TACTILE SYSTEMS TECHNOLOGY INC 10-Q

Item 1. Financial Statements ​ ​ ​ ​ ​ ​ ​ ​ Tactile Systems Technology, Inc. Condensed Consolidated Balance Sheets (Unaudited) ​ September 30, December 31, (In thousands, except share and per share data) 2022 2021 Assets ​ ​ ​ ​ ​ Current assets ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 23,426 ​ $ 28,229 Accounts receivable ​ 51,814 ​ 49,478 Net investment in leases ​ 15,052 ​ 12,482 Inventories ​ 23,020 ​ 19,217 Prepaid expenses and other current assets ​ 3,484 ​ 4,141 Total current assets ​ 116,796 ​ 113,547 Non-current assets ​ ​ ​ ​ ​ ​ Property and equipment, net ​ 6,677 ​ 6,750 Right of use operating lease assets ​ 21,975 ​ 23,984 Intangible assets, net ​ 51,308 ​ 54,081 Goodwill ​ ​ 31,063 ​ ​ 31,063 Accounts receivable, non-current ​ 17,703 ​ 12,847 Other non-current assets ​ 3,004 ​ 1,998 Total non-current assets ​ 131,730 ​ 130,723 Total assets ​ $ 248,526 ​ $ 244,270 Liabilities and Stockholders' Equity ​ ​ ​ ​ ​ ​ Current liabilities ​ ​ ​ ​ ​ ​ Accounts payable ​ $ 11,171 ​ $ 5,023 Note payable ​ ​ 2,968 ​ ​ 2,960 Earn-out, current ​ ​ 10,000 ​ ​ 3,250 Accrued payroll and related taxes ​ 13,575 ​ 12,139 Accrued expenses ​ 6,953 ​ 5,262 Income taxes payable ​ 11 ​ 16 Operating lease liabilities ​ 2,486 ​ 2,506 Other current liabilities ​ 8,497 ​ 3,305 Total current liabilities ​ 55,661 ​ 34,461 Non-current liabilities ​ ​ ​ ​ ​ ​ Revolving line of credit, non-current ​ ​ 24,904 ​ ​ 24,857 Note payable, non-current ​ ​ 21,721 ​ ​ 26,933 Earn-out, non-current ​ ​ 7,098 ​ ​ 2,950 Accrued warranty reserve, non-current ​ 2,892 ​ 3,108 Income taxes payable, non-current ​ 298 ​ 348 Operating lease liabilities, non-current ​ ​ 21,506 ​ 23,354 Deferred income taxes ​ ​ 49 ​ ​ 32 Total non-current liabilities ​ 78,468 ​ 81,582 Total liabilities ​ 134,129 ​ 116,043 ​ ​ ​ ​ ​ ​ ​ Stockholders’ equity: ​ ​ ​ ​ ​ ​ Preferred stock, $ 0.001 par value, 50,000,000 shares authorized; none issued and outstanding as of September 30, 2022 and December 31, 2021 ​ — ​ — Common stock, $ 0.001 par value, 300,000,000 shares authorized; 20,155,704 shares issued and outstanding as of September 30, 2022; 19,877,786 shares issued and outstanding as of December 31, 2021 ​ 20 ​ 20 Additional paid-in capital ​ 128,619 ​ 119,962 (Accumulated deficit) retained earnings ​ ( 14,242 ) ​ 8,245 Total stockholders’ equity ​ 114,397 ​ 128,227 Total liabilities and stockholders’ equity ​ $ 248,526 ​ $ 244,270 ​ The accompanying notes are an integral part of these unaudited condensed consolidated financial statements ​ ​ 4 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Tactile Systems Technology, Inc. Condensed Consolidated Statements of Operations (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ September 30, ​ September 30, (In thousands, except share and per share data) 2022 2021 2022 2021 Revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Sales revenue ​ $ 55,545 ​ $ 44,460 ​ $ 147,980 ​ $ 124,215 Rental revenue ​ 9,717 ​ 8,037 ​ 24,905 ​ 22,114 Total revenue ​ 65,262 ​ 52,497 ​ 172,885 ​ 146,329 Cost of revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cost of sales revenue ​ 15,476 ​ 13,096 ​ 41,366 ​ 36,425 Cost of rental revenue ​ 2,992 ​ 2,433 ​ 7,640 ​ 6,501 Total cost of revenue ​ 18,468 ​ 15,529 ​ 49,006 ​ 42,926 Gross profit ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Gross profit - sales revenue ​ 40,069 ​ 31,364 ​ 106,614 ​ 87,790 Gross profit - rental revenue ​ 6,725 ​ 5,604 ​ 17,265 ​ 15,613 Gross profit ​ 46,794 ​ 36,968 ​ 123,879 ​ 103,403 Operating expenses ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Sales and marketing ​ 26,583 ​ 22,231 ​ 79,335 ​ 61,949 Research and development ​ 1,581 ​ 1,409 ​ 4,949 ​ 3,885 Reimbursement, general and administrative ​ 16,257 ​ 14,500 ​ 47,369 ​ 42,802 Intangible asset amortization and earn-out ​ ​ 3,993 ​ ​ 195 ​ ​ 12,834 ​ ​ 294 Total operating expenses ​ 48,414 ​ 38,335 ​ 144,487 ​ 108,930 Loss from operations ​ ( 1,620 ) ​ ( 1,367 ) ​ ( 20,608 ) ​ ( 5,527 ) Other expense ​ ( 736 ) ​ ( 120 ) ​ ( 1,765 ) ​ ( 154 ) Loss before income taxes ​ ( 2,356 ) ​ ( 1,487 ) ​ ( 22,373 ) ​ ( 5,681 ) Income tax (benefit) expense ​ ( 77 ) ​ 1,868 ​ 114 ​ ( 1,365 ) Net loss ​ $ ( 2,279 ) ​ $ ( 3,355 ) ​ $ ( 22,487 ) ​ $ ( 4,316 ) Net loss per common share ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ $ ( 0.11 ) ​ $ ( 0.17 ) ​ $ ( 1.12 ) ​ $ ( 0.22 ) Diluted ​ $ ( 0.11 ) ​ $ ( 0.17 ) ​ $ ( 1.12 ) ​ $ ( 0.22 ) Weighted-average common shares used to compute net loss per common share ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ ​ 20,139,944 ​ ​ 19,790,838 ​ ​ 20,021,966 ​ ​ 19,676,749 Diluted ​ ​ 20,139,944 ​ ​ 19,790,838 ​ ​ 20,021,966 ​ ​ 19,676,749 ​ The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. ​ ​ 5 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Tactile Systems Technology, Inc. Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Accumulated ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Additional ​ Deficit) ​ ​ ​ ​ ​ Common Stock ​ Paid-In ​ Retained ​ ​ ​ (In thousands, except share data) Shares Par Value Capital Earnings Total Balances, June 30, 2022 ​ 20,132,145 ​ $ 20 ​ $ 126,059 ​ $ ( 11,963 ) ​ $ 114,116 Stock-based compensation ​ — ​ ​ — ​ ​ 2,560 ​ ​ — ​ ​ 2,560 Exercise of common stock options and vesting of performance and restricted stock units ​ 23,559 ​ ​ — ​ ​ — ​ ​ — ​ ​ — Net loss for the period ​ — ​ ​ — ​ ​ — ​ ​ ( 2,279 ) ​ ​ ( 2,279 ) Balances, September 30, 2022 ​ 20,155,704 ​ $ 20 ​ $ 128,619 ​ $ ( 14,242 ) ​ $ 114,397 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balances, December 31, 2021 ​ 19,877,786 ​ $ 20 ​ $ 119,962 ​ $ 8,245 ​ $ 128,227 Stock-based compensation ​ — ​ ​ — ​ ​ 7,681 ​ ​ — ​ ​ 7,681 Exercise of common stock options and vesting of performance and restricted stock units ​ 192,644 ​ ​ — ​ ​ 152 ​ ​ — ​ ​ 152 Common shares issued for employee stock purchase plan ​ 85,274 ​ ​ — ​ ​ 824 ​ ​ — ​ ​ 824 Net loss for the period ​ — ​ ​ — ​ ​ — ​ ​ ( 22,487 ) ​ ​ ( 22,487 ) Balances, September 30, 2022 ​ 20,155,704 ​ $ 20 ​ $ 128,619 ​ $ ( 14,242 ) ​ $ 114,397 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balances, June 30, 2021 ​ 19,782,295 ​ $ 20 ​ $ 113,601 ​ $ 19,095 ​ $ 132,716 Stock-based compensation ​ — ​ ​ — ​ ​ 2,588 ​ ​ — ​ ​ 2,588 Exercise of common stock options and vesting of performance and restricted stock units ​ 16,366 ​ ​ — ​ ​ 199 ​ ​ — ​ ​ 199 Taxes paid for net share settlement of performance and restricted stock units ​ ( 938 ) ​ ​ — ​ ​ ( 42 ) ​ ​ — ​ ​ ( 42 ) Net loss for the period ​ — ​ ​ — ​ ​ — ​ ​ ( 3,355 ) ​ ​ ( 3,355 ) Balances, September 30, 2021 ​ 19,797,723 ​ $ 20 ​ $ 116,346 ​ $ 15,740 ​ $ 132,106 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balances, December 31, 2020 ​ 19,492,718 ​ $ 19 ​ $ 104,675 ​ $ 20,056 ​ $ 124,750 Stock-based compensation ​ — ​ ​ — ​ ​ 7,703 ​ ​ — ​ ​ 7,703 Exercise of common stock options and vesting of performance and restricted stock units ​ 284,829 ​ ​ 1 ​ ​ 3,583 ​ ​ — ​ ​ 3,584 Taxes paid for net share settlement of performance and restricted stock units ​ ( 21,918 ) ​ ​ — ​ ​ ( 1,157 ) ​ ​ — ​ ​ ( 1,157 ) Common shares issued for employee stock purchase plan ​ 42,094 ​ ​ — ​ ​ 1,542 ​ ​ — ​ ​ 1,542 Net loss for the period ​ — ​ ​ — ​ ​ — ​ ​ ( 4,316 ) ​ ​ ( 4,316 ) Balances, September 30, 2021 ​ 19,797,723 ​ $ 20 ​ $ 116,346 ​ $ 15,740 ​ $ 132,106 ​ The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. ​ 6 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ Tactile Systems Technology, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) ​ ​ ​ ​ ​ Nine Months Ended September 30, (In thousands) 2022 2021 Cash flows from operating activities ​ ​ ​ ​ ​ ​ Net loss ​ $ ( 22,487 ) ​ $ ( 4,316 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: ​ ​ ​ ​ ​ ​ Depreciation and amortization ​ ​ 4,670 ​ ​ 2,150 Deferred income taxes ​ ​ 17 ​ ​ ( 1,709 ) Stock-based compensation expense ​ ​ 7,681 ​ ​ 7,703 Loss on disposal of property and equipment and intangibles ​ ​ 20 ​ ​ 7 Change in fair value of earn-out liability ​ ​ 10,898 ​ ​ — Changes in assets and liabilities, net of acquisition: ​ ​ ​ ​ ​ ​ Accounts receivable ​ ​ ( 2,336 ) ​ ​ ( 408 ) Net investment in leases ​ ​ ( 2,570 ) ​ ​ ( 1,677 ) Inventories ​ ​ ( 3,803 ) ​ ​ ( 3,641 ) Income taxes ​ ​ ( 55 ) ​ ​ ( 1,181 ) Prepaid expenses and other assets ​ ​ ( 349 ) ​ ​ ( 1,133 ) Right of use operating lease assets ​ ​ 141 ​ ​ 588 Accounts receivable, non-current ​ ​ ( 4,856 ) ​ ​ ( 2,989 ) Accounts payable ​ ​ 6,148 ​ ​ 1,995 Accrued payroll and related taxes ​ ​ 1,436 ​ ​ ( 1,266 ) Accrued expenses and other liabilities ​ ​ 6,799 ​ ​ 2,902 Net cash provided by (used in) operating activities ​ ​ 1,354 ​ ​ ( 2,975 ) Cash flows from investing activities ​ ​ ​ ​ ​ ​ Payments related to acquisition ​ ​ — ​ ​ ( 79,829 ) Purchases of property and equipment ​ ​ ( 1,731 ) ​ ​ ( 1,221 ) Intangible assets expenditures ​ ​ ( 113 ) ​ ​ ( 187 ) Net cash used in investing activities ​ ​ ( 1,844 ) ​ ​ ( 81,237 ) Cash flows from financing activities ​ ​ ​ ​ ​ ​ Proceeds from issuance of note payable ​ ​ — ​ ​ 30,000 Proceeds from revolving line of credit ​ ​ — ​ ​ 25,000 Payments on note payable ​ ​ ( 5,250 ) ​ ​ — Payments of deferred debt issuance costs ​ ​ ( 39 ) ​ ​ ( 211 ) Taxes paid for net share settlement of performance and restricted stock units ​ ​ — ​ ​ ( 1,157 ) Proceeds from exercise of common stock options ​ ​ 152 ​ ​ 3,584 Proceeds from the issuance of common stock from the employee stock purchase plan ​ ​ 824 ​ ​ 1,542 Net cash (used in) provided by financing activities ​ ​ ( 4,313 ) ​ ​ 58,758 Net decrease in cash and cash equivalents ​ ​ ( 4,803 ) ​ ​ ( 25,454 ) Cash and cash equivalents – beginning of period ​ ​ 28,229 ​ ​ 47,855 Cash and cash equivalents – end of period ​ $ 23,426 ​ $ 22,401 ​ ​ ​ ​ ​ ​ ​ Supplemental cash flow disclosure ​ ​ ​ ​ ​ ​ Cash paid for interest ​ $ 1,433 ​ $ — Cash paid for taxes ​ $ 29 ​ $ 1,541 Capital expenditures incurred but not yet paid ​ $ 16 ​ $ — ​ The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. ​ 7 Table of Contents ​ Tactile Systems Technology, Inc. Notes to the Condensed Consolidated Financial Statements (Unaudited) Note 1. Nature of Business and Operations Tactile Systems Technology, Inc. (“we,” “us,” and “our”) manufactures and distributes medical devices for the treatment of patients with underserved chronic diseases at home. We provide our Flexitouch® and Entre™ systems, which help control symptoms of lymphedema, a chronic progressive medical condition, 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 manufactured AffloVest. AffloVest is a portable, wearable vest that treats patients with chronic respiratory conditions. We sell this device through home medical equipment and durable medical equipment (“DME”) providers throughout the United States. We were originally incorporated in Minnesota under the name Tactile Systems Technology, Inc. on January 30, 1995. During 2006, we established a merger corporation and subsequently, on July 21, 2006, merged with and into this merger corporation, resulting in our reincorporation as a Delaware corporation. The resulting corporation assumed the name Tactile Systems Technology, Inc. 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. Our business is affected by seasonality. In the first quarter of each year, when most patients have started a new insurance year and have not yet met their annual out-of-pocket payment obligations, we experience substantially reduced demand for our products. We typically experience higher revenue in the third and fourth quarters of the year when patients have met their annual insurance deductibles, thereby reducing their out-of-pocket costs for our products, and because patients desire to exhaust their flexible spending accounts at year end. This seasonality applies only to purchases and rentals of our products by patients covered by commercial insurance and is not relevant to Medicare, Medicaid or the Veterans Administration, as those payers either do not have plans that have declining deductibles over the course of the plan year and/or do not have plans that include patient deductibles for purchases or rentals of our products. Further, seasonality trends have been, and may continue to be, significantly different than historical trends as a result of the COVID-19 pandemic and related impacts . Note 2. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. 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, 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. 8 Table of Contents Principles of Consolidation The accompanying unaudited condensed consolidated financial statements include the accounts of Tactile Systems Technology, Inc. and its wholly owned subsidiary, Swelling Solutions, Inc. All intercompany balances and transactions have been eliminated in consolidation. Risks and Uncertainties Coronavirus (COVID-19) 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 most of 2021 and during the first quarter of 2022. We have also seen staffing challenges, both in our organization and at the clinics we serve, as another lingering consequence of the COVID-19 pandemic. While we saw some level of recovery in the second and third quarters of 2022, ongoing consequences of the pandemic remain uncertain. 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 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. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and to disclose contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. ​ Note 3. 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, 2022. 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. Accounting Pronouncement Not Yet Adopted In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-04, “Reference Rate Reform (Topic 848) — Facilitation of the Effect of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”), addressing the discontinuation of LIBOR, a widely used reference rate for pricing financial products. The ASU is intended to provide optional expedients and exceptions if certain criteria are met when accounting for contracts, hedging relationships and other transactions that reference LIBOR, or another reference rate expected to be discontinued because of reference rate reform. The application and adoption requirements of ASU 2020-04 are optional until December 31, 2022 and vary based on expedients elected. We have not elected any expedients to date and are currently evaluating any potential future impacts on the condensed consolidated financial statements. 9 Table of Contents Note 4. Acquisitions 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. We acquired AffloVest to further expand our position as a leader in treating patients with underserved chronic conditions in the home. The acquired assets included inventory, tooling, intellectual property, permits and approvals, data and records, and customer and supplier information. At closing, $ 80.0 million of the purchase price was paid, of which a total of $ 0.5 million was deposited into an escrow account at closing for purposes of satisfying certain post-closing purchase price adjustments and indemnification claims. Subsequent to closing, $ 0.2 million was returned to us as a result of working capital adjustments. The AffloVest acquisition was funded through a combination of cash on hand and proceeds from borrowings. ​ On November 4, 2022, we entered into an Amendment to the AffloVest APA (the “APA Amendment”) with IBC, which modifies the terms of the earn-out arrangement under the AffloVest APA, as follows: ​ ● Initial Earn-Out: The AffloVest APA provided for an initial earn-out 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; provided that in no event will the payment exceed $ 10.0 million. o The APA Amendment provides that the calculated amount of the initial earn-out payment is $ 10.0 million, of which the Company will pay $ 5.0 million on or before November 28, 2022, and of which the Company will pay $ 5.0 million, plus an imputed interest payment of $ 250,000 , on or before May 26, 2023. ​ ● Second Earn-Out: The AffloVest APA provided for a second earn-out 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. o The APA Amendment changes the 1.5 times multiplier to 3.0 times, but still provides that in no event will the second earn-out payment exceed $ 10.0 million. ​ The fair value of the earn-out as of the acquisition date was $ 6.4 million. The fair value of the earn-out, reflecting management’s estimate of the likelihood of achieving these targets, was determined by employing a Monte Carlo Simulation model. This amount and the current versus non-current allocation is 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. The following table summarizes the purchase price allocation: ​ ​ ​ ​ ​ (In millions) Allocated Fair Value Inventories ​ $ 1.6 Property and equipment (1) ​ ​ — Intangible assets ​ ​ 53.5 Goodwill ​ ​ 31.1 Purchase price ​ $ 86.2 (1) The purchase price included less than $ 0.1 million of property and equipment. The goodwill reflects expected synergies of combining the acquired products and customer information with our existing operations, and is deductible for tax purposes over 15 years . ​ ​ ​ ​ 10 Table of Contents The following table reflects the allocation of the purchase price to the acquired intangible assets and related estimated useful lives: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (In millions) Allocated Fair Value ​ Estimated Useful Life Customer relationships ​ $ 31.0 ​ 13 years Developed technology ​ ​ 13.0 ​ 11 years Tradenames ​ 9.5 ​ Indefinite Total intangible assets ​ $ 53.5 ​ ​ ​ The weighted-average amortization period of the acquired definite-lived intangible assets was 12.3 years. ​ The fair market valuations associated with the assets acquired fall within Level 3 of the fair value hierarchy, due to the use of significant unobservable inputs to determine fair value. The fair value measurements were calculated using unobservable inputs, primarily using the income approach, specifically the discounted cash flow method. The amount and timing of future cash flows within our analysis was based on our due diligence models, most recent operational budgets, long-range strategic plans and other estimates. ​ ​ Note 5. Inventories Inventories consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ (In thousands) At September 30, 2022 At December 31, 2021 Finished goods ​ $ 7,060 ​ $ 8,242 Component parts and work-in-process ​ 15,960 ​ 10,975 Total inventories ​ $ 23,020 ​ $ 19,217 ​ ​ ​ ​ Note 6. Goodwill and Intangible Assets 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ At September 30, 2022 ​ ​ Average ​ Gross ​ ​ ​ ​ ​ ​ Amortization ​ Carrying ​ Accumulated ​ Net (In thousands) Period ​ Amount ​ Amortization ​ Amount Definite-lived intangible assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Patents ​ 12 years ​ $ 829 ​ $ 157 ​ $ 672 Defensive intangible assets ​ 3 years ​ ​ 1,125 ​ ​ 721 ​ ​ 404 Customer accounts ​ 1 year ​ ​ 125 ​ ​ 108 ​ ​ 17 Customer relationships ​ 12 years ​ ​ 31,000 ​ ​ 2,530 ​ ​ 28,470 Developed technology ​ 10 years ​ ​ 13,000 ​ ​ 1,254 ​ ​ 11,746 Subtotal ​ ​ ​ ​ 46,079 ​ ​ 4,770 ​ ​ 41,309 Unamortized intangible assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Tradenames ​ ​ ​ ​ 9,500 ​ ​ — ​ ​ 9,500 Patents pending ​ ​ ​ ​ 499 ​ ​ — ​ ​ 499 Total intangible assets ​ ​ ​ $ 56,078 ​ $ 4,770 ​ $ 51,308 ​ 11 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ ​ At December 31, 2021 ​ ​ Average ​ ​ Gross ​ ​ ​ ​ ​ ​ Amortization ​ ​ Carrying ​ Accumulated ​ Net (In thousands) Period ​ ​ Amount ​ Amortization ​ Amount Definite-lived intangible assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Patents ​ 12 years ​ ​ $ 666 ​ $ 109 ​ $ 557 Defensive intangible assets ​ 3 years ​ ​ ​ 1,125 ​ ​ 592 ​ ​ 533 Customer accounts ​ 1 year ​ ​ 125 ​ 89 ​ 36 Customer relationships ​ 13 years ​ ​ ​ 31,000 ​ ​ 742 ​ ​ 30,258 Developed technology ​ 11 years ​ ​ ​ 13,000 ​ ​ 368 ​ ​ 12,632 Subtotal ​ ​ ​ ​ ​ 45,916 ​ ​ 1,900 ​ ​ 44,016 Unamortized intangible assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Tradenames ​ ​ ​ ​ ​ 9,500 ​ ​ — ​ ​ 9,500 Patents pending ​ ​ ​ ​ ​ 565 ​ ​ — ​ ​ 565 Total intangible assets ​ ​ ​ ​ $ 55,981 ​ $ 1,900 ​ $ 54,081 ​ Amortization expense was $ 1.0 million and $ 0.3 million for the three months ended September 30, 2022 and 2021, respectively, and $ 2.9 million and $ 0.4 million for the nine months ended September 30, 2022 and 2021, respectively. Future amortization expenses are expected as follows: ​ ​ ​ ​ ​ (In thousands) ​ ​ ​ 2022 (October 1 - December 31) $ 958 2023 ​ ​ 3,801 2024 ​ 3,780 2025 ​ 3,690 2026 ​ 3,626 Thereafter ​ 25,454 Total ​ $ 41,309 ​ In the third quarter of 2022, we performed our annual goodwill impairment test utilizing both the qualitative and quantitative approach described in FASB ASU No. 2021-03, “Intangibles—Goodwill and Other (Topic 350) – Accounting Alternative for Evaluating Triggering Events. Based on the testing using the qualitative approach, it was determined that it was not more likely than not that the fair value of the reporting unit was less than the carrying value. As a result, it was not deemed necessary to proceed to the quantitative test and no impairment was recognized. ​ ​ Note 7. Accrued Expenses Accrued expenses consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ (In thousands) At September 30, 2022 At December 31, 2021 Legal and consulting ​ $ 1,835 ​ $ 1,371 Warranty ​ ​ 1,732 ​ ​ 1,851 Travel ​ ​ 918 ​ ​ 661 In-transit inventory ​ 589 ​ 416 Clinical studies ​ ​ 165 ​ ​ 113 Sales and use tax ​ ​ 110 ​ ​ 106 Other ​ 1,604 ​ 744 Total ​ $ 6,953 ​ $ 5,262 ​ ​ 12 Table of Contents Note 8. Warranty Reserves The activity in the warranty reserve during and as of the end of the reporting periods presented was as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ September 30, ​ September 30, (In thousands) 2022 2021 2022 2021 Beginning balance ​ $ 4,818 ​ $ 5,117 ​ $ 4,959 ​ $ 4,841 Warranty provision ​ 589 ​ 624 ​ 1,586 ​ 2,080 Processed warranty claims ​ ( 783 ) ​ ( 604 ) ​ ( 1,921 ) ​ ( 1,784 ) Ending balance ​ $ 4,624 ​ $ 5,137 ​ $ 4,624 ​ $ 5,137 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accrued warranty reserve, current ​ $ 1,732 ​ $ 1,779 ​ $ 1,732 ​ $ 1,779 Accrued warranty reserve, non-current ​ ​ 2,892 ​ ​ 3,358 ​ ​ 2,892 ​ ​ 3,358 Total accrued warranty reserve ​ $ 4,624 ​ $ 5,137 ​ $ 4,624 ​ $ 5,137 ​ ​ Note 9. 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 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. 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 September 30, 2022, the outstanding balance of the term loan was $ 24.8 million and the outstanding balance under the revolving credit facility was $ 25.0 million. As of September 30, 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 13 Table of Contents one, three or six months, at our option, plus the applicable margin. The applicable margin is 0.75 % to 2.25 % on loans bearing interest at the Base Rate and 1.75 % to 3.25 % on loans bearing interest at LIBOR, in each case depending on our consolidated total leverage ratio; except that, pursuant to the Second Amendment, during the period commencing on February 22, 2022 and ending on the last day of the fiscal quarter ending June 30, 2023, the applicable margin for LIBOR rate loans is 3.50 % . At September 30, 2022, all outstanding borrowings were subject to interest at a rate calculated at LIBOR plus an applicable margin, for an interest rate of 5.93 % . 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, 2022, are as follows: ​ ​ ​ ​ ​ (In thousands) Amount 2022 (October 1 - December 31) ​ $ 750 2023 ​ ​ 3,000 2024 ​ ​ 21,000 Total ​ $ 24,750 ​ 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 September 30, 2022, we were in compliance with all financial covenants under the Credit Agreement. Note 10. Commitments and Contingencies Lease Obligations We lease property and equipment under operating leases, typically with terms greater than 12 months , and determine if an arrangement contains a lease at inception. In general, an arrangement contains a lease if there is an identified asset and we have the right to direct the use of and obtain substantially all of the economic benefit from the use of the identified asset. We record an operating lease liability at the present value of lease payments over the lease term on the commencement date. The related right of use (“ROU”) operating lease asset reflects rental escalation clauses, as well as renewal options and/or termination options. The exercise of lease renewal and/or termination options are at our discretion and are included in the determination of the lease term and lease payment obligations when it is deemed reasonably certain that the option will be exercised. When available, we use the rate implicit in the lease to discount lease payments to present value; however, certain leases do not provide a readily determinable implicit rate. Therefore, we must estimate our incremental borrowing rate to discount the lease payments based on information available at lease commencement. 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 Sheets. None of our lease agreements contain material restrictive covenants or residual value guarantees. Buildings 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 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 September 30, 2022. 14 Table of Contents We entered into a lease (“initial lease”) in October 2018, for approximately 80,000 square feet of office space for our new corporate headquarters in Minneapolis, Minnesota. In December 2018, we amended the initial lease to add approximately 29,000 square feet of additional office space, which is accounted for as a separate lease (“second lease”) in accordance with ASU No. 2016-02, “Leases” (Topic 842) (“ASC 842”). In December 2019, we further amended the lease which extended the expiration date of the initial lease, extended the expiration date of and added approximately 4,000 square feet to the second lease, as well as added approximately 37,000 square feet of additional office space, accounted for as a separate lease (“third lease”) in accordance with ASC 842. The portion of the space covered under the initial lease was placed in service in September 2019. The portion of the space covered under the second lease commenced in September 2020. Finally, the portion of the space covered under the third lease commenced in September 2021. Vehicles We lease vehicles for certain members of our field sales organization under a vehicle fleet program whereby the initial, noncancelable lease is for a term of 367 days , thus more than one year. Subsequent to the initial term, the lease becomes a month-to-month, cancelable lease. As of September 30, 2022, we had approximately nine 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. The nonlease components are not significant. Computer and Office Equipment We also have operating lease agreements for certain computer and office equipment. The remaining lease terms as of September 30, 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. The leases will automatically renew as a month-to-month rental at the end of the lease if the equipment is not purchased or returned. ​ 15 Table of Contents Lease Position, Undiscounted Cash Flow and Supplemental Information The table below presents information related to our ROU operating lease assets and operating lease liabilities that we have recorded: ​ ​ ​ ​ ​ ​ ​ ​ (In thousands) At September 30, 2022 At December 31, 2021 Right of use operating lease assets ​ $ 21,975 ​ $ 23,984 ​ ​ ​ ​ ​ ​ ​ Operating lease liabilities: ​ ​ ​ ​ ​ ​ Current ​ $ 2,486 ​ $ 2,506 Non-current ​ 21,506 ​ 23,354 Total ​ $ 23,992 ​ $ 25,860 ​ ​ ​ ​ ​ ​ ​ Operating leases: ​ ​ ​ ​ ​ ​ Weighted average remaining lease term ​ 7.9 years ​ ​ 8.6 years Weighted average discount rate ​ ​ 4.2 % ​ ​ 4.2 % ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, ​ ​ 2022 ​ 2021 Supplemental cash flow information for our operating leases: ​ ​ ​ ​ ​ ​ Cash paid for operating lease liabilities ​ $ 2,703 ​ $ 2,411 Non-cash right of use assets obtained in exchange for new operating lease obligations ​ $ 49 ​ $ 6,146 ​ The table below reconciles the undiscounted cash flows for the periods presented to the operating lease liabilities recorded on the Condensed Consolidated Balance Sheet for the periods presented: ​ ​ ​ ​ ​ (In thousands) ​ ​ ​ 2022 (October 1 - December 31) ​ $ 874 2023 ​ ​ 3,428 2024 ​ 3,418 2025 ​ 3,518 2026 ​ 3,615 Thereafter ​ 13,249 Total minimum lease payments ​ ​ 28,102 Less: Amount of lease payments representing interest ​ ​ ( 4,110 ) Present value of future minimum lease payments ​ ​ 23,992 Less: Current obligations under operating lease liabilities ​ ​ ( 2,486 ) Non-current obligations under operating lease liabilities ​ $ 21,506 ​ Operating lease costs were $ 0.9 million for each of the three months ended September 30, 2022 and 2021. Operating lease costs were $ 2.8 million and $ 2.6 million for the nine months ended September 30, 2022 and 2021, respectively. Major Vendors We had purchases from one vendor that accounted for 24 % of our total purchases for the three months ended September 30, 2022 and purchases from two vendors that accounted for 44 % of our total purchases for the nine months ended September 30, 2022. We had purchases from two vendors that accounted for 36 % of our total purchases for the three months ended September 30, 2021 and purchases from one vendor that accounted for 24 % of our total purchases for the nine months ended September 30, 2021. 16 Table of Contents Purchase Commitments We issued purchase orders prior to September 30, 2022, totaling $ 36.3 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 $ 0.4 million and $ 0.3 million for the three months ended September 30, 2022 and 2021, respectively, and $ 1.1 million and $ 0.9 million for the nine months ended September 30, 2022 and 2021, respectively. Legal Proceedings From time to time, we are subject to various claims and legal proceedings arising in the ordinary course of business. Regardless of outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors. 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. 0:20-cv-02074-NEB-BRT (the “Mart lawsuit”). On April 19, 2021, the plaintiff filed an Amended Complaint against us and eight of our present and former officers and directors. Plaintiff seeks to represent a class consisting of investors who purchased our common stock in the market during the time period from May 7, 2018 through June 8, 2020 (“alleged class period”). The Amended Complaint alleges the following claims under the Securities Exchange Act of 1934, as amended (the “Exchange Act”): (1) that we and certain officer defendants made materially false or misleading public statements about our business, operational and compliance policies, and results during the alleged class period in violation of Section 10(b) of the Exchange Act; (2) that we and the individual defendants engaged in a scheme to defraud investors in order to allow the individual defendants to sell our stock in violation of Section 10(b) of the Exchange Act; (3) that the individual defendants engaged in improper insider trading of our stock in violation of Section 20A of the Exchange Act; and (4) that we and the individual defendants are liable under Section 20(a) of the Exchange Act because each defendant is a controlling person. On June 18, 2021, we and the individual defendants filed a motion to dismiss the Amended Complaint. 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. On May 24, 2022, a stockholder derivative lawsuit was filed in the United States District Court for the District of Minnesota, purportedly on behalf of the Company against certain present and former officers and directors and the Company (as a nominal defendant), captioned Jack Weaver v. Moen , et al., File No. 0:22-cv-01403-NEB-BRT. This complaint generally arises out of the same subject matter as the Mart lawsuit and alleges the following claims under the Exchange Act and common law: (1) that the director defendants made materially false or misleading public statements in proxy statements in violation of Section 14(a) of the Exchange Act; (2) that the director defendants’ stock and option awards should be rescinded under Section 29(b) of the Exchange Act; (3) that the officer defendants’ employment contract compensation should be rescinded under Section 29(b) of the Exchange Act; (4) that certain officer defendants are liable for contribution arising out of any liability incurred in the Mart lawsuit, under Sections 10(b) and 21D of the Exchange Act; (5) that the individual defendants breached their fiduciary duties; and (6) that the individual defendants were unjustly enriched. The lawsuit seeks unspecified damages. In August 2022, the matter was transferred to the United States District Court for the District of Delaware by order granting the Parties Stipulation to Transfer. It is now captioned Jack Weaver v. Moen , et al., File No. 1:22-cv-01063-GBW. We are defending the action as it proceeds. 17 Table of Contents Note 11. Stockholders' Equity Stock-Based Compensation Our 2016 Equity Incentive Plan (the “2016 Plan”) authorizes us to grant stock options, stock appreciation rights, restricted stock, stock units and other stock-based awards to employees, non-employee directors and certain consultants and advisors. There were up to 4,800,000 shares of our common stock initially reserved for issuance pursuant to the 2016 Plan. The 2016 Plan provides that the number of shares reserved and available for issuance under the 2016 Plan will automatically increase annually on January 1 of each calendar year, commencing in 2017 and ending on and including January 1, 2026, by an amount equal to the lesser of: (a) 5 % of the number of common shares of stock outstanding as of December 31 of the immediately preceding calendar year, or (b) 2,500,000 shares; provided, however, that our Board of Directors may determine that any annual increase be a lesser number. 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 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 September 30, 2022, 5,916,065 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. We recorded stock-based compensation expense of $ 2.6 million for each of the three months ended September 30, 2022 and 2021, and $ 7.7 million for each of the nine months ended September 30, 2022 and 2021. This expense was allocated as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ September 30, ​ September 30, (In thousands) 2022 2021 2022 2021 Cost of revenue ​ $ 67 ​ $ 171 ​ $ 281 ​ $ 455 Sales and marketing expenses ​ ​ 1,101 ​ ​ 1,081 ​ ​ 3,352 ​ ​ 2,979 Research and development expenses ​ ​ 54 ​ ​ 68 ​ ​ 175 ​ ​ 224 Reimbursement, general and administrative expenses ​ ​ 1,338 ​ ​ 1,268 ​ ​ 3,873 ​ ​ 4,045 Total stock-based compensation expense ​ $ 2,560 ​ $ 2,588 ​ $ 7,681 ​ $ 7,703 ​ Stock Options 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 $ 0.6 million and $ 1.0 million for the three months ended September 30, 2022 and 2021, respectively, and $ 2.0 million and $ 3.3 million for the nine months ended September 30, 2022 and 2021, respectively. At September 30, 2022, there was approximately $ 2.2 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 1.2 years. 18 Table of Contents Our stock option activity for the nine months ended September 30, 2022, was as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ Weighted- ​ ​ ​ ​ ​ ​ ​ Average ​ Average ​ Aggregate ​ ​ Options ​ Exercise Price ​ Remaining ​ Intrinsic (In thousands except options and per share data) ​ Outstanding ​ Per Share (1) ​ Contractual Life ​ Value (2) Balance at December 31, 2021 ​ 915,224 ​ $ 39.33 ​ 5.0 years ​ $ 2,068 Granted ​ — ​ $ — ​ ​ ​ ​ ​ Exercised ​ ( 90,878 ) ​ $ 1.68 ​ ​ ​ $ 916 Forfeited ​ ( 58,115 ) ​ $ 46.93 ​ ​ ​ ​ ​ Cancelled/Expired ​ ( 152,448 ) ​ $ 36.62 ​ ​ ​ ​ ​ Balance at September 30, 2022 ​ 613,783 ​ $ 44.86 ​ 4.8 years ​ $ 44 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Options exercisable at September 30, 2022 ​ 402,979 ​ $ 44.18 ​ 4.7 years ​ $ 44 ​ (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. (2) The aggregate intrinsic value of options exercised represents the difference between the exercise price of the option and the closing stock price of our common stock on the date of exercise. 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 508,184 as of September 30, 2021, had a weighted-average exercise price of $ 30.45 per share. Time-Based Restricted Stock Units We have granted time-based restricted stock units to certain participants under the 2016 Plan that are stock-settled with common shares. Time-based restricted stock units granted under the 2016 Plan vest over one to three years . Stock-based compensation expense included in the Condensed Consolidated Statements of Operations for time-based restricted stock units was $ 1.5 million and $ 1.2 million for the three months ended September 30, 2022 and 2021, respectively, and $ 4.5 million and $ 3.7 million for the nine months ended September 30, 2022 and 2021, respectively. At September 30, 2022, there was approximately $ 9.4 million of total unrecognized pre-tax compensation expense related to outstanding time-based restricted stock units that is expected to be recognized over a weighted-average period of 2.0 years. Our time-based restricted stock unit activity for the nine months ended September 30, 2022, was as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ ​ ​ ​ ​ Average Grant Aggregate ​ ​ Units ​ Date Fair Value ​ Intrinsic (In thousands except unit and per unit data) ​ Outstanding ​ Per Unit ​ Value (1) Balance at December 31, 2021 ​ 259,147 ​ $ 42.32 ​ $ 4,932 Granted ​ 496,302 ​ $ 15.64 ​ ​ ​ Vested ​ ( 93,444 ) ​ $ 46.84 ​ ​ ​ Cancelled ​ ( 54,299 ) ​ $ 29.98 ​ ​ ​ Balance at September 30, 2022 ​ 607,706 ​ $ 20.94 ​ $ 4,734 ​ (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. Performance-Based Restricted Stock Units We have granted performance-based restricted stock units (“PSUs”) to certain participants under the 2016 Plan. These PSUs have both performance-based and time-based vesting features. 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 19 Table of Contents 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. One-third of the earned PSUs will vest on the date the Compensation and Organization Committee certifies the number of PSUs earned, and the remaining two-thirds of the earned PSUs will vest on the first anniversary of that certification date. All earned and vested PSUs will be settled in shares of common stock. Stock-based compensation expense recognized for PSUs was $ 0.3 million and $ 0.2 million for the three months ended September 30, 2022 and 2021, respectively, and $ 0.5 million and less than $ 0.1 million for the nine months ended September 30, 2022 and 2021, respectively. At September 30, 2022, there was approximately $ 2.2 million of total unrecognized pre-tax compensation expense related to outstanding PSUs that is expected to be recognized over a weighted average period of 2.3 years. Our performance-based restricted stock unit activity for the nine months ended September 30, 2022, was as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Performance- ​ Weighted- ​ ​ ​ ​ Based Average Grant Aggregate ​ ​ Units ​ Date Fair Value ​ Intrinsic (In thousands except unit and per unit data) ​ Outstanding ​ Per Unit ​ Value (1) Balance at December 31, 2021 ​ 54,317 ​ $ 50.22 ​ $ 1,034 Granted ​ 131,710 ​ $ 18.54 ​ ​ ​ Vested ​ ( 1,853 ) ​ $ 19.03 ​ ​ ​ Cancelled ​ ( 20,147 ) ​ $ 23.18 ​ ​ ​ Balance at September 30, 2022 ​ 164,027 ​ $ 25.11 ​ $ 1,278 ​ (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. Employee Stock Purchase Plan Our employee stock purchase plan (“ESPP”), which was approved by our Board of Directors on April 27, 2016, and by our stockholders on June 20, 2016, allows participating employees to purchase shares of our common stock at a discount through payroll deductions. The ESPP is available to all of our employees and employees of participating subsidiaries. Participating employees may purchase common stock, on a voluntary after-tax basis, at a price equal to 85 % of the lower of the closing market price per share of our common stock on the first or last trading day of each stock purchase period. The ESPP provides for six-month purchase periods, beginning on May 16 and November 16 of each calendar year. A total of 1,600,000 shares of common stock was initially reserved for issuance under the ESPP. 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 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 September 30, 2022, 1,623,486 shares were available for future issuance under the ESPP. We recognized stock-based compensation expense associated with the ESPP of $ 0.2 million for each of the three months ended September 30, 2022 and 2021, and $ 0.7 million and $ 0.6 million for the nine months ended September 30, 2022 and 2021, respectively. Note 12. Revenue 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 line: ​ 20 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ September 30, ​ September 30, (In thousands) 2022 ​ 2021 ​ 2022 ​ 2021 Revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Lymphedema products ​ $ 54,214 ​ $ 51,636 ​ $ 146,502 ​ $ 145,468 Airway clearance products ​ ​ 11,048 ​ ​ 861 ​ ​ 26,383 ​ ​ 861 Total ​ $ 65,262 ​ $ 52,497 ​ $ 172,885 ​ $ 146,329 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Percentage of total revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Lymphedema products ​ 83 % ​ 98 % ​ 85 % ​ 99 % Airway clearance products ​ ​ 17 % ​ ​ 2 % ​ ​ 15 % ​ ​ 1 % Total ​ 100 % ​ 100 % ​ 100 % ​ 100 % ​ Our revenue by channel, inclusive of sales and rental revenue, for the three and nine months ended September 30, 2022 and 2021, are summarized in the following table: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ September 30, ​ September 30, (In thousands) 2022 ​ 2021 ​ 2022 ​ 2021 Private insurers and other payers ​ $ 36,188 ​ $ 36,034 ​ $ 97,726 ​ $ 99,665 Veterans Administration ​ ​ 6,755 ​ ​ 6,737 ​ ​ 19,118 ​ ​ 19,905 Medicare ​ ​ 11,271 ​ ​ 8,865 ​ ​ 29,658 ​ ​ 25,898 Durable medical equipment distributors ​ ​ 11,048 ​ ​ 861 ​ ​ 26,383 ​ ​ 861 Total ​ $ 65,262 ​ $ 52,497 ​ $ 172,885 ​ $ 146,329 ​ Our rental revenue is derived from rent-to-purchase arrangements that typically range from three to ten months . As title transfers to the patient, with whom we have the contract, upon the termination of the lease term and because collectability is probable, under ASC 842, these are recognized as sales-type leases. Each rental agreement contains two components, the controller and related garments, both of which are interdependent and recognized as one lease component. The revenue and associated cost of revenue of sales-type leases are recognized on the lease commencement date and a net investment in leases is recorded on the Condensed Consolidated Balance Sheet. We bill the patients’ insurance payers monthly over the duration of the rental term. We record the net investment in leases and recognize revenue upon commencement of the lease in the amount of the expected consideration to be received through the monthly payments. Similar to our sales revenue, the transaction price is impacted by multiple factors, including the terms and conditions contracted by third-party payers. As the rental contract resides with the patients, we have elected the portfolio approach, at the payer level, to determine the expected consideration, which considers the impact of early terminations. While the contract is with the patient, in certain circumstances, the third-party payer elects an initial rental period with an option to extend. We assess the likelihood of extending the lease at the onset of the lease to determine if the option is reasonably certain to be exercised. As the lease is short-term in nature, we anticipate collection of substantially all of the net investment within the first year of the lease agreement. Completion of these payments represents the fair market value of the equipment, and as such, interest income is not applicable. 21 Table of Contents Rental revenue for the three and nine months ended September 30, 2022 and 2021, was primarily from private insurers. Sales-type lease revenue and the associated cost of revenue for the three and nine months ended September 30, 2022 and 2021, was: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ Nine Months Ended September 30, (In thousands) ​ 2022 ​ 2021 ​ 2022 ​ 2021 Sales-type lease revenue ​ $ 9,717 ​ $ 8,037 ​ $ 24,905 ​ $ 22,114 Cost of sales-type lease revenue ​ 2,992 ​ 2,433 ​ 7,640 ​ 6,501 Gross profit ​ $ 6,725 ​ $ 5,604 ​ $ 17,265 ​ $ 15,613 ​ ​ Note 13. Income Taxes We record our interim provision for income taxes by applying our estimated annual effective tax rate to our year-to-date pre-tax income and adjusting for discrete tax items recorded in the period. Deferred income taxes result from temporary differences between the reporting of amounts for financial statement purposes and income tax purposes. These differences relate primarily to different methods used for income tax reporting purposes, including for depreciation and amortization, warranty and vacation accruals, and deductions related to allowances for doubtful accounts receivable and inventory reserves. 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, 2022, was a benefit of 3.3 % , compared to an expense of 126 % for the three months ended September 30, 2021. The primary driver of the change in the Company’s effective tax rate is attributable to a full valuation allowance being recorded for net deferred tax assets for the current period, whereas no valuation allowance was recorded for 2021. We recorded an income tax benefit of $ 77 thousand and an expense of $ 1.9 million for the three months ended September 30, 2022 and 2021, respectively. ​ The effective tax rate for the nine months ended September 30, 2022, was an expense of 0.5 % , compared to a benefit of 24 % for the nine months ended September 30, 2021. The primary driver of the change in the Company’s effective tax rate is attributable to a full valuation allowance being recorded for net deferred tax assets for the current period, whereas no valuation allowance was recorded for 2021. We recorded an income tax expense of $ 0.1 million and a benefit of $ 1.4 million for the nine months ended September 30, 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. The Company currently is not under examination in any jurisdictions. 22 Table of Contents Note 14. 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, ​ September 30, (In thousands, except share and per share data) 2022 2021 2022 2021 Net loss ​ $ ( 2,279 ) ​ $ ( 3,355 ) ​ $ ( 22,487 ) ​ $ ( 4,316 ) Weighted-average shares outstanding ​ ​ 20,139,944 ​ ​ 19,790,838 ​ ​ 20,021,966 ​ ​ 19,676,749 Dilutive effect of stock-based awards ​ ​ — ​ ​ — ​ ​ — ​ ​ — Weighted-average shares used to compute diluted net loss per share ​ ​ 20,139,944 ​ ​ 19,790,838 ​ ​ 20,021,966 ​ ​ 19,676,749 Net loss per share - Basic ​ $ ( 0.11 ) ​ $ ( 0.17 ) ​ $ ( 1.12 ) ​ $ ( 0.22 ) Net loss per share - Diluted ​ $ ( 0.11 ) ​ $ ( 0.17 ) ​ $ ( 1.12 ) ​ $ ( 0.22 ) ​ 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, ​ September 30, ​ 2022 2021 2022 2021 Restricted stock units ​ 607,706 ​ 190,261 ​ 607,706 ​ 190,261 Common stock options ​ 613,783 ​ 977,076 ​ 613,783 ​ 977,076 Performance stock units ​ 164,027 ​ 60,627 ​ 164,027 ​ 60,627 Employee stock purchase plan ​ 143,526 ​ 38,325 ​ 93,592 ​ 33,931 Total ​ 1,529,042 ​ 1,266,289 ​ 1,479,108 ​ 1,261,895 ​ ​ Note 15. Fair Value Measurements We determine the fair value of our assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. We use a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value. 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 lowest priority is given to unobservable inputs (Level 3). 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 is adjusted to fair value at each reporting date until settled. Changes in fair value are included in intangible asset amortization and earn-out expenses in our Condensed Consolidated Statements of Operations. ​ ​ 23 Table of Contents 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 ​ $ 6,200 Addition for acquisition ​ ​ — Fair value adjustments ​ ​ 10,898 Earn-out liability at September 30, 2022 ​ $ 17,098 ​ As of September 30, 2022, the earn-out liability totaled $ 17.1 million, $ 7.1 million of which was non-current and $ 10.0 million of which had been earned and is a current liability. The following provides information regarding fair value measurements for our remaining contingent earn-out liability as of September 30, 2022, and December 31, 2021, according to the three-level fair value hierarchy: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At September 30, 2022 ​ Quoted Prices ​ ​ ​ ​ ​ ​ ​ ​ in Active ​ Significant ​ ​ ​ ​ ​ ​ ​ ​ Markets for ​ Other ​ Significant ​ ​ ​ ​ Identical ​ Observable ​ Unobservable ​ ​ ​ ​ Assets ​ Inputs ​ Inputs ​ ​ (In thousands) ​ (Level 1) ​ (Level 2) ​ (Level 3) ​ Total Recurring Fair Value Measurements: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Earn-out liability ​ $ — ​ — ​ $ 7,098 ​ $ 7,098 Total ​ $ — ​ $ — ​ $ 7,098 ​ $ 7,098 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At December 31, 2021 ​ Quoted Prices ​ ​ ​ ​ ​ ​ ​ ​ in Active ​ Significant ​ ​ ​ ​ ​ ​ ​ ​ Markets for ​ Other ​ Significant ​ ​ ​ ​ Identical ​ Observable ​ Unobservable ​ ​ ​ ​ Assets ​ Inputs ​ Inputs ​ ​ (In thousands) ​ (Level 1) ​ (Level 2) ​ (Level 3) ​ Total Recurring Fair Value Measurements: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Earn-out liability ​ $ — ​ $ — ​ $ 6,200 ​ $ 6,200 Total ​ $ — ​ $ — ​ $ 6,200 ​ $ 6,200 ​ 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. ​ 24 Table of Contents