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TCMD Tactile Systems Technology

Filed: 2 Aug 21, 4:07pm

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: June 30, 2021

or

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

19,782,295 shares of common stock, par value $0.001 per share, were outstanding as of July 29, 2021.

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.

3

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Tactile Systems Technology, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

    

June 30,

    

December 31,

(In thousands, except share and per share data)

    

2021

    

2020

Assets

Current assets

Cash and cash equivalents

$

49,007

$

47,855

Accounts receivable

 

42,629

 

43,849

Net investment in leases

 

11,741

 

10,708

Inventories

 

21,153

 

18,563

Prepaid expenses and other current assets

 

2,092

 

2,638

Total current assets

 

126,622

 

123,613

Non-current assets

Property and equipment, net

 

6,399

 

6,957

Right of use operating lease assets

 

19,138

 

20,132

Intangible assets, net

 

1,702

 

1,680

Accounts receivable, non-current

 

11,874

 

9,433

Deferred income taxes

 

13,779

 

10,198

Other non-current assets

 

2,118

 

2,074

Total non-current assets

 

55,010

 

50,474

Total assets

$

181,632

$

174,087

Liabilities and Stockholders' Equity

Current liabilities

Accounts payable

$

5,060

$

4,197

Accrued payroll and related taxes

 

10,303

 

11,588

Accrued expenses

 

4,010

 

4,423

Income taxes payable

 

1,530

 

2,658

Operating lease liabilities

 

2,024

 

2,006

Other current liabilities

 

3,716

 

1,842

Total current liabilities

 

26,643

 

26,714

Non-current liabilities

Accrued warranty reserve, non-current

 

3,450

 

3,235

Income taxes payable, non-current

 

348

 

Operating lease liabilities, non-current

18,475

 

19,388

Total non-current liabilities

 

22,273

 

22,623

Total liabilities

 

48,916

 

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 June 30, 2021 and December 31,
2020

 

 

Common stock, $0.001 par value, 300,000,000 shares authorized; 19,782,295 shares issued and outstanding as of June 30, 2021; 19,492,718 shares issued and outstanding as of December 31, 2020

 

20

 

19

Additional paid-in capital

 

113,601

 

104,675

Retained earnings

 

19,095

 

20,056

Total stockholders’ equity

 

132,716

 

124,750

Total liabilities and stockholders’ equity

$

181,632

$

174,087

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

4

Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

Three Months Ended

Six Months Ended

June 30,

June 30,

(In thousands, except share and per share data)

    

2021

    

2020

    

2021

    

2020

Revenue

Sales revenue

$

43,630

$

29,518

$

79,755

$

67,141

Rental revenue

 

7,430

 

5,602

 

14,077

 

11,654

Total revenue

 

51,060

 

35,120

 

93,832

 

78,795

Cost of revenue

Cost of sales revenue

 

12,638

 

8,388

 

23,329

 

19,310

Cost of rental revenue

 

2,217

 

1,820

 

4,068

 

3,500

Total cost of revenue

 

14,855

 

10,208

 

27,397

 

22,810

Gross profit

Gross profit - sales revenue

 

30,992

 

21,130

 

56,426

 

47,831

Gross profit - rental revenue

 

5,213

 

3,782

 

10,009

 

8,154

Gross profit

 

36,205

 

24,912

 

66,435

 

55,985

Operating expenses

Sales and marketing

 

20,933

 

17,398

 

39,718

 

40,368

Research and development

 

1,206

 

1,105

 

2,476

 

2,789

Reimbursement, general and administrative

 

14,142

 

14,372

 

28,401

 

25,242

Total operating expenses

 

36,281

 

32,875

 

70,595

 

68,399

Loss from operations

 

(76)

 

(7,963)

 

(4,160)

 

(12,414)

Other (expense) income

 

(24)

 

36

 

(34)

 

302

Loss before income taxes

 

(100)

 

(7,927)

 

(4,194)

 

(12,112)

Income tax (benefit) expense

 

(1,405)

 

5,923

 

(3,233)

 

3,045

Net income (loss)

$

1,305

$

(13,850)

$

(961)

$

(15,157)

Net income (loss) per common share

Basic

$

0.07

$

(0.72)

$

(0.05)

$

(0.79)

Diluted

$

0.07

$

(0.72)

$

(0.05)

$

(0.79)

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

Basic

19,691,156

19,337,644

19,618,759

19,255,612

Diluted

20,047,277

19,337,644

19,618,759

19,255,612

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

5

Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

Three Months Ended

Six Months Ended

June 30,

June 30, 

(In thousands)

    

2021

    

2020

    

2021

    

2020

Net income (loss)

$

1,305

$

(13,850)

$

(961)

$

(15,157)

Other comprehensive income (loss):

 

  

 

  

 

  

 

  

Unrealized loss on marketable securities

 

 

(36)

 

 

(7)

Income tax related to items of other comprehensive loss

 

 

27

 

 

10

Total other comprehensive income (loss)

 

 

(9)

 

 

3

Comprehensive income (loss)

$

1,305

$

(13,859)

$

(961)

$

(15,154)

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

6

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, March 31, 2021

19,639,113

$

20

$

107,312

$

17,790

$

$

125,122

Stock-based compensation

2,658

2,658

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

101,088

2,089

2,089

Common shares issued for employee stock purchase plan

42,094

1,542

1,542

Comprehensive income for the period

1,305

1,305

Balances, June 30, 2021

19,782,295

$

20

$

113,601

$

19,095

$

$

132,716

Balances, December 31, 2020

19,492,718

$

19

$

104,675

$

20,056

$

$

124,750

Stock-based compensation

5,115

5,115

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

268,463

1

3,384

3,385

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

(20,980)

(1,115)

(1,115)

Common shares issued for employee stock purchase plan

42,094

1,542

1,542

Comprehensive loss for the period

(961)

(961)

Balances, June 30, 2021

19,782,295

$

20

$

113,601

$

19,095

$

$

132,716

Balances, March 31, 2020

19,226,665

$

19

$

93,614

$

19,369

$

38

$

113,040

Stock-based compensation

2,396

2,396

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

148,898

376

376

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

(7,812)

(393)

(393)

Common shares issued for employee stock purchase plan

43,653

1,825

1,825

Comprehensive loss for the period

(13,850)

(9)

(13,859)

Balances, June 30, 2020

19,411,404

$

19

$

97,818

$

5,519

$

29

$

103,385

Balances, December 31, 2019

19,152,715

$

19

$

91,874

$

20,676

$

26

$

112,595

Stock-based compensation

5,124

5,124

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

245,084

548

548

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

(30,048)

(1,553)

(1,553)

Common shares issued for employee stock purchase plan

43,653

1,825

1,825

Comprehensive loss for the period

(15,157)

3

(15,154)

Balances, June 30, 2020

19,411,404

$

19

$

97,818

$

5,519

$

29

$

103,385

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

7

Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Six Months Ended June 30, 

(In thousands)

    

2021

    

2020

Cash flows from operating activities

Net loss

$

(961)

$

(15,157)

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

1,287

1,450

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

(89)

Deferred income taxes

(3,581)

4,282

Stock-based compensation expense

5,115

5,124

Gain on other investments and maturities of marketable securities

40

Impairment losses

4,025

Changes in assets and liabilities:

Accounts receivable

1,220

2,892

Net investment in leases

(1,033)

(542)

Inventories

(2,590)

(5,945)

Income taxes

(780)

(1,646)

Prepaid expenses and other assets

502

(317)

Right of use operating lease assets

99

135

Medicare accounts receivable, non-current

(2,441)

(1,697)

Accounts payable

855

1,602

Accrued payroll and related taxes

(1,285)

(3,127)

Accrued expenses and other liabilities

1,676

990

Net cash used in operating activities

(1,917)

(7,980)

Cash flows from investing activities

Proceeds from maturities of securities available-for-sale

16,500

Purchases of property and equipment

(603)

(660)

Intangible assets costs

(140)

(109)

Net cash (used in) provided by investing activities

(743)

15,731

Cash flows from financing activities

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

(1,115)

(1,553)

Proceeds from exercise of common stock options

3,385

548

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

1,542

1,825

Net cash provided by financing activities

3,812

820

Net increase in cash and cash equivalents

1,152

8,571

Cash and cash equivalents – beginning of period

47,855

22,770

Cash and cash equivalents – end of period

$

49,007

$

31,341

Supplemental cash flow disclosure

Cash paid for taxes

$

1,141

$

475

Capital expenditures incurred but not yet paid

$

8

$

241

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

8

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 our products for use in the home and sell or rent them through vascular, wound and lymphedema clinics 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 six months ended June 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.

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.

9

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, particularly during 2020 and the first quarter of 2021. While we saw some level of recovery in the second quarter of 2021, there are no reliable estimates of how long the pandemic will last, whether any recovery will be sustained or will reverse course, the severity of any resurgence of COVID-19 or variant strains of the virus, the effectiveness of vaccines and attitudes towards receiving them, or what ultimate effects the pandemic will have.  For that reason, we are unable to reasonably estimate the long-term impact of the pandemic on our business at this time. Since the onset of COVID-19, we have remained proactive to ensure we continue to adapt to the needs of our employees, clinicians and patients.

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.

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 Income (Loss)

Comprehensive income (loss) reflects the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Our comprehensive income (loss) represents net income (loss) adjusted for unrealized gains and losses on available-for-sale marketable securities and the related taxes.

Note 3. Summary of Significant Accounting Policies

Significant Accounting Policies

There were no material changes in our significant accounting policies during the six months ended June 30, 2021. 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.

Recently Adopted Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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.

Note 4. Marketable Securities

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

10

There were 0 net pre-tax unrealized gains for marketable securities at June 30, 2021. There were 0 sales of marketable securities during the six months ended June 30, 2021.

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

Note 5. Inventories

Inventories consisted of the following:

(In thousands)

    

At June 30, 2021

    

At December 31, 2020

Finished goods

$

9,582

$

7,129

Component parts and work-in-process

 

11,571

 

11,434

Total inventories

$

21,153

$

18,563

Note 6. Intangible Assets

Our patents and other intangible assets are summarized as follows:

Weighted-

At June 30, 2021

Average

Gross

Amortization

Carrying

Accumulated

Net

(In thousands)

    

Period

Amount

Amortization

Amount

Patents

11 years

$

489

$

85

$

404

Defensive intangible assets

4 years

1,125

506

619

Customer accounts

2 years

 

125

 

76

 

49

Total amortizable intangible assets

1,739

667

1,072

Patents pending

630

630

Total intangible assets

$

2,369

$

667

$

1,702

Weighted-

At December 31, 2020

Average

Gross

Amortization

Carrying

Accumulated

Net

(In thousands)

    

Period

Amount

Amortization

Amount

Patents

11 years

$

413

$

65

$

348

Defensive intangible assets

4 years

1,125

421

704

Customer accounts

2 years

 

125

 

63

 

62

Total amortizable intangible assets

1,663

549

1,114

Patents pending

566

566

Total intangible assets

$

2,229

$

549

$

1,680

Amortization expense was $0.1 million for each of the three months ended June 30, 2021 and 2020, and $0.1 million and $0.3 million for the six months ended June 30, 2021 and 2020, respectively. Future amortization expenses are expected as follows:

(In thousands)

2021 (July 1 - December 31)

$

120

2022

240

2023

 

209

2024

 

188

2025

 

98

Thereafter

 

217

Total

$

1,072

11

Note 7. Accrued Expenses

Accrued expenses consisted of the following:

(In thousands)

    

At June 30, 2021

    

At December 31, 2020

Warranty

$

1,667

$

1,606

Legal and consulting

676

882

In-transit inventory

686

634

Travel

 

459

 

545

Sales and use tax

122

193

Clinical studies

72

67

Other

 

328

 

496

Total

$

4,010

$

4,423

Note 8. 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

Six Months Ended

June 30, 

June 30, 

(In thousands)

    

2021

    

2020

    

2021

    

2020

Beginning balance

$

4,869

$

4,242

$

4,841

$

3,759

Warranty provision

 

844

 

372

 

1,456

 

1,277

Processed warranty claims

 

(596)

 

(406)

 

(1,180)

 

(828)

Ending balance

$

5,117

$

4,208

$

5,117

$

4,208

Accrued warranty reserve, current

$

1,667

$

1,347

$

1,667

$

1,347

Accrued warranty reserve, non-current

3,450

2,861

3,450

2,861

Total accrued warranty reserve

$

5,117

$

4,208

$

5,117

$

4,208

Note 9. 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, which expires on April 30, 2024. The Restated Credit Agreement amended and restated in its entirety the 2018 Credit Agreement.

The Restated Credit Agreement provides for a $25 million revolving credit facility, with the ability to increase the amount of the revolving loans available and/or add one or more term loan facilities not to exceed an incremental $30 million in the aggregate, subject to satisfaction of certain conditions. As of June 30, 2021, and the date on which we filed this report, we did 0t have any outstanding borrowings under the Restated Credit Agreement.  

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 and a minimum liquidity covenant. As of June 30, 2021, we were in compliance with all financial covenants under the Restated Credit Agreement.

12

Note 10. Commitments and Contingencies

Lease Obligations

We lease property and equipment under operating leases, typically with terms greater than 12 months, and determine if an arrangement contains a lease at inception. In general, an arrangement contains a lease if there is an identified asset and we have the right to direct the use of and obtain substantially all of the economic benefit from the use of the identified asset. We record 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 years as of June 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 assets and operating lease liabilities on the Condensed Consolidated Balance Sheets. The portion of the space covered under the second lease commenced on September 1, 2020. Finally, the portion of the space covered under the third lease is expected to be occupied and commence in the second half of 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 June 30, 2021, we had approximately 55 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.

13

Computer and Office Equipment

We also have operating lease agreements for certain computer and office equipment. The remaining lease terms as of June 30, 2021, ranged from less than one year to approximately five years with fixed monthly payments that are included in the ROU operating lease assets and operating lease liabilities. The leases provide an option to purchase the related equipment at fair market value at the end of the lease. The 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 June 30, 2021

    

At December 31, 2020

Right of use operating lease assets

$

19,138

$

20,132

Operating lease liabilities:

Current

$

2,024

$

2,006

Non-current

 

18,475

 

19,388

Total

$

20,499

$

21,394

Operating leases:

Weighted average remaining lease term

 

8.9 years

9.4 years

Weighted average discount rate

4.4%

4.4%

Six Months Ended June 30,

2021

2020

Supplemental cash flow information for our operating leases:

Cash paid for operating lease liabilities

$

1,567

$

1,148

Non-cash right of use assets obtained in exchange for new operating lease obligations

$

304

$

686

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 (July 1 - December 31)

$

1,507

2022

2,661

2023

 

2,615

2024

 

2,582

2025

 

2,660

Thereafter

 

12,692

Total minimum lease payments

24,717

Less: Amount of lease payments representing interest

(4,218)

Present value of future minimum lease payments

20,499

Less: Current obligations under operating lease liabilities

(2,024)

Non-current obligations under operating lease liabilities

$

18,475

As of June 30, 2021, we have additional lease commitments of $7.6 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 million and $0.7 million for the three months ended June 30, 2021 and 2020, respectively. Operating lease costs were $1.7 million and $1.4 million for the six months ended June 30, 2021 and 2020, respectively.

14

Major Vendors

We had purchases from 2 vendors that accounted for 33% of our total purchases for each of the three and six months ended June 30, 2021. We had purchases from 2 vendors that accounted for 33% and 32% of our total purchases for the three and six months ended June 30, 2020, respectively.

Purchase Commitments

We issued purchase orders prior to June 30, 2021, totaling $19.8 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 June 30, 2021 and 2020, respectively, and $0.6 million and $0.1 million for the six months ended June 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 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. 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

15

Section 20(a) of the Exchange Act because each defendant is a controlling person. On June 18, 2021, we and the individual defendants filed a motion to dismiss the Amended Complaint. The motion has not been decided yet.

Note 11. Stockholders' Equity

Stock-Based Compensation

Our 2016 Equity Incentive Plan (the “2016 Plan”) authorizes us to grant stock options, stock appreciation rights, restricted stock, stock units and other stock-based awards to employees, non-employee directors and certain consultants and advisors. There were up to 4,800,000 shares of our common stock initially reserved for issuance pursuant to the 2016 Plan. The 2016 Plan provides that the number of shares reserved and available for issuance under the 2016 Plan will automatically increase annually on January 1 of each calendar year, commencing in 2017 and ending on and including January 1, 2026, by an amount equal to the lesser of: (a) 5% of the number of common shares of stock outstanding as of December 31 of the immediately preceding calendar year, or (b) 2,500,000 shares; provided, however, that our Board of Directors may determine that any annual increase be a lesser number. In addition, all awards granted under our 2007 Omnibus Stock Plan and our 2003 Stock Option Plan that were outstanding when the 2016 Plan became effective and that are forfeited, 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 June 30, 2021, 6,358,084 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.

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

We recorded stock-based compensation expense of $2.7 million and $2.4 million for the three months ended June 30, 2021 and 2020, respectively, and $5.1 million for each of the six months ended June 30, 2021 and 2020. This expense was allocated as follows:

Three Months Ended

Six Months Ended

June 30, 

June 30, 

(In thousands)

    

2021

    

2020

    

2021

    

2020

Cost of revenue

$

173

$

105

$

284

$

187

Sales and marketing expenses

920

1,233

1,898

2,479

Research and development expenses

59

94

156

182

Reimbursement, general and administrative expenses

1,506

964

2,777

2,276

Total stock-based compensation expense

$

2,658

$

2,396

$

5,115

$

5,124

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 $1.1 million and $1.0 million for the three months ended June 30, 2021 and 2020, respectively, and $2.3 million and $1.8 million for the six months ended June 30, 2021 and 2020, respectively. At June 30, 2021, there was approximately $7.3 million

16

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 2.0 years.

Our stock option activity for the six months ended June 30, 2021, was as follows:

    

Weighted-

Weighted-

Average

Average

Aggregate

Options

Exercise Price

Remaining

Intrinsic

(In thousands except options and per share data)

Outstanding

Per Share (1)

Contractual Life

Value (2)

Balance at December 31, 2020

1,039,709

$

36.43

5.6 years

$

13,381

Granted

149,366

$

51.88

Exercised

(130,390)

$

25.95

$

3,694

Forfeited

(52,693)

$

48.97

Cancelled/Expired

(7,362)

$

49.14

Balance at June 30, 2021

998,630

$

39.36

5.4 years

$

14,399

Options exercisable at June 30, 2021

509,575

$

31.20

4.6 years

$

11,814

(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 438,283 as of June 30, 2020, had a weighted-average exercise price of $21.86 per share.

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 $1.2 million and $1.4 million for the three months ended June 30, 2021 and 2020, respectively, and $2.5 million and $2.6 million for the six months ended June 30, 2021 and 2020, respectively. At June 30, 2021, there was approximately $7.5 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 2.0 years.

Our time-based restricted stock unit activity for the six months ended June 30, 2021, was as follows:

Weighted-

    

    

Average Grant

    

Aggregate

Units

Date Fair Value

Intrinsic

(In thousands except unit and per unit data)

Outstanding

Per Unit

Value (1)

Balance at December 31, 2020

211,469

$

48.29

$

9,503

Granted

82,657

$

52.22

Vested

(86,347)

$

48.00

Cancelled

(21,391)

$

52.17

Balance at June 30, 2021

186,388

$

49.72

$

9,692

Deferred and unissued at June 30, 2021(2)

6,469

$

38.94

$

336

(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 six months ended June 30, 2021, there were 0 restricted stock units granted to non-employee directors in lieu of their quarterly cash retainer payments. As of June 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.

17

Performance-Based Restricted Stock Units

We have granted performance-based restricted stock units (“PSUs”) to certain participants under the 2016 Plan. These PSUs have both performance-based and time-based vesting features. The PSUs granted in 2018 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 an expense of $0.2 million and a benefit of $0.3 million for the three months ended June 30, 2021 and 2020, respectively, and a benefit of $0.1 million and an expense of $0.1 million for the six months ended June 30, 2021 and 2020, respectively. The stock-based compensation benefit for the six months ended June 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 $0.4 million related to the PSUs granted in 2018 and 2021. At June 30, 2021, there was approximately $1.7 million of total unrecognized pre-tax compensation expense related to outstanding PSUs that is expected to be recognized over a weighted average period of 2.7 years.

Our performance-based restricted stock unit activity for the six months ended June 30, 2021, was as follows:

Performance-

Weighted-

    

Based

    

Average Grant

    

Aggregate

Units

Date Fair Value

Intrinsic

(In thousands except unit and per unit data)

Outstanding

Per Unit

Value (1)

Balance at December 31, 2020

79,303

$

47.83

$

3,564

Granted

39,419

$

51.82

Vested

(34,159)

$

33.98

Cancelled

(23,936)

$

65.43

Balance at June 30, 2021

60,627

$

51.28

$

3,153

(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

18

190,539 shares were added as available for issuance thereunder on January 1, 2021 and 2020, respectively. As of June 30, 2021, 1,740,328 shares were available for future issuance under the ESPP. We recognized stock-based compensation expense associated with the ESPP of $0.2 million and $0.3 million for the three months ended June 30, 2021 and 2020, respectively, and $0.4 million and $0.6 million for the six months ended June 30, 2021 and 2020, respectively.

Note 12. 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

Six Months Ended

June 30,

June 30,

(In thousands)

    

2021

2020

2021

2020

Revenue

Flexitouch system

$

45,093

$

31,127

$

82,530

$

69,713

Other products(1)

 

5,967

 

3,993

 

11,302

 

9,082

Total

$

51,060

$

35,120

$

93,832

$

78,795

Percentage of total revenue

Flexitouch system

 

88%

 

89%

 

88%

 

88%

Other products(1)

 

12%

 

11%

 

12%

 

12%

Total

 

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 and six months ended June 30, 2021 and 2020.

Our revenue from third-party payers, inclusive of sales and rental revenue, for the three and six months ended June 30, 2021 and 2020, are summarized in the following table:

Three Months Ended

Six Months Ended

June 30,

June 30,

(In thousands)

    

2021

2020

2021

2020

Private insurers and other payers

$

35,348

$

25,668

$

63,631

$

55,905

Veterans Administration

7,322

4,322

13,168

11,380

Medicare

8,390

5,130

17,033

11,510

Total

$

51,060

$

35,120

$

93,832

$

78,795

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 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

19

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.

Rental revenue for the three and six months ended June 30, 2021 and 2020, was primarily from private insurers. Sales-type lease revenue and the associated cost of revenue for the three and six months ended June 30, 2021 and 2020, was:

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands)

2021

2020

2021

2020

Sales-type lease revenue

$

7,430

$

5,602

$

14,077

$

11,654

Cost of sales-type lease revenue

 

2,217

 

1,820

 

4,068

 

3,500

Gross profit

$

5,213

$

3,782

$

10,009

$

8,154

Note 13. Income Taxes

We record our interim provision for income taxes by applying our estimated annual effective tax rate to our year-to-date pre-tax income and adjusting for discrete tax items recorded in the period. Deferred income taxes result from temporary differences between the reporting of amounts for financial statement purposes and income tax purposes. These differences relate primarily to different methods used for income tax reporting 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 June 30, 2021, was a benefit of 1,405%, compared to an expense of 75% for the three months ended June 30, 2020. The primary driver of the change in our effective tax rate is attributable to recording a benefit in the three months ended June 30, 2021, to recognize a tax credit for a research and development credit study conducted for tax years 2017-2020. We recorded an income tax benefit of $1.4 million and an expense of $5.9 million for the three months ended June 30, 2021 and 2020, respectively.

The effective tax rate for the six months ended June 30, 2021, was a benefit of 77%, compared to an expense of 25% for the six months ended June 30, 2020. The primary driver of the change in our effective tax rate is attributable to recording a benefit in the six months ended June 30, 2021, to recognize a tax credit for a research and development credit study conducted for tax years 2017-2020. We recorded an income tax benefit of $3.2 million and an expense of $3.0 million for the six months ended June 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 June 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 currently under examination 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.

20

Note 14. Net Income (Loss) Per Share

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

Three Months Ended

Six Months Ended

June 30,

June 30,

(In thousands, except share and per share data)

    

2021

    

2020

    

2021

    

2020

Net income (loss)

$

1,305

$

(13,850)

$

(961)

$

(15,157)

Weighted-average shares outstanding

19,691,156

19,337,644

19,618,759

19,255,612

Dilutive effect of stock-based awards

356,121

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

20,047,277

19,337,644

19,618,759

19,255,612

Net income (loss) per share - Basic

$

0.07

$

(0.72)

$

(0.05)

$

(0.79)

Net income (loss) per share - Diluted

$

0.07

$

(0.72)

$

(0.05)

$

(0.79)

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

Three Months Ended

Six Months Ended

June 30,

June 30,

    

2021

    

2020

    

2021

    

2020

Restricted stock units

17,287

217,137

192,857

217,137

Common stock options

433,447

946,936

998,630

946,936

Performance stock units

116,295

60,627

116,295

Employee stock purchase plan

33,743

50,027

33,888

46,706

Total

484,477

1,330,395

1,286,002

1,327,074

Note 15. Fair Value Measurements

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

The following provides information regarding fair value measurements for our cash equivalents as of June 30, 2021, and December 31, 2020, according to the three-level fair value hierarchy:

At June 30, 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

$

16,190

$

$

$

16,190

Total

$

16,190

$

$

$

16,190

21

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

During the three and six months ended June 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.

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.

22

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)

The United States economy in general and our business specifically have been negatively affected by the COVID-19 pandemic. We have seen adverse impacts as it relates to the decline in the number of patients that healthcare facilities and clinics are able to treat due to enhanced safety protocols, particularly during 2020 and the first quarter of 2021. While we saw some level of recovery in the second quarter of 2021, there are no reliable estimates of how long the pandemic will last, whether any recovery will be sustained or will reverse course, the severity of any resurgence of COVID-19 or variant strains of the virus, the effectiveness of vaccines and attitudes towards receiving them, or what ultimate effects the pandemic will have. For that reason, we are unable to reasonably estimate the long-term impact of the pandemic on our business at this time.

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

Incorporating remote and flexible work arrangements for employees whenever possible, including real-time, online training of our new sales representatives. In addition, we are actively developing our long-term in-office and remote work strategy with the goal of launching it in the second half of 2021.
Eliminating employee travel restrictions in alignment with the opening of healthcare facilities and clinics while also continuing to maintain social distancing contact restrictions to reduce exposure.
Utilizing a mix of employee trainers and independent healthcare practitioners to educate patients on the proper use of our solutions virtually or in-person.
Continuing to host large virtual medical education programs, while also beginning to schedule smaller in-person meetings.
Supporting clinicians and patients by using rigorous infection control practices when in-person visits are required.

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. Additional information related to the COVID-19 pandemic is included in the MD&A sections below.

Overview

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

23

Our current products are the Flexitouch system and Entre system. 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 88% of our revenue in each of the six months ended June 30, 2021 and 2020.

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 six months ended June 30, 2021 and 2020, sales and rentals of our Entre system represented 12% of 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 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 300 employees as of June 30, 2021, compared to 285 employees as of December 31, 2020. This model allows us to directly approach patients and clinicians, whereby we disintermediate the traditional durable medical equipment channel, allowing us to capture both the manufacturer and distributor margins.

As it relates to the impact of COVID-19 on our commercial processes in the first half of 2021, we continued to see restrictions loosen, in line with the applicable governmental regulations. As a result, we continue to expand our interactions with clinicians and patients on an in-person basis, where possible, while continuing to engage in virtual interactions as requested. 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 2021 by adding to our 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

24

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 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 half of 2021, approximately half of our clinical trial sites had resumed research activities as the healthcare provider staff are being reallocated from COVID-19 response teams or furloughs back to research activities. Study visits and new patient enrollments are gradually resuming, albeit more slowly than 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.

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 June 30, 2021, we generated revenue of $51.1 million and had net income of $1.3 million, compared to revenue of $35.1 million and a net loss of $13.9 million for the three months ended June 30, 2020. For the six months ended June 30, 2021, we generated revenue of $93.8 million and had a net loss of $1.0 million, compared to revenue of $78.8 million and a net loss of $15.2 million for the six months ended June 30, 2020. Our primary sources of capital 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.

25

Results of Operations

Comparison of the Three and Six Months Ended June 30, 2021 and 2020

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

Three Months Ended

June 30,

Change

(In thousands)

2021

2020

$

%

Condensed Consolidated Statement

% of

% of

of Operations Data:

revenue

revenue

Revenue

Sales revenue

$

43,630

85

%

$

29,518

84

%

$

14,112

48

%

Rental revenue

7,430

15

%

5,602

16

%

1,828

33

%

Total revenue

51,060

100

%

35,120

100

%

15,940

45

%

Cost of revenue

Cost of sales revenue

12,638

25

%

8,388

24

%

4,250

51

%

Cost of rental revenue

2,217

4

%

1,820

5

%

397

22

%

Total cost of revenue

14,855

29

%

10,208

29

%

4,647

46

%

Gross profit

Gross profit - sales revenue

30,992

60

%

21,130

60

%

9,862

47

%

Gross profit - rental revenue

5,213

11

%

3,782

11

%

1,431

38

%

Gross profit

36,205

71

%

24,912

71

%

11,293

45

%

Operating expenses

Sales and marketing

20,933

41

%

17,398

50

%

3,535

20

%

Research and development

1,206

2

%

1,105

3

%

101

9

%

Reimbursement, general and administrative

14,142

28

%

14,372

41

%

(230)

(2)

%

Total operating expenses

36,281

71

%

32,875

94

%

3,406

10

%

Loss from operations

(76)

%

(7,963)

(23)

%

7,887

(99)

%

Other (expense) income

(24)

%

36

%

(60)

(167)

%

Loss before income taxes

(100)

%

(7,927)

(23)

%

7,827

(99)

%

Income tax (benefit) expense

(1,405)

(3)

%

5,923

17

%

(7,328)

(124)

%

Net income (loss)

$

1,305

3

%

$

(13,850)

(40)

%

$

15,155

(109)

%

26

Six Months Ended

June 30,

Change

(In thousands)

2021

2020

$

%

Condensed Consolidated Statement

% of

% of

of Operations Data:

revenue

revenue

Revenue

Sales revenue

$

79,755

85

%

$

67,141

85

%

$

12,614

19

%

Rental revenue

14,077

15

%

11,654

15

%

2,423

21

%

Total revenue

93,832

100

%

78,795

100

%

15,037

19

%

Cost of revenue

Cost of sales revenue

23,329

25

%

19,310

25

%

4,019

21

%

Cost of rental revenue

4,068

4

%

3,500

4

%

568

16

%

Total cost of revenue

27,397

29

%

22,810

29

%

4,587

20

%

Gross profit

Gross profit - sales revenue

56,426

60

%

47,831

60

%

8,595

18

%

Gross profit - rental revenue

10,009

11

%

8,154

11

%

1,855

23

%

Gross profit

66,435

71

%

55,985

71

%

10,450

19

%

Operating expenses

Sales and marketing

39,718

42

%

40,368

51

%

(650)

(2)

%

Research and development

2,476

3

%

2,789

4

%

(313)

(11)

%

Reimbursement, general and administrative

28,401

30

%

25,242

32

%

3,159

13

%

Total operating expenses

70,595

75

%

68,399

87

%

2,196

3

%

Loss from operations

(4,160)

(4)

%

(12,414)

(16)

%

8,254

(66)

%

Other (expense) income

(34)

%

302

%

(336)

(111)

%

Loss before income taxes

(4,194)

(4)

%

(12,112)

(16)

%

7,918

(65)

%

Income tax (benefit) expense

(3,233)

(3)

%

3,045

4

%

(6,278)

N.M.

%

Net loss

$

(961)

(1)

%

$

(15,157)

(20)

%

$

14,196

(94)

%

27

Revenue

Revenue increased $15.9 million, or 45%, to $51.1 million in the three months ended June 30, 2021, compared to $35.1 million in the three months ended June 30, 2020. The increase in total revenue was attributable to an increase of $14.0 million, or 45%, in sales and rentals of the Flexitouch system and an increase of $2.0 million, or 49%, in sales and rentals of the Entre system in the quarter ended June 30, 2021. Second quarter 2021 revenue 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. The increase in second quarter revenue was further driven by improvements in salesforce productivity and effective virtual education events yielding an expanded prescriber base and an increase in Medicare patients served.

Revenue increased $15.0 million, or 19%, to $93.8 million in the six months ended June 30, 2021, compared to $78.8 million in the six months ended June 30, 2020. The increase was primarily attributable to an increase of $12.8 million, or 18%, in sales and rentals of our Flexitouch system and an increase of $2.2 million, or 24%, in sales and rentals of the Entre system for the six months ended June 30, 2021. Revenue for the six months ended June 30, 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.

Revenue from the Veterans Administration represented 14% and 12% of total revenue in the three months ended June 30, 2021 and 2020, respectively. Revenue from the Veterans Administration represented 14% of total revenue in each of the six months ended June 30, 2021 and 2020. Revenue from Medicare represented 16% and 15% of total revenue in the three months ended June 30, 2021 and 2020, respectively. Revenue from Medicare represented 18% and 15% of total revenue in the six months ended June 30, 2021 and 2020, respectively.

The following table summarizes our revenue by product for the three and six months ended June 30, 2021 and 2020, both in dollars and percentage of total revenue:

Three Months Ended

June 30,

Change

(In thousands)

    

2021

2020

$

%

Revenue

Flexitouch system

$

45,093

$

31,127

$

13,966

45%

Other products(1)

 

5,967

 

3,993

 

1,974

49%

Total

$

51,060

$

35,120

$

15,940

45%

Percentage of total revenue

Flexitouch system

 

88%

 

89%

 

Other products(1)

 

12%

 

11%

 

Total

 

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 June 30, 2021 and 2020.

28

Six Months Ended

June 30,

Change

(In thousands)

    

2021

2020

$

%

Revenue

Flexitouch system

$

82,530

$

69,713

$

12,817

18%

Other products(1)

 

11,302

 

9,082

 

2,220

24%

Total

$

93,832

$

78,795

$

15,037

19%

Percentage of total revenues

Flexitouch system

 

88%

 

88%

 

Other products(1)

 

12%

 

12%

 

Total

 

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 six months ended June 30, 2021 and 2020.

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.

Cost of Revenue and Gross Margin

Cost of revenue increased $4.6 million, or 46%, to $14.9 million in the three months ended June 30, 2021, compared to $10.2 million in the three months ended June 30, 2020. Cost of revenue increased $4.6 million, or 20%, to $27.4 million in the six months ended June 30, 2021, compared to $22.8 million in the six months ended June 30, 2020. The increase in cost of revenue in both periods was primarily attributable to an increase in the number of Flexitouch and Entre systems sold and rented.

The total gross margin rate was 71% of sales in each of the three and six months ended June 30, 2021 and June 30, 2020.

Sales and Marketing Expenses

Sales and marketing expenses increased $3.5 million, or 20%, to $20.9 million in the three months ended June 30, 2021, compared to $17.4 million in the three months ended June 30, 2020. The increase was primarily attributable to a $2.1 million increase in personnel-related compensation expense as a result of the increased headcount in the commercial team, a $0.7 million increase in our external patient training expense as a result of increased in-person trainings and a $0.7 million increase in travel and entertainment expense due to eased restrictions on travel.

Sales and marketing expenses decreased $0.6 million, or 2%, to $39.7 million in the six months ended June 30, 2021, compared to $40.4 million in the six months ended June 30, 2020. The decrease was primarily attributable to a $2.0 million decrease from reduced sales meetings, tradeshows and professional services and a $0.6 reduction in external patient training expense, partially offset by a $2.0 million increase in personnel-related compensation expense as a result of the increased headcount in the commercial team.

29

Research and Development Expenses

Research and development (“R&D”) expenses increased $0.1 million, or 9%, to $1.2 million in the three months ended June 30, 2021, compared to $1.1 million in the three months ended June 30, 2020, which was primarily attributable to an increase in clinical studies activity.

R&D expenses decreased $0.3 million, or 11%, to $2.5 million in the six months ended June 30, 2021, compared to $2.8 million in the six months ended June 30, 2020, which was primarily attributable to a $0.2 million decrease in professional services and a $0.1 million decrease in personnel-related compensation expense.

Reimbursement, General and Administrative Expenses

Reimbursement, general and administrative expenses decreased $0.2 million, or 2%, to $14.1 million in the three months ended June 30, 2021, compared to $14.4 million in the three months ended June 30, 2020. This decrease was primarily attributable to 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, partially offset by a $1.9 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer relations and corporate functions and a combined $1.4 million increase in occupancy costs, depreciation expense and legal fees, in each case in the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

Reimbursement, general and administrative expenses increased $3.2 million, or 13%, to $28.4 million in the six months ended June 30, 2021, compared to $25.2 million in the six months ended June 30, 2020. The increase was primarily attributable to a combined $3.5 million increase in occupancy costs, depreciation expense, legal and professional fees and a $3.3 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer relations and corporate functions, 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.

Other Income (Expense), Net

Other income (expense), net was an expense of $24,000 and income of $36,000 for the three months ended June 30, 2021 and 2020, respectively, and was an expense of $34,000 and income of $0.3 million for the six months ended June 30, 2021 and 2020, respectively. Other income (expense) was primarily impacted by interest income realized on marketable securities and the gain and loss on cost method investments.

Income Taxes

We recorded an income tax benefit of $1.4 million and expense of $5.9 million for the three months ended June 30, 2021 and 2020, respectively. We recorded an income tax benefit of $3.2 million and expense of $3.0 million for the six months ended June 30, 2021 and 2020, respectively. The primary driver of these changes was a tax benefit related to a research and development credit recognized in the second quarter of 2021.

Liquidity and Capital Resources

Cash Flows

At June 30, 2021, our principal sources of liquidity were cash and cash equivalents of $49.0 million and net accounts receivable of $42.6 million, as well as the borrowing capacity available under our Restated Credit Agreement.

30

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

Six Months Ended

June 30,

(In thousands)

    

2021

    

2020

Net cash (used in) provided by:

Operating activities

 

$

(1,917)

$

(7,980)

Investing activities

(743)

15,731

Financing activities

3,812

820

Net increase in cash and cash equivalents

 

$

1,152

$

8,571

Operating Activities

Net cash used in operating activities during the six months ended June 30, 2021, was $1.9 million, resulting from a net loss of $1.0 million and a net decrease in operating assets and liabilities of $3.7 million, which was partially offset by non-cash net income (loss) adjustments of $2.8 million. The non-cash net income (loss) adjustments consisted primarily of $5.1 million of stock-based compensation expense, $3.6 million in deferred taxes and $1.3 million of depreciation and amortization expense. The uses of cash related to changes in operating assets primarily consisted of increases in inventories of $2.6 million, accounts receivable of $1.2 million, net investment in leases of $1.0 million and income taxes of $0.8 million, partially offset by a decrease in prepaid expenses and other assets of $0.5 million. The changes in operating liabilities consisted of  increases in accrued expenses of $1.7 million and accounts payable of $0.9 million, partially offset by a decrease in accrued payroll and related taxes of $1.2 million.

Net cash used in operating activities during the six months ended June 30, 2020, was $8.0 million, resulting from a net loss of $15.2 million and net decrease in operating assets and liabilities of $7.7 million, which were offset by non-cash net income adjustments of $14.8 million. The non-cash net income adjustments consisted primarily of $5.1 million of stock-based compensation expense, a $4.3 million decrease in deferred taxes, a $4.0 million impairment loss charge related to the write-off of our Airwear wrap product line, and $1.4 million of depreciation and amortization expense. The uses of cash related to changes in operating assets primarily consisted of increases in inventories of $5.9 million, income taxes of $1.6 million, net investment in leases of $0.5 million and prepaid expenses and other assets of $0.3 million, partially offset by a decrease in accounts receivable of $1.2 million. The changes in operating liabilities consisted of increases in accounts payable of $1.6 million and accrued expenses of $1.0 million, offset by a decrease in accrued payroll and related taxes of $3.1 million.

Investing Activities

Net cash used in investing activities during the six months ended June 30, 2021, was $0.7 million, consisting of purchases of property and equipment, and patent costs.

Net cash provided by investing activities during the six months ended June 30, 2020, was $15.7 million, primarily consisting of $16.5 million in proceeds from maturities of marketable securities, partially offset by $0.8 million in purchases of property and equipment and patent costs.

Financing Activities

Net cash provided by financing activities during the six months ended June 30, 2021, was $3.8 million, consisting of $4.9 million in proceeds from exercise of common stock options and the issuance of common stock under the ESPP, partially offset by $1.1 million in taxes paid for the net share settlement of performance and restricted stock units.

Net cash provided by financing activities during the six months ended June 30, 2020, was $0.8 million, consisting of $2.4 million in proceeds from 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 restricted stock units.

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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, which expires on April 30, 2024. The Restated Credit Agreement amends and restates in its entirety the 2018 Credit Agreement.  As of June 30, 2021, and the date on which we filed this report, we did not have any outstanding borrowings under the Restated Credit Agreement.  

The Restated Credit Agreement provides for a $25 million revolving credit facility, with the ability to increase the amount of the revolving loans available and/or add one or more term loan facilities not to exceed an incremental $30 million in the aggregate, subject to satisfaction of certain conditions.

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 and a minimum liquidity covenant. As of June 30, 2021, we were in compliance with all financial covenants under the Restated Credit Agreement.

Adequacy of Capital Resources

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

the impact of the COVID-19 pandemic on our business;
sales and marketing resources needed to further penetrate our market;
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 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 six months ended June 30, 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

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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 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 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.

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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 June 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 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 June 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.

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 June 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 10 – “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.

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

Recent Sales of Unregistered Securities

(a)Issuances of Preferred Stock

None.

(b)Issuances of Common Stock

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None.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

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

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EXHIBIT INDEX

Incorporated by Reference

Exhibit

  

Exhibit

  

Filed

Number

Description of Exhibit

Form

  

Date of Filing

Number

Herewith

3.1

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

8-K

05/09/2019

3.2

3.2

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

10-Q

05/03/2021

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

X

31.2

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

X

32.1

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

X

32.2

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

X

101.1

The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 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

X

104.1

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

X

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SIGNATURES

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

Tactile Systems Technology, Inc.

Date: August 2, 2021

By:

/s/ Brent A. Moen

Brent A. Moen

Chief Financial Officer

(Principal financial and accounting officer)

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