What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-02-20 compared with 2023-02-21 · 164 added, 183 removed, 741 unchanged (32% of the section changed)

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Consolidated Statements of Operations

Consolidated Statements of Comprehensive Loss

Consolidated Statements of Stockholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

(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”).

(a Delaware corporation) and subsidiary (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

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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 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.

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

involved with the transaction.

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

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The Company assesses the variable consideration for each Medicare claim as a percentage of the total invoice price based on ultimate approval and collection history.

There is not variable consideration with sales to the Veterans Administration.

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, 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 principal considerations for our determination that this is 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

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Consolidated Balance Sheets

At December 31,

(In thousands, except share and per share data)

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Accounts receivable, non-current

Deferred income taxes

Other non-current assets

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Note payable, non-current

Earn-out, non-current

Accrued warranty reserve, non-current

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Operating lease liabilities, non-current

Deferred income taxes

Total non-current liabilities

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

none issued and outstanding as of December 31, 2022 and December 31, 2021

none issued and outstanding as of December 31, 2023 and 2022

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

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Additional paid-in capital

(Accumulated deficit) retained earnings

Retained earnings (accumulated deficit)

Total stockholders’ equity

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Total operating expenses

Loss from operations

Other (expense) income

Loss before income taxes

Income tax expense (benefit)

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

(In thousands)

Other comprehensive loss

Unrealized loss on marketable securities

Income tax related to items of other comprehensive loss

Total other comprehensive loss

Comprehensive loss

Income (loss) from operations

Other expense

Income (loss) before income taxes

Income tax (benefit) expense

Net income (loss)

Net income (loss) per common share

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

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

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Consolidated Statements of Stockholders’ Equity

Comprehensive

(In thousands, except share data)

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Stock-based compensation

Exercise of common stock options and vesting of restricted stock units

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

Taxes paid for net share settlement of restricted stock units

Common shares issued for employee stock purchase plan

Comprehensive loss for the period

Net loss for the period

Balances, December 31, 2021

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

Taxes paid for net share settlement of restricted stock units

Common shares issued for employee stock purchase plan

Comprehensive loss for the period

Net loss for the period

Balances, December 31, 2022

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

Sale of common stock from follow-on public offering, net of offering expenses

Common shares issued for employee stock purchase plan

Comprehensive loss for the period

Net income for the period

Balances, December 31, 2023

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Cash flows from operating activities

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

Net income (loss)

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

Depreciation and amortization

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

Deferred income taxes

Stock-based compensation expense

Gain on other investments and maturities of marketable securities

Impairment losses

Loss on disposal of property and equipment and intangibles

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Cash flows from investing activities

Proceeds from maturities of securities available-for-sale

Payments related to acquisition

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Intangible assets expenditures

Other investments

Net cash (used in) provided by investing activities

Net cash used in investing activities

Cash flows from financing activities

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Proceeds from revolving line of credit

Payment on earn-out

Payments on earn-out

Payments on note payable

Payments on revolving line of credit

Payments of deferred debt issuance costs

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

Net cash (used in) provided by financing activities

Net (decrease) increase in cash and cash equivalents

Proceeds from issuance of common stock at market

Net cash provided by (used in) financing activities

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents – beginning of period

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Tactile Systems Technology, Inc.

Notes to the Consolidated Financial Statements

Notes to the Consolidated Financial Statement s

Nature of Business and Operations

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(“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.

We provide our Flexitouch Plus and Entre Plus 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.

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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.

On February 27, 2023, we closed on a public offering of 2,875,000 shares of our common stock at a public offering price of $ 13.00 per share.

We received net proceeds from this offering of $ 34.6 million after deducting underwriting discounts, commissions, and offering expenses.

Our business is affected by seasonality.

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

Further, seasonality trends 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

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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, 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 adapt to the needs of our employees, clinicians and patients.

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

We continue to evaluate and, if appropriate, will adopt other measures in the future related to the ongoing safety of our employees, clinicians and patients.

While we saw some level of recovery in 2022 and 2023, consequences of the pandemic remain uncertain.

Although the effects of the COVID-19 pandemic on our operating results continue to subside, the pandemic could still have an unfavorable effect on our financial position, results of operations and cash flows.

Use of Estimates

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Actual results could differ from those estimates.

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

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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.

Our cash was held primarily in checking accounts and an Institutional Insured Liquid Deposit demand account as of December 31, 2023 and 2022.

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

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At December 31, 2023 and 2022, the Company exceeded FDIC limits at various institutions.

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

The Company has not experienced any losses in such accounts.

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.

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.

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.

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We update our assessment on a quarterly basis, which to date has not resulted in any material adjustments to the valuation of our accounts receivable.

We believe the assessment provides reasonable estimates of our accounts receivable valuation, and therefore we believe that substantially all accounts receivable are fully collectible.

A portion of our claims to Medicare are initially denied and enter the appeals process, where many are ultimately reviewed by an Administrative Law Judge.

We believe the assessment provides reasonable estimates of our

accounts receivable valuation, and therefore we believe that substantially all accounts receivable are fully collectible.

A portion of claims to Medicare are initially denied and enter the appeals process, where many are ultimately reviewed by an Administrative Law Judge.

After final adjudication of all claims, approximately 90 % of the claims submitted are approved (this is on a number of claims, not a dollars claimed, basis across all our products).

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Revenue Recognition

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

Flexitouch and Entre

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

Flexitouch Plus and Entre Plus

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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Revenue is recognized from such sales upon transfer of control of the product to the customer at a transaction price determined by collection history.

As a result, the transaction price is impacted by multiple factors, including the terms and conditions contracted by various third-party payers, and therefore payments from third-party payers typically are less than our standard charge and represent an implicit price concession, resulting in variable consideration.

represent an implicit price concession, resulting in variable consideration.

As most contracts are with each individual sale to a patient, we have elected the portfolio approach to determine the transaction price, and ultimately the expected consideration.

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For our products sold to Medicare patients, we recognize revenue from such sales upon shipment of our products, which can occur only after we have received a prescription from a physician and all applicable patient documentation is obtained.

The transaction price for our Entre systems is determined based on the payment history using the same methodology as our private insurers.

A portion of our claims for our Flexitouch system are initially denied, and enter the appeals process, which can be lengthy.

The transaction price for our Entre Plus systems is determined based on the payment history using the same methodology as our private insurers.

A portion of claims for payment for our Flexitouch Plus system are initially denied, and enter the appeals process, which can be lengthy.

We assess the variable consideration for each of these claims as a percentage of the total invoice price based on ultimate approval and collection history.

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

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

Consequently,

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

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

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Stock-Based Compensation

Stock options are valued using the Black-Scholes option-pricing model, except that the valuation of certain “CEO” related stock options subject to a market condition involve the use of the Monte Carlo Simulation model.

The Monte Carlo Simulation and the Black-Scholes valuation models require the input of highly subjective assumptions.

Stock options are valued using the Black-Scholes option-pricing model.

The Black-Scholes valuation model requires the input of highly subjective assumptions.

The assumptions include the expected term of the option, the expected volatility of the price of our common stock, expected dividend yield and the risk-free interest rate.

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Changes in tax rates are reflected in the tax provision as they occur.

Net (Loss) Income Per Common Share

Basic net (loss) income per common share is computed based on the weighted average number of shares of common stock outstanding during the period.

Diluted net (loss) income per common share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential stock-based awards outstanding during the period using the treasury stock method.

Net Income (Loss) Per Common Share

Basic net income (loss) per common share is computed based on the weighted average number of shares of common stock outstanding during the period.

Diluted net income (loss) per common share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential stock-based awards outstanding during the period using the treasury stock method.

Dilutive potential stock-based awards include outstanding common stock options, time- and performance-based restricted stock units and employee stock purchase plan shares.

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Accounting Pronouncement Not Yet Adopted

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

In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2023-07, “Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures” which requires entities to enhance disclosures around segment reporting.

The guidance is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted.

The Company is currently evaluating the effect this standard will have on its consolidated financial statements and related disclosures.

In December 2023, the FASB issued ASU No.

2023-09, “Income Taxes (Topic 740):

Improvements to Income Tax Disclosures” which requires entities to enhance disclosures around income taxes.

The guidance is effective for annual periods beginning after December 15, 2024, with early adoption permitted.

The Company is currently evaluating the effect this standard will have on its consolidated financial statements and related disclosures.

Recently Adopted Accounting Pronouncement

In December 2022, the 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.

We adopted this ASU in the quarter ended June 30, 2023.

The adoption of this standard did not have a significant impact on the Company’s financial statements.

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

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

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

Subsequent to closing, $ 0.2 million was returned to us as a result of working capital adjustments and the remaining $ 0.3 million was released to IBC.

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

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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.

o The APA 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 November 28, 2022, and $ 5.0 million, plus an imputed interest payment of $ 250,000 , on May 25, 2023.

● Second Earn-Out:

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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.

o The APA Amendment changes the 1.5 times multiplier to 3.0 times, but still provides that in no event will the second earn-out payment exceed $ 10.0 million.

o Subsequent to September 30, 2023, it was determined that the calculated amount of the second earn-out payment was $ 5.6 million, which was paid by the Company on November 28, 2023 (see Note 17 – “Fair Value Measurements”).

The fair value of the earn-out as of the acquisition date was $ 6.4 million.

The fair value of the earn-out, reflecting management’s estimate of the likelihood of achieving these targets, was determined by employing a Monte Carlo Simulation model.

This amount and the current versus non-current allocation will be remeasured at the end of each reporting period until the payment requirement ends, with any adjustments reported in income from operations (see Note 17 – “Fair Value Measurements”).

This amount and the current versus non-current allocation was remeasured at the end of each reporting period until the payment requirement ended, with any adjustments reported in income from operations (see Note 17 – “Fair Value Measurements”).

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

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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.

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

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 2021, or of future results.

(In thousands)

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At December 31, 2022

In-transit inventory

Legal and consulting

In-transit inventory

Clinical studies

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Warranty Reserves

The activity in the warranty reserve during and as of the end of the year presented was as follows:

The activity in the warranty reserve during and as of the end of the years presented was as follows:

(In thousands)

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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.

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

The term loan is reflected as a note payable on our Consolidated Balance Sheets.

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

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

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

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

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

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

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.

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.

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

The Second Amendment modified the maximum leverage ratio, the minimum fixed charge coverage ratio and the minimum consolidated EBITDA covenants under the Credit Agreement, and added a minimum liquidity covenant, through the quarter ended June 30, 2023.

The Second Amendment also increased the applicable margin for LIBOR rate loans under the Credit Agreement during the period commencing on the date of the Second Amendment and ending on the last day of the fiscal quarter ending June 30, 2023.

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

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

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

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 %.

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

On June 21, 2023, we entered into a Third Amendment Agreement (the “Third Amendment”) that replaced the interest rate benchmark under the Credit Agreement from LIBOR to the term Secured Overnight Financing Rate (“SOFR”).

All tenors of term SOFR are subject to a credit spread adjustment of 0.10 % (“Adjusted Term SOFR”).

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

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

except that, pursuant to the Second Amendment and the Third 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 and Adjusted Term SOFR loans, as applicable, was 3.50 %.

At December 31, 2023, all outstanding borrowings were subject to interest at a rate calculated at Adjusted Term SOFR plus an applicable margin, for an interest rate of 7.73 %.

On August 1, 2023, we entered into a Fourth Amendment Agreement (the “Fourth Amendment”), which further amends the Credit Agreement.

The Fourth Amendment, among other things, decreased the commitment fees payable under the revolving credit facility under the Credit Agreement such that the undrawn portions of the revolving credit facility are subject to an unused line fee at a rate per annum from 0.125 % to 0.200 %, depending on our consolidated leverage ratio, and eliminated the language providing that the applicable margin for Adjusted Term SOFR loans was 3.50 %, such that the interest rates are in effect as set forth in the above paragraph.

The Fourth Amendment also eliminated the liquidity financial covenant and modified the remaining financial covenants to reflect the termination of the temporary covenant relief period that was in place until June 30, 2023 pursuant to the Second Amendment, such that the financial covenants now include a maximum consolidated total leverage ratio covenant, a minimum consolidated EBITDA covenant and a minimum fixed charge coverage ratio covenant.

In addition, the Fourth Amendment provided for an additional term loan in the amount of $ 8.25 million, which we used for a paydown of the revolving credit facility.

The Fourth Amendment also extended the maturity date of the term loans and revolving credit facility under the Credit Agreement from September 8, 2024, to August 1, 2026.

On December 21, 2023, we made a payment of $ 16.8 million to repay in full the outstanding balance on the revolving credit facility.

As of December 31, 2023, we had outstanding borrowings of $ 29.3 million under the Credit Agreement, comprised entirely of the term loan.

The principal of the term loan is required to be repaid in quarterly installments of $ 750,000 .

Maturities of the term loan for the next three years as of December 31, 2023, were as follows:

(In thousands)

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

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

Deferred Financing Fees

Net Note Payable

Current portion of note payable

Non-current portion of note payable

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

As of December 31, 2023, the Credit Agreement contained a number of restrictions and covenants, including that we maintain compliance with a maximum total leverage ratio, a minimum fixed charge coverage ratio and a minimum consolidated EBITDA covenant.

As of December 31, 2023, we were in compliance with all financial covenants under the Credit Agreement.

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

In December 2018, we amended the initial lease to add approximately 29,000 square feet of additional office space, which is accounted for as a separate lease (“second lease”) in accordance with ASU No.

In December 2018, we amended the

initial lease to add approximately 29,000 square feet of additional office space, which is accounted for as a separate lease (“second lease”) in accordance with ASU No.

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

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

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

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

Finally, the portion of the space covered under the third lease commenced in September 2021.

The three portions were recognized as an operating lease and included in the ROU operating lease assets and operating lease liabilities on the Consolidated Balance Sheets.

We lease vehicles for certain members of our field sales organization under a vehicle fleet program whereby the initial, noncancelable lease is for a term of 367 days , thus more than one year.

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

As of 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.

The nonlease components are not significant.

As of December 31, 2023, we did not have any 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 were recorded as ROU operating lease assets and operating lease liabilities.

Computer and Office Equipment

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Major Vendors

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.

We had purchases from one vendor that accounted for 25 % of our total purchases for the year ended December 31, 2023, and purchases from one vendor that accounted for 18 % of total purchases for the year ended December 31, 2022.

Purchase Commitment

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

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

Tactile Systems Technology, Inc., et al ., File No.

0:20-cv-02074-NEB-BRT (the “Mart Lawsuit”).

On April 19, 2021, the plaintiff filed an Amended Complaint against us and eight of our present and former officers and directors.

Plaintiff seeks to represent a class consisting of investors who purchased our common stock in the market during the time period from May 7, 2018 through June 8, 2020 (“alleged class period”).

The Amended Complaint alleges the following claims under the Securities Exchange Act of 1934, as amended (the “Exchange Act”):

(1) that we and certain officer defendants made materially false or misleading public statements about our business, operational and compliance policies, and results during the alleged class period in violation of Section 10(b) of the Exchange Act;

(2) that we and the individual defendants engaged in a scheme to defraud investors in order to allow the individual defendants to sell our stock in violation of Section 10(b) of the Exchange Act;

(3) that the individual defendants engaged in improper insider trading of our stock in violation of Section 20A of the Exchange Act;

and (4) that we and the individual defendants are liable under Section 20(a) of the Exchange Act because each defendant is a controlling person.

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

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

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

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:

0:22-cv-01403-NEB-BRT (the “Weaver Lawsuit”).

The Weaver Lawsuit generally arises out of the same subject matter as a previously settled securities class action captioned Brian Mart v.

Tech., Inc., et al.

0:20-cv-02074-NEB-BRT (D.

Minn.) (the “Mart Lawsuit”), which alleged, inter alia, that we and eight of our former officers and directors made materially false or misleading statements about our business, operational and compliance policies.

The Weaver Lawsuit 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;

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(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;

(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;

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

We are defending the action as it proceeds.

The plaintiff filed an Amended Complaint on March 3, 2023.

On March 31, 2023, we filed a motion to dismiss the Amended Complaint, which is pending.

On July 31, 2023, the plaintiff filed a Joint Notice of Preliminary Settlement indicating that the parties have reached a non-binding settlement-in-principal on most of the material terms that would resolve all claims between the parties and requested that the Court temporarily stay all deadlines, hearings, and conferences while the parties continue to finalize settlement.

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 .

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We also paid $ 8.2 million in cumulative accrued dividends to our Series A convertible preferred stockholders in connection with the initial public offering, including $ 0.1 million of dividends paid to the holders of the common restricted shares.

On February 27, 2023, we closed on a public offering of 2,875,000 shares of our common stock at a public offering price of $ 13.00 per share.

We received net proceeds from this offering of $ 34.6 million after deducting underwriting discounts, commissions, and offering expenses.

Stock-Based Compensation

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

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

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

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

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

This condition was satisfied in the first quarter of 2021.

The following table sets forth the estimated fair value of these stock options granted and the assumptions on which the fair value was determined:

Expected term

Expected volatility

Risk-free interest rate

Expected dividend yield

Fair value on the date of grant

$ 13.60 - $ 14.70

We recorded total stock-based compensation expense of $ 7.5 million, $ 9.6 million and $ 10.2 million for the years ended December 31, 2023, 2022 and 2021, respectively.

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At December 31, 2023, there was approximately $ 0.2 million of total unrecognized pre-tax stock option expense under our equity compensation plans, which is expected to be recognized on a straight-line basis over a weighted-average period of 0.9 years.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model, other than options that have a market-based vesting condition, which are valued using the Monte Carlo Simulation model.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model.

Annually, we make predictive assumptions regarding future stock price volatility, dividend yield, expected term and forfeiture rate.

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Treasury securities with maturities similar to the expected term of the options for each option group.

We use the “simplified method” to determine the expected term of the stock option grants.

We utilize this method because we do not have sufficient public company exercise data in which to make a reasonable estimate.

The following table sets forth the estimated fair values of our stock options granted in each of the years indicated, and the assumptions on which the fair values were determined:

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45.0 - 52.3 %

44.1 - 46.4 %

Risk-free interest rate

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$ 13.04 - $ 22.90

$ 13.45 - $ 18.64

Our stock option activity for the three years ended December 31, 2023, 2022 and 2021, was as follows:

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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 $ 5.1 million, $ 5.8 million and $ 4.9 million for the years ended December 31, 2023, 2022 and 2021, respectively.

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

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 2021 were earned if and to the extent performance goals based on revenue and adjusted EBITDA were 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.

The number of PSUs earned under these grants 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.

One-third of the earned PSUs will vest on the date the Compensation and Organization Committee certifies the number of PSUs earned, and the remaining two-thirds of the earned PSUs will vest on the first anniversary of that certification date.

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

The PSUs granted in 2023 have three separate performance periods, and one-third of each grant will be earned if and to the extent performance goals based on revenue change and adjusted EBITDA margin are achieved in each of 2023 and 2024 (ranging from 25 % to 175 % of target), and one-third will be earned if and to the extent performance goals to be established are achieved in 2025.

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 $ 0.9 million, $ 0.5 million and $ 0.2 million for the years ended December 31, 2023, 2022 and 2021, respectively.

The stock-based compensation expense for the year ended December 31, 2023 reflects an expense of $ 0.5 million related to the PSUs granted in 2023 and an expense of $ 0.4 million related to the PSUs granted in 2022.

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.

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.

As of December 31, 2023, there was approximately $ 1.3 million of total unrecognized pre-tax compensation expense related to outstanding PSUs that is expected to be recognized over a weighted average period of 1.9 years.

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

Rental revenue for the years ended December 31, 2022, 2021 and 2020, was primarily related to private insurers.

Rental revenue for the years ended December 31, 2023, 2022 and 2021, was primarily from private insurers.

Sales-type lease revenue and the associated cost of revenue for the years ended December 31, 2023, 2022 and 2021, was:

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Cost of sales-type lease revenue

The provision (benefit) for income tax expense consisted of the following:

The (benefit) provision for income tax expense consisted of the following:

Year Ended December 31,

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Unrecognized tax benefit, State

Total provision (benefit) for income taxes

Total (benefit) provision for income taxes

The components of our deferred tax assets and liabilities were as follows:

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Meals and entertainment

Incentive stock options

Employee Stock Purchase Plan

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Deferred reprice - state

Federal carryback claim deferred rate differential

Unrecognized tax benefits

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Interest and penalties

162(m) write down

Net effective rate

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

As of December 31, 2023, the Company had approximately $ 50 thousand of state net operating loss ("NOL") carryforwards.

A portion of the state NOL carry forward amounts have begun to expire in the current year.

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

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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.

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 per share:

As of December 31, 2023, in part because in the current year we achieved three years of cumulative pretax income in the U.S.

federal tax jurisdiction, management determined that there was sufficient positive evidence to conclude that it is more likely than not that additional deferred taxes of $ 19.4 million are realizable.

We therefore reduced the valuation allowance related to the future realization of deferred tax assets accordingly.

Net Income (Loss) Per Common Share

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

(In thousands, except share and per share data)

Net income (loss)

Weighted-average shares outstanding

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:

Net income (loss) per share - Basic

Net income (loss) per share - Diluted

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

Restricted stock units

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

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

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.

As of December 31, 2023, our obligations under the AffloVest earn-out arrangements had been paid in full.

Prior to the determination of the actual amount of the earn-out, 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 included 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.

The model included 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 was adjusted to fair value at each reporting date until the end of the earn-out period, which was September 30, 2023.

Changes in fair value were 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:

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Earn-out liability at December 31, 2022

Addition for acquisition

Payment on earn-out

Payments on earn-out

Fair value adjustments

Earn-out liability at December 31, 2023

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

Quoted Prices

(In thousands)

Recurring Fair Value Measurements:

Earn-out liability

Earn-out liability at December 31, 2021

Payment on earn-out

Fair value adjustments

Earn-out liability at December 31, 2022

On May 25, 2023, the Company paid $ 5.0 million, plus an imputed interest payment of $ 250,000 , relating to the initial earn-out.

Subsequent to September 30, 2023, it was determined that the calculated amount of the second earn-out payment was $ 5.6 million, which was paid by the Company on November 28, 2023.

There is no remaining contingent earn-out liability as of December 31, 2023.

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

At December 31, 2022

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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 8. Financial Statements and Supplementary Data