What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-05-02 compared with 2021-11-08 · 99 added, 197 removed, 104 unchanged (74% of the section changed)

3 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.

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

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

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

In addition, we are actively developing our long-term in-office and remote work strategy with the goal of launching it in 2022.

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

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

● Continuing to host large virtual medical education programs, while also beginning to schedule smaller in-person meetings.

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

● Following government guidelines related to vaccinations of our staff, as well as the needs of our patients and customers.

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

However, 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.

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

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.

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

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

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

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

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

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

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

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

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

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

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

Our current lymphedema products are the Flexitouch and Entre systems and our airway clearance product the AffloVest.

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

5 unchanged sentences

phlebolymphedema and lipedema.

We derive the vast majority of our revenue from our Flexitouch system.

Sales and rentals of our Flexitouch system represented 86% and 88% of our revenue in the nine months ended September 30, 2021 and 2020, respectively.

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

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

For the nine months ended September 30, 2021 and 2020, sales and rentals of our Entre system represented 13% and 12% of our revenue, respectively.

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

AffloVest is a portable, wearable vest that treats patients with chronic respiratory conditions such as COPD-associated breathing conditions like bronchiectasis, or conditions resulting from neuromuscular disorders and cystic fibrosis, by managing airway clearance.

For the nine months ended September 30, 2021, sales of our AffloVest represented 1% our revenue.

In October 2018, we licensed, from Sun Scientific, Inc., the intellectual property rights related to the Airwear Gradient Compression Wrap, or the Airwear wrap, in the United States and Canada, for use in all medical applications, including but not limited to swelling/edema and ulcers (including lymphedema and chronic venous insufficiency conditions), but excluding the use of the intellectual property in the field of prophylaxis for deep vein thrombosis.

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.

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

Due to the planned discontinuation of the product line, we recorded a $4.0 million non-cash impairment charge to fully write-off the inventory and long-lived assets of the Airwear wrap in the quarter ended June 30, 2020.

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

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

See Note 8 - “Intangible Assets” to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020 for more information regarding this impairment charge and discontinuation.

We derive the vast majority of our revenue from our lymphedema product line.

Sales and rentals of our lymphedema products represented 85% and 100% of our revenue in the three months ended March 31, 2022 and 2021, respectively.

On September 8, 2021, we acquired the assets of the AffloVest airway clearance product line from IBC, a privately-held company which developed and manufactures AffloVest.

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

conditions resulting from neuromuscular disorders.

For the three months ended March 31, 2022, sales of AffloVest represented 15% our revenue.

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

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

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

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

In the quarter ended September 30, 2021, our direct sales force experienced increased turnover and difficulty in recruiting qualified replacements.

As a result, we had fewer direct sales representatives on September 30, 2021 compared to September 30, 2020.

We believe this to be a temporary condition.

Our collective field commercial team, including our respiratory sales force, has grown to over 335 employees as of September 30, 2021, compared to 285 employees as of December 31, 2020.

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

Conversely, in the third quarter of 2021, we were adversely impacted by the resurgence of the Delta variant resulting in renewed patient cancellations, absenteeism of staff and access limitations implemented by clinics and health systems.

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

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

To that end, we plan to continue to work towards expanding our commercial organization through the remainder of 2021 and into 2022 by adding to our overall commercial team.

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

The AffloVest device is sold through respiratory durable medical equipment providers throughout the United States that service patients and bill third-party payers for the product.

We also employ a small group of respiratory specialists, who educate DME provider representatives, provide product demonstrations for targeted clinicians and support technical questions related to the AffloVest.

As of March 31, 2022, we employed a field staff of 268 Tactile employees, made up of sales representatives, as well as managers, who provide support throughout the United States for our lymphedema and respiratory therapies.

This compares to 244 as of March 31, 2021.

As it relates to the impact of COVID-19 on our commercial processes, 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.

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

4 unchanged sentences

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

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

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

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

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

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

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

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

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

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

We plan for IBC to continue to manufacture the product on our behalf through the first half of 2022 and we will begin to take over the shipping of products in the fourth quarter of 2021.

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

The AffloVest device continued to be manufactured and shipped by IBC on our behalf pursuant to a Transition Services Agreement through April 30, 2022.

We will be manufacturing and shipping the AffloVest device going forward .

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

1 unchanged sentence

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

For the three months ended September 30, 2021, we generated revenue of $52.5 million and had a net loss of $3.4 million, compared to revenue of $49.1 million and net income of $2.4 million for the three months ended September 30, 2020.

For the nine months ended September 30, 2021, we generated revenue of $146.3 million and had a net loss of $4.3 million, compared to revenue of $127.9 million and a net loss of $12.7 million for the nine months ended September 30, 2020.

Our primary sources of capital since inception have been from operating income, private placements of our capital stock and capital raised in our initial public offering, which closed on August 2, 2016.

For the three months ended March 31, 2022, we generated revenue of $48.0 million and had a net loss of $15.6 million, compared to revenue of $42.8 million and a net loss of $2.3 million for the three months ended March 31, 2021.

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

We operate in one segment for financial reporting purposes.

Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2021 and 2020

The following tables present our results of operations for the periods indicated:

Comparison of the Three Months Ended March 31, 20 22 and 20 21

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

Three Months Ended

September 30,

(In thousands)

14 unchanged sentences

Reimbursement, general and administrative

Intangible asset amortization

Intangible asset amortization and earn-out

Total operating expenses

(Loss) income from operations

Loss from operations

Other expense

(Loss) income before income taxes

Loss before income taxes

Income tax expense (benefit)

Net (loss) income

“N.M.” Not Meaningful

Nine Months Ended

September 30,

(In thousands)

Condensed Consolidated Statement

of Operations Data:

Sales revenue

Rental revenue

Total revenue

Cost of revenue

Cost of sales revenue

Cost of rental revenue

Total cost of revenue

Gross profit - sales revenue

Gross profit - rental revenue

Operating expenses

Sales and marketing

Research and development

Reimbursement, general and administrative

Intangible asset amortization

Total operating expenses

Loss from operations

Other (expense) income

Loss before income taxes

Income tax (benefit) expense

Revenue increased $3.4 million, or 7%, to $52.5 million in the three months ended September 30, 2021, compared to $49.1 million in the three months ended September 30, 2020.

The increase in total revenue was attributable to an increase of $1.1 million, or 3%, in sales and rentals of the Flexitouch system, an increase of $1.4 million, or 23%, in sales and rentals of the Entre system and $0.9 million in sales of the recently acquired AffloVest in the quarter ended September 30, 2021.

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

Third quarter 2021 revenue was negatively impacted by the prolonged recovery from COVID-19, including the resurgence due to the Delta variant during the period, which resulted in restricted access to clinics and hospitals and disrupted the recovery in patient visits versus the pre-COVID environment.

In addition, the challenging labor market impacted our ability to recruit and retain quality candidates for our direct sales force .

Revenue increased $18.4 million, or 14%, to $146.3 million in the nine months ended September 30, 2021, compared to $127.9 million in the nine months ended September 30, 2020.

The increase was primarily attributable to an increase of $13.9 million, or 12%, in sales and rentals of our Flexitouch system, an increase of $3.7 million, or 24%, in sales and rentals of the Entre system and $0.9 million in sales of the recently acquired AffloVest for the nine months ended September 30, 2021.

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

However, in the t hird quarter of 2021 revenue was negatively impacted by the prolonged recovery from COVID-19, including the resurgence due to the Delta variant during the period, which resulted in restricted access to clinics and hospitals and disrupted the recovery in patient visits versus the pre-COVID environment.

In addition, the challenging labor market impacted our ability to recruit and retain quality candidates for our direct sales force .

Revenue from the Veterans Administration represented 13% and 14% of total revenue in the three months ended September 30, 2021 and 2020, respectively.

Revenue from the Veterans Administration represented 14% of total revenue in each of the nine months ended September 30, 2021 and 2020.

Revenue from Medicare represented 17% and 16% of total revenue in the three months ended September 30, 2021 and 2020, respectively.

Revenue from Medicare represented 18% and 15% of total revenue in the nine months ended September 30, 2021 and 2020, respectively.

The following table summarizes our revenue by product for the three and nine months ended September 30, 2021 and 2020, both in dollars and percentage of total revenue:

Revenue increased $5.2 million, or 12%, to $48.0 million in the three months ended March 31, 2022 , compared to $42.8 million in the three months ended March 31, 2021 .

The increase in total revenue was attributable to $7.3 million in sales of the airway clearance product line, which includes the AffloVest product acquired on September 8, 2021, partially offset by a decrease of $2.1 million, or 5%, in sales and rentals of the lymphedema product line in the quarter ended March 31, 2022, compared to the 2021 first quarter.

First quarter 2022 revenue was negatively impacted by the prolonged recovery from COVID-19, including the resurgence due to the Omicron variant during the period, which resulted in restricted access to clinics and hospitals and disrupted the recovery in patient visits versus the pre-COVID environment.

In addition, the challenging labor market continued to impact our ability to recruit and retain quality candidates for our direct sales force .

Revenue from the Veterans Administration represented 12% and 14% of total revenue in the three months ended March 31, 2022 and 2021, respectively.

Revenue from Medicare represented 18% and 20% of total revenue in the three months ended March 31, 2022 and 2021, respectively.

The following table summarizes our revenue by product line for the three months ended March 31, 2022 and 2021, both in dollars and percentage of total revenue:

Three Months Ended

September 30,

(In thousands)

Flexitouch system

Lymphedema products

Airway clearance products

Percentage of total revenue

Flexitouch system

“N.M.” Not Meaningful

Nine Months Ended

September 30,

(In thousands)

Flexitouch system

Percentage of total revenues

Flexitouch system

Lymphedema products

Airway clearance products

“N.M.” Not Meaningful

3 unchanged sentences

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.

Cost of Revenue and Gross Margin

Cost of revenue increased $1.4 million, or 10%, to $15.5 million in the three months ended September 30, 2021, compared to $14.1 million in the three months ended September 30, 2020.

Cost of revenue increased $6.0 million, or 16%, to $42.9 million in the nine months ended September 30, 2021, compared to $36.9 million in the nine months ended September 30, 2020.

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

The total gross margin rate was 70% and 71% of sales in the three months ended September 30, 2021 and 2020, respectively, and 71% of sales in each of the nine months ended September 30, 2021 and 2020.

Cost of revenue increased $1.6 million, or 13%, to $14.1 million in the three months ended March 31, 2022, compared to $12.5 million in the three months ended March 31, 2021.

The increase in cost of revenue was primarily attributable to the additional contribution of AffloVest sales and an increase in inbound freight costs.

The total gross margin was 71% of sales in each of the three months ended March 31, 2022 and 2021.

Sales and Marketing Expenses

Sales and marketing expenses increased $2.7 million, or 14%, to $22.2 million in the three months ended September 30, 2021, compared to $19.5 million in the three months ended September 30, 2020.

The increase was primarily attributable to a:

● $1.3 million increase in personnel-related compensation expense as a result of the increased headcount in the collective field commercial team, including sales personnel associated with the AffloVest acquisition;

● $1.4 million increase in other selling expenses, driven mostly by increased meetings, travel and entertainment expenses.

Sales and marketing expenses increased $2.1 million, or 3%, to $61.9 million in the nine months ended September 30, 2021, compared to $59.9 million in the nine months ended September 30, 2020.

Sales and marketing expenses increased $5.1 million, or 27%, to $23.9 million in the three months ended March 31, 2022, compared to $18.8 million in the three months ended March 31, 2021.

The increase was primarily attributable to a:

1 unchanged sentence

● $1.0 million increase in travel and entertainment expense due to eased restrictions on travel;

● $0.4 million increase in demo equipment expense.

These increases were partially offset by a:

● $2.0 million decrease in expenses due to reduced sales meetings, tradeshows and professional services;

● $0.7 million decrease in external patient training expense.

● $0.3 million increase in sales meetings and tradeshows.

These increases were partially offset by a $0.8 million decrease in external patient training expense as a result of transitioning to employee trainers.

Research and Development Expenses

Research and development (“R&D”) expenses increased $0.3 million, or 28%, to $1.4 million in the three months ended September 30, 2021, compared to $1.1 million in the three months ended September 30, 2020, which was primarily attributable to an increase in professional services.

R&D expenses were $3.9 million in each of the nine months ended September 30, 2021 and 2020.

Research and development (“R&D”) expenses increased $0.3 million, or 20%, to $1.5 million in the three months ended March 31, 2022, compared to $1.3 million in the three months ended March 31, 2021, which was primarily attributable to an increase in personnel-related compensation expense and R&D supplies.

Reimbursement, General and Administrative Expenses

Reimbursement, general and administrative expenses increased $2.0 million, or 16%, to $14.5 million in the three months ended September 30, 2021, compared to $12.5 million in the three months ended September 30, 2020.

Reimbursement, general and administrative expenses increased $2.0 million, or 14%, to $16.2 million in the three months ended March 31, 2022, compared to $14.2 million in the three months ended March 31, 2021.

This increase was primarily attributable to a:

● $1.0 million increase in occupancy costs, depreciation expense, legal and professional fees;

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

● $0.3 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer relations and corporate functions.

Reimbursement, general and administrative expenses increased $5.1 million, or 14%, to $42.8 million in the nine months ended September 30, 2021, compared to $37.7 million in the nine months ended September 30, 2020.

The increase was primarily attributable to a:

● $4.5 million increase in occupancy costs, depreciation expense, legal and professional fees;

● $1.2 million increase in occupancy costs, depreciation expense, and legal and professional fees;

● $0.8 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer relations and corporate functions.

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

partially offset by a

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

Intangible Asset Amortization

Intangible asset amortization expense increased $0.1 million to $0.2 million in the three months ended September 30, 2021, compared to $0.1 million in the three months ended September 30, 2020, which was primarily attributable to the amortization recognized related to the assets recorded as a result of the acquisition of AffloVest.

Intangible asset amortization expenses increased $0.1 million to $0.3 million in the nine months ended September 30, 2021, compared to $0.2 million in the three months ended September 30, 2020, which was primarily attributable to the amortization recognized related to the assets recorded as a result of the acquisition of AffloVest.

Other (Expense) Income, Net

Other (expense) income, net was an expense of $0.1 million for each of the three months ended September 30, 2021 and 2020, and was an expense of $0.2 million and income of $0.2 million for the nine months ended September 30, 2021 and 2020, respectively.

Other (expense) income was primarily impacted by interest income realized on marketable securities, the gain and loss on cost method investments and an increase in interest expense recognized in the third quarter of 2021 .

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

The increase in income tax expense was primarily due to a change in our effective tax rate, which was attributable to a change in projected taxable income.

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

The primary driver of the change was a tax benefit related to a research and development credit recognized in the second quarter of 2021 as well as 100% deductibility of business meals in 2021 as compared to 50% deductibility in 2020.

Intangible Asset Amortization and Earn-out Expense

Intangible asset amortization and earn-out expense increased $7.0 million to $7.1 million in the three months ended March 31, 2022, compared to $0.1 million in the three months ended March 31, 2021.

The increase in intangible asset amortization and earn-out expense was primarily attributable to the increase in the estimated fair value of our earn-out liability.

Other Expense, Net

Other expense, net was $0.5 million and $10 thousand for the three months ended March 31, 2022 and 2021, respectively.

Other expense was primarily attributable to an increase in interest expense .

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

The difference relates to a full valuation allowance being recorded against all deferred tax assets in the current year.

Liquidity and Capital Resources

At September 30, 2021, our principal sources of liquidity were cash and cash equivalents of $ 22.4 million and net accounts receivable of $ 44.3 million.

This compares to cash and cash equivalents of $47.9 million and net accounts receivable of $43.8 million at September 30, 2020.

At March 31, 2022 , our principal sources of liquidity were cash and cash equivalents of $ 21.2 million and net accounts receivable of $ 59.5 million.

This compares to cash and cash equivalents of $28.2 million and net accounts receivable of $62.3 million at December 31, 2021.

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

Nine Months Ended

September 30,

Three Months Ended

(In thousands)

3 unchanged sentences

Financing activities

Net (decrease) increase in cash and cash equivalents

Net decrease in cash and cash equivalents

Operating Activities

Net cash used in operating activities during the nine months ended September 30, 2021, was $3.0 million, resulting from a net loss of $4.3 million and a net decrease in operating assets and liabilities, net of acquisition, of $6.8 million, which was partially offset by non-cash net income (loss) adjustments of $8.1 million.

The non-cash net income (loss) adjustments consisted primarily of $7.7 million of stock-based compensation expense, $2.1 million of depreciation and amortization expense and a $1.7 million increase in deferred taxes.

The uses of cash related to changes in operating assets primarily consisted of increases in inventories of $3.6 million, in accounts receivable of $3.4 million, in net investment in leases of $1.7 million, in income taxes of $1.2 million, and in prepaid expenses and other assets of $1.1 million.

The changes in operating liabilities consisted of increases in accrued expenses and other liabilities of $2.9 million and accounts payable of $2.0 million, partially offset by a decrease in accrued payroll and related taxes of $1.3 million.

Net cash used in operating activities during the nine months ended September 30, 2020, was $2.2 million, resulting from a net loss of $12.7 million and a net increase in operating assets and liabilities of $7.9 million, which were offset by non-cash net income adjustments of $18.2 million.

The non-cash net income adjustments consisted primarily of $8.3 million of stock-based compensation expense, a $4.0 million impairment

loss charge related to the write-off of our Airwear wrap product line, a $3.9 million decrease in deferred taxes and $2.1 million of depreciation and amortization expense.

The uses of cash related to changes in operating assets primarily consisted of increases in accounts receivable of $5.5 million, in inventories of $3.5 million, in prepaid expenses and other assets of $1.6 million and in net investment in leases of $1.3 million, partially offset by a decrease in income taxes receivable of $0.7 million.

The changes in operating liabilities consisted primarily of increases in accrued expenses and other liabilities of $1.1 million, in accounts payable of $0.9 million and in accrued payroll and related taxes of $0.8 million.

Net cash used in operating activities during the three months ended March 31, 2022, was $3.2 million, resulting from a net loss of $15.6 million and a net decrease in operating assets and liabilities of $2.1 million, which was partially offset by non-cash net income (loss) adjustments of $10.3 million.

The non-cash net income (loss) adjustments consisted primarily of $6.5 million related to a change in fair value of earn-out liability, $2.2 million of stock-based compensation expense, $1.5 million of depreciation and amortization expense and $0.1 million of deferred income tax expense.

The uses of cash related to changes in operating assets primarily consisted of decreases in accounts receivable of $2.8 million and in net investment in leases of $0.2 million, partially offset by increases in prepaid expenses and other assets of $0.6 million and in inventories of $0.3 million.

The changes in operating liabilities consisted of a decrease in accrued payroll and related taxes of $2.7 million, partially offset by increases in accrued expenses and other liabilities of $1.4 million and accounts payable of $1.2 million.

Net cash used in operating activities during the three months ended March 31, 2021, was $0.8 million, resulting from a net loss of $2.3 million which was offset by non-cash net income (loss) adjustments of $1.4 million and a net decrease in operating assets and liabilities of $0.1 million.

The non-cash net income (loss) adjustments consisted primarily of $2.5 million of stock-based compensation expense, $1.8 million in deferred taxes and $0.7 million of depreciation and amortization expense.

The uses of cash related to changes in operating assets primarily consisted of increases in inventories of $3.5 million and net investment in leases of $0.5 million, partially offset by decreases in accounts receivable of $2.5 million and prepaid expenses and other assets of $0.4 million.

The changes in operating liabilities consisted of an increase in accounts payable of $5.0 million, partially offset by decreases in accrued payroll and related taxes of $3.0 million and accrued expenses and other liabilities of $0.8 million .

Investing Activities

Net cash used in investing activities during the nine months ended September 30, 2021, was $81.2 million, primarily consisting of acquisition-related payments of $79.8 million associated with the purchase of the AffloVest business and $1.4 million in purchases of property and equipment, and patent costs.

Net cash provided by investing activities during the nine months ended September 30, 2020, was $20.7 million, primarily consisting of $22.5 million in proceeds from maturities of marketable securities, partially offset by $1.8 million in purchases of property and equipment, and patent costs.

Net cash used in investing activities during the three months ended March 31, 2022, was $0.2 million, consisting of purchases of property and equipment, and patent costs.

Net cash used in investing activities during the three months ended March 31, 2021, was $0.3 million consisting of purchases of property and equipment, and patent costs.

Financing Activities

Net cash provided by financing activities during the nine months ended September 30, 2021, was $58.8 million, primarily consisting of borrowings of $54.8 million net of debt issuance costs incurred and $5.1 million in proceeds from the exercise of common stock options and the issuance of common stock under the ESPP, partially offset by $1.2 million in taxes paid for the net share settlement of performance and restricted stock units.

Net cash provided by financing activities during the nine months ended September 30, 2020, was $1.0 million, consisting of $2.6 million in proceeds from the exercise of common stock options and the issuance of common stock under the ESPP, partially offset by $1.6 million in taxes paid for the net share settlement of performance and restricted stock units.

Net cash used by financing activities during the three months ended March 31, 2022, was $3.7 million, primarily consisting of payments of $3.8 million made on our term loan, slightly offset by $0.1 million in proceeds from exercise of common stock options.

Net cash provided by financing activities during the three months ended March 31, 2021, was $0.2 million, consisting of $1.3 million in proceeds from exercise of common stock options, partially offset by $1.1 million in taxes paid for the net share settlement of performance and restricted stock units .

Credit Agreement

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

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

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

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

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

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.

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

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 amends 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.

As of September 30, 2021, we had outstanding borrowings of $55.0 million under the Credit Agreement, comprised of $30.0 million under the term loan and $25.0 million under the revolving credit facility.

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.

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, 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.

For additional information regarding the Credit Agreement, including interest rates, fees and maturities, see Note 9 – “Credit Agreement” of the condensed consolidated financial statements contained in this report.

Adequacy of Capital Resources

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

Future Cash Requirements

For a discussion of our material estimated future cash requirements under our contractual obligations and commercial commitments, in total and disaggregated into current and long-term , see “Future Cash Requirements” included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2021.

There have been no material changes since December 31, 2021.

Adequacy of Resources

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

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

● sales and marketing resources needed to further penetrate our market;

● increased inflation-related costs associated with labor and/or suppliers;

● expansion of our operations domestically and/or internationally;

1 unchanged sentence

● costs associated with clinical research activities;

● increases in interest rates;

● labor shortages and wage inflation;

● costs to develop and implement new products;

1 unchanged sentence

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

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

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

On March 27, 2020 the CARES Act was signed into law.

The CARES Act is a tax-and-spending package intended to provide economic relief to address the impact of the COVID-19 pandemic.

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

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

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

An initial $30 billion of the funds were released for immediate infusion and were distributed to all facilities and providers that received Medicare fee-for-service (“FFS”) reimbursements in 2019.

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

Within 45 days of each reporting period end, we are required to comply with reporting requirements confirming funds were utilized in a manner

described within the terms and conditions outlined by the U.S.

Department of Health & Human Services.

As of December 31, 2020, we recognized all of the funds received in the initial allotment as other income.

Contractual and Commercial Commitments Summary

For a discussion on our contractual and commercial commitments, see “Contractual and Commercial Commitments Summary,” included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2020.

There have been no material changes since December 31, 2020.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt.

Additionally, we are not a party to any derivative contracts or synthetic leases.

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

Recent Accounting Pronouncements

Refer to Note 3 – “Summary of Significant Accounting Policies” of the condensed consolidated financial statements contained in this report for a description of recently issued accounting pronouncements that are applicable to our business.

Critical Accounting Policies and Estimates

A “critical accounting policy” is one that is both important to the portrayal of our financial condition and results and requires management’s most subjective or complex judgments, often as a result of the need to make estimates about the effect of items that are inherently uncertain.

For additional information, please see the discussion of our significant accounting policies under “Critical Accounting Policies and Significant Estimates ” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2020.

Critical Accounting Estimates

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

For additional information, please see the discussion of our most critical accounting estimates under “Critical Accounting Estimates ” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2021.

Quantitative and Qualitative Disclosures About Market Risk

2 unchanged sentences

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 2. Management’s Discussion and Analysis