UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: June 30, ~~2021~~2022

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

For the transition period from to

Commission File Number: 001-37799

Tactile Systems Technology, Inc.

(Exact name of registrant as specified in its charter)


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

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

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


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

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

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

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


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

Smaller reporting company	☐	Emerging growth company	☐

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

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

~~19,782,295~~20,132,081 shares of common stock, par value $0.001 per share, were outstanding as of July ~~29, 2021.~~28, 2022.

Table of Contents

Forward-Looking Information

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

●

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

●

the adequacy of our liquidity to pursue our business objectives;

●

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

●

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

●

adverse economic conditions or intense competition;

●

loss of a key supplier;

●

entry of new competitors and products;

●

adverse federal, state and local government regulation;

●

technological obsolescence of our products;

●

technical problems with our research and products;

●

our ability to expand our business through strategic acquisitions;

●

our ability to integrate acquisitions and related businesses;

●

wage and component price ~~increases for supplies and components;~~inflation;

●

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

●

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

You should read the matters described in "Risk Factors" and the other cautionary statements made in our Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, and in this Quarterly Report on Form 10-Q. We cannot assure you that the forward-looking statements in this report will prove to be accurate and therefore you are encouraged not to place undue reliance on forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. You are urged to carefully review and consider the various disclosures made by us in this report and in other filings with the Securities and Exchange Commission (the “SEC”) that advise of the risks and factors that may affect our business. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we may make.

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

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


June 30,

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

2021

2020
Assets

Current assets

Cash and cash equivalents

$
49,007

$
47,855
Accounts receivable

42,629

43,849
Net investment in leases

11,741

10,708
Inventories

21,153

18,563
Prepaid expenses and other current assets

2,092

2,638
Total current assets

126,622

123,613
Non-current assets

Property and equipment, net

6,399

6,957
Right of use operating lease assets

19,138

20,132
Intangible assets, net

1,702

1,680
Accounts receivable, non-current

11,874

9,433
Deferred income taxes

13,779

10,198
Other non-current assets

2,118

2,074
Total non-current assets

55,010

50,474
Total assets

$
181,632

$
174,087
Liabilities and Stockholders' Equity

Current liabilities

Accounts payable

$
5,060

$
4,197
Accrued payroll and related taxes

10,303

11,588
Accrued expenses

4,010

4,423
Income taxes payable

1,530

2,658
Operating lease liabilities

2,024

2,006
Other current liabilities

3,716

1,842
Total current liabilities

26,643

26,714
Non-current liabilities

Accrued warranty reserve, non-current

3,450

3,235
Income taxes payable, non-current

348

—
Operating lease liabilities, non-current

18,475

19,388
Total non-current liabilities

22,273

22,623
Total liabilities

48,916

49,337

Commitments and Contingencies (see Note 10)

Stockholders’ equity:

Preferred stock, $0.001 par value, 50,000,000 shares authorized; NaN issued and outstanding as of June 30, 2021 and December 31,
2020

—

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

20

19
Additional paid-in capital

113,601

104,675
Retained earnings

19,095

20,056
Total stockholders’ equity

132,716

124,750
Total liabilities and stockholders’ equity

$
181,632

$
174,087


Tactile Systems Technology, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
	June 30,		December 31,
(In thousands, except share and per share data)	2022		2021
Assets
Current assets
Cash and cash equivalents	$	23,350	$	28,229
Accounts receivable		49,157		49,478
Net investment in leases		13,346		12,482
Inventories		19,970		19,217
Prepaid expenses and other current assets		1,446		4,141
Total current assets		107,269		113,547
Non-current assets
Property and equipment, net		5,978		6,750
Right of use operating lease assets		22,628		23,984
Intangible assets, net		52,254		54,081
Goodwill		31,063		31,063
Accounts receivable, non-current		15,343		12,847
Other non-current assets		2,768		1,998
Total non-current assets		130,034		130,723
Total assets	$	237,303	$	244,270
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable	$	9,110	$	5,023
Note payable		2,968		2,960
Earn-out, current		9,800		3,250
Accrued payroll and related taxes		12,144		12,139
Accrued expenses		5,258		5,262
Income taxes payable		11		16
Operating lease liabilities		2,488		2,506
Other current liabilities		4,767		3,305
Total current liabilities		46,546		34,461
Non-current liabilities
Revolving line of credit, non-current		24,891		24,857
Note payable, non-current		22,463		26,933
Earn-out, non-current		3,950		2,950
Accrued warranty reserve, non-current		2,791		3,108
Income taxes payable, non-current		298		348
Operating lease liabilities, non-current		22,122		23,354
Deferred income taxes		126		32
Total non-current liabilities		76,641		81,582
Total liabilities		123,187		116,043

Commitments and Contingencies (see Note 10)

Stockholders’ equity:
Preferred stock, $0.001 par value, 50,000,000 shares authorized; NaN issued and outstanding as of June 30, 2022 and December 31, 2021		—		—
Common stock, $0.001 par value, 300,000,000 shares authorized; 20,132,145 shares issued and outstanding as of June 30, 2022; 19,877,786 shares issued and outstanding as of December 31, 2021		20		20
Additional paid-in capital		126,059		119,962
(Accumulated deficit) retained earnings		(11,963)		8,245
Total stockholders’ equity		114,116		128,227
Total liabilities and stockholders’ equity	$	237,303	$	244,270

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

Table of Contents

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

Three Months Ended

Six Months Ended

June 30,

June 30,
(In thousands, except share and per share data)

2021

2020

2021

2020
Revenue

Sales revenue

$
43,630

$
29,518

$
79,755

$
67,141
Rental revenue

7,430

5,602

14,077

11,654
Total revenue

51,060

35,120

93,832

78,795
Cost of revenue

Cost of sales revenue

12,638

8,388

23,329

19,310
Cost of rental revenue

2,217

1,820

4,068

3,500
Total cost of revenue

14,855

10,208

27,397

22,810
Gross profit

Gross profit - sales revenue

30,992

21,130

56,426

47,831
Gross profit - rental revenue

5,213

3,782

10,009

8,154
Gross profit

36,205

24,912

66,435

55,985
Operating expenses

Sales and marketing

20,933

17,398

39,718

40,368
Research and development

1,206

1,105

2,476

2,789
Reimbursement, general and administrative

14,142

14,372

28,401

25,242
Total operating expenses

36,281

32,875

70,595

68,399
Loss from operations

(76)

(7,963)

(4,160)

(12,414)
Other (expense) income

(24)

36

(34)

302
Loss before income taxes

(100)

(7,927)

(4,194)

(12,112)
Income tax (benefit) expense

(1,405)

5,923

(3,233)

3,045
Net income (loss)

$
1,305

$
(13,850)

$
(961)

$
(15,157)
Net income (loss) per common share

Basic

$
0.07

$
(0.72)

$
(0.05)

$
(0.79)
Diluted

$
0.07

$
(0.72)

$
(0.05)

$
(0.79)
Weighted-average common shares used to compute net income (loss) per common share

Basic

19,691,156

19,337,644

19,618,759

19,255,612
Diluted

20,047,277

19,337,644

19,618,759

19,255,612

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

~~Table of Contents~~

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)


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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(In thousands, except share and per share data)	2022		2021		2022		2021
Revenue
Sales revenue	$	51,265	$	43,630	$	92,435	$	79,755
Rental revenue		8,380		7,430		15,188		14,077
Total revenue		59,645		51,060		107,623		93,832
Cost of revenue
Cost of sales revenue		13,810		12,638		25,890		23,329
Cost of rental revenue		2,612		2,217		4,648		4,068
Total cost of revenue		16,422		14,855		30,538		27,397
Gross profit
Gross profit - sales revenue		37,455		30,992		66,545		56,426
Gross profit - rental revenue		5,768		5,213		10,540		10,009
Gross profit		43,223		36,205		77,085		66,435
Operating expenses
Sales and marketing		28,822		20,933		52,752		39,718
Research and development		1,849		1,206		3,369		2,476
Reimbursement, general and administrative		14,894		14,094		31,111		28,303
Intangible asset amortization and earn-out		1,745		48		8,841		98
Total operating expenses		47,310		36,281		96,073		70,595
Loss from operations		(4,087)		(76)		(18,988)		(4,160)
Other expense		(573)		(24)		(1,029)		(34)
Loss before income taxes		(4,660)		(100)		(20,017)		(4,194)
Income tax (benefit) expense		(20)		(1,405)		191		(3,233)
Net (loss) income	$	(4,640)	$	1,305	$	(20,208)	$	(961)
Net (loss) income per common share
Basic	$	(0.23)	$	0.07	$	(1.01)	$	(0.05)
Diluted	$	(0.23)	$	0.07	$	(1.01)	$	(0.05)
Weighted-average common shares used to compute net (loss) income per common share
Basic		20,024,798		19,691,156		19,961,999		19,618,759
Diluted		20,024,798		20,047,277		19,961,999		19,618,759

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

Table of Contents


Tactile Systems Technology, Inc.	Tactile Systems Technology, Inc.												Tactile Systems Technology, Inc.
Condensed Consolidated Statements of Stockholders’ Equity	Condensed Consolidated Statements of Stockholders’ Equity												Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)	(Unaudited)												(Unaudited)
									Accumulated
					Additional				Other
		Common Stock			Paid-In		Retained		Comprehensive										(Accumulated
																	Additional		Deficit)
														Common Stock			Paid-In		Retained
(In thousands, except share data)		Shares	Par Value		Capital		Earnings		(Loss) Income		Total			Shares	Par Value		Capital		Earnings		Total
Balances, March 31, 2022														19,939,843	$	20	$	122,281	$	(7,323)	$	114,978
Stock-based compensation														—		—		2,892		—		2,892
Exercise of common stock options and vesting of performance and restricted stock units														107,028		—		62		—		62
Common shares issued for employee stock purchase plan														85,274		—		824		—		824
Net loss for the period														—		—		—		(4,640)		(4,640)
Balances, June 30, 2022														20,132,145	$	20	$	126,059	$	(11,963)	$	114,116

Balances, December 31, 2021														19,877,786	$	20	$	119,962	$	8,245	$	128,227
Stock-based compensation														—		—		5,121		—		5,121
Exercise of common stock options and vesting of performance and restricted stock units														169,085		—		152		—		152
Common shares issued for employee stock purchase plan														85,274		—		824		—		824
Net loss for the period														—		—		—		(20,208)		(20,208)
Balances, June 30, 2022														20,132,145	$	20	$	126,059	$	(11,963)	$	114,116

Balances, March 31, 2021		19,639,113	$	20	$	107,312	$	17,790	$	—	$	125,122		19,639,113	$	20	$	107,312	$	17,790	$	125,122
Stock-based compensation		—		—		2,658		—		—		2,658		—		—		2,658		—		2,658
Exercise of common stock options and vesting of performance and restricted stock units		101,088		—		2,089		—		—		2,089		101,088		—		2,089		—		2,089
Common shares issued for employee stock purchase plan		42,094		—		1,542		—		—		1,542		42,094		—		1,542		—		1,542
Comprehensive income for the period		—		—		—		1,305		—		1,305
Net income for the period														—		—		—		1,305		1,305
Balances, June 30, 2021		19,782,295	$	20	$	113,601	$	19,095	$	—	$	132,716		19,782,295	$	20	$	113,601	$	19,095	$	132,716

Balances, December 31, 2020		19,492,718	$	19	$	104,675	$	20,056	$	—	$	124,750		19,492,718	$	19	$	104,675	$	20,056	$	124,750
Stock-based compensation		—		—		5,115		—		—		5,115		—		—		5,115		—		5,115
Exercise of common stock options and vesting of performance and restricted stock units		268,463		1		3,384		—		—		3,385		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)		(20,980)		—		(1,115)		—		(1,115)
Common shares issued for employee stock purchase plan		42,094		—		1,542		—		—		1,542		42,094		—		1,542		—		1,542
Comprehensive loss for the period		—		—		—		(961)		—		(961)
Net loss for the period														—		—		—		(961)		(961)
Balances, June 30, 2021		19,782,295	$	20	$	113,601	$	19,095	$	—	$	132,716		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.

Table of Contents

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

Six Months Ended June 30,
(In thousands)

2021

2020
Cash flows from operating activities

Net loss

$
(961)

$
(15,157)
Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

1,287

1,450
Net amortization of premiums and discounts on securities available-for-sale

—

(89)
Deferred income taxes

(3,581)

4,282
Stock-based compensation expense

5,115

5,124
Gain on other investments and maturities of marketable securities

—

40
Impairment losses

—

4,025
Changes in assets and liabilities:

Accounts receivable

1,220

2,892
Net investment in leases

(1,033)

(542)
Inventories

(2,590)

(5,945)
Income taxes

(780)

(1,646)
Prepaid expenses and other assets

502

(317)
Right of use operating lease assets

99

135
Medicare accounts receivable, non-current

(2,441)

(1,697)
Accounts payable

855

1,602
Accrued payroll and related taxes

(1,285)

(3,127)
Accrued expenses and other liabilities

1,676

990
Net cash used in operating activities

(1,917)

(7,980)
Cash flows from investing activities

Proceeds from maturities of securities available-for-sale

—

16,500
Purchases of property and equipment

(603)

(660)
Intangible assets costs

(140)

(109)
Net cash (used in) provided by investing activities

(743)

15,731
Cash flows from financing activities

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

(1,115)

(1,553)
Proceeds from exercise of common stock options

3,385

548
Proceeds from the issuance of common stock from the employee stock purchase plan

1,542

1,825
Net cash provided by financing activities

3,812

820
Net increase in cash and cash equivalents

1,152

8,571
Cash and cash equivalents – beginning of period

47,855

22,770
Cash and cash equivalents – end of period

$
49,007

$
31,341

Supplemental cash flow disclosure

Cash paid for taxes

$
1,141

$
475
Capital expenditures incurred but not yet paid

$
8

$
241


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

	Six Months Ended June 30,
(In thousands)	2022		2021
Cash flows from operating activities
Net loss	$	(20,208)	$	(961)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		3,015		1,287
Deferred income taxes		94		(3,581)
Stock-based compensation expense		5,121		5,115
Change in fair value of earn-out liability		7,550		—
Changes in assets and liabilities, net of acquisition:
Accounts receivable		321		1,220
Net investment in leases		(864)		(1,033)
Inventories		(753)		(2,590)
Income taxes		(55)		(780)
Prepaid expenses and other assets		1,925		502
Right of use operating lease assets		106		99
Accounts receivable, non-current		(2,496)		(2,441)
Accounts payable		4,087		855
Accrued payroll and related taxes		5		(1,285)
Accrued expenses and other liabilities		1,252		1,676
Net cash used in operating activities		(900)		(1,917)
Cash flows from investing activities
Purchases of property and equipment		(331)		(603)
Intangible assets expenditures		(85)		(140)
Net cash used in investing activities		(416)		(743)
Cash flows from financing activities
Payment on note payable		(4,500)		—
Payment of deferred debt issuance costs		(39)		—
Taxes paid for net share settlement of performance and restricted stock units		—		(1,115)
Proceeds from exercise of common stock options		152		3,385
Proceeds from the issuance of common stock from the employee stock purchase plan		824		1,542
Net cash (used in) provided by financing activities		(3,563)		3,812
Net (decrease) increase in cash and cash equivalents		(4,879)		1,152
Cash and cash equivalents – beginning of period		28,229		47,855
Cash and cash equivalents – end of period	$	23,350	$	49,007

Supplemental cash flow disclosure
Cash paid for interest	$	448	$	—
Cash paid for taxes	$	28	$	1,141
Capital expenditures incurred but not yet paid	$	—	$	8

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

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

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

On August 2, 2016, we closed the initial public offering of our common stock, which resulted in the sale of 4,120,000 shares of our common stock at a public offering price of $10.00 per share. We received net proceeds from the initial public offering of approximately $35.4 million, after deducting underwriting discounts and approximately $2.9 million of transaction expenses. In connection with the closing of the initial public offering, all of our outstanding redeemable convertible preferred stock automatically converted to common stock on August 2, 2016.

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

Note 2. Basis of Presentation

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

The results for the six months ended June 30, ~~2021,~~2022, are not necessarily indicative of results to be expected for the year ending December 31, ~~2021,~~2022, or for any other interim period or for any future year. The condensed consolidated interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

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, particularly during ~~2020~~most of 2021 and during the first quarter of ~~2021.~~2022. We have also seen staffing challenges, both in our organization and at the clinics we serve, as another consequence of the COVID-19 pandemic. While we saw some level of recovery in the second quarter of ~~2021,~~2022, there are no reliable estimates of how long the pandemic will last, whether any recovery will be sustained or will reverse course, the severity of any resurgence of COVID-19 or variant strains of the virus, the effectiveness of vaccines and attitudes towards receiving them, or what ultimate effects the pandemic will have. For that reason, we are unable to reasonably estimate the long-term impact of the pandemic on our business at this time.

Since the onset of COVID-19, we have remained proactive to ensure we continue to adapt to the needs of our employees, clinicians and ~~patients.~~patients

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

Use of Estimates

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

~~Comprehensive Income (Loss)~~

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

Note 3. Summary of Significant Accounting Policies

Significant Accounting Policies

There were no material changes in our significant accounting policies during the six months ended June 30, ~~2021.~~2022. See Note 3 – “Summary of Significant Accounting Policies” to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, for information regarding our significant accounting policies.

~~Recently~~Accounting Pronouncement Not Yet Adopted ~~Accounting Pronouncements~~

In ~~December 2019,~~March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. ~~2019-12, “Income Taxes~~2020-04, “Reference Rate Reform (Topic ~~740)~~848) — ~~Simplifying~~Facilitation of the ~~Accounting~~Effect of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”), addressing the discontinuation of LIBOR, a widely used reference rate for ~~Income Taxes” (“~~pricing financial products. The ASU ~~2019-12”), which~~ is intended to ~~simplify various aspects of the~~provide optional expedients and exceptions if certain criteria are met when accounting for ~~income taxes.~~contracts, hedging relationships and other transactions that reference LIBOR, or another reference rate expected to be discontinued because of reference rate reform. The application and adoption requirements of ASU ~~2019-12 removes certain exceptions~~2020-04 are optional until December 31, 2022 and vary based on expedients elected. We have not elected any expedients to ~~the general principles in Topic 740~~date and ~~also clarifies and amends existing guidance to improve consistent application. We adopted ASU 2019-12 as of January 1, 2021, and it did not have an impact~~are currently evaluating any potential future impacts on the condensed consolidated financial statements.

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Note 4. ~~Marketable Securities~~Acquisitions

~~There were 0 investments~~On September 8, 2021, we entered into an Asset Purchase Agreement (“AffloVest APA”) to acquire the AffloVest airway clearance business from IBC. Under the terms of the AffloVest APA, we agreed to pay IBC a total of up to $100.0 million for the purchase of substantially all of the assets related to its branded high frequency chest wall oscillation vest therapy business, other than specifically identified excluded assets. We acquired AffloVest to further expand our position as a leader in ~~marketable securities~~treating patients with underserved chronic conditions in the home. The acquired assets included inventory, tooling, intellectual property, permits and approvals, data and records, and customer and supplier information. At closing, $80.0 million of the purchase price was paid, of which a total of $0.5 million was deposited into an escrow account at ~~June 30, 2021~~closing for purposes of satisfying certain post-closing purchase price adjustments and ~~December 31, 2020.~~indemnification claims. Subsequent to closing, $0.2 million was returned to us as a result of working capital adjustments. The AffloVest acquisition was funded through a combination of cash on hand and proceeds from borrowings.

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

●

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

●

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

The fair value of the earn-out as of the acquisition date was $6.4 million. The fair value of the earn-out, reflecting management’s estimate of the likelihood of achieving these targets, was determined by employing a Monte Carlo Simulation model. This amount and the current versus non-current allocation will be remeasured at the end of each reporting period until the payment requirement ends, with any adjustments reported in income from operations (see Note 15 – “Fair Value Measurements”).

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


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

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

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

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



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

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

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~~There~~The fair market valuations associated with the assets acquired fall within Level 3 of the fair value hierarchy, due to the use of significant unobservable inputs to determine fair value. The fair value measurements were ~~0 net pre-tax unrealized gains for marketable securities at June 30, 2021. There were 0 sales~~calculated using unobservable inputs, primarily using the income approach, specifically the discounted cash flow method. The amount and timing of ~~marketable securities during the six months ended June 30, 2021.~~future cash flows within our analysis was based on our due diligence models, most recent operational budgets, long-range strategic plans and other estimates.

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

Note 5. Inventories

Inventories consisted of the following:


(In thousands)	At June 30, 2021		At December 31, 2020		At June 30, 2022		At December 31, 2021
Finished goods	$	9,582	$	7,129	$	7,718	$	8,242
Component parts and work-in-process		11,571		11,434		12,252		10,975
Total inventories	$	21,153	$	18,563	$	19,970	$	19,217

Note 6. Goodwill and Intangible Assets

Goodwill

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

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~~Note 6.~~ Intangible Assets

Our patents and other intangible assets are summarized as follows:


	Weighted-	At June 30, 2021						Weighted-	At June 30, 2022
	Average	Gross						Average	Gross
	Amortization	Carrying		Accumulated		Net		Amortization	Carrying		Accumulated		Net
(In thousands)	Period	Amount		Amortization		Amount		Period	Amount		Amortization		Amount
Definite-lived intangible assets:
Patents	11 years	$	489	$	85	$	404	12 years	$	723	$	140	$	583
Defensive intangible assets	4 years		1,125		506		619	3 years		1,125		678		447
Customer accounts	2 years		125		76		49	1 year		125		101		24
Total amortizable intangible assets			1,739		667		1,072
Customer relationships								12 years		31,000		1,934		29,066
Developed technology								10 years		13,000		959		12,041
Subtotal										45,973		3,812		42,161
Unamortized intangible assets:
Tradenames										9,500		—		9,500
Patents pending			630		—		630			593		—		593
Total intangible assets		$	2,369	$	667	$	1,702		$	56,066	$	3,812	$	52,254


	Weighted-	At December 31, 2020						Weighted-	At December 31, 2021
	Average	Gross						Average	Gross
	Amortization	Carrying		Accumulated		Net		Amortization	Carrying		Accumulated		Net
(In thousands)	Period	Amount		Amortization		Amount		Period	Amount		Amortization		Amount
Definite-lived intangible assets:
Patents	11 years	$	413	$	65	$	348	12 years	$	666	$	109	$	557
Defensive intangible assets	4 years		1,125		421		704	3 years		1,125		592		533
Customer accounts	2 years		125		63		62	1 year		125		89		36
Total amortizable intangible assets			1,663		549		1,114
Customer relationships								13 years		31,000		742		30,258
Developed technology								11 years		13,000		368		12,632
Subtotal										45,916		1,900		44,016
Unamortized intangible assets:
Tradenames										9,500		—		9,500
Patents pending			566		—		566			565		—		565
Total intangible assets		$	2,229	$	549	$	1,680		$	55,981	$	1,900	$	54,081

Amortization expense was $1.0 million and $0.1 million for ~~each of~~ the three months ended June 30, 2022 and 2021, and ~~2020,~~$1.9 million and $0.1 ~~million and $0.3~~ million for the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. Future amortization expenses are expected as follows:


(In thousands)
2021 (July 1 - December 31)	$	120
2022		240
2022 (July 1 - December 31)			$	1,913
2023		209		3,795
2024		188		3,773
2025		98		3,683
2026				3,619
Thereafter		217		25,378
Total	$	1,072	$	42,161

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Note 7. Accrued Expenses

Accrued expenses consisted of the following:


(In thousands)	At June 30, 2021		At December 31, 2020		At June 30, 2022		At December 31, 2021
Warranty	$	1,667	$	1,606	$	2,027	$	1,851
Travel						714		661
Legal and consulting		676		882		611		1,371
In-transit inventory		686		634		554		416
Travel		459		545
Clinical studies						161		113
Sales and use tax		122		193		115		106
Clinical studies		72		67
Other		328		496		1,076		744
Total	$	4,010	$	4,423	$	5,258	$	5,262

Note 8. Warranty Reserves

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


	Three Months Ended				Six Months Ended				Three Months Ended				Six Months Ended
	June 30,				June 30,				June 30,				June 30,
(In thousands)	2021		2020		2021		2020		2022		2021		2022		2021
Beginning balance	$	4,869	$	4,242	$	4,841	$	3,759	$	4,995	$	4,869	$	4,959	$	4,841
Warranty provision		844		372		1,456		1,277		354		844		997		1,456
Processed warranty claims		(596)		(406)		(1,180)		(828)		(531)		(596)		(1,138)		(1,180)
Ending balance	$	5,117	$	4,208	$	5,117	$	4,208	$	4,818	$	5,117	$	4,818	$	5,117

Accrued warranty reserve, current	$	1,667	$	1,347	$	1,667	$	1,347	$	2,027	$	1,667	$	2,027	$	1,667
Accrued warranty reserve, non-current		3,450		2,861		3,450		2,861		2,791		3,450		2,791		3,450
Total accrued warranty reserve	$	5,117	$	4,208	$	5,117	$	4,208	$	4,818	$	5,117	$	4,818	$	5,117

Note 9. Credit Agreement

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

~~The~~On September 8, 2021, we entered into a First Amendment Agreement (the “Amendment”), which amends the Restated Credit Agreement ~~provides for~~(as amended by the Amendment, the “Credit Agreement”) with the lenders from time to time party thereto and Wells Fargo Bank, National Association, as administrative agent. The Amendment, among other things, adds a ~~$25~~$30.0 million incremental term loan to the $25.0 million revolving credit facility ~~with~~provided by the ~~ability~~Restated Credit Agreement. The term loan is reflected on our condensed consolidated financial statements as a note payable. The term loan and the revolving credit facility mature on September 8, 2024. The Credit Agreement provides that, subject to satisfaction of certain conditions, we may increase the amount of the revolving loans available under the Credit Agreement and/or add one or more term loan facilities in an amount not to exceed ~~an incremental $30~~$25.0 million in the aggregate, ~~subject~~such that the total aggregate principal amount of loans available under the Credit Agreement (including under the revolving credit facility) does not exceed $80.0 million.

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

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On February 22, 2022, we entered into a Second Amendment Agreement (the “Second Amendment”), which further amended the Credit Agreement, including with respect to the financial covenants.

The principal of the term loan is required to be repaid in quarterly installments of $750,000 commencing January 7, 2022, through July 8, 2024, with the remaining outstanding balance due on September 8, 2024. Pursuant to the Second Amendment, we made a mandatory principal prepayment of the term loan of $3.0 million on February 22, 2022.

As of June 30, ~~2021,~~2022, the outstanding balance of the term loan was $25.5 million and the ~~date~~outstanding balance under the revolving credit facility was $25.0 million. As of June 30, 2022, there was 0 availability under our Credit Agreement.

The term loan and amounts drawn under the revolving credit facility bear interest, at our option, at a rate equal to (a) the highest of (i) the prime rate, (ii) the federal funds rate plus 0.50% and (iii) LIBOR for an interest period of one month plus 1% (the “Base Rate”) plus an applicable margin or (b) LIBOR for an interest period of one, three or six months, at our option, plus the applicable margin. The applicable margin is 0.75% to 2.25% on ~~which we filed this report, we did 0t have any~~loans bearing interest at the Base Rate and 1.75% to 3.25% on loans bearing interest at LIBOR, in each case depending on our consolidated total leverage ratio; except that, pursuant to the Second Amendment, during the period commencing on February 22, 2022 and ending on the last day of the fiscal quarter ending June 30, 2023, the applicable margin for LIBOR rate loans is 3.50%. At June 30, 2022, all outstanding borrowings ~~under~~were subject to interest at a rate calculated at LIBOR plus an applicable margin, for an interest rate of 4.49%. Undrawn portions of the ~~Restated Credit Agreement.~~ revolving credit facility are subject to an unused line fee at a rate per annum from 0.300% to 0.375%, depending on our consolidated total leverage ratio.

Maturities of the term loan for the next three years as of June 30, 2022, are as follows:


(In thousands)	Amount
2022 (July 1 - December 31)	$	1,500
2023		3,000
2024		21,000
Total	$	25,500

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, a minimum fixed charge coverage ratio, a minimum consolidated EBITDA covenant, and a minimum liquidity covenant. As of June 30, ~~2021,~~2022, 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

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

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,~~Sheets, with rent expense to be recognized on a straight-line basis over the term of the lease. The remaining lease terms vary from approximately one to ~~ten~~eight years as of June 30, ~~2021.~~2022.

We entered into a lease (“initial lease”) in October 2018, for approximately 80,000 square feet of office space for our new corporate headquarters in Minneapolis, Minnesota. In December 2018, we amended the initial lease to add approximately 29,000 square feet of additional office space, which is accounted for as a separate lease (“second lease”) in accordance with ASU No. 2016-02, “Leases” (Topic 842) (“ASC 842”). In December 2019, we further amended the lease which extended the expiration date of the initial lease, extended the expiration date of and added approximately 4,000 square feet to the second lease, as well as added approximately 37,000 square feet of additional office space, accounted for as a separate lease (“third lease”) in accordance with ASC 842. The portion of the space covered under the initial lease was placed in service in September 2019. This portion was recognized as an operating lease and included in the ROU operating lease assets and operating lease liabilities on the Condensed Consolidated Balance Sheets. The portion of the space covered under the second lease commenced onin September 1, 2020. Finally, the portion of the space covered under the third lease ~~is expected to be occupied and commence~~commenced in ~~the second half of~~September 2021.

Vehicles

We lease vehicles for certain members of our field sales organization under a vehicle fleet program whereby the initial, noncancelable lease is for a term of 367 days, thus more than one year. Subsequent to the initial term, the lease becomes a month-to-month, cancelable lease. As of June 30, ~~2021,~~2022, we had approximately 5516 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 June 30, ~~2021,~~2022, ranged from less than one year to approximately ~~five~~four years with fixed monthly payments that are included in the ROU operating lease assets and operating lease liabilities. The leases provide an option to purchase the related equipment at fair market value at the end of the lease. The leases will automatically renew as a month-to-month rental at the end of the lease if the equipment is not purchased or returned.

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Lease Position, Undiscounted Cash Flow and Supplemental Information

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


(In thousands)	At June 30, 2021		At December 31, 2020		At June 30, 2022		At December 31, 2021
Right of use operating lease assets	$	19,138	$	20,132	$	22,628	$	23,984

Operating lease liabilities:
Current	$	2,024	$	2,006	$	2,488	$	2,506
Non-current		18,475		19,388		22,122		23,354
Total	$	20,499	$	21,394	$	24,610	$	25,860

Operating leases:
Weighted average remaining lease term		8.9 years		9.4 years		8.2 years		8.6 years
Weighted average discount rate		4.4%		4.4%		4.2%		4.2%

	Six Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2022		2021
Supplemental cash flow information for our operating leases:
Cash paid for operating lease liabilities	$	1,567	$	1,148	$	1,814	$	1,567
Non-cash right of use assets obtained in exchange for new operating lease obligations	$	304	$	686	$	41	$	304

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


(In thousands)
2021 (July 1 - December 31)	$	1,507
2022		2,661
2022 (July 1 - December 31)			$	1,761
2023		2,615		3,425
2024		2,582		3,415
2025		2,660		3,516
2026				3,615
Thereafter		12,692		13,249
Total minimum lease payments		24,717		28,981
Less: Amount of lease payments representing interest		(4,218)		(4,371)
Present value of future minimum lease payments		20,499		24,610
Less: Current obligations under operating lease liabilities		(2,024)		(2,488)
Non-current obligations under operating lease liabilities	$	18,475	$	22,122

As of June 30, 2021, we have additional lease commitments of $7.6 million related to amendments to existing building leases that have not yet commenced. As the lessee we are involved in providing guidance to the lessor for related improvements, however these improvements are managed and owned by the lessor.

Operating lease costs were ~~$0.8~~$1.0 million and ~~$0.7~~$0.8 million for the three months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. Operating lease costs were ~~$1.7~~$1.9 million and ~~$1.4~~$1.7 million for the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

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Major Vendors

We had purchases from 2 vendors that accounted for 31% and 26% of our total purchases for the three and six months ended June 30, 2022, respectively. We had purchases from 2 vendors that accounted for 33% of our total purchases for each of the three and six months ended June 30, 2021. ~~We had purchases from 2 vendors that accounted for 33% and 32% of our total purchases for the three and six months ended June 30, 2020, respectively.~~

Purchase Commitments

We issued purchase orders prior to June 30, ~~2021,~~2022, totaling ~~$19.8~~$41.5 million for goods that we expect to receive within the next year.

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Retirement Plan

We maintain a 401(k) retirement plan for our employees in which eligible employees can contribute a percentage of their pre-tax compensation. We recorded an expense related to our discretionary contributions to the 401(k) plan of $0.3 million ~~and $0.1 million~~ for each of the three months ended June 30, 2022 and 2021, and ~~2020, respectively,~~$0.7 million and $0.6 ~~million and $0.1~~ million for the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

Legal Proceedings

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

~~On February 13, 2019, we were served with a sealed amended complaint venued in the United States District Court for the Southern District of Texas, Houston Division, captioned~~ ~~United States ex rel Veterans First Medical Supply, LLC vs. Tactile Medical Systems Technology, Inc.,~~ ~~Case No. 18-2871, which had been filed on January 23, 2019. The complaint is a~~ ~~qui tam~~ action on behalf of the United States brought by one of our competitors. The United States has declined to intervene in this action. The complaint alleges that we violated the Federal Anti-Kickback Statute and the Federal False Claims Act, claiming that we submitted false claims and made false statements in connection with the Medicare and Medicaid programs, and that we engaged in unlawful retaliation in violation of the Federal False Claims Act. The complaint seeks damages, statutory penalties, attorneys’ fees, treble damages and costs. We filed a motion to dismiss on April 5, 2019. This motion was denied on February 21, 2020. On March 6, 2020, we filed our answer to the complaint and asserted counterclaims. On May 7, 2020, the plaintiff filed a motion to dismiss our counterclaims. On September 8, 2020, we filed a motion for Partial Summary Judgment. On January 2, 2021, the plaintiff filed a motion for Partial Summary Judgment. These motions were decided on March 29, 2021, wherein the court denied plaintiff’s motion to dismiss our counterclaims; granted our motion for Partial Summary Judgment and dismissed Counts I (standalone/direct violation of the Federal Anti-Kickback Statute) and III (violation of the retaliation provision of the Federal False Claims Act) of the complaint; and denied plaintiff’s motion for Partial Summary Judgment. As a result, the remaining allegations consist of those in Count II (violations of the Federal False Claims Act) of the complaint. We believe the plaintiff’s remaining allegations are without merit and we intend to continue to vigorously defend against the lawsuit.

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

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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. On March 31, 2022, the court granted in part, and denied in part, the defendants’ motion to dismiss. All claims against three individual defendants were dismissed, and most claims against four other individual defendants were dismissed. The ~~motion has not been decided yet.~~Company remains a defendant on alleged Sections 10(b) and 20(a) claims. We are defending the action as it proceeds.

On May 24, 2022, a stockholder derivative lawsuit was filed in the United States District Court for the District of Minnesota, purportedly on behalf of the Company against certain present and former officers and directors and the Company (as a nominal defendant), captioned Jack Weaver v. Moen, et al., File No. 0:22-cv-01403-NEB-BRT. This complaint generally arises out of the same subject matter as the Mart lawsuit and alleges the following claims under the Exchange Act and common law: (1) that the director defendants made materially false or misleading public statements in proxy statements in violation of Section 14(a) of the Exchange Act; (2) that the director defendants’ stock and option awards should be rescinded under Section 29(b) of the Exchange Act; (3) that the officer defendants’ employment contract compensation should be rescinded under Section 29(b) of the Exchange Act; (4) that certain officer defendants are liable for contribution arising out of any liability incurred in the Mart lawsuit, under Sections 10(b) and 21D of the Exchange Act; (5) that the individual defendants breached their fiduciary duties; and (6) that the individual defendants were unjustly enriched. The lawsuit seeks unspecified damages. We are defending the action as it proceeds.

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

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preceding calendar year, or (b) 2,500,000 shares; provided, however, that our Board of Directors may determine that any annual increase be a lesser number. In addition, all awards granted under our 2007 Omnibus Stock Plan and our 2003 Stock Option Plan that were outstanding when the 2016 Plan became effective and that are forfeited, expired, cancelled, settled for cash or otherwise not issued, will become available for issuance under the 2016 Plan. Pursuant to the automatic increase feature of the 2016 Plan, 972,591 ~~and 952,697~~ shares were added as available for issuance thereunder on January 1, ~~2021 and 2020, respectively.~~2021. Our Board of Directors exercised its prerogative to forego the automatic increase on January 1, 2022. As of June 30, ~~2021, 6,358,084~~2022, 5,879,162 shares were available for future grant pursuant to the 2016 Plan.

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

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

We recorded stock-based compensation expense of ~~$2.7~~$2.9 million and ~~$2.4~~$2.7 million for the three months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively, and $5.1 million for each of the six months ended June 30, ~~2021~~2022 and ~~2020.~~2021. This expense was allocated as follows:


	Three Months Ended				Six Months Ended				Three Months Ended				Six Months Ended
	June 30,				June 30,				June 30,				June 30,
(In thousands)	2021		2020		2021		2020		2022		2021		2022		2021
Cost of revenue	$	173	$	105	$	284	$	187	$	112	$	173	$	214	$	284
Sales and marketing expenses		920		1,233		1,898		2,479		1,224		920		2,251		1,898
Research and development expenses		59		94		156		182		38		59		121		156
Reimbursement, general and administrative expenses		1,506		964		2,777		2,276		1,518		1,506		2,535		2,777
Total stock-based compensation expense	$	2,658	$	2,396	$	5,115	$	5,124	$	2,892	$	2,658	$	5,121	$	5,115

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~~$0.6 million and ~~$1.0~~$1.1 million for the three months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively, and ~~$2.3~~$1.4 million and ~~$1.8~~$2.3 million for the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. At June 30, ~~2021,~~2022, there was approximately ~~$7.3~~$1.7 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 1.7 years.

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~~of total unrecognized pre-tax stock option expense under our equity compensation plans, which is expected to be recognized on a straight-line basis over a weighted-average period of 2.0 years.~~

Our stock option activity for the six months ended June 30, ~~2021,~~2022, was as follows:


		Weighted-		Weighted-				Weighted-		Weighted-
		Average		Average	Aggregate			Average		Average	Aggregate
	Options	Exercise Price		Remaining	Intrinsic		Options	Exercise Price		Remaining	Intrinsic
(In thousands except options and per share data)	Outstanding	Per Share ⁽¹⁾		Contractual Life	Value ⁽²⁾		Outstanding	Per Share ⁽¹⁾		Contractual Life	Value ⁽²⁾
Balance at December 31, 2020	1,039,709	$	36.43	5.6 years	$	13,381
Balance at December 31, 2021							915,224	$	39.33	5.0 years	$	2,068
Granted	149,366	$	51.88				—	$	—
Exercised	(130,390)	$	25.95		$	3,694	(90,169)	$	1.69		$	910
Forfeited	(52,693)	$	48.97				(47,509)	$	47.38
Cancelled/Expired	(7,362)	$	49.14				(54,775)	$	46.10
Balance at June 30, 2021	998,630	$	39.36	5.4 years	$	14,399
Balance at June 30, 2022							722,771	$	42.99	4.8 years	$	45

Options exercisable at June 30, 2021	509,575	$	31.20	4.6 years	$	11,814
Options exercisable at June 30, 2022							482,154	$	41.52	4.5 years	$	45

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

(2)

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

Options exercisable of ~~438,283~~509,575 as of June 30, ~~2020,~~2021, had a weighted-average exercise price of ~~$21.86~~$31.20 per share.

Time-Based Restricted Stock Units

We have granted time-based restricted stock units to certain participants under the 2016 Plan that are stock-settled with common shares. Time-based restricted stock units granted under the 2016 Plan vest over one to three years. Stock-based compensation expense included in the Condensed Consolidated Statements of Operations for time-based restricted stock units was ~~$1.2~~$1.6 million and ~~$1.4~~$1.2 million for the three months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively, and ~~$2.5~~$3.0 million and ~~$2.6~~$2.5 million for the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. At June 30, ~~2021,~~2022, there was approximately ~~$7.5~~$10.5 million of total unrecognized pre-tax compensation expense related to outstanding time-based restricted stock units that is expected to be recognized over a weighted-average period of ~~2.0~~2.1 years.

Our time-based restricted stock unit activity for the six months ended June 30, ~~2021,~~2022, was as follows:


		Weighted-					Weighted-
		Average Grant		Aggregate			Average Grant		Aggregate
	Units	Date Fair Value		Intrinsic		Units	Date Fair Value		Intrinsic
(In thousands except unit and per unit data)	Outstanding	Per Unit		Value ⁽¹⁾		Outstanding	Per Unit		Value ⁽¹⁾
Balance at December 31, 2020	211,469	$	48.29	$	9,503
Balance at December 31, 2021						259,147	$	42.32	$	4,932
Granted	82,657	$	52.22			407,844	$	17.05
Vested	(86,347)	$	48.00			(70,594)	$	51.30
Cancelled	(21,391)	$	52.17			(37,217)	$	32.94
Balance at June 30, 2021	186,388	$	49.72	$	9,692

Deferred and unissued at June 30, 2021⁽²⁾	6,469	$	38.94	$	336
Balance at June 30, 2022						559,180	$	23.38	$	4,082

(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.

Performance-Based Restricted Stock Units

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~~Performance-Based Restricted Stock Units~~

We have granted performance-based restricted stock units (“PSUs”) to certain participants under the 2016 Plan. These PSUs have both performance-based and time-based vesting features. The PSUs granted in 2018 were earned to the extent performance goals based on revenue and adjusted EBITDA were achieved in 2019. The PSUs granted in 2019 would have been earned to the extent performance goals based on revenue and adjusted EBITDA were achieved in 2020, but none were so earned. The PSUs granted in 2020 will be earned if and to the extent performance goals based on revenue and adjusted EBITDA are achieved in 2021. The PSUs granted in 2021 will be earned if and to the extent performance goals based on revenue and adjusted EBITDA are achieved in 2022. The number of PSUs earned will depend on the level at which the performance targets are achieved and can range from 50% of target if the minimum performance threshold is achieved and up to 150% of target if maximum performance is achieved. One-third of the earned PSUs will vest on the date the Compensation and Organization Committee certifies the number of PSUs earned, and the remaining two-thirds of the earned PSUs will vest on the first anniversary of that certification date. All earned and vested PSUs will be settled in shares of common stock.

Stock-based compensation expense recognized for PSUs was ~~an expense of $0.2~~$0.3 million and ~~a benefit of $0.3~~$0.2 million for the three months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively, and ~~a benefit~~an expense of $0.1 million and ~~an expense~~a benefit of $0.1 million for the six months ended June 30, 2022 and 2021, ~~and 2020,~~ respectively. The stock-based compensation benefit for the six months ended June 30, 2021 reflected a $0.5 million benefit due to a change in the estimated payout associated with PSUs granted in 2020 being below the minimum performance target threshold level, as defined, partially offset by an expense of $0.4 million related to the PSUs granted in 2018 and 2021. At June 30, ~~2021,~~2022, there was approximately ~~$1.7~~$2.5 million of total unrecognized pre-tax compensation expense related to outstanding PSUs that is expected to be recognized over a weighted average period of ~~2.7~~2.5 years.

Our performance-based restricted stock unit activity for the six months ended June 30, ~~2021,~~2022, was as follows:


	Performance-	Weighted-				Performance-	Weighted-
	Based	Average Grant		Aggregate		Based	Average Grant		Aggregate
	Units	Date Fair Value		Intrinsic		Units	Date Fair Value		Intrinsic
(In thousands except unit and per unit data)	Outstanding	Per Unit		Value ⁽¹⁾		Outstanding	Per Unit		Value ⁽¹⁾
Balance at December 31, 2020	79,303	$	47.83	$	3,564
Balance at December 31, 2021						54,317	$	50.22	$	1,034
Granted	39,419	$	51.82			131,710	$	18.54
Vested	(34,159)	$	33.98			(1,853)	$	19.03
Cancelled	(23,936)	$	65.43			(20,147)	$	23.18
Balance at June 30, 2021	60,627	$	51.28	$	3,153
Balance at June 30, 2022						164,027	$	25.11	$	1,197

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

Employee Stock Purchase Plan

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

A total of 1,600,000 shares of common stock was initially reserved for issuance under the ESPP. This share reserve will automatically be supplemented each January 1, commencing in 2017 and ending on and including January 1, 2026, by an amount equal to the least of (a) 1% of the shares of our common stock outstanding on the immediately preceding December 31, (b) 500,000 shares or (c) such lesser amount as our Board of Directors may determine. Pursuant to the automatic increase feature of the ESPP, 194,518 ~~and~~

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~~190,539~~ shares were added as available for issuance thereunder on January 1, ~~2021 and 2020, respectively.~~2021. Our Board of Directors exercised its prerogative to forego the automatic increase on January 1, 2022. As of June 30, ~~2021, 1,740,328~~2022, 1,623,486 shares were available for future issuance under the ESPP. We recognized stock-based compensation expense associated with the ESPP of ~~$0.2~~$0.4 million and ~~$0.3~~$0.2 million for the three months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively, and ~~$0.4~~$0.6 million and ~~$0.6~~$0.4 million for the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

Note 12. Revenue

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

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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				Six Months Ended
	June 30,				June 30,
(In thousands)	2022		2021		2022		2021
Revenue
Lymphedema products	$	51,634	$	51,060	$	92,288	$	93,832
Airway clearance products		8,011		—		15,335		—
Total	$	59,645	$	51,060	$	107,623	$	93,832

Percentage of total revenue
Lymphedema products		87%		100%		86%		100%
Airway clearance products		13%		— %		14%		— %
Total		100%		100%		100%		100%

Three Months Ended

Six Months Ended

June 30,

June 30,
(In thousands)

2021

2020

2021

2020
Revenue

Flexitouch system

$
45,093

$
31,127

$
82,530

$
69,713
Other products⁽¹⁾

5,967

3,993

11,302

9,082
Total

$
51,060

$
35,120

$
93,832

$
78,795

Percentage of total revenue

Flexitouch system

88%

89%

88%

88%
Other products⁽¹⁾

12%

11%

12%

12%
Total

100%

100%

100%

100%

~~(1)~~

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

Our revenue ~~from third-party payers,~~by channel, inclusive of sales and rental revenue, for the three and six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, are summarized in the following table:


	Three Months Ended				Six Months Ended				Three Months Ended				Six Months Ended
	June 30,				June 30,				June 30,				June 30,
(In thousands)	2021		2020		2021		2020		2022		2021		2022		2021
Private insurers and other payers	$	35,348	$	25,668	$	63,631	$	55,905	$	34,972	$	35,348	$	61,538	$	63,631
Veterans Administration		7,322		4,322		13,168		11,380		6,728		7,322		12,363		13,168
Medicare		8,390		5,130		17,033		11,510		9,934		8,390		18,387		17,033
Durable medical equipment distributors										8,011		—		15,335		—
Total	$	51,060	$	35,120	$	93,832	$	78,795	$	59,645	$	51,060	$	107,623	$	93,832

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~~months. As title transfers to the patient, with whom we have the contract, upon the termination of the lease term and because collectability is probable, under ASC 842, these are recognized as sales-type leases. Each rental agreement contains two components, the controller and related garments, both of which are interdependent and recognized as one lease component.

The revenue and associated cost of revenue of sales-type leases are recognized on the lease commencement date and a net investment in leases is recorded on the Condensed Consolidated Balance Sheet. We bill the patients’ insurance payers monthly over the duration of the rental term. We record the net investment in leases and recognize revenue upon commencement of the lease in the amount of the expected consideration to be received through the monthly payments. Similar to our sales revenue, the transaction price is impacted by multiple factors, including the terms and conditions contracted by ~~third party~~third-party payers. As the rental contract resides with the patients, we have elected the portfolio approach, at the payer level, to determine the expected consideration, which considers the impact of early terminations. While the contract is with the patient, in certain circumstances, the ~~third party~~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~~2022 and ~~2020,~~2021, was primarily from private insurers. Sales-type lease revenue and the associated cost of revenue for the three and six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, was:


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2021		2020		2021		2020		2022		2021		2022		2021
Sales-type lease revenue	$	7,430	$	5,602	$	14,077	$	11,654	$	8,380	$	7,430	$	15,188	$	14,077
Cost of sales-type lease revenue		2,217		1,820		4,068		3,500		2,612		2,217		4,648		4,068
Gross profit	$	5,213	$	3,782	$	10,009	$	8,154	$	5,768	$	5,213	$	10,540	$	10,009

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Note 13. Income Taxes

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

The effective tax rate for the three months ended June 30, ~~2021,~~2022, was a benefit of ~~1,405%~~0.4%, compared to ~~an expense~~a benefit of ~~75%~~1,405% for the three months ended June 30, ~~2020.~~2021. The primary driver of the change in our effective tax rate is attributable to recording a benefit in the three months ended June 30, 2021, to recognize a tax credit for a research and development credit study conducted for tax years 2017-2020. We recorded an income tax benefit of ~~$1.4 million~~$20 thousand and ~~an expense of $5.9~~$1.4 million for the three months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

The effective tax rate for the six months ended June 30, ~~2021,~~2022, was an expense of 1.0%, compared to a benefit of ~~77%, compared to an expense of 25%~~77.1% for the six months ended June 30, ~~2020.~~2021. The primary driver of the change in our effective tax rate is attributable to recording a benefit in the six months ended June 30, 2021, to recognize a tax credit for a research and development credit study conducted for tax years 2017-2020. We recorded an income tax expense of $0.2 million and a benefit of $3.2 ~~million and an expense of $3.0~~ million for the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority is more-likely-than-not to sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the condensed consolidated financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. As of June 30, 2021, tax contingencies related to federal and state credits recorded within the Condensed Consolidated Balance Sheets were $0.5 million. Changes in tax laws, regulations, administrative practices, principles, and interpretations may impact our tax contingencies. The timing of the resolution of income tax controversies is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts accrued.

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

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Note 14. Net (Loss) Income ~~(Loss)~~ Per Share

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


	Three Months Ended				Six Months Ended				Three Months Ended				Six Months Ended
	June 30,				June 30,				June 30,				June 30,
(In thousands, except share and per share data)	2021		2020		2021		2020		2022		2021		2022		2021
Net income (loss)	$	1,305	$	(13,850)	$	(961)	$	(15,157)
Net (loss) income									$	(4,640)	$	1,305	$	(20,208)	$	(961)
Weighted-average shares outstanding		19,691,156		19,337,644		19,618,759		19,255,612		20,024,798		19,691,156		19,961,999		19,618,759
Dilutive effect of stock-based awards		356,121		—		—		—		—		356,121		—		—
Weighted-average shares used to compute diluted net income (loss) per share		20,047,277		19,337,644		19,618,759		19,255,612
Net income (loss) per share - Basic	$	0.07	$	(0.72)	$	(0.05)	$	(0.79)
Net income (loss) per share - Diluted	$	0.07	$	(0.72)	$	(0.05)	$	(0.79)
Weighted-average shares used to compute diluted net (loss) income per share										20,024,798		20,047,277		19,961,999		19,618,759
Net (loss) income per share - Basic									$	(0.23)	$	0.07	$	(1.01)	$	(0.05)
Net (loss) income per share - Diluted									$	(0.23)	$	0.07	$	(1.01)	$	(0.05)

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


	Three Months Ended		Six Months Ended		Three Months Ended		Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2021	2020	2021	2020	2022	2021	2022	2021
Restricted stock units	17,287	217,137	192,857	217,137	559,180	17,287	559,180	192,857
Common stock options	433,447	946,936	998,630	946,936	722,771	433,447	722,771	998,630
Performance stock units	—	116,295	60,627	116,295	164,027	—	164,027	60,627
Employee stock purchase plan	33,743	50,027	33,888	46,706	100,695	33,743	100,695	33,888
Total	484,477	1,330,395	1,286,002	1,327,074	1,546,673	484,477	1,546,673	1,286,002

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).

We have obligations to pay up to $20.0 million in earn-out payments in cash if certain future U.S. revenues of the AffloVest are met. The ~~following provides information regarding~~earn-out liability was valued by employing a Monte Carlo Simulation model in a risk-neutral framework, which is a Level 3 input. The underlying simulated variable includes recognized revenue. The recognized revenue volatility estimate was based on a study of historical asset volatility for a set of comparable public companies. The model includes other assumptions including the market price of risk, which was calculated as the weighted average cost of capital less the long-term risk-free rate. The earn-out liability will be adjusted to fair value ~~measurements for our cash equivalents as of June 30, 2021, and December 31, 2020, according to the three-level~~at each reporting date until settled. Changes in fair value ~~hierarchy:~~will be included in intangible asset amortization and earn-out expenses in our Condensed Consolidated Statements of Operations.

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

2123

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At December 31, 2020


Quoted Prices






in Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

Assets

Inputs

Inputs

(In thousands)

(Level 1)

(Level 2)

(Level 3)

Total
Recurring Fair Value Measurements:

Money market mutual funds

$
16,188

$
—

$
—

$
16,188
Total

$
16,188

$
—

$
—

$
16,188

Changes in the earn-out liability measured at fair value using Level 3 inputs were as follows:


(In thousands)
Earn-out liability at December 31, 2021	$	6,200
Addition for acquisition		—
Fair value adjustments		7,550
Earn-out liability at June 30, 2022	$	13,750

~~During the three and six months ended~~As of June 30, ~~2021, there were 0 transfers within~~2022, the ~~three-level hierarchy. A significant transfer is recognized when the inputs used to~~fair value ~~a security have been changed, which merits a transfer between the disclosed levels~~ of the ~~valuation hierarchy.~~earn-out liability totaled $13.8 million, of which $4.0 million was non-current.

The following provides information regarding fair value measurements for our earn-out liability as of ~~our money market mutual funds is determined based on valuations provided by external investment managers who obtain them from a variety of industry standard data providers.~~June 30, 2022, and December 31, 2021, according to the three-level fair value hierarchy:


	At June 30, 2022
	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:
Earn-out liability	$	—		—	$	13,750	$	13,750
Total	$	—	$	—	$	13,750	$	13,750


	At December 31, 2021
	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
(In thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Recurring Fair Value Measurements:
Earn-out liability	$	—	$	—	$	6,200	$	6,200
Total	$	—	$	—	$	6,200	$	6,200

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)

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

●

~~Incorporating remote and flexible work arrangements for employees whenever possible, including real-time, online training of our new sales representatives. In addition,~~However, we ~~are actively developing our long-term in-office and remote work strategy with the goal of launching it in the second half of 2021.~~

●

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

●

~~Utilizing a mix of employee trainers and independent healthcare practitioners to educate patients on the proper use of our solutions virtually or in-person.~~

●

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

●

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

We cannot assure you ~~that~~ these changes to our processes and practices will be successful in mitigating the impact of COVID-19 on our business. We continue to evaluate and, if appropriate, will adopt other measures in the future related to the ongoing safety of our employees, clinicians and patients. ~~Additional information related to the COVID-19 pandemic is included in the MD&A sections below.~~

Overview

We are a medical technology company that develops and provides innovative medical devices for the treatment of underserved chronic diseases. Our mission is to help people suffering from chronic diseases live better and care for themselves at home. We focus our efforts on advancing the standard of care in treating underserved chronic diseases in the home setting to improve patient outcomes and quality of life and help control rising healthcare expenditures. Our ~~initial area~~areas of therapeutic focus isare (1) vascular disease, with a goal of advancing the standard of care in treating lymphedema and chronic venous ~~insufficiency.~~insufficiency, (2) oncology, where lymphedema is a common consequence among cancer survivors and (3) providing airway clearance therapy for those suffering from chronic respiratory conditions. We possess a unique, scalable platform to deliver at-home healthcare solutions throughout the United States. This evolving home care delivery model is recognized by ~~policy-makers~~policymakers 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.

~~Table of Contents~~

Our current lymphedema products are the Flexitouch ~~system~~ and Entre ~~system.~~systems and our airway clearance product is the AffloVest. A predecessor to our Flexitouch system received 510(k) clearance from the U.S. Food and Drug Administration (the “FDA”) in July 2002, and we introduced the system to address the many limitations of self-administered home-based manual lymphatic drainage therapy. We began selling our more advanced Flexitouch system after receiving 510(k) clearance from the FDA in October 2006. In September 2016, we received 510(k) clearance from the FDA for the Flexitouch system in treating lymphedema of the head and neck. In June 2017, we announced that we received 510(k) clearance from the FDA for the Flexitouch Plus, the third-generation version of our Flexitouch system. In December 2020, we received 510(k) clearance for two new indications for our Flexitouch Plus system: phlebolymphedema and lipedema. We ~~derive the vast majority of our revenue from our Flexitouch system. Sales and rentals of our Flexitouch system represented 88% of our revenue in each of the six months ended June 30, 2021 and 2020.~~

We introduced our Entre system in the United States in February 2013. The Entre system is sold or rented to patients who need a simple pump or who do not yet qualify for insurance reimbursement for an advanced compression device such as our Flexitouch system. ~~For each~~Sales and rentals of our lymphedema products represented 86% and 100% of our revenue in the six months ended June 30, 2022 and 2021, ~~and 2020, sales and rentals of our Entre system represented 12% of our revenue.~~respectively.

~~In October 2018,~~On September 8, 2021, we ~~licensed, from Sun Scientific, Inc.,~~acquired 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~~AffloVest airway clearance product line from IBC, a privately-held company which developed and manufactures AffloVest. AffloVest is a portable, wearable vest that provides airway clearance to treat patients with chronic respiratory conditions such as bronchiectasis or

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conditions resulting from neuromuscular disorders. For the ~~quarter~~six months ended June 30, ~~2020. Further, effective July 31, 2020, Sun Scientific, Inc. terminated the license agreement with us related to the Airwear wrap.See Note 8 - “Intangible Assets” to the consolidated financial statements in~~2022, sales of AffloVest represented 14% our ~~Annual Report on Form 10-K for the year ended December 31, 2020 for more information regarding this impairment charge and discontinuation.~~revenue.

To support the growth of our business, we continue to invest ~~heavily~~ in our commercial infrastructure, consisting of our direct sales force, training resources, reimbursement capabilities and clinical expertise. We market our lymphedema products in the United States using a direct-to-patient and -provider model. ~~Our~~The AffloVest device is sold through respiratory durable medical equipment providers throughout the United States that service patients and bill third-party payers for the product. We also employ a small group of respiratory specialists, who educate DME provider representatives, provide product demonstrations for targeted clinicians and support technical questions related to the AffloVest. As of June 30, 2022, we employed a field ~~commercial team consists~~staff of 286 Tactile employees, made up of sales representatives, as well as managers, who provide support throughout the United States for our ~~direct sales force~~lymphedema and ~~a team of Field Support Specialists. Our collective field commercial team has grown~~respiratory therapies. This compares to ~~over 300 employees~~234 as of June 30, 2021, compared to 285 employees as of December 31, 2020. This model allows us to directly approach patients and clinicians, whereby we disintermediate the traditional durable medical equipment channel, allowing us to capture both the manufacturer and distributor margins.

As it relates to the impact of COVID-19 on our commercial processes in the first half of 2021, we continued to see restrictions loosen, in line with the applicable governmental regulations. As a result, we continue to expand our interactions with clinicians and patients on an in-person basis, where possible, while continuing to engage in virtual interactions as requested. We expect these virtual interactions with clinicians and patients to continue into the future until the pandemic subsides, and perhaps as a best practice in the future. To that end, we plan to continue to work towards expanding our commercial organization throughout 2021 by adding to our overall commercial team. 2021.

We invest ~~substantial resources~~ in our reimbursement function to improve operational efficiencies and enhance individual payer expertise, while continuing our strategic focus of payer development. Our payer relations function focuses on payer policy development, education, contract negotiations, and data analysis. Our reimbursement operations function is responsible for verifying patient insurance benefits, individual patient case development, prior authorization submissions, case follow-up, and appeals when necessary. Since the onset of COVID-19, our reimbursement function has been actively working with Medicare and a broad base of private payers to understand the ever-changing reimbursement criteria being introduced. ~~We have seen increased flexibility in coverage~~While the U.S. government’s declaration of a public health emergency (PHE) related to the COVID-19 pandemic has relaxed some Medicare 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~~for respiratory patients, these circumstances are

~~Table of Contents~~

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

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

We rely on third party contract manufacturers for the sourcing of parts, the assembly of our controllers and the manufacturing of the garments used with our systems. We conduct final assembly of the garments used with our ~~Flexitouch system,~~products, perform quality assurance and ship our products from our facility in Minneapolis, Minnesota. The AffloVest device continued to be manufactured and shipped by IBC on our behalf pursuant to a Transition Services Agreement through April 30, 2022. On May 1,2022, we began manufacturing and shipping the AffloVest device from our Minnesota-based facility.

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.~~future or that we will be able to meet any increased demand.

In July 2022, we launched Kylee™ a free mobile app that makes it easier for patients to manage their conditions by tracking treatments and symptoms, as well as having direct access to educational resources.

For the three months ended June 30, ~~2021,~~2022, we generated revenue of $59.6 million and had a net loss of $4.6 million, compared to revenue of $51.1 million and ~~had~~a net income of $1.3 ~~million, compared to revenue of $35.1 million and a net loss of $13.9~~ million for the three months ended June 30, ~~2020.~~2021. For the six months ended June 30, ~~2021,~~2022, we generated revenue of ~~$93.8~~$107.6 million and had a net loss of ~~$1.0~~$20.2 million, compared to revenue of ~~$78.8~~$93.8 million and a net loss of ~~$15.2~~$1.0 million for the six months ended June 30, ~~2020.~~2021. Our primary sources of capital since ~~inception~~our initial public offering in 2016 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.~~bank financing.

We operate in one segment for financial reporting purposes.

2526

Table of Contents

Results of Operations

Comparison of the Three and Six Months Ended June 30, ~~2021~~2022 and ~~2020~~2021

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


	Three Months Ended												Three Months Ended
	June 30,								Change				June 30,								Change
(In thousands)	2021				2020				$		%		2022				2021				$		%
Condensed Consolidated Statement			% of				% of								% of				% of
of Operations Data:			revenue				revenue								revenue				revenue
Revenue
Sales revenue	$	43,630	85	%	$	29,518	84	%	$	14,112	48	%	$	51,265	86	%	$	43,630	85	%	$	7,635	17	%
Rental revenue		7,430	15	%		5,602	16	%		1,828	33	%		8,380	14	%		7,430	15	%		950	13	%
Total revenue		51,060	100	%		35,120	100	%		15,940	45	%		59,645	100	%		51,060	100	%		8,585	17	%
Cost of revenue
Cost of sales revenue		12,638	25	%		8,388	24	%		4,250	51	%		13,810	23	%		12,638	25	%		1,172	9	%
Cost of rental revenue		2,217	4	%		1,820	5	%		397	22	%		2,612	4	%		2,217	4	%		395	18	%
Total cost of revenue		14,855	29	%		10,208	29	%		4,647	46	%		16,422	27	%		14,855	29	%		1,567	11	%
Gross profit
Gross profit - sales revenue		30,992	60	%		21,130	60	%		9,862	47	%		37,455	63	%		30,992	60	%		6,463	21	%
Gross profit - rental revenue		5,213	11	%		3,782	11	%		1,431	38	%		5,768	10	%		5,213	11	%		555	11	%
Gross profit		36,205	71	%		24,912	71	%		11,293	45	%		43,223	73	%		36,205	71	%		7,018	19	%
Operating expenses
Sales and marketing		20,933	41	%		17,398	50	%		3,535	20	%		28,822	48	%		20,933	41	%		7,889	38	%
Research and development		1,206	2	%		1,105	3	%		101	9	%		1,849	3	%		1,206	2	%		643	53	%
Reimbursement, general and administrative		14,142	28	%		14,372	41	%		(230)	(2)	%		14,894	25	%		14,094	28	%		800	6	%
Intangible asset amortization and earn-out														1,745	3	%		48	—	%		1,697	N.M.	%
Total operating expenses		36,281	71	%		32,875	94	%		3,406	10	%		47,310	79	%		36,281	71	%		11,029	30	%
Loss from operations		(76)	—	%		(7,963)	(23)	%		7,887	(99)	%		(4,087)	(6)	%		(76)	—	%		(4,011)	N.M.	%
Other (expense) income		(24)	—	%		36	—	%		(60)	(167)	%
Other expense														(573)	(1)	%		(24)	—	%		(549)	N.M.	%
Loss before income taxes		(100)	—	%		(7,927)	(23)	%		7,827	(99)	%		(4,660)	(7)	%		(100)	—	%		(4,560)	N.M.	%
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)	%
Income tax (benefit)														(20)	—	%		(1,405)	(3)	%		1,385	(99)	%
Net (loss) income													$	(4,640)	(7)	%	$	1,305	3	%	$	(5,945)	N.M.	%

~~Table of Contents~~

Six Months Ended

June 30,

Change
(In thousands)

2021

2020

$

%
Condensed Consolidated Statement

% of

% of

of Operations Data:

revenue

revenue

Revenue

Sales revenue

$
79,755

85
%

$
67,141

85
%

$
12,614

19
%
Rental revenue

14,077

15
%

11,654

15
%

2,423

21
%
Total revenue

93,832

100
%

78,795

100
%

15,037

19
%
Cost of revenue

Cost of sales revenue

23,329

25
%

19,310

25
%

4,019

21
%
Cost of rental revenue

4,068

4
%

3,500

4
%

568

16
%
Total cost of revenue

27,397

29
%

22,810

29
%

4,587

20
%
Gross profit

Gross profit - sales revenue

56,426

60
%

47,831

60
%

8,595

18
%
Gross profit - rental revenue

10,009

11
%

8,154

11
%

1,855

23
%
Gross profit

66,435

71
%

55,985

71
%

10,450

19
%
Operating expenses

Sales and marketing

39,718

42
%

40,368

51
%

(650)

(2)
%
Research and development

2,476

3
%

2,789

4
%

(313)

(11)
%
Reimbursement, general and administrative

28,401

30
%

25,242

32
%

3,159

13
%
Total operating expenses

70,595

75
%

68,399

87
%

2,196

3
%
Loss from operations

(4,160)

(4)
%

(12,414)

(16)
%

8,254

(66)
%
Other (expense) income

(34)

—
%

302

—
%

(336)

(111)
%
Loss before income taxes

(4,194)

(4)
%

(12,112)

(16)
%

7,918

(65)
%
Income tax (benefit) expense

(3,233)

(3)
%

3,045

4
%

(6,278)

N.M.
%
Net loss

$
(961)

(1)
%

$
(15,157)

(20)
%

$
14,196

(94)
%

“N.M.” Not Meaningful

Table of Contents

~~Revenue~~

Revenue increased $15.9 million, or 45%, to $51.1 million in the three months ended June 30, 2021, compared to $35.1 million in the three months ended June 30, 2020. The increase in total revenue was attributable to an increase of $14.0 million, or 45%, in sales and rentals of the Flexitouch system and an increase of $2.0 million, or 49%, in sales and rentals of the Entre system in the quarter ended June 30, 2021. Second quarter 2021 revenue benefited from the initial stages of recovery from the COVID-19 pandemic, with a portion of healthcare facilities and clinics relaxing restrictions and increasing patient throughput. The increase in second quarter revenue was further driven by improvements in salesforce productivity and effective virtual education events yielding an expanded prescriber base and an increase in Medicare patients served.


	Six Months Ended
	June 30,								Change
(In thousands)	2022				2021				$		%
Consolidated Statement			% of				% of
of Operations Data:			revenue				revenue
Revenue
Sales revenue	$	92,435	86	%	$	79,755	85	%	$	12,680	16	%
Rental revenue		15,188	14	%		14,077	15	%		1,111	8	%
Total revenue		107,623	100	%		93,832	100	%		13,791	15	%
Cost of revenue
Cost of sales revenue		25,890	24	%		23,329	25	%		2,561	11	%
Cost of rental revenue		4,648	4	%		4,068	4	%		580	14	%
Total cost of revenue		30,538	28	%		27,397	29	%		3,141	11	%
Gross profit
Gross profit - sales revenue		66,545	62	%		56,426	60	%		10,119	18	%
Gross profit - rental revenue		10,540	10	%		10,009	11	%		531	5	%
Gross profit		77,085	72	%		66,435	71	%		10,650	16	%
Operating expenses
Sales and marketing		52,752	49	%		39,718	42	%		13,034	33	%
Research and development		3,369	3	%		2,476	3	%		893	36	%
Reimbursement, general and administrative		31,111	29	%		28,303	30	%		2,808	10	%
Intangible asset amortization and earn-out		8,841	8	%		98	—	%		8,743	N.M.	%
Total operating expenses		96,073	89	%		70,595	75	%		25,478	36	%
Loss from operations		(18,988)	(17)	%		(4,160)	(4)	%		(14,828)	N.M.	%
Other expense		(1,029)	(1)	%		(34)	—	%		(995)	N.M.	%
Loss before income taxes		(20,017)	(18)	%		(4,194)	(4)	%		(15,823)	N.M.	%
Income tax expense (benefit)		191	—	%		(3,233)	(3)	%		3,424	(106)	%
Net loss	$	(20,208)	(18)	%	$	(961)	(1)	%	$	(19,247)	N.M.	%

Revenue increased $15.0 million, or 19%, to $93.8 million in the six months ended June 30, 2021, compared to $78.8 million in the six months ended June 30, 2020. The increase was primarily attributable to an increase of $12.8 million, or 18%, in sales and rentals of our Flexitouch system and an increase of $2.2 million, or 24%, in sales and rentals of the Entre system for the six months ended June 30, 2021. Revenue for the six months ended June 30, 2021, benefited from the initial stages of recovery from the COVID-19 pandemic, with a portion of healthcare facilities and clinics relaxing restrictions and increasing patient throughput, as well as an expanded prescriber base.“N.M.” Not Meaningful

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

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

Three Months Ended

June 30,

Change
(In thousands)

2021

2020

$

%
Revenue

Flexitouch system

$
45,093

$
31,127

$
13,966

45%
Other products⁽¹⁾

5,967

3,993

1,974

49%
Total

$
51,060

$
35,120

$
15,940

45%

Percentage of total revenue

Flexitouch system
��

88%

89%

Other products⁽¹⁾

12%

11%

Total

100%

100%

~~(1)~~

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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%

Revenue

Revenue increased $8.6 million, or 17%, to $59.6 million in the three months ended June 30, 2022, compared to $51.1 million in the three months ended June 30, 2021. The increase in total revenue was attributable to $8.0 million in sales of the airway clearance product line, which includes the AffloVest product acquired on September 8, 2021, and an increase of $0.6 million, or 1%, in sales and rentals of the lymphedema product line in the quarter ended June 30, 2022, compared to the 2021 second quarter.

Revenue increased $13.8 million, or 15%, to $107.6 million in the six months ended June 30, 2022, compared to $93.8 million in the six months ended June 30, 2021. The increase in total revenue was attributable to $15.3 million in sales of the airway clearance product line, which includes the AffloVest product acquired onSeptember 8, 2021, partially offset by a decrease of $1.5 million, or 2%, in sales and rentals of the lymphedema product line for the six months ended June 30, 2022. The first six months of 2022 revenue from the lymphedema product line was adversely affected by the fact that first quarter 2022 revenue was negatively impacted by the prolonged recovery from COVID-19, including the resurgence due to the Omicron variant during the period, which resulted in restricted access to clinics and hospitals and disrupted the recovery in patient visits versus the pre-COVID environment. In addition, the challenging labor market continued to impact our ability to recruit and retain quality candidates for our direct sales force, particularly during the first quarter of 2022.

Revenue from the Veterans Administration represented 11% and 14% of total revenue in the three months ended June 30, 2022 and 2021, respectively. Revenue from the Veterans Administration represented 12% and 14% of total revenue in the six months ended June 30, 2022 and 2021, respectively. Revenue from Medicare represented 17% and 16% of total revenue in the three months ended June 30, 2022 and 2021, respectively. Revenue from Medicare represented 17% and 18% of total revenue in the six months ended June 30, 2022 and 2021, respectively.

The following table summarizes our revenue by product line for the three and six months ended June 30, 2022 and 2021, both in dollars and percentage of total revenue:


	Three Months Ended
	June 30,				Change
(In thousands)	2022		2021		$		%
Revenue
Lymphedema products	$	51,634	$	51,060	$	574	1%
Airway clearance products		8,011		—		8,011	N.M.
Total	$	59,645	$	51,060	$	8,585	17%

Percentage of total revenue
Lymphedema products		87%		100%
Airway clearance products		13%		0%
Total		100%		100%

“N.M.” Not Meaningful

~~(1)~~

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

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	Six Months Ended
	June 30,				Change
(In thousands)	2022		2021		$		%
Revenue
Lymphedema products	$	92,288	$	93,832	$	(1,544)	(2)%
Airway clearance products		15,335		—		15,335	N.M.
Total	$	107,623	$	93,832	$	13,791	15%

Percentage of total revenues
Lymphedema products		86%		100%
Airway clearance products		14%		0%
Total		100%		100%

“N.M.” Not Meaningful

Cost of Revenue and Gross Margin

Cost of revenue increased ~~$4.6~~$1.6 million, or ~~46%~~11%, to ~~$14.9~~$16.4 million in the three months ended June 30, ~~2021,~~2022, compared to ~~$10.2~~$14.8 million in the three months ended June 30, ~~2020.~~2021. Cost of revenue increased ~~$4.6~~$3.1 million, or ~~20%~~11%, to $30.5 million in the six months ended June 30, 2022, compared to $27.4 million in the six months ended June 30, ~~2021, compared to $22.8 million in the six months ended June 30, 2020.~~2021. The increase in cost of revenue in both periods was primarily attributable to the additional contribution of AffloVest sales and an increase in ~~the number of Flexitouch and Entre systems sold and rented.~~inbound freight costs.

The total gross margin ~~rate~~ was 73% and 71% of sales in ~~each of~~ the three months ended June 30, 2022 and 2021, respectively, and 72% and 71% of sales in the six months ended June 30, 2022 and 2021, ~~and June 30, 2020.~~respectively.

Sales and Marketing Expenses

Sales and marketing expenses increased ~~$3.5~~$7.9 million, or ~~20%~~38%, to $28.8 million in the three months ended June 30, 2022, compared to $20.9 million in the three months ended June 30, ~~2021, compared to $17.4 million in the three months ended June 30, 2020.~~2021. The increase was primarily attributable to a $2.1 million increase in personnel-related compensation expense as a result of the increased headcount in the commercial team, a $0.7 million increase in our external patient training expense as a result of increased in-person trainings a:

●

$4.8 million increase in personnel-related compensation expense as a result of the increased headcount in the collective field commercial team;

●

$1.3 million increase in travel and entertainment expense due to eased restrictions on travel;

●

$1.2 million increase related to our annual national sales training meeting;

and ~~a $0.7 million increase in travel and entertainment expense due to eased restrictions on travel.~~

●

$0.6 million increase for new product introduction.

Sales and marketing expenses ~~decreased $0.6~~increased $13.0 million, or 2%33%, to $52.7 million in the six months ended June 30, 2022, compared to $39.7 million in the six months ended June 30, ~~2021, compared to $40.4 million in the six months ended June 30, 2020.~~2021. The ~~decrease~~increase was primarily attributable to a $2.0 million decrease from reduced sales meetings, tradeshows and professional services and a $0.6 reduction in external patient training expense, partially offset by a $2.0 million increase in personnel-related compensation expense as a result of the increased headcount in the commercial team.a:

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●

$8.3 million increase in personnel-related compensation expense as a result of the increased headcount in the collective field commercial team;

●

$2.2 million increase in travel and entertainment expense due to eased restrictions on travel;

●

$1.2 million increase related to our annual national sales training meeting;

●

$0.9 million increase for new product introduction;

and

●

$0.4 million increase in sales meetings and tradeshows.

Research and Development Expenses

Research and development (“R&D”) expenses increased ~~$0.1~~$0.6 million, or 9%53%, to $1.8 million in the three months ended June 30, 2022, compared to $1.2 million in the three months ended June 30, 2021, ~~compared to $1.1 million in the three months ended June 30, 2020,~~ which was primarily attributable to an increase in ~~clinical studies activity.~~personnel-related compensation expense, R&D supplies and professional services.

R&D expenses ~~decreased $0.3~~increased $0.9 million, or ~~11%~~36%, to $3.4 million in the six months ended June 30, 2022, compared to $2.5 million in the six months ended June 30, 2021, ~~compared to $2.8 million in the six months ended June 30, 2020,~~ which was primarily attributable to ~~a $0.2 million decrease in professional services and a $0.1 million decrease~~an increase in personnel-related compensation ~~expense.~~expense, R&D supplies and professional services.

Reimbursement, General and Administrative Expenses

Reimbursement, general and administrative expenses ~~decreased $0.2~~increased $0.8 million, or 2%6%, to $14.9 million in the three months ended June 30, 2022, compared to $14.1 million in the three months ended June 30, ~~2021,~~2021. This increase was primarily attributable to a:

●

$0.5 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer relations and corporate functions; and

●

$0.3 million increase in occupancy costs, depreciation expense, and legal and professional fees.

Reimbursement, general and administrative expenses increased $2.8 million, or 10%, to $31.1 million in the six months ended June 30, 2022, compared to ~~$14.4~~$28.3 million in the six months ended June 30, 2021. This increase was primarily attributable to a:

●

$1.5 million increase in occupancy costs, depreciation expense, and legal and professional fees; and

●

$1.3 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer relations and corporate functions.

Intangible Asset Amortization and Earn-out Expense

Intangible asset amortization and earn-out expense increased $1.7 million to $1.7 million in the three months ended June 30, ~~2020. This decrease was primarily attributable~~2022, compared to a $3.6 million impairment charge related to the write-off of our Airwear wrap-related long-lived assets recorded in the second quarter of 2020, partially offset by a $1.9 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer relations and corporate functions and a combined $1.4 million increase in occupancy costs, depreciation expense and legal fees, in each case$48 thousand in the three months ended June 30, ~~2021 compared~~2021. The increase in intangible asset amortization and earn-out expense was primarily attributable to the ~~three months ended June 30, 2020.~~increase in the estimated fair value of our earn-out liability.

~~Reimbursement, general~~Intangible asset amortization and ~~administrative expenses~~earn-out expense increased ~~$3.2~~$8.7 million ~~or 13%,~~ to ~~$28.4~~$8.8 million in the six months ended June 30, ~~2021,~~2022, compared to ~~$25.2~~$0.1 million in the six months ended June 30, ~~2020.~~2021. The increase in intangible asset amortization and earn-out expense was primarily attributable to ~~a combined $3.5 million~~the increase in occupancy costs, depreciation expense, legal and professional fees and a $3.3 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer relations and corporate functions, partially offset by a $3.6 million impairment charge related to the ~~write-off~~estimated fair value of our ~~Airwear wrap-related long-lived assets recorded in the second quarter of 2020.~~earn-out liability.

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

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Other ~~income (expense),~~expense, net was ~~an expense of $24,000~~$0.6 million and ~~income of $36,000~~$24 thousand for the three months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively, and was ~~an expense of $34,000~~$1.0 million and ~~income of $0.3 million~~$34 thousand for the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. Other ~~income (expense)~~expense was primarily ~~impacted by~~attributable to an increase in interest ~~income realized on marketable securities and the gain and loss on cost method investments.~~expense.

Income Taxes

We recorded an income tax benefit of ~~$1.4 million~~$20 thousand and ~~expense of $5.9~~$1.4 million for the three months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. We recorded an income tax expense of $0.2 million and an income tax benefit of $3.2 ~~million and expense of $3.0~~ million for the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. The ~~primary driver of these changes was~~difference relates to a full valuation allowance being recorded against all deferred tax assets in the current year periods and a tax benefit related to a research and development credit recognized in the second quarter of 2021.

Liquidity and Capital Resources

Cash Flows

At June 30, ~~2021,~~2022, our principal sources of liquidity were cash and cash equivalents of ~~$49.0~~$23.4 million and net accounts receivable of ~~$42.6~~$64.5 million. This compares to cash and cash equivalents of $28.2 million ~~as well as the borrowing capacity available under our Restated Credit Agreement.~~and net accounts receivable of $62.3 million at December 31, 2021.

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


	Six Months Ended				Six Months Ended
	June 30,				June 30,
(In thousands)	2021		2020		2022		2021
Net cash (used in) provided by:
Operating activities	$	(1,917)	$	(7,980)	$	(900)	$	(1,917)
Investing activities		(743)		15,731		(416)		(743)
Financing activities		3,812		820		(3,563)		3,812
Net increase in cash and cash equivalents	$	1,152	$	8,571
Net (decrease) increase in cash and cash equivalents					$	(4,879)	$	1,152

Operating Activities

Net cash used in operating activities during the six months ended June 30, 2022, was $0.9 million, resulting from a net loss of $20.2 million, which was partially offset by a net increase in operating assets and liabilities of $3.5 million and non-cash net (loss) income adjustments of $15.8 million. The non-cash net (loss) income adjustments consisted primarily of $7.6 million related to a change in fair value of earn-out liability, $5.1 million of stock-based compensation expense, $3.0 million of depreciation and amortization expense and $0.1 million of deferred income tax expense. The uses of cash related to changes in operating assets primarily consisted of increases in accounts receivable of $2.2 million, net investment in leases of $0.9 million and inventories of $0.7 million, partially offset by decreases in prepaid expenses and other assets of $1.9 million. The changes in operating liabilities consisted of increases in accounts payable of $4.1 million and accrued expenses and other liabilities of $1.2 million.

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

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Investing Activities

Net cash used in ~~operating~~investing activities during the six months ended June 30, ~~2020,~~2022, was ~~$8.0~~$0.4 million, ~~resulting from a net loss~~consisting of ~~$15.2 million~~purchases of property and ~~net decrease in operating assets~~equipment, and liabilities of $7.7 million, which were offset by non-cash net income adjustments of $14.8 million. The non-cash net income adjustments consisted primarily of $5.1 million of stock-based compensation expense, a $4.3 million decrease in deferred taxes, a $4.0 million impairment loss charge related to the write-off of our Airwear wrap product line, and $1.4 million of depreciation and amortization expense. The uses of cash related to changes in operating assets primarily consisted of increases in inventories of $5.9 million, income taxes of $1.6 million, net investment in leases of $0.5 million and prepaid expenses and other assets of $0.3 million, partially offset by a decrease in accounts receivable of $1.2 million. The changes in operating liabilities consisted of increases in accounts payable of $1.6 million and accrued expenses of $1.0 million, offset by a decrease in accrued payroll and related taxes of $3.1 million.

~~Investing Activities~~patent costs.

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.

Financing Activities

Net cash ~~provided~~used by ~~investing~~financing activities during the six months ended June 30, ~~2020,~~2022, was ~~$15.7~~$3.6 million, primarily consisting of ~~$16.5~~payments of $4.5 million made on our term loan, slightly offset by $1.0 million in proceeds from ~~maturities~~exercise of ~~marketable securities, partially offset by $0.8 million in purchases~~common stock options and the issuance of ~~property and equipment and patent costs.~~

~~Financing Activities~~common stock under the ESPP.

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

Net cash provided by financing activities during the six months ended June 30, 2020, was $0.8 million, consisting of $2.4 million in proceeds from exercise of common stock options and the issuance of common stock under the ESPP, partially offset by $1.6 million in taxes paid for the net share settlement of restricted stock units.

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Credit Agreement

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

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

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

On February 22, 2022, we entered into a Second Amendment Agreement (the “Second Amendment”), which further amends the Credit Agreement, including with respect to the financial covenants.

The principal of ~~certain conditions.~~the term loan is required to be repaid in quarterly installments of $750,000 commencing January 7, 2022, through July 8, 2024, with the remaining outstanding balance due on September 8, 2024. Pursuant to the Second Amendment, we made a mandatory principal prepayment of the term loan of $3.0 million on February 22, 2022.

As of June 30, 2022, the outstanding balance of the term loan was $25.5 million and the outstanding balance under the revolving credit facility was $25.0 million. As of June 30, 2022, there was no availability under our Credit Agreement.

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minimum fixed charge coverage ratio, a minimum consolidated EBITDA covenant and a minimum liquidity covenant. As of June 30, ~~2021,~~2022, we were in compliance with all financial covenants under the ~~Restated~~ Credit Agreement.

For additional information regarding the Credit Agreement, including interest rates, fees and maturities, see Note 9 – “Credit Agreement” of the condensed consolidated financial statements contained in this report.

Future Cash Requirements

For a discussion of our material estimated future cash requirements under our contractual obligations and commercial commitments, in total and disaggregated into current and long-term, see “Future Cash Requirements” 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, 2021. There have been no material changes since December 31, 2021.

Adequacy of ~~Capital~~ Resources

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

●

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

●

sales and marketing resources needed to further penetrate our market;

●

expansion of our operations domestically and/or internationally;

●

response of competitors to our solutions and applications;

●

costs associated with clinical research activities;

●

increases in interest rates;

●

labor shortages and wage inflation;

●

component price inflation;

●

costs to develop and implement new products; and

●

use of capital for acquisitions or licenses, if any.

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

Although the impact of the COVID-19 pandemic isand other factors such as inflation and rising interest rates are 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, debt repayment and related interest, and other cash requirements for at least the next twelve months.

Inflation and changing prices did not have a material effect on our business during the six months ended June 30, 2021, and we do not expect that inflation or changing prices will materially affect our business for at least the next twelve months.

In August 2017, we filed a shelf registration statement on Form S-3 with the SEC. Under the shelf registration statement, we may offer and sell from time to time up to $200 million of common stock, preferred stock, debt securities, warrants, rights or units. The shelf registration statement also registered for resale from time to time up to 5,703,534 shares of our common stock held by the selling stockholders named therein. In

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September 2017, certain of the selling stockholders completed a secondary offering of 3,795,000 shares of our common stock at a public offering price of $33.00 per share. We did not receive any proceeds from the sale of the shares by the selling stockholders.

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

On March 27, 2020 the CARES Act was signed into law. The CARES Act is a tax-and-spending package intended to provide economic relief to address the impact of the COVID-19 pandemic. The CARES Act includes several tax provisions that, among other things, allow businesses to carry back net operating losses (“NOLs”) arising in 2018, 2019, and 2020 to the prior five tax years. In the third quarter of 2020, we collected $2.9 million related to the carry back of our NOLs arising from these prior tax years.

In addition, the CARES Act provided $100 billion in relief funds to hospitals and other healthcare providers on the front lines of the COVID-19 pandemic. An initial $30 billion of the funds were released for immediate infusion and were distributed to all facilities and providers that received Medicare fee-for-service (“FFS”) reimbursements in 2019. On April 10, 2020, we received $1.2 million of the initial allotment to all facilities and providers which was determined to be our proportionate share. Within 45 days of each reporting period end, we are required to comply with reporting requirements confirming funds were utilized in a manner described within the terms and conditions outlined by the U.S. Department of Health & Human Services. As of December 31, 2020, we recognized all of the funds received in the initial allotment as other income.

~~Contractual and Commercial Commitments Summary~~

For a discussion on our contractual and commercial commitments, see “Contractual and Commercial Commitments Summary,” included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2020. There have been no material changes since December 31, 2020.

~~Off-Balance Sheet Arrangements~~

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

Recent Accounting Pronouncements

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

Critical Accounting ~~Policies~~Estimates

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Critical accounting estimates are those that involve a significant level of estimation uncertainty and ~~Estimates~~

~~A “critical accounting policy” is one that is both important~~have had or are reasonably likely to ~~the portrayal of~~have a material impact on 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.~~operations. For additional information, please see the discussion of our ~~significant~~most critical accounting ~~policies~~estimates under “Critical Accounting ~~Policies and Significant~~ Estimates” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

For a discussion on our market risks, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” included in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. There have been no material changes since December 31, ~~2020.~~2021.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, ~~2021.~~2022. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, ~~2021,~~2022, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that occurred during the quarter ended June 30, ~~2021,~~2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

Information pertaining to certain legal proceedings in which we are involved can be found in Note 10 – “Commitments and Contingencies” to our condensed consolidated financial statements included in Part I, Item 1 of this report and is incorporated herein by reference.

Item 1A. Risk Factors.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, 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.

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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 March 10, 2021

8-K

03/12/2021

3.1

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

8-K

03/12/2021

3.1

10.1

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

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 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

The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in Inline XBRL: (i) Balance Sheets, (ii) Statements of Operations, (iii) Statements of Stockholders’ Equity, (iv) Statements of Cash Flows, and (v) 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: August ~~2, 2021~~1, 2022	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	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2325
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3435
Item 4.	Controls and Procedures	3435

	PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	3435
Item 1A.	Risk Factors	3435
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3436
Item 3.	Defaults Upon Senior Securities	3536
Item 4.	Mine Safety Disclosures	3536
Item 5.	Other Information	3536
Item 6.	Exhibits	3536