10-Q 1 tcmd-20220331x10q.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: March 31, 2022

or

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

For the transition period from to

Commission File Number: 001-37799

Tactile Systems Technology, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

3701 Wayzata Blvd, Suite 300

41-1801204

(State or other jurisdiction of

incorporation or organization)

Minneapolis, Minnesota 55416

(I.R.S. Employer

Identification No.)

(Address and zip code of principal executive offices)

(612) 355-5100

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, Par Value $0.001 Per Share

TCMD

The Nasdaq Stock Market

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

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

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

 

Large accelerated filer

Accelerated filer

Non-accelerated filer 

Smaller reporting company 

Emerging growth company

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

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

19,939,296 shares of common stock, par value $0.001 per share, were outstanding as of April 28, 2022.

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:

the impacts of the COVID-19 pandemic on our business, financial condition and results of operations, and our inability to mitigate such impacts;
the adequacy of our liquidity to pursue our business objectives;
our ability to obtain reimbursement from third-party payers for our products;
loss or retirement of key executives, including prior to identifying a successor;
adverse economic conditions or intense competition;
loss of a key supplier;
entry of new competitors and products;
adverse federal, state and local government regulation;
technological obsolescence of our products;
technical problems with our research and products;
our ability to expand our business through strategic acquisitions;
our ability to integrate acquisitions and related businesses;
price increases for supplies and components;
the effects of current and future U.S. and foreign trade policy and tariff actions; and
the inability to carry out research, development and commercialization plans.

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

3

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Tactile Systems Technology, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

    

March 31,

    

December 31,

(In thousands, except share and per share data)

    

2022

    

2021

Assets

Current assets

Cash and cash equivalents

$

21,150

$

28,229

Accounts receivable

 

45,927

 

49,478

Net investment in leases

 

12,307

 

12,482

Inventories

 

19,479

 

19,217

Prepaid expenses and other current assets

 

4,374

 

4,141

Total current assets

 

103,237

 

113,547

Non-current assets

Property and equipment, net

 

6,330

 

6,750

Right of use operating lease assets

 

23,315

 

23,984

Intangible assets, net

 

53,169

 

54,081

Goodwill

31,063

31,063

Accounts receivable, non-current

 

13,577

 

12,847

Other non-current assets

 

2,321

 

1,998

Total non-current assets

 

129,775

 

130,723

Total assets

$

233,012

$

244,270

Liabilities and Stockholders' Equity

Current liabilities

Accounts payable

$

6,200

$

5,023

Note payable

2,964

2,960

Earn-out, current

9,150

3,250

Accrued payroll and related taxes

 

9,481

 

12,139

Accrued expenses

 

5,673

 

5,262

Income taxes payable

 

26

 

16

Operating lease liabilities

 

2,504

 

2,506

Other current liabilities

 

4,275

 

3,305

Total current liabilities

 

40,273

 

34,461

Non-current liabilities

Revolving line of credit, non-current

24,878

24,857

Note payable, non-current

23,199

26,933

Earn-out, non-current

3,500

2,950

Accrued warranty reserve, non-current

 

2,997

 

3,108

Income taxes payable, non-current

 

298

 

348

Operating lease liabilities, non-current

22,742

 

23,354

Deferred income taxes

147

32

Total non-current liabilities

 

77,761

 

81,582

Total liabilities

 

118,034

 

116,043

Commitments and Contingencies (see Note 10)

Stockholders’ equity:

Preferred stock, $0.001 par value, 50,000,000 shares authorized; none issued and outstanding as of March 31, 2022 and December 31,
2021

 

 

Common stock, $0.001 par value, 300,000,000 shares authorized; 19,939,843 shares issued and outstanding as of March 31, 2022; 19,877,786 shares issued and outstanding as of December 31, 2021

 

20

 

20

Additional paid-in capital

 

122,281

 

119,962

(Accumulated deficit) retained earnings

 

(7,323)

 

8,245

Total stockholders’ equity

 

114,978

 

128,227

Total liabilities and stockholders’ equity

$

233,012

$

244,270

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

4

Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

Three Months Ended

March 31,

(In thousands, except share and per share data)

    

2022

    

2021

Revenue

Sales revenue

$

41,170

$

36,125

Rental revenue

 

6,808

 

6,647

Total revenue

 

47,978

 

42,772

Cost of revenue

Cost of sales revenue

 

12,080

 

10,691

Cost of rental revenue

 

2,036

 

1,851

Total cost of revenue

 

14,116

 

12,542

Gross profit

Gross profit - sales revenue

 

29,090

 

25,434

Gross profit - rental revenue

 

4,772

 

4,796

Gross profit

 

33,862

 

30,230

Operating expenses

Sales and marketing

 

23,930

 

18,785

Research and development

 

1,520

 

1,270

Reimbursement, general and administrative

 

16,217

 

14,209

Intangible asset amortization and earn-out

7,096

50

Total operating expenses

 

48,763

 

34,314

Loss from operations

 

(14,901)

 

(4,084)

Other expense

 

(456)

 

(10)

Loss before income taxes

 

(15,357)

 

(4,094)

Income tax expense (benefit)

 

211

 

(1,828)

Net loss

$

(15,568)

$

(2,266)

Net loss per common share

Basic

$

(0.78)

$

(0.12)

Diluted

$

(0.78)

$

(0.12)

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

Basic

19,898,502

19,545,558

Diluted

19,898,502

19,545,558

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

5

Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(Accumulated

Additional

Deficit)

Common Stock

Paid-In

Retained

(In thousands, except share data)

 

Shares

 

Par Value

 

Capital

 

Earnings

 

Total

Balances, December 31, 2021

19,877,786

$

20

$

119,962

$

8,245

$

128,227

Stock-based compensation

2,228

2,228

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

62,057

91

91

Comprehensive loss for the period

(15,568)

(15,568)

Balances, March 31, 2022

19,939,843

$

20

$

122,281

$

(7,323)

$

114,978

Balances, December 31, 2020

19,492,718

$

19

$

104,675

$

20,056

$

124,750

Stock-based compensation

2,457

2,457

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

167,375

1

1,295

1,296

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

(20,980)

(1,115)

(1,115)

Comprehensive loss for the period

(2,266)

(2,266)

Balances, March 31, 2021

19,639,113

$

20

$

107,312

$

17,790

$

125,122

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

6

Tactile Systems Technology, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Three Months Ended March 31, 

(In thousands)

    

2022

    

2021

Cash flows from operating activities

Net loss

$

(15,568)

$

(2,266)

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

Depreciation and amortization

1,507

652

Deferred income taxes

115

(1,828)

Stock-based compensation expense

2,228

2,457

Change in fair value of earn-out liability

6,450

Changes in assets and liabilities, net of acquisition:

Accounts receivable

3,551

3,806

Net investment in leases

175

(546)

Inventories

(262)

(3,479)

Income taxes

(40)

Prepaid expenses and other assets

(556)

447

Right of use operating lease assets

55

49

Medicare accounts receivable, non-current

(730)

(1,294)

Accounts payable

1,177

5,022

Accrued payroll and related taxes

(2,658)

(3,041)

Accrued expenses and other liabilities

1,350

(779)

Net cash used in operating activities

(3,206)

(800)

Cash flows from investing activities

Purchases of property and equipment

(131)

(249)

Intangible assets expenditures

(44)

(62)

Net cash used in investing activities

(175)

(311)

Cash flows from financing activities

Payment on note payable

(3,750)

Payment of deferred debt issuance costs

(39)

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

(1,115)

Proceeds from exercise of common stock options

91

1,296

Net cash (used in) provided by financing activities

(3,698)

181

Net decrease in cash and cash equivalents

(7,079)

(930)

Cash and cash equivalents – beginning of period

28,229

47,855

Cash and cash equivalents – end of period

$

21,150

$

46,925

Supplemental cash flow disclosure

Cash paid for interest

$

413

$

Cash paid for taxes

$

12

$

13

Capital expenditures incurred but not yet paid

$

8

$

133

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

7

Tactile Systems Technology, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Note 1. Nature of Business and Operations

Tactile Systems Technology, Inc. (“we,” “us,” and “our”)  manufactures and distributes medical devices that help control symptoms of lymphedema, a chronic and progressive medical condition. We provide our Flexitouch® and Entre™ systems through our direct sales force for use in the home and sell or rent them through vascular, wound and lymphedema clinics throughout the United States.

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

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

Note 2. Basis of Presentation

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

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

Principles of Consolidation

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

8

Risks and Uncertainties

Coronavirus (COVID-19)

The United States economy in general and our business specifically have been negatively affected by the COVID-19 pandemic. In the first quarter of 2022, the continued prolonged recovery from COVID-19 and increased Omicron variant cases resulted in restricted access to clinics and hospitals and disrupted the recovery in patient visits versus the pre-COVID environment. The adverse impacts in the first quarter of 2022 were similar to those we experienced during the first quarter of 2021. At this time, there are no reliable estimates of how long the pandemic will last, whether any recovery will be sustained or will reverse course, the severity of any resurgence of COVID-19 or variant strains of the virus, the effectiveness of vaccines and attitudes towards receiving them, or what ultimate effects the pandemic will have. For that reason, we are unable to reasonably estimate the long-term impact of the pandemic on our business at this time.

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

Use of Estimates

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

Comprehensive (Loss) Income

Comprehensive (loss) income reflects the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.

Note 3. Summary of Significant Accounting Policies

Significant Accounting Policies  

There were no material changes in our significant accounting policies during the three months ended March 31, 2022, except as set forth below. See Note 3 – “Summary of Significant Accounting Policies” to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021, for information regarding our significant accounting policies.

Accounting Pronouncement Not Yet Adopted

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

9

Note 4. Acquisitions

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

 

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

Initial Earn-Out: Equal to 1.5 times the amount by which the AffloVest U.S. revenues in the period from October 1, 2021 to September 30, 2022 (the “Initial Earn-Out Period”) exceed a specified amount; provided that in no event will the payment exceed $10.0 million; and
Second Earn-Out: Equal to 1.5 times the amount by which the AffloVest U.S. revenues in the period from October 1, 2022 to September 30, 2023 exceed the revenues recognized during the Initial Earn-Out Period; provided that in no event will the payment exceed $10.0 million.

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

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

(In millions)

    

Allocated Fair Value

Inventories

$

1.6

Property and equipment(1)

Intangible assets

53.5

Goodwill

31.1

Purchase price

$

86.2

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

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

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

(In millions)

    

Allocated Fair Value

Estimated Useful Life

Customer relationships

$

31.0

13 years

Developed technology

13.0

11 years

Tradenames

 

9.5

Indefinite

Total intangible assets

$

53.5

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

10

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

Note 5. Inventories

Inventories consisted of the following:

(In thousands)

    

At March 31, 2022

    

At December 31, 2021

Finished goods

$

9,433

$

8,242

Component parts and work-in-process

 

10,046

 

10,975

Total inventories

$

19,479

$

19,217

Note 6. Goodwill and Intangible Assets

Goodwill

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

11

Intangible Assets

Our patents and other intangible assets are summarized as follows:

Weighted-

At March 31, 2022

Average

Gross

Amortization

Carrying

Accumulated

Net

(In thousands)

    

Period

Amount

Amortization

Amount

Definite-lived intangible assets:

Patents

12 years

$

689

$

124

$

565

Defensive intangible assets

3 years

1,125

635

490

Customer accounts

1 year

125

95

30

Customer relationships

12 years

31,000

1,338

29,662

Developed technology

10 years

13,000

663

12,337

Subtotal

45,939

2,855

43,084

Unamortized intangible assets:

Tradenames

9,500

9,500

Patents pending

585

585

Total intangible assets

$

56,024

$

2,855

$

53,169

Weighted-

At December 31, 2021

Average

Gross

Amortization

Carrying

Accumulated

Net

(In thousands)

    

Period

Amount

Amortization

Amount

Definite-lived intangible assets:

Patents

12 years

$

666

$

109

$

557

Defensive intangible assets

3 years

1,125

592

533

Customer accounts

1 year

 

125

 

89

 

36

Customer relationships

13 years

31,000

742

30,258

Developed technology

11 years

13,000

368

12,632

Subtotal

45,916

1,900

44,016

Unamortized intangible assets:

Tradenames

9,500

9,500

Patents pending

565

565

Total intangible assets

$

55,981

$

1,900

$

54,081

Amortization expense was $1.0 million and $0.1 million for the three months ended March 31, 2022 and 2021, respectively. Future amortization expenses are expected as follows:

(In thousands)

2022 (April 1 - December 31)

$

2,867

2023

3,793

2024

 

3,771

2025

 

3,682

2026

 

3,617

Thereafter

 

25,354

Total

$

43,084

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Note 7. Accrued Expenses

Accrued expenses consisted of the following:

(In thousands)

    

At March 31, 2022

    

At December 31, 2021

Warranty

$

1,998

$

1,851

Legal and consulting

1,248

1,371

Travel

752

661

In-transit inventory

 

611

 

416

Clinical studies

122

113

Sales and use tax

71

106

Other

 

871

 

744

Total

$

5,673

$

5,262

Note 8. Warranty Reserves

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

Three Months Ended

March 31, 

(In thousands)

2022

    

2021

Beginning balance

$

4,959

$

4,841

Warranty provision

 

643

 

612

Processed warranty claims

 

(607)

 

(584)

Ending balance

$

4,995

$

4,869

Accrued warranty reserve, current

$

1,998

$

1,610

Accrued warranty reserve, non-current

2,997

3,259

Total accrued warranty reserve

$

4,995

$

4,869

Note 9. 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 amends the Restated Credit Agreement (as amended by the Amendment, the “Credit Agreement”) with the lenders from time to time party thereto and Wells Fargo Bank, National Association, as administrative agent. The Amendment, among other things, adds a $30.0 million incremental term loan to the $25.0 million revolving credit facility provided by the Restated Credit Agreement. The term loan is reflected on our condensed consolidated financial statements as a note payable. The term loan and the revolving credit facility mature on September 8, 2024. The Credit Agreement provides that, subject to satisfaction of certain conditions, we may increase the amount of the revolving loans available under the Credit Agreement and/or add one or more term loan facilities in an amount not to exceed $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 AffloVest Acquisition, we borrowed the $30.0 million term loan and utilized that borrowing, together with a draw of $25.0 million under the revolving credit facility and cash on hand, to fund the purchase price.

13

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

 

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

As of March 31, 2022, the outstanding balance of the term loan was $26.3 million and the outstanding balance under the revolving credit facility was $25.0 million. As of March 31, 2022, there was no availability under our Credit Agreement.

The term loan and amounts drawn under the revolving credit facility bear interest, at our option, at a rate equal to (a) the highest of (i) the prime rate, (ii) the federal funds rate plus 0.50% and (iii) LIBOR for an interest period of one month plus 1% (the “Base Rate”) plus an applicable margin or (b) LIBOR for an interest period of one, three or six months, at our option, plus the applicable margin. The applicable margin is 0.75% to 2.25% on loans bearing interest at the Base Rate and 1.75% to 3.25% on loans bearing interest at LIBOR, in each case depending on our consolidated total leverage ratio; except that, pursuant to the Second Amendment, during the period commencing on February 22, 2022 and ending on the last day of the fiscal quarter ending June 30, 2023, the applicable margin for LIBOR rate loans is 3.50%. At March 31, 2022, all outstanding borrowings were subject to interest at a rate calculated at LIBOR plus an applicable margin, for an interest rate of 3.70%. Undrawn portions of the revolving credit facility are subject to an unused line fee at a rate per annum from 0.300% to 0.375%, depending on our consolidated total leverage ratio.

 

Maturities of the term loan for the next three years as of March 31, 2022, are as follows:

(In thousands)

    

Amount

2022 (April 1 - December 31)

$

2,250

2023

3,000

2024

21,000

Total

$

26,250

Our obligations under the Credit Agreement are secured by a security interest in substantially all of our and our subsidiaries’ assets and are also guaranteed by our subsidiaries. The Credit Agreement contains a number of restrictions and covenants, including that we maintain compliance with a maximum leverage ratio, a minimum fixed charge coverage ratio, a minimum consolidated EBITDA covenant, and a minimum liquidity covenant. As of March 31, 2022, we were in compliance with all financial covenants under the Credit Agreement.

Note 10. Commitments and Contingencies

Lease Obligations

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

We classify our leases as buildings, vehicles or computer and office equipment and do not separate lease and nonlease components of contracts for any of the aforementioned classifications. In accordance with

14

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

None of our lease agreements contain material restrictive covenants or residual value guarantees.

Buildings

We lease certain office and warehouse space at various locations in the United States where we provide services. These leases are typically greater than one year with fixed, escalating rents over the noncancelable terms and, therefore, ROU operating lease assets and operating lease liabilities are recorded on the Condensed Consolidated Balance Sheets, with rent expense to be recognized on a straight-line basis over the term of the lease. The remaining lease terms vary from approximately one to eight years as of March 31, 2022.

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

Vehicles

We lease vehicles for certain members of our field sales organization under a vehicle fleet program whereby the initial, noncancelable lease is for a term of 367 days, thus more than one year. Subsequent to the initial term, the lease becomes a month-to-month, cancelable lease. As of March 31, 2022, we had approximately 32 vehicles with agreements within the initial, noncancelable lease term that are recorded as ROU operating lease assets and operating lease liabilities. In addition to monthly rental fees specific to the vehicle, there are fixed monthly nonlease components that have been included in the ROU operating lease assets and operating lease liabilities. The nonlease components are not significant.

Computer and Office Equipment

We also have operating lease agreements for certain computer and office equipment. The remaining lease terms as of March 31, 2022, ranged from less than one year to approximately four years with fixed monthly payments that are included in the ROU operating lease assets and operating lease liabilities. The leases provide an option to purchase the related equipment at fair market value at the end of the lease. The leases will automatically renew as a month-to-month rental at the end of the lease if the equipment is not purchased or returned.

15

Lease Position, Undiscounted Cash Flow and Supplemental Information

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

(In thousands)

    

At March 31, 2022

    

At December 31, 2021

Right of use operating lease assets

$

23,315

$

23,984

Operating lease liabilities:

Current

$

2,504

$

2,506

Non-current

 

22,742

 

23,354

Total

$

25,246

$

25,860

Operating leases:

Weighted average remaining lease term

 

8.4 years

8.6 years

Weighted average discount rate

4.2%

4.2%

Three Months Ended March 31,

2022

2021

Supplemental cash flow information for our operating leases:

Cash paid for operating lease liabilities

$

918

$

789

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

$

41

$

124

The table below reconciles the undiscounted cash flows for the periods presented to the operating lease liabilities recorded on the Condensed Consolidated Balance Sheet as of March 31, 2022:

(In thousands)

2022 (April 1 - December 31)

$

2,658

2023

3,425

2024

 

3,415

2025

 

3,516

2026

 

3,615

Thereafter

 

13,249

Total minimum lease payments

29,878

Less: Amount of lease payments representing interest

(4,632)

Present value of future minimum lease payments

25,246

Less: Current obligations under operating lease liabilities

(2,504)

Non-current obligations under operating lease liabilities

$

22,742

Operating lease costs were $1.0 million and $0.8 million for the three months ended March 31, 2022 and 2021, respectively.

Major Vendors

We had purchases from two vendors that accounted for 29% of our total purchases for the three months ended March 31, 2022, and from two vendors that accounted for 33% of our total purchases for the three months ended March 31, 2021.

Purchase Commitments

We issued purchase orders prior to March 31, 2022, totaling $38.8 million for goods that we expect to receive within the next year.

16

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 $0.4 million and $0.3 million for the three months ended March 31, 2022 and 2021, respectively.

Legal Proceedings

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

We and certain of our present or former officers have been sued in a purported securities class action lawsuit that was filed in the United States District Court for the District of Minnesota on September 29, 2020, and that is pending under the caption Brian Mart v. Tactile Systems Technology, Inc., et al., File No. 0:20-cv-02074-NEB-BRT. On April 19, 2021, the plaintiff filed an Amended Complaint against us and eight of our present and former officers and directors. Plaintiff seeks to represent a class consisting of investors who purchased our common stock in the market during the time period from May 7, 2018 through June 8, 2020 (“alleged class period”). The Amended Complaint alleges the following claims under the Securities Exchange Act of 1934, as amended (the “Exchange Act”): (1) that we and certain officer defendants made materially false or misleading public statements about our business, operational and compliance policies, and results during the alleged class period in violation of Section 10(b) of the Exchange Act; (2) that we and the individual defendants engaged in a scheme to defraud investors in order to allow the individual defendants to sell our stock in violation of Section 10(b) of the Exchange Act; (3) that the individual defendants engaged in improper insider trading of our stock in violation of Section 20A of the Exchange Act; and (4) that we and the individual defendants are liable under Section 20(a) of the Exchange Act because each defendant is a controlling person. On June 18, 2021, we and the individual defendants filed a motion to dismiss the Amended Complaint. On March 31, 2022, the court granted in part, and denied in part, the defendants’ motion to dismiss. All claims against three individual defendants were dismissed, and most claims against four other individual defendants were dismissed. The Company remains a defendant on alleged Sections 10(b) and 20(a) claims. We are defending the action as it proceeds.

Note 11. Stockholders' Equity

Stock-Based Compensation

Our 2016 Equity Incentive Plan (the “2016 Plan”) authorizes us to grant stock options, stock appreciation rights, restricted stock, stock units and other stock-based awards to employees, non-employee directors and certain consultants and advisors. There were up to 4,800,000 shares of our common stock initially reserved for issuance pursuant to the 2016 Plan. The 2016 Plan provides that the number of shares reserved and available for issuance under the 2016 Plan will automatically increase annually on January 1 of each calendar year, commencing in 2017 and ending on and including January 1, 2026, by an amount equal to the lesser of: (a) 5% of the number of common shares of stock outstanding as of December 31 of the immediately preceding calendar year, or (b) 2,500,000 shares; provided, however, that our Board of Directors may determine that any annual increase be a lesser number. In addition, all awards granted under our 2007 Omnibus Stock Plan and our 2003 Stock Option Plan that were outstanding when the 2016 Plan became effective and that are forfeited, expired, cancelled, settled for cash or otherwise not issued, will become available for issuance under the 2016 Plan. Pursuant to the automatic increase feature of the 2016 Plan, 972,591 shares were added as available for issuance thereunder on January 1, 2021. Our Board of Directors exercised its prerogative to forego the automatic increase on January 1, 2022. As of March 31, 2022, 5,919,092 shares were available for future grant pursuant to the 2016 Plan.

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

17

We recorded stock-based compensation expense of $2.2 million and $2.5 million for the three months ended March 31, 2022 and 2021, respectively. This expense was allocated as follows: