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: ~~September~~June 30, ~~2020~~2021

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

For the transition period from to

Commission File Number: 001-37799

Tactile Systems Technology, Inc.

(Exact name of registrant as specified in its charter)


Delaware	3701 Wayzata Blvd, Suite 300	41-1801204
(State or other jurisdiction of incorporation or organization)	Minneapolis, Minnesota 55416	(I.R.S. Employer Identification No.)
	(Address and zip code of principal executive offices)

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

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


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

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

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

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


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

Smaller reporting company	☐	Emerging growth company	☐

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

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

~~19,424,679~~19,782,295 shares of common stock, par value $0.001 per share, were outstanding as of ~~October 30, 2020.~~July 29, 2021.

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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~~third-party payers for our products;

●

our Chief Executive Officer transition, including disruptions and uncertainties related thereto, the potential impact on our business and future strategic direction resulting from our transition to a new Chief Executive Officer and our ability to retain other key members of senior management;

●

loss or retirement of key ~~executives;~~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, ~~2019, in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, in our Quarterly Report on Form 10-Q for the quarter ended June 30,~~ 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

~~Table of Contents~~

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.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements


Tactile Systems Technology, Inc.	Tactile Systems Technology, Inc.					Tactile Systems Technology, Inc.
Condensed Consolidated Balance Sheets	Condensed Consolidated Balance Sheets					Condensed Consolidated Balance Sheets
(Unaudited)	(Unaudited)					(Unaudited)
		September 30,		December 31,			June 30,		December 31,
(In thousands, except share and per share data)		2020		2019			2021		2020
Assets
Current assets
Cash and cash equivalents		$	42,204	$	22,770		$	49,007	$	47,855
Marketable securities			—		22,464
Accounts receivable			36,033		33,444			42,629		43,849
Net investment in leases			9,451		8,147			11,741		10,708
Inventories			22,419		19,059			21,153		18,563
Prepaid expenses and other current assets			4,003		2,451			2,092		2,638
Total current assets			114,110		108,335			126,622		123,613
Non-current assets
Property and equipment, net			7,177		7,408			6,399		6,957
Right of use operating lease assets			20,717		15,885			19,138		20,132
Intangible assets, net			1,671		5,312			1,702		1,680
Accounts receivable, non-current			7,100		4,184			11,874		9,433
Deferred income taxes			5,010		8,970			13,779		10,198
Other non-current assets			1,965		1,658			2,118		2,074
Total non-current assets			43,640		43,417			55,010		50,474
Total assets		$	157,750	$	151,752		$	181,632	$	174,087
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable		$	5,053	$	3,843		$	5,060	$	4,197
Accrued payroll and related taxes			10,864		10,098			10,303		11,588
Accrued expenses			3,582		4,498			4,010		4,423
Income taxes payable			1,459		632			1,530		2,658
Operating lease liabilities			2,010		1,454			2,024		2,006
Other current liabilities			2,673		903			3,716		1,842
Total current liabilities			25,641		21,428			26,643		26,714
Non-current liabilities
Accrued warranty reserve, non-current			3,071		2,541			3,450		3,235
Income taxes, non-current			—		54
Income taxes payable, non-current								348		—
Operating lease liabilities, non-current			19,919		15,134			18,475		19,388
Total non-current liabilities			22,990		17,729			22,273		22,623
Total liabilities			48,631		39,157			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 September 30, 2020 and December 31, 2019			—		—
Common stock, $0.001 par value, 300,000,000 shares authorized; 19,424,679 shares issued and outstanding as of September 30, 2020; 19,152,715 shares issued and outstanding as of December 31, 2019			19		19
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			101,157		91,874			113,601		104,675
Retained earnings			7,943		20,676			19,095		20,056
Accumulated other comprehensive income			—		26
Total stockholders’ equity			109,119		112,595			132,716		124,750
Total liabilities and stockholders’ equity		$	157,750	$	151,752		$	181,632	$	174,087

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

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

		Three Months Ended				Nine Months Ended					Three Months Ended				Six Months Ended
		September 30,				September 30,					June 30,				June 30,
(In thousands, except share and per share data)		2020		2019		2020		2019			2021		2020		2021		2020
Revenue
Sales revenue		$	42,573	$	42,882	$	109,714	$	112,503		$	43,630	$	29,518	$	79,755	$	67,141
Rental revenue			6,519		6,730		18,173		19,926			7,430		5,602		14,077		11,654
Total revenue			49,092		49,612		127,887		132,429			51,060		35,120		93,832		78,795
Cost of revenue
Cost of sales revenue			11,558		12,233		30,868		33,231			12,638		8,388		23,329		19,310
Cost of rental revenue			2,562		2,006		6,062		6,062			2,217		1,820		4,068		3,500
Total cost of revenue			14,120		14,239		36,930		39,293			14,855		10,208		27,397		22,810
Gross profit
Gross profit - sales revenue			31,015		30,649		78,846		79,272			30,992		21,130		56,426		47,831
Gross profit - rental revenue			3,957		4,724		12,111		13,864			5,213		3,782		10,009		8,154
Gross profit			34,972		35,373		90,957		93,136			36,205		24,912		66,435		55,985
Operating expenses
Sales and marketing			19,488		20,737		59,856		56,546			20,933		17,398		39,718		40,368
Research and development			1,102		1,467		3,891		3,982			1,206		1,105		2,476		2,789
Reimbursement, general and administrative			12,588		9,972		37,830		28,177			14,142		14,372		28,401		25,242
Total operating expenses			33,178		32,176		101,577		88,705			36,281		32,875		70,595		68,399
Income (loss) from operations			1,794		3,197		(10,620)		4,431
Loss from operations												(76)		(7,963)		(4,160)		(12,414)
Other (expense) income			(121)		166		181		498			(24)		36		(34)		302
Income (loss) before income taxes			1,673		3,363		(10,439)		4,929
Loss before income taxes												(100)		(7,927)		(4,194)		(12,112)
Income tax (benefit) expense			(751)		932		2,294		(1,759)			(1,405)		5,923		(3,233)		3,045
Net income (loss)		$	2,424	$	2,431	$	(12,733)	$	6,688		$	1,305	$	(13,850)	$	(961)	$	(15,157)
Net income (loss) per common share
Basic		$	0.12	$	0.13	$	(0.66)	$	0.35		$	0.07	$	(0.72)	$	(0.05)	$	(0.79)
Diluted		$	0.12	$	0.12	$	(0.66)	$	0.34		$	0.07	$	(0.72)	$	(0.05)	$	(0.79)
Weighted-average common shares used to compute net income (loss) per common share
Basic			19,415,640		18,981,015		19,309,344		18,870,622			19,691,156		19,337,644		19,618,759		19,255,612
Diluted			19,747,365		19,641,853		19,309,344		19,630,721			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.

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

Three Months Ended

Nine Months Ended

September 30,

September 30,
(In thousands)

2020

2019

2020

2019
Net income (loss)

$
2,424

$
2,431

$
(12,733)

$
6,688
Other comprehensive (loss) income:








Unrealized (loss) gain on marketable securities

(14)

(13)

(21)

51
Income tax related to items of other comprehensive (loss) income

(15)

4

(5)

(12)
Total other comprehensive (loss) income

(29)

(9)

(26)

39
Comprehensive income (loss)

$
2,395

$
2,422

$
(12,759)

$
6,727


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.

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

Accumulated

Additional

Other

Common Stock

Paid-In

Retained

Comprehensive

(In thousands, except share data)

Shares

Par Value

Capital

Earnings

(Loss) Income

Total
Balances, June 30, 2020

19,411,404

$
19

$
97,818

$
5,519

$
29

$
103,385
Stock-based compensation

—

—

3,164

—

—

3,164
Exercise of common stock options and vesting of restricted stock units

14,322

—

214

—

—

214
Taxes paid for net share settlement of restricted stock units

(1,047)

—

(39)

—

—

(39)
Comprehensive income (loss) for the period

—

—

—

2,424

(29)

2,395
Balances, September 30, 2020

19,424,679

$
19

$
101,157

$
7,943

$
—

$
109,119

Balances, December 31, 2019

19,152,715

$
19

$
91,874

$
20,676

$
26

$
112,595
Stock-based compensation

—

—

8,288

—

—

8,288
Exercise of common stock options and vesting of restricted stock units

259,406

—

762

—

—

762
Taxes paid for net share settlement of restricted stock units

(31,095)

—

(1,592)

—

—

(1,592)
Common shares issued for employee stock purchase plan

43,653

—

1,825

—

—

1,825
Comprehensive loss for the period

—

—

—

(12,733)

(26)

(12,759)
Balances, September 30, 2020

19,424,679

$
19

$
101,157

$
7,943

$
—

$
109,119

Balances, June 30, 2019

18,956,912

$
19

$
84,987

$
13,962

$
40

$
99,008
Stock-based compensation

—

—

2,330

—

—

2,330
Exercise of common stock options and vesting of restricted stock units

60,833

—

296

—

—

296
Taxes paid for net share settlement of restricted stock units

(1,713)

—

(89)

—

—

(89)
Comprehensive income (loss) for the period

—

—

—

2,431

(9)

2,422
Balances, September 30, 2019

19,016,032

$
19

$
87,524

$
16,393

$
31

$
103,967

Balances, December 31, 2018

18,631,125

19

79,554

9,705

(8)

89,270
Stock-based compensation

—

—

7,387

—

—

7,387
Exercise of common stock options and vesting of restricted stock units

398,477

—

1,838

—

—

1,838
Taxes paid for net share settlement of restricted stock units

(56,956)

—

(3,107)

—

—

(3,107)
Common shares issued for employee stock purchase plan

43,386

—

1,852

—

—

1,852
Comprehensive income for the period

—

—

—

6,688

39

6,727
Balances, September 30, 2019

19,016,032

$
19

$
87,524

$
16,393

$
31

$
103,967


Tactile Systems Technology, Inc.
Condensed Consolidated Statements of 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.

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

		Nine Months Ended September 30,					Six Months Ended June 30,
(In thousands)		2020		2019			2021		2020
Cash flows from operating activities
Net (loss) income		$	(12,733)	$	6,688
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Net loss							$	(961)	$	(15,157)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			2,102		2,808			1,287		1,450
Net amortization of premiums and discounts on securities available-for-sale			(91)		(225)			—		(89)
Deferred income taxes			3,934		(31)			(3,581)		4,282
Stock-based compensation expense			8,288		7,387			5,115		5,124
Gain on other investments and maturities of marketable securities			10		—			—		40
Impairment losses			4,025		—			—		4,025
Changes in assets and liabilities:
Accounts receivable			(2,589)		(3,349)			1,220		2,892
Net investment in leases			(1,304)		(7,628)			(1,033)		(542)
Inventories			(3,538)		(5,693)			(2,590)		(5,945)
Income taxes			773		(2,051)			(780)		(1,646)
Prepaid expenses and other assets			(1,553)		(418)			502		(317)
Right of use operating lease assets			509		107			99		135
Medicare accounts receivable, non-current			(2,916)		(1,141)			(2,441)		(1,697)
Accounts payable			938		979			855		1,602
Accrued payroll and related taxes			766		3,915			(1,285)		(3,127)
Accrued expenses and other liabilities			1,134		1,073			1,676		990
Net cash (used in) provided by operating activities			(2,245)		2,421
Net cash used in operating activities								(1,917)		(7,980)
Cash flows from investing activities
Proceeds from maturities of securities available-for-sale			22,500		16,000			—		16,500
Purchases of securities available-for-sale			—		(14,859)
Purchases of property and equipment			(1,623)		(4,276)			(603)		(660)
Intangible assets costs			(163)		(154)			(140)		(109)
Other investments			(30)		—
Net cash provided by (used in) investing activities			20,684		(3,289)
Net cash (used in) provided by investing activities								(743)		15,731
Cash flows from financing activities
Taxes paid for net share settlement of restricted stock units			(1,592)		(3,107)
Taxes paid for net share settlement of performance and restricted stock units								(1,115)		(1,553)
Proceeds from exercise of common stock options			762		1,838			3,385		548
Proceeds from the issuance of common stock from the employee stock purchase plan			1,825		1,852			1,542		1,825
Net cash provided by financing activities			995		583			3,812		820
Net increase (decrease) in cash and cash equivalents			19,434		(285)
Net increase in cash and cash equivalents								1,152		8,571
Cash and cash equivalents – beginning of period			22,770		20,099			47,855		22,770
Cash and cash equivalents – end of period		$	42,204	$	19,814		$	49,007	$	31,341

Supplemental cash flow disclosure
Cash paid for taxes		$	475	$	326		$	1,141	$	475
Capital expenditures incurred but not yet paid		$	41	$	801		$	8	$	241

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

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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. ~~Our~~We provide our products ~~are purchased~~for use in the home and sell or ~~rented for at-home use and are recommended by~~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. ~~As a result, at August 2, 2016, we did not have any redeemable convertible preferred stock issued or outstanding.~~

Our business is affected by seasonality. In the first quarter of each year, when most patients have started a new insurance year and have not yet met their annual out-of-pocket payment obligations, we experience substantially reduced demand for our products. We typically experience higher 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 ~~2020~~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 ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, are not necessarily indicative of results to be expected for the year ending December 31, ~~2020,~~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, ~~2019.~~2020.

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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.

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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. There~~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 ~~how many people are likely to be affected by it.~~will reverse course, the severity of any resurgence of COVID-19 or variant strains of the virus, the effectiveness of vaccines and attitudes towards receiving them, or what ultimate effects the pandemic will have. For that reason, we are unable to reasonably estimate the long-term impact of the pandemic on our business at this time. Our first priority with regard to the COVID-19 pandemic is to ensure the safety and health of our employees, clinicians and patients. Subject to that, we are focusing our efforts on attempting to continue our business operations in this unprecedented environment. Part of our strategy includes changing many of our processes and practices in an effort to help mitigate the impact of COVID-19 on our business so that we can support our clinicians and safely make our at-home therapies available to patients. 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 needs. These changes to our business include, but are not limited to:~~patients.

●

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

●

~~We have continued to incorporate remote and flexible work arrangements for employees whenever possible, including real-time, online training of our new sales representatives.~~

●

~~Continuing employee travel and contact restrictions to reduce exposure.~~

●

~~Collaborating with payers to modify coverage requirements by serving patients virtually.~~

●

In concert with COVID-19 social distancing requirements and recommendations, we moved to a “no contact” virtual patient training model. This new model substantially reduced the need for in-person contact and visits to patients’ homes and clinics in order to protect the health and limit the exposure of both our trainers and patients. Accordingly in the second quarter of 2020, we inactivated our independent healthcare practitioners, who acted as at-home trainers to educate patients on the proper use of our systems, in order to allow these individuals to have access to specific COVID related financial relief.

●

~~We continue to transition large, in-person medical education programs in favor of conducting virtual meetings whenever possible.~~

●

~~When in-person visits are required, we are supporting clinicians and patients by using rigorous infection control practices.~~

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.

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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 ~~nine~~six months ended ~~September~~June 30, ~~2020, except as set forth below.~~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, ~~2019,~~2020, for information regarding our significant accounting policies.

~~Impairment of Long-Lived Assets~~

We review long-lived assets, including property and equipment and patents, for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be fully recoverable. We assess long-lived assets used in operations for impairment indicators, including when undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount.

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. The majority of the impairment charge was comprised of the intangible assets and property and equipment, totaling $3.6 million, and was classified within the reimbursement, general and administrative line of the Condensed Consolidated Statements of Operations. The inventory-related component of the impairment charge was $0.4 million, and was classified within the cost of revenue line of the Condensed Consolidated Statements of Operations.

Recently Adopted Accounting Pronouncements

In ~~June 2016,~~December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments — Credit Losses” (“ASU 2016-13”), which introduced a new model for recognizing credit losses on financial instruments based on an estimate of the current expected credit losses. The new current expected credit losses (“CECL”) model generally calls for the immediate recognition of all expected credit losses and applies to financial instruments and other assets, including accounts receivable and other financial assets measured at amortized cost, debt securities and other financial assets. This guidance replaces the previous incurred loss model for measuring expected credit losses and requires expected losses on available-for-sale debt securities to be recognized through an allowance for credit losses rather than as reductions in the amortized cost of the securities. We adopted ASU 2016-13 as of January 1, 2020, and it did not have an impact on the condensed consolidated financial statements.

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~~Accounting Pronouncements Issued Not Yet Adopted~~

~~In December 2019, the FASB issued ASU~~ No. 2019-12, “Income Taxes (Topic 740) — Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which is intended to simplify various aspects of the accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ~~This guidance is effective for fiscal years,~~We adopted ASU 2019-12 as of January 1, 2021, and ~~interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We are currently evaluating~~it did not have an impact on the ~~applicability and impact of the standard on our~~ condensed consolidated financial ~~statements and related disclosures.~~ statements.

Note 4. Marketable Securities

There were 0 investments in marketable securities at ~~September~~June 30, ~~2020. At~~2021 and December 31, ~~2019 investments in marketable securities were classified as available-for-sale and consisted~~2020.

Table of ~~the following:~~Contents

At December 31, 2019


Amortized

Unrealized

Fair
(In thousands)

Cost

Gains

Losses

Value
U.S. government and agency obligations

$
19,950

$
14

$
1

$
19,963
Corporate debt securities

2,493

8

—

2,501
Marketable securities

$
22,443

$
22

$
1

$
22,464

There were 0 net pre-tax unrealized gains for marketable securities at ~~September~~June 30, ~~2020.~~2021. There were 0 sales of marketable securities during the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021.

There were 0 marketable securities in an unrealized loss position at ~~September~~June 30, ~~2020.~~

At2021 and December 31, ~~2019, unrealized losses and the fair value of marketable securities aggregated by investment category and the length of time the securities were in a continuous loss position, were as follows:~~2020.

At December 31, 2019

Less than 12 months

12 months or more

Total


Fair

Unrealized

Fair

Unrealized

Fair

Unrealized
(In thousands)

Value

Losses

Value

Losses

Value

Losses
U.S. government and agency obligations

$
5,997

$
1

$
—

$
—

$
5,997

$
1
Corporate debt securities

—

—

—

—

—

—
Marketable securities

$
5,997

$
1

$
—

$
—

$
5,997

$
1

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Note 5. Inventories

Inventories consisted of the following:


(In thousands)	At September 30, 2020		At December 31, 2019		At June 30, 2021		At December 31, 2020
Finished goods	$	9,287	$	6,508	$	9,582	$	7,129
Component parts and work-in-process		13,132		12,551		11,571		11,434
Total inventories	$	22,419	$	19,059	$	21,153	$	18,563

Note 6. Intangible Assets

Our patents and other intangible assets are summarized as follows:


	Weighted-	At September 30, 2020						Weighted-	At June 30, 2021
	Average	Gross						Average	Gross
	Amortization	Carrying		Accumulated		Net		Amortization	Carrying		Accumulated		Net
(In thousands)	Period	Amount		Amortization		Amount		Period	Amount		Amortization		Amount
Patents	12 years	$	388	$	55	$	333	11 years	$	489	$	85	$	404
Defensive intangible assets	4 years		1,125		378		747	4 years		1,125		506		619
Customer accounts	3 years		125		57		68	2 years		125		76		49
Total amortizable intangible assets			1,638		490		1,148			1,739		667		1,072
Patents pending			523		—		523			630		—		630
Total intangible assets		$	2,161	$	490	$	1,671		$	2,369	$	667	$	1,702


	Weighted-	At December 31, 2019						Weighted-	At December 31, 2020
	Average	Gross						Average	Gross
	Amortization	Carrying		Accumulated		Net		Amortization	Carrying		Accumulated		Net
(In thousands)	Period	Amount		Amortization		Amount		Period	Amount		Amortization		Amount
Patents	11 years	$	4,386	$	447	$	3,939	11 years	$	413	$	65	$	348
Defensive intangible assets	5 years		1,125		250		875	4 years		1,125		421		704
Customer accounts	3 years		125		37		88	2 years		125		63		62
Total amortizable intangible assets			5,636		734		4,902			1,663		549		1,114
Patents pending			410		—		410			566		—		566
Total intangible assets		$	6,046	$	734	$	5,312		$	2,229	$	549	$	1,680

Amortization expense was $0.1 million for each of the three months ended ~~September~~June 30, 2021 and 2020, and ~~2019,~~$0.1 million and $0.3 million ~~and $0.4 million~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. Future amortization expenses are expected as follows:


(In thousands)
2020 (October 1 - December 31)	$	58
2021		230
2021 (July 1 - December 31)			$	120
2022		230		240
2023		200		209
2024		179		188
2025				98
Thereafter		251		217
Total	$	1,148	$	1,072

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Note 7. Accrued Expenses

Accrued expenses consisted of the following:


(In thousands)	At September 30, 2020		At December 31, 2019		At June 30, 2021		At December 31, 2020
Warranty	$	1,443	$	1,218	$	1,667	$	1,606
Legal and consulting		675		617		676		882
Travel and business		413		776
In-transit inventory		129		106		686		634
Travel						459		545
Sales and use tax		183		200		122		193
Clinical studies		38		85		72		67
Lease termination costs		—		1,200
Other		701		296		328		496
Total	$	3,582	$	4,498	$	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				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
(In thousands)	2020		2019		2020		2019		2021		2020		2021		2020
Beginning balance	$	4,208	$	3,002	$	3,759	$	2,566	$	4,869	$	4,242	$	4,841	$	3,759
Warranty provision		820		664		2,097		1,677		844		372		1,456		1,277
Processed warranty claims		(514)		(386)		(1,342)		(963)		(596)		(406)		(1,180)		(828)
Ending balance	$	4,514	$	3,280	$	4,514	$	3,280	$	5,117	$	4,208	$	5,117	$	4,208

Accrued warranty reserve, current	$	1,443	$	1,053	$	1,443	$	1,053	$	1,667	$	1,347	$	1,667	$	1,347
Accrued warranty reserve, non-current		3,071		2,227		3,071		2,227		3,450		2,861		3,450		2,861
Total accrued warranty reserve	$	4,514	$	3,280	$	4,514	$	3,280	$	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 ~~“Credit~~“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 ~~August 3, 2021.~~April 30, 2024. The Restated Credit Agreement amended and restated in its entirety the 2018 Credit Agreement.

The Restated Credit Agreement provides for a ~~$10.0~~$25 million revolving credit ~~facility. Subject~~facility, with the ability to ~~satisfaction of certain conditions, we may~~ increase the amount of the revolving loans available ~~under the Credit Agreement~~ and/or add one or more term loan facilities ~~in an amount~~ not to exceed an incremental ~~$25.0~~$30 million in the aggregate, ~~such that the total aggregate principal amount~~subject to satisfaction of ~~loans available under the Credit Agreement (including under the revolving credit facility) does not exceed $35.0 million.~~certain conditions. As of ~~September~~June 30, ~~2020,~~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 ~~September~~June 30, ~~2020,~~2021, we were in compliance with all financial covenants under the Restated Credit Agreement.

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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 ~~three~~one to ten years as of ~~September~~June 30, ~~2020.~~

In March 2008, we entered into a noncancelable operating lease agreement for building space for our previous corporate headquarters that provided for monthly rent, real estate taxes and operating expenses that was subsequently extended to July 31, 2021. Due to the move to our new headquarters in September 2019, we entered into a termination agreement for our former corporate headquarters on December 31, 2019. We agreed to pay $1.2 million in order to terminate all future rights and obligations of the lease. The lease was removed from our ROU operating lease assets and operating lease liabilities and the total net loss on termination of $1.1 million was recorded in the reimbursement, general and administrative line of our Condensed Consolidated Statements of Operations.

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 beginning as of September 30, 2019.~~Sheets. The portion of the space covered under the second lease commenced on September 1, 2020. ~~This portion was recognized as an operating lease and included in~~Finally, the ~~ROU operating lease assets and operating lease liabilities on the Condensed Consolidated Balance Sheets as of September 30, 2020. The~~ portion of the space covered under the third lease is expected to be occupied and commence in the second half of 2021.

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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 ~~September~~June 30, ~~2020,~~2021, we had approximately 6955 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.

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Computer and Office Equipment

We also have operating lease agreements for certain computer and office equipment. The remaining lease terms as of ~~September~~June 30, ~~2020,~~2021, ranged from less than one year to approximately ~~three~~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 September 30, 2020

At December 31, 2019
Right of use operating lease assets

$
20,717

$
15,885

Operating lease liabilities:

Current

$
2,010

$
1,454
Non-current

19,919

15,134
Total

$
21,929

$
16,588

Operating leases:

Weighted average remaining lease term

9.6 years

10.1 years
Weighted average discount rate

4.3%

4.6%

Nine Months Ended September 30,

2020

2019
Supplemental cash flow information for our operating leases:

Cash paid for operating lease liabilities

$
1,849

$
1,147
Non-cash right of use assets obtained in exchange for new operating lease obligations

$
6,664

$
16,296

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(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)
2020 (October 1 - December 31)	$	788
2021		2,781
2021 (July 1 - December 31)			$	1,507
2022		2,643		2,661
2023		2,594		2,615
2024		2,575		2,582
2025				2,660
Thereafter		15,344		12,692
Total minimum lease payments		26,725		24,717
Less: Amount of lease payments representing interest		(4,796)		(4,218)
Present value of future minimum lease payments		21,929		20,499
Less: Current obligations under operating lease liabilities		(2,010)		(2,024)
Non-current obligations under operating lease liabilities	$	19,919	$	18,475

As of ~~September~~June 30, ~~2020,~~2021, we have additional lease commitments of ~~$7.1~~$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 ~~$0.6~~$0.7 million for the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. Operating lease costs were ~~$2.1~~$1.7 million and ~~$1.3~~$1.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively.

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Major Vendors

We had purchases from 2 ~~major~~ vendors that accounted for ~~31%~~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 ~~nine~~six months ended ~~September~~June 30, 2020, ~~respectively. We had purchases from 2 major vendors that accounted for 42% and 37% of our total purchases for the three and nine months ended September 30, 2019,~~ respectively.

Purchase Commitments

We issued purchase orders prior to ~~September~~June 30, ~~2020,~~2021, totaling ~~$20.5~~$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. ~~Discretionary~~We recorded an expense related to our discretionary contributions to the 401(k) plan ~~totaled~~of $0.3 million and $0.1 million for ~~each~~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 ~~three ended~~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 ~~30,~~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 ~~2019,~~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 ~~$0.2 million for each~~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 ~~nine months ended September 30, 2020~~Exchange Act; (2) that we and ~~2019.~~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

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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

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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, ~~shares were added as approved by the Board of Directors for each year since inception other than 2019, at which point, the Board exercised its prerogative to forgo the increase. On January 1, 2020,~~972,591 and 952,697 shares were added as available for issuance ~~thereunder.~~thereunder on January 1, 2021 and 2020, respectively. As of ~~September~~June 30, ~~2020, 4,658,176~~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 ~~will vest~~vested on June 30, 2021, with the remaining portion of the awards vesting over a period of three years from the date of grant. Further, ~~all of~~ the stock options ~~included in these awards require~~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 ~~$3.2~~$2.7 million and ~~$2.3~~$2.4 million for the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~$8.3 million and $7.4~~$5.1 million for each of the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019, respectively.~~2020. This expense was allocated as follows:


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
(In thousands)	2020		2019		2020		2019		2021		2020		2021		2020
Cost of revenue	$	171	$	75	$	358	$	249	$	173	$	105	$	284	$	187
Sales and marketing expenses		1,436		1,029		3,915		3,262		920		1,233		1,898		2,479
Research and development expenses		87		95		269		275		59		94		156		182
Reimbursement, general and administrative expenses		1,470		1,131		3,746		3,601		1,506		964		2,777		2,276
Total stock-based compensation expense	$	3,164	$	2,330	$	8,288	$	7,387	$	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

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~~Stock Options~~

~~We have granted stock options to certain participants that 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 $0.6 million for the three months ended September 30, 2020 and 2019, respectively, and $3.0 million and $2.0 million for the nine months ended September 30, 2020 and 2019, respectively.

~~At September 30, 2020, there was approximately $7.9 million~~ of total unrecognized pre-tax stock option expense under our equity compensation plans, which is expected to be recognized on a straight-line basis over a weighted-average period of ~~2.1~~2.0 years.

Our stock option activity for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, was as follows:


		Weighted-		Weighted-				Weighted-		Weighted-
		Average		Average	Aggregate			Average		Average	Aggregate
	Options	Exercise Price		Remaining	Intrinsic		Options	Exercise Price		Remaining	Intrinsic
(In thousands except options and per share data)	Outstanding	Per Share ⁽¹⁾		Contractual Life	Value ⁽²⁾		Outstanding	Per Share ⁽¹⁾		Contractual Life	Value ⁽²⁾
Balance at December 31, 2019	866,955	$	28.76	6.1 years	$	33,957
Balance at December 31, 2020							1,039,709	$	36.43	5.6 years	$	13,381
Granted	284,674	$	47.66				149,366	$	51.88
Exercised	(132,911)	$	5.74		$	6,224	(130,390)	$	25.95		$	3,694
Forfeited	(33,818)	$	53.54				(52,693)	$	48.97
Expired	(2,718)	$	63.02
Balance at September 30, 2020	982,182	$	36.41	5.8 years	$	8,829
Cancelled/Expired							(7,362)	$	49.14
Balance at June 30, 2021							998,630	$	39.36	5.4 years	$	14,399

Options exercisable at September 30, 2020	461,138	$	23.35	4.9 years	$	8,102
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 ~~539,487~~438,283 as of ~~September~~June 30, ~~2019,~~2020, had a weighted-average exercise price of ~~$5.15~~$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 ~~$1.4~~$1.2 million and ~~$1.0~~$1.4 million for the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~$4.0~~$2.5 million and ~~$2.9~~$2.6 million for the ~~nine~~six months ended ~~September~~June 30, 2021 and 2020, ~~and 2019,~~ respectively. ~~As of September~~At June 30, ~~2020,~~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 ~~1.9~~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.

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~~Our time-based restricted stock unit activity for the nine months ended September 30, 2020, 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, 2019

171,687

$
43.74

$
11,591
Granted

149,175

$
48.20

Modification

2,288

$
21.85

Vested

(94,640)

$
38.07

Forfeited

(11,701)

$
55.33

Balance at September 30, 2020

216,809

$
48.42

$
7,933

Deferred and unissued at September 30, 2020⁽²⁾

6,967

$
40.27

$
255

~~(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 nine months ended September 30, 2020, there were 858 restricted stock units granted to non-employee directors in lieu of their quarterly cash retainer payments. These restricted stock units were fully vested upon grant and represent the right to receive 1 share of common stock, per unit, upon the earlier of the director’s termination of service as a director of ours or the occurrence of a change of control of us. These restricted stock units are included in the “Granted” line in the table above and are also included in the “Vested” line in the table above due to their being fully vested upon grant. As of September 30, 2020, there were 6,967 outstanding restricted stock units that have been previously granted to non-employee directors in lieu of their quarterly director retainer payments.

Performance-Based Restricted Stock Units

We have granted performance-based restricted stock units (“PSUs”) to certain participants under the 2016 Plan. These PSUs have both performance-based and time-based vesting features. The PSUs granted in 2018 were earned to the extent performance goals based on revenue and adjusted EBITDA were achieved in 2019. The PSUs granted in 2019 ~~will be~~would have been earned ~~if and~~ to the extent performance goals based on revenue and adjusted EBITDA ~~are~~were achieved in ~~2020.~~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 ~~$0.4~~an expense of $0.2 million and ~~$0.5~~a benefit of $0.3 million for the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~$0.5~~a benefit of $0.1 million and ~~$1.7~~an expense of $0.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. The stock-based compensation ~~expense~~benefit for the ~~nine~~six months ended ~~September~~June 30, ~~2020 reflects~~2021 reflected a ~~$1.0~~$0.5 million benefit due to a change in the estimated payout associated with PSUs granted in ~~2019~~2020 being below the minimum performance target threshold level, as ~~defined. As~~defined, partially offset by an expense of ~~September~~$0.4 million related to the PSUs granted in 2018 and 2021. At June 30, ~~2020,~~2021, there was approximately ~~$1.4~~$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 ~~2.0~~2.7 years.

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Our performance-based restricted stock unit activity for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, was as follows:


	Performance-	Weighted-				Performance-	Weighted-
	Based	Average Grant		Aggregate		Based	Average Grant		Aggregate
	Units	Date Fair Value		Intrinsic		Units	Date Fair Value		Intrinsic
(In thousands except unit and per unit data)	Outstanding	Per Unit		Value ⁽¹⁾		Outstanding	Per Unit		Value ⁽¹⁾
Balance at December 31, 2019	91,151	$	44.63	$	6,154
Balance at December 31, 2020						79,303	$	47.83	$	3,564
Granted	31,731	$	50.41			39,419	$	51.82
Vested	(21,589)	$	33.62			(34,159)	$	33.98
Forfeited	(8,846)	$	70.46
Balance at September 30, 2020	92,447	$	46.72	$	3,383
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, ~~shares were added as approved by the Board~~194,518 and

Table of ~~Directors for each year since inception other than 2019, at which point, the Board exercised its prerogative to forgo the increase. On January 1, 2020,~~ Contents

190,539 shares were added as available for issuance ~~thereunder.~~thereunder on January 1, 2021 and 2020, respectively. As of ~~September~~June 30, ~~2020, 1,618,335~~2021, 1,740,328 shares were available for future issuance under the ESPP. We recognized stock-based compensation expense associated with the ESPP of ~~$0.3~~$0.2 million and ~~$0.2~~$0.3 million for the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~$0.8~~$0.4 million and ~~$0.7~~$0.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively.

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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				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
(In thousands)	2020		2019		2020		2019		2021		2020		2021		2020
Revenue
Flexitouch system	$	42,908	$	44,699	$	112,621	$	119,767	$	45,093	$	31,127	$	82,530	$	69,713
Other products⁽¹⁾		6,184		4,913		15,266		12,662		5,967		3,993		11,302		9,082
Total	$	49,092	$	49,612	$	127,887	$	132,429	$	51,060	$	35,120	$	93,832	$	78,795

Percentage of total revenue
Flexitouch system		87 %		90 %		88 %		90 %		88%		89%		88%		88%
Other products⁽¹⁾		13 %		10 %		12 %		10 %		12%		11%		12%		12%
Total		100 %		100 %		100 %		100 %		100%		100%		100%		100%

(1)

The “other products” line primarily includes revenue from our Entre system. The Actitouch system and the Airwear wrap contributed immaterial amounts of revenue for each of the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020.

~~Rental revenue for the three and nine months ended September 30, 2020 and 2019, was primarily from private insurers.~~ Our revenue from third-party payers, inclusive of sales and rental revenue, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, are summarized in the following table:


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
(In thousands)	2020		2019		2020		2019		2021		2020		2021		2020
Private insurers and other payers	$	34,554	$	35,909	$	90,459	$	93,932	$	35,348	$	25,668	$	63,631	$	55,905
Veterans Administration		6,788		7,764		18,168		23,690		7,322		4,322		13,168		11,380
Medicare		7,750		5,939		19,260		14,807		8,390		5,130		17,033		11,510
Total	$	49,092	$	49,612	$	127,887	$	132,429	$	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.

Rental agreements initiated subsequent to January 1, 2019, are recorded as sales-type leases in accordance with ASC 842, whereby rental revenue and cost of rental revenue are recognized upon the lease commencement date. In 2019, in accordance with applicable guidance, we continued to recognize rental agreements commencing prior to December 31, 2018, on a month-to-month basis as an operating lease until they were completed. These rental agreements do not have an impact on the revenue results in 2020. Total rental revenue for the three and nine months ended September 30, 2019 included both operating and sales-type lease revenue. Operating lease revenue was $0.6 million and $4.8 million for the three and nine months ended September 30, 2019.

The revenue and associated cost of revenue of sales-type leases are recognized on the lease commencement date and a net investment in leases is recorded on the 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

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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

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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 ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, was:



	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2020		2019		2020		2019		2021		2020		2021		2020
Sales-type lease revenue	$	6,519	$	6,088	$	18,173	$	15,088	$	7,430	$	5,602	$	14,077	$	11,654
Cost of sales-type lease revenue		2,562		1,932		6,062		5,358		2,217		1,820		4,068		3,500
Gross profit	$	3,957	$	4,156	$	12,111	$	9,730	$	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 ~~September~~June 30, ~~2020~~2021, was a benefit of ~~55%~~1,405%, compared to an expense of ~~27%~~75% for the three months ended ~~September~~June 30, ~~2019.~~2020. The primary driver of the change in our effective tax rate is attributable to recording a ~~change~~benefit in ~~projected taxable income, including proportionately higher~~the three months ended June 30, 2021, to recognize a tax ~~benefits~~credit for ~~stock-based compensation as compared to the same period last year.~~a research and development credit study conducted for tax years 2017-2020. We recorded an income tax benefit of ~~$0.8~~$1.4 million and an expense of ~~$0.9~~$5.9 million for the three months ended ~~September~~June 30, 2021 and 2020, ~~and 2019,~~ respectively.

The effective tax rate for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021, was a benefit of 77%, compared to an expense of ~~17%, compared to a benefit of 36%~~25% for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. The primary driver of the change in our effective tax rate is attributable to recording a ~~change~~benefit in ~~projected taxable income, including proportionately lower~~the six months ended June 30, 2021, to recognize a tax ~~benefits~~credit for ~~stock-based compensation as compared to the same period last year.~~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 ~~$2.3 million and a benefit of $1.8~~$3.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~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 ~~not~~ currently under examination ~~in any jurisdiction.~~by the New York Department of Taxation and Finance for tax years 2017, 2018, and 2019. The examination may lead to proposed adjustments to our taxes or our net operating losses with respect to years under examination as well as subsequent periods. In the event of any future tax assessments, we have elected to record the income taxes and any related interest and penalties as income tax expense on our statement of operations.

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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				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
(In thousands, except share and per share data)	2020		2019		2020		2019		2021		2020		2021		2020
Net income (loss)	$	2,424	$	2,431	$	(12,733)	$	6,688	$	1,305	$	(13,850)	$	(961)	$	(15,157)
Weighted-average shares outstanding		19,415,640		18,981,015		19,309,344		18,870,622		19,691,156		19,337,644		19,618,759		19,255,612
Dilutive effect of stock-based awards		331,725		660,838		—		760,099		356,121		—		—		—
Weighted-average shares used to compute diluted net (loss) income per share		19,747,365		19,641,853		19,309,344		19,630,721
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	$	0.12	$	0.13	$	(0.66)	$	0.35	$	0.07	$	(0.72)	$	(0.05)	$	(0.79)
Net income (loss) per share - Diluted	$	0.12	$	0.12	$	(0.66)	$	0.34	$	0.07	$	(0.72)	$	(0.05)	$	(0.79)

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


	Three Months Ended		Nine Months Ended		Three Months Ended		Six Months Ended
	September 30,		September 30,		June 30,		June 30,
	2020	2019	2020	2019	2021	2020	2021	2020
Restricted stock units	104,786	37,813	223,776	39,905	17,287	217,137	192,857	217,137
Common stock options	594,117	198,663	982,182	202,179	433,447	946,936	998,630	946,936
Performance stock units	38,666	25,724	113,646	25,724	—	116,295	60,627	116,295
Employee stock purchase plan	60,196	—	48,360	—	33,743	50,027	33,888	46,706
Total	797,765	262,200	1,367,964	267,808	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

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The following provides information regarding fair value measurements for our cash equivalents and marketable securities as of September 30, 2020, and December 31, 2019, according to the three-level fair value hierarchy:

At September 30, 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

$
9,159

$
—

$
—

$
9,159
U.S. government and agency obligations

5,000

—

—

5,000
Total

$
14,159

$
—

$
—

$
14,159


	At December 31, 2019								At December 31, 2020
	Quoted Prices								Quoted Prices
	in Active		Significant						in Active		Significant
	Markets for		Other		Significant				Markets for		Other		Significant
	Identical		Observable		Unobservable				Identical		Observable		Unobservable
	Assets		Inputs		Inputs				Assets		Inputs		Inputs
(In thousands)	(Level 1)		(Level 2)		(Level 3)		Total		(Level 1)		(Level 2)		(Level 3)		Total
Recurring Fair Value Measurements:
Money market mutual funds	$	481	$	—	$	—	$	481	$	16,188	$	—	$	—	$	16,188
U.S. government and agency obligations		25,954		—		—		25,954
Corporate debt securities		—		2,501		—		2,501
Total	$	26,435	$	2,501	$	—	$	28,936	$	16,188	$	—	$	—	$	16,188

During the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~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 ~~values for~~value of our money market mutual funds ~~U.S. government and agency obligations and corporate debt securities are~~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.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with 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. ~~There~~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 ~~how many people are likely to be affected by it.~~will reverse course, the severity of any resurgence of COVID-19 or variant strains of the virus, the effectiveness of vaccines and attitudes towards receiving them, or what ultimate effects the pandemic will have. For that reason, we are unable to reasonably estimate the long-term impact of the pandemic on our business at this time. Our first priority with regard to the COVID-19 pandemic is to ensure the safety and health of our employees, clinicians and patients. Subject to that, we are focusing our efforts on attempting to continue our business operations in this unprecedented environment. Part of our strategy includes changing many of our processes and practices in an effort to help mitigate the impact of COVID-19 on our business so that we can support our clinicians and safely make our at-home therapies available to patients.

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 needs. These~~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:

●

~~We have continued to incorporate~~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.

●

~~Continuing~~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.

●

~~Collaborating with payers to modify coverage requirements by serving patients virtually.~~

●

~~In concert with COVID-19 social distancing requirements and recommendations, we moved to~~Utilizing a “no contact” virtual patient training model. This new model substantially reduced the need for in-person contact and visits to patients’ homes and clinics in order to protect the health and limit the exposuremix of ~~both our~~employee trainers and ~~patients. Accordingly in the second quarter of 2020, we inactivated our~~ independent healthcare practitioners ~~who acted as at-home trainers~~ to educate patients on the proper use of our ~~systems, in order to allow these individuals to have access to specific COVID related financial relief.~~solutions virtually or in-person.

●

~~We continue~~Continuing to ~~transition~~host large ~~in-person~~virtual medical education programs, ~~in favor of conducting virtual meetings whenever possible.~~while also beginning to schedule smaller in-person meetings.

●

~~When in-person visits are required, we are supporting~~Supporting clinicians and patients by using rigorous infection control ~~practices.~~practices when in-person visits are required.

~~Table of Contents~~

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.

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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% ~~and 90%~~ of our revenue in each of the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019, respectively.~~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 ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, sales and rentals of our Entre system represented 12% ~~and 10%~~ of our ~~revenue, respectively.~~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. ~~See Note 3 - “Summary of Significant Accounting Policies” to the consolidated financial statements in this report for more information regarding this impairment charge and discontinuation.~~ 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, ~~home~~ training ~~materials, contracted at-home trainers,~~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 ~~salesforce~~sales force and a team of Field Support Specialists. Our collective field commercial team has grown to ~~a team of~~ over ~~250~~300 employees as of ~~September~~June 30, ~~2020,~~2021, compared to ~~over 230~~285 employees as of ~~September 30, 2019.~~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.

In concert with COVID-19 social distancing requirements, we moved to a “no contact” virtual patient training model. This new model substantially reduced the need for in-person contact and visits to patients’ homes and clinics. Accordingly, in the second quarter of 2020, we inactivated our independent healthcare practitioners, who acted as at-home trainers to educate patients on the proper use of our systems.

As it relates to the impact of COVID-19 on our ~~third quarter~~ commercial processes in the first half of 2021, we continued to see ~~a certain number of healthcare facilities and clinics with restricted access to their clinicians, reduced patient~~

~~Table of Contents~~

~~consultations and treatments, or being closed temporarily due to the pandemic. We continued to see some of the~~ restrictions loosen, in line with the applicable governmental regulations. As ~~most of~~a result, we continue to expand our ~~clinician customers practice outside of a hospital, we can interact~~interactions with clinicians and patients on aan in-person basis, where possible, while continuing to engage in virtual ~~basis, using video conferencing and other non-direct means.~~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 ~~will~~plan to continue to work towards expanding our commercial organization throughout ~~the fourth quarter of 2020~~2021 by adding to our ~~direct sales force.~~overall commercial team.

We invest substantial resources in our ~~Reimbursement Department~~reimbursement function to improve operational efficiencies and enhance individual payer expertise, while continuing our strategic focus of payer development. Our ~~Payer Development group is composed of both strategic and analytical teams, with focus~~payer relations function focuses on ~~payer decision-maker relationships and education,~~ payer policy development, ~~and revision, payer~~education, contract negotiations, and ~~payer~~ data analysis. Our ~~experienced Reimbursement Operations group~~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 Department~~reimbursement function has been actively working with Medicare and a broad base of private payers to understand the ever-changing reimbursement criteria ~~that are~~ 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

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ever-changing, the extent to which these changes will remain in place and the impact on our business in the future are not determinable at this time.

We also have a clinical team, consisting of a scientific advisory board, in-house therapists and nurses, and a ~~medical director~~Chief Medical Officer (part-time), that serves as a resource to clinicians and patients and guides the development of clinical evidence in support of our products.Most clinical studies require observation and interaction with clinicians and patients to monitor results and progress. Given the impact of COVID-19, patient recruitment for our clinical studies involving our products and clinical outcomes ~~has~~had previously been ~~suspended. We do not have an expectation for when~~suspended in 2020. However, in the first half of 2021, approximately half of our clinical ~~studies will resume.~~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 ~~September~~June 30, ~~2020,~~2021, we generated revenue of ~~$49.1~~$51.1 million and had net income of ~~$2.4~~$1.3 million, compared to revenue of ~~$49.6~~$35.1 million and a net ~~income~~loss of ~~$2.4~~$13.9 million for the three months ended ~~September~~June 30, ~~2019.~~2020. For the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, we generated revenue of ~~$127.9~~$93.8 million and had a net loss of ~~$12.7~~$1.0 million, compared to revenue of ~~$132.4~~$78.8 million and a net ~~income~~loss of ~~$6.7~~$15.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. Our primary sources of capital ~~to date~~since inception have been from operating income, private placements of our capital stock and capital raised in our initial public offering, which closed on August 2, 2016.

We operate in one segment for financial reporting purposes.

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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)	%

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~~Results of Operations~~

~~Comparison of the Three and Nine Months Ended September 30, 2020 and 2019~~

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

Three Months Ended

September 30,

Change
(In thousands)

2020

2019

$

%
Condensed Consolidated Statement

% of

% of

of Operations Data:

revenue

revenue

Revenue

Sales revenue

$
42,573

87
%

$
42,882

86
%

$
(309)

(1)
%
Rental revenue

6,519

13
%

6,730

14
%

(211)

(3)
%
Total revenue

49,092

100
%

49,612

100
%

(520)

(1)
%
Cost of revenue

Cost of sales revenue

11,558

24
%

12,233

25
%

(675)

(6)
%
Cost of rental revenue

2,562

5
%

2,006

4
%

556

28
%
Total cost of revenue

14,120

29
%

14,239

29
%

(119)

(1)
%
Gross profit

Gross profit - sales revenue

31,015

63
%

30,649

61
%

366

1
%
Gross profit - rental revenue

3,957

8
%

4,724

10
%

(767)

(16)
%
Gross profit

34,972

71
%

35,373

71
%

(401)

(1)
%
Operating expenses

Sales and marketing

19,488

40
%

20,737

42
%

(1,249)

(6)
%
Research and development

1,102

2
%

1,467

3
%

(365)

(25)
%
Reimbursement, general and administrative

12,588

26
%

9,966

20
%

2,622

26
%
Total operating expenses

33,178

68
%

32,170

65
%

1,008

3
%
Income from operations

1,794

3
%

3,203

6
%

(1,409)

(44)
%
Other (expense) income

(121)

—
%

160

—
%

(281)

(176)
%
Income before income taxes

1,673

3
%

3,363

6
%

(1,690)

(50)
%
Income tax (benefit) expense

(751)

(2)
%

932

2
%

(1,683)

(181)
%
Net income

$
2,424

5
%

$
2,431

4
%

$
(7)

(0)
%

~~Table of Contents~~


	Nine Months Ended												Six Months Ended
	September 30,								Change				June 30,								Change
(In thousands)	2020				2019				$		%		2021				2020				$		%
Condensed Consolidated Statement			% of				% of								% of				% of
of Operations Data:			revenue				revenue								revenue				revenue
Revenue
Sales revenue	$	109,714	86	%	$	112,503	85	%	$	(2,789)	(2)	%	$	79,755	85	%	$	67,141	85	%	$	12,614	19	%
Rental revenue		18,173	14	%		19,926	15	%		(1,753)	(9)	%		14,077	15	%		11,654	15	%		2,423	21	%
Total revenue		127,887	100	%		132,429	100	%		(4,542)	(3)	%		93,832	100	%		78,795	100	%		15,037	19	%
Cost of revenue
Cost of sales revenue		30,868	24	%		33,231	25	%		(2,363)	(7)	%		23,329	25	%		19,310	25	%		4,019	21	%
Cost of rental revenue		6,062	5	%		6,062	5	%		—	—	%		4,068	4	%		3,500	4	%		568	16	%
Total cost of revenue		36,930	29	%		39,293	30	%		(2,363)	(6)	%		27,397	29	%		22,810	29	%		4,587	20	%
Gross profit
Gross profit - sales revenue		78,846	62	%		79,272	60	%		(426)	(1)	%		56,426	60	%		47,831	60	%		8,595	18	%
Gross profit - rental revenue		12,111	9	%		13,864	10	%		(1,753)	(13)	%		10,009	11	%		8,154	11	%		1,855	23	%
Gross profit		90,957	71	%		93,136	70	%		(2,179)	(2)	%		66,435	71	%		55,985	71	%		10,450	19	%
Operating expenses
Sales and marketing		59,856	47	%		56,546	43	%		3,310	6	%		39,718	42	%		40,368	51	%		(650)	(2)	%
Research and development		3,891	3	%		3,982	3	%		(91)	(2)	%		2,476	3	%		2,789	4	%		(313)	(11)	%
Reimbursement, general and administrative		37,830	30	%		28,159	21	%		9,671	34	%		28,401	30	%		25,242	32	%		3,159	13	%
Total operating expenses		101,577	80	%		88,687	67	%		12,890	15	%		70,595	75	%		68,399	87	%		2,196	3	%
(Loss) income from operations		(10,620)	(9)	%		4,449	3	%		(15,069)	N.M.	%
Other income		181	—	%		480	—	%		(299)	(62)	%
(Loss) income before income taxes		(10,439)	(9)	%		4,929	3	%		(15,368)	N.M.	%
Income tax expense (benefit)		2,294	2	%		(1,759)	(1)	%		4,053	N.M.	%
Net (loss) income	$	(12,733)	(10)	%	$	6,688	4	%	$	(19,421)	N.M.	%
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)	%

~~“N.M.” Not Meaningful~~

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Revenue

Revenue ~~decreased $0.5~~increased $15.9 million, or 1%45%, to ~~$49.1~~$51.1 million in the three months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~$49.6~~$35.1 million in the three months ended ~~September~~June 30, ~~2019.~~2020. The ~~decrease~~increase in total revenue was attributable to ~~a decrease~~an increase of ~~$1.8~~$14.0 million, or 4%45%, in sales and rentals of the Flexitouch system ~~offset partially by~~and an increase of ~~$1.3~~$2.0 million, or ~~26%~~49%, in sales and rentals of the Entre system in the quarter ended ~~September~~June 30, ~~2020.~~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 ~~decrease~~increase in ~~third quarter revenue continued to be negatively impacted by COVID-19, primarily from social distancing requirements and safety protocols imposed within clinics. The decrease in third~~second quarter revenue was ~~partially offset~~further driven by ~~the continued expansion of our commercial team,~~improvements in salesforce productivity and effective virtual ~~educational~~education events yielding an expanded prescriber base and an increase in ~~the number of~~ Medicare patients served.

Revenue ~~decreased $4.5~~increased $15.0 million, or 3%19%, to ~~$127.9~~$93.8 million in the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~$132.4~~$78.8 million in the ~~nine~~six months ended ~~September~~June 30, ~~2019, which decrease~~2020. The increase was primarily attributable to ~~a decrease~~an increase of ~~approximately $7.1~~$12.8 million, or 6%18%, in sales and rentals of our Flexitouch system ~~offset partially by~~and an increase of ~~$2.6~~$2.2 million, or ~~21%~~24%, in sales and rentals of the Entre system for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. Revenue infor the ~~first two~~six months ended June 30, 2021, benefited from the initial stages of ~~2020 was ahead of our expectations. Beginning in March 2020 and continuing through the third quarter, revenue was impacted by~~recovery from the COVID-19 pandemic, ~~which limited our ability to access our clinician customers and their patients. Specifically, we saw~~with a portion of healthcare facilities and clinics ~~restricting access to their clinicians, reducing~~relaxing restrictions and increasing patient ~~consultations, or closing temporarily due to COVID-19.~~throughput, as well as an expanded prescriber base.

Revenue from the Veterans Administration represented 14% and 16% of total revenue in the three months ended September 30, 2020 and 2019, respectively. Revenue from the Veterans Administration represented 14% and 18% of total revenue in the nine months ended September 30, 2020 and 2019, respectively. Revenue from Medicare represented 16% and 12% of total revenue in the three months ended ~~September~~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 ~~2019,~~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 ~~15%~~18% and ~~11%~~15% of total revenue in the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively.

The following ~~tables summarize~~table summarizes our revenue by product for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, both in dollars and percentage of total revenue:


	Three Months Ended								Three Months Ended
	September 30,				Change				June 30,				Change
(In thousands)	2020		2019		$		%		2021		2020		$		%
Revenue
Flexitouch system	$	42,908	$	44,699	$	(1,791)	(4)%		$	45,093	$	31,127	$	13,966	45%
Other products⁽¹⁾		6,184		4,913		1,271	26%			5,967		3,993		1,974	49%
Total	$	49,092	$	49,612	$	(520)	(1)%		$	51,060	$	35,120	$	15,940	45%

Percentage of total revenue
Flexitouch system		87%		90%				��		88%		89%
Other products⁽¹⁾		13%		10%						12%		11%
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 months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020.

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Nine Months Ended

September 30,

Change
(In thousands)

2020

2019

$

%
Revenue

Flexitouch system

$
112,621

$
119,767

$
(7,146)

(6)%
Other products⁽¹⁾

15,266

12,662

2,604

21%
Total

$
127,887

$
132,429

$
(4,542)

(3)%

Percentage of total revenues

Flexitouch system

88%

90%

Other products⁽¹⁾

12%

10%

Total

100%

100%


	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 ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020.

Cost of Revenue and Gross Margin

Cost of revenue ~~decreased $0.1~~increased $4.6 million, or 1%46%, to ~~$14.1~~$14.9 million in the three months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~$14.2~~$10.2 million in the three months ended ~~September~~June 30, ~~2019.~~2020. Cost of revenue ~~decreased $2.4~~increased $4.6 million, or 6%20%, to ~~$36.9~~$27.4 million in the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~$39.3~~$22.8 million in the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. The ~~decrease~~increase in cost of revenue in both periods was primarily attributable to ~~a decrease~~an increase in the number of Flexitouch and Entre systems sold and rented, slightly offset by an increase in other products sales and rentals, and in the nine month period, the $0.4 million inventory impairment charge related to discontinuing the Airwear wrap product line. rented.

The total gross margin rate was 71% of sales in each of the three and ~~nine~~six months ended ~~September~~June 30, ~~2020, compared to 71%~~2021 and ~~70% in the three and nine months ended September~~June 30, ~~2019, respectively. The increase for the nine month period was primarily attributable to the composition of sales and rental mix by payer.~~2020.

Sales and Marketing Expenses

Sales and marketing expenses ~~decreased $1.2~~increased $3.5 million, or 6%20%, to ~~$19.5~~$20.9 million in the three months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~$20.7~~$17.4 million in the three months ended ~~September~~June 30, ~~2019.~~2020. The ~~decrease~~increase was primarily attributable to a ~~$1.6~~$2.1 million ~~reduction~~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 ~~pivoting to more virtual patient~~increased in-person trainings ~~$1.1 million decrease from reduced tradeshows~~ and ~~professional services, and~~a $0.7 million ~~of reduced~~increase in travel and entertainment expense due to decreased travel activities, partially offset by continued investment in our field sales team and marketing initiatives to increase clinician awareness, resulting in an increase of $2.2 million in personnel-related compensation expense, including $0.4 million of incremental stock-based compensation expense.eased restrictions on travel.

Sales and marketing expenses ~~increased $3.3~~decreased $0.6 million, or 6%2%, to ~~$59.9~~$39.7 million in the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~$56.6~~$40.4 million in the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. The ~~increase~~decrease was primarily attributable to ~~our continued investment~~a $2.0 million decrease from reduced sales meetings, tradeshows and professional services and a $0.6 reduction in ~~our field sales team and marketing initiatives to~~external patient training expense, partially offset by a $2.0 million increase ~~clinician awareness, resulting in an increase of $8.3 million~~ in personnel-related compensation expense as a result of the increased headcount in the commercial team.

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expense, including $0.7 million of incremental stock-based compensation expense, partially offset by a reduction of $2.9 million in our external patient training expense as a result of moving to increased virtual patient trainings, $1.5 million in reduced travel and entertainment expense due to decreased travel activities and a $0.6 million decrease from reduced tradeshows and professional services.

Research and Development Expenses

Research and development (“R&D”) expenses ~~decreased $0.4~~increased $0.1 million, or ~~25%~~9%, to $1.2 million in the three months ended June 30, 2021, compared to $1.1 million in the three months ended ~~September~~June 30, 2020, ~~compared to $1.5 million in the three months ended September 30, 2019,~~ which ~~decrease~~ was primarily attributable to ~~slowing of~~an increase in clinical studies ~~activities as a result of COVID-19.~~activity.

R&D expenses decreased ~~$0.1~~$0.3 million, or 2%11%, to ~~$3.9~~$2.5 million in the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~$4.0~~$2.8 million in the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, which ~~decrease~~ was primarily attributable to ~~the slowing of clinical studies activities as~~ a ~~result of COVID-19, partially offset by first quarter investments~~$0.2 million decrease in ~~our R&D team~~professional services and ~~clinical studies projects.~~a $0.1 million decrease in personnel-related compensation expense.

Reimbursement, General and Administrative Expenses

Reimbursement, general and administrative expenses ~~increased $2.6~~decreased $0.2 million, or ~~26%~~2%, to ~~$12.6~~$14.1 million in the three months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~$10.0~~$14.4 million in the three months ended ~~September~~June 30, ~~2019.~~2020. This increase was primarily attributable to a $1.6 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer development and corporate functions, including $0.4 million severance related expense related to the departure of our Chief Operating Officer. The increase in reimbursement, general and administrative expenses was also attributable to a $1.0 million increase in occupancy costs, depreciation expense, legal and professional fees.

Reimbursement, general and administrative expenses increased $9.7 million, or 34%, to $37.8 million in the nine months ended September 30, 2020, compared to $28.2 million in the nine months ended September 30, 2019. This increasedecrease was primarily attributable to a $3.6 million impairment charge related to the write-off of our Airwear wrap-related long-lived assets ~~and~~recorded in the second quarter of 2020, partially offset by a ~~$3.3 million increase in occupancy costs, depreciation expense, legal and professional fees. The increase in reimbursement, general and administrative expenses was also attributable to a $2.8~~$1.9 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer ~~development~~relations and corporate functions ~~including $0.4~~and a combined $1.4 million ~~severance related~~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 ~~departure~~write-off of our ~~Chief Operating Officer.~~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 ~~$0.1 million~~$24,000 and income of ~~$0.2 million~~$36,000 for the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively, and was an expense of $34,000 and income of ~~$0.2 million and $0.5~~$0.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~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 ~~$0.8~~$1.4 million and ~~an income tax~~ expense of ~~$0.9~~$5.9 million for the three months ended ~~September~~June 30, 2021 and 2020, respectively. We recorded an income tax benefit of $3.2 million and ~~2019,~~expense of $3.0 million for the six months ended June 30, 2021 and 2020, respectively. The primary driver of ~~this change~~these changes was ~~an increase~~a tax benefit related to a research and development credit recognized in ~~tax-deductible share-based compensation activity, as compared to~~ the ~~prior year period. We recorded an income tax expense~~second quarter of ~~$2.3~~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 ~~an income tax benefit~~net accounts receivable of ~~$1.8~~$42.6 million, ~~for~~as well as the ~~nine months ended September 30, 2020 and 2019, respectively. The primary driver of this change was a decrease in tax-deductible share-based compensation activity, as compared to the prior year period.~~ borrowing capacity available under our Restated Credit Agreement.

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~~Liquidity and Capital Resources~~

~~Cash Flows~~

At September 30, 2020, our principal sources of liquidity were cash and cash equivalents of $42.2 million and net accounts receivable of $36.0 million, as well as the borrowing capacity available under our Credit Agreement.

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

Nine Months Ended

September 30,
(In thousands)

2020

2019
Net cash (used in) provided by:

Operating activities

$
(2,245)

$
2,421
Investing activities

20,684

(3,289)
Financing activities

995

583
Net increase (decrease) in cash and cash equivalents

$
19,434

$
(285)


	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 ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, was ~~$2.2~~$1.9 million, resulting from a net loss of ~~$12.7~~$1.0 million and a net ~~increase~~decrease in operating assets and liabilities of ~~$7.9~~$3.7 million, which ~~were~~was partially offset by non-cash net income (loss) adjustments of ~~$18.2~~$2.8 million. The non-cash net income (loss) adjustments consisted primarily of ~~$8.3~~$5.1 million of stock-based compensation expense, ~~a $4.0~~$3.6 million ~~impairment loss charge related to the write-off of our Airwear wrap product line, a $3.9 million decrease~~ in deferred taxes and ~~$2.1~~$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 ~~$5.5~~$1.2 million, net investment in ~~inventories~~leases of ~~$3.5~~$1.0 million and income taxes of $0.8 million, partially offset by a decrease in prepaid expenses and other assets of ~~$1.6~~$0.5 million. The changes in operating liabilities consisted of increases in accrued expenses of $1.7 million and ~~in net investment in leases~~accounts payable of ~~$1.3~~$0.9 million, partially offset by a decrease in income taxes receivable of $0.7 million. The changes in operating liabilities consisted primarily of increases in accrued expenses and other liabilities of $1.1 million, in accounts payable of $0.9 million and I accrued payroll and related taxes of ~~$0.8~~$1.2 million.

Net cash ~~provided by~~used in operating activities during the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, was ~~$2.4~~$8.0 million, resulting from a net ~~income~~loss of ~~$6.7~~$15.2 million and ~~non-cash~~ net ~~income adjustments of $9.9 million, which were offset by a net increase~~decrease in operating assets and liabilities of ~~$14.2~~$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 ~~$7.4~~$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 ~~$2.6~~$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 ~~$7.6~~$0.5 million ~~in inventory~~and prepaid expenses and other assets of ~~$5.7~~$0.3 million, partially offset by a decrease in accounts receivable of ~~$4.5 million, and in income taxes receivable of $2.1~~$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 ~~$3.9 million, in accrued expenses and other liabilities of $1.1 million and in accounts payable of $1.0~~$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 ~~nine~~six months ended ~~September~~June 30, 2020, was ~~$20.7~~$15.7 million, primarily consisting of ~~$22.5~~$16.5 million in proceeds from maturities of marketable securities, partially offset by ~~$1.8~~$0.8 million in purchases of property and equipment and patent costs.

Net cash used in investing activities during the nine months ended September 30, 2019, was $3.3 million, primarily consisting of $4.3 million in purchases of property and equipment partially offset by $1.1 million in net marketable securities activity.

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Financing Activities

Net cash provided by financing activities during the ~~nine~~six months ended ~~September~~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 ~~$1.0~~$0.8 million, consisting of ~~$2.6~~$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.

~~Net cash provided by financing activities during the nine months ended September 30, 2019, was $0.6 million, consisting~~31

Table of proceeds from the issuance of common stock under the ESPP of $1.9 million and exercises of common stock options of $1.8 million, partially offset by $3.1 million in taxes paid for the net share settlement of restricted stock units.Contents

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 ~~“Credit~~“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 ~~August 3, 2021.~~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 ~~$10.0~~$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 ~~$25.0~~$30 million in the aggregate, subject to satisfaction of certain conditions. ~~As of September 30, 2020, and the date on which we filed this report, we did not have any outstanding borrowings under the 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.

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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 ~~nine~~six months ended ~~September~~June 30, ~~2020,~~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 ~~$200.0~~$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. ~~We are currently~~As of December 31, 2020, we recognized all of the funds received in the ~~process of evaluating the impact and applicability of these funds on our financial statements.~~initial allotment as other income.

Contractual and Commercial Commitments Summary

For a discussion on our contractual and commercial commitments, see ~~Item 7,~~ “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, ~~2019.~~2020. There have been no material changes since December 31, ~~2019.~~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

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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, ~~2019.~~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, ~~2019.~~2020. There have been no material changes since December 31, ~~2019.~~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 ~~September~~June 30, ~~2020.~~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 ~~September~~June 30, ~~2020,~~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 ~~September~~June 30, ~~2020,~~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.

~~From time~~Information pertaining to ~~time,~~certain legal proceedings in which we are ~~subject~~involved can be found in Note 10 – “Commitments and Contingencies” to ~~various claims~~our condensed consolidated financial statements included in Part I, Item 1 of this report and legal proceedings arising in the ordinary course of business. Regardless of outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

~~On February 13, 2019, we were served with a sealed amended complaint venued in the United States District Court in the Southern District of Texas, Houston Division, captioned~~ ~~United States ex rel Veterans First Medical Supply, LLC vs. Tactile Medical Systems Technology, Inc.,~~ ~~Case No. 18-2871, which had been filed on January 23, 2019. The complaint~~ is a ~~qui tam~~ ~~action on behalf of the United States brought~~incorporated herein by one of our competitors. The United States has declined to intervene in this action. The complaint alleges that we violated the Federal Anti-Kickback Statute claiming that we submitted false claims and made false statements in connection with the Medicare and Medicaid programs, and that we engaged in unlawful retaliation in violation of the Federal False Claims Act. The complaint seeks damages, statutory penalties, attorneys’ fees, treble damages and costs. We filed a motion to dismiss on April 5, 2019. This motion 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 Judgement. Both motions are currently pending decision. We believe that the plaintiff’s allegations are without merit and we intend to continue to vigorously defend against the lawsuit.

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On September 29, 2020, a complaint in a purported securities class action lawsuit was filed against us and three of our present or former officers in the United States District Court for the District of Minnesota under the following caption: ~~Brian Mart, Individually and on Behalf of All Others Similarly Situated v. Tactile Systems Technology, Inc., et al.~~ The complaint alleges, among other things, that the defendants made materially false and misleading statements regarding our business, operational and compliance policies, and financial results during the time period from May 7, 2018 through June 8, 2020 (“alleged class period”), in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder. Plaintiff seeks to represent a class consisting of all investors who purchased our stock during the alleged class period. The complaint seeks damages in an unspecified amount and an award of costs and expenses, including attorneys’ and experts’ fees. We have not yet responded to the complaint, and do not have a deadline to respond, but we intend to move to dismiss it.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, ~~2019,~~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, except as set forth below.~~

The potential effects of the COVID-19 pandemic are likely to impact, and may exacerbate or trigger, many of our risk factors that were included in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019. In addition, the following risk factor is added:

~~The COVID -19 pandemic has adversely affected, and we expect that it will continue to adversely affect, our business, financial condition and results of operations.~~

The COVID-19 pandemic, and efforts taken to address the pandemic, have negatively impacted the global economy and our business, and are expected to continue to have negative effects. The pandemic has caused us to modify many of our business practices, but we cannot assure you that those modifications will be successful in mitigating the negative impacts of COVID-19. As described elsewhere in this report, as a result of the COVID-19 pandemic, a number of healthcare facilities and clinics have restricted access to their clinicians, reduced patient consultations and treatments, or closed temporarily due to the 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. Further, due to the impact of COVID-19, patient recruitment for our clinical studies involving our products and clinical outcomes has been suspended.

Further, the extent to which the COVID-19 pandemic will impact our business, financial condition and results of operations in the future will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration, spread, severity, and impact of the COVID-19 pandemic, the effects of the COVID-19 pandemic on our clinician customers and their patients, our suppliers and our payers, and the remedial actions and stimulus measures adopted by governmental authorities, and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic recession or depression that has occurred or may occur in the future.

~~The potential negative impacts of the COVID-19 pandemic on us include, but are not limited to:~~

●

~~further reduced demand for our products;~~

●

~~reductions in coverage or reimbursement of our products by payers;~~

●

~~our inability to effectively conduct virtual patient demonstrations and trainings;~~

●

~~continued restricted access to clinicians, further reduced patient consultations and treatments, and additional or further closures of healthcare facilities and clinics;~~

●

~~disruptions to our supply chain;~~

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~~limitations on the ability of our workforce to perform their duties effectively;~~

●

~~disruptions in the timely delivery of our products to patients;~~

●

~~increased risks of phishing and other cybersecurity attacks;~~

●

~~delayed reviews and approvals by the U.S. Food and Drug Administration;~~

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~~increased unemployment rates in the U.S., which may lead to a reduced number of patients with available insurance coverage, resulting in a reduction in the demand for our products;~~

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~~significant stock market volatility, resulting in extreme price and volume fluctuations;~~

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~~our inability to focus on or expend resources toward the expansion of our business; and~~

●

~~continued adverse impact on liquidity or sources of capital.~~

Given the evolving health, economic, social and governmental impacts of the COVID-19 pandemic, the potential impact that the COVID-19 pandemic could have on us remains uncertain, but it could have a material adverse effect on our business, financial condition and results of operations.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

Filed

Exhibit

Filed

Number

Description of Exhibit

Form

Date of Filing

Number

Herewith

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

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

8-K

05/09/2019

3.2

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

8-K

05/09/2019

3.3

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

31.2

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

32.1

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

32.2

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

101.1

The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL: (i) Balance Sheets, (ii) Statements of Operations, (iii) Statements of Comprehensive Income (Loss), (iv) Statements of Stockholders’ Equity, (v) Statements of Cash Flows, and (vi) Notes to the Condensed Consolidated Financial Statements

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

104.1

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

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SIGNATURES

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


	Tactile Systems Technology, Inc.

Date: ~~November~~August 2, ~~2020~~2021	By:	/s/ Brent A. Moen
		Brent A. Moen
		Chief Financial Officer
		(Principal financial and accounting officer)

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	PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements	54
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2723
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3834
Item 4.	Controls and Procedures	3834

	PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	3834
Item 1A.	Risk Factors	3934
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4034
Item 3.	Defaults Upon Senior Securities	4035
Item 4.	Mine Safety Disclosures	4035
Item 5.	Other Information	4035
Item 6.	Exhibits	4035


	At December 31, 2019
	Amortized		Unrealized				Fair
(In thousands)	Cost		Gains		Losses		Value
U.S. government and agency obligations	$	19,950	$	14	$	1	$	19,963
Corporate debt securities		2,493		8		—		2,501
Marketable securities	$	22,443	$	22	$	1	$	22,464


	At December 31, 2019
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(In thousands)	Value		Losses		Value		Losses		Value		Losses
U.S. government and agency obligations	$	5,997	$	1	$	—	$	—	$	5,997	$	1
Corporate debt securities		—		—		—		—		—		—
Marketable securities	$	5,997	$	1	$	—	$	—	$	5,997	$	1