What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2023-02-21 compared with 2022-02-23 · 158 added, 211 removed, 766 unchanged (33% of the section changed)

4 unchanged sentences

Consolidated Statements of Operations

Consolidated Statements of Comprehensive (Loss) Income

Consolidated Statements of Comprehensive Loss

Consolidated Statements of Stockholders’ Equity

5 unchanged sentences

We have audited the accompanying consolidated balance sheets of Tactile Systems Technology, Inc.

(a Delaware corporation) and its subsidiary (the “Company”) as of December 31, 2021 and 2020 , the related consolidated statements of operations, comprehensive (loss) income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”).

(a Delaware corporation) and subsidiary (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

14 unchanged sentences

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

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

Transaction Price Adjustment – Uncollected Flexitouch Product Sales

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

Transaction Price Adjustment – Uncollected Lymphedema Product Sales with Commercial Payers and Medicare

As described further in Note 3.

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

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

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

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

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

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

4 unchanged sentences

The results of the variable consideration assessment are the primary source of information in estimating the recognition of net revenue and the net valuation of the related accounts receivable .

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

We identified the transaction price adjustment, as it relates to the uncollected Lymphedema product sales to commercial payers and Medicare, as a critical audit matter.

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

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

● significant judgment is required to estimate the expected amount of cash consideration to be collected, which is a key input into management’s transaction price assessment.

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

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

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

● Significant judgment is required to estimate the expected amount of cash consideration to be collected, which is a key input into management’s transaction price adjustment

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

Our audit procedures related to the transaction price adjustment – uncollected Lymphedema product sales with commercial payers and Medicare included the following, among others:

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

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

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

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

● For sales to patients covered by Medicare, we:

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

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

/s/ GRANT THORNTON LLP

16 unchanged sentences

Accounts receivable, non-current

Deferred income taxes

Other non-current assets

28 unchanged sentences

Additional paid-in capital

Retained earnings

(Accumulated deficit) retained earnings

Total stockholders’ equity

19 unchanged sentences

Total operating expenses

(Loss) income from operations

Loss from operations

Other (expense) income

(Loss) income before income taxes

Loss before income taxes

Income tax expense (benefit)

Net (loss) income

Net (loss) income per common share

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

Net loss per common share

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

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

Tactile Systems Technology, Inc.

Consolidated Statements of Comprehensive (Loss) Income

Consolidated Statements of Comprehensive Loss

(In thousands)

Net (loss) income

Other comprehensive income (loss):

Unrealized gain (loss) on marketable securities

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

Total other comprehensive income (loss)

Comprehensive (loss) income

Other comprehensive loss

Unrealized loss on marketable securities

Income tax related to items of other comprehensive loss

Total other comprehensive loss

Comprehensive loss

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

3 unchanged sentences

(In thousands, except share data)

(Loss) Income

Balances, December 31, 2019

3 unchanged sentences

Common shares issued for employee stock purchase plan

Comprehensive income for the period

Comprehensive loss for the period

Balances, December 31, 2020

7 unchanged sentences

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

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

Common shares issued for employee stock purchase plan

7 unchanged sentences

Cash flows from operating activities

Net (loss) income

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization

4 unchanged sentences

Impairment losses

Loss on termination of lease

Loss on disposal of property and equipment

Loss on disposal of property and equipment and intangibles

Change in fair value of earn-out liability

4 unchanged sentences

Right of use operating lease assets

Medicare accounts receivable, non-current

Accounts receivable, non-current

Accounts payable

3 unchanged sentences

Cash flows from investing activities

Proceeds from sales of securities available-for-sale

Proceeds from maturities of securities available-for-sale

Purchases of securities available-for-sale

Payments related to acquisition

Purchases of property and equipment

Intangible assets costs

Proceeds from sale of property and equipment

Intangible assets expenditures

Other investments

Net (used in) provided by investing activities

Net cash (used in) provided by investing activities

Cash flows from financing activities

1 unchanged sentence

Proceeds from revolving line of credit

Payment of deferred debt issuance costs

Payment on earn-out

Payments on note payable

Payments of deferred debt issuance costs

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

1 unchanged sentence

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

Net cash provided by financing activities

Net cash (used in) provided by financing activities

Net (decrease) increase in cash and cash equivalents

10 unchanged sentences

Tactile Systems Technology, Inc.

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

We provide these products through our direct sales force for use in the home and sell or rent them through vascular, wound and lymphedema clinics throughout the United States.

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

(“we,” “us,” and “our”) manufactures and distributes medical devices 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.

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

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.

3 unchanged sentences

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.

2 unchanged sentences

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

Further, seasonality trends 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.

Basis of Presentation

Our accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the SEC.

We have reclassified certain prior year amounts to conform to the current year’s presentation.

The results for the year ended December 31, 2022, are not necessarily indicative of results to be expected for any future year.

6 unchanged sentences

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

We have seen adverse impacts as it relates to the decline in the number of patients

that healthcare facilities and clinics are able to treat due to enhanced safety protocols, particularly during 2020 and the first quarter of 2021.

While we saw some level of recovery in the second quarter of 2021, the 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 2020, most of 2021 and 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, 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.

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

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

3 unchanged sentences

Actual results could differ from those estimates.

Coronavirus Aid, Relief, and Economic Security Act

We may receive cash payments from the government during a public health emergency (PHE).

We consider the nature and substance of the government funds received and record the cash payment in accordance with the terms and conditions of the funds.

In the year ended December 31, 2020, we received a grant of $ 1.2 million from the Public Health and Social Services Emergency Fund (Relief Fund), which was among the provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) signed into law on March 27, 2020.

During the year ended December 31, 2020, we recorded $ 1.2 million in other income, which was associated with lost revenues from the COVID-19 PHE incurred in the period based on our interpretation of guidance issued by the Department of Health and Human Services through January 2021.

Comprehensive Income (Loss)

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

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

Comprehensive Loss

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

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

Summary of Significant Accounting Policies

Cash and Cash Equivalents

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

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

Cash and cash equivalents consist of all cash on hand and deposits.

Our cash was held primarily in checking accounts as of December 31, 2022 and 2021.

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

2 unchanged sentences

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

Marketable Securities and Equity Investments

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

Debt securities are classified

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

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

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

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

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

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

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

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

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

Equity Investments

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

For equity investments with no readily determinable fair value, we measure these investments at cost less impairment, if any, plus or minus

changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

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

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

As of each of December 31, 2022 and 2021, the total carrying value of our equity investments, with no readily determinable fair value, was $ 0.3 million, and are included in other non-current assets on our Consolidated Balance Sheets.

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

16 unchanged sentences

Maintenance, repairs and minor renewals are expensed as incurred.

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

losses are included in income.

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

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

38 unchanged sentences

Title to these products passes to the patients at the end of the rental period.

Patients may return the product before the end of the rental period, and as such these arrangements are deemed to be month-to-month cancelable leases in accordance with Accounting Standards Codification (“ASC”) 840, “Leases,” if they commenced prior to December 31, 2018.

Accordingly, we recognized the related revenue for these rental arrangements monthly, on a pro rata basis, over the lesser of the duration of the rental period or the period during which the patient possesses the product.

Rental agreements commencing after January 1, 2019, are recorded as sales-type leases in accordance with Accounting Standards Update (“ASU”) No.

Rental agreements are recorded as sales-type leases in accordance with Accounting Standards Update (“ASU”) No.

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

Accordingly, as sales-type leases, the transaction price for the entire rental term is recognized upon transfer of control.

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

The AffloVest device is sold through durable medical equipment providers.

30 unchanged sentences

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

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

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

See Note 8 – “Goodwill and Intangible Assets” for additional information.

5 unchanged sentences

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

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

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

Income taxes are accounted for under the liability method.

10 unchanged sentences

Accounting Pronouncement Not Yet Adopted

In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No.

2020-04, “Reference Rate Reform (Topic 848) — Facilitation of the Effect of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”), addressing the discontinuation of LIBOR, a widely used reference rate for pricing financial products.

The ASU is intended to provide optional expedients and exceptions if certain criteria are met when accounting for contracts, hedging relationships and other transactions that reference LIBOR, or another reference rate expected to be discontinued because of reference rate reform.

The application and adoption requirements of ASU 2020-04 are optional until December 31, 2022 and vary based on expedients elected.

In December 2022, the Financial Accounting Standards Board (“FASB”) issued ASU No.

2022-06, “Reference Rate Reform (Topic 848) — Facilitation of the Effect of Reference Rate Reform on Financial Reporting” (“ASU 2022-06”), which provides optional expedients and exceptions for applying GAAP to transactions affected by reference rate (e.g., LIBOR) reform if certain criteria are met, for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting.

The ASU deferred the sunset date of Topic 848 from December 31, 2022 to December 31, 2024.

The ASU is effective as of December 21, 2022 through December 31, 2024.

We continue to evaluate transactions or contract modifications occurring as a result of reference rate reform and determine whether to apply the optional guidance on an ongoing basis.

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

Recently Adopted Accounting Pronouncements

In December 2019, the FASB issued ASU No.

2019-12, “Income Taxes (Topic 740) — Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which is intended to simplify various aspects of the accounting for income taxes.

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

We adopted ASU 2019-12 as of January 1, 2021, and it did not have an impact on the consolidated financial statements.

In June 2016, the FASB issued ASU No.

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

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

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

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

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

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

5 unchanged sentences

The AffloVest acquisition was funded through a combination of cash on hand and proceeds from borrowings.

Two earn-out payments of up to $ 10.0 million each are potentially due to IBC under the AffloVest APA depending on the achievement of specified revenue targets, as follows:

On November 4, 2022, we entered into an Amendment to the AffloVest APA, the “Amendment” with IBC, which modifies the terms of the earn-out arrangement under the AffloVest APA, as follows:

● Initial Earn-Out:

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

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 Amendment provides that the calculated amount of the initial earn-out payment is $ 10.0 million, of which the Company paid $ 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:

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

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 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.

22 unchanged sentences

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

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

These costs have been expensed as incurred and are included in reimbursement, general and administrative expenses in our Consolidated Statements of Operations for the year ended December 31, 2021.

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

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

The following unaudited pro forma information for the years ended December 31, 2021 and 2020 presents the revenues and net income assuming the acquisition of AffloVest had occurred as of January 1, 2020.

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

The following unaudited pro forma information for the years ended December 31, 2021 and 2020 presents the revenue and net income assuming the acquisition of AffloVest had occurred as of January 1, 2020.

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

3 unchanged sentences

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

Marketable Securities

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

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

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

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

Accounts Receivable

4 unchanged sentences

Inventories consisted of the following:

At December 31,

(In thousands)

At December 31, 2022

At December 31, 2021

Finished goods

7 unchanged sentences

Leasehold improvements

Construction in progress

Demonstration equipment

Construction in progress

accumulated depreciation

21 unchanged sentences

Customer accounts

Customer relationships

Developed technology

Unamortized intangible assets:

5 unchanged sentences

The weighted-average remaining amortization period for these intangible assets was 11.0 years as of December 31, 2022.

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

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

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

The majority of the impairment charge was comprised of the patent intangible assets and property and equipment, totaling $ 3.6 million, and was classified within the reimbursement, general and administrative expenses line of the Consolidated Statements of Operations.

The inventory-related component of the impairment charge was $ 0.4 million and was classified within the cost of revenue line of the Consolidated Statements of Operations.

Accrued Expenses

Accrued expenses consisted of the following:

At December 31,

(In thousands)

Legal and consulting

At December 31, 2022

At December 31, 2021

In-transit inventory

Legal and consulting

Clinical studies

11 unchanged sentences

Credit Agreement

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

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

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

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

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

4 unchanged sentences

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

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

As of both December 31, 2022 and 2021, there was no availability under our Credit Agreement.

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

3 unchanged sentences

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 %.

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

At December 31, 2022, all outstanding borrowings were subject to interest at a rate calculated at LIBOR plus an applicable margin, for an interest rate of 7.41 %.

2 unchanged sentences

(In thousands)

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

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

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

1 unchanged sentence

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

The Second Amendment modifies the maximum leverage ratio, the minimum fixed charge coverage ratio and the minimum consolidated EBITDA covenants under the Credit Agreement, and adds a minimum liquidity covenant.

Commitments and Contingencies

12 unchanged sentences

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

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

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

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

In March 2008, we entered into a noncancelable operating lease agreement for building space for our previous corporate headquarters that provided for monthly rent, real estate taxes and operating expenses that was subsequently extended to July 31, 2021.

Due to the move to our new headquarters in September 2019, we entered into a termination agreement for our former corporate headquarters on December 31, 2019.

We agreed to pay $ 1.2 million in order to terminate all future rights and obligations of the lease.

The lease was removed from our ROU operating lease assets and operating lease liabilities and the total net loss on termination of $ 1.1 million was recorded in the reimbursement, general and administrative line of our Consolidated Statements of Operations.

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

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

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

8 unchanged sentences

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

As of December 31, 2021, we had approximately 39 vehicles with agreements within the initial, noncancelable lease term that are recorded as ROU operating lease assets and operating lease liabilities.

As of December 31, 2022, we had approximately two 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.

28 unchanged sentences

Major Vendors

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

We had purchases from one vendor that accounted for 18 % of our total purchases for the year ended December 31, 2022 and purchases from two vendors that accounted for 32 % of total purchases for the year ended December 31, 2021.

Purchase Commitment

2 unchanged sentences

We maintain a 401(k) retirement plan for our employees to 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 $ 1.2 million for the year ended December 31, 2021 and $ 0.3 million for each of the years ended December 31, 2020 and 2019.

We recorded an expense related to our discretionary contributions to the 401(k) plan of $ 1.5 million, $ 1.2 million and $ 0.3 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Legal Proceedings

1 unchanged sentence

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

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

Tactile Medical Systems Technology, Inc.

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

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

The United States declined to intervene in this action.

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

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

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

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

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

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

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.

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.

6 unchanged sentences

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

The motion has not been decided yet.

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

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

On November 21, 2022, the company announced that it entered a Memorandum of Understanding to settle this matter.

The Company does not expect to fund any portion of cash payments made in connection with the $ 5 million settlement amount.

The settlement does not constitute an admission of liability or wrongdoing by the Company.

The settlement is subject to the parties reaching agreement on various non-monetary terms and court approval of the final terms will be required.

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 of our 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, the matter was transferred to the United States District Court for the District of Delaware by order granting the Parties Stipulation to Transfer.

On February 10, 2023, we filed a motion to dismiss the action.

We are defending the action as it proceeds.

Stockholders' Equity

We completed an initial public offering of our common stock on August 2, 2016, in which we sold 4,120,000 shares of our common stock at a public offering price of $ 10.00 per share.

Immediately prior to the completion of the initial public offering, all then-outstanding shares of our Series A and Series B preferred stock were converted into 5,924,453 shares of our common stock.

Immediately prior to the completion of the initial public offering, all then-outstanding shares of our Series A and Series B preferred stock

were converted into 5,924,453 shares of our common stock.

Our Series A preferred stock converted to common stock at a ratio of 1-for- 1.03 and our Series B preferred stock converted to common stock at a ratio of 1-for- 1 .

8 unchanged sentences

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, expire, are cancelled, are settled for cash or otherwise not issued, will become available for issuance under the 2016 Plan.

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

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

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 each of January 1, 2023 and 2022.

As of December 31, 2022, 5,957,683 shares were available for future grant pursuant to the 2016 Plan.

21 unchanged sentences

Total stock-based compensation expense

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

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

Stock Options

18 unchanged sentences

44.1 - 46.4 %

43.2 - 44.6 %

Risk-free interest rate

3 unchanged sentences

$ 13.45 - $ 18.64

$ 19.57 - $ 33.12

Our stock option activity for the three years ended December 31, 2022, 2021 and 2020, was as follows:

26 unchanged sentences

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

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

one to three years .

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

Stock-based compensation expense included in our Consolidated Statements of Operations for time-based restricted stock units was $ 5.8 million, $ 4.9 million and $ 5.2 million for the years ended December 31, 2022, 2021 and 2020, respectively.

8 unchanged sentences

Balance at December 31, 2022

Deferred and unissued at December 31, 2021 (2)

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

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

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

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

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

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

Performance-Based Restricted Stock Units

3 unchanged sentences

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

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

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

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

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

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

1 unchanged sentence

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

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

respectively.

The stock-based compensation expense for the year ended December 31, 2021 reflects a $ 0.5 million benefit due to a change in the estimated payout associated with PSUs granted in 2020 being below the minimum performance target threshold level, as defined, partially offset by an expense of $ 0.7 million related to the PSUs granted in 2018 and 2021.

Stock-based compensation expense included in our Consolidated Statements of Operations for PSUs was $ 0.5 million, $ 0.2 million, and $ 0.5 million for the years ended December 31, 2022, 2021 and 2020, respectively.

The stock-based compensation expense for the year ended December 31, 2022 reflects an expense of $ 0.6 million related to the PSUs granted in 2022.

partially offset by an expense of $ 0.7 million related to the PSUs granted in 2018 and 2021.

As of December 31, 2022, there was approximately $ 1.4 million of total unrecognized pre-tax compensation expense related to outstanding PSUs that is expected to be recognized over a weighted average period of 2.0 years.

15 unchanged sentences

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

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

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

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 each of January 1, 2023 and 2022.

As of December 31, 2022, 1,559,151 shares were available for future issuance under the ESPP.

3 unchanged sentences

(In thousands)

Flexitouch system

Lymphedema products

Airway clearance products

Percentage of total revenue

Flexitouch system

Lymphedema products

Airway clearance products

Our revenue by channel, inclusive of sales and rental revenue, for the years ended December 31, 2022, 2021 and 2020 are summarized in the following table:

6 unchanged sentences

Each rental agreement contains two components, the controller and related garments, both of which are interdependent and recognized as one lease component.

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

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

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

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

Operating lease revenue was $ 5.0 million for the year ended December 31, 2019.

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 Consolidated Balance Sheet.

4 unchanged sentences

While the contract is with the patient, in certain circumstances, the third party payer elects an initial rental period with an option to extend.

the likelihood of extending the lease at the onset of the lease to determine if the option is reasonably certain to be exercised.

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.

60 unchanged sentences

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

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

As of December 31, 2022, the Company had approximately $ 179 thousand of state net operating loss ("NOL") carryforwards.

The state NOL carryforward amounts expire beginning in tax years 2027 if not utilized.

2 unchanged sentences

federal and state tax years prior to 2019 are closed to examination.

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

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

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

The Company is not under exam in any jurisdictions.

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

1 unchanged sentence

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 is more likely than not to be realized and which comprises the assets that will not be offset by the reversal of deferred tax liabilities.

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

A significant piece of objective negative evidence evaluated was the cumulative loss expected to be incurred over the three-year period ended December 31, 2022.

Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth.

On the basis of this evaluation, as of December 31, 2022, a valuation allowance of $ 17.8 million was recorded to recognize only the portion of the deferred tax assets that is more likely than not to be realized.

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

Net (Loss) Income Per Common Share

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

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

(In thousands, except share and per share data)

Net (loss) income

Weighted-average shares outstanding

Dilutive effect of stock-based awards

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

Net (loss) income per share - Basic

Net (loss) income per share - Diluted

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

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

Net loss per share - Basic

Net loss per share - Diluted

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

Restricted stock units

10 unchanged sentences

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

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

We have obligations to pay a $ 5.0 million agreed-upon earn-out payment in cash and up to an additional $ 10.0 million earn-out payment 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 will be included in intangible asset amortization and earn-out expenses in our Consolidated Statements of Operations.

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

(In thousands)

Earn-out liability at December 31, 2021

Addition for acquisition

Payment on earn-out

Fair value adjustments

Earn-out liability at December 31, 2022

As of December 31, 2022, the fair value of the earn-out liability accrued but not yet earned totaled $ 8.1 million and was classified as a current liability.

The remaining $ 5.0 million of the earn-out liability had been earned and is to be paid by May 26, 2023.

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

At December 31, 2022

3 unchanged sentences

Earn-out liability

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

At December 31, 2021

2 unchanged sentences

Recurring Fair Value Measurements:

Money market mutual funds

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

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

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

Earn-out liability

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

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

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

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

The earn-out liability was valued by employing a Monte Carlo Simulation model in a risk-neutral framework, which is a Level 3 input.

The underlying simulated variable includes recognized revenue.

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

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

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

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

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

(In thousands)

Earn-out liability at December 31, 2020

Addition for acquisition

Fair value adjustments

Earn-out liability at December 31, 2021

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

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

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data