What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-21 compared with 2022-02-23 · 98 added, 117 removed, 246 unchanged (47% of the section changed)

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

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

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

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 2022 after the first quarter, 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.

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

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

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

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

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

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

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

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

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

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

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

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.

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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 is the AffloVest.

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

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In June 2017, we announced that we received 510(k) clearance from the FDA for the Flexitouch Plus, the third-generation version of our Flexitouch system.

In December 2020, we received 510(k) clearance for two new indications for our Flexitouch Plus system:

In December 2020, we received 510(k) clearance for two

new indications for our Flexitouch Plus system:

phlebolymphedema and lipedema.

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

Sales and rentals of our Flexitouch system represented 85% and 88% of our revenue in the years ended December 31, 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 years ended December 31, 2021 and 2020, sales and rentals of our Entre system represented 13% and 12% of our revenue, respectively.

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

During fiscal year 2018, we recorded a $2.5 million non-cash impairment charge to fully impair the inventory and intangible assets related to our Actitouch system due to the lack of market demand for the product.

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

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

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

Sales and rentals of our lymphedema products represented 86% and 98% of our revenue in the years ended December 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 manufactured AffloVest.

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

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

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

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.

The Airwear wrap is indicated for the management of venous insufficiency, venous hypertension, venous ulcerations and lymphedema.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

For the years ended December 31, 2022 and 2021, sales of AffloVest represented 14% and 2% of our revenue, respectively.

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

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 representatives, provide product demonstrations for targeted clinicians and support technical questions related to the AffloVest.

As of December 31, 2022, we employed a field staff of 287 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 a field staff of 262 as of December 31, 2021.

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

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

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

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

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

While the U.S.

government’s declaration of a public health emergency (PHE) related to the COVID-19 pandemic has relaxed some Medicare criteria for respiratory patients, these circumstances are ever-changing, and the extent to which these changes will remain in place and the impact on our business in the future are not determinable at this time.

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

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

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

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

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

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

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

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

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 products, perform quality assurance and ship our products from our facility in 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.

On May 1, 2022, we began manufacturing and shipping the AffloVest device from our Minnesota-based facility.

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

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

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

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

However, we cannot assure you that our supply chain will not be materially impacted in the future or that we will be able to meet any increased demand.

In July 2022, we launched Kylee™, a free mobile application that allows for patients to manage their conditions by tracking treatments and symptoms, as well as having direct access to educational resources.

For the year ended December 31, 2022, we generated revenue of $246.8 million and had a net loss of $17.9 million, compared to revenue of $208.1 million and a net loss of $11.8 million for the year ended

December 31, 2021, and revenue of $187.1 million and a net loss of $0.6 million for the year ended December 31, 2020.

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

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Components of our Results of Operations

We derive our revenue from sales and rentals of our Flexitouch and Entre systems, to patients in the United States.

We derive revenue from sales and rentals of our Flexitouch and Entre systems to patients in the United States.

Revenue growth has been driven by increased clinician, patient and payer awareness of lymphedema and the clinical efficacy of our Flexitouch system, and the launch of our Entre system in 2013.

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

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

Approximately 10% of our revenue in 2022 and 13% of our revenue in 2021 came from the Veterans Administration.

Approximately 19% of our revenue in 2022 and 17% of our revenue in 2021 came from Medicare patients.

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

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

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

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

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

Cost of Revenue and Gross Margin

Cost of revenue consists primarily of component costs, direct labor, overhead costs, product warranties, provisions for slow-moving and obsolete inventory, delivery costs for items sold or rented, and amortization related to the intangible assets related to our products.

A significant portion of our cost of revenue consists of manufacturing overhead costs.

These overhead costs include the cost of quality assurance, material procurement, inventory control, facilities, equipment and operations supervision and management.

Overhead costs include the cost of quality assurance, material procurement, inventory control, facilities, equipment and operations supervision and management.

Cost of revenue also includes depreciation expense for product tooling and equipment as well as shipping costs.

We expect overhead costs as a percentage of revenue to decrease as a result of expected increases in production volume and yields.

We expect overhead costs as a percentage of revenue to decrease as a result of expected

increases in production volume and yields.

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

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We expect R&D expenses as a percentage of our revenue to vary over time depending on the level and timing of initiating new product development efforts, as well as our clinical trial activities.

Intangible Asset Amortization and Earn-Out

Amortization of intangible assets includes the amortization expense of our definite-lived intangible assets, consisting of patents, customer relationships, customer accounts, developed technology and defensive intangible assets.

The costs of definite-lived intangibles are amortized to expense over their useful lives.

Indefinite-lived intangible assets, such as goodwill and tradenames, are not amortized;

we test for impairment on these assets annually.

The fair value of the earn-out, which is payable if certain future U.S.

revenues of AffloVest are met, is recorded as a liability.

On a quarterly basis the earn-out is revalued to fair value.

Any gain or loss related to this revaluation is recorded through the income statement.

Reimbursement, General and Administrative Expenses

Reimbursement, general and administrative expenses consist primarily of compensation, including salaries, bonuses and benefits for employees in our patient services and advocacy, billing and collections, case management, payer relations and governmental affairs and reimbursement operations departments, as well as finance, human resources and administration, information technology, business development and general management functions, and facilities costs.

management functions, and facilities costs.

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

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Revenue Recognition

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

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

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

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

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

● AffloVest products.

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

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

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

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

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

Changes in contractual pricing,

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

Stock-Based Compensation

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

The Monte Carlo Simulation and Black-Scholes valuation models require the input of highly subjective assumptions, including the expected term of the option, the expected volatility of the price of our common stock,

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

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

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Loss from operations

Other (expense) income

Other expense

Loss before income taxes

Income tax expense (benefit)

Income tax expense

“N.M.” Not Meaningful

Revenue increased $38.7 million, or 19%, to $246.8 million in the year ended December 31, 2022, compared to $208.1 million in the year ended December 31, 2021.

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

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

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

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

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

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

In addition, the challenging labor

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

The increase in revenue was attributable to an increase of approximately $29.4 million in sales of our airway clearance product line, which consists of the AffloVest product we acquired on September 8, 2021, and an increase of $9.4 million, or 5%, in sales and rentals of the lymphedema product line compared to the year ended December 31, 2021.

While we saw some level of recovery in 2022 after the first quarter, revenue in 2022 from the lymphedema product line was adversely affected by the fact that first quarter 2022 revenue was negatively impacted by the prolonged recovery from COVID-19, including the resurgence due to the Omicron variant during that 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, particularly during the first quarter of 2022.

Revenue from the Veterans Administration represented 10% and 12% of total revenue for the years ended December 31, 2022 and 2021, respectively.

Revenue from Medicare represented 19% and 17% of total revenue for the years ended December 31, 2022 and 2021, respectively.

The following table summarizes our revenue by product for the years ended December 31, 2022 and 2021, both in dollars and percentage of total revenue:

(In thousands)

Flexitouch system

Lymphedema products

Airway clearance products

Percentage of total revenue

Flexitouch system

Lymphedema products

Airway clearance products

Cost of Revenue and Gross Margin

Cost of revenue increased $11.0 million, or 18%, to $70.8 million during the year ended December 31, 2022, compared to $59.8 million during the year ended December 31, 2021.

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

The increase in cost of revenue was primarily attributable to the additional cost of revenue related to AffloVest.

Gross margin was 71% for both of the years ended December 31, 2022 and 2021.

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● $15.8 million increase in personnel-related compensation expense as a result of the increased headcount in the collective field commercial team;

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

● $0.7 million increase in demonstration equipment expense.

These increases were partially offset by a:

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

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

● $2.6 million increase in travel and entertainment expenses;

● $1.2 million increase related to our annual national sales training meeting;

● $0.6 million increase related to sales meetings and tradeshows;

● $0.1 million increase in expenses for new product introductions.

These increases were partially offset by a $0.7 million decrease in professional services.

Research and Development Expenses

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

Research and development (“R&D”) expenses increased $1.4 million, or 25%, to $7.1 million during the year ended December 31, 2022, compared to $5.7 million during the year ended December 31, 2021, which was primarily attributable to an increase in personnel-related expense and R&D supplies.

Reimbursement, General and Administrative Expenses

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The increase was primarily attributable to a:

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

● $4.0 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer relations and corporate functions;

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

These increases were partially offset by a:

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

● $0.7 million increase in occupancy costs, depreciation expense, and legal and professional fees;

● $0.1 million increase in travel and entertainment.

These increases were partially offset by a $0.8 million decrease in acquisition costs.

Intangible Asset Amortization and Earn-out

Intangible asset amortization and earn-out expenses increased $13.7 million to $14.4 million during the year ended December 31, 2022, compared to $0.7 million during the year ended December 31, 2021.

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

Other (Expense) Income, Net

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

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

Income Tax Expense (Benefit)

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

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

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 related to the AffloVest acquisition.

Other Expense, Net

Other expense, net was $2.7 million for the year ended December 31, 2022, compared to $0.5 million for the year ended December 31, 2021.

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

Income Tax Expense

We recorded an income tax expense of $2.4 million and $9.5 million for the years ended December 31, 2022 and 2021, respectively.

The current year tax expense was primarily driven by the change in deferred tax assets and corresponding increase in the full valuation allowance which remains in place after an assessment of existing positive and negative evidence indicated these deferred tax assets would not be realizable.

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

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

Based on this evaluation, as of December 31, 2022 and 2021, a valuation allowance of $17.8 million and $12.0 million, respectively, was recorded to recognize only the residual portion of the existing deferred tax asset that are more likely than not to be realized and which comprises the assets that will not be offset by the reversal of deferred tax liabilities.

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

Our business is affected by seasonality.

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

experience substantially reduced demand for our products.

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

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

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

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

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

Liquidity and Capital Resources

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Net Cash Provided by Operating Activities

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

Net cash provided by operating activities during the year ended December 31, 2022, was $5.2 million, resulting from a net loss of $17.9 million and non-cash net income adjustments of $27.7 million, which were offset by a change in net operating assets and liabilities of $4.6 million.

The non-cash net income adjustments primarily consisted of $11.9 million change in fair value of earn-out liability, $9.6 million of stock-based compensation expense, and $6.3 million of depreciation and amortization expense.

Changes in operating assets and liabilities were unfavorably impacted by increasing accounts receivable, net investment in leases and continued investment in inventory designed to meet future projected demand, partially offset by an increase in current liabilities.

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

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

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

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

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

Net Cash (Used in) Provided by Investing Activities

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

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

Net Cash Provided by Financing Activities

Changes in operating assets and liabilities were unfavorably impacted by increasing accounts receivable, net investment in leases and income taxes payable, partially offset by an increase in current liabilities.

Net Cash (Used in) Investing Activities

Net cash used in investing activities during the year ended December 31, 2022, was $1.9 million, primarily consisting of $1.8 million in purchases of property and equipment primarily related to office equipment, production tooling and tenant improvements and $0.1 million related to the acquisition of patents and other intangible assets.

equipment, production tooling and tenant improvements and $0.3 million related to the acquisition of patents and other intangible assets.

Net Cash (Used in) Provided by Financing Activities

Net cash used in financing activities during the year ended December 31, 2022, was $9.6 million, primarily consisting of payments of $6.0 million on notes payable and a payment of $5.0 million on the AffloVest earn-out, partially offset by $1.4 million in proceeds from exercises of common stock options and the issuance of common stock under the ESPP.

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

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

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

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The principal of the term loan is required to be repaid in quarterly installments of $750,000 commencing January 7, 2022, through July 8, 2024, with the remaining outstanding balance due on September 8, 2024 .

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

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

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

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

As of December 31, 2022, we had outstanding borrowings of $49.0 million under the Credit Agreement, comprised of $24.0 million under the term loan and $25.0 million under the revolving credit facility.

For additional information regarding the Credit Agreement, including interest rates, fees and maturities, see Note 11 – “Credit Agreement” of the consolidated financial statements contained in this report.

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

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

At December 31, 2022, we had two vehicles under this program with current lease commitments.

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

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(5) Interest payment amounts on long-term debt are calculated using outstanding balances and interest rates in effect on December 31, 2022.

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

(6) In connection with the acquisition of AffloVest, as of December 31, 2022, we were obligated to make an earn-out payment in the amount of $5.0 million (as well as an imputed interest payment of $250,000) by May 26, 2023, and may be obligated to make an additional earn-out payment of up to $10.0 million in cash, if certain future financial results of the AffloVest business are met.

The fair value of this obligation at December 31, 2022 was $13.1 million, which is reflected on our Consolidated Balance Sheets.

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

● expansion of our operations domestically and/or internationally;

● expansion of our operations;

● response of competitors to our solutions and applications;

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

What changed 10-K

Item 7. Management’s Discussion and Analysis