that are recorded as ROU operating lease assets and operating lease liabilities.

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

2 unchanged sentences

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

The remaining lease terms as of September 30, 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 remaining lease terms as of March 31, 2022, ranged from less than one year to approximately four years with fixed monthly payments that are included in the ROU operating lease assets and operating lease liabilities.

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

3 unchanged sentences

(In thousands)

At September 30, 2021

At March 31, 2022

At December 31, 2021

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Weighted average discount rate

Nine Months Ended September 30,

Three Months Ended March 31,

Supplemental cash flow information for our operating leases:

1 unchanged sentence

Non-cash right of use assets obtained in exchange for new operating lease obligations

The table below reconciles the undiscounted cash flows under the operating lease liabilities recorded on the Condensed Consolidated Balance Sheet for the periods presented:

The table below reconciles the undiscounted cash flows for the periods presented to the operating lease liabilities recorded on the Condensed Consolidated Balance Sheet as of March 31, 2022:

(In thousands)

2021 (October 1 - December 31)

2022 (April 1 - December 31)

Total minimum lease payments

3 unchanged sentences

Non-current obligations under operating lease liabilities

As of September 30, 2021, we have additional lease commitments of $ 0.8 million related to amendments to existing building leases that have not yet commenced.

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

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

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

Operating lease costs were $ 1.0 million and $ 0.8 million for the three months ended March 31, 2022 and 2021, respectively.

Major Vendors

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

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

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

We had purchases from two vendors that accounted for 29 % of our total purchases for the three months ended March 31, 2022, and from two vendors that accounted for 33 % of our total purchases for the three months ended March 31, 2021.

Purchase Commitments

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

We issued purchase orders prior to March 31, 2022, totaling $ 38.8 million for goods that we expect to receive within the next year.

Retirement Plan

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

We recorded an expense related to our discretionary contributions to the 401(k) plan of $ 0.3 million and $ 0.1 million for the three months ended September 30, 2021 and 2020, respectively, and $ 0.9 million and $ 0.2 million for the nine months ended September 30, 2021 and 2020, respectively.

We recorded an expense related to our discretionary contributions to the 401(k) plan of $ 0.4 million and $ 0.3 million for the three months ended March 31, 2022 and 2021, respectively.

Legal Proceedings

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Regardless of outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

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

Tactile Medical Systems Technology, Inc., Case No.

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

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

The United States has declined to intervene in this action.

The complaint alleges that we violated

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

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

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

This motion was denied on February 21, 2020.

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

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

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

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

These motions were decided on March 29, 2021, wherein the court denied plaintiff’s motion to dismiss our counterclaims;

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

and denied plaintiff’s motion for Partial Summary Judgment.

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

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

Plaintiff filed a motion for summary judgement on the counterclaims.

These motions are currently pending.

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

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.

We and certain of our present or former officers have been 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.

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

The motion has not been decided yet.

On March 31, 2022, the court granted in part, and denied in part, the defendants’ motion to dismiss.

All claims against three individual defendants were dismissed, and most claims against four other individual defendants were dismissed.

The Company remains a defendant on alleged Sections 10(b) and 20(a) claims.

We are defending the action as it proceeds.

Stockholders' Equity

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

Pursuant to the automatic increase feature of the 2016 Plan, 972,591 and 952,697 shares were added as available for issuance thereunder on January 1, 2021 and 2020, respectively.

As of September 30, 2021, 6,366,806 shares were available for future grant pursuant to the 2016 Plan.

Pursuant to the automatic increase feature of the 2016 Plan, 972,591 shares were added as available for issuance thereunder on January 1, 2021.

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

As of March 31, 2022, 5,919,092 shares were available for future grant pursuant to the 2016 Plan.

Upon adoption and approval of the 2016 Plan, all of our previous equity incentive compensation plans were terminated.

However, existing awards under those plans continue to vest in accordance with the original vesting schedules and will expire at the end of their original terms.

In the second fiscal quarter of 2020, our Board of Directors appointed a new President and Chief Executive Officer (“CEO”), effective June 8, 2020.

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

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

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

This condition was satisfied in the first quarter of 2021 .

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

We recorded stock-based compensation expense of $ 2.2 million and $ 2.5 million for the three months ended March 31, 2022 and 2021, respectively.

This expense was allocated as follows:

Three Months Ended

Nine Months Ended

September 30,

(In thousands)

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Stock options issued to participants other than non-employees typically vest over three or four years and typically have a contractual term of seven or ten years .

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

At September 30, 2021, there was approximately $ 6.4 million of total unrecognized pre-tax stock option expense under our equity compensation plans, which is expected to be recognized on a straight-line basis over a weighted-average period of 1.9 years.

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

Stock-based compensation expense included in the Condensed Consolidated Statements of Operations for stock options was $ 0.7 million and $ 1.2 million for the three months ended March 31, 2022 and 2021, respectively.

At March 31, 2022, there was approximately $ 4.0 million of total unrecognized pre-tax stock option expense under our equity compensation plans, which is expected to be recognized on a straight-line basis over a weighted-average period of 1.6 years.

Our stock option activity for the three months ended March 31, 2022, was as follows:

Exercise Price

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Cancelled/Expired

Balance at September 30, 2021

Options exercisable at September 30, 2021

Balance at March 31, 2022

Options exercisable at March 31, 2022

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

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

Options exercisable of 461,138 as of September 30, 2020, had a weighted-average exercise price of $ 23.35 per share.

Options exercisable of 546,067 as of March 31, 2021, had a weighted-average exercise price of $ 30.27 per share.

Time-Based Restricted Stock Units

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

Stock-based compensation expense included in the Condensed Consolidated Statements of Operations for time-based restricted stock units was $ 1.2 million and $ 1.4 million for the three months ended September 30, 2021 and 2020, respectively, and $ 3.7 million and $ 4.0 million for the nine months ended September 30, 2021 and 2020, respectively.

At September 30, 2021, there was approximately $ 6.6 million of total unrecognized pre-tax compensation expense related to outstanding time-based restricted stock units that is expected to be recognized over a weighted-average period of 1.9 years.

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

Stock-based compensation expense included in the Condensed Consolidated Statements of Operations for time-based restricted stock units was $ 1.4 million and $ 1.3 million for the three months ended March 31, 2022 and 2021, respectively.

At March 31, 2022, there was approximately $ 11.2 million of total unrecognized pre-tax compensation expense related to outstanding time-based restricted stock units that is expected to be recognized over a weighted-average period of 2.3 years.

Our time-based restricted stock unit activity for the three months ended March 31, 2022, was as follows:

Average Grant

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Balance at December 31, 2021

Balance at September 30, 2021

Deferred and unissued at September 30, 2021 (2)

Balance at March 31, 2022

Deferred and unissued at March 31, 2022 (2)

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

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

As of September 30, 2021, there were 6,469 outstanding restricted stock units that had been previously granted to non-employee directors in lieu of their quarterly cash retainer payments.

(2) For the three months ended March 31, 2022, there were no restricted stock units granted to non-employee directors in lieu of their quarterly cash retainer payments.

As of March 31, 2022, there were 6,469 outstanding restricted stock units that had been previously granted to non-employee directors in lieu of their quarterly cash retainer payments.

Performance-Based Restricted Stock Units

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These PSUs have both performance-based and time-based vesting features.

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

The PSUs granted in 2020 would have been earned to the extent performance goals based on revenue and adjusted EBITDA were achieved in 2021, but none were so earned.

The PSUs granted in 2021 will be earned if and to the extent performance goals based on revenue and adjusted EBITDA are achieved in 2022.

The PSUs granted in 2022 will be earned if and to the extent performance goals based on revenue change and adjusted EBITDA margin are achieved in 2023.

The number of PSUs earned will depend on the level at which the performance targets are achieved and can range from 50 % of target if the minimum performance threshold is achieved and up to 150 % of target if maximum performance is achieved.

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

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

The stock-based compensation expense for the nine months ended September 30, 2021 reflected a $ 0.5 million benefit due to a change in the estimated payout associated with PSUs granted in 2020 being below the minimum performance target threshold level, as defined, partially offset by an expense of $ 0.5 million related to the PSUs granted in 2018 and 2021.

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

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

Stock-based compensation expense recognized for PSUs was a benefit of $ 0.1 million and $ 0.3 million for the three months ended March 31, 2022 and 2021, respectively.

The stock-based compensation benefit for the three months ended March 31, 2022 reflected a $ 0.2 million benefit due to a change in the estimated payout associated with PSUs granted in 2021 being below the performance target threshold level, as defined, partially offset by an expense of $ 0.1 million related to the PSUs granted in 2022.

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

At March 31, 2022, there was approximately $ 2.8 million of total unrecognized pre-tax compensation expense related to outstanding PSUs that is expected to be recognized over a weighted average period of 2.7 years.

Our performance-based restricted stock unit activity for the three months ended March 31, 2022, was as follows:

Average Grant

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Balance at December 31, 2021

Balance at September 30, 2021

Balance at March 31, 2022

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

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

Pursuant to the automatic increase feature of the ESPP, 194,518 and 190,539 shares were added as available for issuance thereunder on January 1, 2021 and 2020, respectively.

As of September 30, 2021, 1,740,328 shares were available for future issuance under the ESPP.

We recognized stock-based compensation expense associated with the ESPP of $ 0.2 million and $ 0.3 million for the three months ended September 30, 2021 and 2020, respectively, and $ 0.6 million and $ 0.8 million for the nine months ended September 30, 2021 and 2020, respectively.

Pursuant to the automatic increase feature of the ESPP, 194,518 shares were added as available for issuance thereunder on January 1, 2021.

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

As of March 31, 2022, 1,708,760 shares were available for future issuance under the ESPP.

We recognized stock-based compensation expense associated with the ESPP of $ 0.2 million and $ 0.3 million for the three months ended March 31, 2022 and 2021, respectively.

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

The following table presents our revenue, inclusive of sales and rental revenue, disaggregated by product categories:

The following table presents our revenue, inclusive of sales and rental revenue, disaggregated by product line:

Three Months Ended

Nine Months Ended

September 30,

(In thousands)

Flexitouch system

Lymphedema products

Airway clearance products

Percentage of total revenue

Flexitouch system

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

Lymphedema products

Airway clearance products

Our revenue by channel, inclusive of sales and rental revenue, for the three months ended March 31, 2022 and 2021, are summarized in the following table:

Three Months Ended

Nine Months Ended

September 30,

(In thousands)

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

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

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

Three Months Ended September 30,

Nine Months Ended September 30,

Rental revenue for the three months ended March 31, 2022 and 2021, was primarily from private insurers.

Sales-type lease revenue and the associated cost of revenue for the three months ended March 31, 2022 and 2021, was:

Three Months Ended March 31,

(In thousands)

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

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

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

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

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

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

We recorded an income tax benefit of $ 1.4 million and an expense of $ 2.3 million for the nine months ended September 30, 2021 and 2020, respectively.

The effective tax rate for the three months ended March 31, 2022, was an expense of 1.4 % , compared to a benefit of 44.6 % for the three months ended March 31, 2021.

The primary driver of the change in our effective tax rate is primarily attributable to a full valuation allowance being recorded for net deferred tax assets for the current year period, whereas no valuation allowance was recorded for the same period in 2021.

We recorded an income tax expense of $ 0.2 million and a benefit of $ 1.8 million for the three months ended March 31, 2022 and 2021, respectively.

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

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

As of September 30, 2021, tax contingencies related to federal and state credits recorded within the Condensed Consolidated Balance Sheets were $ 0.5 million.

Changes in tax laws, regulations, administrative practices, principles, and interpretations may impact our tax contingencies.

The timing of the resolution of income tax controversies is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts accrued.

We are currently under examination by the New York Department of Taxation and Finance for tax years 2017, 2018, and 2019.

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

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

Net (Loss) Income Per Share

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

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 Condensed Consolidated Statements of Operations.

The Company is not under examination in any other jurisdictions.

Net Loss Per Share

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

Three Months Ended

Nine Months Ended

September 30,

(In thousands, except share and per share data)

Net (loss) income

Weighted-average shares outstanding

Dilutive effect of stock-based awards

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

Net (loss) income per share - Basic

Net (loss) income per share - Diluted

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

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

Net loss per share - Basic

Net loss per share - Diluted

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

Three Months Ended

Nine Months Ended

September 30,

Restricted stock units

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The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1).

The next highest priority is based on quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in non-active markets or other observable inputs (Level 2).

The next highest

priority is based on quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in non-active markets or other observable inputs (Level 2).

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

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

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

We have obligations to pay up to $ 20.0 million in earn-out payments in cash if certain future U.S.

revenues of the AffloVest 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 expenses in our Condensed 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, 2021

Addition for acquisition

Fair value adjustments

Earn-out liability at March 31, 2022

As of March 31, 2022, the fair value of the earn-out liability totaled $ 12.7 million, of which $ 3.5 million was non-current.

The following provides information regarding fair value measurements for our earn-out liability as of March 31, 2022, and December 31, 2021, according to the three-level fair value hierarchy:

At March 31, 2022

Quoted Prices

(In thousands)

Recurring Fair Value Measurements:

Earn-out liability

At December 31, 2021

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Recurring Fair Value Measurements:

Money market mutual funds

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

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

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

Earn-out liability

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 .

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

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

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

The underlying simulated variable includes recognized revenue.

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

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

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

What changed 10-Q

Item 1. Financial Statements