UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ~~ended March 31,~~ended: September 30, 2019

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-37799

Tactile Systems Technology, Inc.

(Exact name of registrant as specified in its charter)


Delaware	3701 Wayzata Blvd, Suite 300	41-1801204
~~Delaware~~	~~1331 Tyler Street NE, Suite 200~~	~~41-1801204~~
(State or other jurisdiction of incorporation or organization)	Minneapolis, Minnesota ~~55413~~55416	(I.R.S. employer identification number)
	(Address and Zip Code of principal executive offices)

	~~(612)~~ (612) 355-5100
	(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, Par Value $0.001 Per Share	TCMD	The Nasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☑	Accelerated filer	☐◻	Non-accelerated filer	☐◻

Smaller reporting company	☐	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

~~Securities registered pursuant to Section 12(b) of the Act:~~


~~Title of each class~~	~~Trading Symbol(s)~~	~~Name of each exchange on which registered~~
~~Common Stock, Par Value $0.001 Per Share~~	~~TCMD~~	~~The Nasdaq Stock Market~~

~~18,825,688~~19,028,450 shares of common stock, par value $0.001 per share, were outstanding as of ~~May 2,~~October 31, 2019.

Table of Contents

Forward-Looking Information

All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business, operations and financial performance and condition, are forward-looking statements. In some cases, you can identify forward-looking statements by the following words: "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "might," "target," "ongoing," "plan," "potential," "predict," "project," "should," "will," "would," or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance or achievements to be materially different from the information expressed or implied by the forward-looking statements in this Quarterly Report on Form 10-Q. These risks, uncertainties and other factors include, but are not limited to:

●

the adequacy of our liquidity to pursue our ~~complete~~ business objectives;

●

our ability to obtain reimbursement from ~~third-party~~third party payers for our products;

●

loss or retirement of key executives;

●

adverse economic conditions or intense competition;

●

loss of a key supplier;

●

entry of new competitors and products;

●

adverse federal, state and local government regulation;

●

technological obsolescence of our products;

●

technical problems with our research and products;

●

our ability to expand our business through strategic acquisitions;

●

our ability to integrate acquisitions and related businesses;

●

price increases for supplies and components;

●

the effects of current and future U.S. and foreign trade policy and tariff actions; and

●

the inability to carry out research, development and commercialization plans.

You should read the matters described in "Risk Factors" and the other cautionary statements made in our Annual Report on Form 10-K for the year ended December 31, 2018 and in this Quarterly Report on Form 10-Q. We cannot assure you that the forward-looking statements in this report will prove to be accurate and therefore you are encouraged not to place undue reliance on forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. You are urged to carefully review and consider the various disclosures made by us in this report and in other filings with the Securities and Exchange Commission (the “SEC”) that advise of the risks and factors that may affect our business. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we may make.

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements


Tactile Systems Technology, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
	September 30,		December 31,
(In thousands, except share and per share data)	2019		2018
Assets
Current assets
Cash and cash equivalents	$	19,814	$	20,099
Marketable securities		24,920		25,786
Accounts receivable, net		27,681		24,332
Net investment in leases		7,628		—
Inventories		16,882		11,189
Income taxes receivable		3,847		1,793
Prepaid expenses and other current assets		1,956		1,762
Total current assets		102,728		84,961
Non-current assets
Property and equipment, net		7,499		4,810
Right of use operating lease assets		15,204		—
Intangible assets, net		5,074		5,339
Medicare accounts receivable, non-current		3,025		1,884
Deferred income taxes		8,840		8,820
Other non-current assets		1,405		1,257
Total non-current assets		41,047		22,110
Total assets	$	143,775	$	107,071
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable	$	6,289	$	5,110
Accrued payroll and related taxes		11,336		7,421
Accrued expenses		3,696		2,785
Operating lease liabilities		1,990		—
Other current liabilities		817		760
Total current liabilities		24,128		16,076
Non-current liabilities
Accrued warranty reserve, non-current		2,227		1,725
Income taxes, non-current		54		—
Operating lease liabilities, non-current		13,399		—
Total non-current liabilities		15,680		1,725
Total liabilities		39,808		17,801

Commitments and Contingencies (see Note 10)

Stockholders’ equity:
Preferred stock, $0.001 par value, 50,000,000 shares authorized; NaN issued and outstanding as of September 30, 2019 and December 31, 2018		—		—
Common stock, $0.001 par value, 300,000,000 shares authorized; 19,016,032 shares issued and outstanding as of September 30, 2019; 18,631,125 shares issued and outstanding as of December 31, 2018		19		19
Additional paid-in capital		87,524		79,554
Retained earnings		16,393		9,705
Accumulated other comprehensive income (loss)		31		(8)
Total stockholders’ equity		103,967		89,270
Total liabilities and stockholders’ equity	$	143,775	$	107,071

Tactile Systems Technology, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)


March 31,

December 31,
(In thousands, except share and per share data)

2019

2018
ASSETS

Current assets:

Cash and cash equivalents

$
23,548

$
20,099
Marketable securities

21,384

25,786
Accounts receivable, net

21,661

24,332
Net investment in leases

3,362

—
Inventories

11,321

11,189
Income taxes receivable

2,814

1,793
Prepaid expenses and other current assets

1,680

1,762
Total current assets

85,770

84,961
Non-current assets:

Property and equipment, net

4,616

4,810
Right of use operating lease assets

3,396

—
Intangible assets, net

5,244

5,339
Medicare accounts receivable, long-term

2,172

1,884
Deferred income taxes

11,077

8,820
Other non-current assets

1,242

1,257
Total non-current assets

27,747

22,110
Total assets

$
113,517

$
107,071
LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$
5,832

$
5,110
Accrued payroll and related taxes

6,837

7,421
Accrued expenses

2,685

2,780
Future product royalties

3

5
Income taxes

—

51
Right of use operating lease liabilities

1,147

—
Other current liabilities

800

709
Total current liabilities

17,304

16,076
Non-current liabilities:

Accrued warranty reserve, non-current

1,854

1,725
Income taxes, non-current

42

—
Right of use operating lease liabilities, non-current

2,318

—
Total non-current liabilities

4,214

1,725
Total liabilities

21,518

17,801
Commitments and contingencies (see Note 10)

Stockholders’ equity:

Preferred stock, $0.001 par value, 50,000,000 shares authorized; none issued and outstanding as of March 31, 2019 and December 31, 2018

—

—
Common stock, $0.001 par value, 300,000,000 shares authorized; 18,818,692 shares issued and outstanding as of March 31, 2019; 18,631,125 shares issued and outstanding as of December 31, 2018

19

19
Additional paid-in capital

80,788

79,554
Retained earnings

11,177

9,705
Accumulated other comprehensive income (loss)

15

(8)
Total stockholders’ equity

91,999

89,270
Total liabilities and stockholders’ equity

$
113,517

$
107,071

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

Table of Contents


Tactile Systems Technology, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands, except share and per share data)	2019		2018		2019		2018
Revenue
Sales revenue	$	42,882	$	32,969	$	112,503	$	87,731
Rental revenue		6,730		3,353		19,926		9,572
Total revenue		49,612		36,322		132,429		97,303
Cost of revenue
Cost of sales revenue		12,233		9,153		33,231		24,275
Cost of rental revenue		2,006		988		6,062		2,785
Total cost of revenue		14,239		10,141		39,293		27,060
Gross profit
Gross profit - sales revenue		30,649		23,816		79,272		63,456
Gross profit - rental revenue		4,724		2,365		13,864		6,787
Gross profit		35,373		26,181		93,136		70,243
Operating expenses
Sales and marketing		20,737		15,632		56,546		42,641
Research and development		1,467		1,223		3,982		3,949
Reimbursement, general and administrative		9,966		7,956		28,159		22,799
Total operating expenses		32,170		24,811		88,687		69,389
Income from operations		3,203		1,370		4,449		854
Other income		160		128		480		351
Income before income taxes		3,363		1,498		4,929		1,205
Income tax expense (benefit)		932		(248)		(1,759)		(3,063)
Net income	$	2,431	$	1,746	$	6,688	$	4,268
Net income per common share
Basic	$	0.13	$	0.10	$	0.35	$	0.23
Diluted	$	0.12	$	0.09	$	0.34	$	0.22
Weighted-average common shares used to compute net income per common share
Basic		18,981,015		18,344,956		18,870,622		18,166,999
Diluted		19,641,853		19,525,686		19,630,721		19,328,947

Tactile Systems Technology, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)

Three Months Ended

March 31,
(In thousands, except share and per share data)

2019

2018
Revenue

Sales revenue

$
30,831

$
23,647
Rental revenue

6,786

3,201
Total revenue

37,617

26,848
Cost of revenue

Cost of sales revenue

9,412

6,409
Cost of rental revenue

1,947

900
Total cost of revenue

11,359

7,309
Gross profit

Gross profit - sales revenue

21,419

17,238
Gross profit - rental revenue

4,839

2,301
Gross profit

26,258

19,539
Operating expenses

Sales and marketing

17,391

12,557
Research and development

1,281

1,437
Reimbursement, general and administrative

9,388

7,372
Total operating expenses

28,060

21,366
Loss from operations

(1,802)

(1,827)
Other income

161

91
Loss before income taxes

(1,641)

(1,736)
Income tax benefit

(3,113)

(1,686)
Net income (loss)

$
1,472

$
(50)
Net income per common share

Basic

$
0.08

$
0.00
Diluted

$
0.08

$
0.00
Weighted-average common shares used to compute net income per common share

Basic

18,746,751

17,996,672
Diluted

19,579,847

17,996,672

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

Table of Contents

Tactile Systems Technology, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)

Three Months Ended

March 31,
(In thousands)

2019

2018
Net income (loss)

$
1,472

$
(50)
Other comprehensive income (loss):

Unrealized gain (loss) on marketable securities

30

(7)
Income tax related to items of other comprehensive income (loss)

(7)

1
Total other comprehensive income (loss)

23

(6)
Comprehensive income (loss)

$
1,495

$
(56)

~~The accompanying notes are an integral part of these unaudited condensed consolidated financial statements~~


Tactile Systems Technology, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands)	2019		2018		2019		2018
Net income	$	2,431	$	1,746	$	6,688	$	4,268
Other comprehensive (loss) income:
Unrealized (loss) gain on marketable securities		(13)		10		51		29
Income tax related to items of other comprehensive (loss) income		4		(3)		(12)		(16)
Total other comprehensive (loss) income		(9)		7		39		13
Comprehensive income	$	2,422	$	1,753	$	6,727	$	4,281

~~Table of Contents~~

Tactile Systems Technology, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)

Accumulated

Additional

Other

Common Stock

Paid-In

Retained

Comprehensive

Treasury

(In thousands, except share data)

Shares

Par Value

Capital

Earnings

(Loss) Income

Stock

Total
Balances, December 31, 2017

17,846,379

$
18

$
70,224

$
3,082

$
(44)

$
(493)

$
72,787
Stock-based compensation

—

—

1,481

—

—

—

1,481
Exercise of common stock options and vesting of restricted stock units

230,532

—

138

—

—

—

138
Taxes paid for net share settlement of restricted stock units

(40,202)

—

(1,188)

—

—

—

(1,188)
Comprehensive loss for the period

—

—

—

(50)

(6)

—

(56)
Balances, March 31, 2018

18,036,709

$
18

$
70,655

$
3,032

$
(50)

$
(493)

$
73,162

Balances, December 31, 2018

18,631,125

19

79,554

9,705

(8)

—

89,270
Stock-based compensation

—

—

2,783

—

—

—

2,783
Exercise of common stock options and vesting of restricted stock units

231,814

—

861

—

—

—

861
Taxes paid for net share settlement of restricted stock units

(44,247)

—

(2,410)

—

—

—

(2,410)
Comprehensive income for the period

—

—

—

1,472

23

—

1,495
Balances, March 31, 2019

18,818,692

$
19

$
80,788

$
11,177

$
15

$
—

$
91,999

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

Table of Contents


Tactile Systems Technology, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
								Accumulated
				Additional				Other
	Common Stock			Paid-In		Retained		Comprehensive		Treasury
(In thousands, except share data)	Shares	Par Value		Capital		Earnings		(Loss) Income		Stock		Total
Balances, December 31, 2017	17,846,379	$	18	$	70,224	$	3,082	$	(44)	$	(493)	$	72,787
Stock-based compensation	—		—		5,638		—		—		—		5,638
Exercise of common stock options and vesting of restricted stock units	536,125		—		1,218		—		—		—		1,218
Taxes paid for net share settlement of restricted stock units	(56,469)		—		(1,922)		—		—		—		(1,922)
Treasury stock issued for option exercises	26,086		—		(493)		—		—		493		—
Common shares issued for employee stock purchase plan	63,578		—		1,416		—		—		—		1,416
Comprehensive income for the period	—		—		—		4,268		13		—		4,281
Balances, September 30, 2018	18,415,699	$	18	$	76,081	$	7,350	$	(31)	$	—	$	83,418

Balances, December 31, 2018	18,631,125		19		79,554		9,705		(8)		—		89,270
Stock-based compensation	—		—		7,387		—		—		—		7,387
Exercise of common stock options and vesting of restricted stock units	398,477		—		1,838		—		—		—		1,838
Taxes paid for net share settlement of restricted stock units	(56,956)		—		(3,107)		—		—		—		(3,107)
Common shares issued for employee stock purchase plan	43,386		—		1,852		—		—		—		1,852
Comprehensive income for the period	—		—		—		6,688		39		—		6,727
Balances, September 30, 2019	19,016,032	$	19	$	87,524	$	16,393	$	31	$	—	$	103,967

Tactile Systems Technology, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)

Three Months Ended

March 31,
(In thousands)

2019

2018
Cash flows from operating activities

Net income (loss)

$
1,472

$
(50)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Depreciation and amortization

996

463
Deferred income taxes

(2,264)

—
Stock-based compensation expense

2,783

1,481
Changes in assets and liabilities:

Accounts receivable

2,671

3,414
Net investment in leases

(3,362)

—
Inventories

(132)

(3,616)
Income taxes

(1,030)

(1,952)
Prepaid expenses and other assets

97

63
Right of use operating lease assets

(3,396)

—
Medicare accounts receivable – long-term

(288)

(253)
Accounts payable

722

885
Accrued payroll and related taxes

(584)

(1,850)
Accrued expenses and other liabilities

125

(756)
Right of use operating lease liabilities

3,465

—
Future product royalties

(2)

(2)
Net cash provided by (used in) operating activities

1,273

(2,173)
Cash flows from investing activities

Proceeds from sales of securities available-for-sale

—

1,000
Proceeds from maturities of securities available-for-sale

4,500

4,000
Purchases of property and equipment

(731)

(432)
Intangible assets costs

(44)

—
Net cash provided by investing activities

3,725

4,568
Cash flows from financing activities

Taxes paid for net share settlement of restricted stock units

(2,410)

(1,188)
Proceeds from exercise of common stock options

861

138
Net cash used in financing activities

(1,549)

(1,050)
Net increase in cash and cash equivalents

3,449

1,345
Cash and cash equivalents – beginning of period

20,099

23,968
Cash and cash equivalents – end of period

$
23,548

$
25,313
Supplemental cash flow disclosure

Cash paid for interest

$
—

$
—
Cash paid for taxes

$
181

$
284
Capital expenditures incurred but not yet paid

$
176

$
96

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

Table of Contents


Tactile Systems Technology, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
	Nine Months Ended
	September 30,
(In thousands)	2019		2018
Cash flows from operating activities
Net income	$	6,688	$	4,268
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,583		2,474
Deferred income taxes		(31)		(1,411)
Stock-based compensation expense		7,387		5,638
Loss on disposal of equipment		—		3
Changes in assets and liabilities:
Accounts receivable		(3,349)		(2,556)
Net investment in leases		(7,628)		—
Inventories		(5,693)		(3,879)
Income taxes		(2,051)		(2,090)
Prepaid expenses and other assets		(418)		(1,358)
Right of use operating lease assets		107		—
Medicare accounts receivable, non-current		(1,141)		1,707
Accounts payable		979		(508)
Accrued payroll and related taxes		3,915		1,586
Accrued expenses and other liabilities		1,073		(190)
Net cash provided by operating activities		2,421		3,684
Cash flows from investing activities
Proceeds from sales of securities available-for-sale		—		2,000
Proceeds from maturities of securities available-for-sale		16,000		11,000
Purchases of securities available-for-sale		(14,859)		(14,792)
Purchases of property and equipment		(4,276)		(2,384)
Intangible assets costs		(154)		(1,052)
Net cash used in investing activities		(3,289)		(5,228)
Cash flows from financing activities
Taxes paid for net share settlement of restricted stock units		(3,107)		(1,922)
Proceeds from exercise of common stock options		1,838		1,218
Proceeds from the issuance of common stock from the employee stock purchase plan		1,852		1,416
Net cash provided by financing activities		583		712
Net decrease in cash and cash equivalents		(285)		(832)
Cash and cash equivalents – beginning of period		20,099		23,968
Cash and cash equivalents – end of period	$	19,814	$	23,136

Supplemental cash flow disclosure
Cash paid for interest	$	—	$	3
Cash paid for taxes	$	326	$	448
Capital expenditures incurred but not yet paid	$	801	$	184

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

Table of Contents

Tactile Systems Technology, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Note 1. Nature of Business and Operations

Tactile Systems Technology, Inc. (“we,” “us,” and “our”) is the sole manufacturer and distributor of the ~~Flexitouch~~Flexitouch® and ~~Entre~~Entre™ systems, medical devices that help control symptoms of lymphedema, a chronic and progressive medical condition, the ~~Actitouch~~Actitouch® system, a medical device used to treat venous leg ulcers and chronic venous insufficiency, and the Airwear wrap, a medical device used for the management of venous insufficiency, venous hypertension, venous ulcerations and lymphedema. ~~We provide our~~Our products are purchased or rented for home use ~~in the home~~ and ~~sell or rent them through~~are recommended by vascular, wound and lymphedema clinics throughout the United States. ~~We do business as “Tactile Medical.”~~

We were originally incorporated in Minnesota under the name Tactile Systems Technology, Inc. on January 30, 1995. During 2006, we established a merger corporation and subsequently, on July 21, 2006, merged with and into this merger corporation, resulting in ~~us being reincorporated~~our reincorporation as a Delaware corporation. The resulting corporation assumed the name Tactile Systems Technology, Inc. In September 2013, we began doing business as “Tactile Medical.”

On August 2, 2016, we closed the initial public offering of our common stock, which resulted in the sale of 4,120,000 shares of our common stock at a public offering price of $10.00 per share. We received net proceeds from the initial public offering of approximately $35.4 million, after deducting underwriting discounts and approximately $2.9 million of transaction expenses. In connection with the closing of the initial public offering, all of our outstanding redeemable convertible preferred stock automatically converted to common stock on August 2, 2016. AtAs a result, at August 2, 2016, we did not have any redeemable convertible preferred stock issued or outstanding.

Our business is affected by seasonality. In the first quarter of each year, when most patients have started a new insurance year and have not yet met their annual out-of-pocket payment obligations, we experience substantially reduced demand for our products. We typically experience higher ~~revenues~~revenue in the third and fourth quarters ~~as a result of~~when patients ~~having paid~~have met their annual insurance deductibles, ~~in full,~~ thereby reducing their out-of-pocket costs for our products, and because patients ~~often spend the remaining balances in~~desire to exhaust their ~~healthcare~~ flexible spending accounts at ~~that time.~~year end. This seasonality applies only to purchases and rentals of our products by patients covered by commercial insurance and is not relevant to Medicare ~~Medicaid~~ or the Veterans Administration, as those payers either do not have plans that have declining deductibles over the course of the plan year and/or do not have plans that include patient deductibles for purchases or rentals of our products.

Note 2. Basis of Presentation

~~Our~~The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including those which are normal and recurring) considered necessary for a fair presentation of the interim financial information have been included. We have reclassified certain prior year amounts to conform to the current year’s presentation.

The results for the ~~three~~nine months ended ~~March 31,~~September 30, 2019, are not necessarily indicative of results to be expected for the year ending December 31, 2019, or for any other interim period or for any future year. The condensed consolidated interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018.

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Principles of Consolidation

~~Our~~The accompanying unaudited condensed consolidated financial statements include the accounts of Tactile Systems Technology, Inc. and its wholly owned subsidiary, Swelling Solutions, Inc. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and to disclose contingent assets and liabilities at the date of the financial statements and the reported amounts of ~~revenues~~revenue and expenses during the reporting period. Actual results could differ from those estimates.

Comprehensive Income

Comprehensive income 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 represents net income adjusted for unrealized gains and losses on available-for-sale marketable ~~securities.~~securities and the related taxes.

JOBS Act Accounting Election

Prior to December 31, 2018, we were an “emerging growth company” as defined by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) ~~and as~~. As a result, we were eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. We elected to take advantage of the extended transition period for adopting new or revised accounting standards that have different effective dates for public and private companies until such time as those standards would otherwise apply to private companies. However, as of the last business day of our second fiscal quarter of 2018, the market value of our common stock that was held by non-affiliates exceeded ~~$700~~$700.0 million, and as a result, we no longer qualified as an emerging growth company as of December 31, 2018, and are no longer able to take advantage of certain exemptions, including, the extended transition period for adopting new or revised accounting ~~standards. Therefore, beginning~~standards and our exemption from providing our auditor’s attestation on our system of internal control over financial reporting, which was included for the first time in our Annual Report on Form 10-K for the year ended December 31, ~~2018, we were required to adopt new or revised accounting standards when they are applicable to public companies that are not emerging growth companies.~~2018.

Note 3. Summary of Significant Accounting Policies

Significant Accounting Policies

Excluding the adoption of ~~ASC~~Accounting Standards Codification (“ASC”) 842 ~~“Leases”~~– Leases, as described below, there were no material changes in our significant accounting policies during the ~~three~~nine months ended ~~March 31,~~September 30, 2019. See Note 3 -– “Summary of Significant Accounting Policies” to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018, for information regarding our significant accounting policies.

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases” (Topic 842) (“ASC 842”), which supersedes the ~~existing~~then-existing guidance for lease accounting, “Leases” (Topic 840) (“ASC 840”). ASC 842 requires lessees to recognize a lease liability and a right of use asset for all leases that extend beyond one year. As a result of our change in filing status, we adopted this standard using the modified retrospective transition approach at the adoption date of January 1, 2019. This approach ~~does~~did not require restatement of previous periods. We completed a qualitative and quantitative assessment of our leases from both a lessee and lessor perspective. As part of our process, we elected to utilize certain practical expedients that were provided for transition relief. Accordingly, we did not reassess expired or existing contracts, lease classifications or related initial direct costs as part of our

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assessment process for either lessee or lessor leases. Additionally, we elected the practical expedient to treat lease and nonlease components of fixed payments due to the lessor as one, and therefore no separate allocation was required on the initial implementation date of January 1, 2019, and thereafter. The adoption of

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this standard, from a lessee perspective, resulted in us recording ~~Right~~right of ~~Use~~use (“ROU”) operating lease assets and operating lease liabilities of approximately $3.1 million on the Condensed Consolidated Balance Sheet as of January 1, 2019, with no impact to retained earnings. In addition, we elected as an accounting policy, not to record leases with an initial term of less than 12 months. From a lessor perspective, the application of ASC 842 to our rental revenue, which was recognized as month-to-month, cancelable leases in accordance with ASC 840 through December 31, 2018, resulted in recognizing rental revenue as a sales-type lease under ASC 842 thereafter. Rental sales agreements that commenced prior to December 31, 2018, ~~will~~ continue to be recognized as month-to-month, cancelable leases until they are completed, as we elected the practical expedient to not reassess the lease classification for leases in existence upon adoption. As such, rental agreements commencing after January 1, 2019, were recorded as sales-type leases with the associated revenue and cost of revenue recognized on the lease commencement date and a corresponding net investment in leases on the Condensed Consolidated Balance Sheet. (See Note 10 – “Commitments and Contingencies” and Note 12 – “Revenue” for additional information and required disclosures.)

In June 2016, the FASB issued ASU No. 2016-13, ~~“Financial~~Financial Instruments — Credit Losses”, to require the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts. The ASU will be effective for us for interim and annual periods beginning January 1, 2020. Therefore, we plan to further evaluate the anticipated impact of the adoption of this ASU on ~~our~~the condensed consolidated financial statements in future periods.

In July 2018, the FASB issued ASU No. 2018-07, ~~“Improvements~~Improvements to Non-employee Share-Based Payment Accounting”(“ASU 2018-07”), which expands the scope of ASC 718 – ~~“Stock~~Stock Based ~~Compensation”~~Compensation to include share-based payment transactions for acquiring goods and services from non-employees. The ASU was effective for us beginning January 1, 2019, including interim periods within the fiscal year. We ~~have early~~ adopted ASU 2018-07 for the quarter ended March 31, 2019, and it did not have a material impact on ~~our~~the condensed consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (“ASU 2018-15”), which aligns the accounting for implementation costs incurred in a cloud computing arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software. We early adopted this ASU effective January 1, 2019, and it did not have a material impact on the condensed consolidated financial statements.

Note 4. Marketable Securities

Our investments in marketable securities, all of which have original contractual maturities of ten to twenty-four months, are classified as available-for-sale and consist of the following:

At March 31, 2019

Amortized

Unrealized

Fair
(In thousands)

Cost

Gains

Losses

Value
U.S. government and agency obligations

$
17,391

$
13

$
3

$
17,401
Corporate debt securities and certificates of deposit

3,973

11

1

3,983
Marketable securities

$
21,364

$
24

$
4

$
21,384

At December 31, 2018

Amortized

Unrealized

Fair
(In thousands)

Cost

Gains

Losses

Value
U.S. government and agency obligations

$
19,332

$
5

$
17

$
19,320
Corporate debt securities and certificates of deposit

6,464

7

5

6,466
Marketable securities

$
25,796

$
12

$
22

$
25,786


	At September 30, 2019
	Amortized		Unrealized				Fair
(In thousands)	Cost		Gains		Losses		Value
U.S. government and agency obligations	$	22,392	$	26	$	—	$	22,418
Corporate debt securities		2,487		15		—		2,502
Marketable securities	$	24,879	$	41	$	—	$	24,920

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	At December 31, 2018
	Amortized		Unrealized				Fair
(In thousands)	Cost		Gains		Losses		Value
U.S. government and agency obligations	$	19,332	$	5	$	17	$	19,320
Corporate debt securities		6,464		7		5		6,466
Marketable securities	$	25,796	$	12	$	22	$	25,786

Net pre-tax unrealized gains for marketable securities at ~~March 31,~~September 30, 2019, were recorded as a component of accumulated other comprehensive income in stockholders' equity. There were no0 sales of marketable securities during the ~~three~~nine months ended ~~March~~September 30, 2019.

There were 0 marketable securities in an unrealized loss position at September 30, 2019.

At December 31, ~~2019.~~

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~~Unrealized~~2018, unrealized losses and the fair value of marketable securities aggregated by investment category and the length of time the securities were in a continuous loss position, were as follows:

At March 31, 2019

Less than 12 months

12 months or more

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized
(In thousands)

Value

Losses

Value

Losses

Value

Losses
U.S. government and agency obligations

$
7,474

$
2

$
999

$
1

$
8,473

$
3
Corporate debt securities and certificates of deposit

1,498

1

—

—

1,498

1
Marketable securities

$
8,972

$
3

$
999

$
1

$
9,971

$
4

At December 31, 2018

Less than 12 months

12 months or more

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized
(In thousands)

Value

Losses

Value

Losses

Value

Losses
U.S. government and agency obligations

$
11,884

$
11

$
2,993

$
6

$
14,877

$
17
Corporate debt securities and certificates of deposit

2,993

3

999

2

3,992

5
Marketable securities

$
14,877

$
14

$
3,992

$
8

$
18,869

$
22


		At December 31, 2018
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(In thousands)	Value		Losses		Value		Losses		Value		Losses
U.S. government and agency obligations	$	11,884	$	11	$	2,993	$	6	$	14,877	$	17
Corporate debt securities		2,993		3		999		2		3,992		5
Marketable securities	$	14,877	$	14	$	3,992	$	8	$	18,869	$	22

Note 5. Inventories

Inventories consisted of the following:

(In thousands)

At March 31, 2019

At December 31, 2018
Finished goods

$
4,656

$
5,318
Component parts and work-in-process

6,665

5,871
Total inventories

$
11,321

$
11,189


(In thousands)	At September 30, 2019		At December 31, 2018
Finished goods	$	6,261	$	5,318
Component parts and work-in-process		10,621		5,871
Total inventories	$	16,882	$	11,189

Note 6. Intangible Assets

Our patents and other intangible assets, all of which are subject to amortization, are summarized as follows:

Weighted-

At March 31, 2019

At December 31, 2018

Average

Gross

Gross

Amortization

Carrying

Accumulated

Net

Carrying

Accumulated

Net
(In thousands)

Period

Amount

Amortization

Amount

Amount

Amortization

Amount
Patents

11 years

$
4,298

$
157

$
4,141

$
4,253

$
71

$
4,182
Defensive intangible assets

5 years

1,126

130

996

1,126

82

1,044
Customer accounts

4 years

125

18

107

125

12

113
Total

$
5,549

$
305

$
5,244

$
5,504

$
165

$
5,339


	Weighted-	At September 30, 2019						At December 31, 2018
	Average	Gross						Gross
	Amortization	Carrying		Accumulated		Net		Carrying		Accumulated		Net
(In thousands)	Period	Amount		Amortization		Amount		Amount		Amortization		Amount
Patents	11 years	$	4,406	$	328	$	4,078	$	4,253	$	71	$	4,182
Defensive intangible assets	5 years		1,126		224		902		1,126		82		1,044
Customer accounts	4 years		125		31		94		125		12		113
Total		$	5,657	$	583	$	5,074	$	5,504	$	165	$	5,339

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Amortization expense was $0.1 million for each of the three months ended ~~March 31,~~September 30, 2019 and ~~2018.~~2018, and $0.4 million and $0.2 million for the nine months ended September 30, 2019 and 2018, respectively. Future amortization expenses are expected as follows:

(In thousands)

2019 (April 1 - December 31)

$
419
2020

558
2021

558
2022

558
2023

491
Thereafter

2,660
Total

$
5,244


(In thousands)
2019 (October 1 - December 31)	$	140
2020		558
2021		558
2022		558
2023		490
Thereafter		2,770
Total	$	5,074

Note 7. Accrued Expenses

Accrued expenses consisted of the following:


(In thousands)	At September 30, 2019		At December 31, 2018
Warranty	$	1,053	$	841
Legal and consulting		636		319
Travel and business		662		557
Headquarter related costs		482		—
Sales and use tax		223		115
Acquisition earn-out		—		375
Deferred rent		—		155
Other		640		423
Total	$	3,696	$	2,785

(In thousands)

At March 31, 2019

At December 31, 2018
Warranty

$
873

$
841
Legal and consulting

710

319
Travel and business

622

557
Accrued taxes

262

115
Clinical studies

33

60
Acquisition earn-out

—

375
Deferred rent

—

155
Other

185

358
Total

$
2,685

$
2,780

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Note 8. Warranty Reserves

The activity in the warranty reserve ~~for warranties~~during and as of the end of the reporting periods presented was as follows:

Three Months Ended

March 31,
(In thousands)

2019

2018
Beginning balance

$
2,566

$
1,672
Warranty provision

418

351
Processed warranty claims

(257)

(203)
Ending balance

$
2,727

$
1,820

Accrued warranty reserve, current

$
873

$
648
Accrued warranty reserve, non-current

1,854

1,172
Total accrued warranty reserve

$
2,727

$
1,820


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands)	2019		2018		2019		2018
Beginning balance	$	3,002	$	2,102	$	2,566	$	1,672
Warranty provision		664		429		1,677		1,286
Processed warranty claims		(386)		(245)		(963)		(672)
Ending balance	$	3,280	$	2,286	$	3,280	$	2,286

Accrued warranty reserve, current	$	1,053	$	726	$	1,053	$	726
Accrued warranty reserve, non-current		2,227		1,560		2,227		1,560
Total accrued warranty reserve	$	3,280	$	2,286	$	3,280	$	2,286

Note 9. Credit Agreement

On August 3, 2018, we entered into a credit agreement with Wells Fargo Bank, National ~~Association. On~~Association, which was amended by a First Amendment dated February 12, 2019, ~~we entered into~~ a ~~first amendment to our credit agreement, which provided for an increase in our annual capital expenditure limitations. On~~Waiver and Second Amendment dated March 25, 2019, ~~we entered into~~and a waiver and second amendment to our credit agreement, which provided that the business plan and budget required to be delivered annually be reduced to cover one year as opposed to the initial three-year coverage requirement. We refer to the credit agreement, as amended, asThird Amendment dated August 2, 2019 (collectively, the “Credit ~~Agreement.”~~Agreement”), which expires on August 3, 2021.

The Credit Agreement provides for a $10.0 million revolving credit facility. ~~The revolving credit facility expires on August 3, 2021.~~ 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

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not to exceed an incremental $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 $35.0 million.

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 plus the applicable margin. The applicable margin is 0.40% to 1.15% on loans bearing interest at the Base Rate and 1.40% to 2.15% on loans bearing interest at LIBOR, in each case depending on our consolidated total leverage ratio. Undrawn portions of the revolving credit facility are subject to an unused line fee at a rate per annum from 0.200% to 0.275%, depending on our consolidated total leverage ratio.

As of ~~March 31,~~September 30, 2019, and the date on which we filed this report, we did not have any outstanding borrowings under the Credit Agreement.

Our obligations under the Credit Agreement are secured by a security interest in substantially all of our and our subsidiaries’ assets and are also guaranteed by our subsidiaries. The Credit Agreement contains a number of restrictions and covenants, including that we maintain compliance with a maximum leverage ratio and a minimum liquidity covenant. As of September 30, 2019, we were in compliance with all financial covenants under the Credit Agreement.

Note 10. Commitments and Contingencies

Lease Obligations

We lease property and equipment under operating leases, typically with terms greater than 12 months, and determine if an arrangement contains a lease at inception. In general, an arrangement contains a lease if there is an identified asset and we have the right to direct the use of and obtain substantially all of the economic benefit from the use of the identified asset. We record ~~a ROU~~an operating lease liability at the present value of lease payments over the lease term on the commencement date. The related ROU operating lease asset reflects rental escalation clauses, as well as renewal options and/or termination options. The exercise of lease renewal and/or termination options are at our discretion and are included in the determination of the lease term and lease payment obligations when it is deemed reasonably certain that the option will be exercised. When available, we use the rate implicit in the lease to discount lease payments to present value; however, certain leases do not provide a readily determinable implicit rate. Therefore, we must estimate our incremental borrowing rate to discount the lease payments based on information available at lease commencement.

We classify our leases as ~~Buildings, Vehicles~~buildings, vehicles or ~~Computer/Office Equipment~~computer and office equipment and do not separate lease and nonlease components of contracts for any of the aforementioned classifications. In accordance with

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applicable guidance, we do not record leases with terms that are less than one year on the Condensed Consolidated Balance Sheet.

None of our lease agreements contain material restrictive covenants or residual value guarantees.

Buildings

We lease certain office and warehouse space at various locations in the United States where we provide services. These leases are typically greater than one year with fixed, escalating rents over the noncancelable terms and, therefore, ROU operating lease assets and operating lease liabilities are recorded on the Condensed Consolidated Balance Sheet, with rent expense to be recognized on a straight-line basis over the term of the lease. The remaining lease terms vary from approximately 1one to 5ten years as of ~~the adoption date of January 1,~~September 30, 2019.

In March 2008, we entered into a noncancelable operating lease agreement for building space for our previous corporate headquarters that provides for monthly rent, real estate taxes and operating expenses that was subsequently extended to July 31, 2021. This space is included in our ROU operating lease assets and operating lease liabilities. We are ~~looking to sub-lease this space~~in the process of negotiating a buy-out of the lease for ~~the remainder of our lease obligation~~these premises due to our move in September to our new ~~headquarters lease described below.~~headquarters.

We entered into a lease (“initial lease”) in October 2018 for approximately 80,000 square feet of office space for our ~~future~~new corporate headquarters in Minneapolis, ~~Minnesota which will commence upon our move,~~Minnesota. In December 2018, we amended the initial lease to add 29,000 square feet of additional office space, which is ~~expected to occur~~accounted for as a separate lease (“second lease”) in accordance with ASC 842. The initial and second leases expire in February 2030. The portion of the ~~fourth quarter of~~space under the initial lease was placed in service in September 2019. ~~As such, this~~This portion was recognized as an operating lease ~~is not~~and included in ~~either~~ the ROU operating lease assets ~~or liabilities.~~and operating lease liabilities on the Condensed Consolidated Balance Sheet. The ~~initial~~portion of the space covered under the second lease ~~term~~ is ~~through February 2030, with an option~~expected to ~~renew for two periods~~be occupied and commence in the second half of ~~five years each.~~2020.

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Vehicles

~~Vehicles~~

We lease vehicles for certain members of our field sales organization under a vehicle fleet program whereby the initial, noncancelable lease is for a term of 367 days, thus more than one year. Subsequent to the initial term, the lease becomes a month-to-month, cancelable lease. As of ~~March 31,~~September 30, 2019, we had approximately 4075 vehicles with agreements within the initial, noncancelable lease term that are recorded as ROU operating lease assets and operating lease liabilities. In addition to monthly rental fees specific to the vehicle, there are fixed monthly nonlease components that have been included in the ROU operating lease assets and operating lease liabilities. The nonlease components are not significant.

Computer and Office Equipment

We also have operating lease agreements for certain computer and office equipment. The remaining lease terms at the ASC 842 adoption date of January 1, 2019, ~~range~~ranged from ~~seven months~~less than one year to approximately ~~four and a half~~five years with fixed monthly payments that are included in the ROU operating lease assets and operating lease liabilities. The leases provide an option to purchase the related equipment at fair market value at the end of the lease. The lease will automatically renew as a month-to-month rental at the end of the lease if the equipment is not purchased or returned.

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Lease Position, Undiscounted Cash Flow and Supplemental Information

The table below presents ~~the lease-related~~information related to our ROU operating lease assets and operating lease liabilities ~~recorded on~~that we have recorded:


(In thousands)	At September 30, 2019
Right of use operating lease assets	$	15,204

Operating lease liabilities:
Current	$	1,990
Non-current		13,399
Total	$	15,389

Operating leases:
Weighted average remaining lease term		8.8 years
Weighted average discount rate ⁽¹⁾		5.10%

	Nine Months Ended
	September 30, 2019
Supplemental cash flow information for our operating leases:
Cash paid for operating lease liabilities	$	1,147
Non-cash right of use assets obtained in exchange for new operating lease obligations	$	16,296

(1) Discount rates were established as of January 1, 2019, the adoption date of ASC 842, and as of September 16, 2019 the commencement date of the initial lease for our ~~Condensed Consolidated Balance Sheet:~~new headquarters.

(In thousands)

At March 31, 2019
Right of use operating lease assets

$
3,396

Right of use operating lease liabilities:

Current

$
1,147
Non-current

2,318
Total

$
3,465

Operating leases:

Weighted average remaining lease term

3.5 years
Weighted average discount rate (1)

5.05%

~~(1)~~

~~Discount rates were established as of January 1, 2019, the adoption date~~

The table below reconciles the undiscounted cash flows under the operating ~~leases~~lease liabilities recorded on the Condensed Consolidated Balance Sheet for ~~each of~~ the ~~next five years and total of the remaining years:~~

(In thousands)

2019 (April 1 - December 31)

$
1,000
2020

1,082
2021

741
2022

456
2023

383
Thereafter

32
Total minimum lease payments

3,694
Less: amount of lease payments representing interest

(229)
Present value of future minimum lease payments

3,465
Less: current obligations under leases

(1,147)
Long-term lease obligations

$
2,318

periods presented:


(In thousands)
2019 (October 1 - December 31)	$	766
2020		2,666
2021		2,137
2022		1,894
2023		1,852
Thereafter		9,974
Total minimum lease payments		19,289
Less: Amount of lease payments representing interest		(3,900)
Present value of future minimum lease payments		15,389
Less: Current obligations under operating lease liabilities		(1,990)
Non-current obligations under operating lease liabilities	$	13,399

As of ~~March 31,~~September 30, 2019, we have additional lease commitments of ~~$19.9~~$5.2 million related to the second lease of our ~~future headquarters that we anticipate will commence in the fourth quarter of 2019.~~new headquarters. As the lessee we are involved in

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providing guidance to the lessor for related improvements, however these improvements are managed and owned by the lessor.

Operating lease costs accounted for under ASC 842 were $0.6 million and $1.3 million for the three and nine months ended ~~March 31,~~September 30, 2019, ~~were $0.3 million. Cash paid for the three months ended March 31, 2019 for operating lease liabilities included in the measurement of the lease liability was $0.3 million.~~

respectively. Rent expense accounted for under ASC 840 was $0.4 million and $1.2 million for the three and nine months ended ~~March 31,~~September 30, 2018, ~~was $0.3 million.~~respectively.

Major Vendors

We had purchases from ~~three~~2 major vendors that accounted for ~~40%~~42% and 37% of our total purchases for the three and nine months ended ~~March 31,~~September 30, 2019, ~~and~~respectively. We had purchases from ~~two~~2 major vendors that accounted for ~~33%~~45% and 41% of our total purchases for the three and nine months ended ~~March 31, 2018.~~September 30, 2018, respectively.

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Purchase Commitments

We issued purchase orders prior to ~~March 31,~~September 30, 2019, totaling ~~$19.5~~$35.1 million for goods that we expect to receive ~~between April and December of 2019.~~within the next year.

Retirement Plan

We maintain a 401(k) retirement plan for our employees in which eligible employees can contribute a percentage of their pre-tax compensation. Discretionary contributions to the 401(k) plan totaled $0.1 million for each of the three months ended ~~March 31,~~September 30, 2019 and 2018, and $0.2 million for each of the nine months ended September 30, 2019 and 2018.

Note 11. Stockholders' Equity

Stock-Based Compensation

Our 2016 Equity Incentive Plan (the “2016 Plan”) authorizes us to grant stock options, stock appreciation rights, restricted stock, stock units and other stock-based awards to employees, non-employee directors and certain consultants and advisors. There were up to 4,800,000 shares of our common stock initially reserved for issuance pursuant to the 2016 Plan. The 2016 Plan provides that the number of shares reserved and available for issuance under the 2016 Plan will automatically increase annually on January 1 of each calendar year, commencing in 2017 and ending on and including January 1, 2026, by an amount equal to the lesser of: (a) 5% of the number of common shares of stock outstanding as of December 31 of the immediately preceding calendar year, or (b) 2,500,000 shares; provided, however, that our Board of Directors may determine that any annual increase be a lesser number. In addition, all awards granted under our 2007 Omnibus Stock Plan and our 2003 Stock Option Plan that were outstanding when the 2016 Plan became effective and that are forfeited, ~~expire, are~~expired, 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, 892,318 and 841,686 shares were added as available for issuance thereunder on January 1, 2018 and 2017, respectively. Our Board of Directors exercised its prerogative to forego the automatic increase on January 1, 2019. As of ~~March 31,~~September 30, 2019, ~~5,092,296~~5,116,012 shares were available for future grant pursuant to the 2016 Plan.

Upon adoption and approval of the 2016 Plan, all of our previous equity incentive compensation plans were terminated. However, existing awards under those plans continue to vest in accordance with the original vesting schedules and will expire at the end of their original terms.

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We recorded stock-based compensation expense of ~~$2.8~~$2.3 million and ~~$1.5~~$2.4 million for the three months ended ~~March 31,~~September 30, 2019 and 2018, respectively, and $7.4 million and $5.6 million for the nine months ended September 30, 2019 and 2018, respectively. This expense was allocated as follows:

Three Months Ended

March 31,
(In thousands)

2019

2018
Cost of revenue

$
98

$
40
Sales and marketing expenses

1,166

652
Research and development expenses

80

69
Reimbursement, general and administrative expenses

1,439

720
Total stock-based compensation expense

$
2,783

$
1,481

~~The stock-based compensation expense included modifications~~


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands)	2019		2018		2019		2018
Cost of revenue	$	75	$	69	$	249	$	178
Sales and marketing expenses		1,029		834		3,262		2,272
Research and development expenses		95		52		275		146
Reimbursement, general and administrative expenses		1,131		1,425		3,601		3,042
Total stock-based compensation expense	$	2,330	$	2,380	$	7,387	$	5,638

Table of share-based awards totaling $0.3 million for the three months ended March 31, 2019. This amount included the acceleration of vesting pursuant to the terms of an employee’s award agreement of $0.2 million and a final charge of $0.1 million pertaining to the January 1, 2019 revaluation of the unvested portion of outstanding awards held by a former executive upon our adoption of ASU No. 2018-07 “Improvements to Non-employee Share Based Payment Accounting”.Contents

Stock Options

Stock options issued to participants other than non-employees vest over three or four years and typically have a contractual term of seven or ten years. ~~Annually,~~In each of 2018 and 2017, stock options ~~are~~were granted to our non-employee directors on the date of the annual meeting of stockholders in that year and ~~vest~~vested in full on the earlier of one year after the date of grant or on the date of the next year’s annual meeting of stockholders. These options have a contractual term of seven years.

Stock-based compensation expense included in ~~our~~the Condensed Consolidated Statements of Operations for stock options was ~~$0.7~~$0.6 million and ~~$0.5~~$0.8 million for the three months ended ~~March 31,~~September 30, 2019 and 2018, respectively, and $2.0 million and $1.8 million for the nine months ended September 30, 2019 and 2018, respectively.

At ~~March 31,~~September 30, 2019, there was approximately ~~$7.2~~$5.9 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 ~~2.9~~2.6 years.

~~Stock~~Our stock option activity for the ~~three~~nine months ended ~~March 31,~~September 30, 2019, ~~is summarized~~was as follows:

Weighted-

Weighted-

Average

Average

Aggregate

Options

Exercise Price

Remaining

Intrinsic
(In thousands except options and per share data)

Outstanding

Per Share (1)

Contractual Life

Value (2)
Balance at December 31, 2018

1,076,535

$
17.94

6.5 years

$
31,172
Granted

73,948

$
72.64

Exercised

(101,016)

$
8.53

$
5,731
Forfeited

(10,416)

$
28.44

Balance at March 31, 2019

1,039,051

$
22.64

6.4 years

$
33,527

Options exercisable at March 31, 2019

586,039

$
8.57

5.1 years

$
25,887


		Weighted-		Weighted-
		Average		Average	Aggregate
	Options	Exercise Price		Remaining	Intrinsic
(In thousands except options and per share data)	Outstanding	Per Share ⁽¹⁾		Contractual Life	Value ⁽²⁾
Balance at December 31, 2018	1,076,535	$	17.94	6.5 years	$	31,172
Granted	112,892	$	65.25
Exercised	(225,536)	$	8.15		$	11,209
Forfeited	(65,335)	$	35.72
Cancelled	(174)	$	58.57
Balance at September 30, 2019	898,382	$	25.04	6.1 years	$	19,522

Options exercisable at September 30, 2019	539,487	$	5.15	5.1 years	$	16,466

(1)

~~(1)~~

The exercise price of each option granted during the period shown was equal to the market price of the underlying stock on the date of grant.

(2)

~~(2)~~

The aggregate intrinsic value of options exercised represents the difference between the exercise price of the option and the closing stock price of our common stock on the date of exercise. The aggregate intrinsic value of options outstanding represents the difference between the exercise price of the option and the closing stock price of our common stock on the last trading day of the period.

Options exercisable of ~~906,063~~706,423 as of ~~March 31,~~September 30, 2018, had a weighted-average exercise price of ~~$2.75~~$3.80 per share.

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Time-Based Restricted Stock Units

We have granted time-based restricted stock units to certain participants under the 2016 Plan that are stock-settled with common shares. Time-based restricted stock units granted under the 2016 Plan vest over one to three years. Stock-based compensation expense included in ~~our~~the Condensed Consolidated Statements of Operations for time-based restricted stock units was ~~$0.8~~$1.0 million and $1.3 million for the three months ended September 30, 2019 and 2018, respectively, and $2.9 million for each of the ~~three-month periods~~nine months ended ~~March 31,~~September 30, 2019 and 2018. As of ~~March 31,~~September 30, 2019, there was approximately ~~$7.0~~$5.6 million of total unrecognized pre-tax compensation expense related to outstanding time-based restricted stock units that is expected to be recognized over a weighted-average period of ~~2.2~~1.6 years.

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Our time-based restricted stock unit activity for the ~~three~~nine months ended ~~March 31,~~September 30, 2019, was as follows:

Weighted-

Average Grant

Aggregate

Units

Date Fair Value

Intrinsic
(In thousands except unit and per unit data)

Outstanding

Per Unit

Value (1)
Balance at December 31, 2018

309,632

$
23.69

$
14,104
Granted

43,258

$
72.38

Vested

(131,363)

$
15.76

Cancelled

(244)

$
17.35

Balance at March 31, 2019

221,283

$
37.92

$
11,666

Deferred and unissued at March 31, 2019(2)

4,432

$
35.43

$
234


		Weighted-
		Average Grant		Aggregate
	Units	Date Fair Value		Intrinsic
(In thousands except unit and per unit data)	Outstanding	Per Unit		Value ⁽¹⁾
Balance at December 31, 2018	309,632	$	23.69	$	14,104
Granted	64,241	$	61.34
Vested	(174,739)	$	19.25
Cancelled	(16,088)	$	36.41
Balance at September 30, 2019	183,046	$	40.02	$	7,747

Deferred and unissued at September 30,2019⁽²⁾	5,665	$	38.29	$	240

(1)

~~(1)~~

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

(2)

~~(2)~~

For the ~~three~~nine months ended ~~March 31,~~September 30, 2019, there were ~~567~~1,800 restricted stock units granted to non-employee directors in lieu of their quarterly cash retainer payments. These restricted stock units were fully vested upon grant and represent the right to receive ~~one~~1 share of common stock, per unit, upon the earlier of the directors’ termination of service as a director of ours or the occurrence of a change of control of us. These restricted stock units are included in the “Granted” line in the table above and are also included in the “Vested” line in the table above due to their being fully vested upon grant. As of ~~March 31,~~September 30, 2019, there were ~~4,432~~5,665 outstanding restricted stock units that have been previously granted to non-employee directors in lieu of their quarterly director retainer payments. ~~These restricted stock units are not included in the “Balance at March 31, 2019” line in the table above because they are fully vested.~~

Performance-Based Restricted Stock Units

We have granted performance-based restricted stock units (“PSUs”) to certain participants under the 2016 Plan. These PSUs have both performance-based and time-based vesting features. The PSUs granted in 2018 will be earned if and to the extent performance goals based on revenue and adjusted EBITDA are achieved in 2019. The PSUs granted in 2019 will be earned if and to the extent performance goals based on revenue and adjusted EBITDA are achieved in 2020. The number of PSUs earned will depend on the level at which the performance targets are achieved and can range from 50% of target if the minimum performance threshold ~~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~~two-thirds of the earned PSUs will vest on the first anniversary of that certification date. All earned and vested PSUs will be settled in shares of common stock. Stock-based compensation expense included in ~~our~~the Condensed Consolidated Statements of Operations for PSUs was ~~$0.7~~$0.5 million and ~~$0.1~~$0.2 million for the three months ended ~~March 31,~~September 30, 2019 and 2018, respectively, and $1.7 million and $0.5 million for the nine months ended September 30, 2019 and 2018, respectively. The stock-based compensation expense for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 reflects a ~~$0.4~~$0.7 million charge due to a change in the estimated payout to 150% of target for those PSUs granted in 2018. As of ~~March 31,~~September 30, 2019, there was approximately ~~$3.8~~$2.8 million of total unrecognized pre-tax compensation expense related to outstanding PSUs that is expected to be recognized over a weighted average period of ~~2.4~~1.6 years.

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Our performance-based restricted stock unit activity reflected at the estimated payout of 150% of target for the ~~three-months~~nine months ended ~~March 31,~~September 30, 2019, was as follows:


	Performance-	Weighted-
	Based	Average Grant		Aggregate
	Units	Date Fair Value		Intrinsic
(In thousands except unit and per unit data)	Outstanding	Per Unit		Value ⁽¹⁾
Balance at December 31, 2018	65,427	$	33.62	$	2,980
Granted	25,724	$	72.64
Vested	—	$	—
Cancelled	—	$	—
Balance at September 30, 2019	91,151	$	44.63	$	3,858

Performance-

Weighted-

Based

Average Grant

Aggregate

Units

Date Fair Value

Intrinsic
(In thousands except unit and per unit data)

Outstanding

Per Unit

Value (1)
Balance at December 31, 2018

65,427

$
33.62

$
2,980
Granted

25,724

$
72.64

Vested

—

$
—

Cancelled

—

$
—

Balance at March 31, 2019

91,151

$
44.63

$
4,805

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(1)

~~(1)~~

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

Employee Stock Purchase Plan

Our employee stock purchase plan (“ESPP”), which was approved by our Board of Directors on April 27, 2016, and by our stockholders on June 20, 2016, allows participating employees to purchase shares of our common stock at a discount through payroll deductions. The ~~plan~~ESPP is available to all of our employees and employees of participating subsidiaries. Participating employees may purchase common stock, on a voluntary after-tax basis, at a price equal to 85% of the lower of the closing market price per share of our common stock on the first or last trading day of each stock purchase period. The ~~plan~~ESPP provides for ~~six-month~~nine-month purchase periods, beginning on May 16 and November 16 of each calendar year.

A total of 1.6 million shares of common stock was initially reserved for issuance under the ~~ESPP, and this~~ESPP. This share reserve will automatically be supplemented each January 1, commencing in 2017 and ending on and including January 1, 2026, by an amount equal to the least of ~~(1)~~(a) 1% of the shares of our common stock outstanding on the immediately preceding December 31, ~~(2)~~(b) 500,000 shares or ~~(3)~~(c) such lesser amount as our Board of Directors may determine. Pursuant to the automatic increase feature of the ~~plan,~~ESPP, 178,463 and 168,337 shares were added to the ESPP on January 1, 2018 and 2017, respectively. Our Board of Directors exercised its prerogative to forego the automatic increase on January 1, 2019. As of ~~March 31,~~September 30, 2019, ~~1,542,576~~1,499,190 shares were available for future issuance under the ESPP. We recognized stock-based compensation expense associated with the ESPP of ~~$0.3~~$0.2 million and $0.1 million for ~~each of~~ the ~~three-month periods~~three months ended ~~March 31,~~September 30, 2019 and ~~2018.~~2018, respectively, and $0.7 million and $0.5 million for the nine months ended September 30, 2019 and 2018, respectively.

Note 12. Revenue

We derive our ~~revenues~~revenue from the sale and rental of our Flexitouch, Entre and Actitouch systems to our customers in the United States. While our primary source of revenue is from the sale of our products, a portion of our ~~revenues are~~revenue is derived from patients who obtain our products under rental arrangements. (See description below for additional information on rental revenue as it relates to ASC ~~842 “Leases”.~~842.) These arrangements are primarily for rentals of the Flexitouch system and ~~are mostly related to~~arise from transactions with private insurers and ~~the Veterans Administration.~~other payers.

~~Table of Contents~~

The following table presents our revenue, inclusive of sales and rental revenue, disaggregated by product:

Three Months Ended

March 31,
(In thousands)

2019

2018
Revenues

Flexitouch system

$
34,109

$
24,530
Entre/Actitouch systems

3,508

2,318
Total

$
37,617

$
26,848

Percentage of total revenues

Flexitouch system

91 %

91 %
Entre/Actitouch systems

9 %

9 %
Total

100 %

100 %


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands)	2019		2018		2019		2018
Revenue
Flexitouch system	$	44,699	$	33,330	$	119,767	$	89,216
Entre/Actitouch systems		4,913		2,992		12,662		8,087
Total	$	49,612	$	36,322	$	132,429	$	97,303

Percentage of total revenue
Flexitouch system		90 %		92 %		90 %		92 %
Entre/Actitouch systems		10 %		8 %		10 %		8 %
Total		100 %		100 %		100 %		100 %

Our ~~revenues~~revenue from ~~third-party~~third party payers, inclusive of sales and rental revenue, for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018, ~~are~~is summarized in the following table:

Three Months Ended

March 31,
(In thousands)

2019

2018
Private insurers and other payers

$
25,929

$
18,115
Veterans Administration

7,670

6,179
Medicare

4,018

2,554
Total

$
37,617

$
26,848

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	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands)	2019		2018		2019		2018
Private insurers and other payers	$	35,909	$	25,934	$	93,932	$	69,358
Veterans Administration		7,764		6,863		23,690		19,877
Medicare		5,939		3,525		14,807		8,068
Total	$	49,612	$	36,322	$	132,429	$	97,303

Our rental revenue is derived from ~~rent to purchase~~rent-to-purchase arrangements that typically range from three to ten months. Under ASC 840, our rental revenue was recognized as month-to-month, cancelable ~~leases,~~leases; however, because title transfers to the patient, with whom we have the contract, upon the termination of the lease term and because collectability is probable, under ASC 842, these are recognized as sales-type leases. Each rental agreement contains two components, the controller and related garments, both of which are interdependent and recognized as one lease component.

In accordance with applicable guidance, we ~~will~~ continue to recognize rental agreements commencing prior to December 31, 2018, on a month-to-month basis as an operating lease until they are completed, which we anticipate to be in the fourth quarter of this fiscal year. Those 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. Total rental revenue in the three and nine months ended ~~March 31,~~September 30, 2019 includes both operating and sales-type lease revenue. Operating lease revenue was $0.6 million and $4.8 million for the three and nine months ended ~~March 31,~~September 30, 2019, ~~was $2.8 million.~~respectively. Rental revenue ~~for the three months ended March 31, 2018~~ related to operating leases under ASC 840 ~~and~~ includes garment revenue of approximately ~~$0.2~~$0.4 million and $1.0 million previously included as ~~a purchase.~~sales revenue for the three and nine months ended September 30, 2018, respectively.

The revenue and associated cost of revenue of sales-type leases are recognized on the lease commencement date and a net investment in leases is recorded on the Condensed Consolidated Balance Sheet. We bill the patients’ insurance payers monthly over the duration of the rental term. We record the net investment in leases and recognize revenue upon commencement of the lease in the amount of the expected consideration to be received through the monthly payments. Similar to our sales revenue, the transaction price is impacted by multiple factors, including the terms and conditions contracted by various third party payers. As the rental contract resides with the patients, we have elected the portfolio approach, at the payer level, to determine the expected consideration, which considers the impact of early terminations. While the contract is with the patient, in certain circumstances, the third party payer elects an initial rental period with an option to extend. We assess the likelihood of extending the lease at the onset of the lease to determine if the option is reasonably certain to be exercised. As the lease is short-term in nature, we anticipate collection of substantially

~~Table of Contents~~

all of the net investment within the first year of the lease agreement. Completion of these payments represents the fair market value of the equipment, and as such, interest income is not applicable.

Sales-type lease revenue and the associated cost of revenue for the three and nine months ended ~~March 31,~~September 30, 2019, was:

Three Months Ended

March 31,
(In thousands)

2019
Sales-type lease revenue

$
3,965
Cost of sales-type lease revenue

1,543
Gross profit

$
2,422


	Three Months Ended		Nine Months Ended
	September 30,		September 30,
(In thousands)	2019		2019
Sales-type lease revenue	$	6,088	$	15,088
Cost of sales-type lease revenue		1,932		5,358
Gross profit	$	4,156	$	9,730

Note 13. Income Taxes

We record our interim provision for income taxes by applying our estimated annual effective tax rate to our year-to-date pre-tax income and adjusting for discrete tax items recorded in the period. Deferred income taxes result from temporary differences between the reporting of amounts for financial statement purposes and income tax purposes. These differences relate primarily to different methods used for income tax reporting

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purposes, including for depreciation and amortization, warranty and vacation accruals, and deductions related to allowances for doubtful accounts receivable and inventory reserves. Our provision for income taxes included current federal and state income tax expense, as well as deferred federal and state income tax expense.

The effective tax rate for the three months ended ~~March 31,~~September 30, 2019, was ~~a benefit~~an expense of ~~189.7%~~27%, compared to a benefit of ~~97.1%~~17% for the three months ended ~~March 31,~~September 30, 2018. The primary driver of the change in our effective tax rate was attributable to a decrease in the tax benefits related to share-based compensation proportionate to pre-tax book income as compared to the prior year's reporting period. We recorded an ~~increase~~income tax expense of $0.9 million for the three months ended September 30, 2019, compared to an income tax benefit of $0.2 million for the three months ended September 30, 2018.

The effective tax rate for the nine months ended September 30, 2019, was a benefit of 36%, compared to a benefit of 254% for the nine months ended September 30, 2018. The primary driver of the change in our effective tax rate was attributable to a decrease in the tax benefits related to share-based compensation proportionate to pre-tax book income as compared to the prior year's reporting period. We recorded an income tax benefit of ~~$3.1~~$1.8 million and ~~$1.7~~$3.1 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 and 2018, respectively.

We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority is more-likely-than-not to sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the condensed consolidated financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. As of ~~March 31,~~September 30, 2019, we had an unrecognized tax benefit of $0.1 million classified ~~as a~~within non-current ~~liability.~~liabilities on the Condensed Consolidated Balance Sheet.

We are not currently under examination in any jurisdiction. 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 statement~~the Condensed Consolidated Statement of ~~operations.~~Operations.

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Note 14. Net Income Per Share

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

Three Months Ended

March 31,
(In thousands, except share and per share data)

2019

2018
Net income (loss)

$
1,472

$
(50)
Weighted-average shares outstanding

18,746,751

17,996,672
Effect of restricted stock units, common stock options, and employee stock purchase plan shares

833,096

—
Weighted-average shares used to compute diluted net income per share

19,579,847

17,996,672
Net income per share - Basic

$
0.08

$
0.00
Net income per share - Diluted

$
0.08

$
0.00


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands, except share and per share data)	2019		2018		2019		2018
Net income	$	2,431	$	1,746	$	6,688	$	4,268
Weighted-average shares outstanding		18,981,015		18,344,956		18,870,622		18,166,999
Effect of restricted stock units, common stock options, and employee stock purchase plan shares		660,838		1,180,730		760,099		1,161,948
Weighted-average shares used to compute diluted net income per share		19,641,853		19,525,686		19,630,721		19,328,947
Net income per share - Basic	$	0.13	$	0.10	$	0.35	$	0.23
Net income per share - Diluted	$	0.12	$	0.09	$	0.34	$	0.22

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

Three Months Ended

March 31,

2019

2018
Restricted stock units

42,691

395,046
Common stock options

165,638

1,445,089
Employee stock purchase plan

—

68,114
Total

208,329

1,908,249


	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2019	2018	2019	2018
Restricted stock units	37,813	—	39,905	5,413
Common stock options	198,663	25,703	202,179	47,981
Performance stock units	25,724	—	25,724	—
Employee stock purchase plan	—	—	—	28,996
Total	262,200	25,703	267,808	82,390

Note 15. Fair Value Measurements

We determine the fair value of our assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. We use a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1). The next highest priority is based on quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in non-active markets or other observable inputs (Level 2). The lowest priority is given to unobservable inputs (Level 3).

~~Table of Contents~~

The following provides information regarding fair value measurements for our cash equivalents and marketable securities as of ~~March 31,~~September 30, 2019, and December 31, 2018, according to the three-level fair value hierarchy:

At March 31, 2019

Quoted Prices

in Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

Assets

Inputs

Inputs

(In thousands)

(Level 1)

(Level 2)

(Level 3)

Total
Recurring Fair Value Measurements:

Money market mutual funds

$
7,055

$
—

$
—

$
7,055
U.S. government and agency obligations

16,402

999

—

17,401
Corporate debt securities

—

3,983

—

3,983
Total

$
23,457

$
4,982

$
—

$
28,439

At December 31, 2018

Quoted Prices

in Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

Assets

Inputs

Inputs

(In thousands)

(Level 1)

(Level 2)

(Level 3)

Total
Recurring Fair Value Measurements:

Money market mutual funds

$
2,447

$
—

$
—

$
2,447
U.S. government and agency obligations

16,326

2,994

—

19,320
Corporate debt securities

—

6,466

—

6,466
Total

$
18,773

$
9,460

$
—

$
28,233


	At September 30, 2019
	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
(In thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Recurring Fair Value Measurements:
Money market mutual funds	$	3,897	$	—	$	—	$	3,897
U.S. government and agency obligations		22,418		—		—		22,418
Corporate debt securities		—		2,502		—		2,502
Total	$	26,315	$	2,502	$	—	$	28,817

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	At December 31, 2018
	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
(In thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Recurring Fair Value Measurements:
Money market mutual funds	$	2,447	$	—	$	—	$	2,447
U.S. government and agency obligations		16,326		2,994		—		19,320
Corporate debt securities		—		6,466		—		6,466
Total	$	18,773	$	9,460	$	—	$	28,233

During the ~~three~~nine months ended ~~March 31,~~September 30, 2019, there were no0 transfers within the three-level hierarchy. 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, U.S. government and agency obligations and corporate debt securities are determined based on valuations provided by external investment managers who obtain them from a variety of industry standard data providers.

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 December 31, 2018, we re-measured the value of our intangible assets related to the Actitouch product line to their fair value, which was deemed to be $0 using ~~level~~Level 3 measurements. We had no0 re-measurements of non-financial assets to fair value in the ~~three~~nine months ended ~~March 31,~~September 30, 2019.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with ~~our~~the condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this report.

Overview

~~Overview~~

We are a medical technology company that develops and provides innovative medical devices for the treatment of chronic diseases. Our mission is to help people suffering from chronic diseases live better and care for themselves at home. We focus our efforts on advancing the standard of care in treating chronic diseases in the home setting to improve patient outcomes and quality of life and help control rising healthcare expenditures. Our initial area of therapeutic focus is vascular disease, with a goal of advancing the standard of care in treating lymphedema and chronic venous insufficiency. We possess a unique, scalable platform to deliver at-home healthcare solutions throughout the United States. This evolving home care delivery model is recognized by policy-makers and insurance payers as a key for controlling rising healthcare costs. Our solutions deliver cost-effective, clinically proven, long-term treatment for people with these chronic diseases.

Our proprietary products are the Flexitouch, Entre and Actitouch systems. A predecessor to our Flexitouch system received 510(k) clearance from the U.S. Food and Drug Administration (the “FDA”) in July 2002, and we introduced the system to address the many limitations of self-administered home-based manual lymphatic drainage therapy. We began selling our more advanced Flexitouch system after receiving 510(k) clearance from the FDA in October 2006. In September 2016, we received 510(k) clearance from the FDA for the Flexitouch system in treating lymphedema of the head and neck. In June 2017, we announced that we received 510(k) clearance from the FDA for the Flexitouch Plus, the third-generation version of our Flexitouch system. We derive the vast majority of our ~~revenues~~revenue from our Flexitouch system. For ~~each of~~ the ~~three~~nine months ended ~~March 31,~~September 30, 2019 and 2018, sales and rentals of our Flexitouch system represented ~~91%~~90% and 92% of our ~~revenues.~~revenue, respectively.

In September 2012, we acquired our second proprietary product, the Actitouch system. The system received 510(k) clearance from the FDA in June 2013, and we began selling the product in September 2013, to address the many limitations of multilayered bandages that are worn by patients suffering from venous leg ulcers. We also introduced our Entre system in the United States in February 2013. The Entre system is sold to patients who need a more basic pump or who do not yet qualify for insurance reimbursement for an advanced compression device such as our Flexitouch system. For ~~each of~~ the ~~three~~nine months ended ~~March 31,~~September 30, 2019 and 2018, sales and rentals of our Entre and Actitouch systems combined represented 9%10% and 8% of our ~~revenues.~~revenue, respectively. During fiscal year 2018, we recorded a $2.5 million non-cash impairment charge to fully impair the inventory and intangible assets related to our Actitouch ~~system, and we~~system. We intend to discontinue this product line in the ~~second half~~fourth quarter of 2019. See Note 3 -– “Summary of Significant Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2018, for more information regarding this impairment charge and discontinuation.

In October 2018, we licensed the intellectual property rights related to the Airwear Gradient Compression Wrap, or the Airwear wrap, in the U.S. and Canada, for use in all medical applications, including but not limited to swelling/edema and ulcers (including lymphedema and chronic venous insufficiency conditions), but excluding the use of the intellectual property in the field of prophylaxis for deep vein thrombosis. The Airwear wrap is indicated for the management of venous insufficiency, venous hypertension, venous ulcerations and lymphedema. We plan to begin selling the Airwear wrap in the ~~second half~~first quarter of ~~2019.~~2020.

To support the growth of our business, we invest heavily in our commercial infrastructure, consisting of our direct salesforce, home training resources, reimbursement capabilities and clinical expertise. We market our products in the United States using a direct-to-patient and -provider model. Our direct salesforce has grown to a team of over ~~210~~230 employees as of ~~March 31,~~September 30, 2019, compared to over ~~160~~185 employees as of ~~March 31,~~September 30, 2018. This model allows us to directly approach patients and clinicians, whereby we disintermediate the traditional durable medical equipment channel, allowing us to capture both the manufacturer and distributor margins. We also utilize over ~~560~~550 licensed, independent healthcare practitioners as home trainers who educate patients on the proper use of our systems. We invest substantial resources in our Reimbursement Department,

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which was reorganized in 2018 to improve operational efficiencies and enhance individual payer expertise, while continuing our strategic focus of payer development. The Reimbursement Department, composed of over

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75 85 employees, now consists of our Payer Development and Reimbursement Operations groups. Our Payer Development group is composed of both strategic and analytical teams, with focus on payer decision-maker relationships and education, payer policy development and revision, payer contract negotiations, and payer data analysis. Our experienced Reimbursement Operations group is responsible for verifying patient insurance benefits, individual patient case development, prior authorization ~~submissons,~~submissions, case follow-up, and appeals, when necessary. We also have a clinical team, consisting of a scientific advisory board, in-house therapists and nurses, and a medical director (part-time), that serves as a resource to clinicians and patients and guides the development of clinical evidence in support of our products.

We rely on ~~third-party~~third party contract manufacturers for the sourcing of parts, the assembly of our controllers and the manufacturing of the garments used with our systems. We conduct final assembly of the garments used with our Flexitouch system, perform quality assurance and ship our products from our facility in Minneapolis, Minnesota.

In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842) (“ASC 842”), which supersedes the ~~existing~~then-existing guidance for lease accounting, “Leases” (Topic 840) (“ASC 840”). ASC 842 requires lessees to recognize a lease liability and a right of use asset for all leases that extend beyond one year. As a result of our change in filing status, we adopted this standard using the modified retrospective transition approach at the adoption date of January 1, 2019. This approach ~~does~~did not require restatement of previous periods. We completed a qualitative and quantitative assessment of our leases from both a lessee and lessor perspective. As part of our process, we elected to utilize certain practical expedients that were provided for transition relief. Accordingly, we did not reassess expired or existing contracts, lease classifications or related initial direct costs as part of our assessment process for either lessee or lessor leases. Additionally, we elected the practical expedient to treat lease and nonlease components of fixed payments due to the lessor as one, and therefore no separate allocation was required on the initial implementation date of January 1, 2019 and thereafter. The adoption of this standard, from a lessee perspective, resulted in us recording ROU operating lease assets and operating lease liabilities of approximately $3.1 million on the Condensed Consolidated Balance Sheet as of January 1, 2019, with no impact to retained earnings. In addition, we elected as an accounting policy, not to record leases with an initial term of less than 12 months. From a lessor perspective, the application of ASC 842 to our rental revenue, which was recognized as month-to-month, cancelable leases in accordance with ASC 840 through December 31, 2018, resulted in recognizing rental revenue as a sales-type lease under ASC 842 thereafter. Rental sales agreements that commenced prior to December 31, 2018, ~~will~~ continue to be recognized as month-to-month, cancelable leases until they are completed, as we elected the practical expedient to not reassess the lease classification for leases in existence upon adoption. As such, rental agreements commencing after January 1, 2019, were recorded as sales-type leases with the associated revenue and cost of revenue recognized on the lease commencement date and a corresponding net investment in leases on the Condensed Consolidated Balance Sheet. (See Note 10 – “Commitments and Contingencies” and Note 12 – “Revenue” to the condensed consolidated financial statements in this report for additional information and required disclosures.)

As a result of our adoption of ASC 842, ~~our rental revenue is such that,~~ beginning with the three months ended March 31, 2019, our rental revenue, cost of rental revenue and gross profit -– rental revenue are presented as line items separate from our sales revenue, cost of sales revenue and gross profit -– sales revenue, respectively, in ~~our~~the Condensed Consolidated Statements of Operations. Our adoption of ASC 842 under the modified retrospective transition approach did not require restatement of previous periods, and therefore rental revenue, cost of rental revenue and gross profit -– rental revenue for the three and nine months ended ~~March 31,~~September 30, 2018, were determined under ASC 840, inclusive of rental garments, but have been presented as separate line items in this report to conform to the current year presentation.

For the three months ended ~~March 31,~~September 30, 2019, we generated ~~revenues~~revenue of ~~$37.6~~$49.6 million and had net income of ~~$1.5~~$2.4 million, compared to ~~revenues~~revenue of ~~$26.8~~$36.3 million and a net ~~loss~~income of ~~$0.1~~$1.7 million for the three months ended ~~March 31,~~September 30, 2018.

For the nine months ended September 30, 2019, we generated revenue of $132.4 million and had net income of $6.7 million, compared to revenue of $97.3 million and net income of $4.3 million for the nine months ended September 30, 2018. Our primary sources of capital to date have been from

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operating income, private placements of our capital stock and capital raised in our initial public offering, which closed on August 2, 2016.

We operate in one segment for financial reporting purposes.

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Results of Operations

Comparison of the Three and Nine Months Ended ~~March 31,~~September 30, 2019 and 2018

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


	Three Months Ended
	March 31,								Change

													Three Months Ended
													September 30,								Change
(In thousands)	2019				2018				$		%		2019				2018				$		%
Condensed Consolidated Statement			% of				% of								% of				% of
of Operations Data:			revenue				revenue								revenue				revenue
Revenue
Sales revenue	$	30,831	82	%	$	23,647	88	%	$	7,184	30	%	$	42,882	86	%	$	32,969	91	%	$	9,913	30	%
Rental revenue		6,786	18	%		3,201	12	%		3,585	112	%		6,730	14	%		3,353	9	%		3,377	101	%
Total revenue		37,617	100	%		26,848	100	%		10,769	40	%		49,612	100	%		36,322	100	%		13,290	37	%
Cost of revenue
Cost of sales revenue		9,412	25	%		6,409	24	%		3,003	47	%		12,233	25	%		9,153	25	%		3,080	34	%
Cost of rental revenue		1,947	5	%		900	3	%		1,047	116	%		2,006	4	%		988	3	%		1,018	103	%
Total cost of revenue		11,359	30	%		7,309	27	%		4,050	55	%		14,239	29	%		10,141	28	%		4,098	40	%
Gross profit
Gross profit - sales revenue		21,419	57	%		17,238	64	%		4,181	24	%		30,649	61	%		23,816	66	%		6,833	29	%
Gross profit - rental revenue		4,839	13	%		2,301	9	%		2,538	110	%		4,724	10	%		2,365	6	%		2,359	100	%
Gross profit		26,258	70	%		19,539	73	%		6,719	34	%		35,373	71	%		26,181	72	%		9,192	35	%
Operating expenses
Sales and marketing		17,391	47	%		12,557	48	%		4,834	38	%		20,737	42	%		15,632	43	%		5,105	33	%
Research and development		1,281	3	%		1,437	5	%		(156)	(11)	%		1,467	3	%		1,223	3	%		244	20	%
Reimbursement, general and administrative		9,388	25	%		7,372	27	%		2,016	27	%		9,966	20	%		7,956	22	%		2,010	25	%
Total operating expenses		28,060	75	%		21,366	80	%		6,694	31	%		32,170	65	%		24,811	68	%		7,359	30	%
Loss from operations		(1,802)	(5)	%		(1,827)	(7)	%		25	(1)	%
Income from operations														3,203	6	%		1,370	4	%		1,833	134	%
Other income		161	—	%		91	—	%		70	77	%		160	—	%		128	—	%		32	25	%
Loss before income taxes		(1,641)	(5)	%		(1,736)	(7)	%		95	(5)	%
Income tax benefit		(3,113)	(8)	%		(1,686)	(7)	%		(1,427)	85	%
Net income (loss)	$	1,472	3	%	$	(50)	—	%	$	1,522	N.M.	%
Income before income taxes														3,363	6	%		1,498	4	%		1,865	124	%
Income tax expense (benefit)														932	2	%		(248)	(1)	%		1,180	N.M.	%
Net income													$	2,431	4	%	$	1,746	5	%	$	685	39	%

“N.M.” Not Meaningful

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	Nine Months Ended
	September 30,								Change
(In thousands)	2019				2018				$		%
Condensed Consolidated Statement			% of				% of
of Operations Data:			revenue				revenue
Revenue
Sales revenue	$	112,503	85	%	$	87,731	90	%	$	24,772	28	%
Rental revenue		19,926	15	%		9,572	10	%		10,354	108	%
Total revenue		132,429	100	%		97,303	100	%		35,126	36	%
Cost of revenue
Cost of sales revenue		33,231	25	%		24,275	25	%		8,956	37	%
Cost of rental revenue		6,062	5	%		2,785	3	%		3,277	118	%
Total cost of revenue		39,293	30	%		27,060	28	%		12,233	45	%
Gross profit
Gross profit - sales revenue		79,272	60	%		63,456	65	%		15,816	25	%
Gross profit - rental revenue		13,864	10	%		6,787	7	%		7,077	104	%
Gross profit		93,136	70	%		70,243	72	%		22,893	33	%
Operating expenses
Sales and marketing		56,546	43	%		42,641	44	%		13,905	33	%
Research and development		3,982	3	%		3,949	4	%		33	1	%
Reimbursement, general and administrative		28,159	21	%		22,799	23	%		5,360	24	%
Total operating expenses		88,687	67	%		69,389	71	%		19,298	28	%
Income from operations		4,449	3	%		854	1	%		3,595	N.M.	%
Other income		480	—	%		351	—	%		129	37	%
Income before income taxes		4,929	3	%		1,205	1	%		3,724	N.M.	%
Income tax benefit		(1,759)	(1)	%		(3,063)	(3)	%		1,304	(43)	%
Net income	$	6,688	4	%	$	4,268	4	%	$	2,420	57	%

“N.M.” Not Meaningful

~~Revenues~~

Revenue

~~Revenues~~Revenue increased ~~$10.8~~$13.3 million, or ~~40%~~37%, to ~~$37.6~~$49.6 million in the three months ended ~~March 31,~~September 30, 2019, compared to ~~$26.8~~$36.3 million in the three months ended ~~March 31,~~September 30, 2018. Revenue increased $35.1 million, or 36%, to $132.4 million in the nine months ended September 30, 2019, compared to $97.3 million in the nine months ended September 30, 2018. The growth in ~~revenues~~revenue was primarily attributable to an increase of approximately ~~$9.6~~$11.4 million, or ~~39%~~34%, in sales and rentals of our Flexitouch system in the three months ended September 30, 2019, and an increase of approximately ~~$1.2~~$30.6 million, or ~~51%~~34%, in ~~sales and rentals of our Entre/Actitouch systems in~~ the ~~three~~nine months ended ~~March 31,~~September 30, 2019. The increase in Flexitouch system sales and rentals was largely driven by expansion of our salesforce, ~~growth in the Medicare channel,~~ increased physician and patient awareness of the treatment options for lymphedema, ~~and expanded contractual~~the broad in-network coverage with national and regional insurance ~~payers.~~payers and growth in the Medicare channel. The growth in revenue was also attributable to an increase of approximately $1.9 million, or 64%, in sales and rentals of our Entre system in the three months ended September 30, 2019, and an increase of $4.6 million, or 57%, for the nine months ended September 30, 2019. The increase in ~~Entre/Actitouch systems~~Entre system sales and rentals was largely driven by the continued benefit from managing orders in-house and ~~expanded contractual~~broad in-network coverage with national and regional insurance payers. ~~Additionally,~~The effect of the adoption of ASC 842 contributed 10three percentage points and five percentage points to our year-over-year total revenue growth for the three and nine months ended ~~March 31, 2019.~~September 30, 2019, respectively.

~~Revenues~~Revenue from the Veterans Administration represented ~~20%~~16% and ~~23%~~19% of total ~~revenues~~revenue in the three months ended ~~March 31,~~September 30, 2019 and 2018, respectively. ~~Revenues~~Revenue from the Veterans Administration represented 18% and 20% of total revenue in the nine months ended September 30, 2019 and 2018, respectively. Revenue from Medicare represented 12% and 10% of total revenue in the three months ended September 30, 2019 and 2018, respectively. Revenue from Medicare represented 11% and ~~10%~~8% of total ~~revenues~~revenue in the ~~three~~nine months ended ~~March 31,~~September 30, 2019 and 2018, respectively.

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The following ~~table summarizes~~tables summarize our ~~revenues~~revenue by product for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018, both in dollars and percentage of total ~~revenues:~~revenue:


	Three Months Ended
	March 31,				Change

								Three Months Ended
								September 30,				Change
(In thousands)	2019		2018		$		%	2019		2018		$		%
Revenues
Revenue
Flexitouch system	$	34,109	$	24,530	$	9,579	39 %	$	44,699	$	33,330	$	11,369	34 %
Entre/Actitouch systems		3,508		2,318		1,190	51 %		4,913		2,992		1,921	64 %
Total	$	37,617	$	26,848	$	10,769	40 %	$	49,612	$	36,322	$	13,290	37 %

Percentage of total revenues

Percentage of total revenue
Flexitouch system		91 %		91 %					90 %		92 %
Entre/Actitouch systems		9 %		9 %					10 %		8 %
Total		100 %		100 %					100 %		100 %


	Nine Months Ended
	September 30,				Change
(In thousands)	2019		2018		$		%
Revenue
Flexitouch system	$	119,767	$	89,216	$	30,551	34 %
Entre/Actitouch systems		12,662		8,087		4,575	57 %
Total	$	132,429	$	97,303	$	35,126	36 %

Percentage of total revenue
Flexitouch system		90 %		92 %
Entre/Actitouch systems		10 %		8 %
Total		100 %		100 %

Our business is affected by seasonality. In the first quarter of each year, when most patients have started a new insurance year and have not yet met their annual out-of-pocket payment obligations, we experience substantially reduced demand for our products. We typically experience higher ~~revenues~~revenue in the third and fourth quarters of the year ~~as a result of~~when patients ~~having paid~~have met their annual insurance deductibles, ~~in full,~~ thereby reducing their out-of-pocket costs for our products, and because patients ~~often spend the remaining balances in~~desire to exhaust their ~~healthcare~~ flexible spending accounts at ~~that time.~~year end. This seasonality applies only to purchases and rentals of our products by patients covered by commercial insurance and is not relevant to Medicare ~~Medicaid,~~ or the Veterans Administration, as those payers either do not have plans that have declining deductibles over the course of the plan year and/or do not have plans that include patient deductibles for purchases or rentals of our products.

Cost of Revenue and Gross Margin

Cost of revenue increased $4.1 million, or ~~55%~~40%, to ~~$11.4~~$14.2 million in the three months ended ~~March 31,~~September 30, 2019, compared to ~~$7.3~~$10.1 million in the three months ended ~~March 31,~~September 30, 2018. Cost of revenue increased $12.2 million, or 45%, to $39.3 million in the nine months ended September 30, 2019, compared to $27.1 million in the nine months ended September 30, 2018. The increase in cost of revenue in both periods was primarily attributable to an increase in the number of Flexitouch and Entre systems ~~sold/rented~~sold and ~~ASC 842 leasing impact~~rented, as well as additional manufacturing headcount to support increased volumes. In addition, cost of rental revenue increased due to the adoption of ASC 842, whereby rental revenue and cost of rental revenue are recognized upon the lease commencement date.

Sales gross margin was 71% and 70% of sales revenue in the three and nine months ended ~~March 31,~~September 30, 2019, respectively, compared to ~~73%~~72% of sales revenue in each of the three and nine months ended ~~March 31,~~September 30, 2018. Rental gross margin was 70% of rental revenue in each of the three and nine months ended September 30, 2019, compared to 71% of rental revenue in each of the three and nine months ended

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September 30, 2018. The gross margin rate decrease for the three months ended ~~March 31,~~September 30, 2019, ~~compared to 72% of rental revenue in the three months ended March 31, 2018. The gross margin decreases were~~was primarily attributable to ~~negative pricing effects related to the new large private insurer contract we entered into in July 2018,~~ the composition of sales and rental mix by payer and by product in comparison to the prior year and amortization expense related to the ~~newly~~assets licensed ~~assets~~ from Sun Scientific, Inc. in October 2018. The gross margin rate decrease for the nine months ended September 30, 2019, was primarily attributable to negative pricing effects related to the new large private insurer contract that became effective in July 2018, the composition of sales and rental mix by payer and by product in comparison to the prior year and amortization expense related to the assets licensed from Sun Scientific, Inc. in October 2018.

Sales and Marketing Expenses

Sales and marketing expenses increased ~~$4.8~~$5.1 million, or ~~38%~~33%, to ~~$17.4~~$20.7 million in the three months ended ~~March 31,~~September 30, 2019, compared to ~~$12.6~~$15.6 million in the three months ended ~~March 31,~~September 30, 2018. The increase was primarily ~~driven by a $3.3~~attributable to our continued investment in our field sales team, patient training and marketing initiatives to increase clinician awareness, resulting in an increase of $3.7 million ~~increase~~ in personnel-related compensation expense, ~~due to increased sales and marketing headcount,~~ including ~~$0.5~~$0.2 million of incremental stock-based compensation ~~expense. In addition, other sales~~expense, as well as an increase of $1.4 million in associated expenses.

Sales and marketing expenses increased ~~$1.5~~$13.9 million, ~~driven by increased spending associated with~~or 33%, to $56.5 million in the nine months ended September 30, 2019, compared to $42.6 million in the nine months ended September 30, 2018. The increase was primarily attributable to our continued investment in our field sales ~~meetings, travel and entertainment, recruiting, and~~team, patient training and marketing initiatives to increase clinician awareness, resulting in an increase of $10.0 million in personnel-related compensation expense, including $1.0 million of incremental stock-based compensation expense, as well as an increase of $3.9 million in associated expenses.

Research and Development Expenses

Research and development (“R&D”) expenses ~~decreased~~increased $0.2 million, or ~~11%~~20%, to ~~$1.3~~$1.5 million in the three months ended ~~March 31,~~September 30, 2019, compared to ~~$1.4~~$1.2 million in the three months ended ~~March 31, 2018. The decrease~~September 30, 2018, which was ~~primarily~~ attributable to the timing of clinical studies projects.

~~Table~~ R&D expenses remained consistent at $4.0 million in each of ~~Contents~~the nine months ended September 30, 2019 and 2018.

Reimbursement, General and Administrative Expenses

Reimbursement, general and administrative expenses increased $2.0 million, or ~~27%~~25%, to ~~$9.4~~$10.0 million in the three months ended ~~March 31,~~September 30, 2019, compared to ~~$7.4~~$8.0 million in the three months ended ~~March 31,~~September 30, 2018. This increase was primarily attributable to a ~~$1.2~~$1.3 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer development and corporate functions, ~~including $0.7~~partially offset by $0.6 million ~~of incremental~~year-over-year decrease in stock-based compensation ~~expense.~~expense related to the vesting of equity awards by a former executive in the prior year period. The increase in reimbursement, general and administrative expenses was also attributable to a ~~$0.7~~$1.2 million increase in professional fees, legal expenses, facilities and depreciation, as well as $0.1 million in legal expenses specifically related to the defense of the ongoing lawsuit described in “Legal Proceedings” in this report.

Reimbursement, general, and administrative expenses increased $5.4 million, or 24%, to $28.2 million in the nine months ended September 30, 2019, compared to $22.8 million in the nine months ended September 30, 2018. This increase was primarily attributable to a $3.6 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer development and corporate functions, partially offset by $0.6 million year-over-year decrease in stock-based compensation expense related to the vesting of equity awards by a former executive in the prior year period. The increase in reimbursement, general and administrative expenses was also attributable to a $2.1 million increase in professional fees, legal expenses, facilities and depreciation, as well as $0.3 million in legal expenses specifically related to the defense of the ongoing lawsuit described in “Legal Proceedings” in this report.

Other Income, Net

Other income, net, was $0.2 million and $0.1 million for the three months ended ~~March 31,~~September 30, 2019 and 2018, respectively, and $0.5 million and $0.4 million for the nine months ended September 30, 2019 and

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2018, respectively. The increases in other income in both periods were primarily due to the interest income realized on marketable securities.

Income Taxes

We recorded an income tax expense of $0.9 million and an income tax benefit of $0.2 million for the three months ended September 30, 2019 and 2018, respectively. ~~The increase in other income was primarily due the accretion of discounts on purchases of~~ ~~marketable securities~~.

~~Income Taxes~~

We recorded an income tax benefit of $1.8 million and $3.1 million ~~and $1.7 million in~~for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 and 2018, respectively. The ~~continued significant~~primary driver of the changes in our income tax ~~deductions~~expense/benefit in both periods was a decrease in the tax benefits related to tax benefits realized from the vesting of restricted stock units, the exercise of non-qualified stock options, and the disqualifying dispositions of incentive stock options and ESPP shares contributed to our net income for the three months ended March 31, 2019. The increase in the current period income tax benefit was due to increased tax-deductible share-based compensation ~~activity recognized in~~proportionate to pre-tax book income as compared to the ~~three months ended March 31, 2019.~~prior year's reporting period.

Liquidity and Capital Resources

Cash Flows

At ~~March 31,~~September 30, 2019, our principal sources of liquidity were cash and cash equivalents of $~~23.5~~$19.8 million, marketable securities of $~~21.4~~$24.9 million and net accounts receivable of $~~23.8~~$27.7 million and the borrowing capacity available under our Credit Agreement.

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


	Three Months Ended
	March 31,

					Nine Months Ended
					September 30,
(In thousands)	2019		2018		2019		2018
Net cash provided by (used in):
Operating activities	$	1,273	$	(2,173)	$	2,421	$	3,684
Investing activities		3,725		4,568		(3,289)		(5,228)
Financing activities		(1,549)		(1,050)		583		712
Net increase in cash and cash equivalents	$	3,449	$	1,345
Net decrease in cash and cash equivalents					$	(285)	$	(832)

Operating Activities

Net cash provided by operating activities during the ~~three~~nine months ended ~~March 31,~~September 30, 2019, was ~~$1.3~~$2.4 million, resulting from net income of ~~$1.5~~$6.7 million and non-cash net income adjustments of ~~$1.5~~$9.9 million, which were offset by a net increase in operating assets and liabilities of ~~$1.7~~$14.2 million. The non-cash net income adjustments consisted primarily of ~~$2.8~~$7.4 million of stock-based compensation expense and ~~$1.0~~$2.6 million of depreciation and amortization ~~expense, partially offset by deferred income tax changes of $2.3 million.~~expense. The uses of cash related to changes in operating assets primarily consisted of increases in net investment in leases of ~~$3.4~~$7.6 million, ~~right~~inventory of ~~use operating lease assets~~$5.7 million, accounts receivable of ~~$3.4~~$4.5 million, and an increase in income taxes receivable of ~~$1.0 million, partially offset by a decrease in accounts receivable of $2.7~~$2.1 million. The changes in operating liabilities consisted of increases in ~~right of use operating lease liabilities of $3.5 million and accounts payable of $0.7 million, partially~~

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~~offset by a decrease in~~ accrued payroll and related taxes of ~~$0.6~~$3.9 million, accrued expenses of $1.1 million and accounts payable of $1.0 million. ~~These changes occurred primarily due to the adoption of ASC 842.~~

Net cash ~~used~~provided in operating activities induring the ~~three~~nine months ended ~~March 31,~~September 30, 2018, was ~~$2.2~~$3.7 million, resulting from a net ~~loss~~income of ~~$0.1~~$4.3 million and non-cash net income adjustments of $6.7 million, which were partially offset by a net increase in operating assets and liabilities of ~~$4.1~~$7.3 million. The non-cash net income adjustments primarily consisted of $5.6 million of stock-based compensation expense and $2.5 million of depreciation and amortization expense, partially offset by ~~non-cash operating expenses~~deferred income tax changes of ~~$2.0~~$1.4 million. The changes in net operating assets and liabilities were ~~primarilty~~primarily due to a ~~$3.6~~$3.9 million increase in inventories, associated with the commercial launch of our ~~next-generation~~ Flexitouch ~~system; a $1.8 million decrease in accrued payroll and related taxes, driven by the payment of 2017 bonuses;~~Plus system, and a ~~$1.8~~$2.1 million increase in income taxes receivable, driven by the current period tax benefit associated with tax-deductible stock-based compensation ~~activity~~activity.

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Investing Activities

Net cash used in ~~that period,~~investing activities during the nine months ended September 30, 2019, was $3.3 million, primarily consisting of $4.3 million in purchases of property and equipment partially offset by ~~a $3.4~~$1.1 million ~~decrease~~ in ~~accounts receivable. The non-cash operating expenses~~net marketable securities activity.

Net cash used in investing activities during the nine months ended September 30, 2018, was $5.2 million, consisting primarily ~~consisted~~ of ~~$1.5~~$2.3 million in purchases of ~~stock-based compensation~~property and ~~$0.5~~equipment, $1.8 million in net purchases of ~~depreciation~~marketable securities and ~~amortization~~$1.1 million related to the acquisition of ~~equipment, leasehold improvements~~patents and ~~patents.~~other intangible assets.

Financing Activities

~~Investing Activities~~

Net cash provided by investing activities during the three months ended March 31, 2019 was $3.7 million, primarly consisting of $4.5 million in maturities of marketable securities partially offset by $0.7 million in purchases of product tooling and computer and manufacturing equipment, leasehold improvements and furniture and fixtures.

Net cash provided by investing activities during the three months ended March 31, 2018 was $4.6 million, consisting primarily of $5.0 million in sales and maturities of marketable securities, offset by $0.4 million in purchases of product tooling and computer and manufacturing equipment.

~~Financing Activities~~

~~Net cash used in~~ financing activities during the ~~three~~nine months ended ~~March 31,~~September 30, 2019, was ~~$1.5~~$0.6 million, consisting of ~~$2.4~~proceeds from the issuance of common stock under the ESPP of $1.9 million and exercises of common stock options of $1.9 million, partially offset by $3.1 million in taxes paid for the net share settlement of restricted stock ~~units, offset~~units.

Net cash provided by financing activities during the nine months ended September 30, 2018, was $0.7 million, consisting of proceeds from the issuance of common stock under the ESPP of $1.4 million and proceeds from exercises of common stock options of ~~$0.9 million.~~

~~Net cash used in financing activities during the three months ended March 31, 2018 was $1.1~~$1.2 million, ~~consisting of $1.2~~partially offset by $1.9 million in taxes paid for the net share settlement of stock-settled restricted stock ~~units, offset by proceeds from exercises of common stock options of $0.1 million.~~units.

Credit Agreement

On August 3, 2018, we entered into a credit agreement with Wells Fargo Bank, National Association, which was amended by a First Amendment dated February 12, 2019, ~~and~~ a Waiver and Second Amendment dated March 25, 2019, and a Third Amendment dated August 2, 2019 (collectively, the “Credit Agreement”), which expires on August 3, 2021.

The Credit Agreement provides for a $10.0 million revolving credit ~~facility, with the ability~~facility. 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 an incremental $25.0 million ~~subject to satisfaction~~in the aggregate, such that the total aggregate principal amount of ~~certain conditions.~~loans available under the Credit Agreement (including under the revolving credit facility) does not exceed $35.0 million. As of ~~March 31,~~September 30, 2019, and the date on which we filed this report, we did not have any outstanding borrowings ~~under the Credit Agreement.~~

~~Our obligations under the Credit Agreement are secured by a security interest in substantially all of our~~ and our subsidiaries’ assets and are also guaranteed by our subsidiaries. The Credit Agreement contains a number of restrictions and covenants, including that we maintain compliance with a maximum leverage ratio and a minimum liquidity covenant. As of March 31, 2019, we were in compliance with all financial covenants under the Credit Agreement. For additional information on the Credit Agreement, see Note 9 – “Credit Agreement” to the condensed consolidated financial statements in this report.

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Adequacy of Capital Resources

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

●

sales and marketing resources needed to further penetrate our market;

●

expansion of our operations domestically and/or internationally;

●

responses of competitors to our solutions and applications;

●

costs associated with clinical research activities;

●

costs to develop and implement new products; and

●

use of capital for acquisitions or licenses, if any.

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

We believe our cash, cash equivalents, marketable securities and cash flows from operations together with the Credit Agreement will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months.

Inflation and changing prices did not have a material effect on our business during the ~~three~~nine months ended ~~March 31,~~September 30, 2019, and we do not expect that inflation or changing prices will materially affect our business for at least the next twelve months.

In August 2017, we filed a shelf registration statement on Form S-3 with the SEC. Under the shelf registration statement, we may offer and sell from ~~time to time~~time-to-time up to ~~$200~~$200.0 million of common stock, preferred stock, debt securities, warrants, rights or units. The shelf registration statement also registered for resale from ~~time to time~~time-to-time up to 5,703,534 shares of our common stock held by the selling stockholders named therein. In September 2017, certain of the selling stockholders completed a secondary offering of 3,795,000 shares of our common stock at a public offering price of $33.00 per share. We did not receive any proceeds from the sale of the shares by the selling stockholders.

Contractual and Commercial Commitments Summary

Our contractual obligations and commercial commitments as of ~~March 31,~~September 30, 2019, are summarized below:


	Payments Due By Period
			Less Than						More Than

											Payments Due By Period
													Less Than						More Than
(In thousands)	Total		1 Year		1-3 Years		3-5 Years		5 Years		Total		1 Year		1-3 Years		3-5 Years		5 Years
Purchase commitments (1)	$	19,505	$	19,505	$	—	$	—	$	—	$	35,109	$	35,109	$	—	$	—	$	—
Operating lease obligations (2)		3,694		1,290		1,653		751		—		19,289		2,828		4,171		3,460		8,830
Future product royalties (3)		3		3		—		—		—
Product royalties ⁽³⁾												1		1		—		—		—
Total	$	23,202	$	20,798	$	1,653	$	751	$	—	$	54,399	$	37,938	$	4,171	$	3,460	$	8,830

(1)

~~(1)~~

We issued purchase orders prior to ~~March 31,~~September 30, 2019, totaling ~~$19.5~~$35.1 million for goods that we expect to receive ~~between April and December of 2019.~~

within the next year.

(2)

~~(2)~~

We currently lease approximately 52,000 square feet of office space for our previous corporate headquarters in Minneapolis, Minnesota, under a lease that expires in July 2021 and 44,000 square feet of office, assembly and warehouse space at another leased facility in Minneapolis, Minnesota, under a lease that expires in February 2024. We entered into a lease (“initial lease”) in October 2018 for approximately ~~110,000~~80,000 square feet of office space for our ~~future~~new corporate headquarters in Minneapolis, ~~Minnesota,~~Minnesota. In December 2018, we amended the initial lease to add 29,000 square feet of additional office space, which ~~will commence upon our move, which is expected to occur~~was accounted for as a separate lease (“second lease”) in ~~the fourth quarter of 2019. That lease expires~~accordance with ASC 842. The initial and second leases expire in February 2030. The portion of the space under the initial lease was placed in service in September 2019. The portion placed in service was recognized as an operating lease and the lease commitments related to the initial lease are included in the table above. As of ~~March 31,~~September 30, 2019, we have lease commitments of ~~$19.9 millions~~$5.2 million related to our ~~future headquarters~~second lease that are not included in the table above since we have not

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yet recognized it as an operating lease. As the lessee, we are involved in providing guidance to the lessor for related improvements, however these improvements are managed and owned by the lessor. We entered into a fleet vehicle program for certain members of our field sales organization in 2016. At ~~March 31,~~September 30, 2019, we had 4075 vehicles under this program with current lease commitments. Furthermore, we lease office equipment from time-to-time based on our needs and these commitments are classified as operating leases.

(3)

~~(3)~~

We are required to make quarterly royalty payments to a ~~third-party~~third party for our Actitouch system revenue through August 2023. Beginning in September 2017, the payments are equal to 6% of our quarterly ~~revenues~~revenue attributable to our Actitouch system. In any year that ~~these revenues exceed~~this revenue exceeds $40.0 million, we are required to pay 7% on ~~revenues~~revenue over $40.0 million and 6% on ~~revenues~~revenue of $40.0 million and under. Because our ~~revenues~~revenue attributable to our Actitouch system, and therefore the amount of royalty payments we will be required to pay in the future, are unknown, this amount only reflects royalties due associated with a portion of our 2019 Actitouch ~~revenues.~~

revenue.

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Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt. Additionally, we are not a party to any derivative contracts or synthetic leases.

Recent Accounting Pronouncements

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

JOBS Act

Prior to December 31, 2018, we were an “emerging growth company” as defined by the JOBS Act. ~~The JOBS Act provides~~As a result, we were eligible to take advantage of certain exemptions from various reporting requirements that anare applicable to other public companies that are not emerging growth ~~company can~~companies. We elected to take advantage of the extended transition period for ~~complying with~~adopting new or revised accounting ~~standards. This allows an emerging growth company to delay the adoption of certain accounting~~ standards that have different effective dates for public and private companies until such time as those standards would otherwise apply to private companies. We elected to avail ourselves of this exemption prior to December 31, 2018, and as a result, our financial statements prior to that date may not have been comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies.

Subject to certain conditions, as an emerging growth company we also were able to rely on certain of the exemptions and reduced reporting requirements of the JOBS Act, including without limitation, from providing an auditor's attestation report on our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 and from complying with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. Because the market value of our common stock that was held by non-affiliatesHowever, as of the last business day of our second fiscal quarter of 2018, the market value of our common stock that was held by non-affiliates exceeded ~~$700~~$700.0 million, ~~we were deemed~~and as a ~~large accelerated filer and~~result, we no longer ~~qualify~~qualified as an emerging growth company as of December 31, ~~2018. As a result, we~~2018, and are no longer ~~are~~ able to take advantage of certain exemptions, including, the extended transition period for ~~the adoption of certain~~adopting new or revised accounting standards ~~or of the reduced disclosure~~ and ~~other benefits available to emerging growth companies, including~~ our exemption from providing our auditor’s attestation on our system of internal control over financial reporting, which was included for the first time in our Annual Report on Form 10-K for the year ended December 31, 2018.

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Critical Accounting Policies and Estimates

A “critical accounting policy” is one that is both important to the portrayal of our financial condition and results and requires management’s most subjective or complex judgments, often as a result of the need to make estimates about the effect of items that are inherently uncertain. For additional information, please see the discussion of our significant accounting policies under “Critical Accounting Policies and Significant ~~Estimates~~”Estimates” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2018.

Item 3. Quantitative and Qualitative Disclosures ~~about~~About Market Risk

~~Interest Rate~~For a discussion on our market risks, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,

We are exposed to market risk from changes in interest rates, primarily related to our investment activities. The principal objectives of our investment activities are to preserve principal, provide liquidity and maximize income consistent with minimizing risk of material loss. The recorded carrying amounts of cash and cash equivalents approximate fair value due to their short maturities. Our interest income is sensitive to changes in the general level of interest rates in the United States, particularly since our investments are generally short-term in nature. Based on the nature of our short-term investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our portfolio.

~~Inflation~~

~~Inflationary factors, such as increases~~” included in our ~~cost of revenue, sales and marketing expenses and reimbursement expenses, may adversely affect our operating results. Although we do not believe that inflation has had a material impact~~Annual Report on ~~our financial condition or results of operations to date, a high rate of inflation in~~Form 10-K for the future may have an adverse effect on our ability to maintain and increase our gross margin, and on our sales and marketing and reimbursement expenses as a percentage of our revenues, if the selling and rental prices of our products do not increase as much or more than these increased costs.

~~Credit Risk~~

~~As of March 31, 2019 and~~year ended December 31, ~~2018, our cash, cash equivalents and marketable securities were maintained with three financial institutions in the United States.~~

Our accounts receivable primarily relate to revenues from the sale and rental of our products to patients in the United States. As of March 31, 2019 and 2018, our accounts receivable and net investment in leases were $27.2 million and $17.2 million, respectively. We had accounts receivable from three insurers representing approximately 30%, 14% and 8% of accounts receivable as of March 31, 2019, and we had accounts receivable from three insurance companies representing approximately 25%, 17% and 6% of accounts receivable as of March 31, 2018.

~~Foreign Currency Risk~~

~~Our business is conducted in U.S. dollars and international transactions~~ There have been ~~minimal. As we begin building relationships to commercialize and distribute our products internationally, our results of operations and cash flows may become increasingly subject to~~no material changes ~~in foreign currency exchange rates.~~since December 31, 2018.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of ~~March 31, 2019.~~September 30, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or

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submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management

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necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of ~~March 31,~~September 30, 2019, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There was no change in ~~the Company’s~~our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that occurred during the quarter ended ~~March 31,~~September 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we are subject to various claims and legal proceedings arising in the ordinary course of business. Regardless of outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

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., Case No. 18-2871, which had been filed on January 23, 2019. The complaint was unsealed on March 20, 2019. The complaint is a qui tam action on behalf of the United States brought by one of our competitors. The United States has declined to intervene in this action. The complaint alleges 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 seeks damages, statutory penalties, attorneys’ fees, treble damages and costs. We filed a motion to dismiss on April 5, 2019. This motion is currently pending decision. We believe that the allegations in the lawsuit are without merit and we intend to continue to vigorously defend against the lawsuit.

Item 1A. Risk Factors.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, which could materially affect our business, financial condition or future results. There have been no material changes in our risk factors from those disclosed in that report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Recent Sales of Unregistered Securities

(a)

Issuances of Preferred Stock

None.

(b)

Issuances of Common Stock

None.

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Use of Proceeds from Registered Securities

On August 2, 2016, we issued and sold 4,120,000 shares of our common stock in the initial public offering at a public offering price of $10.00 per share, for aggregate gross proceeds of $41.2 million. All of the shares issued and sold in the initial public offering were registered under the Securities Act of 1933, as amended, pursuant to a Registration Statement on Form S-1 (File No. 333-209115), which was declared effective by the SEC on July 27, 2016. The offering terminated on August 2, 2016.

~~The~~35

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We received net proceeds from the initial public offering ~~proceeds to us,~~of approximately $35.4 million, after deducting underwriting discounts ofand approximately $2.9 million ~~and~~of transaction expenses. In connection with the closing of the initial public offering, ~~expenses paid by us totaling approximately $2.9 million, were approximately $35.4 million.~~all of our outstanding redeemable convertible preferred stock automatically converted to common stock on August 2, 2016. As a result, at August 2, 2016, we did not have any redeemable convertible preferred stock issued or outstanding. No offering expenses were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning 10% or more of any class of our equity securities or to any other affiliates. We also paid $8.2 million in cumulative accrued dividends to our Series A preferred stockholders from the issuance proceeds.

At ~~March 31,~~September 30, 2019, the net proceeds from our initial public offering were held in a diversified portfolio of bank deposits, government money market funds, government securities (U.S. Treasury and U.S. government agency securities), and high-grade short-term corporate bonds. All investments were in compliance with our Investment Policy and are highly liquid, with liquidity and capital preservation being the primary investment objectives. There has been no material change in our planned uses of the net proceeds from those described in the Prospectus dated July 27, 2016.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Notapplicable.

~~Notapplicable.~~

Item 5. Other Information.

None.

~~None.~~

Item 6. Exhibits.

The exhibits filed as part of this Quarterly Report on Form 10-Q are set forth on the Exhibit Index below.

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EXHIBIT INDEX

Incorporated by Reference

Exhibit

File

Exhibit

Filed

Number

Description of Exhibit

Form

Number

Date of Filing

Number

Herewith

3.1

Amended and Restated Certificate of Incorporation, as amended through May 9, 2019

8-K

001-37799

05/09/2019

3.2

Amended and Restated By-laws, effective May 9, 2019

8-K

001-37799

05/09/2019

3.3

10.1

Third Amendment to Credit Agreement, dated as of August 2, 2019, by and among Tactile Systems Technology, Inc., the lenders party thereto and Wells Fargo Bank, National Association

10.2

Letter Agreement between Tactile Systems Technology, Inc. and Mary Thompson, dated July 16, 2019

8-K

001-37799

07/22/2019

10.1

31.1

Certification of Principal Executive Officer pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934, as amended

31.2

Certification of Principal Financial Officer pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934, as amended

32.1

Certification of Principal Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification of Principal Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.1

The following condensed consolidated financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in Inline XBRL: (i) Balance Sheets (unaudited), (ii) Statements of Operations (unaudited), (iii) Statements of Comprehensive Income (unaudited); (iv) Statements of Stockholders’ Equity (unaudited), (v) Statements of Cash Flows (unaudited), and (vi) Notes to the Condensed Consolidated Financial Statements.

~~EXHIBIT INDEX~~

Incorporated by Reference

Exhibit

File

Exhibit

Filed
Number

Description of Exhibit

Form

Number

Date of Filing

Number

Herewith
3.1

Fourth Amended and Restated Certificate of Incorporation

S-1

333-209115

06/09/2016

3.1

3.2

Amended and Restated By-laws

S-1

333-209115

05/06/2016

3.2

10.1

First Amendment to Credit Agreement, dated as of February 12, 2019, by and among Tactile Systems Technology, Inc., the lenders party thereto and Wells Fargo Bank, National Association

10-K

001-37799

02/28/2019

10.33

10.2

Waiver and Second Amendment to Credit Agreement, dated as of March 25, 2019, by and among Tactile Systems Technology, Inc., the lenders party thereto and Wells Fargo Bank, National Association

X

10.3

Form of Restricted Stock Unit Award Agreement under the 2016 Equity Incentive Plan (to be used for awards beginning in 2019)

X

10.4

Form of Performance Stock Unit Agreement under the 2016 Equity Incentive Plan (to be used for awards beginning in 2019)

X

10.5

Non-Employee Director Compensation Policy

10-K

001-37799

02/28/2019

10.21

31.1

Certification of Principal Executive Officer pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934, as amended

X

31.2

Certification of Principal Financial Officer pursuant to Rule 13a-14(a) / 15d-14(a) of the Securities Exchange Act of 1934, as amended

X

32.1

Certification of Principal Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

X

32.2

Certification of Principal Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

X

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~~101.1~~104.1

~~The following condensed consolidated financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, formatted~~Cover page Interactive Data File (formatted as Inline XBRL and contained in XBRL: (i) Balance Sheets (unaudited), (ii) Statements of Operations (unaudited), (iii) Statements of Comprehensive Income (unaudited); (iv) Statements of Stockholders’ Equity (unaudited), (v) Statements of Cash Flows (unaudited), and (vi) Notes to the Condensed Consolidated Financial Statements.Exhibit 101.1)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	Tactile Systems Technology, Inc.

Date: ~~May 6,~~November 4, 2019	By:	/s/ Brent A. Moen
			Brent A. Moen
			Chief Financial Officer
			(Principal financial and accounting officer)

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	PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements	3 4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23 25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
~~Item 4.~~	~~Controls and Procedures~~	31

	~~PART II—OTHER INFORMATION~~
		34
Item 1.4.	~~Legal Proceedings~~Controls and Procedures	32 34

	PART II—OTHER INFORMATION

Item ~~1A.~~1.	~~Risk Factors~~Legal Proceedings	32 35
Item 2.1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32 35
Item 3.	Defaults Upon Senior Securities	33 36
Item 4.	Mine Safety Disclosures	33 36
Item 5.	Other Information	33 36
Item 6.	Exhibits	33 36


Tactile Systems Technology, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
	March 31,		December 31,
(In thousands, except share and per share data)	2019		2018
ASSETS
Current assets:
Cash and cash equivalents	$	23,548	$	20,099
Marketable securities		21,384		25,786
Accounts receivable, net		21,661		24,332
Net investment in leases		3,362		—
Inventories		11,321		11,189
Income taxes receivable		2,814		1,793
Prepaid expenses and other current assets		1,680		1,762
Total current assets		85,770		84,961
Non-current assets:
Property and equipment, net		4,616		4,810
Right of use operating lease assets		3,396		—
Intangible assets, net		5,244		5,339
Medicare accounts receivable, long-term		2,172		1,884
Deferred income taxes		11,077		8,820
Other non-current assets		1,242		1,257
Total non-current assets		27,747		22,110
Total assets	$	113,517	$	107,071
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5,832	$	5,110
Accrued payroll and related taxes		6,837		7,421
Accrued expenses		2,685		2,780
Future product royalties		3		5
Income taxes		—		51
Right of use operating lease liabilities		1,147		—
Other current liabilities		800		709
Total current liabilities		17,304		16,076
Non-current liabilities:
Accrued warranty reserve, non-current		1,854		1,725
Income taxes, non-current		42		—
Right of use operating lease liabilities, non-current		2,318		—
Total non-current liabilities		4,214		1,725
Total liabilities		21,518		17,801
Commitments and contingencies (see Note 10)
Stockholders’ equity:
Preferred stock, $0.001 par value, 50,000,000 shares authorized; none issued and outstanding as of March 31, 2019 and December 31, 2018		—		—
Common stock, $0.001 par value, 300,000,000 shares authorized; 18,818,692 shares issued and outstanding as of March 31, 2019; 18,631,125 shares issued and outstanding as of December 31, 2018		19		19
Additional paid-in capital		80,788		79,554
Retained earnings		11,177		9,705
Accumulated other comprehensive income (loss)		15		(8)
Total stockholders’ equity		91,999		89,270
Total liabilities and stockholders’ equity	$	113,517	$	107,071


Tactile Systems Technology, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
	Three Months Ended
	March 31,
(In thousands, except share and per share data)	2019		2018
Revenue
Sales revenue	$	30,831	$	23,647
Rental revenue		6,786		3,201
Total revenue		37,617		26,848
Cost of revenue
Cost of sales revenue		9,412		6,409
Cost of rental revenue		1,947		900
Total cost of revenue		11,359		7,309
Gross profit
Gross profit - sales revenue		21,419		17,238
Gross profit - rental revenue		4,839		2,301
Gross profit		26,258		19,539
Operating expenses
Sales and marketing		17,391		12,557
Research and development		1,281		1,437
Reimbursement, general and administrative		9,388		7,372
Total operating expenses		28,060		21,366
Loss from operations		(1,802)		(1,827)
Other income		161		91
Loss before income taxes		(1,641)		(1,736)
Income tax benefit		(3,113)		(1,686)
Net income (loss)	$	1,472	$	(50)
Net income per common share
Basic	$	0.08	$	0.00
Diluted	$	0.08	$	0.00
Weighted-average common shares used to compute net income per common share
Basic		18,746,751		17,996,672
Diluted		19,579,847		17,996,672


Tactile Systems Technology, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
	Three Months Ended
	March 31,
(In thousands)	2019		2018
Net income (loss)	$	1,472	$	(50)
Other comprehensive income (loss):
Unrealized gain (loss) on marketable securities		30		(7)
Income tax related to items of other comprehensive income (loss)		(7)		1
Total other comprehensive income (loss)		23		(6)
Comprehensive income (loss)	$	1,495	$	(56)


Tactile Systems Technology, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
								Accumulated
				Additional				Other
	Common Stock			Paid-In		Retained		Comprehensive		Treasury
(In thousands, except share data)	Shares	Par Value		Capital		Earnings		(Loss) Income		Stock		Total
Balances, December 31, 2017	17,846,379	$	18	$	70,224	$	3,082	$	(44)	$	(493)	$	72,787
Stock-based compensation	—		—		1,481		—		—		—		1,481
Exercise of common stock options and vesting of restricted stock units	230,532		—		138		—		—		—		138
Taxes paid for net share settlement of restricted stock units	(40,202)		—		(1,188)		—		—		—		(1,188)
Comprehensive loss for the period	—		—		—		(50)		(6)		—		(56)
Balances, March 31, 2018	18,036,709	$	18	$	70,655	$	3,032	$	(50)	$	(493)	$	73,162

Balances, December 31, 2018	18,631,125		19		79,554		9,705		(8)		—		89,270
Stock-based compensation	—		—		2,783		—		—		—		2,783
Exercise of common stock options and vesting of restricted stock units	231,814		—		861		—		—		—		861
Taxes paid for net share settlement of restricted stock units	(44,247)		—		(2,410)		—		—		—		(2,410)
Comprehensive income for the period	—		—		—		1,472		23		—		1,495
Balances, March 31, 2019	18,818,692	$	19	$	80,788	$	11,177	$	15	$	—	$	91,999


Tactile Systems Technology, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
	Three Months Ended
	March 31,
(In thousands)	2019		2018
Cash flows from operating activities
Net income (loss)	$	1,472	$	(50)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		996		463
Deferred income taxes		(2,264)		—
Stock-based compensation expense		2,783		1,481
Changes in assets and liabilities:
Accounts receivable		2,671		3,414
Net investment in leases		(3,362)		—
Inventories		(132)		(3,616)
Income taxes		(1,030)		(1,952)
Prepaid expenses and other assets		97		63
Right of use operating lease assets		(3,396)		—
Medicare accounts receivable – long-term		(288)		(253)
Accounts payable		722		885
Accrued payroll and related taxes		(584)		(1,850)
Accrued expenses and other liabilities		125		(756)
Right of use operating lease liabilities		3,465		—
Future product royalties		(2)		(2)
Net cash provided by (used in) operating activities		1,273		(2,173)
Cash flows from investing activities
Proceeds from sales of securities available-for-sale		—		1,000
Proceeds from maturities of securities available-for-sale		4,500		4,000
Purchases of property and equipment		(731)		(432)
Intangible assets costs		(44)		—
Net cash provided by investing activities		3,725		4,568
Cash flows from financing activities
Taxes paid for net share settlement of restricted stock units		(2,410)		(1,188)
Proceeds from exercise of common stock options		861		138
Net cash used in financing activities		(1,549)		(1,050)
Net increase in cash and cash equivalents		3,449		1,345
Cash and cash equivalents – beginning of period		20,099		23,968
Cash and cash equivalents – end of period	$	23,548	$	25,313
Supplemental cash flow disclosure
Cash paid for interest	$	—	$	—
Cash paid for taxes	$	181	$	284
Capital expenditures incurred but not yet paid	$	176	$	96


	At March 31, 2019
	Amortized		Unrealized				Fair
(In thousands)	Cost		Gains		Losses		Value
U.S. government and agency obligations	$	17,391	$	13	$	3	$	17,401
Corporate debt securities and certificates of deposit		3,973		11		1		3,983
Marketable securities	$	21,364	$	24	$	4	$	21,384


	At December 31, 2018
	Amortized		Unrealized				Fair
(In thousands)	Cost		Gains		Losses		Value
U.S. government and agency obligations	$	19,332	$	5	$	17	$	19,320
Corporate debt securities and certificates of deposit		6,464		7		5		6,466
Marketable securities	$	25,796	$	12	$	22	$	25,786


	At March 31, 2019
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(In thousands)	Value		Losses		Value		Losses		Value		Losses
U.S. government and agency obligations	$	7,474	$	2	$	999	$	1	$	8,473	$	3
Corporate debt securities and certificates of deposit		1,498		1		—		—		1,498		1
Marketable securities	$	8,972	$	3	$	999	$	1	$	9,971	$	4


	Weighted-	At March 31, 2019						At December 31, 2018
	Average	Gross						Gross
	Amortization	Carrying		Accumulated		Net		Carrying		Accumulated		Net
(In thousands)	Period	Amount		Amortization		Amount		Amount		Amortization		Amount
Patents	11 years	$	4,298	$	157	$	4,141	$	4,253	$	71	$	4,182
Defensive intangible assets	5 years		1,126		130		996		1,126		82		1,044
Customer accounts	4 years		125		18		107		125		12		113
Total		$	5,549	$	305	$	5,244	$	5,504	$	165	$	5,339


(In thousands)
2019 (April 1 - December 31)	$	419
2020		558
2021		558
2022		558
2023		491
Thereafter		2,660
Total	$	5,244


		Weighted-
		Average Grant		Aggregate
	Units	Date Fair Value		Intrinsic
(In thousands except unit and per unit data)	Outstanding	Per Unit		Value (1)
Balance at December 31, 2018	309,632	$	23.69	$	14,104
Granted	43,258	$	72.38
Vested	(131,363)	$	15.76
Cancelled	(244)	$	17.35
Balance at March 31, 2019	221,283	$	37.92	$	11,666

Deferred and unissued at March 31, 2019(2)	4,432	$	35.43	$	234


	Performance-	Weighted-
	Based	Average Grant		Aggregate
	Units	Date Fair Value		Intrinsic
(In thousands except unit and per unit data)	Outstanding	Per Unit		Value (1)
Balance at December 31, 2018	65,427	$	33.62	$	2,980
Granted	25,724	$	72.64
Vested	—	$	—
Cancelled	—	$	—
Balance at March 31, 2019	91,151	$	44.63	$	4,805


	At March 31, 2019
	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
(In thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Recurring Fair Value Measurements:
Money market mutual funds	$	7,055	$	—	$	—	$	7,055
U.S. government and agency obligations		16,402		999		—		17,401
Corporate debt securities		—		3,983		—		3,983
Total	$	23,457	$	4,982	$	—	$	28,439