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Tactile Systems Technology Inc.

11/04/2024 | Press release | Distributed by Public on 11/04/2024 15:09

Quarterly Report for Quarter Ending September 30, 2024 (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: September 30, 2024

☐ 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 ☑

23,997,089shares of common stock, par value $0.001 per share, were outstanding as of October 31, 2024.

Table of Contents

TABLE OF CONTENTS


	PART I-FINANCIAL INFORMATION

Item 1.		Financial Statements	4
Item 2.		Management's Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.		Controls and Procedures	34

	PART II-OTHER INFORMATION

Item 1.		Legal Proceedings	34
Item 1A.		Risk Factors	34
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.		Defaults Upon Senior Securities	34
Item 4.		Mine Safety Disclosures	35
Item 5.		Other Information	35
Item 6.		Exhibits	35

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," "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:

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

●	the impact of inflation, rising interest rates or recession;

●	the adequacy of our liquidity to pursue our business objectives;

●	adverse economic conditions or intense competition;

●	price increases for supplies and components;

●	wage and component price inflation;

●	loss of a key supplier;

●	entry of new competitors and products;

●	compliance with and changes in federal, state and local government regulation;

●	loss or retirement of key executives, including transition matters related to our recent Chief Executive Officer change;

●	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;

●	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, 2023, and in subsequent Quarterly Reports 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, whether as a result of new information, future events or otherwise. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we may make.

Table of Contents

PART I-FINANCIAL INFORMATION

Item 1. Financial Statements


Tactile Systems Technology, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
	September 30,		December 31,
(In thousands, except share and per share data)	2024		2023
Assets
Current assets
Cash and cash equivalents	$	82,146		$	61,033
Accounts receivable		39,970			43,173
Net investment in leases		13,953			14,195
Inventories		21,176			22,527
Prepaid expenses and other current assets		5,127			4,366
Total current assets		162,372			145,294
Non-current assets
Property and equipment, net		5,878			6,195
Right of use operating lease assets		17,553			19,128
Intangible assets, net		43,708			46,724
Goodwill		31,063			31,063
Accounts receivable, non-current		3,628			10,936
Deferred income taxes		19,719			19,378
Other non-current assets		3,803			2,720
Total non-current assets		125,352			136,144
Total assets	$	287,724		$	281,438
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable	$	7,290		$	6,659
Note payable		2,956			2,956
Accrued payroll and related taxes		13,086			16,789
Accrued expenses		7,088			5,904
Income taxes payable		611			1,467
Operating lease liabilities		2,883			2,807
Other current liabilities		3,240			4,475
Total current liabilities		37,154			41,057
Non-current liabilities
Note payable, non-current		23,959			26,176
Accrued warranty reserve, non-current		1,448			1,681
Income taxes payable, non-current		495			446
Operating lease liabilities, non-current		16,767			18,436
Total non-current liabilities		42,669			46,739
Total liabilities		79,823			87,796

Stockholders' equity:
Preferred stock, $0.001par value, 50,000,000shares authorized; noneissued and outstandingas of September 30, 2024 and December 31, 2023		-			-
Common stock, $0.001par value, 300,000,000shares authorized; 23,997,089shares issued and outstandingas of September 30, 2024; 23,600,584shares issued and outstandingas of December 31, 2023		24			24
Additional paid-in capital		181,739			174,724
Retained earnings		26,138			18,894
Total stockholders' equity		207,901			193,642
Total liabilities and stockholders' equity	$	287,724		$	281,438

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

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


	Three Months Ended		Nine Months Ended
	September 30,		September 30,
(In thousands, except share and per share data)	2024		2023		2024	2023
Revenue
Sales revenue	$	63,168		$	58,866	$	180,742	$	171,459
Rental revenue		9,925			10,720		26,657		25,312
Total revenue		73,093			69,586		207,399		196,771
Cost of revenue
Cost of sales revenue		15,603			17,016		46,810		48,523
Cost of rental revenue		2,703			3,211		8,270		9,122
Total cost of revenue		18,306			20,227		55,080		57,645
Gross profit
Gross profit - sales revenue		47,565			41,850		133,932		122,936
Gross profit - rental revenue		7,222			7,509		18,387		16,190
Gross profit		54,787			49,359		152,319		139,126
Operating expenses
Sales and marketing		26,838			26,030		82,803		80,538
Research and development		2,417			1,964		6,794		6,030
Reimbursement, general and administrative		18,118			16,449		51,158		46,874
Intangible asset amortization and earn-out		633			(3,073)		1,898		(557)
Total operating expenses		48,006			41,370		142,653		132,885
Income from operations		6,781			7,989		9,666		6,241
Other income (expense)		452			(404)		832		(2,235)
Income before income taxes		7,233			7,585		10,498		4,006
Income tax expense (benefit)		2,078			(14,714)		3,254		(16,307)
Net income	$	5,155		$	22,299	$	7,244	$	20,313
Net income per common share
Basic	$	0.21		$	0.95	$	0.30	$	0.89
Diluted	$	0.21		$	0.94	$	0.30	$	0.88
Weighted-average common shares used to compute net income per common share
Basic		23,985,364			23,483,269		23,842,049		22,714,574
Diluted		24,254,176			23,848,729		24,070,084		22,987,667

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

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


				Retained
					Additional		Earnings
	Common Stock	Paid-In		(Accumulated
(In thousands, except share data)	Shares	Par Value		Capital		Deficit)		Total
Balances, June 30, 2024	23,966,748	$	24		$	179,669		$	20,983	$	200,676
Stock-based compensation	-		-			2,070			-		2,070
Exercise of common stock options and vesting of performance and restricted stock units	30,341		-			-			-		-
Net income for the period	-		-			-			5,155		5,155
Balances, September 30, 2024	23,997,089	$	24		$	181,739		$	26,138	$	207,901

Balances, December 31, 2023	23,600,584	$	24		$	174,724		$	18,894	$	193,642
Stock-based compensation	-		-			5,969			-		5,969
Exercise of common stock options and vesting of performance and restricted stock units	288,598		-			2			-		2
Common shares issued for employee stock purchase plan	107,907		-			1,044			-		1,044
Net income for the period	-		-			-			7,244		7,244
Balances, September 30, 2024	23,997,089	$	24		$	181,739		$	26,138	$	207,901

Balances, June 30, 2023	23,458,302	$	23		$	170,347		$	(11,607)	$	158,763
Stock-based compensation	-		-			1,766			-		1,766
Exercise of common stock options and vesting of performance and restricted stock units	39,255		-			2			-		2
Net income for the period	-		-			-			22,299		22,299
Balances, September 30, 2023	23,497,557	$	23		$	172,115		$	10,692	$	182,830

Balances, December 31, 2022	20,252,677	$	20		$	131,001		$	(9,621)	$	121,400
Stock-based compensation	-		-			5,597			-		5,597
Exercise of common stock options and vesting of performance and restricted stock units	249,064		-			13			-		13
Sale of common stock from follow-on public offering, net of offering expenses	2,875,000		3			34,622			-		34,625
Common shares issued for employee stock purchase plan	120,816		-			882			-		882
Net income for the period	-		-			-			20,313		20,313
Balances, September 30, 2023	23,497,557	$	23		$	172,115		$	10,692	$	182,830

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

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

	Nine Months Ended September 30,
(In thousands)	2024		2023
Cash flows from operating activities
Net income	$	7,244		$	20,313
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		5,079			4,916
Deferred income taxes		(341)			(20,717)
Stock-based compensation expense		5,969			5,597
Loss on disposal of property and equipment and intangibles		308			3
Change in fair value of earn-out liability		-			(2,475)
Changes in assets and liabilities, net of acquisition:
Accounts receivable		3,203			10,947
Net investment in leases		242			2,527
Inventories		1,351			(374)
Income taxes		(807)			(99)
Prepaid expenses and other assets		(1,844)			(369)
Right of use operating lease assets		(18)			292
Accounts receivable, non-current		7,308			8,425
Accounts payable		582			(3,622)
Accrued payroll and related taxes		(3,703)			(2,316)
Accrued expenses and other liabilities		(251)			(5,545)
Net cash provided by operating activities		24,322			17,503
Cash flows from investing activities
Purchases of property and equipment		(1,932)			(1,424)
Proceeds from sale of property and equipment		12			-
Intangible assets expenditures		(85)			(117)
Net cash used in investing activities		(2,005)			(1,541)
Cash flows from financing activities
Proceeds from issuance of note payable		-			8,250
Payments on earn-out		-			(5,000)
Payments on note payable		(2,250)			(2,250)
Payments on revolving line of credit		-			(8,250)
Payments of deferred debt issuance costs		-			(125)
Proceeds from exercise of common stock options		2			13
Proceeds from the issuance of common stock from the employee stock purchase plan		1,044			882
Proceeds from issuance of common stock at market		-			34,625
Net cash (used in) provided by financing activities		(1,204)			28,145
Net increase in cash and cash equivalents		21,113			44,107
Cash and cash equivalents - beginning of period		61,033			21,929
Cash and cash equivalents - end of period	$	82,146		$	66,036

Supplemental cash flow disclosure
Cash paid for interest	$	1,612		$	2,810
Cash paid for taxes	$	4,428		$	3,006
Capital expenditures incurred but not yet paid	$	49		$	40

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," "our," and the "Company") manufactures and distributes medical devices for the treatment of patients with underserved chronic diseases at home. We provide our Flexitouch® Plus and Entre™ Plus systems, which help control symptoms of lymphedema, a chronic progressive medical condition, through our direct sales force for use in the home following receipt of prescriptions from 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"). 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 4,120,000shares of our common stock at a public offering price of $10.00per share. We received net proceeds from the initial public offering of approximately $35.4million, after deducting underwriting discounts and approximately $2.9million of transaction expenses.

On February 27, 2023, we closed on a public offering of 2,875,000shares of our common stock at a public offering price of $13.00per share. We received net proceeds from this offering of $34.6million after deducting underwriting discounts, commissions, and offering expenses.

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.

Note 2. Basis of Presentation

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

The results for the nine months ended September 30, 2024, are not necessarily indicative of results to be expected for the year ending December 31, 2024, 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, 2023.

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Principles of Consolidation

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

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.

Note 3. Summary of Significant Accounting Policies

Significant Accounting Policies

There were no material changes in our significant accounting policies during the nine months ended September 30, 2024. 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, 2023, for information regarding our significant accounting policies.

Accounting Pronouncement Not Yet Adopted

In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures" which requires entities to enhance disclosures around segment reporting. The guidance is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the effect this standard will have on its consolidated financial statements and related disclosures.

In December 2023, the FASB issued ASU No. 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures" which requires entities to enhance disclosures around income taxes. The guidance is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the effect this standard will have on its consolidated financial statements and related disclosures.

Note 4. Inventories

Inventories consisted of the following:


(In thousands)	At September 30, 2024		At December 31, 2023
Finished goods	$	7,022		$	7,979
Component parts and work-in-process		14,154			14,548
Total inventories	$	21,176		$	22,527

Note 5. 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 $31.1million, which was assigned to goodwill.

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Intangible Assets

Our patents and other intangible assets are summarized as follows:


	Weighted-	At September 30, 2024
	Average	Gross
	Amortization	Carrying		Accumulated		Net
(In thousands)	Period	Amount		Amortization		Amount
Definite-lived intangible assets:
Patents	12 years	$	1,148		$	310	$	838
Defensive intangible assets	1 year		1,125			1,029		96
Customer accounts	-		125			125		-
Customer relationships	10 years		31,000			7,299		23,701
Developed technology	8 years		13,000			3,618		9,382
Subtotal			46,398			12,381		34,017
Unamortized intangible assets:
Tradenames			9,500			-		9,500
Patents pending			191			-		191
Total intangible assets		$	56,089		$	12,381	$	43,708


	Weighted-	At December 31, 2023
	Average	Gross
	Amortization	Carrying		Accumulated		Net
(In thousands)	Period	Amount		Amortization		Amount
Definite-lived intangible assets:
Patents	12 years	$	1,018		$	248	$	770
Defensive intangible assets	1 year		1,125			920		205
Customer accounts	-		125			125		-
Customer relationships	11 years		31,000			5,511		25,489
Developed technology	9 years		13,000			2,731		10,269
Subtotal			46,268			9,535		36,733
Unamortized intangible assets:
Tradenames			9,500			-		9,500
Patents pending			491			-		491
Total intangible assets		$	56,259		$	9,535	$	46,724

Amortization expense was $0.9million for each of the three months ended September 30, 2024 and 2023, and $2.8million and $2.9million for the nine months ended September 30, 2024 and 2023, respectively, of which $0.3million in each of the three months ended September 30, 2024 and 2023, and $0.9million in each of the nine months ended September 30, 2024 and 2023, were recorded in cost of sales revenue. Future amortization expenses are expected as follows:


(In thousands)
2024 (October 1 - December 31)	$	951
2025		3,714
2026		3,650
2027		3,641
2028		3,638
Thereafter		18,423
Total	$	34,017

In the third quarter of 2024, we performed our annual goodwill impairment test utilizing both the qualitative and quantitative approach described in FASB ASU No. 2021-03, "Intangibles-Goodwill and Other (Topic 350) - Accounting Alternative for Evaluating Triggering Events." Based on the testing using the qualitative approach, it was determined that it was not more likely than not that the fair value of the reporting

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unit was less than the carrying value. As a result, it was not deemed necessary to proceed to the quantitative test and noimpairment was recognized.

Note 6. Accrued Expenses

Accrued expenses consisted of the following:


(In thousands)	At September 30, 2024		At December 31, 2023
Warranty	$	1,991		$	2,357
Legal and consulting		921			611
In-transit inventory		1,565			401
Travel		1,000			1,038
Clinical studies		339			363
Sales and use tax		168			183
Other		1,104			951
Total	$	7,088		$	5,904

Note 7. Warranty Reserves

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


	Three Months Ended		Nine Months Ended
	September 30,		September 30,
(In thousands)	2024		2023		2024	2023
Beginning balance	$	3,692		$	3,828	$	4,038	$	4,212
Warranty provision		629			1,228		2,371		3,128
Processed warranty claims		(882)			(1,403)		(2,970)		(3,687)
Ending balance	$	3,439		$	3,653	$	3,439	$	3,653

Accrued warranty reserve, current	$	1,991		$	1,872	$	1,991	$	1,872
Accrued warranty reserve, non-current		1,448			1,781		1,448		1,781
Total accrued warranty reserve	$	3,439		$	3,653	$	3,439	$	3,653

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Note 8. Credit Agreement

On April 30, 2021, we entered into an Amended and Restated Credit Agreement (the "Restated Credit Agreement") with the lenders from time to time party thereto, and Wells Fargo Bank, National Association, as Administrative Agent. The Restated Credit Agreement amended and restated in its entirety our prior credit agreement.

On September 8, 2021, we entered into a First Amendment Agreement (the "Amendment"), which amended the Restated Credit Agreement (as amended by the Amendment, the "Credit Agreement") with the lenders from time to time party thereto and Wells Fargo Bank, National Association, as administrative agent. The Amendment, among other things, added a $30.0million incremental term loan to the $25.0million revolving credit facility provided by the Restated Credit Agreement. The term loan is reflected on our condensed consolidated financial statements as a note payable. 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 $25.0million in the aggregate, such that the total aggregate principal amount of loans available under the Credit Agreement (including under the revolving credit facility) does not exceed $80.0million.

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

On February 22, 2022, we entered into a Second Amendment Agreement (the "Second Amendment"), which further amended the Credit Agreement. The Second Amendment modified the maximum leverage ratio, the minimum fixed charge coverage ratio and the minimum consolidated EBITDA covenants under the Credit Agreement, and added a minimum liquidity covenant, through the quarter ended June 30, 2023. The Second Amendment also increased the applicable margin for LIBOR rate loans under the Credit Agreement during the period commencing on the date of the Second Amendment and ending on the last day of the fiscal quarter ending June 30, 2023. Pursuant to the Second Amendment, we made a mandatory principal prepayment of the term loan of $3.0million on February 22, 2022.

On June 21, 2023, we entered into a Third Amendment Agreement (the "Third Amendment") that replaced the interest rate benchmark under the Credit Agreement from LIBOR to the term Secured Overnight Financing Rate ("SOFR"). All tenors of term SOFR are subject to a credit spread adjustment of 0.10%("Adjusted Term SOFR").

Following the Third Amendment, 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) Adjusted Term SOFR for a one-month tenor plus 1%(the "Base Rate") plus an applicable margin or (b) Adjusted Term SOFR for an interest period of one, three or six months, at our option, plus the applicable margin. The applicable margin is 0.75%to 2.25%on loans bearing interest at the Base Rate and 1.75%to 3.25%on loans bearing interest at Adjusted Term SOFR, in each case depending on our consolidated total leverage ratio; except that, pursuant to the Second Amendment and the Third 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 and Adjusted Term SOFR loans, as applicable, was 3.50%.

On August 1, 2023, we entered into a Fourth Amendment Agreement (the "Fourth Amendment"), which further amended the Credit Agreement. The Fourth Amendment, among other things, decreased the commitment fees payable under the revolving credit facility under the Credit Agreement such that the undrawn portions of the revolving credit facility are subject to an unused line fee at a rate per annum from 0.125%to 0.200%, depending on our consolidated leverage ratio, and eliminated the language providing that the applicable margin for Adjusted Term SOFR loans was 3.50%, such that the interest rates are in effect as set forth in the above paragraph. The Fourth Amendment also eliminated the liquidity financial covenant and modified the remaining financial covenants to reflect the termination of the temporary covenant relief period that was in place until June 30, 2023 pursuant to the Second Amendment, such that the financial covenants now include a maximum consolidated total leverage ratio covenant, a minimum consolidated EBITDA covenant and a minimum fixed charge coverage ratio covenant. In addition, the Fourth Amendment provided for an

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additional term loan in the amount of $8.25million, which we used for a paydown of the revolving credit facility. The Fourth Amendment also extended the maturity date of the term loans and revolving credit facility under the Credit Agreement from September 8, 2024, to August 1, 2026.

On November 1, 2024, we entered into a Fifth Amendment Agreement (the "Fifth Amendment"), which further amended the Credit Agreement. The Fifth Amendment permits the Company to make payments to repurchase shares of its common stock, as long as the Company is not in default before and after giving effect to such repurchases, and as long as such repurchases do not exceed $30.0million.

On December 21, 2023, we made a payment of $16.8 million to repay in full the outstanding balance on the revolving credit facility.

As of September 30, 2024, we had outstanding borrowings of $27.0million under the Credit Agreement, comprised entirely of the term loan. At September 30, 2024, all outstanding borrowings were subject to interest at a rate calculated at Adjusted Term SOFR plus an applicable margin, for an interest rate of 7.10%. The principal of the term loan is required to be repaid in quarterlyinstallments of $750,000. Maturities of the term loan for the next three years as of September 30, 2024, were as follows:


(In thousands)	Amount
2024 (October 1 - December 31)	$	750
2025		3,000
2026		23,250
Total		27,000
Less: Deferred financing fees		(85)
Net Note Payable		26,915
Less: Current portion of note payable		(2,956)
Non-current portion of note payable	$	23,959

Our obligations under the Credit Agreement are secured by a security interest in substantially all of our and our subsidiary's assets and are also guaranteed by our subsidiary. As of September 30, 2024, the Credit Agreement contained a number of restrictions and covenants, including that we maintain compliance with a maximum consolidated total leverage ratio, a minimum fixed charge coverage ratio and a minimum consolidated EBITDA covenant. As of September 30, 2024, we were in compliance with all covenants under the Credit Agreement.

Note 9. 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 non-lease components of contracts for any of the aforementioned classifications. In accordance with applicable guidance, we do not record leases with terms that are less than one year on the Condensed Consolidated Balance Sheets.

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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 Sheets, with rent expense recognized on a straight-line basis over the term of the lease. The remaining lease terms vary from approximately oneto seven yearsas of September 30, 2024.

We entered into a lease ("initial lease") in October 2018, for approximately 80,000square feet of office space for our new corporate headquarters in Minneapolis, Minnesota. In December 2018, we amended the initial lease to add approximately 29,000square 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 4,000square feet to the second lease, as well as added approximately 37,000square 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. The portion of the space covered under the second lease commenced in September 2020. Finally, the portion of the space covered under the third lease commenced in September 2021. The three portions were recognized as an operating lease and included in the ROU operating lease assets and operating lease liabilities on the Condensed Consolidated Balance Sheets.

Computer and Office Equipment

We also have operating lease agreements for certain computer and office equipment. The remaining lease terms as of September 30, 2024, ranged from less than one yearto approximately four yearswith 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 renewas 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 September 30, 2024		At December 31, 2023
Right of use operating lease assets	$	17,553		$	19,128

Operating lease liabilities:
Current	$	2,883		$	2,807
Non-current		16,767			18,436
Total	$	19,650		$	21,243

Operating leases:
Weighted average remaining lease term		6.0years			6.7years
Weighted average discount rate		4.4%			4.3%

	Nine Months Ended September 30,
	2024		2023
Supplemental cash flow information for our operating leases:
Cash paid for operating lease liabilities	$	2,642		$	2,579
Non-cash right of use assets obtained in exchange for new operating lease obligations	$	386		$	132

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


(In thousands)
2024 (October 1 - December 31)	$	924
2025		3,734
2026		3,807
2027		3,309
2028		3,275
Thereafter		7,008
Total minimum lease payments		22,057
Less: Amount of lease payments representing interest		(2,407)
Present value of future minimum lease payments		19,650
Less: Current obligations under operating lease liabilities		(2,883)
Non-current obligations under operating lease liabilities	$	16,767

Operating lease costs were $0.9million for each of the three months ended September 30, 2024 and 2023. Operating lease costs were $2.6million and $2.7million for the nine months ended September 30, 2024 and 2023, respectively.

Major Vendors

We had purchases from onevendor that accounted for 22%of our total purchases for the three months ended September 30, 2024, and purchases from onevendor that accounted for 20%of our total purchases for the nine months ended September 30, 2024. We had purchases from onevendor that accounted for 29%of our total purchases for the three months ended September 30, 2023, and purchases from onevendor that accounted for 26%of our total purchases for the nine months ended September 30, 2023.

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Purchase Commitments

We issued purchase orders prior to September 30, 2024, totaling $24.8million for goods that we expect to receive within the next year.

Retirement Plan

We maintain a 401(k) retirement plan for our employees in which eligible employees can contribute a percentage of their pre-tax compensation. We recorded an expense related to our discretionary contributions to the 401(k) plan of $0.6million and $0.4million for the three months ended September 30, 2024 and 2023, respectively, and $1.7million and $1.1million for the nine months ended September 30, 2024 and 2023, 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 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 of our 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 (the "Weaver Lawsuit"). The Weaver Lawsuit generally arises out of the same subject matter as a previously settled securities class action captioned Brian Mart v. Tactile Sys. Tech., Inc., et al., File No. 0:20-cv-02074-NEB-BRT (D. Minn.) (the "Mart Lawsuit"), which alleged, inter alia, that we and eightof our former officers and directors made materially false or misleading statements about our business, operational and compliance policies. The Weaver Lawsuit 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 Weaver Lawsuit seeks unspecified damages. In August 2022, the matter was transferred to the United States District Court for the District of Delaware by order granting the Parties Stipulation to Transfer. On February 10, 2023, we filed a motion to dismiss the action. The plaintiff filed an Amended Complaint on March 3, 2023. On March 31, 2023, we filed a motion to dismiss the Amended Complaint. On July 31, 2023, the plaintiff filed a Joint Notice of Preliminary Settlement indicating that the parties had reached a non-binding settlement-in-principal on most of the material terms that would resolve all claims between the parties and requested that the Court temporarily stay all deadlines, hearings, and conferences while the parties continued to finalize settlement.

On June 6, 2024, the parties entered into a Stipulation of Settlement in the Weaver Lawsuit. On June 7, 2024, the plaintiff filed an unopposed motion for preliminary approval of the settlement. On June 27, 2024, the Court entered an order granting the motion for preliminary approval of the settlement. The final settlement hearing occurred on August 28, 2024, and on September 4, 2024, the Court entered its order approving the settlement, including the agreed upon attorneys' fees and expense awards to plaintiffs' counsel and service awards to the shareholder plaintiffs. Pursuant to the settlement, we are adopting, implementing, and maintaining certain corporate governance reforms. The attorneys' fees and expense award of approximately $0.5million was covered by insurance and has been paid. The settlement does not constitute an admission of liability or wrongdoing by us or any of our current or former directors or officers. This matter is now concluded.

On October 25, 2024, the United States District Court, District of Massachusetts (Boston) unsealed two qui tamcomplaints against us. The first complaint is captioned United States ex. rel. Benjaman Scarborough vs. Tactile Systems Technology, Inc., Case No. 1:21-cv-10813-IT, and was filed under seal on May 17, 2021, on behalf of the United States by a former employee (the "Scarborough Complaint"). The Scarborough Complaint alleges that we submitted false claims and made false statements in connection with the Medicare

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programs, in violation of the Federal False Claims Act. The second complaint is captioned United States ex. rel. Jackie Gorham, an individual, and Dustin Gast, an individual, vs. Tactile Systems Technology, Inc. Case No. 1:21-cv-11809-IT, and was filed under seal on September 1, 2021, on behalf of the United States by two former employees (the "Gorham Complaint"). The Gorham Complaint alleges that we submitted false claims and made false statements in connection with the Medicare, Medicare Advantage plans, Medicaid and other government payers, in violation of the Federal False Claims Act and submitted false claims resulting from kickbacks in violation of the Federal False Claims Act and the Federal Anti-Kickback Statute. Both complaints seek damages, statutory penalties, attorneys' fees, and costs.

Note 10. 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 4,800,000shares of our common stock initially reserved for issuance pursuant to the 2016 Plan. The 2016 Plan provides that the number of shares reserved and available for issuance under the 2016 Plan will automatically increase annually on January 1 of each calendar year, commencing in 2017 and ending on and including January 1, 2026, by an amount equal to the lesser of: (a) 5%of the number of common shares of stock outstanding as of December 31 of the immediately preceding calendar year, or (b) 2,500,000shares; 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, 1,180,019shares were added as available for issuance thereunder on January 1, 2024. Our Board of Directors exercised its prerogative to forego the automatic increase on January 1, 2023. As of September 30, 2024, 6,462,956shares 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.

We recorded stock-based compensation expense of $2.1million and $1.8million for the three months ended September 30, 2024 and 2023, respectively, and $6.0million and $5.6million for the nine months ended September 30, 2024 and 2023, respectively. This expense was allocated as follows:


	Three Months Ended		Nine Months Ended
	September 30,		September 30,
(In thousands)	2024		2023		2024	2023
Cost of revenue	$	100		$	116	$	286	$	340
Sales and marketing expenses		595			634		1,939		2,196
Research and development expenses		42			5		123		98
Reimbursement, general and administrative expenses		1,333			1,011		3,621		2,963
Total stock-based compensation expense	$	2,070		$	1,766	$	5,969	$	5,597

Stock Options

Stock options issued to participants other than non-employees typically vest over threeor four yearsand typically have a contractual term of sevenor ten years. Stock-based compensation expense included in the Condensed Consolidated Statements of Operations for stock options was $0.0million and $0.2million for the three months ended September 30, 2024 and 2023, respectively, and $0.2million and $0.8million for the nine months ended September 30, 2024 and 2023, respectively. At September 30, 2024, there was approximately $42,100of 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 1.0years.

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Our stock option activity for the nine months ended September 30, 2024, was as follows:


		Weighted-		Weighted-
		Average		Average		Aggregate
	Options	Exercise Price		Remaining		Intrinsic
(In thousands except options and per share data)	Outstanding	Per Share ⁽¹⁾		Contractual Life		Value ⁽²⁾
Balance at December 31, 2023	429,960	$	40.74		3.8years		$	223
Exercised	(1,153)	$	1.35				$	14
Cancelled/Expired	(24,142)	$	43.45
Balance at September 30, 2024	404,665	$	40.69		3.1years		$	218

Options exercisable at September 30, 2024	385,514	$	42.11		3.0years		$	116

(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 400,484as of September 30, 2023, had a weighted-average exercise price of $43.45per 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 oneto three years. Stock-based compensation expense included in the Condensed Consolidated Statements of Operations for time-based restricted stock units was $1.5million and $1.2million for the three months ended September 30, 2024 and 2023, respectively, and $4.4million and $3.8million for the nine months ended September 30, 2024 and 2023, respectively. At September 30, 2024, there was approximately $7.7million of total unrecognized pre-tax compensation expense related to outstanding time-based restricted stock units that is expected to be recognized over a weighted-average period of 1.9years.

Our time-based restricted stock unit activity for the nine months ended September 30, 2024, was as follows:


		Weighted-
		Average Grant		Aggregate
	Units	Date Fair Value		Intrinsic
(In thousands except unit and per unit data)	Outstanding	Per Unit		Value ⁽¹⁾
Balance at December 31, 2023	589,142	$	16.35		$	8,425
Granted	539,496	$	13.82
Vested	(254,490)	$	17.44
Cancelled	(113,724)	$	14.70
Balance at September 30, 2024	760,424	$	14.44		$	11,110

(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.

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 2023 have threeseparate performance periods, and one-thirdof each grant will be earned if and to the extent performance goals based on revenue change and adjusted EBITDA margin are achieved in each of 2023 and 2024 (ranging from 25%to 175%of target), and one-thirdwill be earned if and to the extent performance goals based on revenue change and adjusted EBITDA change are achieved in 2025 (ranging from 25%to 175%of target). The PSUs granted in 2024 have threeseparate performance periods, and one-thirdof each grant will be earned if and to the extent performance goals based on revenue change and adjusted EBITDA margin are

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achieved in 2024 (ranging from 25%to 175%of target), one-thirdwill be earned if and to the extent performance goals based on revenue change and adjusted EBITDA change are achieved in 2025 (ranging from 25%to 175%of target), and one-thirdwill be earned if and to the extent performance goals to be established are achieved in 2026. All earned and vested PSUs will be settled in shares of common stock.

Stock-based compensation expense recognized for PSUs was $0.4million and $0.3million for the three months ended September 30, 2024 and 2023, respectively, and $1.0million and $0.6million for the nine months ended September 30, 2024 and 2023, respectively. At September 30, 2024, there was approximately $2.0million of total unrecognized pre-tax compensation expense related to outstanding PSUs that is expected to be recognized over a weighted average period of 2.2years.

Our PSU activity for the nine months ended September 30, 2024, was as follows:


		Weighted-
		Average Grant		Aggregate
	PSUs	Date Fair Value		Intrinsic
(In thousands except unit and per unit data)	Outstanding	Per Unit		Value ⁽¹⁾
Balance at December 31, 2023	198,232	$	18.93		$	2,785
Granted	223,762	$	13.76
Vested	(44,162)	$	27.31
Cancelled	(104,913)	$	14.14
Balance at September 30, 2024	272,919	$	15.19		$	3,987

(1)	The aggregate intrinsic value of PSUs 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-monthpurchase periods, beginning on May 16 and November 16 of each calendar year.

A total of 1,600,000shares 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) 500,000shares or (c) such lesser amount as our Board of Directors may determine. Pursuant to the automatic increase feature of the ESPP, 236,003shares were added as available for issuance thereunder on January 1, 2024. Our Board of Directors exercised its prerogative to forego the automatic increase on January 1, 2023. As of September 30, 2024, 1,497,964shares were available for future issuance under the ESPP. We recognized stock-based compensation expense associated with the ESPP of $0.2million and $0.1million for the three months ended September 30, 2024 and 2023, respectively, and $0.4million for each of the nine months ended September 30, 2024 and 2023.

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Note 11. 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:


	Three Months Ended		Nine Months Ended
	September 30,		September 30,
(In thousands)	2024		2023		2024	2023
Revenue
Lymphedema products	$	65,282		$	62,506	$	182,278	$	172,257
Airway clearance products		7,811			7,080		25,121		24,514
Total	$	73,093		$	69,586	$	207,399	$	196,771

Percentage of total revenue
Lymphedema products		89%			90%		88%		88%
Airway clearance products		11%			10%		12%		12%
Total		100%			100%		100%		100%

Our revenue by channel, inclusive of sales and rental revenue, for the three and nine months ended September 30, 2024 and 2023, are summarized in the following table:


	Three Months Ended		Nine Months Ended
	September 30,		September 30,
(In thousands)	2024		2023		2024	2023
Private insurers and other payers	$	47,564		$	39,376	$	122,907	$	101,300
Veterans Administration		8,442			7,259		23,339		20,203
Medicare		9,276			15,871		36,032		50,754
Durable medical equipment distributors		7,811			7,080		25,121		24,514
Total	$	73,093		$	69,586	$	207,399	$	196,771

Our rental revenue is derived from rent-to-purchase arrangements that typically range from threeto ten 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 Sheets. We bill the patients' insurance payers monthly over the duration of the rental term. We record the net investment in leases and recognize revenue upon commencement of the lease in the amount of the expected consideration to be received through the monthly payments. Similar to our sales revenue, the transaction price is impacted by multiple factors, including the terms and conditions contracted by third-party payers. As the rental contract resides with the patients, we have elected the portfolio approach, at the payer level, to determine the expected consideration, which considers the impact of early terminations. While the contract is with the patient, in certain circumstances, the third-party payer elects an initial rental period with an option to extend. We assess the likelihood of extending the lease at the onset of the lease to determine if the option is reasonably certain to be exercised. As the lease is short-term in nature, we anticipate collection of substantially all of the net investment within the first year of the lease agreement. Completion of these payments represents the fair market value of the equipment, and as such, interest income is not applicable.

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Rental revenue for the three and nine months ended September 30, 2024 and 2023, was primarily from private insurers. Sales-type lease revenue and the associated cost of revenue for the three and nine months ended September 30, 2024 and 2023, was:


	Three Months Ended September 30,		Nine Months Ended September 30,
(In thousands)	2024		2023		2024	2023
Sales-type lease revenue	$	9,925		$	10,720	$	26,657	$	25,312
Cost of sales-type lease revenue		2,703			3,211		8,270		9,122
Gross profit	$	7,222		$	7,509	$	18,387	$	16,190

Note 12. 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 (loss) 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 includes current federal and state income tax expense, as well as deferred federal and state income tax expense.

The effective tax rate for the three months ended September 30, 2024, was an expense of 28.7%, compared to a benefit of 194.0%for the three months ended September 30, 2023. The primary driver of the change in our effective tax rate was attributable to the fact that we did not have a full valuation allowance on our deferred tax assets for the current year period, while the prior year period released a valuation allowance to recognize the full value of its deferred tax assets. We recorded income tax expense of $2.1million and an income tax benefit of $14.7million for the three months ended September 30, 2024 and 2023, respectively.

The effective tax rate for the nine months ended September 30, 2024, was an expense of 31.0%, compared to a benefit of 407.1%for the nine months ended September 30, 2023. The primary driver of the change in our effective tax rate was attributable to the fact that we did not have a full valuation allowance on our deferred tax assets for the current year period, while the prior year period released a valuation allowance to recognize the full value of its deferred tax assets. We recorded an income tax expense of $3.3million and an income tax benefit of $16.3million for the nine months ended September 30, 2024 and 2023, 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.

The Company currently is not under examination in any jurisdictions.

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Note 13. Net Income Per Share

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


	Three Months Ended		Nine Months Ended
	September 30,		September 30,
(In thousands, except share and per share data)	2024		2023		2024	2023
Net income	$	5,155		$	22,299	$	7,244	$	20,313
Weighted-average shares outstanding		23,985,364			23,483,269		23,842,049		22,714,574
Weighted-average shares used to compute diluted net income per share		24,254,176			23,848,729		24,070,084		22,987,667
Net income per share - Basic	$	0.21		$	0.95	$	0.30	$	0.89
Net income per share - Diluted	$	0.21		$	0.94	$	0.30	$	0.88

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


	Three Months Ended	Nine Months Ended
	September 30,	September 30,
	2024	2023	2024	2023
Restricted stock units	361,130	74,972	520,171	190,071
Common stock options	370,040	430,521	370,040	430,521
Performance stock units	63,103	-	142,351	17,392
Employee stock purchase plan	79,295	-	-	-
Total	873,568	505,493	1,032,562	637,984

Note 14. Fair Value Measurements

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

As of September 30, 2024, our obligations under the AffloVest Acquisition earn-out arrangements had been paid in full. Prior to the determination of the actual amount of the earn-out, the 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 included 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 included 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 was adjusted to fair value at each reporting date until the end of the earn-out period, which was September 30, 2023. Changes in fair value were included in intangible asset amortization and earn-out expenses in our Condensed Consolidated Statements of Operations.

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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, 2022	$	13,050
Payment on earn-out		(5,000)
Fair value adjustments		(2,475)
Earn-out liability at September 30, 2023	$	5,575

On May 25, 2023, the Company paid $5.0million, plus an imputed interest payment of $250,000, relating to the initial earn-out. Subsequent to September 30, 2023, it was determined that the calculated amount of the second earn-out payment was $5.6million, which was paid by the Company on November 28, 2023.

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.

Note 15. Subsequent Event

On October 30, 2024, our Board of Directors authorized a program to repurchase up to $30.0million of common stock. Under the program, purchases may be made from time to time in the open market, in privately negotiated purchases, or both. The timing and number of shares to be purchased will be based on the price of the Company's common stock, general business and market conditions and other investment considerations and factors. The share repurchase program expires on October 31, 2026. The program does not obligate the Company to repurchase any specific number of shares and may be suspended or discontinued at any time without prior notice.

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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.

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 areas of therapeutic focus are (1) vascular disease, with a goal of advancing the standard of care in treating lymphedema and chronic venous 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 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.

Our current lymphedema products are the Flexitouch Plus, Entre Plus and Nimbl 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 introduced our Entre system in the United States in February 2013 and the second generation, Entre Plus, in March 2023. The Entre Plus 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 Plus system. Nimbl, our next-generation pneumatic compression platform, received 510(k) clearance in June 2024 and, beginning in October 2024, is commercially available throughout the United States for the treatment of upper extremity lymphedema. Sales and rentals of our lymphedema products represented 88% of our revenue in each of the nine months ended September 30, 2024 and 2023.

On September 8, 2021, we acquired the assets of the AffloVest airway clearance product line. AffloVest is a portable, wearable vest that provides airway clearance to treat patients with chronic respiratory conditions such as bronchiectasis or conditions resulting from neuromuscular disorders. For each of the nine months ended September 30, 2024 and 2023, sales of AffloVest represented 12% of our revenue.

To support the growth of our business, we continue to invest 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. 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 representatives, provide product demonstrations for targeted clinicians and support technical questions related to the AffloVest. As of September 30, 2024, we employed 270 field sales representatives for our lymphedema products and a team of 19 supporting our airway clearance products. This compares to 246 field sales representatives for our lymphedema products and a team of 13 specialists supporting our airway clearance products as of September 30, 2023.

We invest 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

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operations function is responsible for verifying patient insurance benefits, individual patient case development, prior authorization submissions, case follow-up, and appeals when necessary.

We also have a clinical team, consisting of a scientific advisory board, in-house therapists and nurses, and a Chief Medical Officer, 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.

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 products, perform quality assurance and ship our products from our facility in Minnesota. We also manufacture and ship the AffloVest device from our Minnesota-based facility.

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. Flexitouch Plus and Nimbl devices include Bluetooth technology, which is viewable using Kylee.

For the three months ended September 30, 2024, we generated revenue of $73.1 million and had net income of $5.2 million, compared to revenue of $69.6 million and net income of $22.3 million for the three months ended September 30, 2023. For the nine months ended September 30, 2024, we generated revenue of $207.4 million and had net income of $7.2 million, compared to revenue of $196.8 million and net income of $20.3 million for the nine months ended September 30, 2023. Our primary sources of capital since our initial public offering in 2016 have been from operating income, bank financing and our public offering in February 2023.

We operate in one segment for financial reporting purposes.

Current Economic Conditions

General global economic downturns and macroeconomic trends, including heightened inflation, capital market volatility, interest rate fluctuations, increased unemployment and economic slowdown or recession, may result in unfavorable conditions that could negatively affect demand for our products and exacerbate some of the other risks that affect our business, financial condition and results of operations.

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Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2024 and 2023

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


	Three Months Ended
	September 30,		Change
(In thousands)	2024		2023		$	%
Condensed Consolidated Statement				% of				% of
of Operations Data:				revenue				revenue
Revenue
Sales revenue	$	63,168		86	%	$	58,866		85	%	$	4,302	7	%
Rental revenue		9,925		14	%		10,720		15	%		(795)	(7)	%
Total revenue		73,093		100	%		69,586		100	%		3,507	5	%
Cost of revenue
Cost of sales revenue		15,603		21	%		17,016		24	%		(1,413)	(8)	%
Cost of rental revenue		2,703		4	%		3,211		5	%		(508)	(16)	%
Total cost of revenue		18,306		25	%		20,227		29	%		(1,921)	(9)	%
Gross profit
Gross profit - sales revenue		47,565		65	%		41,850		61	%		5,715	14	%
Gross profit - rental revenue		7,222		10	%		7,509		10	%		(287)	(4)	%
Gross profit		54,787		75	%		49,359		71	%		5,428	11	%
Operating expenses
Sales and marketing		26,838		37	%		26,030		37	%		808	3	%
Research and development		2,417		3	%		1,964		3	%		453	23	%
Reimbursement, general and administrative		18,118		25	%		16,449		24	%		1,669	10	%
Intangible asset amortization and earn-out		633		1	%		(3,073)		(4)	%		3,706	(121)	%
Total operating expenses		48,006		66	%		41,370		60	%		6,636	16	%
Income from operations		6,781		9	%		7,989		11	%		(1,208)	(15)	%
Other income (expense)		452		1	%		(404)		(1)	%		856	N.M.	%
Income before income taxes		7,233		10	%		7,585		10	%		(352)	(5)	%
Income tax expense (benefit)		2,078		3	%		(14,714)		(21)	%		16,792	(114)	%
Net income	$	5,155		7	%	$	22,299		31	%	$	(17,144)	(77)	%

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	Nine Months Ended
	September 30,		Change
(In thousands)	2024		2023		$	%
Condensed Consolidated Statement				% of				% of
of Operations Data:				revenue				revenue
Revenue
Sales revenue	$	180,742		87	%	$	171,459		87	%	$	9,283	5	%
Rental revenue		26,657		13	%		25,312		13	%		1,345	5	%
Total revenue		207,399		100	%		196,771		100	%		10,628	5	%
Cost of revenue
Cost of sales revenue		46,810		23	%		48,523		24	%		(1,713)	(4)	%
Cost of rental revenue		8,270		4	%		9,122		5	%		(852)	(9)	%
Total cost of revenue		55,080		27	%		57,645		29	%		(2,565)	(4)	%
Gross profit
Gross profit - sales revenue		133,932		64	%		122,936		63	%		10,996	9	%
Gross profit - rental revenue		18,387		9	%		16,190		8	%		2,197	14	%
Gross profit		152,319		73	%		139,126		71	%		13,193	9	%
Operating expenses
Sales and marketing		82,803		40	%		80,538		41	%		2,265	3	%
Research and development		6,794		3	%		6,030		3	%		764	13	%
Reimbursement, general and administrative		51,158		24	%		46,874		24	%		4,284	9	%
Intangible asset amortization and earn-out		1,898		1	%		(557)		-	%		2,455	N.M.	%
Total operating expenses		142,653		68	%		132,885		68	%		9,768	7	%
Income from operations		9,666		5	%		6,241		3	%		3,425	55	%
Other income (expense)		832		-	%		(2,235)		(1)	%		3,067	(137)	%
Income before income taxes		10,498		5	%		4,006		2	%		6,492	162	%
Income tax expense (benefit)		3,254		2	%		(16,307)		(8)	%		19,561	(120)	%
Net income	$	7,244		3	%	$	20,313		10	%	$	(13,069)	(64)	%

Revenue

Revenue increased $3.5 million, or 5%, to $73.1 million in the three months ended September 30, 2024, compared to $69.6 million in the three months ended September 30, 2023. The increase in total revenue was attributable to an increase of $2.8 million, or 4%, in sales and rentals of the lymphedema product line and an increase of $0.7 million, or 10%, in sales of the airway clearance product line in the three months ended September 30, 2024, compared to the three months ended September 30, 2023.

Revenue increased $10.6 million, or 5%, to $207.4 million in the nine months ended September 30, 2024, compared to $196.8 million in the nine months ended September 30, 2023. The increase in total revenue was attributable to an increase of $10.0 million, or 6%, in sales and rentals of the lymphedema product line, and an increase of $0.6 million, or 2%, in sales of the airway clearance product line in the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023.

The increase in the lymphedema product line revenue in each of the three and nine months ended September 30, 2024, was attributable to the growth of our field sales team and ongoing technology and workflow initiatives. The increase in the airway clearance product line revenue in the three and nine months ended September 30, 2024, was primarily attributable to the onboarding of a new DME partner in 2024.

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The following table summarizes our revenue by product line for the three and nine months ended September 30, 2024 and 2023, both in dollars and percentage of total revenue:


	Three Months Ended
	September 30,		Change
(In thousands)	2024		2023		$	%
Revenue
Lymphedema products	$	65,282		$	62,506	$	2,776	4%
Airway clearance products		7,811			7,080		731	10%
Total	$	73,093		$	69,586	$	3,507	5%

Percentage of total revenue
Lymphedema products		89%			90%
Airway clearance products		11%			10%
Total		100%			100%


	Nine Months Ended
	September 30,		Change
(In thousands)	2024		2023		$	%
Revenue
Lymphedema products	$	182,278		$	172,257	$	10,021	6%
Airway clearance products		25,121			24,514		607	2%
Total	$	207,399		$	196,771	$	10,628	5%

Percentage of total revenues
Lymphedema products		88%			88%
Airway clearance products		12%			12%
Total		100%			100%

Our business is affected by seasonality. In the first quarter of each year, when most patients have started a new insurance year and have not yet met their annual out-of-pocket payment obligations, we experience substantially reduced demand for our products. We typically experience higher 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 have an increasing 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.

Cost of Revenue and Gross Margin

Cost of revenue decreased $1.9 million, or 9%, to $18.3 million in the three months ended September 30, 2024, compared to $20.2 million in the three months ended September 30, 2023. Cost of revenue decreased $2.6 million, or 4%, to $55.1 million in the nine months ended September 30, 2024, compared to $57.6 million in the nine months ended September 30, 2023. The decrease in cost of revenue in both periods was primarily attributable to lower manufacturing and warranty costs.

Gross margin was 75.0% and 70.9% in the three months ended September 30, 2024 and 2023, respectively, and 73.4% and 70.7% in the nine months ended September 30 2024 and 2023, respectively.

Sales and Marketing Expenses

Sales and marketing expenses increased $0.8 million, or 3%, to $26.8 million in the three months ended September 30, 2024, compared to $26.0 million in the three months ended September 30, 2023. The increase

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was primarily attributable to a $0.5 million increase in travel and entertainment expenses and a $0.4 million increase in personnel-related compensation expenses, partially offset by a decrease of $0.1 million in tradeshow related expenses.

Sales and marketing expenses increased $2.3 million, or 3%, to $82.8 million in the nine months ended September 30, 2024, compared to $80.5 million in the nine months ended September 30, 2023. The increase was primarily attributable to a $1.1 million increase in travel and entertainment expenses, a $0.7 million increase in personnel-related compensation expenses and a $0.5 million increase in meetings, seminars and tradeshow related expenses.

Research and Development Expenses

Research and development ("R&D") expenses increased $0.5 million, or 23%, to $2.4 million in the three months ended September 30, 2024, compared to $2.0 million in the three months ended September 30, 2023. The increase was primarily attributable to a $0.4 million increase in professional fees and a $0.2 million increase in personnel-related compensation expenses, partially offset by a $0.1 million decrease in clinical study related expenses.

R&D expenses increased $0.8 million, or 13%, to $6.8 million in the nine months ended September 30, 2024, compared to $6.0 million in the nine months ended September 30, 2023. The increase was primarily attributable to a $0.5 million increase in professional fees, a $0.2 million increase in personnel-related compensation expenses, and a $0.1 million increase in clinical study related expenses.

Reimbursement, General and Administrative Expenses

Reimbursement, general and administrative expenses increased $1.7 million, or 10%, to $18.1 million in the three months ended September 30, 2024, compared to $16.5 million in the three months ended September 30, 2023. This increase was primarily attributable to a $1.2 million increase in personnel-related compensation expenses and a $0.9 million increase in IT related expenses, partially offset by a $0.4 million decrease in occupancy costs, depreciation expense and professional fees.

Reimbursement, general and administrative expenses increased $4.3 million, or 9%, to $51.2 million in the nine months ended September 30, 2024, compared to $46.9 million in the nine months ended September 30, 2023. This increase was primarily attributable to a $2.3 million increase in personnel-related compensation expenses, and a $2.0 million increase in IT related expenses.

Intangible Asset Amortization and Earn-out Expense

Intangible asset amortization and earn-out expense increased $3.7 million to an expense of $0.6 million in the three months ended September 30, 2024, compared to a benefit of $3.1 million in the three months ended September 30, 2023. The increase in expense was related to there being no earn-out expense in the three months ended September 30, 2024, as final payment under the AffloVest Acquisition earn-out arrangement was made on November 28, 2023, and therefore there was no change in fair value of an earn-out expense recorded in the three months ended September 30, 2024, compared to a decrease in the fair value of the earn-out expense of $3.7 million for the three months ended September 30, 2023, due to the lower than expected airway clearance product revenue.

Intangible asset amortization and earn-out expense increased $2.5 million to an expense of $1.9 million in the nine months ended September 30, 2024, compared to a benefit of $0.6 million in the nine months ended September 30, 2023. The increase was related to there being no earn-out expense in the nine months ended September 30, 2024, as final payment under the AffloVest Acquisition earn-out arrangement was made on November 28, 2023, and therefore there was no change in fair value of an earn-out expense recorded in the nine months ended September 30, 2024, compared to a decrease in the fair value of the earn-out expense of $2.5 million for the nine months ended September 30, 2023, due to the lower than expected airway clearance product revenue.

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Other Income (Expense), Net

We recorded other income, net of $0.5 million and other expense, net of $0.4 million for the three months ended September 30, 2024 and 2023, respectively. The primary drivers of the change were a decrease in interest expense of $0.4 million and an increase in interest income of $0.4 million.

We recorded other income, net of $0.8 million and other expense, net of $2.2 million for the nine months ended September 30, 2024 and 2023, respectively. The primary drivers of the change were a decrease in interest expense of $1.6 million and an increase in interest income of $1.4 million.

Income Taxes

We recorded income tax expense of $2.1 million and an income tax benefit $14.7 million for the three months ended September 30, 2024 and 2023, respectively. The primary driver of the change was the fact that we did not have a full valuation allowance on our deferred tax assets for the current year period, while in the prior year period there was a release of a valuation allowance to recognize the full value of our deferred tax assets.

We recorded an income tax expense of $3.3 million and an income tax benefit of $16.3 million for the nine months ended September 30, 2024 and 2023, respectively. The primary driver of the change was the fact that we did not have a full valuation allowance on our deferred tax assets for the current year period, while in the prior year period there was a release of a valuation allowance to recognize the full value of our deferred tax assets.

Liquidity and Capital Resources

Cash Flows

On September 30, 2024, our principal sources of liquidity were cash and cash equivalents of $82.1 million and net accounts receivable of $43.2 million. This compares to cash and cash equivalents of $66.0 million and net accounts receivable of $58.5 million at September 30, 2023.

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


	Nine Months Ended
	September 30,
(In thousands)	2024		2023
Net cash provided by (used in):
Operating activities	$	24,322		$	17,503
Investing activities		(2,005)			(1,541)
Financing activities		(1,204)			28,145
Net increase in cash and cash equivalents	$	21,113		$	44,107

Operating Activities

Net cash provided by operating activities during the nine months ended September 30, 2024 was $24.3 million, resulting from non-cash net income adjustments of $11.0 million, net income of $7.2 million and a net increase in operating assets and liabilities of $6.1 million. The positive non-cash net income adjustments consisted primarily of $6.0 million of stock-based compensation expense and $5.1 million of depreciation. Cash provided relating to the change in operating assets and liabilities primarily consisted of a decrease in accounts receivable of $10.5 million, a decrease in inventories of $1.4 million and a $0.6 million increase in accounts payable, partially offset by a decrease in accrued payroll and related taxes of $3.7 million, an increase in prepaid

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expenses and other assets of $1.8 million, a decrease in income taxes payable of $0.8 million and a decrease in accrued expenses and other liabilities of $0.3 million.

Net cash provided by operating activities during the nine months ended September 30, 2023 was $17.5 million, resulting from net income of $20.3 million and a net increase in operating assets and liabilities of $9.9 million, which were partially offset by non-cash net income adjustments of $12.7 million. Cash provided relating to the change in operating assets and liabilities primarily consisted of a decrease in accounts receivable of $19.3 million and a decrease in net investment in leases of $2.5 million, partially offset by a decrease in accrued expenses of $5.5 million, a decrease in accounts payable of $3.6 million, a decrease in accrued payroll and related taxes of $2.3 million, and an increase in prepaid expenses and inventories of $0.7 million. The negative non-cash net loss adjustments consisted primarily of $20.7 million of deferred income taxes and a $2.5 million change in the fair value of earn-out liability, offset by $5.6 million of stock-based compensation expense and $4.9 million of depreciation and amortization expense.

Investing Activities

Net cash used in investing activities during the nine months ended September 30, 2024, was $2.0 million, consisting of purchases of property and equipment primarily related to tenant improvements, and patent costs.

Net cash used in investing activities during the nine months ended September 30, 2023, was $1.5 million, consisting of purchases of property and equipment, and patent costs.

Financing Activities

Net cash used in financing activities during the nine months ended September 30, 2024, was $1.2 million, primarily consisting of a $2.3 million payment made on our term loan, partially offset by $1.0 million in proceeds from the issuance of common stock under the ESPP.

Net cash provided by financing activities during the nine months ended September 30, 2023, was $28.1 million, primarily consisting of net proceeds from the offering of our common stock of $34.6 million and $1.0 million in proceeds from the issuance of common stock under the ESPP, partially offset by a payment of $5.0 million on the AffloVest earn-out and a $2.3 million payment made on our term loan.

Credit Agreement

On September 8, 2021, we entered into a First Amendment Agreement (the "Amendment"), which amended the Restated Credit Agreement (as amended by the Amendment, the "Credit Agreement") with the lenders from time to time party thereto and Wells Fargo Bank, National Association, as administrative agent. The Amendment, among other things, added a $30.0 million incremental term loan to the $25.0 million revolving credit facility provided by the Restated Credit Agreement. The term loan is reflected on our condensed consolidated financial statements as a note payable. 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 $25.0 million in the aggregate, such that the total aggregate principal amount of loans available under the Credit Agreement (including under the revolving credit facility) does not exceed $80.0 million.

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

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On February 22, 2022, we entered into a Second Amendment Agreement (the "Second Amendment"), which further amends the Credit Agreement. The Second Amendment modified the maximum leverage ratio, the minimum fixed charge coverage ratio and the minimum consolidated EBITDA covenants under the Credit Agreement, and added a minimum liquidity covenant, through the quarter ended June 30, 2023. The Second Amendment also increased the applicable margin for LIBOR rate loans under the Credit Agreement during the period commencing on the date of the Second Amendment and ending on the last day of the fiscal quarter ending June 30, 2023. Pursuant to the Second Amendment, we made a mandatory principal prepayment of the term loan of $3.0 million on February 22, 2022.

On August 1, 2023, we entered into a Fourth Amendment Agreement (the "Fourth Amendment"), which further amended the Credit Agreement. The Fourth Amendment, among other things, decreased the commitment fees payable under the revolving credit facility and eliminated the temporary increase in the applicable margin for Adjusted Term SOFR loans. The Fourth Amendment also eliminated the liquidity financial covenant and modified the remaining financial covenants to reflect the termination of the temporary covenant relief period that was in place until June 30, 2023 pursuant to the Second Amendment. In addition, the Fourth Amendment provided for an additional term loan in the amount of $8.25 million, which we used for a paydown of the revolving credit facility. The Fourth Amendment also extended the maturity date of the term loans and revolving credit facility under the Credit Agreement from September 8, 2024 to August 1, 2026.

On December 21, 2023, we made a payment of $16.8 million to repay in full the outstanding balance on the revolving credit facility.

As of September 30, 2024, we had outstanding borrowings of $27.0 million under the Credit Agreement, comprised entirely of the term loan. The principal of the term loan is required to be repaid in quarterly installments of $750,000.

For additional information regarding the Credit Agreement, including interest rates, fees and maturities, see Note 8 - "Credit Agreement" of the condensed consolidated financial statements contained in this report.

Share Repurchase Program

On October 30, 2024, our Board of Directors authorized a program to repurchase up to $30.0 million of common stock. Under the program, purchases may be made from time to time in the open market, in privately negotiated purchases, or both. The timing and number of shares to be purchased will be based on the price of our common stock, general business and market conditions and other investment considerations and factors. The share repurchase program expires on October 31, 2026. The program does not obligate us to repurchase any specific number of shares and may be suspended or discontinued at any time without prior notice. We intend to finance the share repurchase program with cash on hand.

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, 2023. There have been no material changes since December 31, 2023.

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Adequacy of Resources

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

●	the impacts of inflation, rising interest rates or a recession on our business;

●	sales and marketing resources needed to further penetrate our market;

●	expansion of our operations;

●	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.

We believe our cash, cash equivalents and cash flows from operations will be sufficient to meet our working capital, 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 quarter ended September 30, 2024, and we do not expect that inflation or changing prices will materially affect our business for at least the next twelve months.

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 Estimates

Critical accounting estimates are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations.For additional information, please see the discussion of our most critical accounting estimates under "Critical Accounting 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, 2023.

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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, 2023. There have been no material changes since December 31, 2023.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2024. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2024, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that occurred during the quarter ended September 30, 2024, 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 9 - "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, 2023, which could materially affect our business, financial condition or future results. There have been no material changes in our risk factors from those disclosed in that report.

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

None.

Item 3. Defaults Upon Senior Securities.

Not applicable.

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Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Fifth Amendment to Credit Agreement

Because we are filing this Quarterly Report on Form 10-Q within four business days after the triggering event, we are making the following disclosure under this Item 5 instead of filing a Current Report on Form 8-K under Item 1.01, Entry into a Material Definitive Agreement and Item 2.03, Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant:

On November 1, 2024, we entered into a Fifth Amendment Agreement (the "Fifth Amendment"), which amends the Amended and Restated Credit Agreement, dated as of April 30, 2021, as amended by the First Amendment Agreement dated as of September 8, 2021, the Second Amendment Agreement dated as of February 22, 2022, the Third Amendment Agreement dated as of June 21, 2023, and the Fourth Amendment Agreement dated as of August 1, 2023 (as further amended by the Fifth Amendment, the "Credit Agreement"), by and among us, the lenders from time to time party thereto, and Wells Fargo Bank, National Association, as administrative agent.

The Credit Agreement restricts the Company from making certain payments, including any payments to repurchase shares of its common stock. The Fifth Amendment provides for an exception to this restriction by permitting the Company to make payments to repurchase shares of its common stock, as long as the Company is not in default before and after giving effect to such repurchases, and as long as such repurchases do not exceed $30.0 million.

The foregoing description of the Fifth Amendment is a summary, does not purport to be complete, and is qualified in its entirety by reference to the Fifth Amendment, a copy of which is attached to this Quarterly Report on Form 10-Q as Exhibit 10.2 and is incorporated herein by reference.

Trading Arrangements

During the quarter ended September 30, 2024, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adoptedor terminatedany contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) of the Exchange Act or any non-Rule 10b5-1trading arrangement (as defined in Item 408(c) of Regulation S-K).

Item 6. Exhibits.

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

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EXHIBIT INDEX


		Incorporated by Reference
Exhibit				Exhibit	Filed
Number	Description of Exhibit	Form	Date of Filing	Number	Herewith

3.1	Amended and Restated Certificate of Incorporation, conformed version reflecting all amendments through May 8, 2024	10-Q	08/05/2024	3.3

3.2	Amended and Restated By-laws, effective December 19, 2022	10-K	02/21/2023	3.2

10.1	Tactile Systems Technology, Inc. Executive Employee Severance Plan, Amended and Restated as of October 15, 2024				X

10.2	Fifth Amendment Agreement, dated as of November 1, 2024, among Tactile Systems Technology, Inc., the lenders signatory thereto and Wells Fargo Bank, National Association, as administrative agent				X

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

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

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

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

101.1	Inline XBRL for the following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2024: (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; and for the information set forth in Part II, Item 5.				X

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

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SIGNATURES

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


	Tactile Systems Technology, Inc.

Date: November 4, 2024		By:	/s/ Elaine M. Birkemeyer
	Elaine M. Birkemeyer
	Chief Financial Officer
	(Principal financial and accounting officer)

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