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,~~September 30, 2021

☐ 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
(State or other jurisdiction of incorporation or organization)	Minneapolis, Minnesota 55416	(I.R.S. Employer Identification No.)
	(Address and zip code of principal executive offices)

	(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 ☑

~~19,650,900~~19,823,022 shares of common stock, par value $0.001 per share, were outstanding as of ~~April 29,~~November 4, 2021.

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 impacts of the COVID-19 pandemic on our business, financial condition and results of operations, and our inability to mitigate such impacts;

●

the adequacy of our liquidity to pursue our business objectives;

●

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

●

loss or retirement of key executives, including prior to identifying a successor;

●

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, 2020, 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)


March 31,

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

2021

2020
Assets

Current assets

Cash and cash equivalents

$
46,925

$
47,855
Accounts receivable

40,043

43,849
Net investment in leases

11,254

10,708
Inventories

22,042

18,563
Prepaid expenses and other current assets

2,235

2,638
Total current assets

122,499

123,613
Non-current assets

Property and equipment, net

6,746

6,957
Right of use operating lease assets

19,565

20,132
Intangible assets, net

1,683

1,680
Accounts receivable, non-current

10,727

9,433
Deferred income taxes

12,026

10,198
Other non-current assets

2,030

2,074
Total non-current assets

52,777

50,474
Total assets

$
175,276

$
174,087
Liabilities and Stockholders' Equity

Current liabilities

Accounts payable

$
9,352

$
4,197
Accrued payroll and related taxes

8,547

11,588
Accrued expenses

3,227

4,423
Income taxes payable

2,658

2,658
Operating lease liabilities

1,966

2,006
Other current liabilities

2,235

1,842
Total current liabilities

27,985

26,714
Non-current liabilities

Accrued warranty reserve, non-current

3,259

3,235
Operating lease liabilities, non-current

18,910

19,388
Total non-current liabilities

22,169

22,623
Total liabilities

50,154

49,337

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 March 31, 2021 and December 31,
2020

—

—
Common stock, $0.001 par value, 300,000,000 shares authorized; 19,639,113 shares issued and outstanding as of March 31, 2021; 19,492,718 shares issued and outstanding as of December 31, 2020

20

19
Additional paid-in capital

107,312

104,675
Retained earnings

17,790

20,056
Total stockholders’ equity

125,122

124,750
Total liabilities and stockholders’ equity

$
175,276

$
174,087


Tactile Systems Technology, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
	September 30,		December 31,
(In thousands, except share and per share data)	2021		2020
Assets
Current assets
Cash and cash equivalents	$	22,401	$	47,855
Accounts receivable		44,257		43,849
Net investment in leases		12,385		10,708
Inventories		23,830		18,563
Prepaid expenses and other current assets		3,701		2,638
Total current assets		106,574		123,613
Non-current assets
Property and equipment, net		6,458		6,957
Right of use operating lease assets		23,919		20,132
Intangible assets, net		54,970		1,680
Goodwill		31,063		—
Accounts receivable, non-current		12,422		9,433
Deferred income taxes		11,907		10,198
Other non-current assets		2,082		2,074
Total non-current assets		142,821		50,474
Total assets	$	249,395	$	174,087
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable	$	6,192	$	4,197
Note payable		2,210		—
Accrued payroll and related taxes		10,322		11,588
Accrued expenses		5,350		4,423
Income taxes payable		1,129		2,658
Operating lease liabilities		2,412		2,006
Other current liabilities		3,694		1,842
Total current liabilities		31,309		26,714
Non-current liabilities
Revolving line of credit, non-current		24,844		—
Note payable, non-current		27,673		—
Earn-out, non-current		6,400		—
Accrued warranty reserve, non-current		3,358		3,235
Income taxes payable, non-current		348		—
Operating lease liabilities, non-current		23,357		19,388
Total non-current liabilities		85,980		22,623
Total liabilities		117,289		49,337

Commitments and Contingencies (see Note 11)

Stockholders’ equity:
Preferred stock, $0.001 par value, 50,000,000 shares authorized; NaN issued and outstanding as of September 30, 2021 and December 31, 2020		—		—
Common stock, $0.001 par value, 300,000,000 shares authorized; 19,797,723 shares issued and outstanding as of September 30, 2021; 19,492,718 shares issued and outstanding as of December 31, 2020		20		19
Additional paid-in capital		116,346		104,675
Retained earnings		15,740		20,056
Total stockholders’ equity		132,106		124,750
Total liabilities and stockholders’ equity	$	249,395	$	174,087

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

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

2021

2020
Revenue

Sales revenue

$
36,125

$
37,623
Rental revenue

6,647

6,052
Total revenue

42,772

43,675
Cost of revenue

Cost of sales revenue

10,691

10,922
Cost of rental revenue

1,851

1,680
Total cost of revenue

12,542

12,602
Gross profit

Gross profit - sales revenue

25,434

26,701
Gross profit - rental revenue

4,796

4,372
Gross profit

30,230

31,073
Operating expenses

Sales and marketing

18,785

22,970
Research and development

1,270

1,684
Reimbursement, general and administrative

14,259

10,870
Total operating expenses

34,314

35,524
Loss from operations

(4,084)

(4,451)
Other (expense) income

(10)

266
Loss before income taxes

(4,094)

(4,185)
Income tax benefit

(1,828)

(2,878)
Net loss

$
(2,266)

$
(1,307)
Net loss per common share

Basic

$
(0.12)

$
(0.07)
Diluted

$
(0.12)

$
(0.07)
Weighted-average common shares used to compute net loss per common share

Basic

19,545,558

19,173,580
Diluted

19,545,558

19,173,580


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)	2021		2020		2021		2020
Revenue
Sales revenue	$	44,460	$	42,573	$	124,215	$	109,714
Rental revenue		8,037		6,519		22,114		18,173
Total revenue		52,497		49,092		146,329		127,887
Cost of revenue
Cost of sales revenue		13,096		11,558		36,425		30,868
Cost of rental revenue		2,433		2,562		6,501		6,062
Total cost of revenue		15,529		14,120		42,926		36,930
Gross profit
Gross profit - sales revenue		31,364		31,015		87,790		78,846
Gross profit - rental revenue		5,604		3,957		15,613		12,111
Gross profit		36,968		34,972		103,403		90,957
Operating expenses
Sales and marketing		22,231		19,488		61,949		59,856
Research and development		1,409		1,102		3,885		3,891
Reimbursement, general and administrative		14,500		12,539		42,802		37,682
Intangible asset amortization		195		49		294		148
Total operating expenses		38,335		33,178		108,930		101,577
(Loss) income from operations		(1,367)		1,794		(5,527)		(10,620)
Other (expense) income		(120)		(121)		(154)		181
(Loss) income before income taxes		(1,487)		1,673		(5,681)		(10,439)
Income tax expense (benefit)		1,868		(751)		(1,365)		2,294
Net (loss) income	$	(3,355)	$	2,424	$	(4,316)	$	(12,733)
Net (loss) income per common share
Basic	$	(0.17)	$	0.12	$	(0.22)	$	(0.66)
Diluted	$	(0.17)	$	0.12	$	(0.22)	$	(0.66)
Weighted-average common shares used to compute net (loss) income per common share
Basic		19,790,838		19,415,640		19,676,749		19,309,344
Diluted		19,790,838		19,747,365		19,676,749		19,309,344

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 Loss
(Unaudited)

Three Months Ended

March 31,
(In thousands)

2021

2020
Net loss

$
(2,266)

$
(1,307)
Other comprehensive income:




Unrealized gain on marketable securities

—

30
Income tax related to items of other comprehensive income

—

(18)
Total other comprehensive income

—

12
Comprehensive loss

$
(2,266)

$
(1,295)


Tactile Systems Technology, Inc.
Condensed Consolidated Statements of Comprehensive (Loss) Income
(Unaudited)
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands)	2021		2020		2021		2020
Net (loss) income	$	(3,355)	$	2,424	$	(4,316)	$	(12,733)
Other comprehensive loss
Unrealized loss on marketable securities		—		(14)		—		(21)
Income tax related to items of other comprehensive loss		—		(15)		—		(5)
Total other comprehensive loss		—		(29)		—		(26)
Comprehensive (loss) income	$	(3,355)	$	2,395	$	(4,316)	$	(12,759)

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

(In thousands, except share data)

Shares

Par Value

Capital

Earnings

(Loss) Income

Total
Balances, December 31, 2020

19,492,718

$
19

$
104,675

$
20,056

$
—

$
124,750
Stock-based compensation

—

—

2,457

—

—

2,457
Exercise of common stock options and vesting of performance and restricted stock units

167,375

1

1,295

—

—

1,296
Taxes paid for net share settlement of performance and restricted stock units

(20,980)

—

(1,115)

—

—

(1,115)
Comprehensive loss for the period

—

—

—

(2,266)

—

(2,266)
Balances, March 31, 2021

19,639,113

$
20

$
107,312

$
17,790

$
—

$
125,122

Balances, December 31, 2019

19,152,715

$
19

$
91,874

$
20,676

$
26

$
112,595
Stock-based compensation

—

—

2,728

—

—

2,728
Exercise of common stock options and vesting of performance and restricted stock units

96,186

—

172

—

—

172
Taxes paid for net share settlement of performance and restricted stock units

(22,236)

—

(1,160)

—

—

(1,160)
Comprehensive loss for the period

—

—

—

(1,307)

12

(1,295)
Balances, March 31, 2020

19,226,665

$
19

$
93,614

$
19,369

$
38

$
113,040


Tactile Systems Technology, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
								Accumulated
				Additional				Other
	Common Stock			Paid-In		Retained		Comprehensive
(In thousands, except share data)	Shares	Par Value		Capital		Earnings		(Loss) Income		Total
Balances, June 30, 2021	19,782,295	$	20	$	113,601	$	19,095	$	—	$	132,716
Stock-based compensation	—		—		2,588		—		—		2,588
Exercise of common stock options and vesting of performance and restricted stock units	16,366		—		199		—		—		199
Taxes paid for net share settlement of performance and restricted stock units	(938)		—		(42)		—		—		(42)
Comprehensive loss for the period	—		—		—		(3,355)		—		(3,355)
Balances, September 30, 2021	19,797,723	$	20	$	116,346	$	15,740	$	—	$	132,106

Balances, December 31, 2020	19,492,718	$	19	$	104,675	$	20,056	$	—	$	124,750
Stock-based compensation	—		—		7,703		—		—		7,703
Exercise of common stock options and vesting of performance and restricted stock units	284,829		1		3,583		—		—		3,584
Taxes paid for net share settlement of performance and restricted stock units	(21,918)		—		(1,157)		—		—		(1,157)
Common shares issued for employee stock purchase plan	42,094		—		1,542		—		—		1,542
Comprehensive loss for the period	—		—		—		(4,316)		—		(4,316)
Balances, September 30, 2021	19,797,723	$	20	$	116,346	$	15,740	$	—	$	132,106

Balances, June 30, 2020	19,411,404	$	19	$	97,818	$	5,519	$	29	$	103,385
Stock-based compensation	—		—		3,164		—		—		3,164
Exercise of common stock options and vesting of performance and restricted stock units	14,322		—		214		—		—		214
Taxes paid for net share settlement of performance and restricted stock units	(1,047)		—		(39)		—		—		(39)
Comprehensive income for the period	—		—		—		2,424		(29)		2,395
Balances, September 30, 2020	19,424,679	$	19	$	101,157	$	7,943	$	—	$	109,119

Balances, December 31, 2019	19,152,715	$	19	$	91,874	$	20,676	$	26	$	112,595
Stock-based compensation	—		—		8,288		—		—		8,288
Exercise of common stock options and vesting of performance and restricted stock units	259,406		—		762		—		—		762
Taxes paid for net share settlement of performance and restricted stock units	(31,095)		—		(1,592)		—		—		(1,592)
Common shares issued for employee stock purchase plan	43,653		—		1,825		—		—		1,825
Comprehensive loss for the period	—		—		—		(12,733)		(26)		(12,759)
Balances, September 30, 2020	19,424,679	$	19	$	101,157	$	7,943	$	—	$	109,119

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)

Three Months Ended March 31,
(In thousands)

2021

2020
Cash flows from operating activities

Net loss

$
(2,266)

$
(1,307)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

Depreciation and amortization

652

730
Net amortization of premiums and discounts on securities available-for-sale

—

(43)
Deferred income taxes

(1,828)

979
Stock-based compensation expense

2,457

2,728
Changes in assets and liabilities:

Accounts receivable

3,806

2,663
Net investment in leases

(546)

(735)
Inventories

(3,479)

(3,304)
Income taxes

—

(4,153)
Prepaid expenses and other assets

447

192
Right of use operating lease assets

49

151
Medicare accounts receivable, non-current

(1,294)

(973)
Accounts payable

5,022

4,741
Accrued payroll and related taxes

(3,041)

(1,804)
Accrued expenses and other liabilities

(779)

1,044
Net cash (used in) provided by operating activities

(800)

909
Cash flows from investing activities

Proceeds from maturities of securities available-for-sale

—

10,000
Purchases of property and equipment

(249)

(358)
Intangible assets costs

(62)

(36)
Net (used in) provided by investing activities

(311)

9,606
Cash flows from financing activities

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

(1,115)

(1,160)
Proceeds from exercise of common stock options

1,296

172
Net cash provided by (used in) financing activities

181

(988)
Net (decrease) increase in cash and cash equivalents

(930)

9,527
Cash and cash equivalents – beginning of period

47,855

22,770
Cash and cash equivalents – end of period

$
46,925

$
32,297

Supplemental cash flow disclosure

Cash paid for taxes

$
13

$
311
Capital expenditures incurred but not yet paid

$
133

$
155


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

	Nine Months Ended September 30,
(In thousands)	2021		2020
Cash flows from operating activities
Net loss	$	(4,316)	$	(12,733)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,150		2,102
Net amortization of premiums and discounts on securities available-for-sale		—		(91)
Deferred income taxes		(1,709)		3,934
Stock-based compensation expense		7,703		8,288
Gain on other investments and maturities of marketable securities		—		10
Impairment losses		—		4,025
Loss on disposal of property and equipment		7		—
Changes in assets and liabilities, net of acquisition:
Accounts receivable		(408)		(2,589)
Net investment in leases		(1,677)		(1,304)
Inventories		(3,641)		(3,538)
Income taxes		(1,181)		773
Prepaid expenses and other assets		(1,133)		(1,553)
Right of use operating lease assets		588		509
Medicare accounts receivable, non-current		(2,989)		(2,916)
Accounts payable		1,995		938
Accrued payroll and related taxes		(1,266)		766
Accrued expenses and other liabilities		2,902		1,134
Net cash used in operating activities		(2,975)		(2,245)
Cash flows from investing activities
Proceeds from maturities of securities available-for-sale		—		22,500
Payments related to acquisition		(79,829)		—
Purchases of property and equipment		(1,221)		(1,623)
Intangible assets costs		(187)		(163)
Other investments		—		(30)
Net cash (used in) provided by investing activities		(81,237)		20,684
Cash flows from financing activities
Proceeds from issuance of note payable		30,000		—
Proceeds from revolving line of credit		25,000		—
Payment of deferred debt issuance costs		(211)		—
Taxes paid for net share settlement of performance and restricted stock units		(1,157)		(1,592)
Proceeds from exercise of common stock options		3,584		762
Proceeds from the issuance of common stock from the employee stock purchase plan		1,542		1,825
Net cash provided by financing activities		58,758		995
Net (decrease) increase in cash and cash equivalents		(25,454)		19,434
Cash and cash equivalents – beginning of period		47,855		22,770
Cash and cash equivalents – end of period	$	22,401	$	42,204

Supplemental cash flow disclosure
Cash paid for taxes	$	1,541	$	475
Capital expenditures incurred but not yet paid	$	—	$	41

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® and Entre™ systems, medical devices that help control symptoms of lymphedema, a chronic and progressive medical condition. We provide these products through our ~~products~~direct sales force for use in the home and sell or rent them through vascular, wound and lymphedema clinics throughout the United States.

On September 8, 2021, we acquired the assets of the AffloVest respiratory therapy business (“AffloVest Acquisition”) from International Biophysics Corporation (“IBC”), a privately-held company which developed and manufactures AffloVest. AffloVest is a portable, wearable vest that treats patients with chronic respiratory conditions. The device is sold through home medical equipment and durable medical equipment providers throughout the United States.

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

On August 2, 2016, we closed the initial public offering of our common stock, which resulted in the sale of 4,120,000 shares of our common stock at a public offering price of $10.00 per share. We received net proceeds from the initial public offering of approximately $35.4 million, after deducting underwriting discounts and approximately $2.9 million of transaction expenses. 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.

Our business is affected by seasonality. In the first quarter of each year, when most patients have started a new insurance year and have not yet met their annual out-of-pocket payment obligations, we experience substantially reduced demand for our products. We typically experience higher revenue in the third and fourth quarters of the year when patients have met their annual insurance deductibles, thereby reducing their out-of-pocket costs for our products, and because patients desire to exhaust their flexible spending accounts at year end. This seasonality applies only to purchases and rentals of our products by patients covered by commercial insurance and is not relevant to Medicare, Medicaid or the Veterans Administration, as those payers either do not have plans that have declining deductibles over the course of the plan year and/or do not have plans that include patient deductibles for purchases or rentals of our products. Further, seasonality trends in 2021 may be significantly different than in prior years as a result of the COVID-19 pandemic and related impacts.

Note 2. Basis of Presentation

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

The results for the ~~three~~nine months ended ~~March 31,~~September 30, 2021, are not necessarily indicative of results to be expected for the year ending December 31, 2021, 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, 2020.

Table of Contents

Principles of Consolidation

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

~~Table of Contents~~

Risks and Uncertainties

Coronavirus (COVID-19)

The United States economy in general and our business specifically have been negatively affected by the COVID-19 pandemic. We have seen adverse impacts as it relates to the decline in the number of patients that healthcare facilities and clinics are able to treat due to enhanced safety ~~protocols.~~protocols, particularly during 2020 and the first quarter of 2021. While we saw some level of recovery in the second quarter of 2021, the third quarter was negatively impacted by the prolonged recovery from COVID-19 and increased Delta variant cases during the period, which resulted in restricted access to clinics and hospitals and disrupted the recovery in patient visits versus the pre-COVID environment. There are no reliable estimates of how long the pandemic will last, whether any recovery will be sustained or ~~how many people are likely to be affected by it.~~will reverse course, the severity of any resurgence of COVID-19 or variant strains of the virus, the effectiveness of vaccines and attitudes towards receiving them, or what ultimate effects the pandemic will have. For that reason, we are unable to reasonably estimate the long-term impact of the pandemic on our business at this time. Since the onset of COVID-19, we have remained proactive to ensure we continue to adapt to the needs of our employees, clinicians and patients.

We cannot assure you that these changes to our processes and practices will be successful in mitigating the impact of COVID-19 on our business. We continue to evaluate and, if appropriate, will adopt other measures in the future related to the ongoing safety of our employees, clinicians and patients.

In addition, we are closely monitoring mandatory vaccination requirements and related evolving guidance that is or may be applicable to us, including in our capacity as a U.S. government contractor. See See Part II, Item 1A. “Risk Factors” in this Form 10-Q for additional information about vaccine mandates and potential risks related thereto.

Use of Estimates

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

Comprehensive ~~Loss~~(Loss) Income

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

Note 3. Summary of Significant Accounting Policies

Significant Accounting Policies

There were no material changes in our significant accounting policies during the ~~three~~nine months ended ~~March 31, 2021.~~September 30, 2021, except as set forth below. 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, 2020, for information regarding our significant accounting policies.

Business Segments

~~Recently Adopted Accounting Pronouncements~~10

Table of Contents

We operate and report in only 1 operating and reportable segment. Our chief operating decision maker does not use financial information below revenue to allocate resources.

Goodwill

Goodwill represents the excess of the purchase price paid over the estimated fair value of the net assets acquired and liabilities assumed in the acquisition of a business. Goodwill is not amortized, but is tested for impairment at least annually or on an interim basis if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. We plan to perform our annual assessment of goodwill for impairment as of July 1st of each fiscal year. See Note 7 – “Goodwill and Intangible Assets” for additional information.

Revenue Recognition for AffloVest

The AffloVest device is sold through home medical equipment and durable medical equipment providers (collectively, "distributors"). Revenue is recognized when control of the promised goods or services is transferred to the distributors, in an amount that reflects the consideration we expect to be entitled to in exchange for transferring those goods or providing services. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. When determining whether the distributor has obtained control of the goods or services, we consider any future performance obligations. Generally, there is no post-shipment obligation on products sold other than warranty obligations in the normal and ordinary course of business.

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

Certain of our contracts include volume-based incentives which involve rebates that are negotiated at or prior to the time of sale with the customer and are redeemable only if the customer achieves a specified cumulative level of sales or sales increase. Under these incentive programs, at the time of sale, we determine the most likely amount of the rebate to be paid based on forecasted sales levels. These forecasts are updated at least quarterly for each customer, and the transaction price is reduced for the anticipated cost of the rebate. If the forecasted sales for a customer change, the accrual for rebates is adjusted to reflect the new rebates expected to be earned by the customer.

Amounts billed to customers for shipping and handling activities after the customer obtains control are treated as a promised service performance obligation and recorded in revenue in the accompanying Consolidated Statements of Operations. Shipping and handling costs incurred for the delivery of goods to customers are considered a cost to fulfill the contract and are included in cost of revenue sold in the accompanying Consolidated Statements of Operations.

For a description of our revenue recognition policies related to our Flexitouch and Entre systems, see Note 3 – “Summary of Significant Accounting Policies” to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December ~~2019,~~31, 2020.

Accounting Pronouncement Not Yet Adopted

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-04, “Reference Rate Reform (Topic 848) — Facilitation of the Effect of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”), addressing the discontinuation of LIBOR, a widely used reference rate for pricing financial products. The ASU is intended to provide optional expedients and exceptions if certain criteria are met when accounting for contracts, hedging relationships and other transactions that reference LIBOR, or another reference rate expected to be discontinued because of reference rate reform. The application and adoption requirements of ASU 2020-04 are optional until December 31, 2022 and vary based on expedients elected. We have not elected any expedients to date and are currently evaluating any potential future impacts on the condensed consolidated financial statements.

Table of Contents

Recently Adopted Accounting Pronouncements

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740) — Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which is intended to simplify various aspects of the accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. We adopted ASU 2019-12 as of January 1, 2021, and it did not have an impact on the condensed consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments — Credit Losses” (“ASU 2016-13”), which introduced a new model for recognizing credit losses on financial instruments based on an estimate of the current expected credit losses. The new current expected credit losses (“CECL”) model generally calls for the immediate recognition of all expected credit losses and applies to financial instruments and other assets, including accounts receivable and other financial assets measured at amortized cost, debt securities and other financial assets. This guidance replaced the previous incurred loss model for measuring expected credit losses and requires expected losses on available-for-sale debt securities to be recognized through an allowance for credit losses rather than as reductions in the amortized cost of the securities. We adopted ASU 2016-13 as of January 1, 2020, and it did not have an impact on the consolidated financial statements at that time. In connection with the AffloVest Acquisition, it was determined CECL did not have a material financial impact on the receivables related to the durable medical equipment channel.

Note 4. Acquisitions

On September 8, 2021, we entered into an Asset Purchase Agreement (“AffloVest APA”) to acquire the AffloVest therapy business from International Biophysics Corporation. Under the terms of the AffloVest APA, we agreed to pay IBC a total of up to $100.0 million for the purchase of substantially all of the assets related to its branded high frequency chest wall oscillation vest therapy business, other than specifically identified excluded assets. We acquired AffloVest to further expand our position as a leader in treating patients with underserved chronic conditions in the home. The acquired assets included inventory, tooling, intellectual property, permits and approvals, data and records, and customer and supplier information. At closing, $80.0 million of the purchase price was paid, of which a total of $0.5 million was deposited into an escrow account at closing for purposes of satisfying certain post-closing purchase price adjustments and indemnification claims. Subsequent to closing, $0.2 milion was returned to us as a result of working capital adjustments. The AffloVest acquisition was funded through a combination of cash on hand and proceeds from borrowings.

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

●

Initial Earn-Out: Equal to 1.5 times the amount by which the AffloVest business’ U.S. revenues in the period from October 1, 2021 to September 30, 2022 (the “Initial Earn-Out Period”) exceed a specified amount; provided that in no event will the payment exceed $10.0 million; and

●

Second Earn-Out: Equal to 1.5 times the amount by which the AffloVest business’ U.S. revenues in the period from October 1, 2022 to September 30, 2023 exceed the revenues recognized during the Initial Earn-Out Period; provided that in no event will the payment exceed $10.0 million.

This liability was recorded on the Condensed Consolidated Balance Sheet at September 30, 2021 in the line item Earn-out, non-current, at an acquisition-date fair value of $6.4 million. The fair value of the earn-out, reflecting management’s estimate of the likelihood of achieving these targets, was determined by employing a Monte Carlo Simulation model. This amount will be re-measured at the end of each reporting period until the payment requirement ends, with any adjustments reported in income from operations.

Table of Contents

On the date of AffloVest Acquisition, we allocated the assets acquired based on an estimate of their fair values. The following table summarizes the purchase price allocation:


(In millions)	Allocated Fair Value
Inventories	$	1.6
Property and equipment⁽¹⁾		—
Intangible assets		53.5
Goodwill		31.1
Purchase price	$	86.2

(1)	The purchase price included less than $0.1 million of property and equipment.

The goodwill reflects expected synergies of combining the acquired products and customer information with our existing operations, and is deductible for tax purposes over 15 years.

The following table reflects the allocation of purchase price to the acquired intangible assets and related estimated useful lives:



(In millions)	Allocated Fair Value		Estimated Useful Life
Customer relationships	$	31.0	13 years
Developed technology		13.0	11 years
Tradenames		9.5	Indefinite
Total intangible assets	$	53.5

The weighted-average amortization period of the acquired intangible assets was 12.3 years.

The fair market valuations associated with the assets acquired fall within Level 3 of the fair value hierarchy, due to the use of significant unobservable inputs to determine fair value. The fair value measurements were calculated using unobservable inputs, primarily using the income approach, specifically the discounted cash flow method. The amount and timing of future cash flows within our analysis was based on our due diligence models, most recent operational budgets, long-range strategic plans and other estimates.

Transaction costs, such as legal and other costs, related to the acquisition aggregated approximately $0.8 million. These costs have been expensed as incurred and are included in reimbursement, general and administrative expenses in our Condensed Consolidated Statements of Operations.

The Condensed Consolidated Statements of Operations reflect the AffloVest operations beginning September 9, 2021. The following unaudited pro forma information for the three and nine months ended September 30, 2021 and the three and nine months ended September 30, 2020 presents the revenues and net income assuming the acquisition of AffloVest had occurred as of January 1, 2020. This information has been prepared for comparative purposes only and is not indicative of what actual results would have been if the acquisition had taken place at the beginning of fiscal 2020, or of future results.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands)	2021		2020		2021		2020
Total revenue	$	56,249	$	53,068	$	157,686	$	139,130
Net income (loss)	$	628	$	(309)	$	1,369	$	1,770

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

Table of Contents

Note 4.5. Marketable Securities

There were 0 investments in marketable securities at ~~March 31,~~September 30, 2021 and December 31, 2020.

There were 0 net pre-tax unrealized gains for marketable securities at ~~March 31,~~September 30, 2021. There were 0 sales of marketable securities during the ~~three~~nine months ended ~~March 31,~~September 30, 2021.

~~Table of Contents~~

There were 0 marketable securities in an unrealized loss position at ~~March 31,~~September 30, 2021 and December 31, 2020.

Note 5.6. Inventories

Inventories consisted of the following:


(In thousands)	At March 31, 2021		At December 31, 2020		At September 30, 2021		At December 31, 2020
Finished goods	$	10,169	$	7,129	$	9,607	$	7,129
Component parts and work-in-process		11,873		11,434		14,223		11,434
Total inventories	$	22,042	$	18,563	$	23,830	$	18,563

Note 7. Goodwill and Intangible Assets

Goodwill

In the third quarter of fiscal 2021, we completed the AffloVest Acqusition. The purchase price of the AffloVest business exceeded the net acquisition-date estimated fair value amounts of the identifiable assets acquired and the liabilities assumed by $31.1 million, which was assigned to goodwill.

Intangible Assets

Our patents and other intangible assets are summarized as follows:


	Weighted-	At September 30, 2021
	Average	Gross
	Amortization	Carrying		Accumulated		Net
(In thousands)	Period	Amount		Amortization		Amount
Definite-lived intangible assets:
Patents	12 years	$	537	$	97	$	440
Defensive intangible assets	3 years		1,125		550		575
Customer accounts	2 years		125		82		43
Customer relationships	13 years		31,000		146		30,854
Developed technology	11 years		13,000		72		12,928
Subtotal			45,787		947		44,840
Unamortized intangible assets:
Tradenames			9,500		—		9,500
Patents pending			630		—		630
Total intangible assets		$	55,917	$	947	$	54,970

Table of Contents

~~Note 6. Intangible Assets~~

~~Our patents and other intangible assets are summarized as follows:~~

Weighted-

At March 31, 2021

Average

Gross

Amortization

Carrying

Accumulated

Net
(In thousands)

Period

Amount

Amortization

Amount
Patents

11 years

$
413

$
74

$
339
Defensive intangible assets

4 years

1,125

464

661
Customer accounts

2 years

125

70

55
Total amortizable intangible assets

1,663

608

1,055
Patents pending

628

—

628
Total intangible assets

$
2,291

$
608

$
1,683


	Weighted-	At December 31, 2020						Weighted-	At December 31, 2020
	Average	Gross						Average	Gross
	Amortization	Carrying		Accumulated		Net		Amortization	Carrying		Accumulated		Net
(In thousands)	Period	Amount		Amortization		Amount		Period	Amount		Amortization		Amount
Definite-lived intangible assets:
Patents	11 years	$	413	$	65	$	348	11 years	$	413	$	65	$	348
Defensive intangible assets	4 years		1,125		421		704	4 years		1,125		421		704
Customer accounts	2 years		125		63		62	2 years		125		63		62
Total amortizable intangible assets			1,663		549		1,114
Subtotal										1,663		549		1,114
Unamortized intangible assets:
Patents pending			566		—		566			566		—		566
Total intangible assets		$	2,229	$	549	$	1,680		$	2,229	$	549	$	1,680

Amortization expense was $0.3 million and $0.1 million for ~~each of~~ the three months ended ~~March 31,~~September 30, 2021 and ~~2020.~~2020, respectively, and $0.4 million and $0.3 million for the nine months ended September 30, 2021 and 2020, respectively. Future amortization expenses are expected as follows:


(In thousands)
2021 (April 1 - December 31)	$	177
2021 (October 1 - December 31)			$	953
2022		236		3,811
2023		205		3,781
2024		184		3,759
2025		94		3,669
Thereafter		159		28,867
Total	$	1,055	$	44,840

~~Table of Contents~~

Note 7.8. Accrued Expenses

Accrued expenses consisted of the following:


(In thousands)	At March 31, 2021		At December 31, 2020		At September 30, 2021		At December 31, 2020
Warranty	$	1,610	$	1,606	$	1,779	$	1,606
In-transit inventory						1,341		634
Legal and consulting		373		882		985		882
In-transit inventory		422		634
Travel and business		314		545
Travel						552		545
Clinical studies						135		67
Sales and use tax		164		193		109		193
Clinical studies		86		67
Other		258		496		449		496
Total	$	3,227	$	4,423	$	5,350	$	4,423

Table of Contents

Note 8.9. Warranty Reserves

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


	Three Months Ended				Three Months Ended				Nine Months Ended
	March 31,				September 30,				September 30,
(In thousands)	2021		2020		2021		2020		2021		2020
Beginning balance	$	4,841	$	3,759	$	5,117	$	4,208	$	4,841	$	3,759
Warranty provision		612		905		624		820		2,080		2,097
Processed warranty claims		(584)		(422)		(604)		(514)		(1,784)		(1,342)
Ending balance	$	4,869	$	4,242	$	5,137	$	4,514	$	5,137	$	4,514

Accrued warranty reserve, current	$	1,610	$	1,358	$	1,779	$	1,443	$	1,779	$	1,443
Accrued warranty reserve, non-current		3,259		2,884		3,358		3,071		3,358		3,071
Total accrued warranty reserve	$	4,869	$	4,242	$	5,137	$	4,514	$	5,137	$	4,514

Note 9.10. Credit Agreement

On August 3, 2018, we entered into a credit agreement with Wells Fargo Bank, National Association, which was amended by a First Amendment dated February 12, 2019, a Waiver and Second Amendment dated March 25, 2019, and a Third Amendment dated August 2, 2019 (collectively, the “2018 Credit Agreement”). On April 30, 2021, we entered into an Amended and Restated Credit Agreement (the “Restated Credit Agreement”) with the lenders from time to time party thereto, and Wells Fargo Bank, National Association, as Administrative Agent. The Restated Credit Agreement amended and restated in its entirety the 2018 Credit Agreement.

On September 8, 2021, we entered into a First Amendment Agreement (the “Amendment”), which ~~expires~~amends the Restated Credit Agreement (as amended by the Amendment, the “Credit Agreement”) with the lenders from time to time party thereto and Wells Fargo Bank, National Association, as administrative agent. The Amendment, among other things, adds a $30.0 million incremental term loan to the $25.0 million revolving credit facility provided by the Restated Credit Agreement. The term loan is reflected on ~~August 3, 2021.~~

our condensed consolidated financial statements as a note payable. The ~~2018~~term loan and the revolving credit facility mature on September 8, 2024. The Credit Agreement provides ~~for a $10.0 million revolving credit facility. Subject~~that, subject to satisfaction of certain conditions, we may increase the amount of the revolving loans available under the ~~2018~~ Credit Agreement and/or add one or more term loan facilities in an amount not to exceed ~~an incremental~~ $25.0 million in the aggregate, such that the total aggregate principal amount of loans available under the ~~2018~~ Credit Agreement (including under the revolving credit facility) does not exceed ~~$35.0~~$80.0 million. As

On September 8, 2021, in connection with the closing of ~~March 31,~~the AffloVest Acquisition, we borrowed the $30.0 million term loan and utilized that borrowing, together with a draw of $25.0 million under the revolving credit facility and cash on hand, to fund the purchase price.

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

The term loan and amounts drawn under the revolving credit facility bear interest, at our option, at a rate equal to (a) the highest of (i) the prime rate, (ii) the federal funds rate plus 0.50% and (iii) LIBOR for an interest period of one month plus 1% (the “Base Rate”) plus an applicable margin or (b) LIBOR for an interest period of one, three or six months, at our option, plus the applicable margin. The applicable margin is 0.75% to 2.25% on loans bearing interest at the Base Rate and 1.75% to 3.25% on loans bearing interest at LIBOR, in each case depending on our consolidated total leverage ratio. At September 30, 2021, ~~and the date on which we filed this report, we did 0t have any~~all outstanding borrowings ~~under~~were subject to interest at a rate calculated at LIBOR plus an applicable margin equaling 2.8%. Undrawn portions of the ~~2018 Credit Agreement.~~revolving credit facility are subject to an unused line fee at a rate per annum from 0.300% to 0.375%, depending on our consolidated total leverage ratio.

Table of Contents

Maturities of the term loan for the next three years as of September 30, 2021, are as follows:


(In thousands)	Amount
2021 (October 1 - December 31)	$	—
2022		3,000
2023		3,000
2024		24,000
Total	$	30,000

Our obligations under the ~~2018~~ 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 ~~2018~~ Credit Agreement contains a number of restrictions and covenants, including that we maintain compliance with a maximum leverage ratio, minimum fixed charge coverage ratio and a minimum ~~liquidity~~consolidated EBITDA covenant. As of ~~March 31,~~September 30, 2021, we were in compliance with all financial covenants under the ~~2018~~ Credit Agreement.

~~On April 30, 2021, we entered into an Amended and Restated Credit Agreement (the “Restated Credit Agreement”) with Wells Fargo Bank, National Association.The Restated Credit Agreement amends and~~

~~Table of Contents~~

~~restates in its entirety the 2018 Credit Agreement. For additional information on the Restated Credit Agreement, see Note 16 – “Subsequent Event”.~~

Note ~~10.~~11. Commitments and Contingencies

Lease Obligations

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

We classify our leases as buildings, vehicles or computer and office equipment and do not separate lease and nonlease components of contracts for any of the aforementioned classifications. In accordance with applicable guidance, we do not record leases with terms that are less than one year on the Condensed Consolidated Balance 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 one to ~~ten~~nine years as of ~~March 31,~~September 30, 2021.

We entered into a lease (“initial lease”) in October 2018, for approximately 80,000 square feet of office space for our new corporate headquarters in Minneapolis, Minnesota. In December 2018, we amended the initial lease to add approximately 29,000 square feet of additional office space, which is accounted for as a separate lease (“second lease”) in accordance with ASU No. 2016-02, “Leases” (Topic 842) (“ASC 842”). In December 2019, we further amended the lease which extended the expiration date of the initial lease, extended the expiration date of and added approximately 4,000 square feet to the second lease, as well as added approximately 37,000 square feet of additional office space, accounted for as a separate lease (“third lease”) in accordance with ASC 842. The portion of the space covered under the initial lease was placed in service in September 2019. This portion was recognized as an operating lease and included in the ROU operating lease

Table of Contents

assets and operating lease liabilities on the Condensed Consolidated Balance Sheets. The portion of the space covered under the second lease commenced onin September 1, 2020. Finally, the portion of the space covered under the third lease ~~is expected to be occupied and commence~~commenced in ~~the second half of~~September 2021.

Vehicles

We lease vehicles for certain members of our field sales organization under a vehicle fleet program whereby the initial, noncancelable lease is for a term of 367 days, thus more than one year. Subsequent to the initial term, the lease becomes a month-to-month, cancelable lease. As of ~~March 31,~~September 30, 2021, we had approximately 5045 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.

~~Table of Contents~~

Computer and Office Equipment

We also have operating lease agreements for certain computer and office equipment. The remaining lease terms as of ~~March 31,~~September 30, 2021, ranged from less than one year to approximately ~~five~~four years with fixed monthly payments that are included in the ROU operating lease assets and operating lease liabilities. The leases provide an option to purchase the related equipment at fair market value at the end of the lease. The leases will automatically renew as a month-to-month rental at the end of the lease if the equipment is not purchased or returned.

Lease Position, Undiscounted Cash Flow and Supplemental Information

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


(In thousands)	At March 31, 2021		At December 31, 2020		At September 30, 2021		At December 31, 2020
Right of use operating lease assets	$	19,565	$	20,132	$	23,919	$	20,132

Operating lease liabilities:
Current	$	1,966	$	2,006	$	2,412	$	2,006
Non-current		18,910		19,388		23,357		19,388
Total	$	20,876	$	21,394	$	25,769	$	21,394

Operating leases:
Weighted average remaining lease term		9.2 years		9.4 years		8.9 years		9.4 years
Weighted average discount rate		4.4%		4.4%		4.2%		4.4%

	Three Months Ended March 31,				Nine Months Ended September 30,
	2021		2020		2021		2020
Supplemental cash flow information for our operating leases:
Cash paid for operating lease liabilities	$	789	$	463	$	2,411	$	1,849
Non-cash right of use assets obtained in exchange for new operating lease obligations	$	124	$	295	$	6,146	$	6,664

Table of Contents

The table below reconciles the undiscounted cash flows under the operating lease liabilities recorded on the Condensed Consolidated Balance Sheet for the periods presented:


(In thousands)
2021 (April 1 - December 31)	$	2,171
2021 (October 1 - December 31)			$	908
2022		2,598		3,345
2023		2,612		3,274
2024		2,581		3,260
2025		2,660		3,359
Thereafter		12,692		16,653
Total minimum lease payments		25,314		30,799
Less: Amount of lease payments representing interest		(4,438)		(5,030)
Present value of future minimum lease payments		20,876		25,769
Less: Current obligations under operating lease liabilities		(1,966)		(2,412)
Non-current obligations under operating lease liabilities	$	18,910	$	23,357

As of ~~March 31,~~September 30, 2021, we have additional lease commitments of ~~$7.1~~$0.8 million related to amendments to existing building leases that have not yet commenced. 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.

Operating lease costs were ~~$0.8~~$0.9 million and ~~$0.7~~$0.8 million for the three months ended ~~March 31,~~September 30, 2021 and 2020, respectively. Operating lease costs were $2.6 million and $2.1 million for the nine months ended September 30, 2021 and 2020, respectively.

~~Table of Contents~~

Major Vendors

We had purchases from 2 vendors that accounted for ~~33%~~36% of our total purchases for the three months ended ~~March 31, 2021, and~~September 30, 2021. We had purchases from 1 vendor that accounted for 24% of our total purchases for the nine months ended September 30, 2021. We had purchases from 2 vendors that accounted for ~~32%~~31% and 33% of our total purchases for the three and nine months ended ~~March 31, 2020.~~September 30, 2020, respectively.

Purchase Commitments

We issued purchase orders prior to ~~March 31,~~September 30, 2021, totaling ~~$19.8~~$28.4 million for goods that we expect to receive within the next year.

Retirement Plan

We maintain a 401(k) retirement plan for our employees in which eligible employees can contribute a percentage of their pre-tax compensation. We recorded an expense related to our discretionary contributions to the 401(k) plan of $0.3 million and $0.1 million for the three months ended ~~March 31,~~September 30, 2021 and 2020, respectively, and $0.9 million and $0.2 million for the nine months ended September 30, 2021 and 2020, respectively.

Legal Proceedings

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

On February 13, 2019, we were served with a sealed amended complaint venued in the United States District Court for 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 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

Table of Contents

the Federal Anti-Kickback Statute and the Federal False Claims Act, 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 was denied on February 21, 2020. On March 6, 2020, we filed our answer to the complaint and asserted counterclaims. On May 7, 2020, the plaintiff filed a motion to dismiss our counterclaims. On September 8, 2020, we filed a motion for Partial Summary Judgment. On January 2, 2021, the plaintiff filed a motion for Partial Summary Judgment. These motions were decided on March 29, 2021, wherein the court denied plaintiff’s motion to dismiss our counterclaims; granted our motion for Partial Summary Judgment and dismissed Counts I (standalone/direct violation of the Federal Anti-Kickback Statute) and III (violation of the retaliation provision of the Federal False Claims Act) of the complaint; and denied plaintiff’s motion for Partial Summary Judgment. As a result, the remaining allegations consist of those in Count II (violations of the Federal False Claims Act) of the complaint. On August 13, 2021, we filed a motion for summary judgement on the remaining Count II. Plaintiff filed a motion for summary judgement on the counterclaims. These motions are currently pending. We believe the plaintiff’s remaining allegations are without merit and we intend to continue to vigorously defend against the lawsuit.

We and certain of our present or former officers were sued in a purported securities class action lawsuit that was filed in the United States District Court for the District of Minnesota on September 29, 2020, and that is pending under the caption Brian Mart v. Tactile Systems Technology, Inc., et al., File No. 0:20-cv-02074-NEB-BRT. On April 19, 2021, the plaintiff filed an Amended Complaint against us and eight of our present and former officers and directors. Plaintiff seeks to represent a class consisting of investors who purchased our common stock in the market during the time period from May 7, 2018 through June 8, 2020 (“alleged class period”). The Amended Complaint alleges the following claims under the Securities Exchange Act of 1934, as amended (the “Exchange Act”): (1) that we and certain officer defendants made materially false or misleading public statements about our business, operational and compliance policies, and results during the alleged class period in violation of Section 10(b) of the Exchange Act; (2) that we and the individual defendants engaged in a scheme to defraud investors in order to allow the individual defendants to sell our stock in violation of Section 10(b) of the Exchange Act; (3) that the individual defendants engaged in improper insider trading of our stock in violation of Section 20A of the Exchange Act; and (4) that we and the individual defendants are liable under

~~Table of Contents~~

Section 20(a) of the Exchange Act because each defendant is a controlling person. ~~Defendants’ response to the Amended Complaint is due on~~On June 18, ~~2021. We intend to move~~2021, we and the individual defendants filed a motion to dismiss the ~~action.~~Amended Complaint. The motion has not been decided yet.

Note ~~11.~~12. Stockholders' Equity

Stock-Based Compensation

Our 2016 Equity Incentive Plan (the “2016 Plan”) authorizes us to grant stock options, stock appreciation rights, restricted stock, stock units and other stock-based awards to employees, non-employee directors and certain consultants and advisors. There were up to 4,800,000 shares of our common stock initially reserved for issuance pursuant to the 2016 Plan. The 2016 Plan provides that the number of shares reserved and available for issuance under the 2016 Plan will automatically increase annually on January 1 of each calendar year, commencing in 2017 and ending on and including January 1, 2026, by an amount equal to the lesser of: (a) 5% of the number of common shares of stock outstanding as of December 31 of the immediately preceding calendar year, or (b) 2,500,000 shares; provided, however, that our Board of Directors may determine that any annual increase be a lesser number. In addition, all awards granted under our 2007 Omnibus Stock Plan and our 2003 Stock Option Plan that were outstanding when the 2016 Plan became effective and that are forfeited, expired, cancelled, settled for cash or otherwise not issued, will become available for issuance under the 2016 Plan. Pursuant to the automatic increase feature of the 2016 Plan, 972,591 and 952,697 shares were added as available for issuance thereunder on January 1, 2021 and 2020, respectively. As of ~~March 31,~~September 30, 2021, ~~6,345,847~~6,366,806 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.

Table of Contents

In the second fiscal quarter of 2020, our Board of Directors appointed a new President and Chief Executive Officer (“CEO”), effective June 8, 2020. In conjunction with the acceptance of the written offer, our CEO received both restricted stock units and stock option awards under our 2016 Plan during the third fiscal quarter of 2020 and the stock options have a seven year term. A portion of the awards ~~will vest~~vested on June 30, 2021, with the remaining portion of the awards vesting over a period of three years from the date of grant. Further, ~~all of~~ the stock options ~~included in these awards~~were valued at the date of grant using the Monte Carlo Simulation model due to a market condition that required that our stock price ~~exceeded~~exceed $40.15 for 20 consecutive trading days during the term of the option in order to ~~vest, which~~vest. This condition was ~~met~~satisfied in the first quarter of 2021.~~The fair value of stock options subject to the market condition was estimated, at the date of grant, using the Monte Carlo Simulation model.~~

We recorded stock-based compensation expense of ~~$2.5~~$2.6 million and ~~$2.7~~$3.2 million for the three months ended ~~March 31,~~September 30, 2021 and 2020, respectively, and $7.7 million and $8.3 million for the nine months ended September 30, 2021 and 2020, respectively. This expense was allocated as follows:


	Three Months Ended				Three Months Ended				Nine Months Ended
	March 31,				September 30,				September 30,
(In thousands)	2021		2020		2021		2020		2021		2020
Cost of revenue	$	111	$	82	$	171	$	171	$	455	$	358
Sales and marketing expenses		978		1,246		1,081		1,436		2,979		3,915
Research and development expenses		97		88		68		87		224		269
Reimbursement, general and administrative expenses		1,271		1,312		1,268		1,470		4,045		3,746
Total stock-based compensation expense	$	2,457	$	2,728	$	2,588	$	3,164	$	7,703	$	8,288

Stock Options

Stock options issued to participants other than non-employees typically vest over three or four years and typically have a contractual term of seven or ten years. Stock-based compensation expense included in the Condensed Consolidated Statements of Operations for stock options was ~~$1.2~~$1.0 million and ~~$0.9~~$1.1 million for the three months ended ~~March 31,~~September 30, 2021 and 2020, respectively, and $3.3 million and $3.0 million for the nine months ended September 30, 2021 and 2020, respectively. At ~~March 31,~~September 30, 2021, there was approximately ~~$8.8~~$6.4 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 ~~2.1~~1.9 years.

~~Table of Contents~~

Our stock option activity for the ~~three~~nine months ended ~~March 31,~~September 30, 2021, was as follows:


		Weighted-		Weighted-				Weighted-		Weighted-
		Average		Average	Aggregate			Average		Average	Aggregate
	Options	Exercise Price		Remaining	Intrinsic		Options	Exercise Price		Remaining	Intrinsic
(In thousands except options and per share data)	Outstanding	Per Share ⁽¹⁾		Contractual Life	Value ⁽²⁾		Outstanding	Per Share ⁽¹⁾		Contractual Life	Value ⁽²⁾
Balance at December 31, 2020	1,039,709	$	36.43	5.6 years	$	13,381	1,039,709	$	36.43	5.6 years	$	13,381
Granted	132,606	$	51.60				174,755	$	50.88
Exercised	(53,967)	$	24.00		$	1,516	(138,586)	$	25.85		$	3,863
Forfeited	(10,866)	$	46.28				(68,797)	$	48.64
Cancelled/Expired	(5,982)	$	46.18				(30,005)	$	61.13
Balance at March 31, 2021	1,101,500	$	38.72	5.6 years	$	18,893
Balance at September 30, 2021							977,076	$	38.90	5.2 years	$	10,208

Options exercisable at March 31, 2021	546,067	$	30.27	4.7 years	$	14,229
Options exercisable at September 30, 2021							508,184	$	30.45	4.4 years	$	9,229

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

(2)

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

Options exercisable of ~~529,219~~461,138 as of ~~March 31,~~September 30, 2020, had a weighted-average exercise price of ~~$17.88~~$23.35 per share.

Table of Contents

Time-Based Restricted Stock Units

We have granted time-based restricted stock units to certain participants under the 2016 Plan that are stock-settled with common shares. Time-based restricted stock units granted under the 2016 Plan vest over one to three years. Stock-based compensation expense included in the Condensed Consolidated Statements of Operations for time-based restricted stock units was ~~$1.3~~$1.2 million and ~~$1.2~~$1.4 million for the three months ended ~~March 31,~~September 30, 2021 and 2020, respectively, and $3.7 million and $4.0 million for the nine months ended September 30, 2021 and 2020, respectively. ~~As of March 31,~~At September 30, 2021, there was approximately ~~$7.9~~$6.6 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 ~~2.1~~1.9 years.

Our time-based restricted stock unit activity for the ~~three~~nine months ended ~~March 31,~~September 30, 2021, was as follows:


		Weighted-					Weighted-
		Average Grant		Aggregate			Average Grant		Aggregate
	Units	Date Fair Value		Intrinsic		Units	Date Fair Value		Intrinsic
(In thousands except unit and per unit data)	Outstanding	Per Unit		Value ⁽¹⁾		Outstanding	Per Unit		Value ⁽¹⁾
Balance at December 31, 2020	211,469	$	48.29	$	9,503	211,469	$	48.29	$	9,503
Granted	48,893	$	51.60			91,001	$	51.56
Vested	(61,682)	$	49.49			(94,517)	$	47.99
Cancelled	(3,382)	$	54.25			(24,161)	$	51.29
Balance at March 31, 2021	195,298	$	48.63	$	10,642
Balance at September 30, 2021						183,792	$	49.66	$	8,170

Deferred and unissued at March 31, 2021⁽²⁾	6,469	$	38.94	$	352
Deferred and unissued at September 30, 2021⁽²⁾						6,469	$	38.94	$	288

(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)

For the ~~three~~nine months ended ~~March 31,~~September 30, 2021, there were 0 restricted stock units granted to non-employee directors in lieu of their quarterly cash retainer payments. As of ~~March 31,~~September 30, 2021, there were 6,469 outstanding restricted stock units that had been previously granted to non-employee directors in lieu of their quarterly cash retainer payments.

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

~~Table of Contents~~

2018 were earned to the extent performance goals based on revenue and adjusted EBITDA were achieved in 2019. The PSUs granted in 2019 would have been earned to the extent performance goals based on revenue and adjusted EBITDA were achieved in 2020, but none were so earned. The PSUs granted in 2020 will be earned if and to the extent performance goals based on revenue and adjusted EBITDA are achieved in 2021. The PSUs granted in 2021 will be earned if and to the extent performance goals based on revenue and adjusted EBITDA are achieved in 2022. The number of PSUs earned will depend on the level at which the performance targets are achieved and can range from 50% of target if the minimum performance threshold is achieved and up to 150% of target if maximum performance is achieved. One-third of the earned PSUs will vest on the date the Compensation and Organization Committee certifies the number of PSUs earned, and the remaining two-thirds of the earned PSUs will vest on the first anniversary of that certification date. All earned and vested PSUs will be settled in shares of common stock.

Stock-based compensation expense recognized for PSUs was ~~a benefit of $0.3 million and~~ an expense of $0.2 million and $0.4 million for the three months ended ~~March 31,~~September 30, 2021 and 2020, respectively, and less than $0.1 million and $0.5 million for the nine months ended September 30, 2021 and 2020, respectively. The stock-based compensation ~~benefit~~expense for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 reflected a $0.5 million benefit due to a change in the estimated payout associated with PSUs granted in 2020 being below the minimum performance target threshold level, as defined, partially offset by an expense of ~~$0.2~~$0.5 million related to the PSUs granted in 2018 and 2021. ~~As of March 31,~~At September 30, 2021, there was approximately ~~$1.8~~$1.5 million of total unrecognized pre-tax compensation expense related to outstanding PSUs that is expected to be recognized over a weighted average period of ~~2.9~~2.4 years.

Table of Contents

Our performance-based restricted stock unit activity for the ~~three~~nine months ended ~~March 31,~~September 30, 2021, was as follows:


	Performance-	Weighted-				Performance-	Weighted-
	Based	Average Grant		Aggregate		Based	Average Grant		Aggregate
	Units	Date Fair Value		Intrinsic		Units	Date Fair Value		Intrinsic
(In thousands except unit and per unit data)	Outstanding	Per Unit		Value ⁽¹⁾		Outstanding	Per Unit		Value ⁽¹⁾
Balance at December 31, 2020	79,303	$	47.83	$	3,564	79,303	$	47.83	$	3,564
Granted	35,929	$	51.60			39,419	$	51.82
Vested	(34,159)	$	33.98			(34,159)	$	33.98
Cancelled	(19,032)	$	69.17			(23,936)	$	65.43
Balance at March 31, 2021	62,041	$	51.10	$	3,381
Balance at September 30, 2021						60,627	$	51.28	$	2,695

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

Employee Stock Purchase Plan

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

A total of 1,600,000 shares of common stock was initially reserved for issuance under the ESPP. This share reserve will automatically be supplemented each January 1, commencing in 2017 and ending on and including January 1, 2026, by an amount equal to the least of (a) 1% of the shares of our common stock outstanding on the immediately preceding December 31, (b) 500,000 shares or (c) such lesser amount as our Board of Directors may determine. Pursuant to the automatic increase feature of the ESPP, 194,518 and 190,539 shares were added as available for issuance thereunder on January 1, 2021 and 2020, respectively. As of ~~March 31,~~September 30, 2021, ~~1,782,422~~1,740,328 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 ~~$0.2~~$0.3 million for the three months ended ~~March 31,~~September 30, 2021 and 2020, respectively, and $0.6 million and $0.8 million for the nine months ended September 30, 2021 and 2020, respectively.

1823

Table of Contents

Note ~~12.~~13. Revenue

We derive our revenue from the sale and rental of our ~~compression~~ products to our customers in the United States. The following table presents our revenue, inclusive of sales and rental revenue, disaggregated by product categories:


	Three Months Ended				Three Months Ended				Nine Months Ended
	March 31,				September 30,				September 30,
(In thousands)	2021		2020		2021		2020		2021		2020
Revenue
Flexitouch system	$	37,437	$	38,586	$	44,014	$	42,908	$	126,544	$	112,621
Other products⁽¹⁾		5,335		5,089
Entre system						7,622		6,184		18,924		15,266
AffloVest						861		—		861		—
Total	$	42,772	$	43,675	$	52,497	$	49,092	$	146,329	$	127,887

Percentage of total revenue
Flexitouch system		88%		88%		84%		87%		86%		88%
Other products⁽¹⁾		12%		12%
Entre system						14%		13%		13%		12%
AffloVest						2%		— %		1%		— %
Total		100%		100%		100%		100%		100%		100%

~~(1)~~

The “other products” line primarily includes revenue from our Entre system. The Actitouch system and the Airwear wrap contributed immaterial amounts of revenue for each of the three months ended March 31, 2021 and 2020.

~~Rental revenue for the three months ended March 31, 2021 and 2020, was primarily from private insurers.~~ Our revenue ~~from third-party payers,~~by channel, inclusive of sales and rental revenue, for the three and nine months ended ~~March 31,~~September 30, 2021 and 2020, are summarized in the following table:


	Three Months Ended				Three Months Ended				Nine Months Ended
	March 31,				September 30,				September 30,
(In thousands)	2021		2020		2021		2020		2021		2020
Private insurers and other payers	$	28,283	$	30,237	$	36,034	$	34,554	$	99,665	$	90,459
Veterans Administration		5,846		7,058		6,737		6,788		19,905		18,168
Medicare		8,643		6,380		8,865		7,750		25,898		19,260
Durable medical equipment distributors						861		—		861		—
Total	$	42,772	$	43,675	$	52,497	$	49,092	$	146,329	$	127,887

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

The revenue and associated cost of revenue of sales-type leases are recognized on the lease commencement date and a net investment in leases is recorded on the Condensed Consolidated Balance Sheet. We bill the patients’ insurance payers monthly over the duration of the rental term. We record the net investment in leases and recognize revenue upon commencement of the lease in the amount of the expected consideration to be received through the monthly payments. Similar to our sales revenue, the transaction price is impacted by multiple factors, including the terms and conditions contracted by third party payers. As the rental contract resides with the patients, we have elected the portfolio approach, at the payer level, to determine the expected consideration, which considers the impact of early terminations. While the contract is with the patient, in certain circumstances, the third party payer elects an initial rental period with an option to extend. We assess the likelihood of extending the lease at the onset of the lease to determine if the option is reasonably certain to be exercised. As the lease is short-term in nature, we anticipate collection of substantially all of the net investment within the first year of the lease agreement. Completion of these payments represents the fair market value of the equipment, and as such, interest income is not applicable.

1924

Table of Contents

Rental revenue for the three and nine months ended September 30, 2021 and 2020, was primarily from private insurers. Sales-type lease revenue and the associated cost of revenue for the three and nine months ended ~~March 31,~~September 30, 2021 and 2020, was:


	Three Months Ended March 31,				Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2021		2020		2021		2020		2021		2020
Sales-type lease revenue	$	6,647	$	6,052	$	8,037	$	6,519	$	22,114	$	18,173
Cost of sales-type lease revenue		1,851		1,680		2,433		2,562		6,501		6,062
Gross profit	$	4,796	$	4,372	$	5,604	$	3,957	$	15,613	$	12,111

Note ~~13.~~14. Income Taxes

We record our interim provision for income taxes by applying our estimated annual effective tax rate to our year-to-date pre-tax income and adjusting for discrete tax items recorded in the period. Deferred income taxes result from temporary differences between the reporting of amounts for financial statement purposes and income tax purposes. These differences relate primarily to different methods used for income tax reporting purposes, including for depreciation and amortization, warranty and vacation accruals, and deductions related to allowances for doubtful accounts receivable and inventory reserves. Our provision for income taxes included current federal and state income tax expense, as well as deferred federal and state income tax expense.

The effective tax rate for the three months ended ~~March 31,~~September 30, 2021, was ~~a benefit~~an expense of ~~44.7%~~126%, compared to a benefit of ~~68.8%~~55% for the three months ended ~~March 31,~~September 30, 2020. The primary ~~drivers~~driver of the change in our effective tax rate is primarily attributable to a change in projected taxable income. We recorded an income tax expense of $1.9 million and a benefit of $0.8 million for the three months ended September 30, 2021 and 2020, respectively.

The effective tax rate for the nine months ended September 30, 2021, was a benefit of 24%, compared to an expense of 17% for the nine months ended September 30, 2020. The primary driver of the change in our effective tax rate is attributable to recording a benefit in the nine months ended September 30, 2021, to recognize a tax credit for a research and development credit study conducted for tax years 2017-2020 as well as a change in ~~the~~ deductibility of business meals to 100% in 2021 ~~from~~compared to 50% in 2020. ~~We also recorded additional tax benefit in the first quarter of 2020 related to a tax refund for a net operating loss carryback claim.~~ We recorded an income tax benefit of ~~$1.8~~$1.4 million and ~~a benefit~~an expense of ~~$2.9~~$2.3 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 and 2020, 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 September 30, 2021, tax contingencies related to federal and state credits recorded within the Condensed Consolidated Balance Sheets were $0.5 million. Changes in tax laws, regulations, administrative practices, principles, and interpretations may impact our tax contingencies. The timing of the resolution of income tax controversies is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts accrued.

We are ~~not~~ currently under examination ~~in any jurisdiction.~~by the New York Department of Taxation and Finance for tax years 2017, 2018, and 2019. The examination may lead to proposed adjustments to our taxes or our net operating losses with respect to years under examination as well as subsequent periods. In the event of any future tax assessments, we have elected to record the income taxes and any related interest and penalties as income tax expense on our statement of operations.

~~Note 14. Net Loss Per Share~~

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

Three Months Ended

March 31,
(In thousands, except share and per share data)
2021

2020
Net loss
$
(2,266)

$
(1,307)
Weighted-average shares outstanding

19,545,558

19,173,580
Dilutive effect of stock-based awards

—

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

19,545,558

19,173,580
Net loss per share - Basic
$
(0.12)

$
(0.07)
Net loss per share - Diluted
$
(0.12)

$
(0.07)

2025

Table of Contents

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

Three Months Ended

March 31,

2021

2020
Restricted stock units

201,767

237,709
Common stock options

1,101,500

1,071,148
Performance stock units

62,041

123,212
Employee stock purchase plan

41,278

44,607
Total

1,406,586

1,476,676

Note 15. Net (Loss) Income Per Share

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands, except share and per share data)	2021		2020		2021		2020
Net (loss) income	$	(3,355)	$	2,424	$	(4,316)	$	(12,733)
Weighted-average shares outstanding		19,790,838		19,415,640		19,676,749		19,309,344
Dilutive effect of stock-based awards		—		331,725		—		—
Weighted-average shares used to compute diluted net (loss) income per share		19,790,838		19,747,365		19,676,749		19,309,344
Net (loss) income per share - Basic	$	(0.17)	$	0.12	$	(0.22)	$	(0.66)
Net (loss) income per share - Diluted	$	(0.17)	$	0.12	$	(0.22)	$	(0.66)

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


	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2021	2020	2021	2020
Restricted stock units	190,261	104,786	190,261	223,776
Common stock options	977,076	594,117	977,076	982,182
Performance stock units	60,627	38,666	60,627	113,646
Employee stock purchase plan	38,325	60,196	33,931	48,360
Total	1,266,289	797,765	1,261,895	1,367,964

Note ~~15.~~16. 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). As of September 30, 2021, we no longer had any money market mutal funds.

The following provides information regarding fair value measurements for our cash equivalents as of ~~March 31, 2021, and~~ December 31, 2020, according to the three-level fair value hierarchy:

At March 31, 2021


Quoted Prices






in Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

Assets

Inputs

Inputs

(In thousands)

(Level 1)

(Level 2)

(Level 3)

Total
Recurring Fair Value Measurements:

Money market mutual funds

$
16,189

$
—

$
—

$
16,189
Total

$
16,189

$
—

$
—

$
16,189


	At December 31, 2020
	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	$	16,188	$	—	$	—	$	16,188
Total	$	16,188	$	—	$	—	$	16,188

Table of Contents

During the three and nine months ended ~~March 31,~~September 30, 2021, there were 0 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.

~~Table of Contents~~

The fair value of our money market mutual funds is 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 June 30, 2020, we re-measured the value of our intangible assets related to the Airwear wrap product line to their fair value, which was deemed to be $0.

~~Note 16. Subsequent Event~~

~~On April 30, 2021, we entered into~~We have obligations to pay up to $20.0 million in earn-out payments in cash if certain future financial results of the ~~Restated Credit Agreement with~~AffloVest business are met. The earn-out liability was valued using Level 3 inputs. The fair value of the ~~lenders from time to time party thereto, and Wells Fargo Bank, National Association,~~earn-out was determined by employing a Monte Carlo Simulation model in a risk-neutral framework. The underlying simulated variable includes recognized revenue. The recognized revenue volatility estimate was based on a study of historical asset volatility for a set of comparable public companies. The model includes other assumptions including the market price of risk, which was calculated as ~~Administrative Agent.The Restated Credit Agreement amends and restates in its entirety~~ the ~~2018 Credit Agreement.~~weighted average cost of capital less the long-term risk free rate.

The Restated Credit Agreement provides for a $25 million revolving credit facility. The revolving credit facility matures on April 30, 2024. Subject to satisfaction of certain conditions, we may increase the amount of the revolving loans available under the Restated Credit Agreement and/or add one or more term loan facilities in an amount not to exceed $30 million in the aggregate, such that the total aggregate principal amount of loans available under the Restated Credit Agreement (including under the revolving credit facility) does not exceed $55 million.

Amounts drawn under the revolving credit facility will 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 0.65% to 1.40% on loans bearing interest at the Base Rate and 1.65% to 2.40% 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 0.300% to 0.375%, depending on our consolidated total leverage ratio.

~~Our obligations under the Restated Credit Agreement are secured by a security interest in substantially all of our assets and those of our subsidiaries and will also be guaranteed by our subsidiaries.~~

The Restated Credit Agreement limits our ability to make capital expenditures during a fiscal year in excess of the amounts set forth in the Restated Credit Agreement, and requires that we (i) not permit, as of the last day of each fiscal quarter, our consolidated total leverage ratio to exceed 3.00 to 1.00 and (ii) maintain minimum cash and cash equivalents, measured on the last day of each fiscal quarter, of not less than $5 million.

The Restated Credit Agreement also contains certain other restrictions and covenants, which, among other things, restrict our ability to acquire or merge with another entity, dispose of our assets, make investments, loans or guarantees, incur additional indebtedness, create liens or other encumbrances, or pay dividends or make other distributions.

Amounts due under the Restated Credit Agreement may be accelerated upon an Event of Default (as defined in the Restated Credit Agreement), such as breach of a representation, covenant or agreement of ours, defaults with respect to certain of our other material indebtedness or the occurrence of bankruptcy if not otherwise waived or cured.

We may use the proceeds from advances under the revolving credit facility (i) to finance capital expenditures, (ii) to pay fees, commissions and expenses in connection with the Restated Credit Agreement and (iii) for working capital and general corporate purposes.

2227

Table of Contents

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 the condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this report.

Coronavirus (COVID-19)

Since the onset of COVID-19, we have remained proactive to ensure we continue to adapt to the needs of our employees, clinicians and patients. ~~These~~For a detailed listing of the changes to our business practices since the onset of the pandemic, refer to previous reports filed with the Securities and Exchange Commission. Continued modifications to our business include, but are not limited to:

●

Initially modifying our operations with the primary focus on keeping our employees safe while continuing to serve our clinicians and patients. As an essential business under federal guidelines, we continued to manufacture product and implemented multiple, smaller rotational shifts and other best practices to help protect the health and safety of our workforce. More recently, however, we have migrated closer to our pre-COVID work shifts, implementing more stringent safety measures including mandatory use of face masks, social distancing and temperature checks for our employees.

●

Incorporating remote and flexible work arrangements for employees whenever possible, including real-time, online training of our new sales representatives. In addition, ~~with the increase in the rollout of vaccines and evolving CDC guidance,~~ we ~~have begun to develop~~are actively developing our long-term in-office and remote work strategy with the goal of launching it in ~~the second half of 2021.~~2022.

●

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

●

~~Continuing to collaborate with payers to modify coverage requirements to allow us to serve patients virtually.~~

●

Utilizing a mix of employee trainers and independent healthcare practitioners to educate patients on the proper use of our solutions virtually or in-person, as required. This is a transition from our initial response to the COVID-19 social distancing requirements and recommendations, which required we initially move to a “no contact” virtual patient training model to substantially reduce the need for in-person contact and visits to patients’ homes and clinics in order to protect the health and limit the exposure of both our trainers and patients.in-person.

●

Continuing to host large virtual medical education programs, ~~in place of formerly~~while also beginning to schedule smaller in-person meetings.

●

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

●

Following government guidelines related to vaccinations of our staff, as well as the needs of our patients and customers.

2328

Table of Contents

Overview

We are a medical technology company that develops and provides innovative medical devices for the treatment of underserved 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~~areas of therapeutic focus isare (1) vascular disease, with a goal of advancing the standard of care in treating lymphedema and chronic venous ~~insufficiency.~~insufficiency, (2) oncology, where lymphedema is a common consequence among survivors and (3) providing airway clearance therapy for those suffering from chronic respiratory conditions. 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 current products are the Flexitouch system, Entre system and ~~Entre system.~~AffloVest. 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. In December 2020, we received 510(k) clearance for two new indications for our Flexitouch Plus system: phlebolymphedema and lipedema. We derive the vast majority of our revenue from our Flexitouch system. Sales and rentals of our Flexitouch system represented 86% and 88% of our revenue in ~~each of~~ the ~~three~~nine months ended ~~March 31,~~September 30, 2021 and ~~2020.~~2020, respectively.

We introduced our Entre system in the United States in February 2013. The Entre system is sold or rented to patients who need a simple pump or who do not yet qualify for insurance reimbursement for an advanced compression device such as our Flexitouch system. For ~~each of~~ the ~~three~~nine months ended ~~March 31,~~September 30, 2021 and 2020, sales and rentals of our Entre system represented 13% and 12% of our revenue, respectively.

On September 8, 2021, we acquired the assets of the AffloVest respiratory therapy product line from International Biophysics Corporation (“IBC”), a privately-held company which developed and manufactures AffloVest. AffloVest is a portable, wearable vest that treats patients with chronic respiratory conditions such as COPD-associated breathing conditions like bronchiectasis, or conditions resulting from neuromuscular disorders and cystic fibrosis, by managing airway clearance. For the nine months ended September 30, 2021, sales of our AffloVest represented 1% our revenue.

In October 2018, we licensed, from Sun Scientific, Inc., the intellectual property rights related to the Airwear Gradient Compression Wrap, or the Airwear wrap, in the United States 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. In the second quarter of 2020, we reevaluated the Airwear wrap go-to market plan, and determined to focus our strategy on more advanced solutions within our core, long-standing Flexitouch and Entre franchises. Accordingly, we made the strategic decision to discontinue the Airwear wrap in the second quarter of 2020. Due to the planned discontinuation of the product line, we recorded a $4.0 million non-cash impairment charge to fully write-off the inventory and long-lived assets of the Airwear wrap in the quarter ended June 30, 2020. Further, effective July 31, 2020, Sun Scientific, Inc. terminated the license agreement with us related to the Airwear wrap. See Note 8 - “Intangible Assets” to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020 for more information regarding this impairment charge and discontinuation.

To support the growth of our business, we invest heavily in our commercial infrastructure, consisting of our direct sales force, training resources, reimbursement capabilities and clinical expertise. We market our Flexitouch and Entre products in the United States using a direct-to-patient and -provider model. Our field commercial team consists of our direct sales force and a team of Field Support Specialists. ~~Our collective field commercial team has grown to over 295 employees as of March 31, 2021, compared to 285 employees as of December 31, 2020. This model allows us to directly approach patients~~The AffloVest device is sold through home medical equipment and ~~clinicians, whereby we disintermediate the traditional~~ durable medical equipment ~~channel, allowing us to capture both~~providers throughout the ~~manufacturer and distributor margins.~~

In the first quarter of 2021, we began to utilize a mix of employee trainers and independent healthcare practitioners to educate patients on the proper use of our solutions virtually or in-person, as required. This is a transition from our initial response to the COVID-19 social distancing requirements and recommendations, which required we initially move to a “no contact” virtual patient training model to substantially reduce the need for in-person contact and visits to patients’ homes and clinics.United

2429

Table of Contents

States.In the quarter ended September 30, 2021, our direct sales force experienced increased turnover and difficulty in recruiting qualified replacements. As a result, we had fewer direct sales representatives on September 30, 2021 compared to September 30, 2020. We believe this to be a temporary condition. Our collective field commercial team, including our respiratory sales force, has grown to over 335 employees as of September 30, 2021, compared to 285 employees as of December 31, 2020.

As it relates to the impact of COVID-19 on our ~~first quarter~~ commercial processes, in the first half of 2021, we continued to see a certain number of healthcare facilities and clinics with restricted access to their clinicians, reduced patient consultations and treatments, or temporary closures due to the pandemic. We also continued to see some of the restrictions loosen, in line with the applicable governmental regulations. Conversely, in the third quarter of 2021, we were adversely impacted by the resurgence of the Delta variant resulting in renewed patient cancellations, absenteeism of staff and access limitations implemented by clinics and health systems. As ~~most of our clinician customers practice outside of~~ a ~~hospital,~~result, we ~~can interact with clinicians and patients on a~~continue to engage in virtual ~~basis, using video conferencing and other non-direct means.~~interactions if possible. We expect these virtual interactions with clinicians and patients to continue into the future until the pandemic subsides, and perhaps as a best practice in the future. To that end, we plan to continue to work towards expanding our commercial organization ~~throughout~~through the ~~first half~~remainder of 2021 and into 2022 by adding to our ~~direct sales force.~~overall commercial team.

We invest substantial resources in our reimbursement function to improve operational efficiencies and enhance individual payer expertise, while continuing our strategic focus of payer development. Our payer relations function focuses on payer policy development, education, contract negotiations, and data analysis. Our reimbursement operations function is responsible for verifying patient insurance benefits, individual patient case development, prior authorization submissions, case follow-up, and appeals when necessary. Since the onset of COVID-19, our reimbursement function has been actively working with Medicare and a broad base of private payers to understand the ever-changing reimbursement criteria being introduced. We have seen increased flexibility in coverage criteria with select payers in which they now allow the use of virtual patient interactions in place of the previously required in-person interactions. However, as these circumstances are ever-changing, the extent to which these changes will remain in place and the impact on our business in the future are not determinable at this time.

We also have a clinical team, consisting of a scientific advisory board, in-house therapists and nurses, and a ~~medical director~~Chief Medical Officer (part-time), that serves as a resource to clinicians and patients and guides the development of clinical evidence in support of our products. Most clinical studies require observation and interaction with clinicians and patients to monitor results and progress. Given the impact of COVID-19, patient recruitment for our clinical studies involving our products and clinical outcomes had previously been suspended in 2020. ~~However, in the first quarter of~~In 2021, ~~approximately half~~all of our clinical ~~trial sites had~~trials have resumed research activities, ~~as the healthcare provider staff are being reallocated from COVID-19 response teams or furloughs back to research activities. Study~~including study visits and new patient enrollments, ~~are gradually resuming,~~ albeit more slowly than the targeted enrollment rates.

We rely on third party contract manufacturers for the sourcing of parts, the assembly of our controllers and the manufacturing of the garments used with our 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. The AffloVest device is currently manufactured and shipped by a third party, IBC, pursuant to a Transition Services Agreement. We plan for IBC to continue to manufacture the product on our behalf through the first half of 2022 and we will begin to take over the shipping of products in the fourth quarter of 2021.

To date, our supply chain has not been materially impacted by COVID-19. We continue to receive our product on time and believe that we have enough safety stock to meet our short and mid-term demand. However, we cannot assure you that our supply chain will not be materially impacted in the future.

For the three months ended ~~March 31,~~September 30, 2021, we generated revenue of ~~$42.8~~$52.5 million and had a net loss of ~~$2.3~~$3.4 million, compared to revenue of ~~$43.7~~$49.1 million and net income of $2.4 million for the three months ended September 30, 2020. For the nine months ended September 30, 2021, we generated revenue of $146.3 million and had a net loss of $4.3 million, compared to revenue of $127.9 million and a net loss of ~~$1.3~~$12.7 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2020. Our primary sources of capital ~~to date~~since inception have been from 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.

2530

Table of Contents

Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2021 and 2020

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


	Three Months Ended
	September 30,								Change
(In thousands)	2021				2020				$		%
Condensed Consolidated Statement			% of				% of
of Operations Data:			revenue				revenue
Revenue
Sales revenue	$	44,460	85	%	$	42,573	87	%	$	1,887	4	%
Rental revenue		8,037	15	%		6,519	13	%		1,518	23	%
Total revenue		52,497	100	%		49,092	100	%		3,405	7	%
Cost of revenue
Cost of sales revenue		13,096	25	%		11,558	24	%		1,538	13	%
Cost of rental revenue		2,433	5	%		2,562	5	%		(129)	(5)	%
Total cost of revenue		15,529	30	%		14,120	29	%		1,409	10	%
Gross profit
Gross profit - sales revenue		31,364	60	%		31,015	63	%		349	1	%
Gross profit - rental revenue		5,604	10	%		3,957	8	%		1,647	42	%
Gross profit		36,968	70	%		34,972	71	%		1,996	6	%
Operating expenses
Sales and marketing		22,231	42	%		19,488	40	%		2,743	14	%
Research and development		1,409	3	%		1,102	2	%		307	28	%
Reimbursement, general and administrative		14,500	28	%		12,539	26	%		1,961	16	%
Intangible asset amortization		195	—	%		49	—	%		146	N.M.	%
Total operating expenses		38,335	73	%		33,178	68	%		5,157	16	%
(Loss) income from operations		(1,367)	(3)	%		1,794	3	%		(3,161)	(176)	%
Other expense		(120)	—	%		(121)	—	%		1	(1)	%
(Loss) income before income taxes		(1,487)	(3)	%		1,673	3	%		(3,160)	(189)	%
Income tax expense (benefit)		1,868	3	%		(751)	(2)	%		2,619	N.M.	%
Net (loss) income	$	(3,355)	(6)	%	$	2,424	5	%	$	(5,779)	N.M.	%

“N.M.” Not Meaningful

Table of Contents

~~Results of Operations~~


	Nine Months Ended
	September 30,								Change
(In thousands)	2021				2020				$		%
Condensed Consolidated Statement			% of				% of
of Operations Data:			revenue				revenue
Revenue
Sales revenue	$	124,215	85	%	$	109,714	86	%	$	14,501	13	%
Rental revenue		22,114	15	%		18,173	14	%		3,941	22	%
Total revenue		146,329	100	%		127,887	100	%		18,442	14	%
Cost of revenue
Cost of sales revenue		36,425	25	%		30,868	24	%		5,557	18	%
Cost of rental revenue		6,501	4	%		6,062	5	%		439	7	%
Total cost of revenue		42,926	29	%		36,930	29	%		5,996	16	%
Gross profit
Gross profit - sales revenue		87,790	60	%		78,846	62	%		8,944	11	%
Gross profit - rental revenue		15,613	11	%		12,111	9	%		3,502	29	%
Gross profit		103,403	71	%		90,957	71	%		12,446	14	%
Operating expenses
Sales and marketing		61,949	42	%		59,856	47	%		2,093	3	%
Research and development		3,885	3	%		3,891	3	%		(6)	(0)	%
Reimbursement, general and administrative		42,802	30	%		37,682	29	%		5,120	14	%
Intangible asset amortization		294	—	%		148	—	%		146	99	%
Total operating expenses		108,930	75	%		101,577	79	%		7,353	7	%
Loss from operations		(5,527)	(4)	%		(10,620)	(8)	%		5,093	(48)	%
Other (expense) income		(154)	—	%		181	—	%		(335)	(185)	%
Loss before income taxes		(5,681)	(4)	%		(10,439)	(8)	%		4,758	(46)	%
Income tax (benefit) expense		(1,365)	(1)	%		2,294	2	%		(3,659)	(160)	%
Net loss	$	(4,316)	(3)	%	$	(12,733)	(10)	%	$	8,417	(66)	%

~~Comparison of the Three Months Ended March 31, 2021 and 2020~~

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

Three Months Ended

March 31,

Change
(In thousands)

2021

2020

$

%
Condensed Consolidated Statement

% of

% of

of Operations Data:

revenue

revenue

Revenue

Sales revenue

$
36,125

84
%

$
37,623

86
%

$
(1,498)

(4)
%
Rental revenue

6,647

16
%

6,052

14
%

595

10
%
Total revenue

42,772

100
%

43,675

100
%

(903)

(2)
%
Cost of revenue

Cost of sales revenue

10,691

25
%

10,922

25
%

(231)

(2)
%
Cost of rental revenue

1,851

4
%

1,680

4
%

171

10
%
Total cost of revenue

12,542

29
%

12,602

29
%

(60)

(0.5)
%
Gross profit

Gross profit - sales revenue

25,434

59
%

26,701

61
%

(1,267)

(5)
%
Gross profit - rental revenue

4,796

12
%

4,372

10
%

424

10
%
Gross profit

30,230

71
%

31,073

71
%

(843)

(3)
%
Operating expenses

Sales and marketing

18,785

44
%

22,970

53
%

(4,185)

(18)
%
Research and development

1,270

3
%

1,684

4
%

(414)

(25)
%
Reimbursement, general and administrative

14,259

33
%

10,870

25
%

3,389

31
%
Total operating expenses

34,314

80
%

35,524

82
%

(1,210)

(3)
%
Loss from operations

(4,084)

(9)
%

(4,451)

(11)
%

367

(8)
%
Other (expense) income

(10)

—
%

266

1
%

(276)

(104)
%
Loss before income taxes

(4,094)

(9)
%

(4,185)

(10)
%

91

(2)
%
Income tax benefit

(1,828)

(4)
%

(2,878)

(7)
%

1,050

(36)
%
Net loss

$
(2,266)

(5)
%

$
(1,307)

(3)
%

$
(959)

73
%

2632

Table of Contents

Revenue

Revenue ~~decreased $0.9~~increased $3.4 million, or 2%7%, to ~~$42.8~~$52.5 million in the three months ended ~~March 31,~~September 30, 2021, compared to ~~$43.7~~$49.1 million in the three months ended ~~March 31,~~September 30, 2020. The ~~decrease~~increase in total revenue was attributable to ~~a decrease~~an increase of $1.1 million, or 3%, in sales and rentals of the Flexitouch system, ~~offset partially by~~ an increase of ~~$0.2~~$1.4 million, or 5%23%, in sales and rentals of the Entre system and $0.9 million in sales of the recently acquired AffloVest in the quarter ended ~~March 31,~~September 30, 2021. ~~First~~Third quarter 2021 revenue ~~continued to be negatively impacted by COVID-19, primarily~~benefited from ~~social distancing requirements and safety protocols imposed within clinics. The decrease in first quarter revenue was partially offset by the continued expansion of our field commercial team,~~ effective virtual ~~educational~~education events and an increase in ~~the number of~~ Medicare patients served. Third quarter 2021 revenue was negatively impacted by the prolonged recovery from COVID-19, including the resurgence due to the Delta variant during the period, which resulted in restricted access to clinics and hospitals and disrupted the recovery in patient visits versus the pre-COVID environment. In addition, the challenging labor market impacted our ability to recruit and retain quality candidates for our direct sales force.

Revenue increased $18.4 million, or 14%, to $146.3 million in the nine months ended September 30, 2021, compared to $127.9 million in the nine months ended September 30, 2020. The increase was primarily attributable to an increase of $13.9 million, or 12%, in sales and rentals of our Flexitouch system, an increase of $3.7 million, or 24%, in sales and rentals of the Entre system and $0.9 million in sales of the recently acquired AffloVest for the nine months ended September 30, 2021. Revenue for the first half of 2021 benefited from the initial stages of recovery from the COVID-19 pandemic, with a portion of healthcare facilities and clinics relaxing restrictions and increasing patient throughput, as well as an expanded prescriber base. However, in the third quarter of 2021 revenue was negatively impacted by the prolonged recovery from COVID-19, including the resurgence due to the Delta variant during the period, which resulted in restricted access to clinics and hospitals and disrupted the recovery in patient visits versus the pre-COVID environment. In addition, the challenging labor market impacted our ability to recruit and retain quality candidates for our direct sales force.

Revenue from the Veterans Administration represented 13% and 14% of total revenue in the three months ended September 30, 2021 and 2020, respectively. Revenue from the Veterans Administration represented 14% of total revenue in each of the nine months ended September 30, 2021 and 2020. Revenue from Medicare represented 17% and 16% of total revenue in the three months ended ~~March 31,~~September 30, 2021 and 2020, respectively. Revenue from Medicare represented ~~20%~~18% and 15% of total revenue in the ~~three~~nine months ended ~~March 31,~~September 30, 2021 and 2020, respectively.

The following table summarizes our revenue by product for the three and nine months ended ~~March 31,~~September 30, 2021 and 2020, both in dollars and percentage of total revenue:


	Three Months Ended							Three Months Ended
	March 31,				Change			September 30,				Change
(In thousands)	2021		2020		$		%	2021		2020		$		%
Revenue
Flexitouch system	$	37,437	$	38,586	$	(1,149)	(3)%	$	44,014	$	42,908	$	1,106	3%
Other products⁽¹⁾		5,335		5,089		246	5%
Entre system									7,622		6,184		1,438	23%
AffloVest									861		—		861	N.M.
Total	$	42,772	$	43,675	$	(903)	(2)%	$	52,497	$	49,092	$	3,405	7%

Percentage of total revenue
Flexitouch system		88%		88%					84%		87%
Other products⁽¹⁾		12%		12%
Entre system									14%		13%
AffloVest									2%		0%
Total		100%		100%					100%		100%

“N.M.” Not Meaningful

~~(1)~~

Table of Contents


	Nine Months Ended
	September 30,				Change
(In thousands)	2021		2020		$		%
Revenue
Flexitouch system	$	126,544	$	112,621	$	13,923	12%
Entre system		18,924		15,266		3,658	24%
AffloVest		861		—		861	N.M.
Total	$	146,329	$	127,887	$	18,442	14%

Percentage of total revenues
Flexitouch system		86%		88%
Entre system		13%		12%
AffloVest		1%		0%
Total		100%		100%

“N.M.” Not Meaningful

Cost of Revenue and Gross Margin

Cost of revenue ~~decreased $0.1~~increased $1.4 million, or ~~0.5%~~10%, to ~~$12.5~~$15.5 million in the three months ended ~~March 31,~~September 30, 2021, compared to ~~$12.6~~$14.1 million in the three months ended ~~March 31,~~September 30, 2020. Cost of revenue increased $6.0 million, or 16%, to $42.9 million in the nine months ended September 30, 2021, compared to $36.9 million in the nine months ended September 30, 2020. The ~~decrease~~increase in cost of revenue in both periods was primarily attributable to ~~a decrease~~an increase in the number of Flexitouch and Entre systems sold and rented, ~~slightly offset by~~the additional contribution of AffloVest, and an increase in ~~Entre system sales and rentals.~~ inbound freight costs.

~~Total~~The total gross margin rate was 70% and 71% of ~~revenue~~sales in the three months ended September 30, 2021 and 2020, respectively, and 71% of sales in each of the ~~three~~nine months ended ~~March 31,~~September 30, 2021 and 2020.

Sales and Marketing Expenses

Sales and marketing expenses increased $2.7 million, or 14%, to $22.2 million in the three months ended September 30, 2021, compared to $19.5 million in the three months ended September 30, 2020. The increase was primarily attributable to a:

●

$1.3 million increase in personnel-related compensation expense as a result of the increased headcount in the collective field commercial team, including sales personnel associated with the AffloVest acquisition; and

●

$1.4 million increase in other selling expenses, driven mostly by increased meetings, travel and entertainment expenses.

Sales and marketing expenses increased $2.1 million, or 3%, to $61.9 million in the nine months ended September 30, 2021, compared to $59.9 million in the nine months ended September 30, 2020. The increase was primarily attributable to a:

2734

Table of Contents

●

$3.3 million increase in personnel-related compensation expense as a result of the increased headcount in the collective field commercial team;

●

$1.1 million increase in travel and entertainment expense due to eased restrictions on travel; and

●

$0.4 million increase in demo equipment expense.

~~Sales and Marketing Expenses~~These increases were partially offset by a:

●

$2.0 million decrease in expenses due to reduced sales meetings, tradeshows and professional services; and

●

$0.7 million decrease in external patient training expense.

Sales and marketing expenses decreased $4.2 million, or 18%, to $18.8 million in the three months ended March 31, 2021, compared to $23.0 million in the three months ended March 31, 2020. The decrease was primarily attributable to a $1.9 million decrease from reduced sales meetings, tradeshows and professional services, a $1.3 million reduction of our external patient training expense as a result of pivoting to more virtual patient trainings, $0.8 million of reduced travel and entertainment expense due to decreased travel activities and a $0.2 million reduction in personnel-related compensation expense.

Research and Development Expenses

Research and development (“R&D”) expenses ~~decreased $0.4~~increased $0.3 million, or ~~25%~~28%, to ~~$1.3~~$1.4 million in the three months ended ~~March 31,~~September 30, 2021, compared to ~~$1.7~~$1.1 million in the three months ended ~~March 31,~~September 30, 2020, which ~~decrease~~ was primarily attributable to ~~comparably lower clinical studies activity as a result~~an increase in professional services.

R&D expenses were $3.9 million in each of ~~COVID-19.~~the nine months ended September 30, 2021 and 2020.

Reimbursement, General and Administrative Expenses

Reimbursement, general and administrative expenses increased ~~$3.4~~$2.0 million, or ~~31%~~16%, to ~~$14.3~~$14.5 million in the three months ended ~~March 31,~~September 30, 2021, compared to ~~$10.9~~$12.5 million in the three months ended ~~March 31,~~September 30, 2020. This increase was primarily attributable to ~~a $2.4 million increase in occupancy costs, depreciation expense, legal and professional fees, and a $1.0~~a:

●

$1.0 million increase in occupancy costs, depreciation expense, legal and professional fees;

●

$0.8 million increase in transaction-related costs related to the acquisition of AffloVest; and

●

$0.3 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer relations and corporate functions.

Reimbursement, general and administrative expenses increased $5.1 million, or 14%, to $42.8 million in the nine months ended September 30, 2021, compared to $37.7 million in the nine months ended September 30, 2020. The increase was primarily attributable to a:

●

$4.5 million increase in occupancy costs, depreciation expense, legal and professional fees;

●

$3.6 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer relations and corporate functions;

●

$0.8 million increase in transaction-related costs related to the acquisition of AffloVest; partially offset by a

●

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

Intangible Asset Amortization

Intangible asset amortization expense increased $0.1 million to $0.2 million in the three months ended September 30, 2021, compared to $0.1 million in the three months ended September 30, 2020, which was primarily attributable to the amortization recognized related to the assets recorded as a result of the acquisition of AffloVest.

Intangible asset amortization expenses increased ~~headcount~~$0.1 million to $0.3 million in ~~our reimbursement operations, payer relations and corporate functions.~~the nine months ended September 30, 2021, compared to $0.2 million in the three months ended September 30, 2020, which was primarily attributable to the amortization recognized related to the assets recorded as a result of the acquisition of AffloVest.

Table of Contents

Other (Expense) Income, ~~(Expense),~~ Net

Other (expense) income, ~~(expense),~~ net was an expense of ~~$10 thousand and income of $0.3~~$0.1 million for each of the three months ended ~~March 31,~~September 30, 2021 and 2020, and was an expense of $0.2 million and income of $0.2 million for the nine months ended September 30, 2021 and 2020, respectively. Other (expense) income ~~(expense)~~ was primarily impacted by interest income realized on marketable securities, ~~and~~ the gain and loss on cost method ~~investments.~~investments and an increase in interest expense recognized in the third quarter of 2021.

Income Taxes

We recorded an income tax expense of $1.9 million and an income tax benefit of ~~$1.8 million and $2.9~~$0.8 million for the three months ended ~~March 31,~~September 30, 2021 and 2020, respectively. The increase in income tax expense was primarily due to a change in our effective tax rate, which was attributable to a change in projected taxable income.

We recorded an income tax benefit of $1.4 million and an income tax expense of $2.3 million for the nine months ended September 30, 2021 and 2020, respectively. The primary driver of ~~this~~the change was a tax benefit related to ~~the net operating loss carryback claim refund~~a research and development credit recognized in the ~~first~~second quarter of ~~2020, which did not impact the benefit in the current year’s comparable period, slightly offset by an increase in the tax~~2021 as well as 100% deductibility of business meals ~~and entertainment related expenses.~~ in 2021 as compared to 50% deductibility in 2020.

Liquidity and Capital Resources

Cash Flows

At ~~March 31,~~September 30, 2021, our principal sources of liquidity were cash and cash equivalents of ~~$46.9~~$22.4 million and net accounts receivable of ~~$40.0~~$44.3 million. This compares to cash and cash equivalents of $47.9 million ~~as well as the borrowing capacity available under our 2018 Credit Agreement.~~and net accounts receivable of $43.8 million at September 30, 2020.

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


	Three Months Ended				Nine Months Ended
	March 31,				September 30,
(In thousands)	2021		2020		2021		2020
Net cash (used in) provided by:
Operating activities	$	(800)	$	909	$	(2,975)	$	(2,245)
Investing activities		(311)		9,606		(81,237)		20,684
Financing activities		181		(988)		58,758		995
Net (decrease) increase in cash and cash equivalents	$	(930)	$	9,527	$	(25,454)	$	19,434

~~Table of Contents~~

Operating Activities

Net cash used in operating activities during the ~~three~~nine months ended ~~March 31,~~September 30, 2021, was ~~$0.8~~$3.0 million, resulting from a net loss of ~~$2.3 million which was offset by non-cash net income (loss) adjustments of $1.4~~$4.3 million and a net decrease in operating assets and liabilities, net of ~~$0.1~~acquisition, of $6.8 million, which was partially offset by non-cash net income (loss) adjustments of $8.1 million. The non-cash net income (loss) adjustments consisted primarily of ~~$2.5~~$7.7 million of stock-based compensation expense, ~~$1.8~~$2.1 million of depreciation and amortization expense and a $1.7 million increase in deferred taxes. The uses of cash related to changes in operating assets primarily consisted of increases in inventories of $3.6 million, in accounts receivable of $3.4 million, in net investment in leases of $1.7 million, in income taxes of $1.2 million, and in prepaid expenses and other assets of $1.1 million. The changes in operating liabilities consisted of increases in accrued expenses and other liabilities of $2.9 million and accounts payable of $2.0 million, partially offset by a decrease in accrued payroll and related taxes of $1.3 million.

Net cash used in operating activities during the nine months ended September 30, 2020, was $2.2 million, resulting from a net loss of $12.7 million and a net increase in operating assets and liabilities of $7.9 million, which were offset by non-cash net income adjustments of $18.2 million. The non-cash net income adjustments consisted primarily of $8.3 million of stock-based compensation expense, a $4.0 million impairment

Table of Contents

loss charge related to the write-off of our Airwear wrap product line, a $3.9 million decrease in deferred taxes and ~~$0.7~~$2.1 million of depreciation and amortization expense. The uses of cash related to changes in operating assets primarily consisted of increases in accounts receivable of $5.5 million, in inventories of $3.5 million, ~~and net investment~~ in ~~leases of $0.5 million, partially offset by decreases in accounts receivable of $2.5 million and~~ prepaid expenses and other assets of ~~$0.4~~$1.6 million and in net investment in leases of $1.3 million, partially offset by a decrease in income taxes receivable of $0.7 million. The changes in operating liabilities consisted primarily of ~~an increase~~increases in accrued expenses and other liabilities of $1.1 million, in accounts payable of ~~$5.0~~$0.9 million ~~partially offset by decreases~~and in accrued payroll and related taxes of ~~$3.0 million and accrued expenses of~~ $0.8 million.

Net cash provided by operating activities during the three months ended March 31, 2020, was $0.9 million, resulting from a net loss of $1.3 million and non-cash net income (loss) adjustments of $4.4 million, which were offset by a net increase in operating assets and liabilities of $2.2 million. The non-cash net income adjustments consisted primarily of $2.7 million of stock-based compensation expense, a $0.9 million decrease in deferred taxes and $0.7 million of depreciation and amortization expense. The uses of cash related to changes in operating assets primarily consisted of increases in the income taxes receivable of $4.2 million, inventories of $3.3 million and net investment in leases of $0.7 million, partially offset by a decrease in accounts receivable of $1.7 million. The changes in operating liabilities consisted of increases in accounts payable of $4.7 million and accrued expenses of $1.0 million, partially offset by a decrease in accrued payroll and related taxes of $1.8 million.

Investing Activities

Net cash used in investing activities during the ~~three~~nine months ended ~~March 31,~~September 30, 2021, was ~~$0.3~~$81.2 million, primarily consisting of acquisition-related payments of $79.8 million associated with the purchase of the AffloVest business and $1.4 million in purchases of property and equipment, and patent costs.

Net cash provided by investing activities during the ~~three~~nine months ended ~~March 31,~~September 30, 2020, was ~~$9.6~~$20.7 million, primarily consisting of ~~$10.0~~$22.5 million in proceeds from maturities of marketable securities, partially offset by ~~$0.4~~$1.8 million in purchases of property and ~~equipment.~~equipment, and patent costs.

Financing Activities

Net cash provided by financing activities during the ~~three~~nine months ended ~~March 31,~~September 30, 2021, was ~~$0.2~~$58.8 million, primarily consisting of ~~$1.3~~borrowings of $54.8 million net of debt issuance costs incurred and $5.1 million in proceeds from the exercise of common stock options and the issuance of common stock under the ESPP, partially offset by ~~$1.1~~$1.2 million in taxes paid for the net share settlement of performance and restricted stock units.

Net cash ~~used in~~provided by financing activities during the ~~three~~nine months ended ~~March 31,~~September 30, 2020, was $1.0 million, consisting of ~~$1.2~~$2.6 million in proceeds from the exercise of common stock options and the issuance of common stock under the ESPP, partially offset by $1.6 million in taxes paid for the net share settlement of performance and restricted stock ~~units, partially offset by $0.2 million in proceeds from exercise of common stock options.~~units.

Credit Agreement

On August 3, 2018, we entered into a credit agreement with Wells Fargo Bank, National Association, which was amended by a First Amendment dated February 12, 2019, a Waiver and Second Amendment dated March 25, 2019, and a Third Amendment dated August 2, 2019 (collectively, the “2018 Credit Agreement”). On April 30, 2021, we entered into an Amended and Restated Credit Agreement (the “Restated Credit Agreement”) with the lenders from time to time party thereto, and Wells Fargo Bank, National Association, as Administrative ~~Agent (the “Restated Credit Agreement”), which expires on April 30, 2024.~~Agent. The Restated Credit Agreement ~~amends~~amended and ~~restates~~restated in its entirety the 2018 Credit Agreement. ~~As of March 31,~~

On September 8, 2021, ~~and~~we entered into a First Amendment Agreement (the “Amendment”), which amends the ~~date on which we filed this report, we did not have any outstanding borrowings under either Credit Agreement.~~

~~Table of Contents~~

~~The~~ Restated Credit Agreement ~~provides for~~(as amended by the Amendment, the “Credit Agreement”) with the lenders from time to time party thereto, and Wells Fargo Bank, National Association, as administrative agent. The Amendment, among other things, adds a ~~$25~~$30.0 million incremental term loan to the $25.0 million revolving credit facility ~~with~~provided by the ~~ability~~Restated Credit Agreement. The term loan and the revolving credit facility mature on September 8, 2024. The Credit Agreement provides that, subject to satisfaction of certain conditions, we may increase the amount of the revolving loans available under the Credit Agreement and/or add one or more term loan facilities in an amount not to exceed ~~an incremental $30~~$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 $80.0 million.

Our obligations under the ~~Restated~~ 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 ~~Restated~~ Credit Agreement contains a number of restrictions and covenants, including that we maintain compliance with a maximum leverage ratio, minimum fixed charge coverage ratio and a minimum ~~liquidity~~consolidated EBITDA covenant. As of ~~March 31,~~September 30, 2021, we were in compliance with all financial covenants under the ~~2018~~ Credit Agreement.

Table of Contents

On September 8, 2021, in connection with the closing of the acquisition of the AffloVest business, we borrowed the $30.0 million term loan and utilized that borrowing, together with a draw of $25.0 million under the revolving credit facility and cash on hand, to fund the purchase price. The principal of the term loan is required to be repaid in quarterly installments of $750,000 commencing January 7, 2022, through July 8, 2024, with the remaining outstanding balance due on September 8, 2024.

As of September 30, 2021, we had outstanding borrowings of $55.0 million under the Credit Agreement, comprised of $30.0 million under the term loan and $25.0 million under the revolving credit facility.

For additional information onregarding the ~~2018~~ Credit Agreement, including interest rates, fees and maturities, see Note 910 – “Credit Agreement” toof the condensed consolidated financial statements contained in this report. ~~For additional information on the Restated Credit Agreement, see Note 16 – “Subsequent Event” to the condensed consolidated financial statements in this report.~~

Adequacy of Capital Resources

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

●

the impact and duration of the COVID-19 pandemic on our business;

●

sales and marketing resources needed to further penetrate our market;

●

increased inflation-related costs associated with labor and/or suppliers;

●

expansion of our operations domestically and/or internationally;

●

response 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.

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

Although the impact of the COVID-19 pandemic is difficult to predict, we believe our cash, cash equivalents and cash flows from operations together with availability under the ~~Restated~~ 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 months ended March 31, 2021, 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 up to $200 million of common stock, preferred stock, debt securities, warrants, rights or units. The shelf registration statement also registered for resale from 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.

Coronavirus Aid, Relief, and Economic Security (CARES) Act

On March 27, 2020 the CARES Act was signed into law. The CARES Act is a tax-and-spending package intended to provide economic relief to address the impact of the COVID-19 pandemic. The CARES

~~Table of Contents~~

Act includes several tax provisions that, among other things, allow businesses to carry back net operating losses (“NOLs”) arising in 2018, 2019, and 2020 to the prior five tax years. In the third quarter of 2020, we collected $2.9 million related to the carry back of our NOLs arising from these prior tax years.

In addition, the CARES Act provided $100 billion in relief funds to hospitals and other healthcare providers on the front lines of the COVID-19 pandemic. An initial $30 billion of the funds were released for immediate infusion and were distributed to all facilities and providers that received Medicare fee-for-service (“FFS”) reimbursements in 2019. On April 10, 2020, we received $1.2 million of the initial allotment to all facilities and providers which was determined to be our proportionate share. Within 45 days of each reporting period end, we are required to comply with reporting requirements confirming funds were utilized in a manner

Table of Contents

described within the terms and conditions outlined by the U.S. Department of Health & Human Services. As of December 31, 2020, we recognized all of the funds received in the initial allotment as other income.

Contractual and Commercial Commitments Summary

For a discussion on our contractual and commercial commitments, see “Contractual and Commercial Commitments Summary,” included in Item 7, 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, 2020. There have been no material changes since December 31, 2020.

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 the condensed consolidated financial statements contained in this report for a description of recently issued accounting pronouncements that are applicable to our business.

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” 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, 2020.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For a discussion on our market risks, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” included in our Annual Report on Form 10-K for the year ended December 31, 2020. There have been no material changes since December 31, 2020.

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,~~September 30, 2021. 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 submits under the Exchange Act is recorded, processed, summarized and reported within the time periods

~~Table of Contents~~

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 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, 2021, 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.

Table of Contents

Changes in Internal Control over Financial Reporting

There was no change in 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, 2021, 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.

Information pertaining to certain legal proceedings in which we are involved can be found in Note 1011 – “Commitments and Contingencies” to our condensed consolidated financial statements included in Part I, Item 1 of this report and is incorporated herein by reference.

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, 2020, 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.~~report, except as set forth below.

The following risk factor is added:

The U.S. government’s pending rules and regulations concerning mandatory COVID-19 vaccination could materially and adversely affect our business, financial condition and results of operations.

On September 9, 2021, President Biden issued an executive order requiring all employers with U.S. government contracts to ensure that their U.S.-based employees, contractors and subcontractors, that work on or in support of U.S. government contracts, are fully vaccinated against COVID-19 by a specified deadline, which is being extended to January 4, 2022. The executive order includes on-site and remote U.S.-based employees, contractors and subcontractors and provides for limited medical and religious exceptions. As a government contractor, we are taking steps to analyze and implement required actions, including as provided in guidance related to the executive order that was recently issued by the Safer Federal Workforce Task Force, as well as any and all other guidance that is issued.

In addition, on September 9, 2021, President Biden announced that he has directed the Occupational Safety and Health Administration (“OSHA”) to develop an Emergency Temporary Standard (“ETS”) mandating either the full vaccination against COVID-19 or weekly testing of employees for employers with 100 or more employees. On November 4, 2021, OSHA issued the ETS and we are currently reviewing its provisions and potential impacts on us.

Further, our suppliers may be subject to, or voluntarily impose, vaccine mandates, which could result in disruptions in our business and supply chain.

It is currently not possible to predict with certainty the impact the executive order, the OSHA ETS, and other vaccine mandates will have on our workforce. Additional vaccine mandates may be announced in jurisdictions in which we operate or by healthcare facilities and clinics. Our implementation of any of these or other requirements may result in employee attrition, including attrition of critically skilled workforce, and difficulty securing future workforce needs, which could have a material adverse effect on our business, financial condition, and results of operations.

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

Recent Sales of Unregistered Securities

(a)

Issuances of Preferred Stock

Table of Contents

None.

(b)

Issuances of Common Stock

None.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Because we are filing this Quarterly Report on Form 10-Q within four business days after the triggering event, we are making the following disclosure under this Item 5 instead of filing a Current Report on Form 8-K

~~Table of Contents~~

~~under Item 1.01, Entry into a Material Definitive Agreement and Item 2.03, Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant:~~

On April 30, 2021, we entered into an Amended and Restated Credit Agreement (the “Restated Credit Agreement”) with the lenders from time to time party thereto, and Wells Fargo Bank, National Association, as Administrative Agent. The Restated Credit Agreement amends and restates in its entirety our Credit Agreement, dated as of August 3, 2018, with Wells Fargo Bank, National Association, and the lenders party thereto, which was amended by a First Amendment dated February 12, 2019, a Waiver and Second Amendment dated March 25, 2019, and a Third Amendment dated August 2, 2019 (collectively, the “2018 Credit Agreement”). As of the date we entered into the Restated Credit Agreement, there were no borrowings outstanding under the 2018 Credit Agreement.

Amounts drawn under the revolving credit facility under the Restated Credit Agreement will 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 0.65% to 1.40% on loans bearing interest at the Base Rate and 1.65% to 2.40% 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 0.300% to 0.375%, depending on our consolidated total leverage ratio.

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.

3341

Table of Contents

EXHIBIT INDEX

Incorporated by Reference

Exhibit

Filed

Exhibit

Filed

Number

Description of Exhibit

Form

Date of Filing

Number

Herewith

Description of Exhibit

Form

Date of Filing

Number

Herewith

2.1

Asset Purchase Agreement, dated as of September 8, 2021, among Tactile Systems Technology, Inc., International Biophysics Corporation and H. David Shockley, Jr.

8-K

09/08/2021

2.1

3.1

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

8-K

05/09/2019

3.2

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

8-K

05/09/2019

3.2

Amended and Restated By-laws, effective March 10, 2021

8-K

03/12/2021

3.1

Amended and Restated By-laws, effective March 10, 2021

8-K

03/12/2021

3.1

10.1

Amended and Restated Credit Agreement, dated as of April 30, 2021, by and among Tactile Systems Technology, Inc., the lenders from time to time party thereto and Wells Fargo Bank, National Association, as Administrative Agent

First Amendment Agreement, dated as of September 8, 2021, among Tactile Systems Technology, Inc., the Lenders signatory thereto and Wells Fargo Bank, National Association, as administrative agent

8-K

09/08/2021

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 financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in Inline XBRL: (i) Balance Sheets, (ii) Statements of Operations, (iii) Statements of Comprehensive Income (Loss), (iv) Statements of Stockholders’ Equity, (v) Statements of Cash Flows, and (vi) Notes to the Condensed Consolidated Financial Statements

The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL: (i) Balance Sheets, (ii) Statements of Operations, (iii) Statements of Comprehensive Income (Loss), (iv) Statements of Stockholders’ Equity, (v) Statements of Cash Flows, and (vi) Notes to the Condensed Consolidated Financial Statements

104.1

Cover page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101.1)

3442

Table of Contents

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 3,~~November 8, 2021	By:	/s/ Brent A. Moen
		Brent A. Moen
		Chief Financial Officer
		(Principal financial and accounting officer)

3543


	PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2328
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3139
Item 4.	Controls and Procedures	3139

	PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	3240
Item 1A.	Risk Factors	3240
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3240
Item 3.	Defaults Upon Senior Securities	3241
Item 4.	Mine Safety Disclosures	3241
Item 5.	Other Information	3241
Item 6.	Exhibits	3341