Use these links to rapidly review the document
TABLE OF CONTENTS
TACTILE SYSTEMS TECHNOLOGY, INC.

Table of Contents

As filed with the Securities and Exchange Commission on January 25, 2016.

Registration No. 333-             

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933



TACTILE SYSTEMS TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  3841
(Primary Standard Industrial
Classification Code Number)
  41-1801204
(I.R.S. Employer
Identification No.)

Tactile Systems Technology, Inc.
1331 Tyler Street NE, Suite 200
Minneapolis, MN 55413
(612) 355-5100

(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)

Gerald R. Mattys
Chief Executive Officer
Tactile Systems Technology, Inc.
1331 Tyler Street NE, Suite 200
Minneapolis, MN 55413
(612) 355-5100
(Name, address, including zip code, and telephone number, including area code, of agent for service)



Copies to:

Jonathan R. Zimmerman
Faegre Baker Daniels LLP
2200 Wells Fargo Center
90 South Seventh Street
Minneapolis, MN 55402-1425
(612) 766-7000

 

Jonathan B. Abram
Dorsey & Whitney LLP
50 South Sixth Street
Suite 1500
Minneapolis, MN 55402-1498
(612) 340-2868



Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box.     o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.     o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  o   Accelerated filer  o   Non-accelerated filer  ý
(Do not check if a
smaller reporting company)
  Smaller reporting company  o



CALCULATION OF REGISTRATION FEE

       
 
Title of Each Class of Securities
to be Registered

  Proposed Maximum
Aggregate Offering
Price(1)

  Amount of
Registration Fee(2)

 

Common stock, par value $0.001 per share

  $86,250,000   $8,685.38

 

(1)
Estimated solely for the purpose of computing the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. Includes offering price of shares of common stock subject to the underwriters' option to purchase additional shares, solely to cover over-allotments, if any.

(2)
Calculated pursuant to Rule 457(o) under the Securities Act of 1933, as amended, based on an estimate of the proposed maximum aggregate offering price.



The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine .

   


Table of Contents

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject to Completion, dated January 25, 2016

             Shares

TACTILE SYSTEMS TECHNOLOGY, INC.  
LOGO

Common Stock

$             per share


Tactile Systems Technology, Inc. is offering              shares.

We anticipate that the initial public offering price will be between $             and $             per share.

This is our initial public offering and no public market currently exists for our shares.

We have applied to have our common stock approved for quotation on The NASDAQ Global Market under the symbol "TCMD."



This investment involves risk. See "Risk Factors" beginning on page 15.

We are an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012, and as such, have elected to comply with certain reduced public company reporting requirements in this prospectus and in future filings.

             
   

 

 

Per Share

 

Total

 

Initial public offering price

  $     $    

Underwriting discounts and commissions (1)

  $     $    

Proceeds to Tactile Systems Technology, Inc., before expenses

  $     $    
   
(1)
See "Underwriting" for additional information regarding underwriting compensation.

The underwriters have the option to purchase up to             additional shares from us at the initial public offering price, less the underwriting discounts and commissions, for 30 days after the date of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of our common stock to investors on or about                           , 2016.

Piper Jaffray   William Blair   Canaccord Genuity



BTIG

   

The date of this prospectus is                           , 2016.


GRAPHIC


Table of Contents


TABLE OF CONTENTS

 
  Page  

       

Prospectus Summary

    1  

Risk Factors

    15  

Special Note Regarding Forward-Looking Statements

    60  

Use of Proceeds

    62  

Dividend Policy

    63  

Capitalization

    64  

Dilution

    66  

Selected Consolidated Financial Data

    69  

Management's Discussion and Analysis of Financial Condition and Results of Operations

    72  

Business

    90  

Management

    122  

Executive Compensation

    130  

Certain Relationships and Related Party Transactions

    143  

Principal Stockholders

    145  

Description of Capital Stock

    147  

Shares Eligible for Future Sale

    154  

Material U.S. Federal Income Tax Consequences to Non-U.S. Holders

    156  

Underwriting

    161  

Legal Matters

    170  

Experts

    170  

Where You Can Find Additional Information

    170  

Index to Consolidated Financial Statements

    F-1  



Until                           , 2016, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotment or subscriptions.

You should rely only on the information contained in this prospectus or any related free writing prospectus we may authorize to be delivered to you. We have not, and the underwriters have not, authorized anyone to provide you with any information other than that contained or incorporated by reference in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. Neither we nor the underwriters take responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date, regardless of the time of delivery of this prospectus or any sale of shares of our common stock.

i


Table of Contents


Investors Outside of the United States

Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus outside the United States.


Trademarks

Tactile Medical, Flexitouch, the Flexitouch and design, ACTitouch, Entré and our logo are our trademarks and are used in this prospectus. Trade names, trademarks and service marks of other companies appearing in this prospectus are the property of their respective owners. Solely for convenience, our trademarks and trade names referred to in this prospectus appear without the ® and TM symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights, or the right of the applicable licensor to these trademarks and trade names. Additionally, we do not intend for our use or display of other companies' trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us, by these other companies.


Industry and Market Data

Certain market and industry data and forecasts included in this prospectus were obtained from independent market research, industry publications and surveys, governmental agencies and publicly available information. Industry surveys, publications and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. We believe the data from such third-party sources to be reliable. However, we have not independently verified any of such data and cannot guarantee its accuracy or completeness. Similarly, internal market research and industry forecasts, which we believe to be reliable based upon our management's knowledge of the market and the industry, have not been verified by any independent sources. While we are not aware of any misstatements regarding the market or industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading "Risk Factors," "Special Note Regarding Forward-Looking Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this prospectus.

ii


Table of Contents



PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should consider when making your investment decision. You should read this entire prospectus carefully, including the sections titled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the notes thereto included elsewhere in this prospectus, before making an investment in our common stock. As used in this prospectus, the terms "company," "we," "our," and "us" refer to Tactile Systems Technology, Inc., doing business as Tactile Medical, except as otherwise indicated herein or as the context otherwise requires.


Tactile Medical

We are a medical technology company that develops and provides innovative medical devices for the treatment of chronic diseases at home. We focus on advancing the standard of care in treating chronic diseases in the home setting to improve patient outcomes and quality of life and help control rising healthcare expenditures. We possess a unique, scalable platform to deliver at-home healthcare solutions throughout the United States. This evolving care delivery model is recognized by policy-makers and payers as a key for controlling rising healthcare expenditures. Our initial area of therapeutic focus is vascular disease, with a goal of advancing the standard of care in treating lymphedema and chronic venous insufficiency. Our proprietary Flexitouch System is an at-home solution for lymphedema patients. Our proprietary ACTitouch System is a home-based solution for chronic venous insufficiency patients that may be worn throughout the day. Our products deliver cost-effective, clinically proven, long-term treatment of chronic diseases. We employ a direct-to-patient and -provider model, through which we obtain patient referrals from clinicians, manage insurance claims on behalf of our patients and their clinicians, deliver our solutions to patients and train them on the proper use of our solutions in their homes. This model allows us to directly approach patients and clinicians, whereby we disintermediate the traditional durable medical equipment channel and capture both the manufacturer and distributor margins. For the year ended December 31, 2014, we generated revenues of $47.7 million and had net income of $2.1 million. Our revenues increased 28% during the year ended December 31, 2014 compared to the year ended December 31, 2013. For the nine months ended September 30, 2015, we generated revenues of $41.7 million and had net income of $0.1 million. Our revenues increased 41% during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014.

A traditional treatment for lymphedema is complete decongestive therapy, consisting of manual lymphatic drainage, which is a specialized application of gentle pressure to the skin applied by a therapist that encourages drainage of lymph fluid, as well as decongestive exercises, skin care and compression with multilayered bandages, compression garments or pumps. Typically, this therapy begins with clinic visits, but eventually patients transition to self-administered home-based therapy. The standard of care treatment for chronic venous insufficiency is compression therapy. As the disease progresses, patients may develop a venous leg ulcer, which is commonly treated using multilayered bandages to minimize swelling and enhance blood flow. A clinician applies these non-removable bandages to patients at a precise pressure and patients wear the bandages between weekly visits to the wound clinic during which the bandages are removed and reapplied.

Our advanced at-home Flexitouch System mimics the clinic-based manual lymphatic drainage therapy through an easy-to-use, one-hour daily, self-applied treatment solution. Peer-reviewed, published studies have shown that our Flexitouch System provides improved quality of life and clinical outcomes and delivers significant cost-savings to payers and patients, compared to traditional treatments. The predecessor version of our Flexitouch System received 510(k) clearance in July 2002 and our current Flexitouch System received 510(k) clearance from the U.S. Food and Drug Administration, or FDA, in

 

1


Table of Contents

October 2006. Our Flexitouch System generated $43.7 million, or 92%, of our revenues in 2014. Our ACTitouch System addresses chronic venous insufficiency and provides precise, sustained and wearable compression that a patient may apply, remove and reapply at home. This system was developed to provide maximum convenience for patients by providing them with the freedom to remain active while simultaneously receiving the benefits of both sustained and intermittent pneumatic compression, which we refer to as dual-compression therapy. In a clinical study, our ACTitouch System was shown to have comparable efficacy in healing venous leg ulcers and achieved higher patient quality of life scores as compared to multilayered bandages. Our ACTitouch System received 510(k) clearance from the FDA in June 2013 and generated $2.4 million, or 5%, of our revenues in 2014.

To support the growth of our business, we invest heavily in our commercial infrastructure, consisting of our direct sales force, reimbursement capabilities and clinical expertise. We are a national, accredited provider of home medical equipment services approved for coverage by private payers, Medicare, the Veterans Administration and certain Medicaid programs in the United States. We market our products using a direct-to-patient and -provider model. Our direct sales force is focused on increasing clinician awareness of our solutions, and has grown from three people in March 2005 to over 70 people as of September 30, 2015. We utilize over 300 licensed, independent healthcare practitioners as at-home trainers who educate patients on the proper use of our solutions. Our experienced reimbursement operations group of over 50 people focuses on verifying case-by-case benefits, obtaining prior authorization, billing and collecting payments from payers and providing customer support services. Our payer relationships group of over 20 people is responsible for developing relationships with payer decision-makers to educate them on our product efficacy, develop overall payer coverage policies and reimbursement criteria, manage Medicare patient claims and contracts with payers and serve as an advocacy liaison between patients, clinicians and payers throughout the appeals process. Our clinical team, consisting of a scientific advisory board, in-house therapists and nurses and a medical director, serves as a resource to clinicians and patients and guides our development of clinical evidence in support of our products. We believe these investments are critical to driving patient adoption of our technologies, and together with our commercial infrastructure, represent a significant competitive advantage. Health insurance coverage for our Flexitouch System and our ACTitouch System is in place with private payers, Medicare, the Veterans Administration and certain Medicaid programs. Based on our estimates, we have contracts as an in-network provider covering over 230 million lives in the United States. Over 44,000 patients were treated with our Flexitouch System since 2002, and over 9,000 Flexitouch Systems were shipped in 2014. More than 1,800 patients were treated with our ACTitouch System during its first full year of commercialization in 2014.

Overview of the Lymphedema and Chronic Venous Insufficiency Markets

Lymphedema

The lymphatic system performs a fundamental role in maintaining health through balancing fluids and regulating immunity by removing harmful bacteria, viruses and waste products. Lymphatic structures are situated throughout the body and are comprised of a series of vessels, lymph nodes and lymphoid organs that act as a drainage system by collecting protein rich lymph fluid and sending it to the venous system. Lymph nodes are located in several areas of the body with superficial and deep lymph nodes under each arm, at the hip, in the groin, above the collar bones in the neck, in the abdomen, tonsils and spleen and in bone marrow.

Lymphedema refers to a type of chronic swelling, or edema, which may occur in the arms, legs, neck, trunk or other body parts and causes severe and debilitating symptoms, including decreased mobility, skin breakdown, pain, increased risk of serious infection and marked psychosocial impairment, resulting in significantly negative implications for a patient's health and quality of life. The disease

 

2


Table of Contents

occurs when the lymphatic vessels are unable to adequately drain protein-rich lymph fluid from the arms, legs or other regions of the body. Any condition or procedure that damages the lymph nodes or lymphatic vessels, such as surgery or treatment for breast and other cancers, obesity, infection, scar tissue formation, trauma or chronic venous insufficiency can cause lymphedema. The disease may also be caused from congenital malformation of the lymphatic system. Lymphedema is progressive in nature, worsens over time, and has no known cure.

Chronic Venous Insufficiency

Chronic venous insufficiency occurs when the venous wall and/or valves in the veins are not working effectively, making it difficult for blood to return to the heart. The disease is prevalent among patients who are obese or pregnant and may also be caused by high blood pressure, trauma, lack of exercise, smoking, deep vein thrombosis and inflammation of the vein walls. As the valves deteriorate, blood leaks or flows backward, leading to increased pressure, stretched and dilated vessels and pooling of blood in the veins. As blood accumulates, swelling occurs, leading to progressive tissue breakdown and venous leg ulcers. Ulcers develop in areas where blood collects as swelling interferes with the movement of oxygen and nutrients through tissues, and if left untreated, these ulcers can quickly become infected or even gangrenous. Prolonged or untreated chronic venous insufficiency may damage the lymphatic system.

Market Opportunity

Lymphedema and chronic venous insufficiency are costly and lifelong conditions with debilitating physical and psychological impacts on patients. We estimate the addressable market opportunity for our solutions treating lymphedema and chronic venous insufficiency in the United States is approximately $4.1 billion. We believe that between three to five million people in the United States are living with lymphedema. Based on an analysis of claims data commissioned by us, we estimate approximately 700,000 patients were diagnosed with lymphedema during the 12 months ended June 30, 2014. We estimate that the addressable market opportunity for our Flexitouch System is approximately $3.5 billion in the United States once clinicians, payers and patients are educated on the benefits of our products. This estimate is based on the number of patients diagnosed with lymphedema and our average selling price per device. We believe that chronic venous insufficiency afflicts approximately 8% of the U.S. population, and this percentage may rise due to the growing prevalence of obesity and cancer, as well as an aging population. Based on an analysis of claims data commissioned by us, we estimate there were over 1.5 million patients diagnosed with venous leg ulcers in the United States during the 12 months ended June 30, 2014. We estimate that our immediately addressable patient population consists of the 30% to 40% of these patients, or approximately 525,000 patients, for whom we believe device reimbursement is available because their venous leg ulcers have not resolved after six months of treatment. We estimate the addressable market opportunity for our ACTitouch System is approximately $580 million in the United States, which is based on the number of patients diagnosed with unresolved venous leg ulcers and our average selling price per device. These estimates of addressable market opportunities are based on a number of internal and third-party estimates, which in turn are based on projections of current trends in the diagnosis and treatment of lymphedema and chronic venous insufficiency as well as other estimates of potential patient populations. These projections and estimates involve inherent uncertainties, and the conditions supporting the projections and estimates may change at any time.

Current Treatment and Limitations

A traditional treatment for lymphedema is complete decongestive therapy, consisting of manual lymphatic drainage, which is a specialized application of gentle pressure to the skin applied by a therapist that encourages drainage of lymph fluid, as well as decongestive exercises, skin care and

 

3


Table of Contents

compression with multilayered bandages, compression garments or pumps. Typically, this therapy begins with clinic visits three to five times per week for four to eight weeks, which is costly and time consuming. At that point, clinical improvement plateaus or reimbursement for the therapy ends and patients transition to self-administered home-based care. Manual lymphatic drainage is difficult for patients to self-administer due to limited range of motion and treatment techniques that are difficult to replicate, and traditional pump-based compression is uncomfortable and has not demonstrated the benefits of our advanced pneumatic pump.

The standard of care treatment for chronic venous insufficiency is compression therapy. As the disease progresses, patients may develop a venous leg ulcer, which is commonly treated using multilayered bandages to minimize swelling and enhance blood flow. A clinician applies these non-removable bandages to patients at a precise pressure and patients wear the bandages between weekly visits to the wound clinic during which the bandages are removed and reapplied. Treatment typically occurs for several months and impairs patient quality of life by limiting bathing, range of motion and other activities. Treatment efficacy is inconsistent because bandages can lose their precise pressure between treatments.

Our Competitive Strengths

We focus on advancing the standard of care in treating chronic diseases at home to improve patient outcomes and quality of life and help control rising healthcare expenditures. Our executive team collectively has over 100 years of experience in healthcare, developing and commercializing innovative medical technology products and services. We believe that our commercialization platform and experience, combined with the following competitive strengths, should allow us to continue to grow our revenues and increase our presence in the market:

      Established leadership in providing therapies for at-home treatment of chronic disease.   Our strategic focus is developing and providing innovative technologies for the treatment of chronic diseases at home. Our core competency, which is our direct-to-patient and -provider model, comprises a direct sales force, contract at-home trainers, reimbursement capabilities and medical expertise that we use to expand awareness, garner referrals and obtain payment for our products.

      Proprietary technology with unique advantages over other treatments.   Our solutions leverage patented technological advancements that we believe give us a competitive advantage in the marketplace. The unique ability of our Flexitouch System to mimic manual lymphatic drainage therapy provides improved quality of life and efficacy and delivers significant cost savings to payers and patients as compared to traditional treatments. Our ACTitouch System has the unique ability to provide both sustained and intermittent pneumatic compression therapy in one wearable product, demonstrating comparable efficacy in healing venous leg ulcers, while achieving higher patient quality of life scores as compared to the current standard of care.

      Substantial clinical evidence and key opinion leader support for our Flexitouch System.   We have developed a substantial body of peer-reviewed, published clinical evidence that our Flexitouch System reduces swelling and improves quality of life for lymphedema patients while reducing healthcare costs. In clinical studies, while using our Flexitouch System, patients reported a significant increase in their ability to control their lymphedema along with an increase in activities of daily living, improvement in emotional status and reduction in limb volume, skin hardening, and pain. Our clinical evidence is primarily based on retrospective studies of a limited number of total subjects, which studies do not

 

4


Table of Contents

        compare our Flexitouch System with other advanced pneumatic compression devices. In addition, we have established strong relationships with key opinion leaders within vascular and lymphedema specialties who promote market awareness of our solutions and inform our clinical efforts. We have in-house expertise that designs and manages clinical and economic studies in support of the efficacy and cost-effectiveness of our products.

      Significant healthcare system cost savings.   Our solutions offer meaningful cost savings for the healthcare system and patients, as compared to traditional treatments. As demonstrated by a study published by the American Medical Association in JAMA Dermatology , our Flexitouch System reduces hospitalization occurrences and length of stays, costly cellulitis infections, outpatient visits and physical therapy visits. In addition, we believe that our ACTitouch System eliminates costly multilayered bandage system supplies and clinic application time, resulting in cost savings for wound clinics.

      Distinctive national third-party payer core competency.   Our specialized reimbursement team is proficient at obtaining reimbursement from payers across the United States. We work closely with government and private payers to educate them on lymphedema diagnosis and treatment, expand coverage and negotiate competitive rates for our solutions. We also work directly with clinicians and patients to help them understand payer requirements for our products. We advocate for coverage and submit claims on behalf of our patients through patient-by-patient support and claim processing. We also engage in broader payer strategic initiatives to gain general preauthorization for our products.

Our Strategy

Our goal is to become a leader in the at-home treatment of chronic diseases. We intend to leverage our established platform to be a global provider of clinically proven, easy-to-use and cost-effective solutions. The key elements of our strategy include:

      Increase awareness of our solutions and establish them as the standards of care.   We believe that many patients with lymphedema and chronic venous insufficiency are undiagnosed or undertreated, and we intend to further educate physicians, wound nurses and lymphedema therapists, patients and payers to raise awareness of these diseases, the associated health burdens of such diseases on patients and society and the clinical and economic benefits of using our products.

      Expand our direct sales and customer support teams.   We plan to expand our direct sales and marketing organization to drive greater product adoption by patients and their clinicians. We intend to strengthen our distribution network by continuing to recruit, train and retain talented sales representatives and increasing the number of licensed home trainers. With an expanded sales force, we believe we could target additional clinical call points.

      Introduce new features and products to grow our technology platform.   We intend to pursue new features for our products, and introduce new solutions to expand the number of patients using our products and allow us to enter new clinical adjacencies. We pursue internal research, design and development, and work with external collaborators to expand our product offerings. In addition, we evaluate opportunities to license or acquire additional technologies and products to expand our total addressable market opportunity.

 

5


Table of Contents

      Continue the development of clinical and economic outcome data.   A key part of our success is our ability to demonstrate the effectiveness of our products through clinical and economic outcome data. We intend to invest in additional studies to support peer-reviewed, published studies that evidence the clinical and economic benefits of our solutions as compared to traditional treatments. We intend to use these data to continue to educate clinicians, payers and patients on the proven advantages of our products compared to other therapies and expand our network of key opinion leader advocates.

      Expand third-party reimbursement.   Our products are covered under existing reimbursement codes, and we have secured coverage for our solutions with private payers, Medicare, the Veterans Administration and certain Medicaid programs. Our team has experienced significant success in obtaining positive coverage policies from payers by developing direct relationships with payer decision-makers, leveraging our relationships with physician societies and key opinion leaders, providing clinical data, demonstrating the efficacy of our products and educating payers on the limitations of traditional lymphedema and venous leg ulcer treatments. We believe that reimbursement for our products could be expanded by obtaining preferred contracts with payers.

      Introduce our solutions outside the United States.   We currently sell our products only within the United States. While our plan is to continue to focus our direct sales efforts on penetrating the U.S. market, we plan to pursue future international expansion. We have European CE Mark approval for our Flexitouch System and plan to seek CE Mark approval for our ACTitouch System. We also have a Medical Device License in Canada for our Flexitouch System.

Risks Related to Our Business

Our ability to successfully operate our business is subject to numerous risks, including those that are generally associated with operating in the medical device industry. Some of the principal risks relating to our business and our ability to execute our business strategy include:

      Our revenues are primarily generated from our Flexitouch System and we are therefore highly dependent on only one product.

      Our long-term growth depends on increasing awareness and adoption of our current products and our ability to develop and commercialize additional products.

      If we are unable to achieve and maintain adequate levels of coverage or reimbursement for our products, our business and results of operations will be adversely affected.

      Our U.S. patents for our Flexitouch System will expire in 2017, which may subject us to increased competition and reduce our opportunity to increase or maintain our revenues from our Flexitouch System.

      A recent change to the criteria for Medicare coverage for our products could have an adverse effect on our business and results of operations.

      If we are unable to expand, manage and maintain our direct sales and marketing organizations, we may not be able to generate anticipated revenues.

 

6


Table of Contents

      Increases in our operating costs could have an adverse effect on our financial condition and results of operations.

      We compete and may compete in the future against other companies, some of which have longer operating histories, more established products or greater resources than we do, which may harm our business.

      Physicians and payers may require additional clinical studies prior to prescribing our products or to providing or maintaining coverage and reimbursement for our products, particularly if the payers and physicians take issue with the design and results of the clinical studies. Any subsequent clinical studies that are conducted and published may not be positive or consistent with our existing data, which would adversely affect the rate of adoption of our products.

      We are subject to extensive federal and state regulation, and if we fail to comply with applicable regulations, we could suffer severe criminal or civil sanctions or be required to make significant changes to our operations that could adversely affect our business, financial condition and operating results.

      If we are unable to protect our intellectual property, or operate our business without infringing on the intellectual property rights of third parties, our business will be negatively affected.

Implications of Being an Emerging Growth Company

As a company with less than $1 billion in revenues during our last fiscal year, we qualify as an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from specified disclosure and other requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:

      being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced "Management's Discussion and Analysis of Financial Condition and Results of Operations" disclosure;

      not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting;

      not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements;

      reduced disclosure obligations regarding executive compensation; and

      exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

 

7


Table of Contents

We may take advantage of these provisions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1 billion in annual revenues, have more than $700 million in market value of our capital stock held by non-affiliates or issue more than $1 billion of non-convertible debt over a three-year period. We may choose to take advantage of some, but not all, of the available exemptions. We have taken advantage of some reduced reporting burdens in this prospectus. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.

In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption and, as a result, our financial statements may not be comparable to the financial statements of issuers that are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies. Section 107 of the JOBS Act provides that we can elect to opt out of the extended transition period at any time, which election is irrevocable.

Corporate Information

We were incorporated in Minnesota in January 1995 and reincorporated in Delaware as Tactile Systems Technology, Inc., through a merger with a wholly-owned subsidiary in July 2006, but have been doing business as Tactile Medical. Our principal executive offices are located at 1331 Tyler Street NE, Suite 200, Minneapolis, Minnesota 55413. Our telephone number is (612) 355-5100. Our website address is www.tactilemedical.com . Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and should not be considered to be part of this prospectus.

 

8


Table of Contents

 


THE OFFERING

Issuer   Tactile Systems Technology, Inc.
Common stock offered by us                       shares
Common stock to be outstanding immediately after this offering                       shares (or                    shares, if the underwriters exercise their option in full to purchase additional shares)
Option to purchase additional shares   The underwriters have the option to purchase up to             additional shares from us. The underwriters can exercise this option at any time within 30 days of this prospectus.
Use of proceeds   We intend to use the net proceeds from this offering primarily to expand our sales, marketing, reimbursement, clinical, regulatory and product development activities, and the remainder for working capital, general and administrative expenses and other general corporate purposes. We will also use a portion of the net proceeds to pay the approximately $                     million of cumulative accrued dividends to our Series A preferred stockholders as described in "Dividend Policy." We may also use a portion of our net proceeds to acquire or invest in complementary products, technologies or businesses, although we have no present commitments to complete any such transaction. See "Use of Proceeds" on page 62 for a more complete description of the intended use of proceeds from this offering.
Risk Factors   Investing in our common stock involves risks. See "Risk Factors" beginning on page 15 and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.
Dividend Policy   The terms of our current certificate of incorporation provide that, upon conversion of our preferred stock into our common stock in connection with this offering, the holders of Series A and Series B preferred stock will receive a cumulative accrued dividend calculated at a rate of 6% per annum. As of September 30, 2015, we had $9.1 million of cumulative accrued dividends payable to our Series A and Series B preferred stockholders. Dividends payable to our Series A and Series B preferred stockholders have continued to accrue subsequent to September 30, 2015. Based on an assumed closing date of                    , 2016, immediately prior to the completion of this offering, we expect to pay approximately $              million of cumulative accrued dividends in cash to our Series A preferred stockholders and issue           shares of our common stock for cumulative accrued dividends to our Series B preferred stockholders. The cash dividends will be paid from the net proceeds of this offering and neither the cash nor the stock dividends will be paid on any shares of our common stock purchased in this offering. We do not pay dividends on our common stock and do not anticipate paying any dividends on our common stock for the foreseeable

 

9


Table of Contents

    future. Any future determinations relating to our dividend policy will be made at the discretion of our board of directors and will depend on various factors. See "Dividend Policy."
Directed Share Program   At our request, the underwriters have reserved for sale at the initial public offering price up to             shares of our common stock, or 5% of the shares offered by this prospectus, for our employees, directors and other persons associated with us. The participants in the directed share program are subject to the 180-day lock-up restriction described in the "Underwriting" section of this prospectus with respect to the directed shares sold to them. The number of shares of our common stock available for sale to the general public in this offering will be reduced by the number of shares sold pursuant to the directed share program. Any directed shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus. The directed share program will be arranged through Piper Jaffray & Co.
Proposed NASDAQ Global Market symbol   "TCMD."

Shares Outstanding

The number of shares of common stock to be outstanding after this offering is based on                     shares of our common stock outstanding as of September 30, 2015, including preferred stock on an as-converted basis and additional shares that our Series A and Series B preferred stockholders are entitled to receive in connection with the initial public offering, and excludes the following:

                          shares of our common stock issuable upon the exercise of outstanding options, with a weighted-average exercise price of $         per share;

                          shares of our common stock issuable upon the exercise of outstanding warrants, with a weighted-average exercise price of $         per share;

                          shares of our common stock reserved under our Employee Stock Purchase Plan, which will become effective prior to the completion of this offering, as well as shares of our common stock that become available pursuant to provisions in our Employee Stock Purchase Plan that automatically increase the share reserve under the Employee Stock Purchase Plan on January 1 of each calendar year as described in "Executive Compensation — Stock Option and Other Equity Compensation Plans;"

                          shares of our common stock reserved for future issuance under our stock-based compensative plans, consisting of:

                          shares of our common stock reserved for future issuance under our 2003 Stock Option Plan;

                          shares of our common stock reserved for future issuance under our 2007 Omnibus Stock Plan; and

 

10


Table of Contents

                            shares of our common stock reserved for future issuance under our 2016 Equity Incentive Plan, which will become effective prior to the completion of this offering, as well as shares of our common stock that become available pursuant to provisions in our 2016 Equity Incentive Plan that automatically increase the share reserve under the 2016 Equity Incentive Plan on January 1 of each calendar year as described in "Executive Compensation — Stock Option and Other Equity Compensation Plans."

Pro Forma Adjustments

Except as otherwise noted, the information in this prospectus reflects and assumes the following:

      a 1-for-    reverse stock split of our capital stock, which became effective on                           , 2016;

      the filing and effectiveness of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws upon completion of this offering;

      the conversion of all shares of our preferred stock outstanding into an aggregate of                            shares of our common stock immediately prior to the completion of this offering;

      the issuance of                    additional shares of our common stock immediately prior to the completion of this offering that our Series A and B preferred stockholders are entitled to receive in connection with this initial public offering, assuming an initial offering price of $           per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus. A $1.00 decrease (increase) in the assumed initial public offering price of $           per share would increase (decrease) the number of additional shares of our common stock issuable in connection with this initial public offering by                     shares;

      the issuance of                    shares of our common stock immediately prior to the completion of this offering to pay accrued dividends on our Series B preferred stock, assuming a closing date of                           , 2016 and an initial offering price of $           per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus. A $1.00 decrease (increase) in the assumed initial public offering price of $           per share would increase (decrease) the number of additional shares of our common stock issuable in connection with paying the accrued dividends on our Series B preferred stock by                     shares;

      the cash payment of a portion of the proceeds from this offering to pay the approximately $              million of cumulative accrued dividends to our Series A preferred stockholders as described in "Dividend Policy;"

      no exercise of our outstanding options or warrants subsequent to September 30, 2015; and

      no exercise by the underwriters of their over-allotment option.

 

11


Table of Contents

 


SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables set forth a summary of our historical consolidated financial data as of and for the periods indicated. The summary consolidated statements of operations data for the years ended December 31, 2013 and 2014 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our summary consolidated statements of operations data for the nine months ended September 30, 2014 and 2015, and the summary consolidated balance sheet data as of September 30, 2015, have been derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited interim consolidated financial statements on the same basis as the audited consolidated financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair statement of financial statements set forth in those statements. Our historical results are not indicative of the results to be expected in the future and our interim results are not necessarily indicative of results to be expected for the full year ended December 31, 2015, or any other period. The following summary financial data should be read in conjunction with, and are qualified in their entirety by reference to, "Use of Proceeds," "Capitalization," "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes included elsewhere in this prospectus.

 

12


Table of Contents

 
  Year Ended
December 31,
  Nine Months Ended
September 30,
 
 
  2013   2014   2014   2015  
 
  (In thousands, except share and per share data)
 

Consolidated Statements of Operations Data:

                         

Revenues, net

  $ 37,176   $ 47,736   $ 29,626   $ 41,712  

Cost of goods sold

    9,772     12,715     8,284     11,839  

Gross profit

    27,404     35,021     21,342     29,873  

Operating expenses:

                         

Sales and marketing

    14,298     18,154     12,457     17,297  

Research and development          

    2,443     2,843     1,931     2,922  

Reimbursement, general and administrative

    8,283     10,225     7,419     9,448  

Total operating expenses

    25,024     31,222     21,807     29,667  

Income (loss) from operations

   
2,380
   
3,799
   
(465

)
 
206
 

Other income (expense)

   
4
   
(4

)
 
12
   
18
 

Income (loss)  before income taxes          

    2,384     3,795     (453 )   224  

Income tax expense (benefit)

   
(772

)
 
1,725
   
(171

)
 
90
 

Net income (loss)

   
3,156
   
2,070
   
(282

)
 
134
 

Convertible preferred stock dividends

    1,668     1,761     1,336     1,396  

Allocation of undistributed earnings to preferred stockholders

    1,074     216          

Net income (loss) attributable to common stockholders

  $ 414   $ 93   $ (1,618 ) $ (1,262 )

Net income (loss) per common share attributable to common stockholders (1)

   
 
   
 
   
 
   
 
 

Basic

  $ 0.07   $ 0.01   $ (0.23 ) $ (0.16 )

Diluted

  $ 0.06   $ 0.01   $ (0.23 ) $ (0.16 )

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

   
 
   
 
   
 
   
 
 

Basic

    6,305,401     7,025,035     6,903,792     7,992,734  

Diluted

    7,276,148     10,709,649     6,903,792     7,992,734  

Pro forma net income (loss) per common share attributable to common stockholders (unaudited) (2)

                         

Basic

                         

Diluted

                         

Weighted-average common shares used to compute pro forma net income (loss) per common share attributable to common stockholders (unaudited) (2)

                         

Basic

                         

Diluted

                         

 

13


Table of Contents

 
  As of September 30, 2015  
 
  Actual   Pro forma (3)   Pro forma as
adjusted (4)(5)
 
 
  (In thousands; unaudited)
 

Consolidated Balance Sheet Data:

                   

Cash and cash equivalents

  $ 5,672   $     $    

Working capital

    18,981              

Total assets

    33,395              

Total debt

    6              

Convertible preferred stock

    32,478              

Accumulated deficit

    (6,738 )            

Total stockholders' equity (deficit)

    (6,590 )            

(1)
Net income (loss) per common share attributable to common stockholders is calculated under the two-class method, as our convertible preferred stock participates in the undistributed earnings of the company. The two-class method requires earnings for the period to be allocated based upon their respective rights to receive distributed and undistributed earnings. No adjustment is made during periods with a net loss, as the holders of the convertible preferred stock have no obligation to fund losses.

(2)
Pro forma net income (loss) per common share attributable to common stockholders and the number of weighted-average common shares used to compute pro forma net income (loss) per common share attributable to common stockholders reflect the adjustments set forth in "Summary — The Offering — Pro Forma Adjustments," except in lieu of the cash payment of a portion of the proceeds to pay cumulative accrued dividends to our Series A preferred stockholders, reflects the additional             shares of common stock that would have been required to be issued to generate sufficient proceeds to fund the cash payment of the Series A convertible preferred stock dividends that are payable from the net proceeds of this offering.

(3)
Reflects the adjustments set forth in "Summary — The Offering — Pro Forma Adjustments," except in lieu of the cash payment of approximately $              million of cumulative accrued dividends to our Series A preferred stockholders, reflects a pro forma adjustment to accrued dividends payable for this amount. Dividends payable to our Series A and Series B preferred stockholders have continued to accrue subsequent to September 30, 2015. Assuming a closing date of                            , 2016 and an initial offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, immediately prior to the completion of this offering, we expect to pay an additional approximately aggregate $              million of cumulative accrued dividends to our Series A preferred stockholders and issue an additional             aggregate shares of common stock to our Series B preferred stockholders, in payment of approximately $              million of cumulative accrued dividends to our Series B preferred stockholders.

(4)
Reflects (a) the pro forma adjustments described in footnote (3) above; (b) the cash payment of accrued dividends as of September 30, 2015 to our Series A preferred stockholders described in footnote (3) above; and (c) our sale and issuance of                           shares of common stock in this offering, at an assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

(5)
A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of our cash and cash equivalents, working capital, total assets and total stockholders' equity (deficit), by approximately $              million, assuming the assumed initial public offering price per share remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) the pro forma as adjusted amount of each of our cash and cash equivalents, working capital, total assets and total stockholders' equity (deficit) by approximately $              million, assuming the assumed initial public offering price remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

14


Table of Contents


RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all the other information in this prospectus before you decide to buy our common stock. If any of the following risks and uncertainties described below, together with all the other information related to our business, actually occurs, our business, financial condition, operating results, and prospects would be adversely affected. In that event, the market price of our common stock could decline and you could lose part or all of your investment.

Risks Related to Our Business

Our revenues are primarily generated from our Flexitouch System and we are therefore highly dependent on only one product.

Our Flexitouch System accounted for 92% of our revenues for the year ended December 31, 2014 and 87% of our revenues for the nine months ended September 30, 2015. We expect that sales of this product will continue to account for the substantial majority of our revenues going forward. Therefore, our ability to execute our growth strategy will depend not only upon increasing awareness of lymphedema, but also on the adoption of our Flexitouch System to treat this condition. Many physicians and clinicians may have experience with, and/or invested substantial resources in, developing expertise in traditional treatments for lymphedema, which may make them less willing to adopt our Flexitouch System. If our Flexitouch System fails to achieve wide market acceptance for any reason, our business, financial condition and results of operations could be adversely affected.

Our long-term growth depends on awareness and adoption of our products.

A primary growth strategy is to establish our products as the standard of care for the treatment of lymphedema and chronic venous insufficiency. In order to achieve this growth strategy, we must:

Clinicians may not adopt our solutions as the standard of care for lymphedema and chronic venous insufficiency or may not prescribe our products for a number of reasons, including:

We believe recommendations and support of our products by key opinion leaders can influence market acceptance and adoption. If these key opinion leaders choose to not support our products, our ability to achieve broad market acceptance for our products may be impaired.

15


Table of Contents

If we are unable to achieve and maintain adequate levels of coverage or reimbursement for our products, our business and results of operations will be adversely affected.

Any decline in the amount payers are willing to reimburse patients for our products could cause difficulty for patients to purchase our products and could create pricing pressure for us. If we are forced to lower the price we charge for our products, our gross margins will decrease, which will adversely affect our business, financial condition and results of operations.

Third-party payers, whether foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods of controlling healthcare costs. In the United States, no uniform policy of coverage and reimbursement for our products exists among third-party payers. Therefore, reimbursement for our products can differ significantly from payer to payer and our products are not universally covered by third-party commercial payers. In addition, payers, including Medicare, continually review existing technologies for continued coverage and can, without notice, deny or reverse coverage for existing products. We believe a reduction or elimination of coverage or reimbursement of our products by Medicare would likely cause commercial third-party payers to implement similar reductions in their coverage or reimbursement of our products. If we are unable to expand coverage of our products by additional commercial payers, or if third-party payers that currently cover or reimburse for our products reverse or limit their coverage in the future, our business and results of operations could be adversely affected.

Further, we believe that future coverage and reimbursement may be subject to increased restrictions, such as additional preauthorization requirements, both in the United States and in international markets. If we are unable to satisfy any new preauthorization requirements or adjust to any future new restrictions on our products, third-party coverage and reimbursement may be limited in the future, which could have an adverse impact on our business.

A recent change to the criteria for Medicare coverage for our products could have an adverse effect on our business and results of operations.

The Medicare Administrative Contractors, or MACs, responsible for processing Medicare claims for durable medical equipment recently approved a Local Coverage Determination, or LCD, document that may limit Medicare coverage of our products for certain patients. This LCD, released by the MACs on December 17, 2015, is retroactively effective, beginning December 1, 2015. The LCD increases the severity of lymphedema symptoms that a patient must exhibit before such patient is eligible for Medicare reimbursement for a pneumatic compression device. The LCD also inserts more restrictive criteria that require a patient to potentially endure a longer period of conservative therapy to prove that it fails to control their lymphedema, instead of requiring completion of just one 4-week round of conservative therapy as stated in the National Coverage Determination, or NCD. The LCD requires four consecutive weeks of conservative therapy with no significant improvement in symptoms during any of those four weeks. Further, the LCD does not cover use of an advanced pneumatic compression device, such as our Flexitouch System, unless the patient's lymphedema is present in the chest, trunk or abdomen. Although many patients with lymphedema likely do have some level of chest, trunk or abdominal involvement, this criteria in the LCD means that patients with lymphedema that is confined to the limb will not have access to advanced pneumatic compression devices until the lymphedema progresses to impact the trunk, chest or abdomen. There is no similar requirement in the NCD that the lymphedema is present in the chest, trunk or abdomen. We are working through a coalition of device manufacturers and healthcare providers to have the LCD revised to mirror the NCD. If our efforts and the efforts of other stakeholders to overturn the LCD are unsuccessful, it may have a negative impact on certain Medicare patients' access to our Flexitouch System and our Entre System, which in turn could have an adverse effect on our business and results of operations. The LCD pneumatic compression device coverage criteria for chronic venous insufficiency with venous stasis ulcers largely track existing NCD criteria, while defining the elements of a required conservative

16


Table of Contents

therapy trial. Under the new LCD, advanced pneumatic compression devices like our Flexitouch System are no longer covered at all for the treatment of venous stasis ulcers. Private payers often follow Medicare's lead in setting reimbursement criteria and, if the LCD is not overturned, private payers may adopt the same or similar coverage standards as set forth in the LCD.

The U.S. patent protection for our Flexitouch System will expire in 2017, which may subject us to increased competition and reduce or eliminate our opportunity to generate product revenues.

The four U.S. patents for our Flexitouch System will expire in 2017. Upon expiration of such patents, our Flexitouch System could be subject to increased competition for products attempting to replicate our technology and our opportunity to increase or maintain revenues from our Flexitouch System could be substantially reduced.

If we are unable to expand, manage and maintain our direct sales and marketing organizations, we may not be able to generate anticipated revenues.

Our operating results are directly dependent upon the sales and marketing efforts of our employees. If our direct sales force fails to adequately promote, market and sell our products, our sales may suffer. Our direct sales force has grown from three people in March 2005 to over 70 people as of September 30, 2015.

In order to generate future sales growth, we will need to expand the size and geographic scope of our direct sales organization. Accordingly, our future success will depend largely on our ability to continue to hire, train, retain and motivate skilled sales personnel with significant technical knowledge of lymphedema and chronic venous insufficiency. Because the competition for their services is high, we cannot assure you we will be able to hire and retain additional personnel on favorable or commercially reasonable terms, if at all. Failure to hire or retain qualified sales personnel would prevent us from building awareness of our solutions, expanding our business and generating additional sales. If we are unable to expand our sales and marketing capabilities, we may not be able to effectively commercialize our products, which could have an adverse impact on our business.

Increases in our operating costs could have an adverse effect on our financial condition and results of operations.

Reimbursement rates are established by fee schedules mandated by private payers, Medicare, the Veterans Administration and certain Medicaid programs and are likely to remain constant or decrease due, in part, to federal and state government budgetary constraints. As a result, with respect to Medicare and Medicaid related revenues, we may not be able to offset the effects of general inflation on our operating costs through increases in prices for our products. In particular, labor and related costs account for a significant portion of our operating costs and we compete with other healthcare providers to attract and retain qualified or skilled personnel and with various industries for administrative and service employees. This competitive environment could result in increased labor costs. As such, we must control our operating costs, particularly labor and related costs, and failing to do so could adversely affect our financial conditions and results of operations.

Our operating costs may fluctuate significantly in the future as a result of a variety of factors, many of which are outside of our control. These factors include:

17


Table of Contents

Our failure to anticipate and minimize the impact of these costs could adversely affect our business and results of operations.

We compete and may compete in the future against other companies, some of which have longer operating histories, more established products or greater resources than we do, which may harm our business.

The medical device industry is highly competitive. Our success depends, in part, upon our ability to maintain a competitive position in the development of technologies and solutions for the at-home treatment of lymphedema and chronic venous insufficiency or for market adjacencies. Any product we develop will have to compete for market acceptance and market share. We face significant competition in the United States, and we expect the intensity of competition will increase over time. Our primary competitors include Bio Compression Systems, Inc., Lympha Press USA and Wright Therapy Products (which was recently acquired by BSN Medical GmbH). If we expand internationally, we expect that ArjoHuntleigh, an affiliate of the Getinge Group, would become a competitor. Many of the companies developing or marketing competing products enjoy several competitive advantages, including:

Our competitors may develop and patent processes or products earlier than us, obtain regulatory clearance or approvals for competing devices more rapidly than us or develop more effective or less expensive products or technologies that render our technology or products obsolete or less competitive. We also face fierce competition in recruiting and retaining qualified sales, scientific, reimbursement and

18


Table of Contents

management personnel, particularly those with direct-to-patient and -provider experience. If our competitors are more successful than us in these matters, our business may be harmed.

Physicians and payers may require additional clinical studies prior to prescribing our products or to providing or maintaining coverage and reimbursement for our products. Any subsequent clinical studies that are conducted and published may not be positive or consistent with our existing data, which would adversely affect the rate of adoption of our products.

Our success depends in large part on the medical and third-party payer community's acceptance of our products as being useful in treating patients with lymphedema or chronic venous insufficiency. We have sponsored 13 clinical studies in which a total of 682 patients were treated with our products to track outcomes of treatment with our products. While the results of our studies collectively indicate a favorable safety and efficacy profile, the study designs and results may not be viewed as compelling to physicians and insurers. In particular, payers and physicians may see limitations in the design and results of the studies because certain studies were not specifically based on our products, involved a limited number of total subjects or subjects outside the control group and made "quality of life" conclusions based upon criteria contained in patient questionnaires that required subjective conclusions. Certain physicians and insurers may also prefer to see longer-term efficacy data than we have produced. If physicians or insurers do not find our data compelling or wish to wait for additional or independently-performed studies, they may choose not to prescribe or to provide coverage and reimbursement for our products.

We cannot assure you that any data that we or others generate will be consistent with that observed in the existing studies or that results will be maintained beyond the time points studied. We also cannot assure you that any data that may be collected will be compelling to the medical community because the data may not be scientifically meaningful or may not demonstrate that our products are attractive alternatives to traditional treatments. If subsequent studies are not positive or consistent with our existing data, adoption of our products may suffer and, accordingly, our business could be adversely impacted.

Our long-term growth depends on our ability to develop and commercialize additional products.

The medical device industry is highly competitive and subject to rapid change and technological advancements. Therefore, it is important to our business that we continue to enhance our product offerings and introduce new products. Developing products is expensive and time-consuming and could divert management's attention away from our business. We may not be successful in developing new products or enhancements to existing products. Our ability to develop and commercialize additional products or enhancements to existing products will depend on several factors, including our ability to:

19


Table of Contents

If we are unsuccessful in developing and commercializing new products, our ability to increase our revenues may be impaired.

It is difficult to forecast future performance and our financial results may vary from forecasts and may fluctuate from quarter to quarter.

Our limited operating history and commercial experience make it difficult for us to predict future performance. A number of factors over which we have limited control, such as seasonal variations in revenues, may contribute to fluctuations in our financial results. In the first and second quarters, our results of operations have been negatively impacted by resetting of annual patient healthcare insurance plan deductibles, which may cause patients to delay purchase of elective products. In the third and fourth quarters, our revenues have been higher because patients often spend the remaining balances in their flexible-spending accounts or because of lower out-of-pocket costs to patients who have met their annual deductibles under their health insurance plans. To the extent that the prevalence of high deductible insurance plans and higher copay and coinsurance plans continue to grow in the private payer market, the seasonal variations in our revenues could become even more pronounced.

Other factors that may cause fluctuation in our quarterly results or variations from our forecasts include:

In the event our actual revenues and operating results do not meet our forecasts or the forecasts or estimates of the research analysts that cover us for a particular period, the market price of our common stock may decline substantially.

We utilize third-party, single-source suppliers for some components and materials used in our products, and the loss of any of these suppliers could have an adverse impact on our business.

We rely on third-party manufacturers and suppliers to supply all components and materials used in our Flexitouch, ACTitouch and Entré Systems. We rely on a single-source supplier for the controller in our

20


Table of Contents

ACTitouch System. Our ability to supply our products commercially depends, in part, on our ability to obtain components and materials in accordance with our specifications and with regulatory requirements and in sufficient quantities to meet demand for our products. Our ability to obtain components and materials may be affected by matters outside our control, including that our suppliers may cancel our arrangements on short notice, we may be relatively less important as a customer to certain suppliers and our suppliers may have disruptions to their operations.

If we are required to establish additional or replacement suppliers for any of our components or materials, it may not be accomplished quickly and our operations could be disrupted. Even if we are able to find replacement suppliers, the replacement suppliers would need to be qualified and may require additional regulatory authority approval, which could result in further delay. In the event of a supply disruption, our product inventories may be insufficient to supply our patients.

If our third-party suppliers fail to deliver the required commercial quantities of materials on a timely basis and at commercially reasonable prices, and we are unable to find one or more replacement suppliers capable of production at a substantially equivalent cost in substantially equivalent volumes and quality on a timely basis, the continued commercialization of our products, the supply of our products to customers and the development of any future products would be delayed, limited or prevented, which could have an adverse impact on our business.

Consolidation in the healthcare industry could lead to demands for price concessions, which may impact our ability to sell our products at prices necessary to support our current business strategies.

Healthcare costs have risen significantly over the past decade, which has resulted in or led to numerous cost reform initiatives by legislators, regulators and third-party payers. Cost reform has triggered a consolidation trend in the healthcare industry to aggregate purchasing power, which may create more requests for pricing concessions in the future. We expect that market demand, government regulation, third-party coverage and reimbursement policies and societal pressures will continue to change the healthcare industry worldwide, resulting in further business consolidations and alliances among our payers, which may exert downward pressure on the prices of our products in the future.

We may be unable to collect all of our Medicare accounts receivable.

At September 30, 2015, we had approximately $3.6 million of accounts receivable for shipments of products to patients covered by Medicare. A portion of our submitted claims to Medicare are initially denied and enter the appeals process, where many are ultimately reviewed by an Administrative Law Judge. The appeal process can be lengthy, lasting more than a year in most cases. At September 30, 2015, we have classified $2.0 million as long-term accounts receivable due to estimated amount of receivables that will be paid more than one year from September 30, 2015. A significant increase in Medicare denial of submitted claims or an increase in the proportion of Medicare denials that are upheld by an Administrative Law Judge would adversely affect our results of operations or cause us to recognize a write off of Medicare accounts receivables.

As an alternative to individual appeals, Medicare may seek to settle a number of outstanding appeals at one time through a settlement conference. On September 3, 2015, we entered into a settlement agreement with the Centers for Medicare and Medicaid Services, or CMS, for 247 claims, representing approximately $1.46 million of original claims based on the Medicare allowable rates, in which we had submitted a request for an Administrative Law Judge hearing in 2013. The settlement entitled us to receive a payment of approximately $0.85 million no later than January 21, 2016. We received this full amount during the fourth quarter of 2015. The settlement will result in a reduction in the fourth quarter of 2015 of $0.82 million in our accounts receivable for shipment of products to patients covered by Medicare. The settlement was part of a pilot program, facilitated by the Office of Medicare Hearings and Appeals, to address a backlog of overdue claims awaiting Administrative Law Judge

21


Table of Contents

adjudication. Because the settlement is part of a pilot program, we cannot predict whether we will be able to conclude future settlements with Medicare or achieve settlements on similar terms. Any future settlement of claims for amounts less than the corresponding amounts receivable would result in a write off.

Changes to the level of Medicare coverage for our products could have an adverse effect on our business and results of operations.

Determinations of which products or services will be reimbursed under Medicare can be developed at the national level through an NCD, by CMS, or at the local level through an LCD, by one or all of the four regional Medicare Administrative Contractors, which are private contractors that process and pay claims on behalf of CMS for different regions. These NCDs and LCDs may be subject to review and revision from time to time, which revisions may not be favorable for coverage of our products, and the NCDs and LCDs may not always be consistent. We have in the past been required to respond to potential changes in LCDs for our products, which, if enacted, would have had adverse effects on our business. Further, we believe that a reduction in coverage by Medicare would likely cause some commercial third-party payers to implement similar reductions in their coverage or reimbursement of our products. Given the evolving nature of the healthcare industry and on-going healthcare cost reforms, we are and will continue to be subject to changes in the level of Medicare coverage for our products, and unfavorable coverage determinations at the national or local level could adversely affect our business and results of operations. See also " A recent change to the criteria for Medicare coverage for our products could have an adverse effect on our business and results of operations."

The size of the market for our products is an estimate, and may be smaller than we believe.

Our estimate of the annual total addressable market for our products is based on a number of internal and third-party estimates. In addition, our internal estimates are based in large part on current trends in diagnosing lymphedema and chronic venous insufficiency. While we believe these factors have historically provided and may continue to provide us with effective tools in estimating the total market for lymphedema, chronic venous insufficiency and our products, these estimates may not be correct and the conditions supporting our estimates may change at any time, thereby reducing the predictive accuracy of these underlying factors. As a result, our estimates of the annual total addressable market for our products may prove to be incorrect. If the actual number of patients who would benefit from our products and the annual total addressable market for our products is smaller than we have estimated, our future growth could be adversely impacted.

We may be unable to manage our growth effectively.

Our past growth has provided, and our future growth may create, challenges to our organization. For instance, from March 2005 to September 30, 2015, the number of our employees increased from 10 to over 230. We intend to continue to grow and may experience periods of rapid growth and expansion. Future growth will impose significant added responsibilities on management, including the need to identify, recruit, train, integrate, retain and motivate additional employees. In addition, rapid and significant growth will place a strain on our administrative personnel, information technology systems and other operational infrastructure. Any failure by us to manage our growth effectively could have an adverse effect on our ability to achieve our development and commercialization goals.

Successful growth is also dependent upon our ability to implement appropriate financial and management controls, systems and procedures. In order to manage our operations and growth, we will need to continue to improve our operational and management controls, reporting and information technology systems and financial internal control procedures. If we are unable to manage our growth effectively, it may be difficult for us to execute our business strategy and there could be an adverse impact on our business.

22


Table of Contents

Our ability to maintain our competitive position depends on our ability to attract, integrate and retain key executives and highly qualified personnel.

We believe that our continued success depends to a significant extent upon the efforts and abilities of our executive officers and other key personnel. Our executive officers and other key personnel are critical to the strategic direction and overall management of our company as well as our research and development process. We intend to enter into new employment agreements with each of our named executive officers prior to the completion of this offering. Our inability to enter into such agreements on commercially reasonable terms or the loss of any of our named executive officers or other key personnel could adversely affect our business, financial condition and operating results. Our Chief Financial Officer and Chief Operating Officer intends to transition into a full-time role as our Chief Operating Officer, and we are actively engaged in a process to identify and hire a new Chief Financial Officer. While he has indicated that he will continue in his current roles until we have hired his replacement, we cannot assure you that we will be able to identify and hire an appropriate candidate in a timely manner or on terms reasonable to us or at all. Any delay in hiring a new Chief Financial Officer could significantly disrupt our business and operations. In addition, some key personnel have only joined us in the last year as part of our investment in the expansion of our business.

Our future success also depends on our ability to continue to attract and retain additional executive officers and other key employees. We invest significant time and expense in training our employees, which increases their value to competitors who may seek to recruit them. Many of our competitors have greater resources than we have that allows them to offer more competitive remuneration, which could adversely impact our ability to attract and retain experienced executives and other key employees. We carry a "key person" insurance policy on only our Chief Executive Officer. The replacement of any of our key personnel likely would involve significant time and costs and may significantly delay or prevent the achievement of our business objectives and would harm our business. Our productivity may be adversely affected if we do not integrate and train our new employees quickly and effectively

Many of our employees have become or will soon become vested in a substantial amount of our common stock or a number of common stock options. Our employees may be more likely to leave us if the shares they own have significantly appreciated in value relative to the original purchase prices of the shares, or if the exercise prices of the options that they hold are significantly below the market price of our common stock, particularly after the expiration of the lock-up agreements described herein.

We face the risk of product liability claims that could be expensive, divert management's attention and harm our reputation and business. We may not be able to maintain adequate product liability insurance.

Our business exposes us to the risk of product liability claims that are inherent in the testing, manufacturing and marketing of medical devices. This risk exists even if a device is cleared or approved for commercial sale by the FDA and manufactured in facilities licensed and regulated by the FDA or an applicable foreign regulatory authority. Our products are designed to affect, and any future products will be designed to affect, important bodily functions and processes. Any side effects, manufacturing defects, misuse or abuse associated with our products or our products in development could result in patient injury or death. The medical device industry has historically been subject to extensive litigation over product liability claims, and we cannot offer any assurance that we will not face product liability suits. We may be subject to product liability claims if our products cause, or merely appear to have caused, patient injury or death. In addition, an injury that is caused by the activities of our suppliers, such as those who provide us with components and materials, may be the basis for a claim against us. Product liability claims may be brought against us by patients, clinicians or others selling or otherwise coming into contact with our products, among others. If we cannot

23


Table of Contents

successfully defend ourselves against product liability claims, we will incur substantial liabilities and reputational harm. In addition, regardless of merit or eventual outcome, product liability claims may result in:

While we may attempt to manage our product liability exposure by proactively recalling or withdrawing from the market any defective products, any recall or market withdrawal of our products would delay the supply of those products to our clinicians and patients and may impact our reputation. We can provide no assurance that we will be successful in initiating appropriate market recall or market withdrawal efforts that may be required in the future or that these efforts will have the intended effect of preventing product malfunctions and the accompanying product liability that may result. Such recalls and withdrawals may also be used by our competitors to harm our reputation for safety or be perceived by patients as a safety risk when considering the use of our products, either of which could have an adverse impact on our business.

In addition, our product liability insurance is subject to deductibles and coverage limitations. Our current product liability insurance may not continue to be available to us on acceptable terms, if at all, and, if available, coverage may not be adequate to protect us against any future product liability claims. If we are unable to obtain insurance at an acceptable cost or on acceptable terms or otherwise protect against potential product liability claims, we could be exposed to significant liabilities. A product liability claim, recall or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could have an adverse impact on our business.

Changes in reimbursement coding could impair our ability to receive reimbursement for our products.

The International Statistical Classification of Diseases and Related Health Problems 9th Revision, or ICD-9, is a coding of diseases, signs and symptoms, abnormal findings, complaints, social circumstances and external causes of injury or diseases, as classified by the World Health Organization that permits the tracking of many diagnoses. Current health plan systems and health care providers are required by the Health Insurance Portability and Accountability Act of 1996, or HIPAA, to use a standard code set to indicate diagnoses and procedures on transactions. For diagnoses, CMS created a derivation of the ICD-9 code for use. For other types of procedures, health plans and providers use Current Procedural Terminology, or CPT, or Healthcare Common Procedure Coding System, or HCPCS, codes. The International Statistical Classification of Diseases and Related Health Problems 10th Revision, or ICD-10, was recently released and a modified version of ICD-10 was adopted by CMS and use of the updated diagnosis codes is now required.

24


Table of Contents

The ICD-10 codes are markedly different from their predecessors and because ICD-9 codes are used in almost every clinical and administrative process in a healthcare setting, substantial system and procedural changes will be necessary to implement and correctly use the new codes. The updated code sets will require significant changes in the way health plans reimburse services, and in the way coverage of services is determined.

Our Flexitouch System is reimbursed under HCPCS code E0652, our ACTitouch System is reimbursed under HCPCS code E0651, and our Entré System is reimbursed under HCPCS code E0651. Garments that cover various parts of the body are used with these systems and billed using HCPCS codes E0651, E0652, E0667, E0668 and E0669. These are tied to specific existing ICD-9 diagnoses. Many private payers have paid for our products using these codes as well. These contracts allow us to be an in-network provider for these payers, and eases our administrative burden in processing at both prior authorization and billing levels. With the change to ICD-10, it is possible the we or our patients may have difficulty properly submitting claims for reimbursement and, even if the claims are properly submitted, private payers, Medicare and Medicaid may have problems processing the claims. This could have an adverse impact on our reimbursement rates, results of operations and cash flows.

If the quality of our products does not meet the expectations of physicians or patients, then our brand and reputation could suffer and our business could be adversely impacted.

In the course of conducting our business, we must adequately address quality issues that may arise with our products, as well as defects in third-party components included in our products. There can be no assurance that our internal procedures to minimize risks that may arise from quality issues will be able to eliminate or mitigate occurrences of these issues and associated liabilities. If the quality of our products does not meet the expectations of physicians or patients, then our brand and reputation could suffer with those physicians or patients and our business could be adversely impacted.

If our facilities are damaged or become inoperable, we will be unable to continue to research, develop, manufacture and commercialize our products and, as a result, there will be an adverse impact on our business until we are able to secure a new facility.

We do not have redundant facilities. We perform substantially all of our research and development, assembly and back office activity and maintain all our finished goods inventory in a single location in Minneapolis, Minnesota. Our facility and equipment would be costly to replace and could require substantial lead time to repair or replace. The facility may be harmed or rendered inoperable by natural or man-made disasters, including, but not limited to, tornadoes, flooding, fire and power outages, which may render it difficult or impossible for us to perform our research, development, manufacturing and commercialization activities for some period of time. The inability to perform those activities, combined with our limited inventory of reserve raw materials and finished product, may result in the inability to continue manufacturing our products during such periods and the loss of customers or harm to our reputation. Our insurance for damage to our property and the disruption of our business may not be sufficient to cover all of our potential losses, and this insurance may not continue to be available to us on acceptable terms, or at all.

If we choose to acquire new and complementary businesses, products or technologies, we may be unable to complete these acquisitions or to successfully integrate them in a cost-effective and non-disruptive manner.

Our success depends on our ability to continually enhance and broaden our product offerings in response to changing customer demands, competitive pressures and advances in technologies. Accordingly, although we have no current commitments with respect to any acquisition or investment, we may in the future pursue the acquisition of, or joint ventures relating to, complementary businesses,

25


Table of Contents

products or technologies instead of developing them ourselves. We do not know if we will be able to successfully complete any future acquisitions or joint ventures, or whether we will be able to successfully integrate any acquired business, product or technology or retain any key employees related thereto. Integrating any business, product or technology we acquire could be expensive and time-consuming, disrupt our ongoing business and distract our management. If we are unable to integrate any acquired businesses, products or technologies effectively, our business will suffer. In addition, any amortization or charges resulting from the costs of acquisitions could increase our expenses.

Failure to protect our information technology infrastructure against cyber-based attacks, network security breaches, service interruptions or data corruption could significantly disrupt our operations and adversely affect our business and operating results.

We rely extensively on information technology systems and telephone networks and systems, including the Internet, to process and transmit sensitive electronic information and to manage or support a variety of business processes and activities, including sales, billing, customer service, procurement and supply chain, manufacturing, and distribution. We use enterprise information technology systems to record, process, and summarize financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal, and tax requirements. Our information technology systems, some of which are managed by third-parties, may be susceptible to damage, disruptions or shutdowns due to computer viruses, attacks by computer hackers, failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, telecommunication failures, user errors or catastrophic events. Despite the precautionary measures we have taken to prevent breakdowns in our information technology and telephone systems, if our systems suffer severe damage or disruption or shutdown and we are unable to effectively resolve the issues in a timely manner, our business and operating results may suffer.

In addition, we accept payments for many of our sales through credit and debit card transactions, which are handled through a third-party payment processor. As a result, we are subject to a number of risks related to credit and debit card payments, including that we pay interchange and other fees, which may increase over time and could require us to either increase the prices we charge for our products or experience an increase in our costs and expenses. In addition, as part of the payment processing process, we transmit our patients' and clinicians' credit and debit card information to our third-party payment processor. We may in the future become subject to lawsuits or other proceedings for purportedly fraudulent transactions arising out of the actual or alleged theft of our patients' credit or debit card information if the security of our third-party credit card payment processor is breached. We and our third-party credit card payment processor are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we or our third-party credit card payment processor fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from our patients, and there may be an adverse impact on our business.

We have no experience selling our products outside of the United States and cannot predict if we will be successful in achieving adoption of our products and revenue growth outside of the United States in a timely manner or at all. If we commercialize any products outside of the United States, a variety of risks associated with international operations could impact our strategy and adversely affect our future growth.

We expect that we would be subject to additional risks related to entering into international markets, including:

26


Table of Contents

If we experience any of these risks, our strategy to expand internationally could be impacted and our future growth could be adversely affected.

Our employees, independent contractors, consultants, collaborators and suppliers may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider trading.

We are exposed to the risk that our employees and other third parties may engage in fraudulent conduct or other illegal activity. Misconduct by employees and other third parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to us that violate FDA regulations, including those laws requiring the reporting of true, complete and accurate information to the FDA, manufacturing standards, federal and state healthcare fraud and abuse laws and regulations, or laws that require the reporting of financial information or data accurately. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Activities subject to these laws also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. It is not always

27


Table of Contents

possible to identify and deter employee and other third-party misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, disgorgement, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings and curtailment or restructuring of our operations, any of which could adversely affect our ability to operate.

A reclassification of our independent contractor home trainers by tax authorities could require us to pay retroactive taxes and penalties, which could have a material adverse effect on our business, financial condition and operating results.

We contract with over 300 licensed healthcare practitioners as home trainers, who educate our patients on the proper use of our solutions. Because we consider these licensed practitioners to be independent contractors, as opposed to employees, we do not withhold federal or state income or other employment related taxes or make federal or state unemployment tax or Federal Insurance Contributions Act payments. Our contracts with these independent contractors obligate them to pay these taxes. The classification of healthcare practitioners as independent contractors depends on the facts and circumstances of the relationship. In the event federal or state taxing authorities determine that the healthcare practitioners are employees, our business may be adversely affected and subject to retroactive taxes and penalties. Under current federal tax law, a safe harbor from reclassification, and consequently retroactive taxes and penalties, is available if our current treatment is consistent with a long-standing practice of a significant segment of our industry and if we meet certain other requirements. If challenged, we may not prevail in demonstrating the applicability of the safe harbor to our operations. Further, interested persons have recently proposed to eliminate the safe harbor and may do so again in the future. If such proposals are reintroduced and passed by Congress, they could impact our classification of healthcare practitioners as independent contractors, which could have a material adverse effect on our business, financial condition and results of operations.

Risks Relating to Government Regulation

We are subject to extensive federal and state regulation, and if we fail to comply with applicable regulations, we could suffer severe criminal or civil sanctions or be required to make significant changes to our operations that could adversely affect our business, financial condition and operating results.

The federal government and all states in which we currently operate regulate various aspects of our business. Our operations also are subject to state laws governing, among other things, distribution of medical equipment and certain types of home health activities, and we are required to obtain and maintain licenses in each state to act as a durable medical equipment supplier.

As a healthcare provider participating in governmental healthcare programs, we are subject to laws directed at preventing fraud and abuse, which subject our marketing, billing, documentation and other practices to government scrutiny. To ensure compliance with Medicare, Medicaid and other regulations, government agencies or their contractors often conduct routine audits and request customer records and other documents to support our claims submitted for payment of services rendered. Government agencies or their contractors also periodically open investigations and obtain information from healthcare providers. Violations of federal and state regulations can result in severe criminal, civil and administrative penalties and sanctions, including debarment, suspension or exclusion

28


Table of Contents

from Medicare, Medicaid and other government reimbursement programs, any of which would have a material adverse effect on our business.

Changes in healthcare laws and regulations and new interpretations of existing laws and regulations may affect permissible activities, the relative costs associated with doing business, and reimbursement amounts paid by federal, state and other third-party payers. There have been and will continue to be regulatory initiatives affecting our business and we cannot predict the extent to which future legislation and regulatory changes could have a material adverse effect on our business, financial condition and results of operations.

We are subject to significant regulation by numerous government agencies, including the FDA. We cannot market or commercially distribute our products without obtaining and maintaining necessary regulatory clearances or approvals.

Our products are medical devices subject to extensive regulation in the United States. The FDA and other U.S. and foreign governmental agencies regulate, among other things, with respect to medical devices:

Unless an exemption applies, each medical device we seek to distribute commercially in the United States requires marketing authorization from the FDA prior to distribution. The two primary types of FDA marketing authorization applicable to a device are premarket notification, also called 510(k) clearance, and premarket approval. The type of marketing authorization is generally linked to the classification of the device. When a 510(k) clearance is required, we must submit a premarket notification to the FDA demonstrating that our proposed device is "substantially equivalent" to a

29


Table of Contents

previously cleared and legally marketed 510(k) device or a device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for the submission of a premarket approval application, which is commonly known as the "predicate device." The FDA may require further information, including clinical data, to make a determination regarding substantial equivalence. A premarket approval application must be submitted to the FDA if the device cannot be cleared through the 510(k) process. The premarket approval application process is much more demanding than the 510(k) premarket notification process and requires the payment of significant user fees. A premarket approval application must be supported by valid scientific evidence, which typically requires extensive data to demonstrate the reasonable assurance of safety and effectiveness of the device. The approval process involves FDA review of information, including but not limited to, technical, preclinical (bench and/or animal), clinical trials, manufacturing and labeling. The FDA clearance and approval process frequently takes longer than anticipated due to increasing FDA demands for clarification of data or new data requirements.

If there is no predicate device that would permit the device to be cleared through the 510(k) path, then the FDA will automatically classify the device as a Class III high risk premarket approval device. In the event of this possibility, the sponsor can request a risk-based classification determination for the device in accordance with the de novo process, which is a route to market for novel medical devices that are low to moderate risk and are not substantially equivalent to a predicate device. A company files a de novo request when it does not have a predicate to which it can claim substantial equivalence. The FDA reviews the request for a de novo decision and grants or denies the request. If the request is granted, the FDA issues an order indicating that the device may legally be marketed and the device is classified as a Class I or II device, depending on risk. Once a device is classified through the de novo process, future devices from the company or a competitor may use that device as a 510(k) predicate. The advantage of the de novo process is that it generally requires less data than a premarket approval. The disadvantage is that it may require more data than a 510(k) and most often will include human clinical data. The FDA is increasingly moving devices with slightly different proposed indication statements or different technological features off the 510(k) path and on to the de novo path resulting in more time and expense for the company.

Both the 510(k) and premarket approval processes can be expensive and lengthy and require the payment of significant fees, unless an exemption applies. The FDA's 510(k) clearance process usually takes from approximately three to 12 months, but may take longer. The process of obtaining a premarket approval is much more costly and uncertain than the 510(k) clearance process and generally takes from approximately one to five years, or longer, from the time the application is submitted to the FDA until an approval is obtained. The process of obtaining regulatory clearances or approvals to market a medical device can be costly and time consuming, and we may not be able to obtain these clearances or approvals on a timely basis, if at all.

In the United States, our currently commercialized products are marketed pursuant to premarket clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act, or FDCA. If the FDA requires us to go through a lengthier, more rigorous examination for future products or modifications to existing products than we had expected, our product introductions or modifications could be delayed or canceled, which could cause our sales to decline. In addition, the FDA may determine that future products will require the more costly, lengthy and uncertain premarket approval process. Although we do not currently market any devices under a premarket approval, the FDA may demand that we obtain a premarket approval prior to marketing certain of our future products. In addition, if the FDA disagrees with our determination that a product we currently market is subject to an exemption from premarket review, the FDA may require us to submit a 510(k) or premarket approval application in order to continue marketing the product. Further, even with respect to those future

30


Table of Contents

products where a premarket approval is not required, we cannot assure you that we will be able to obtain the 510(k) clearances required with respect to those products.

The FDA can delay, limit or deny clearance or approval of a device for many reasons, including:

Any delay in, or failure to receive or maintain, clearances or approvals for our products could prevent us from generating revenue from these products or achieving profitability. Additionally, the FDA and other governmental authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could lead governmental authorities or a court to take action against us, including, but not limited to:

If we fail to obtain and maintain regulatory clearances or approvals, our ability to sell our products and generate revenue will be materially harmed.

In addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions which may prevent or delay approval or clearance of

31


Table of Contents

our products under development or impact our ability to modify our currently approved or cleared products on a timely basis. For example, in response to industry and healthcare provider concerns regarding the predictability, consistency and rigor of the 510(k) regulatory pathway, the FDA published new guidance on the 510(k) regulatory pathway in 2014, which alters the manner in which the 510(k) regulatory pathway is administered and interpreted. The FDA intends these reform actions to improve the efficiency and transparency of the clearance process, as well as bolster patient safety. This new guidance could impose additional regulatory requirements upon us which could delay our ability to obtain new 510(k) clearances, increase the costs of compliance or restrict our ability to maintain our current clearances. In addition, as part of the Food and Drug Administration Safety and Innovation Act, Congress reauthorized the Medical Device User Fee Amendments with various FDA performance goal commitments and enacted several "Medical Device Regulatory Improvements" and miscellaneous reforms which are further intended to clarify and improve medical device regulation both pre- and post-market.

Medical devices may only be promoted and sold for the indications for which they are approved or cleared. In addition, even if the FDA has approved or cleared a product, it can take action affecting such product approvals or clearances if serious safety or other problems develop in the marketplace. Delays in obtaining clearances or approvals could adversely affect our ability to introduce new products or modifications to our existing products in a timely manner, which would delay or prevent commercial sales of our products. Additionally, the FDA and other regulatory authorities have broad enforcement powers. Regulatory enforcement or inquiries, or other increased scrutiny on us, could affect the perceived safety and efficacy of our products and dissuade patients and clinicians from using our products.

If we modify our FDA cleared devices, we may need to seek additional clearances or approvals, which, if not granted, would prevent us from selling our modified products.

The FDA regulations require the submission and clearance of a new 510(k) premarket notification, or possibly, premarket approval, for significant changes or modifications made in the design, components, method of manufacturer and intended use of a device including changes or modifications to a 510(k)-cleared device that could significantly affect the device's safety or effectiveness, or would constitute a major change or modification in the device's intended use. The FDA requires each manufacturer to make this determination, but the FDA may review any manufacturer's decision. The FDA may not agree with our decisions regarding whether new clearances or approvals are necessary. We have modified some of our 510(k) cleared products, and have determined based on our review of the applicable FDA guidance that in certain instances new 510(k) clearances or premarket approval are not required. If the FDA disagrees with our determination and requires us to submit new 510(k) notifications or premarket approval for modifications to our previously cleared products for which we have concluded that new clearances or approvals are unnecessary, we may be required to cease marketing or to recall the modified product until we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties.

Furthermore, the FDA's ongoing review of the 510(k) program may make it more difficult for us to make modifications to our previously cleared products, either by imposing more strict requirements on when a manufacturer must submit a new 510(k) for a modification to a previously cleared product, or by applying more onerous review criteria to such submissions. If the FDA requires us to cease marketing a modified device until we obtain a new 510(k) clearance or premarket approval, our business, financial condition, operating results and future growth prospects could be materially adversely affected. Further in this situation, our products could be subject to recall. Any recall or FDA requirement that we seek additional approvals or clearances could result in significant delays, fines,

32


Table of Contents

increased costs associated with modification of a product, loss of revenue and potential operating restrictions imposed by the FDA.

The misuse or off-label use of our products may harm our image in the marketplace, result in injuries that lead to product liability suits or result in costly investigations, fines or sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could be costly to our business.

The products we currently market have been cleared by the FDA for specific treatments. We train our marketing and direct sales force to not promote our products for uses outside of the FDA-cleared indications for use, known as "off-label uses." We cannot, however, prevent a physician from using our products off-label, when in the physician's independent professional medical judgment he or she deems it appropriate. The FDA does not restrict or regulate a physician's choice of treatment. There may be increased risk of injury to patients if physicians use our products off-label. Furthermore, the use of our products for indications other than those cleared by the governing regulatory body may not effectively treat such conditions, which could harm our reputation in the marketplace among physicians and patients.

If the FDA determines that our promotional materials or training constitute promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our business activities to constitute promotion of an off-label use, which could result in significant penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs, and the curtailment of our operations.

In addition, physicians may misuse our products or use improper techniques, potentially leading to injury and an increased risk of product liability. If our products are misused or used with improper technique, we may become subject to costly litigation by our clinicians or their patients. As noted above, we can be subject to lawsuits, whether or not our product is proven to be defective and whether or not our employees have adequately trained the physicians. Similarly, in an effort to decrease costs, physicians may also reuse those of our products that are intended for a single use or may purchase reprocessed products from third-party reprocessors in lieu of purchasing new products from us, which could result in product failure and liability. As described immediately above, product liability claims could divert management's attention from our core business, be expensive to defend and result in sizeable damage awards against us that may not be covered by insurance.

Our products may cause or contribute to adverse medical events that we are required to report to the FDA, and if we fail to do so, we would be subject to sanctions that would materially harm our business.

Our marketed products are subject to Medical Device Reporting, or MDR, obligations, which require that we report to the FDA any incident in which our products may have caused or contributed to a death or serious injury, or in which our products malfunctioned and, if the malfunction were to recur, it could likely cause or contribute to a death or serious injury. The timing of our obligation to report under the MDR regulations is triggered by the date we become aware of the adverse event as well as the nature of the event. We may fail to report adverse events of which we become aware within the prescribed timeframe. We may also fail to recognize that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of our products. If we fail to comply with our reporting obligations, the FDA could take action including warning letters, untitled letters,

33


Table of Contents

administrative actions, criminal prosecution, imposition of civil monetary penalties, revocation of our device clearances, seizure of our products, or delay in clearance of future products.

Our products may in the future be subject to product recalls. A recall of our products, either voluntarily or at the direction of the FDA or another governmental authority, or the discovery of serious safety issues with our products, could have a significant adverse impact on us.

The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in their design or manufacture. The FDA's authority to require a recall must be based on a finding that there is reasonable probability that the device would cause serious, adverse health consequences or death. We may also choose to voluntarily recall a product if any material deficiency is found. A government-mandated or voluntary recall could occur as a result of an unacceptable risk to health, component failures, malfunctions, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our products would divert managerial and financial resources and have an adverse effect on our reputation and business, which could impair our ability to produce our products in a cost-effective and timely manner in order to meet our patients' demands. We may also be subject to liability claims, be required to bear other costs, or take other actions that may have a negative impact on our future sales and our ability to generate profits.

Companies are required to maintain certain records of recalls and corrections, even if they are not reportable to the FDA. We may initiate voluntary recalls or corrections for our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls and we may be subject to enforcement action.

If we or our component manufacturers fail to comply with the FDA's Quality System Regulation, our manufacturing operations could be interrupted, and our product sales and operating results could suffer.

We and many of our component manufacturers are required to comply with the FDA's Quality System Regulation, or QSR, which covers the procedures and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our devices. The FDA audits compliance with the QSR through periodic announced and unannounced inspections of manufacturing and other facilities. We and our component manufacturers have been, and anticipate in the future being, subject to such inspections. We cannot provide assurance that any future inspection will not result in adverse findings with respect to our QSR compliance. If our manufacturing facilities or those of any of our component manufacturers or suppliers are found to be in violation of applicable laws and regulations, or we or our manufacturers or suppliers fail to take satisfactory corrective action in response to an adverse inspection, the FDA could take enforcement action, including any of the following sanctions:

34


Table of Contents

Any of these sanctions could adversely affect our business, financial condition and results of operations.

If we begin selling our products outside the United States, our products and operations would also be required to comply with standards set by industrial standards bodies, such as the International Organization for Standardization, or ISO. Foreign regulatory bodies may evaluate our products or the testing that our products undergo against these standards. The specific standards, types of evaluation and scope of review differ among foreign regulatory bodies. If we fail to adequately comply with any of these standards, a foreign regulatory body may take adverse actions similar to those within the power of the FDA.

Any of these actions could prevent us from marketing, distributing or selling our products and would likely harm our business.

If clinical studies of our future products do not produce results necessary to support regulatory clearance or approval in the United States or, with respect to our current or future products, elsewhere, we will be unable to expand the indications for or commercialize these products.

We will likely need to conduct additional clinical studies in the future to support new indications for our products or for clearances of new product lines, or for the approval of the use of our products in some foreign countries. Clinical testing can take many years, can be expensive and carries uncertain outcomes. The initiation and completion of any of these studies may be prevented, delayed, or halted for numerous reasons.

Clinical failure can occur at any stage of testing. Our clinical studies may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical and non-clinical testing in addition to those we have planned. Our failure to adequately demonstrate the safety and efficacy of any of our devices would prevent receipt of regulatory clearance or approval and, ultimately, the commercialization of that device or indication for use. Even if our future products are cleared in the United States, commercialization of our products in foreign countries would require approval by regulatory authorities in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and greater than, those in the United States, including additional preclinical studies or clinical trials. Any of these occurrences could have an adverse impact on our business.

If the third parties on which we rely to conduct our clinical trials and to assist us with pre-clinical development do not perform as contractually required or expected, we may not be able to obtain regulatory clearance or approval for or commercialize our products.

We often must rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if these third parties need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our pre-clinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for, or successfully commercialize, our products on a timely basis, if at all, and our business, operating results and prospects may be adversely affected. Furthermore, our third-party clinical trial investigators may be delayed in conducting our clinical trials for reasons outside of their control.

35


Table of Contents

Future regulatory actions may adversely affect our ability to sell our products profitably.

From time to time, legislation is drafted and introduced that could significantly change the statutory provisions governing the clearance or approval, manufacture and marketing of a medical device. In addition, FDA and other regulations and guidance are often revised or reinterpreted in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted or regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be.

Healthcare regulatory reform may affect our ability to sell our products profitably .

In the United States, the legislative landscape, particularly as it relates to healthcare regulation and reimbursement coverage, continues to evolve. In March 2010, the Patient Protection and Affordable Care Act and Health Care and Education Reconciliation Act, which we refer to as the Patient Protection and Affordable Care Act, was passed, which has the potential to substantially change healthcare financing by both governmental and private insurers, and significantly impact the U.S. medical device industry. The Patient Protection and Affordable Care Act, among other things, imposes a new excise tax, which began in 2013, on entities that manufacture, produce or import medical devices in an amount equal to 2.3% of the price for which such devices are sold in the United States. While we believe that our current products are exempt from this tax under an exemption for retail products, if our belief is determined to be incorrect, we could be subject to significant tax liabilities and penalties, which could have a material adverse effect on our results of operations and cash position. Moreover, products that we introduce in the future could be subject to this tax.

In addition, the Patient Protection and Affordable Care Act also expands the round two of competitive bidding to a total of 91 competitive bidding areas, and by 2016, the process must be nationalized or prices in non-competitive bidding areas must be adjusted to match competitive bidding prices. Other legislative changes have been proposed and adopted in the United States since the Patient Protection and Affordable Care Act was enacted. On August 2, 2011, the Budget Control Act of 2011 among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation's automatic reduction to several government programs. This includes aggregate reductions of Medicare payments to providers up to 2% per fiscal year, which went into effect on April 1, 2013. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 which, among other things, further reduced Medicare payments to certain providers, including physicians, hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products or additional pricing pressures.

While our products are not currently subject to the competitive bidding process under Medicare, if our products were to become subject to such process in the future, it could negatively affect our business and financial condition.

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 required the Secretary of Health and Human Services to establish and implement programs under which competitive acquisition areas are established throughout the United States for purposes of awarding contracts for the furnishing of competitively priced items of durable medical equipment.

36


Table of Contents

CMS, the agency responsible for administering the Medicare program, conducts a competition for each competitive acquisition area under which providers submit bids to supply certain covered items of durable medical equipment. Successful bidders must meet certain program quality standards in order to be awarded a contract and only successful bidders can supply the covered items to Medicare beneficiaries in the acquisition area. There are, however, regulations in place that allow non-contracted providers to continue to provide products and services to their existing customers at the new competitive bidding payment amounts. The contracts are expected to be re-bid every three years. CMS is required to award contracts to multiple entities submitting bids in each area for an item or service, but has the authority to limit the number of contractors in a competitive acquisition area to the number it determines to be necessary to meet projected demand.

Although CMS concluded the bidding process for the first round of Metropolitan Statistical Areas in September 2007, in July 2008, Congress enacted Medicare Improvements for Patients and Providers Act of 2008, which retroactively delayed the implementation of competitive bidding. Medicare Improvements for Patients and Providers Act of 2008 also reduced Medicare prices nationwide by 9.5% beginning in 2009 for the product categories that were initially included in competitive bidding.

The Patient Protection and Affordable Care Act legislation requires CMS to expand competitive bidding further to additional geographic markets or to use competitive bid pricing information to adjust the payment amounts otherwise in effect for areas that are not competitive acquisition areas by January 1, 2016.

Although we continue to monitor developments regarding the implementation of the competitive bidding program, we cannot predict the outcome of the competitive bidding program on our business when fully implemented, nor the Medicare payment rates that will be in effect in future years for the items subjected to competitive bidding, including our products. We expect that payment rates will continue to fluctuate, and a large negative payment adjustment could adversely affect our business, financial conditions and results of operations.

We are subject to additional federal, state and foreign laws and regulations relating to our healthcare business; our failure to comply with those laws could have an adverse impact on our business.

We are subject to healthcare fraud and abuse regulation and enforcement by federal and state governments, which could adversely impact our business. Healthcare fraud and abuse and health information privacy and security laws potentially applicable to our operations include:

37


Table of Contents

The risk of our being found in violation of these laws and regulations is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. We are unable to predict what additional federal or state legislation or regulatory initiatives may be enacted in the future regarding our business or the healthcare industry in general, or what effect such legislation or regulations may have on us. Federal or state governments may impose additional restrictions or adopt interpretations of existing laws that could have a material adverse effect on us.

38


Table of Contents

Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under such laws, it is possible that some of our business activities, including certain sales and marketing practices and financial arrangements, including the provision of stock options as partial compensation for consulting services, with physicians, some of whom use or purchase our products, and other customers, could be subject to challenge under one or more of such laws. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management's attention from the operation of our business. If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from governmental healthcare programs, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, and the curtailment or restructuring of our operations, any of which could adversely impact our business.

Failure to comply with regulations affecting the transmission, security and privacy of health information could result in significant penalties.

Numerous federal and state laws and regulations, including HIPAA and the Health Information Technology for Economic and Clinical Health Act, or the HITECH Act, govern the collection, dissemination, security, use and confidentiality of patient-identifiable health information. HIPAA and the HITECH Act require us to comply with standards for the use and disclosure of health information within our company and with third parties. The Privacy Standards and Security Standards under HIPAA establish a set of basic national privacy and security standards for the protection of individually identifiable health information by health plans, healthcare clearinghouses and certain healthcare providers, referred to as covered entities, and the business associates with whom such covered entities contract for services. Notably, whereas HIPAA previously directly regulated only these covered entities, the HITECH Act, which was signed into law as part of the stimulus package in February 2009, makes certain of HIPAA's privacy and security standards also directly applicable to covered entities' business associates. As a result, both covered entities and business associates are now subject to significant civil and criminal penalties for failure to comply with Privacy Standards and Security Standards.

HIPAA and the HITECH Act also include standards for common healthcare electronic transactions and code sets, such as claims information, plan eligibility, payment information and the use of electronic signatures, and privacy and electronic security of individually identifiable health information. Covered entities, such as healthcare providers, are required to conform to such transaction set standards pursuant to HIPAA.

HIPAA requires healthcare providers like us to develop and maintain policies and procedures with respect to protected health information that is used or disclosed, including the adoption of administrative, physical and technical safeguards to protect such information. The HITECH Act expands the notification requirement for breaches of patient-identifiable health information, restricts certain disclosures and sales of patient-identifiable health information and provides a tiered system for civil monetary penalties for HIPAA violations. The HITECH Act also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney fees and costs associated with pursuing federal civil actions. Additionally, certain states have adopted comparable privacy and security laws and regulations, some of which may be more stringent than HIPAA.

If we do not comply with existing or new laws and regulations related to patient health information, we could be subject to criminal or civil sanctions. New health information standards, whether

39


Table of Contents

implemented pursuant to HIPAA, the HITECH Act, congressional action or otherwise, could have a significant effect on the manner in which we handle healthcare related data and communicate with payors, and the cost of complying with these standards could be significant.

The 2013 final HITECH omnibus rule modifies the breach reporting standard in a manner that will likely make more data security incidents qualify as reportable breaches. Any liability from a failure to comply with the requirements of HIPAA or the HITECH Act could adversely affect our financial condition. The costs of complying with privacy and security related legal and regulatory requirements are burdensome and could have a material adverse effect on our results of operations. These new provisions, as modified, will be subject to interpretation by various courts and other governmental authorities, thus creating potentially complex compliance issues for us, as well as our clients and strategic partners. In addition, we are unable to predict what changes to the HIPAA Privacy Standards and Security Standards might be made in the future or how those changes could affect our business. Any new legislation or regulation in the area of privacy and security of personal information, including personal health information, could also adversely affect our business operations.

Additionally, the Federal Trade Commission has issued and several states have issued or are considering new regulations to require holders of certain types of personally identifiable information to implement formal policies and programs to prevent, detect and mitigate the risk of identity theft and other unauthorized access to or use of such information. Further, the U.S. Congress and a number of states have considered or are considering prohibitions or limitations on the disclosure of medical or other information to individuals or entities located outside of the United States. If we begin selling our products outside the United States, we will need to comply with applicable laws in those jurisdictions that regulate the use and disclosure of individually identifiable information.

If we fail to comply with state and federal fraud and abuse laws, including anti-kickback, false claims and anti-inducement laws, we could face substantial penalties and our business, operations, and financial condition could be adversely affected.

The federal anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration, whether directly or indirectly and overtly or covertly, to induce or in return for purchasing, leasing, ordering, or arranging for the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid, or other federal financed healthcare programs. The statutory exceptions and regulatory safe harbors protecting certain common activities from prosecution are drawn narrowly, and any remuneration to or from a prescriber or purchaser of healthcare products or services may be subject to scrutiny if they do not qualify for an exception or safe harbor. Our practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability.

Federal false claims laws prohibit, in part, any person from knowingly presenting or causing to be presented a false claim for payment to the federal government, or knowingly making or causing to be made a false statement to get a false claim paid. The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items or services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of payer. These false claims statutes allow any person to bring suit in the name of the government alleging false and fraudulent claims presented to or paid by the government (or other violations of the statutes) and to share in any amounts paid by the entity to the government in fines or settlement. Such suits, known as qui tam actions, have increased significantly in the healthcare industry in recent years. Sanctions under these federal and state laws may include civil monetary penalties, exclusion of a manufacturer's products from reimbursement under government programs, criminal fines and imprisonment. In addition, the recently enacted Patient Protection and Affordable Care Act, among

40


Table of Contents

other things, amends the intent requirement of the federal anti-kickback and criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the Patient Protection and Affordable Care Act provides that the government may assert that a claim, including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the false claims statutes. Because of the breadth of these laws and the narrowness of the safe harbors and exceptions, it is possible that some of our business activities could be subject to challenge under one or more of such laws. Such a challenge, regardless of the outcome, could have a material adverse effect on our business, business relationships, reputation, financial condition and results of operations.

In addition, there has been a recent trend of increased federal and state regulation of payments made to physicians. The Patient Protection and Affordable Care Act imposes new reporting and disclosure requirements on device and drug manufacturers for any "transfer of value" made or distributed to prescribers and other healthcare providers. Device and drug manufacturers will also be required to report and disclose any investment interests held by physicians and their immediate family members during the preceding calendar year. Failure to submit required information may result in civil monetary penalties of up to an aggregate of $150,000 per year (and up to an aggregate of $1.0 million per year for "knowing failures to report"), for all payments, transfers of value or ownership or investment interests not reported in an annual submission. As of August 1, 2013, manufacturers are required to collect data, and they will be required to submit their first data reports to CMS by March 31, 2014 and by the 90th day of each calendar year thereafter.

Certain states mandate implementation of compliance programs and/or the tracking and reporting of gifts, compensation and other remuneration to physicians. The shifting compliance environment and the need to build and maintain robust and expandable systems to comply with different compliance and/or reporting requirements in multiple jurisdictions increase the possibility that a healthcare company many violate one or more of the requirements.

The Federal Civil Monetary Penalties Law prohibits, in part, the offering or giving of remuneration to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary's selection of a particular supplier of items or services reimbursable by a Federal or state governmental program. We sometimes offer customers various discounts and other financial incentives in connection with the sales of our products. While it is our intent to comply with all applicable laws, the government may find that our marketing activities violate the Civil Monetary Penalties Law. If we are found to be in noncompliance, we could be subject to civil money penalties of up to $10,000 for each wrongful act, assessment of three times the amount claimed for each item or service and exclusion from the Federal healthcare programs.

The scope and enforcement of each of these laws is uncertain and subject to rapid change in the current environment of healthcare reform, especially in light of the lack of applicable precedent and regulations. If our operations are found to be in violation of any of the laws described above or any other government regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines and the curtailment, restructuring, or restricting of our operations. Any penalties, damages, fines, curtailment or restructuring or our operations could harm our ability to operate our business and our financial results. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management's attention from operation of our business. Moreover, achieving and sustaining compliance with applicable federal and state fraud laws may prove costly.

41


Table of Contents

Failure to maintain the licenses and accreditations necessary to operate under our direct-to-patient and -provider model would adversely affect our business.

To continue operating our business under our direct-to-patient and -provider model, we must maintain our Durable Medical Equipment license and certification from the Accreditation Commission for Health Care. In May 2008, we became a Durable, Medical Equipment, Prosthetics, Orthotics, and Supplies accredited Medicare supplier by the Accreditation Commission for Health Care for our solutions and our Medicare accreditation must be renewed every three years through passage of an on-site inspection. Our current accreditation with Medicare is due to expire in May 2017. In addition to maintaining our Durable Medical Equipment license and certification from the Accreditation Commission for Health Care, we also must maintain certain state-required licenses. If we were found to be noncompliant, we could lose our licensure in that state. Losing our licensure could prohibit us from selling our current or future products to patients in such state and our business, financial condition and results of operations could be adversely affected as a result of any such prohibition.

Our products are currently made available to authorized users of the Department of Veterans Affairs Federal Supply Schedule and if we were no longer eligible to sell our products through such channel, our business may be adversely affected.

For our products to be eligible for reimbursement by the Veterans Administration, we must participate in the Department of Veterans Affairs Federal Supply Schedule pricing program, established by Section 603 of the Veterans Health Care Act of 1992. To be eligible for this program, we must comply with additional laws and requirements applicable to our operations and manufacturing processes. If we were to lose eligibility for reimbursement by the Veterans Administration, our business, financial condition and results of operations could be adversely affected.

We may be unable to obtain or maintain international regulatory registrations or approvals for our current or future products and indications, which could adversely impact our business.

Any future sales of our devices outside the United States are subject to foreign regulatory requirements that vary widely from country to country. In addition, the FDA regulates exports of medical devices from the United States. Complying with international regulatory requirements can be an expensive and time-consuming process and approval is not certain. The time required to obtain registration or approvals, if required by other countries, may be longer than that required for FDA clearance, and requirements for such registrations or approvals may significantly differ from FDA requirements. In certain countries we intend to rely upon third-party distributors to obtain all required regulatory registrations and approvals, and these distributors may be unable to obtain or maintain such registrations or approvals. Our distributors in these countries may also incur significant costs in attempting to obtain and in maintaining foreign regulatory approvals or registrations, which could increase the difficulty of attracting and retaining qualified distributors. If these distributors experience delays in receiving necessary registrations or approvals to market our products outside the United States, or if they fail to receive those registrations or approvals, we may be unable to market our products or enhancements in certain international markets effectively, or at all.

Our operations involve the use of hazardous and toxic materials, and we must comply with environmental, health and safety laws and regulations, which can be expensive, and could have an adverse impact on our business.

Our operations use or generate small volumes of hazardous or toxic materials. We are therefore subject to a variety of federal, state and local regulations relating to the use, handling, storage, disposal and human exposure to hazardous and toxic materials. Liability under environmental laws can be joint and several and without regard to comparative fault, and environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties

42


Table of Contents

associated with violations, which could have an adverse impact on our business. There can be no assurance that violations of environmental, health and safety laws will not occur in the future as a result of human error, accident, equipment failure or other causes. The failure to comply with past, present or future laws could result in the imposition of fines, third-party property damage and personal injury claims, investigation and remediation costs, the suspension of production or a cessation of operations. We also expect that our operations will be affected by other new environmental and health and safety laws and regulations on an ongoing basis. Although we cannot predict the ultimate impact of any such new laws and regulations, they will likely result in additional costs, and may require us to change how we manufacture our products, which could have an adverse impact on our business.

Risks Related to Our Financial Condition

We may need substantial additional funding beyond the proceeds of this offering and may be unable to raise capital when needed, which could force us to delay or reduce our commercialization efforts or product development programs.

We believe the net proceeds from this offering, together with our existing cash and cash equivalents and revenues, will be sufficient to meet our capital requirements and fund our operations through          . However, we have based these estimates on assumptions that may prove to be incorrect, and we could spend our available financial resources much faster than we currently expect. Any future funding requirements will depend on many factors, including:

If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Any future debt financing into which we enter may impose upon us covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our

43


Table of Contents

common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us.

Furthermore, we cannot be certain that additional funding will be available on acceptable terms, if at all. If we do not have, or are not able to obtain, sufficient funds, we may have to delay development or commercialization of our products or license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize. We also may have to reduce marketing, customer support or other resources devoted to our products or cease operations. Any of these factors could harm our operating results.

Risks Related to Our Intellectual Property

We may not be able to protect our intellectual property rights throughout the world.

Filing, prosecuting and defending patents on products in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States may be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. For example, many foreign countries have compulsory licensing laws, under which a patent owner must grant licenses to third parties. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products, and further, competitors may export otherwise infringing products to territories where we have patent protection but enforcement rights are not as strong as those in the United States. These products may compete with our products in jurisdictions where we do not have any issued patents, and our patent claims or other intellectual rights may not be effective or sufficient to prevent them from so competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries do not favor the enforcement of patents and other intellectual property protection, which could make it difficult for us to stop the infringement of our patents generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing, and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

The patent protection for our products may expire before we are able to maximize their commercial value, which may subject us to increased competition and reduce or eliminate our opportunity to generate product revenues.

The patents for our products have varying expiration dates and, if these patents expire, we may be subject to increased competition and we may not be able to recover our development costs or market any of our approved products profitably. For instance, our patents for our Flexitouch System will expire in 2017. Upon expiration of our patents, we may be subject to increased competition and our

44


Table of Contents

opportunity to establish or maintain product revenues could be substantially reduced or eliminated. Further, we may not have sufficient time to recover our development costs prior to the expiration of our U.S. and foreign patents.

We may not identify relevant patents or may incorrectly interpret the relevance, scope or expiration of a patent, which may adversely affect our ability to develop and market our products.

We cannot guarantee that any of our patent searches or analyses, including but not limited to the identification of relevant patents, the scope of patent claims or the expiration of relevant patents, are complete or thorough, nor can we be certain that we have identified each and every patent and pending application in the United States and abroad that is relevant to or necessary for the commercialization of our products in any jurisdiction.

The scope of a patent claim is determined by an interpretation of the law, the written disclosure in a patent and the patent family's prosecution history. Our interpretation of the relevance or the scope of a patent or a pending application may be incorrect, which may negatively impact our ability to market our products. We may incorrectly determine that our products are not covered by a third-party patent.

Many patents may cover a marketed product, including but not limited to patents covering the product or portions thereof, methods of use or methods relating to the product, and production processes of or for the product. The identification of all patents and their expiration dates relevant to the production and sale of a therapeutic product is extraordinarily complex and requires sophisticated legal knowledge in the relevant jurisdiction. It may be impossible to identify all patents in all jurisdictions relevant to a marketed product. Our determination of the expiration date of any patent in the United States or abroad that we consider relevant may be incorrect, which may negatively impact our ability to develop and market our products.

Obtaining and maintaining our patent protection depends on compliance with various procedural, documentary, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

The United States Patent and Trademark Office, or USPTO, and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent prosecution process. Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on any issued patent and/or pending patent applications are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of a patent or patent application. We have systems in place to remind us to pay these fees, and we employ an outside firm and rely on our outside counsel to pay these fees. While an inadvertent lapse may sometimes be cured by payment of a late fee or by other means in accordance with the applicable rules, there are many situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. If we fail to maintain the patents and patent applications directed to our products, our competitors might be able to enter the market earlier than should otherwise have been the case, which would have a material adverse effect on our business.

We may become involved in lawsuits to protect our patents or other intellectual property rights, which could be expensive, time-consuming and ultimately unsuccessful.

Competitors may infringe our patents or other intellectual property rights. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on

45


Table of Contents

the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

Various proceedings brought before the USPTO may be necessary to determine the priority of inventions with respect to our patents and patent applications or those of our current or future collaborators. An unfavorable outcome could require us to cease using the technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if a prevailing party does not offer us a license on terms that are acceptable to us. Litigation or other proceedings may fail and, even if successful, may result in substantial costs and distraction of our management and other employees. We may not be able to prevent misappropriation of our proprietary rights, particularly in countries where the laws may not protect those rights as fully as in the United States.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential and proprietary information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock.

Third-party claims of intellectual property infringement or misappropriation may adversely affect our business and could prevent us from developing or commercializing our products.

Our commercial success depends in part on us not infringing the patents and proprietary rights of third parties. There is a substantial amount of litigation, both within and outside the United States, involving patent and other intellectual property rights in the medical device industry, including patent infringement lawsuits, interferences, oppositions, ex-parte review and inter partes reexamination and post-grant review proceedings before the USPTO and corresponding foreign patent offices. Numerous U.S. and foreign issued patents and pending patent applications owned by third parties exist in the fields in which we are developing and may develop our products. As the medical device industry expands and more patents are issued, the risk increases that our products may be subject to claims of infringement of the patent rights of third parties. If a third party claims that we infringe on their products or technology, we could face a number of issues, including:

46


Table of Contents

Third parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents or patent applications with claims to products, materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of our products, that we failed to identify. For example, applications filed before November 29, 2000 and certain applications filed after that date that will not be filed outside the United States remain confidential until issued as patents. Except for the preceding exceptions, patent applications in the United States and elsewhere are generally published only after a waiting period of approximately 18 months after the earliest filing. Therefore, patent applications covering our technology or our products could have been filed by others without our knowledge. Additionally, pending patent applications that have been published can, subject to certain limitations, be later amended in a manner that could cover our technologies, our products or the use or manufacture of our products. We may also face a claim of misappropriation, if a third party believes that we inappropriately obtained and used trade secrets of such third parties. If we are found to have misappropriated a third party's trade secrets, we may be prevented from further using such trade secrets, limiting our ability to develop our products, and we may be required to pay damages.

If any third-party patents were held by a court of competent jurisdiction to cover aspects of our products, materials, formulations, methods of manufacture or methods for treatment, the holders of any such patents would be able to block our ability to develop and commercialize the applicable product candidate until such patent expired or unless we obtain a license. These licenses may not be available on acceptable terms, if at all. Even if we were able to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business operations, if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms. In addition, during the course of any patent or other intellectual property litigation, there could be public announcements of the results of hearings, rulings on motions, and other interim proceedings in the litigation. If securities analysts or investors regard these announcements as negative, the perceived value of our products, programs, or intellectual property could be diminished. Accordingly, the market price of our common stock may decline.

Parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our products. Defending against claims of patent infringement or misappropriation of trade secrets could be costly and time-consuming, regardless of the outcome. Thus, even if we were to ultimately prevail, or to settle at an early stage, such litigation could burden us with substantial unanticipated costs. In addition, litigation or threatened litigation could result in significant demands on the time and attention of our management team, distracting them from the pursuit of other company business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys' fees for willful infringement, pay royalties, redesign our infringing products or obtain one or more licenses from third parties, which may be impossible or require substantial time and monetary expenditure. In addition, the uncertainties associated with litigation could have a material adverse effect on our ability to raise the funds necessary to continue our clinical trials, continue our research programs, license necessary technology from third parties, or enter into development collaborations that would help us bring our products to market.

Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.

As is the case with other medical device companies, our success is heavily dependent on intellectual property, particularly on obtaining and enforcing patents. Obtaining and enforcing patents in the medical device industry involves both technological and legal complexity, and therefore is costly,

47


Table of Contents

time-consuming and inherently uncertain. In addition, the United States has recently enacted and is currently implementing wide-ranging patent reform legislation. Further, several recent judicial rulings have either narrowed the scope of patent protection available in certain circumstances or weakened the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained.

For our U.S. patent applications containing a claim not entitled to priority before March 16, 2013, there is a greater level of uncertainty in the patent law. In September 2011, the Leahy-Smith America Invents Act, or the American Invents Act, or AIA, was signed into law. The AIA includes a number of significant changes to U.S. patent law, including provisions that affect the way patent applications will be prosecuted, reviewed after issuance, and may also affect patent litigation. The USPTO is currently developing regulations and procedures to govern administration of the AIA and many of the substantive changes to patent law associated with the AIA. It is not clear what other, if any, impact the AIA will have on the operation of our business. Moreover, the AIA and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.

An important change introduced by the AIA is that, as of March 16, 2013, the United States transitioned to a "first-inventor-to-file" system for deciding which party should be granted a patent when two or more patent applications are filed by different parties claiming the same invention. A third party that files a patent application in the USPTO after that date but before us could therefore be awarded a patent covering an invention of ours, even if we had made the invention before it was made by the third party. This will require us to be cognizant, going forward, of the time from invention to filing of a patent application, but early filing of patent applications may not always be possible. Furthermore, our ability to obtain and maintain valid and enforceable patents depends on whether the differences between our technology and the prior art allow our technology to be patentable over the prior art. Since patent applications in the United States and most other countries are confidential for a period of time after filing, we cannot be certain that we were the first to either (a) file any patent application related to our products or (b) invent any of the inventions claimed in our patents or patent applications.

Among some of the other changes introduced by the AIA are changes that limit where a patentee may file a patent infringement suit and provide opportunities for third parties to challenge any issued patent in the USPTO. This applies to all of our U.S. patents, even those issued before March 16, 2013. Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in United States federal court necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid as unpatentable, even though the same evidence may be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to use the USPTO procedures to invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action.

Depending on decisions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.

48


Table of Contents

Because of the expense and uncertainty of litigation, we may not be in a position to enforce our intellectual property rights against third parties.

We have become aware from time to time that third parties may be infringing on our patents or other intellectual property rights. Because of the expense and uncertainty of litigation, we have concluded in the past and may conclude in the future that even if a third party is infringing our patents or other intellectual property rights, the risk-adjusted cost of bringing and enforcing such a claim or action may be too high or not in the best interest of our company or our stockholders. In such cases, we may decide that the more prudent course of action is to simply monitor the situation or initiate or seek some other non-litigious action or solution.

Intellectual property rights do not address all potential threats to our competitive advantage.

The degree of future protection afforded by our intellectual property rights is uncertain, because intellectual property rights have limitations and may not adequately protect our business or permit us to maintain our competitive advantage. The following examples are illustrative:

Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and protect other proprietary information.

We consider proprietary trade secrets and/or confidential know-how and unpatented know-how to be important to our business. We may rely on trade secrets and/or confidential know-how to protect our technology, especially where patent protection is believed by us to be of limited value. However, trade secrets and/or confidential know-how can be difficult to maintain as confidential.

49


Table of Contents

To protect this type of information against disclosure or appropriation by competitors, our policy is to require our employees, consultants, contractors and advisors to enter into confidentiality agreements with us. However, current or former employees, consultants, contractors and advisers may unintentionally or willfully disclose our confidential information to competitors, and confidentiality agreements may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. Enforcing a claim that a third party obtained illegally and is using trade secrets and/or confidential know-how is expensive, time consuming and unpredictable. The enforceability of confidentiality agreements may vary from jurisdiction to jurisdiction.

Failure to obtain or maintain trade secrets and/or confidential know-how trade protection could adversely affect our competitive position. Moreover, our competitors may independently develop substantially equivalent proprietary information and may even apply for patent protection in respect of the same. If successful in obtaining such patent protection, our competitors could limit our use of our trade secrets and/or confidential know-how.

We may need to license certain intellectual property from third parties, and such licenses may not be available or may not be available on commercially reasonable terms.

A third party may hold intellectual property, including patent rights that are important or necessary to the development or commercialization of any future products. It may be necessary for us to use the patented or proprietary technology of third parties to commercialize our products, in which case we would be required to obtain a license from these third parties. Such a license may not be available on commercially reasonable terms or at all, which could materially harm our business.

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.

We have received confidential and proprietary information from third parties. In addition, we employ individuals who were previously employed at other medical device companies. We may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise improperly used or disclosed confidential information of these third parties or our employees' former employers. Further, we may be subject to ownership disputes in the future, arising, for example, from conflicting obligations of consultants or others who are involved in developing our products. We may also be subject to claims that former employees, consultants, independent contractors, collaborators or other third parties have an ownership interest in our patents or other intellectual property. Litigation may be necessary to defend against these and other claims challenging our right to and use of confidential and proprietary information. If we fail in defending any such claims, in addition to paying monetary damages, we may lose our rights therein. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against these claims, litigation could result in substantial cost and be a distraction to our management and employees.

We may be subject to claims challenging the inventorship or ownership of our patents and other intellectual property.

We may also be subject to claims that former employees, collaborators or other third parties have an ownership interest in our patents or other intellectual property. We may be subject to ownership disputes in the future, arising, for example, from conflicting obligations of consultants or others who are involved in developing our products. Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material

50


Table of Contents

adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

Our reliance on third parties requires us to share our trade secrets, which increases the possibility that a competitor will discover them or that our trade secrets will be misappropriated or disclosed.

Because we rely on third parties to assist with research and development and to manufacture our products, we must, at times, share trade secrets with them. We seek to protect our proprietary technology in part by entering into confidentiality agreements and, if applicable, material transfer agreements, consulting agreements or other similar agreements with our advisors, employees, third-party contractors and consultants, prior to beginning research or disclosing proprietary information. These agreements typically limit the rights of the third parties to use or disclose our confidential information, including our trade secrets. Despite the contractual provisions employed when working with third parties, the need to share trade secrets and other confidential information increases the risk that such trade secrets become known by our competitors, are inadvertently incorporated into the technology of others, or are disclosed or used in violation of these agreements. Given that our proprietary position is based, in part, on our know-how and trade secrets, a competitor's discovery of our trade secrets or other unauthorized use or disclosure would impair our competitive position and may have a material adverse effect on our business.

In addition, these agreements typically restrict the ability of our advisors, employees, third-party contractors and consultants to publish data potentially relating to our trade secrets, although our agreements may contain certain limited publication rights. For example, any academic institution that we may collaborate with in the future will usually expect to be granted rights to publish data arising out of such collaboration, provided that we are notified in advance and given the opportunity to delay publication for a limited time period in order for us to secure patent protection of intellectual property rights arising from the collaboration, in addition to the opportunity to remove confidential or trade secret information from any such publication. In the future, we may also conduct joint research and development programs that may require us to share trade secrets under the terms of our research and development or similar agreements. Despite our efforts to protect our trade secrets, our competitors may discover our trade secrets, either through breach of our agreements with third parties, independent development or publication of information by any of our third-party collaborators. A competitor's discovery of our trade secrets would impair our competitive position and have an adverse impact on our business.

If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected.

If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest, and our business may be adversely affected. We currently have registered and unregistered trademarks in the United States. Our trademarks or trade names may be challenged, infringed, circumvented or declared generic or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which we need to build name recognition among potential collaborators or customers in our markets of interest. At times, competitors may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. Further, there could be potential trade name or trademark infringement claims brought by owners of other trademarks or trade names that incorporate variations of our trademarks or trade names. In addition, we have not registered our trademarks internationally, and the laws of certain foreign countries may not protect proprietary rights to the same extent as do the laws of the United States. Over the long term, if we are unable to successfully register our trademarks and trade names and/or establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be

51


Table of Contents

adversely affected. Our efforts to enforce or protect our proprietary rights related to trademarks, trade secrets, domain names, copyrights or other intellectual property may be ineffective and could result in substantial costs and diversion of resources and could adversely impact our financial condition or results of operations.

Risks Related to This Offering and Ownership of Our Common Stock

An active trading market for our common stock may not develop.

Prior to this offering, there has been no public market for our common stock. Although we expect our common stock to be approved for listing on The NASDAQ Global Market, an active trading market for our shares may never develop or be sustained following this offering. If the market does not develop or is not sustained, it may be difficult for you to sell your shares of our common stock at a price that is attractive to you or at all. In addition, an inactive market may impair our ability to raise capital by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration, which, in turn, could adversely affect our business.

The trading price of the shares of our common stock could be highly volatile, and purchasers of our common stock may not be able to resell the shares of our common stock at or above the initial public offering price and could incur substantial losses.

Our stock price is likely to be volatile. The stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their shares of our common stock at or above the initial public offering price. The market price for our common stock may be influenced by many factors, including:

52


Table of Contents

In addition, the stock market has recently experienced significant volatility with respect to medical device and other life sciences company stocks. The volatility of medical device and other medical technology company stocks often does not relate to the operating performance of the companies represented by the stock. As we operate in a single industry, we are especially vulnerable to these factors to the extent that they affect our industry or our products, or to a lesser extent our markets.

We are an "emerging growth company," and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.

We are an "emerging growth company," as defined in the JOBS Act and may remain an emerging growth company for up to five years. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:

We have taken advantage of reduced reporting burdens in this prospectus. In particular, in this prospectus, we have provided only two years of audited financial statements and have not included all of the executive compensation related information that would be required if we were not an emerging growth company. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be reduced or more volatile. In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of these accounting standards until they would otherwise apply to private companies. We have elected to avail ourselves of this exemption and, as a result, our financial statements may not be comparable to the financial statements of issuers that are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a

53


Table of Contents

result, there may be a less active trading market for our common stock and our stock price may be reduced or more volatile.

Sales of a substantial number of shares of our common stock by our existing stockholders in the public market could cause our stock price to fall.

Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales might occur, could significantly reduce the market price of our common stock and impair our ability to raise adequate capital through the sale of additional equity securities.

Assuming no exercise of the underwriters' option to purchase additional shares and no exercise of outstanding options and warrants and based on the number of shares outstanding as of September 30, 2015 and the adjustments set forth in "Summary — The Offering — Pro Forma Adjustments," upon completion of this offering, we will have outstanding a total of                            shares of common stock.

Of these shares, only the shares of common stock sold in this offering by us, plus any shares sold upon exercise of the underwriters' option to purchase additional shares, will be freely tradable without restriction in the public market immediately following this offering, unless they are purchased by one of our affiliates.

We, our directors and officers and other holders of substantially all of our outstanding common stock, preferred stock, options and warrants have agreed, subject to certain exceptions, not to engage in sales or dispositions of, or other transactions relating to, our common stock or securities convertible into or exercisable or exchangeable for our common stock or warrants or other rights to acquire shares of our common stock. These "lock-up" restrictions end 180 days after the date of this prospectus. However, Piper Jaffray & Co. and William Blair & Company, L.L.C., in their sole discretion, may permit persons who are subject to these lock-up agreements to sell shares prior to the expiration of the lock-up agreements.

After the lock-up agreements expire, up to an additional                            shares of our common stock will be eligible for sale in the public market, of which                            shares are held by directors, executive officers and other affiliates and will be subject to volume limitations under Rule 144 under the Securities Act of 1933, as amended, or the Securities Act. In addition, shares of our common stock that are subject to outstanding options, outstanding warrants or reserved for future issuance under our employee benefit plans will become eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules, the lock-up agreements and Rule 144 and Rule 701 under the Securities Act. If these additional shares of our common stock are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

Following completion of this offering, the holders of                            shares of our outstanding common stock, or approximately         % of our total outstanding common stock, will be entitled to rights with respect to the registration of their shares under the Securities Act, subject to the 180-day lock-up agreements described above. See "Description of Capital Stock — Registration Rights." Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares held by affiliates, as defined in Rule 144 under the Securities Act. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.

54


Table of Contents

We may use the net proceeds from this offering in ways that you and other stockholders may not approve.

Our management will have broad discretion in the application of the net proceeds from this offering, including for any of the purposes described in the section entitled "Use of Proceeds," and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. Our management might not apply our net proceeds in ways that ultimately increase the value of your investment.

We intend to use the net proceeds from this offering primarily to expand our sales, marketing, reimbursement, clinical, regulatory and product development activities, and the remainder for working capital, general and administrative expenses and other general corporate purposes, as well as to pay the approximately $              million of cumulative accrued dividends to our Series A preferred stockholders as described in "Dividend Policy." We may also use a portion of our net proceeds to acquire or invest in complementary products, technologies or businesses, although we have no present commitments to complete any such transaction. The amounts and timing of our expenditures will depend on numerous factors, including the rate of adoption of our devices, the expenses we incur in sales and marketing our devices, the scope of research and development efforts, the timing and success of any clinical trials we may commence in the future, and the timing of regulatory submissions. Accordingly, our management will have broad discretion over the use of the net proceeds from this offering. The failure by our management to apply the net proceeds from this offering effectively could harm our business. Pending the uses described above, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities, certificates of deposit or governmental securities. These investments may not yield a favorable return to our stockholders.

You will suffer immediate and substantial dilution in the net tangible book value of the common stock you purchase.

The initial public offering price of our common stock is substantially higher than the pro forma as adjusted net tangible book value per share of our outstanding common stock immediately after the completion of this offering. Purchasers of our common stock in this offering will experience immediate dilution of approximately $                            per share, based on the assumed initial public offering price of $                            per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus. In the past, we issued options and warrants to acquire common stock at prices significantly below the assumed initial public offering price. To the extent these outstanding options and warrants are ultimately exercised, investors purchasing common stock in this offering will sustain further dilution. For a further description of the dilution that you will experience immediately after this offering, see "Dilution."

We do not intend to pay dividends on our common stock, and, consequently, your ability to achieve a return on your investment will depend on appreciation, if any, in the price of our common stock.

We have never declared or paid any cash dividend on our common stock and do not currently intend to do so for the foreseeable future. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business. In addition, any future debt financing arrangement may contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock. Any return to stockholders will therefore be limited to any appreciation of their stock. Therefore, the success of an investment in shares of our common stock will depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders purchased their shares.

55


Table of Contents

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. We will be subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, which will require, among other things, that we file with the Securities and Exchange Commission, or the SEC, annual, quarterly and current reports with respect to our business and financial condition. In addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently adopted by the SEC and the stock market to implement provisions of the Sarbanes-Oxley Act, imposes significant requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Further, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC has adopted additional rules and regulations in these areas, such as mandatory "say on pay" voting requirements that will apply to us when we cease to be an emerging growth company. Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and may impact the manner in which we operate our business in ways we cannot currently anticipate.

We expect the rules and regulations applicable to public companies to substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly. If these requirements divert the attention of our management and personnel from other business concerns, they could have a material adverse effect on our business, financial condition, results of operations, and prospects. The increased costs will decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our business or increase the prices of our products or services. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain the same or similar coverage. We are evaluating these rules and regulations, and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

If we fail to maintain proper and effective internal control over financial reporting in the future, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, investors' views of us and, as a result, the value of our common stock.

Pursuant to Section 404 of the Sarbanes-Oxley Act, our management will be required to report upon the effectiveness of our internal control over financial reporting beginning with the annual report for our fiscal year ending December 31, 2015. When and if we are a "large accelerated filer" or an "accelerated filer" and are no longer an "emerging growth company," each as defined in the Exchange Act, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting. However, for so long as we remain an emerging growth company, we intend to take advantage of an exemption available to emerging growth companies from these auditor attestation requirements. We could be an "emerging growth company" for up to five years. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing, and possible remediation. To comply with the requirements of being a reporting company under the

56


Table of Contents

Exchange Act, we will need to upgrade our systems, including information technology; implement additional financial and management controls, reporting systems, and procedures; and hire additional accounting and finance staff.

Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act, or any subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.

In addition, we may encounter problems or delays in implementing any changes necessary to make a favorable assessment of our internal control over financial reporting. Further, once we are no longer an emerging growth company, we may encounter problems or delays in completing the implementation of any requested improvements and receiving a favorable attestation in connection with the attestation provided by our independent registered public accounting firm. If we cannot favorably assess the effectiveness of our internal control over financial reporting, or if our independent registered public accounting firm is unable to provide an unqualified attestation report on our internal controls, investors could lose confidence in our financial information and the trading price of our common stock could decline.

In connection with our future evaluation of our internal control over financial reporting, we may need to upgrade our systems or create new systems, implement additional financial and management controls, update our reporting systems and procedures, create or outsource an internal audit function or hire additional accounting and finance staff. If we are unable to accomplish these objectives in a timely and effective fashion, our ability to comply with the financial reporting requirements and other rules that apply to reporting companies could be impaired. Any failure to maintain effective internal control over financial reporting could have a material adverse effect on our business, financial condition and results of operations and the trading price of our common stock.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws to become effective upon completion of this offering, as well as provisions of Delaware law, may delay or prevent an acquisition of us or a change in our management. These provisions include:

57


Table of Contents

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, who are responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. These provisions would apply even if an offer rejected by our board were considered beneficial by some stockholders. Any provision of our amended and restated certificate of incorporation or our amended and restated bylaws or Delaware law that has the effect of delaying or deterring a change of control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

After this offering, our executive officers, directors and principal stockholders will maintain the ability to control all matters submitted to stockholders for approval and may take actions that may not be in the best interests of our other stockholders.

Assuming the sale of                       shares of common stock in this offering (or                       shares if the underwriters exercise their option to purchase additional shares in full), our executive officers, directors and stockholders who owned more than 5% of our outstanding common stock before this offering will, in the aggregate, beneficially own shares representing approximately         % of our capital stock (or         % if the underwriters exercise their option to purchase additional shares in full). As a result, if these stockholders were to act together, they would be able to control all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if they act together, would control the election of directors and decisions on any merger, consolidation or sale of all or substantially all of our assets. This concentration of voting power could delay or prevent an acquisition of our company on terms that other stockholders may desire or result in management of our company that our public stockholders disagree with. See "Principal Stockholders" for further information regarding the stock ownership of our directors, executive officers and principal stockholders.

If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, the price of our common stock and our trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on our company. If no or too few securities or industry analysts commence coverage of our company, the trading price for our common stock would likely be negatively affected. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, the price of our common stock would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause the price of our shares and trading volume to decline.

58


Table of Contents

Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us.

Our amended and restated certificate of incorporation and amended and restated bylaws that will become effective upon completion of this offering provide that we will indemnify our directors and officers, in each case to the fullest extent permitted by Delaware law.

In addition, as permitted by Section 145 of the Delaware General Corporation Law, our amended and restated bylaws and our indemnification agreements that we intend to enter into with our directors and officers provide that:

59


Table of Contents


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

60


Table of Contents

You should read the matters described in "Risk Factors" and the other cautionary statements made in this prospectus as being applicable to all related forward-looking statements wherever they appear in this prospectus. We cannot assure you that the forward-looking statements in this prospectus will prove to be accurate and therefore prospective investors 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 should read this prospectus, the documents that we reference in this prospectus and the documents that we have filed as exhibits to the registration statement, of which this prospectus is a part, completely. 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.

61


Table of Contents


USE OF PROCEEDS

We estimate that the net proceeds that we will receive from the sale of             shares of our common stock in this initial public offering will be approximately $              million, or approximately $              million if the underwriters exercise their option in full to purchase additional shares from us. This estimate is based upon an assumed initial public offering price of $              per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after the underwriting discounts and commissions and estimated offering expenses payable by us.

A $1.00 increase (decrease) in the assumed initial public offering price of $              per share would increase (decrease) the net proceeds to us from this offering by approximately $              million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) the net proceeds to us from this offering, after the underwriting discounts and commissions and estimated offering expenses payable by us, by approximately $              million, assuming the assumed initial public offering price stays the same.

We intend to use the net proceeds from this offering primarily as follows:

We may also use a portion of our net proceeds to acquire or invest in complementary products, technologies or businesses, although we have no present commitments to complete any such transaction. The amounts and timing of our expenditures will depend on numerous factors, including the rate of adoption of our devices, the expenses we incur in sales and marketing our devices, the scope of research and development efforts, the timing and success of any clinical trials we may commence in the future, and the timing of regulatory submissions.

Accordingly, our management will have broad discretion over the use of the net proceeds from this offering. Pending the uses described above, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities, certificates of deposit or governmental securities.

62


Table of Contents


DIVIDEND POLICY

We have never declared or paid any cash dividends on our common stock. Following the completion of this offering, we intend to retain our future earnings, if any, to finance the operation and expansion of our business. We do not expect to pay cash dividends on our common stock in the foreseeable future. Payment of future cash dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, outstanding indebtedness and plans for expansion and restrictions imposed by lenders, if any.

Holders of our Series A and Series B preferred stock are entitled to dividends upon the conversion of such shares of preferred stock to our common stock in connection with this initial public offering, which will occur immediately prior to the completion of this offering. Each Series A and Series B preferred stockholder is entitled to a cumulative accrued dividend calculated at a rate of 6% per annum of the original issue price of such series of preferred stock. Series B preferred stockholders may elect to receive payment of such dividend in additional shares of Series B preferred stock.

As of September 30, 2015, we had $9.1 million of cumulative accrued dividends payable to our Series A and Series B preferred stockholders. These dividends have continued to accrue subsequent to September 30, 2015. As such, we anticipate that the Series B preferred stockholders will elect to receive payment of such cumulative accrued dividends in additional shares of Series B preferred stock rather than cash. Assuming a closing date of                        , 2016, immediately prior to the completion of this offering, we expect to pay approximately $              million of cumulative accrued dividends in cash to our Series A preferred stockholders and issue              shares of our common stock in payment of approximately $              million of cumulative accrued dividends to our Series B preferred stockholders. The cash dividend will be paid from the net proceeds of this offering and neither cash nor stock dividends will be paid on any shares purchased in this offering.

63


Table of Contents


CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2015:

You should read this information in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes included elsewhere in this prospectus.

64


Table of Contents

 
  As of September 30, 2015  
 
  Actual   Pro
Forma
  Pro Forma
As Adjusted
 
 
  (In thousands, except for share and
per share data; unaudited)

 

Cash and cash equivalents

  $ 5,672   $     $    

Long-term debt (notes payable)

    6              

Convertible preferred stock

                   

Series B preferred stock, $0.001 par value per share,               shares authorized,              shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

    12,428              

Series A preferred stock, $0.001 par value per share,               shares authorized,              shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

    20,050              

Stockholders' equity (deficit):

   
 
   
 
   
 
 

Preferred stock $0.001 par value per share, no shares authorized, issued and outstanding, actual;              shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

                 

Common stock $0.001 par value per share,               shares authorized,              shares issued and outstanding, actual;              shares authorized,              shares issued and outstanding, pro forma;              shares authorized,              shares issued and outstanding, pro forma as adjusted

    8              

Additional paid-in capital

    140              

Accumulated deficit

    (6,738 )            

Total stockholders' equity (deficit)

    (6,590 )            

Total capitalization

  $ 25,894   $     $    

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders' equity and total capitalization by approximately $          million, assuming that the number of shares of our common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) the amount of our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders' equity and total capitalization by approximately $          million, assuming an initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The table and calculations above are based on the adjustments set forth in "Summary — The Offering — Pro Forma Adjustments."

65


Table of Contents


DILUTION

If you invest in our common stock, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after completion of this offering.

As of September 30, 2015, our net tangible book value (deficit) was approximately          million, or approximately          per share. Our net tangible book value represents total tangible assets less total liabilities. Our net tangible book value (deficit) per share is our net tangible book value divided by the number of shares of common stock outstanding as of September 30, 2015.

As of September 30, 2015, our pro forma net tangible book value (deficit) of our common stock was approximately $              million, or approximately $              per share. Our pro forma net tangible book value (deficit) represents total tangible assets less total liabilities. Our pro forma net tangible book value (deficit) per share is our pro forma net tangible book value (deficit) divided by the number of shares of common stock outstanding as of September 30, 2015, after giving effect to (a) the conversion of all outstanding preferred stock into an aggregate of                     shares of our common stock immediately prior to the completion of this offering; (b) the issuance of                      additional shares of common stock immediately prior to the completion of this offering that our Series A and B preferred stockholders are entitled to receive in connection with this initial public offering, assuming an initial offering price of $              per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus; (c) the accrual for the payment of $              million in cumulative accrued dividends to our Series A preferred stockholders as of September 30, 2015; (d) the issuance of                     shares of common stock immediately prior to the completion of this offering to pay accrued dividends on our Series B preferred stock (assuming a closing date of                           , 2016 and an initial offering price of $              per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus); and (e) the effectiveness of our amended and restated certificate of incorporation and adoption of our amended and restated bylaws.

After giving effect to (a) the pro forma adjustments described above; (b) the payment of accrued dividends as of September 30, 2015 to our Series A preferred stockholders described above; and (c) our issuance and sale of                     shares of our common stock in this offering at an assumed initial public offering price of $              per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses, as of September 30, 2015, the pro forma as adjusted net tangible book value (deficit) of our common stock would have been approximately $              million, or approximately $              per share. This amount represents an immediate increase in pro forma net tangible book value (deficit) to our existing stockholders of $              per share and an immediate dilution to new investors purchasing shares in this offering of $              per share. We determine dilution by subtracting the pro forma as adjusted net tangible book value (deficit) per share

66


Table of Contents

after this offering from the amount of cash that a new investor paid for a share of common stock. The following table illustrates this per share dilution:

Assumed initial public offering price per share

        $    

Historical net tangible book value (deficit) per share as of September 30, 2015

  $          

Pro forma increase in net tangible book value (deficit) per share

             

Pro forma net tangible book value (deficit) per share as of September 30, 2015

  $          

Increase in pro forma net tangible book value (deficit) per share attributable to investors purchasing shares in this offering

             

Pro forma as adjusted net tangible book value (deficit) per share, after giving effect to this offering

             

Dilution in pro forma as adjusted net tangible book value (deficit) per share to investors purchasing shares in this offering

        $    

A $1.00 increase (decrease) in the assumed initial public offering price of $              per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted net tangible book value (deficit) per share after this offering by approximately $             , and dilution in pro forma net tangible book value (deficit) per share to new investors by approximately $             , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their option to purchase additional shares in full, there will be an increase in pro forma as adjusted net tangible book value (deficit) to existing stockholders of $              per share and an immediate dilution in pro forma as adjusted net tangible book value (deficit) to new investors of $              per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The following table summarizes, on a pro forma as adjusted basis described above, the difference between existing stockholders and new investors with respect to number of shares of common stock purchased from us, the total consideration paid to us, and the average price per share paid, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 
  Shares
Purchased
   
   
   
 
 
  Total Consideration    
 
 
  Average Price
Per Share
 
 
  Number   Percent   Amount   Percent  

Existing stockholders

            % $         % $    

Investors purchasing shares in this offering

                               

Total

          100 % $       100 % $    

67


Table of Contents

A $1.00 increase (decrease) in the assumed initial public offering price of $              per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid by new investors by $              million, and increase (decrease) the percentage of total consideration paid by investors purchasing shares in this offering by approximately         %, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) the total consideration paid by investors purchasing shares in this offering by $              million, and increase (decrease) the percentage of total consideration paid by new investors by approximately         %, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their option to purchase additional shares in full:

The table and calculations above are based on                     shares outstanding as of September 30, 2015 and the adjustments set forth in "Summary — The Offering — Pro Forma Adjustments."

To the extent any of the outstanding options to purchase shares of our common stock or warrants to purchase shares of our common stock are exercised or new awards are granted under our equity compensation plans, there will be further dilution to investors participating in this offering. To the extent all of such outstanding options and warrants had been exercised as of September 30, 2015, the pro forma as adjusted net tangible book value (deficit) per share after this offering would be $             , and total dilution per share to new investors would be $             .

68


Table of Contents


SELECTED CONSOLIDATED FINANCIAL DATA

The following tables set forth our selected historical consolidated financial data as of and for the periods indicated. The selected consolidated statements of operations data for the years ended December 31, 2013 and 2014, and the selected consolidated balance sheet data as of December 31, 2013 and 2014, have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our selected consolidated statements of operations data for the nine months ended September 30, 2014 and 2015, and the selected consolidated balance sheet data as of September 30, 2015, have been derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited interim consolidated financial statements on the same basis as the audited consolidated financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair statement of financial statements set forth in those statements. Our historical results are not indicative of the results to be expected in the future and our interim results are not necessarily indicative of results to be expected for the full year ended December 31, 2015 or any other period. The following financial data should be read in conjunction with, and are qualified in their entirety by reference to, "Use of Proceeds," "Capitalization," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes included elsewhere in this prospectus.

69


Table of Contents

 
  Year Ended
December 31,
  Nine Months Ended
September 30,
 
 
  2013   2014   2014   2015  
 
  (In thousands, except share and per share data)
 

Consolidated Statements of Operations Data:

                         

Revenues, net

  $ 37,176   $ 47,736   $ 29,626   $ 41,712  

Cost of goods sold

    9,772     12,715     8,284     11,839  

Gross profit

    27,404     35,021     21,342     29,873  

Operating expenses:

                         

Sales and marketing

    14,298     18,154     12,457     17,297  

Research and development

    2,443     2,843     1,931     2,922  

Reimbursement, general and administrative

    8,283     10,225     7,419     9,448  

Total operating expenses

    25,024     31,222     21,807     29,667  

Income (loss) from operations

   
2,380
   
3,799
   
(465

)
 
206
 

Other income (expense)

   
4
   
(4

)
 
12
   
18
 

Income (loss) before income taxes                             

    2,384     3,795     (453 )   224  

Income tax expense (benefit)

   
(772

)
 
1,725
   
(171

)
 
90
 

Net income (loss)

   
3,156
   
2,070
   
(282

)
 
134
 

Convertible preferred stock dividends

    1,668     1,761     1,336     1,396  

Allocation of undistributed earnings to preferred stockholders

    1,074     216          

Net income (loss) attributable to common stockholders

  $ 414   $ 93   $ (1,618 ) $ (1,262 )

Net income (loss) per common share attributable to common stockholders (1)

   
 
   
 
   
 
   
 
 

Basic

  $ 0.07   $ 0.01   $ (0.23 ) $ (0.16 )

Diluted

  $ 0.06   $ 0.01   $ (0.23 ) $ (0.16 )

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

   
 
   
 
   
 
   
 
 

Basic

    6,305,401     7,025,035     6,903,792     7,992,734  

Diluted

    7,276,148     10,709,649     6,903,792     7,992,734  

Pro forma net income (loss) per common share attributable to common stockholders (unaudited) (2)

                         

Basic

                         

Diluted

                         

Weighted-average shares used to compute pro forma net income (loss) per common share attributable to common stockholders (unaudited) (2)

                         

Basic

                         

Diluted

                         

70


Table of Contents


 
  As of
December 31,
   
 
 
  As of
September 30, 2015
 
 
  2013   2014  
 
  (In thousands)
 

Consolidated Balance Sheet Data

                   

Cash and cash equivalents

  $ 6,539   $ 5,416   $ 5,672  

Working capital

    17,164     18,927     18,981  

Total assets

    29,226     31,494     33,395  

Total debt

    22     13     6  

Convertible preferred stock

    29,321     31,082     32,478  

Accumulated deficit

    (8,942 )   (6,872 )   (6,738 )

Total stockholders' equity (deficit)

    (7,114 )   (6,427 )   (6,590 )

(1)
Net income (loss) per common share attributable to common stockholders is calculated under the two-class method, as our convertible preferred stock participates in the undistributed earnings of the company. The two-class method requires earnings for the period to be allocated based upon their respective rights to receive distributed and undistributed earnings. No adjustment is made during periods with a net loss, as the holders of the convertible preferred stock have no obligation to fund losses.

(2)
Pro forma net income (loss) per common share attributable to common stockholders and the number of weighted-average common shares used to compute pro forma net income (loss) per common share attributable to common stockholders reflect the adjustments set forth in "Summary — The Offering — Pro Forma Adjustments," except in lieu of the cash payment of a portion of the proceeds to pay cumulative accrued dividends to our Series A preferred stockholders, reflects the additional             shares of common stock that would have been required to be issued to generate sufficient proceeds to fund the cash payment of the Series A convertible preferred stock dividends that are payable from the net proceeds of our this offering.

71


Table of Contents


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 Selected Consolidated Financial Data and our consolidated financial statements and the accompanying notes thereto included elsewhere in this prospectus. Our actual results could differ materially from those anticipated in the forward-looking statements included in this discussion as a result of certain factors, including, but not limited to, those discussed in "Risk Factors" and "Special Note Regarding Forward-Looking Statements" included elsewhere in this prospectus.

Overview

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

Our two proprietary products are the Flexitouch System and the ACTitouch System. A predecessor to our Flexitouch System received 510(k) clearance from 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. Historically, we derived substantially all of our revenues from our Flexitouch System. For the years ended December 31, 2013 and 2014, and for the nine months ended September 30, 2015, our Flexitouch System represented 97%, 92% and 87% of our revenues, respectively. In September 2012, we acquired our second proprietary product, the ACTitouch System. The system received 510(k) clearance from the FDA in June 2013, and we began selling the product in September 2013 to address the many limitations of non-removable multilayered bandages that are worn by patients suffering from venous leg ulcers. For the years ended December 31, 2013 and 2014, and for the nine months ended September 30, 2015, our ACTitouch System represented 0%, 5% and 6% of our revenues, respectively. We also began selling our Entré System, a 510(k) cleared basic pneumatic compression device, in February 2013.

To support the growth of our business, we invest heavily in our commercial infrastructure, consisting of our direct sales force, home training resources, reimbursement capabilities and clinical expertise. We market our products in the United States using a direct-to-patient and -provider model. Our direct sales force has grown from three representatives in March 2005 to a team of over 70 people as of September 30, 2015. This model allows us to directly approach patients and clinicians, whereby we disintermediate the traditional durable medical equipment channel, allowing us to capture both the manufacturer and distributor margins. We also utilize over 300 licensed, independent healthcare practitioners as home trainers who educate patients on the proper use of our solutions. We invest substantial resources in our reimbursement operations group of over 50 people that focuses on verifying case-by-case benefits, obtaining prior authorization, billing and collecting payments from payers and providing customer support services. Our payer relationships group of over 20 people is responsible for developing relationships with payer decision-makers to educate them on our product efficacy, develop overall payer coverage policies and reimbursement criteria, manage Medicare patient claims and contracts with payers and serve as an advocacy liaison between patients, clinicians and payers throughout the appeals process. We also have a clinical team, consisting of a scientific advisory

72


Table of Contents

board, in-house therapists and nurses, and a medical director, that serves as a resource to clinicians and patients and guides our development of clinical evidence in support of our products.

Our patients are reimbursed by government and private payers for the purchase of our products pursuant to established rates with each payer. We rely on third-party contract manufacturers for the sourcing of parts, the assembly of our controllers and the manufacturing of the garments used with our systems. We conduct final assembly of the garments used with our Flexitouch System at, and perform quality assurance and ship our products from, our facility in Minneapolis, Minnesota.

For the year ended December 31, 2014, we generated revenues of $47.7 million and had net income of $2.1 million, compared to revenues of $37.2 million and net income of $3.2 million for the year ended December 31, 2013. For the nine months ended September 30, 2015, we generated revenues of $41.7 million and had net income of $0.1 million, compared to revenues of $29.6 million and a net loss of $0.3 million for the nine months ended September 30, 2014. As of September 30, 2015, we had an accumulated deficit of $6.7 million. Our primary sources of capital to date have been from operating income and private placements of our capital stock. We operate in one segment.

Components of our Results of Operations

Revenues

We derive our revenues from the sale of our Flexitouch, ACTitouch and Entré systems to patients in the United States. Revenue growth has been driven by increased clinician, patient and payer awareness of lymphedema and the clinical efficacy of our Flexitouch System, and launch of our ACTitouch and Entré systems in 2013. We have expanded our direct sales force that helps us drive and support our revenue growth and intend to continue this expansion. However, any reversal in these recent trends could have a negative impact on our future revenues.

Our revenues have fluctuated, and we expect our revenues to continue to fluctuate, from quarter to quarter due to a variety of factors. For instance, our fourth quarter tends to be our strongest quarter of the year. See "— Seasonality" for a further discussion of factors contributing to seasonality. Further, our revenues are impacted by fluctuations in the mix of products being sold during each period and changes in the mix of our payers.

We sell our products directly to patients, who are referred to us by physicians, therapists or nurses. We bill payers, such as private insurers, Medicare, the Veterans Administration or Medicaid, on behalf of our patients and bill patients directly for their cost-sharing amounts, including any portion of an unsatisfied deductible and any copayments or co-insurance. In 2014, approximately 15% of our sales came from Medicare patients. A recent change to the level of Medicare coverage for our products could reduce the number of Medicare patients who have access to our products, and we are seeking to have the coverage determination overturned. Our products currently are not subject to the competitive bidding process for supplying covered items to Medicare recipients.

We expect our revenues to continue to increase in the future as a result of increased awareness of our solutions, expansion of our direct sales force, marketing and customer support efforts, continued focus on developing clinical and economic outcome data, expanded third-party reimbursement and introduction of our solutions outside the United States.

Cost of Goods Sold and Gross Margin

Cost of goods sold consists primarily of component costs, direct labor, overhead costs, product warranties, provisions for slow-moving and obsolete inventory and delivery costs for items sold. A

73


Table of Contents

significant portion of our cost of goods sold consists of manufacturing overhead costs. These overhead costs include the cost of quality assurance, material procurement, inventory control, facilities, equipment and operations supervision and management. We expect overhead costs as a percentage of revenues to decrease as a result of expected increases in production volume and yields. Cost of goods sold also includes depreciation expense for product tooling, production equipment and shipping costs. See Note 5 to our financial statements included elsewhere in this prospectus for a description of our royalty payments. We expect cost of goods sold to increase in absolute dollars primarily if, and to the extent, our revenues grow.

We provide a warranty on our devices ranging from one to two years for the controller, and one year for the garment. We establish a reserve for warranty repairs based on historical warranty repair costs incurred. Provisions for warranty obligations, which are included in cost of goods sold, are recorded at the time of shipment.

We calculate gross margin as gross profit divided by revenues. Our gross margin has been and will continue to be affected by a variety of factors, including product and payer mix, production volumes, manufacturing costs and cost-reduction strategies. We expect our gross margin to decrease slightly over the near term as we increase the percentage of total revenues from our ACTitouch and Entré systems. However, our gross margin will likely fluctuate from quarter to quarter.

Sales and Marketing Expenses

Our sales and marketing expenses support our direct-to-patient and -provider model. These expenses consist primarily of personnel-related expenses, including salaries, bonuses, commissions and benefits for employees. They also include expenses for patient home training, social media and advertising, informational kits, public relations and other promotional and marketing activities, field sales travel and entertainment expenses, trade shows and conferences, stock-based compensation, as well as customer service. We expect sales and marketing expenses to continue to increase in absolute dollars as we expand our commercial infrastructure to drive and support our planned revenue growth. To the extent our revenues grow, we expect sales and marketing expenses to decrease as a percentage of revenues over time.

Research and Development Expenses

Research and development, or R&D, expenses consist primarily of personnel-related expenses, third-party product development costs, laboratory supplies, consulting fees and related costs, clinical research expenses, expenses related to clinical and regulatory affairs, patent amortization costs, stock-based compensation and patent legal fees, including defense costs and testing costs for new product launches. Clinical research expenses include clinical trial management and monitoring, payment to clinical investigators, consulting fees, data management, stock-based compensation, travel expenses and the cost of manufacturing products for clinical trials. We have made substantial investments in R&D since our inception. Our R&D efforts have focused primarily on activities designed to enhance our technologies and to support development and commercialization of new and existing products. We expect R&D expenses to increase in absolute dollars for the foreseeable future as we continue to develop, enhance and commercialize new products and expand clinical trial efforts. We expect R&D expenses as a percentage of our revenues to vary over time depending on the level and timing of initiating new product development efforts, as well as our clinical trial activities.

Reimbursement, General and Administrative Expenses

Reimbursement, general and administrative expenses consist primarily of compensation, including salaries, bonuses and benefits for employees in our patient services and advocacy, billing and

74


Table of Contents

collections, case management, payer relations and governmental affairs and reimbursement authorization departments, as well as finance, human resources and administration, information technology, business development and general management functions, and facilities costs. Our experienced reimbursement authorization department of over 50 people focuses on verifying case-by-case benefits, obtaining prior authorization, billing and collecting payments from payers and providing customer support services. Reimbursement authorization department expenses also include consulting, travel to payer case manager seminars, professional development and training and certification expenses. General and administrative expenses also include professional services, such as legal, consulting and accounting services, stock-based compensation, travel expenses and insurance costs. We expect to incur additional legal, accounting, insurance and other professional service fees associated with being a public company, which may increase further when we are no longer able to rely on the "emerging growth company" exemption we are afforded under the JOBS Act. We expect our reimbursement, general and administrative expenses to increase in absolute dollars, but decrease as a percentage of our revenues, to the extent our revenues grow.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest expense related to our notes payable and interest income driven by the interest accruing on cash and past due insurance balances. We do not accrue interest on a majority of past due customer accounts receivable balances.

Income Tax Expense (Benefit)

Our income tax expense (benefit) consists primarily of deferred income taxes resulting from temporary differences between the reporting of amounts for financial statement purposes and income tax purposes.

Results of Operations

Comparison of the Nine Months Ended September 30, 2014 and 2015

The following table sets forth our results of operations for the nine months ended September 30, 2014 and 2015:

 
  Nine Months Ended
September 30,
   
 
 
  2014   2015   % Change  
 
  (In thousands, except percentages)
 

Consolidated Statement of Operations Data:

                   

Revenues

  $ 29,626   $ 41,712     41  

Cost of goods sold

    8,284     11,839     43  

Gross profit

    21,342     29,873     40  

Operating expenses:

                   

Sales and marketing

    12,457     17,297     39  

Research and development

    1,931     2,922     51  

Reimbursement, general and administrative

    7,419     9,448     27  

Total operating expenses

    21,807     29,667     36  

Income (loss) from operations

    (465 )   206     144  

Other income (expense):

   
12
   
18
   
50
 

Income (loss) before income taxes

    (453 )   224     149  

Income tax expense (benefit)

   
(171

)
 
90
   
153
 

Net income (loss)

  $ (282 ) $ 134     148  

75


Table of Contents

Revenues

Revenues increased $12.1 million, or 41%, to $41.7 million during the nine months ended September 30, 2015, compared to $29.6 million during the nine months ended September 30, 2014. The growth in revenues was primarily attributable to an increase of approximately $9.1 million, or 34%, in sales of our Flexitouch System, an increase of approximately $1.0 million, or 66%, in sales of our ACTitouch System, and an increase of approximately $2.0 million, or 180%, in sales of our Entré System. The increase in unit sales of our Flexitouch System was driven by expansion of our sales force and increased physician and patient awareness. The increase in unit sales of our ACTitouch System was due to continued penetration of wound clinics, particularly within Veterans Administration hospitals.

The following table summarizes our revenues by product for the nine months ended September 30, 2014 and 2015 both in dollars and percentage of total revenues:

 
  Nine Months Ended
September 30,
   
 
 
  2014   2015   % Change  
 
  (In thousands, except percentages)
 

Revenues

                   

Flexitouch System

  $ 27,010   $ 36,100     34  

ACTitouch System

    1,504     2,500     66  

Entré System

    1,112     3,112     180  

Total

  $ 29,626   $ 41,712     41  

Percentage of total revenues

   
 
   
 
   
 
 

Flexitouch System

    91 %   87 %      

ACTitouch System

    5 %   6 %      

Entré System

    4 %   7 %      

Total

    100 %   100 %      

Cost of Goods Sold and Gross Margin

Cost of goods sold increased $3.6 million, or 43%, to $11.8 million during the nine months ended September 30, 2015, compared to $8.3 million during the nine months ended September 30, 2014. The increase in cost of goods sold was primarily attributable to an increase in the number of systems sold.

Gross margin for the nine months ended September 30, 2015 decreased slightly to 71.6% compared to 72.0% for the nine months ended September 30, 2014. The decrease in gross margin was primarily due to the growth in sales of our ACTitouch and Entré Systems, which have a lower gross margin than our Flexitouch System.

Sales and Marketing Expenses

Sales and marketing expenses increased $4.8 million, or 39%, to $17.3 million during the nine months ended September 30, 2015, compared to $12.5 million during the nine months ended September 30, 2014. The increase was primarily attributable to a $3.6 million increase in compensation expenses as a result of increased sales and marketing headcount. In addition, other sales and marketing expenses increased $1.2 million due to increased field sales meeting, travel and entertainment, consulting and field sales training expenses.

76


Table of Contents

Research and Development Expenses

R&D expenses increased $1.0 million, or 51%, to $2.9 million during the nine months ended September 30, 2015, compared to $1.9 million during the nine months ended September 30, 2014. The increase in R&D expenses was primarily attributable to increases in product development and clinical study costs. In addition, compensation and other personnel-related expenses increased.

Reimbursement, General and Administrative Expenses

Reimbursement, general and administrative expenses increased $2.0 million, or 27%, to $9.4 million during the nine months ended September 30, 2015, compared to $7.4 million during the nine months ended September 30, 2014. The increase in reimbursement, general and administrative expenses was primarily attributable to an increase in personnel-related expenses as a result of increased headcount on our patient services, contracting, case management, billing and collections, advocacy, reimbursement and administrative teams, as well as higher facility costs for rent, utilities, property taxes and maintenance.

Other Income (Expense), Net

Other income (expense), net, was less than $20,000 during the nine months ended September 30, 2015 and 2014.

Comparison of the Years Ended December 31, 2013 and 2014

The following table sets forth our results of operations for the years ended December 31, 2013 and 2014:

 
  Year Ended December 31,    
 
  2013   2014   % Change
 
  (In thousands, except percentages)

Consolidated Statement of Operations Data:

               

Revenues

  $ 37,176   $ 47,736   28

Cost of goods sold

    9,772     12,715   30

Gross profit

    27,404     35,021   28

Operating expenses:

               

Sales and marketing

    14,298     18,154   27

Research and development

    2,443     2,843   16

Reimbursement, general and administrative

    8,283     10,225   23

Total operating expenses

    25,024     31,222   25

Income (loss) from operations

    2,380     3,799   60

Other income (expense)

    4     (4 ) *

Income (loss) before income taxes

    2,384     3,795   59

Income tax expense (benefit)

    (772 )   1,725   *

Net income (loss)

  $ 3,156   $ 2,070   (34)

*Not meaningful.

77


Table of Contents

Revenues

Revenues increased $10.6 million, or 28%, to $47.7 million during the year ended December 31, 2014, compared to $37.2 million during the year ended December 31, 2013. The growth in revenues was primarily attributable to an increase of approximately $7.7 million, or 22%, in sales of our Flexitouch System, an increase of approximately $2.3 million, in sales of our ACTitouch System, and an increase of approximately $0.6 million, or 52%, in sales of our Entré System. The increase in unit sales of our Flexitouch System was driven by expansion of our sales force and increased physician and patient awareness. The increase in unit sales of our ACTitouch System was due to continued penetration of wound clinics, particularly within Veterans Administration hospitals.

The following table summarizes our revenues by product for the years ended December 31, 2013 and 2014 both in dollars and percentage of total revenues:

 
  Year Ended December 31,    
 
  % Change
 
  2013   2014
 
  (In thousands, except percentages)

Revenues

               

Flexitouch System

  $ 35,996   $ 43,738   22

ACTitouch System

    100     2,357   *

Entré System

    1,080     1,641   52

Total

  $ 37,176   $ 47,736   28

Percentage of total revenues

               

Flexitouch System

    97 %   92 %  

ACTitouch System

     —     5 %  

Entré System

    3 %   3 %  

Total

    100 %   100 %  

*Not
*Not meaningful.

Cost of Goods Sold and Gross Margin

Cost of goods sold increased $2.9 million, or 30%, to $12.7 million during the year ended December 31, 2014, compared to $9.8 million during the year ended December 31, 2013. The increase in cost of goods sold was primarily attributable to an increase in the number of systems sold, partially offset by reduced material and labor costs for our products associated with better sourcing and increased volumes.

Gross margin for the year ended December 31, 2014 decreased slightly to 73.4% compared to 73.7% for the year ended December 31, 2013. The decrease in gross margin was primarily due to increased cost of goods sold associated with our ACTitouch and Entré systems, which carry lower gross margins, partially offset by the increase in sales of our Flexitouch System.

Sales and Marketing Expenses

Sales and marketing expenses increased $3.9 million, or 27%, to $18.2 million during the year ended December 31, 2014, compared to $14.3 million during the year ended December 31, 2013. The increase was primarily attributable to a $2.1 million increase in personnel-related compensation expenses as a result of increased sales and marketing headcount. In addition, other sales and marketing

78


Table of Contents

expenses increased $1.6 million due to increased field sales travel expenses, trade show and conference expenses and patient training costs.

Research and Development Expenses

R&D expenses increased $0.4 million, or 16%, to $2.8 million during the year ended December 31, 2014, compared to $2.4 million during the year ended December 31, 2013. The increase in R&D expenses was primarily attributable to increases in product development and consulting costs of $0.2 million and clinical study costs of $0.4 million, offset by ACTitouch System launch costs of $0.2 million during 2013.

Reimbursement, General and Administrative Expenses

Reimbursement, general and administrative expenses increased $1.9 million, or 23%, to $10.2 million during the year ended December 31, 2014, compared to $8.3 million during the year ended December 31, 2013. The increase in reimbursement, general and administrative expenses was primarily attributable to a $1.3 million increase in personnel-related expenses as a result of increased headcount on our patient services, contracting, case management, billing and collections, advocacy, reimbursement and administrative teams, an increase of $0.3 million in professional, legal, accounting and information technology costs, and higher facility costs of $0.1 million for new office space, utilities, property taxes and maintenance.

Other Income (Expense), Net

Other income (expense), net was less than $5,000 during the years ended December 31, 2014 and 2013.

Quarterly Results of Operations Data

The following table sets forth our unaudited quarterly statements of consolidated operations data and other data for each of the seven most recent quarters in the period ended September 30, 2015. We have prepared the quarterly results of operations data on a consistent basis with the audited consolidated financial statements included elsewhere in this prospectus. In the opinion of management, the quarterly results of operations data reflect all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of this data. The statements of consolidated operations data should be read in conjunction with the consolidated financial statements and related

79


Table of Contents

notes included elsewhere in this prospectus. The results of historical periods are not necessarily indicative of results for a full year or for any future period.

 
  Three Months Ended  
 
  March 31,
2014
  June 30,
2014
  September 30,
2014
  December 31,
2014
  March 31,
2015
  June 30,
2015
  September 30,
2015
 
 
  (In thousands, except percentages; unaudited)
 

Revenues

  $ 6,763   $ 10,965   $ 11,898   $ 18,110   $ 10,121   $ 14,771   $ 16,820  

Cost of goods sold

    2,011     2,963     3,310     4,431     2,972     4,401     4,466  

Gross profit

    4,752     8,002     8,588     13,679     7,149     10,370     12,354  

Gross margin

    70.3 %   73.0 %   72.2 %   75.5 %   70.6 %   70.2 %   73.4 %

Operating expenses:

                                           

Sales and marketing

    3,824     4,134     4,499     5,697     5,169     5,929     6,199  

Research and development

    545     686     700     911     817     1,011     1,094  

Reimbursement, general and administrative

    2,132     2,504     2,783     2,807     2,647     3,202     3,599  

Total operating expenses

    6,501     7,324     7,982     9,415     8,633     10,142     10,892  

Income (loss) from operations

    (1,749 )   678     606     4,264     (1,484 )   228     1,462  

Other income (expense)

    3     5     4     (16 )   12     3     3  

Income (loss) before income taxes

    (1,746 )   683     610     4,248     (1,472 )   231     1,465  

Income tax expense (benefit)

    (663 )   260     232     1,932     (592 )   93     589  

Net income (loss)

  $ (1,083 ) $ 423   $ 378   $ 2,316   $ (880 ) $ 138   $ 876  

Seasonality

Our business may be affected by seasonality. In the first quarter of each year, when most patients have started a new insurance year and have not paid their annual insurance deductibles, we experience substantially reduced demand for our products. We typically experience higher sales in the third and fourth quarters as a result of patients having paid their annual insurance deductibles in full, thereby reducing their out-of-pocket costs for our products, or because patients often spend the remaining balances in their flexible-spending accounts.

Liquidity and Capital Resources

Overview

As of September 30, 2015, we had cash and cash equivalents of $5.7 million and an accumulated deficit of $6.7 million, compared to cash and cash equivalents of $5.4 million and an accumulated deficit of $6.9 million as of December 31, 2014. Our primary sources of capital have been from operating income and private placements of our capital stock. As of September 30, 2015, we had raised net proceeds of $29.5 million from private placements of our capital stock.

80


Table of Contents

Cash Flows

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

 
  Year Ended
December 31,
  Nine Months Ended
September 30,
 
 
  2013   2014   2014   2015  
 
  (In thousands)
 

Net cash (used in) provided by:

                         

Operating activities

  $ (425 ) $ (991 ) $ (2,330 ) $ (166 )

Investing activities

    (364 )   (353 )   (208 )   (438 )

Financing activities

    (2,075 )   221     215     860  

Net (decrease) increase in cash and cash equivalents

  $ (2,864 ) $ (1,123 ) $ (2,323 ) $ 256  

Net Cash Used in Operating Activities

Net cash used in operating activities during the nine months ended September 30, 2015 was $0.2 million, consisting primarily of our net income of $0.1 million, and a decrease of $0.1 million in deferred income taxes asset, a $0.3 million provision for doubtful accounts and a non-cash expense of $0.8 million. The cash used in operations was primarily due to the ongoing commercialization of our products. The non-cash expense items primarily consisted of depreciation and amortization of equipment and leasehold improvements and patents and stock-based compensation. Our net operating assets and liabilities decreased $1.5 million. The decrease in our net operating assets and liabilities was primarily due to increased inventory and decreased accrued compensation and expenses and increased accounts payable, partially offset by increased collections on accounts receivable.

Net cash used in operating activities during the nine months ended September 30, 2014 was $2.3 million, consisting primarily of our net loss of $0.3 million and an increase of $0.2 million in deferred income taxes asset, offset by a non-cash expense of $0.7 million. The cash used in operations was primarily due to the ongoing commercialization of our products. The non-cash expense items primarily consisted of depreciation and amortization of equipment and leasehold improvements and patents and stock-based compensation. Our net operating assets and liabilities increased $2.5 million. The increase in our net operating assets and liabilities was primarily due to increased inventory and other non-current assets and a decrease in our accrued compensation and expenses.

Net cash used in operating activities during the year ended December 31, 2014 was $1.0 million, consisting primarily of our net income of $2.1 million, a decrease of $1.6 million in deferred income taxes asset, a $0.5 million provision for doubtful accounts and a non-cash expense of $0.9 million. The cash used in operations was primarily due to the ongoing commercialization of our products, as well as increased accounts receivable and inventory and decreased accrued compensation, offset by increased accounts payable. The non-cash expense items primarily consisted of depreciation and amortization of equipment and leasehold improvements and patents and stock-based compensation. Our net operating assets and liabilities increased $6.0 million. The increase in our net operating assets and liabilities was primarily due to increased accounts receivable and inventory.

Net cash used in operating activities during the year ended December 31, 2013 was $0.4 million, consisting primarily of our net income of $3.2 million, an increase of $0.9 million in deferred income taxes asset, a $0.3 million provision for doubtful accounts and a non-cash expense of $0.7 million. The cash used in operations was primarily due to the ongoing commercialization of our products, as well as increased accounts receivable and inventory and decreased accrued expenses, offset by increased accounts payable and accrued compensation. The non-cash expense items primarily consisted of depreciation and amortization of equipment and leasehold improvements and patents and stock-based compensation. Our net operating assets and liabilities increased $3.7 million. The increase in our net operating assets and liabilities was primarily due to increased accounts receivable and inventory.

81


Table of Contents

Net Cash Used in Investing Activities

Net cash used in investing activities during the nine months ended September 30, 2015, was $0.4 million, consisting of product tooling and computer and manufacturing equipment. Net cash used in investing activities during the nine months ended September 30, 2014 was $0.2 million, consisting of product tooling and computer and manufacturing equipment.

Net cash used in investing activities during the year ended December 31, 2014, was $0.4 million, consisting of product tooling and computer and manufacturing equipment. Net cash used in investing activities during the year ended December 31, 2013 was $0.4 million, consisting of product tooling and computer and manufacturing equipment.

Net Cash (Used in) Provided by Financing Activities

Historically, we have funded our operations through the issuance of capital stock. Net cash provided by financing activities during the nine months ended September 30, 2015, was $0.9 million, consisting of proceeds from exercise of stock options and warrants, partially offset by minimal repayments of borrowings. Net cash provided by financing activities during the nine months ended September 30, 2014 was $0.2 million, consisting of proceeds from exercise of stock options, partially offset by minimal repayments of borrowings.

Net cash provided by financing activities during the year ended December 31, 2014, was $0.2 million, consisting of proceeds from exercise of stock options, partially offset by minimal repayments of borrowings. Net cash used in financing activities during the year ended December 31, 2013 was $2.1 million, consisting of a $2.0 million milestone payment relating to our ACTitouch System asset purchase and redemption of common stock of $0.1 million.

Credit Line

As of September 30, 2015, we had a credit line with Venture Bank with borrowing availability of $2.0 million, which we refer to as our credit line. As of September 30, 2015, we did not have any outstanding borrowings under our credit line.

Our credit line bears interest based on the prime rate, which was 3.25% as of September 30, 2015, and expires on May 11, 2016. Our credit line is secured by substantially all our assets, including property and equipment, accounts receivable and inventory. Our credit line contains customary conditions to borrowing, events of default and covenants, including covenants that restrict our ability to dispose of assets, merge with or acquire other entities, incur indebtedness and encumbrances. In addition, we complied with certain financial covenants relating to liquidity and leverage ratios until the renewal in May 2015 that released us from our covenant obligations. We were in compliance with those covenants as of December 31, 2013 and 2014.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under the applicable regulations.

82


Table of Contents

Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2014.

 
  Payments Due by Period  
 
  Less Than
1 Year
  2-3
Years
  4-5
Years
  More Than
5 Years
  Total  
 
  (In thousands)
 

Operating lease obligations (1)

  $ 491   $ 960   $ 990   $ 830   $ 3,271  

Future product royalties (2)

    924     446             1,370  

Purchase commitments (3)

    2,788     4,213             7,001  

Total

  $ 4,203   $ 5,619   $ 990   $ 830   $ 11,642  

(1)
We currently lease approximately 52,000 square feet of office and assembly space at our corporate headquarters in Minneapolis, Minnesota under a lease that expires in July 2021.

(2)
We are required to make royalty payments to a third-party for our ACTitouch System through 2023. We are required to make quarterly payments through 2023, with guaranteed payments through the third quarter of 2016, and for the remaining period equal to 6% of our quarterly revenues attributable to our ACTitouch System. In any year that these revenues exceed $40 million, we are required to pay 7% on revenues over $40 million and 6% on revenues $40 million and under.

(3)
Represents purchase orders issued in March 2015 to vendors for inventory expected to be received in 2015 and 2016.

Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

We are exposed to market risk from changes in interest rates, primarily related to our investment activities. The principal objectives of our investment activities are to preserve principal, provide liquidity and maximize income consistent with minimizing risk of material loss. The recorded carrying amounts of cash and cash equivalents approximate fair value due to their short maturities. Our interest income is sensitive to changes in the general level of interest rates in the United States, particularly since our investments are generally short-term in nature. Due to the nature of our short-term investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our portfolio.

Additionally, the interest rates for our credit line have both fixed and variable components. If overall interest rates had increased by 100 basis points during the periods presented, our interest expense would not have been materially affected.

Inflation

Inflationary factors, such as increases in our cost of goods sold, sales and marketing expenses and reimbursement expenses, may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial condition or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain and increase our gross margin, and on our sales and marketing and reimbursement expenses as a percentage of our revenues if the selling prices of our products do not increase as much or more than these increased costs.

Credit Risk

As of December 31, 2013 and 2014 and September 30, 2015, our cash and cash equivalents were maintained with one financial institution in the United states and our current deposits are likely in excess of insured limits. We have reviewed the financial statements of this institution and believe it has

83


Table of Contents

sufficient assets and liquidity to conduct its operations in the ordinary course of business with little or no credit risk to us.

Our accounts receivable primarily relate to revenues from the sale of our products to patients in the United States. For the year ended December 31, 2014 and for the nine months ended September 30, 2015, our accounts receivable were $15.0 million and $14.4 million, respectively. We had accounts receivable from three insurance companies representing approximately 28%, 20% and 5% of accounts receivable as of September 30, 2015 and we had accounts receivable from three insurance companies representing approximately 23%, 16% and 4% as of September 30, 2014. We had accounts receivable from three insurance companies representing approximately 25%, 24% and 5% of accounts receivable as of December 31, 2014 and we had accounts receivable from three insurance companies representing approximately 18%, 33% and 7% as of December 31, 2013.

Foreign Currency Risk

Our business is conducted in U.S. dollars and foreign transactions have been minimal. As we begin building relationships to commercialize our products internationally, our results of operations and cash flows may become increasingly subject to changes in foreign exchange rates.

Critical Accounting Policies and Significant Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements which have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities, revenues and expenses at the date of the financial statements. Generally, we base our estimates on historical experience and on various other assumptions in accordance with GAAP that we believe to be reasonable under the circumstances. Actual results may differ from these estimates and such differences could be material to our financial position and results of operations.

While our significant accounting policies are more fully described in Note 1 to our consolidated financial statements included elsewhere in this prospectus, we believe the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective and complex judgments.

Revenue Recognition

We recognize revenue when persuasive evidence of a sale arrangement exists, delivery of product has occurred through the transfer of title and risks of reward of ownership, the selling price is fixed or determinable and collectability is reasonably assessed.

We distribute our products directly to patients. For any of our products sold to patients covered by private payers, such as commercial insurance companies, we recognize revenues from such sales upon shipment of our products. A product is not shipped until we have received a prescription from a physician for our products and, as applicable, receipt of prior authorization from payers. At shipment, we invoice the payer for their portion of the total product cost and we recognize revenue as a percentage of the payer's invoice based on the polices and payment history of the applicable payer. The payment history of the applicable payer is drawn from our actual payment experience over the last three years. Any differences in payments received as compared to our estimates are recognized in the period for which we actually receive payment for the product. Over time, we adjust the applicable estimates used for each payer to reflect any such differences. We separately invoice the patient for their

84


Table of Contents

payment obligation with respect to the shipped product, such as copayments and deductibles, and recognize revenue upon sending such invoice.

For any of our products sold to Medicare patients, we recognize revenues from such sales upon shipment of our products, which can occur only after we have received a prescription from a physician and all applicable Medicare documentation. We estimate the revenue on each shipment to a Medicare patient as a percentage of the total invoice based on the payment history of each regional administrative contractor. While we have contracted rates with Medicare, to the extent any claims for reimbursement are denied, we will recognize any necessary adjustments in the period for which the adjustment is made.

Accounts Receivable

The majority of our accounts receivable and revenues are from commercial insurance payers and government payers, such as Medicare, Veterans Administration and Medicaid.

Accounts receivable are carried net of allowances for estimated non-receipt of patient co-payment and deductible obligations and allowances for uncollectible accounts. We believe all accounts receivable in excess of the allowance are fully collectible. We do not accrue interest on a majority of the past due accounts receivable. We determine when accounts become past due on a customer by customer basis. If accounts receivables in excess of the provided allowance are determined uncollectible, they are charged to expense in the quarter that determination is made and accounts receivable are written off after all collection efforts have failed. A portion of our claims to Medicare are initially denied, and enter the appeals process, where many are ultimately reviewed by an Administrative Law Judge. After final adjudication of all claims, approximately 90% of the claims submitted are approved (this is on a number of claims, not a dollars claimed, basis). Historically, we successfully appealed 90% of our initial Medicare claims denials. The appeal process can be lengthy, lasting more than a year in most cases. Accordingly, we classify a portion of our Medicare accounts receivable as non-current based on our experience with Medicare.

As an alternative to individual appeals, Medicare may seek to settle a number of outstanding appeals at one time through a settlement conference. On September 3, 2015, we entered into a settlement agreement with the Centers for Medicare and Medicaid Services, or CMS, for 247 claims, representing approximately $1.46 million of original claims based on the Medicare allowable rates, in which we had submitted a request for an Administrative Law Judge hearing in 2013. The settlement entitled us to receive a payment of approximately $0.85 million no later than January 21, 2016. We received this full amount during the fourth quarter of 2015. The settlement will result in a reduction in the fourth quarter of 2015 of $0.82 million in our accounts receivable for shipment of products to patients covered by Medicare. The settlement was part of a pilot program, facilitated by the Office of Medicare Hearings and Appeals, to address a backlog of overdue claims awaiting Administrative Law Judge adjudication. Because the settlement is part of a pilot program, we cannot predict whether we will be able to conclude future settlements with Medicare or achieve settlements on similar terms. Any future settlement of claims for amounts less than the corresponding amounts receivable would result in a write off.

Stock-Based Compensation

We account for stock-based compensation awards at the fair value on the date of grant expensed over the applicable vesting period. The fair value of options on the grant date is estimated using the Black-Scholes option-pricing model. We recognize the fair value of each award as an expense on a straight-line basis over the requisite service period, which is generally the vesting period of the equity grant.

85


Table of Contents

The Black-Scholes option-pricing model requires the input of highly subjective assumptions, including the expected term of the option, the expected volatility of the price of our common stock, the risk-free interest rate and the expected dividend yield. These estimates involve inherent uncertainties and the significant application of management's judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future. We determined weighted-average valuation assumptions as follows:

      Expected term.   We use the "simplified method" to determine the expected term of the stock option.

      Expected volatility.   Our expected volatility is derived using the historical volatility of a public company of similar size and industry because we believe the expected volatility will approximate historical volatility, due to the fact that we have no trading history.

      Risk-free interest rate.   The risk free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option group.

      Expected dividend yield.   We have never declared or paid any cash dividends on our common stock and do not presently plan to pay cash dividends on our common stock in the foreseeable future. Consequently, we use an expected dividend yield of zero.

The following table summarizes the assumptions relating to our stock options for the years ended December 31, 2013 and 2014 and the nine months ended September 30, 2014 and 2015:

 
  Year Ended
December 31,
  Nine Months Ended
September 30,
 
  2013   2014   2014   2015

Expected term

  6 years   6 years   6 years   6 years

Expected volatility

  40%   60%   60%   50%

Risk-free interest rate

  2%   2%   2%   2%

Expected dividend yield

  0%   0%   0%   0%

If in the future we determine that another method is more reasonable, or if another method for calculating these input assumptions is prescribed by authoritative guidance, and, therefore, should be used to estimate volatility or expected life, the fair value calculated for our stock options could change significantly. Higher volatility and longer expected lives result in an increase to stock-based compensation expense determined at the date of grant. Stock-based compensation expense affects our reimbursement, general and administrative expenses.

We estimate our forfeiture rate based on an analysis of our actual forfeitures and will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior and other factors. Quarterly changes in the estimated forfeiture rate can have a significant effect on reported stock-based compensation expense, as the cumulative effect of adjusting the rate for all expense amortization is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the stock-based compensation expense recognized in the consolidated financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the stock-based compensation expense recognized in the consolidated financial statements. The effect of forfeiture adjustments was insignificant for the years ended December 31, 2013 and 2014 and the nine-month

86


Table of Contents

periods ended September 30, 2014 and 2015. We will continue to use significant judgment in evaluating the expected term, volatility and forfeiture rate related to our stock-based compensation.

The fair value of the common stock underlying our equity compensation awards was historically determined by our board of directors, with input from management and third-party valuations on an annual basis. We believe that our board of directors has the relevant experience and expertise to determine the fair value of our common stock. However, the fair value of our common stock may vary significantly in the future and from the estimates previously made. Given the absence of a public trading market for our common stock, our board of directors exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our common stock using methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants, or AICPA, Audit and Accounting Practice Aid Series: Valuation of Privately Held Company Equity Securities Issued as Compensation , known as the AICPA Accounting and Valuation Guide. The following factors, among others, were considered:

      our results of operations, history of losses and other financial metrics;

      our capital resources and financial condition;

      the contemporaneous valuations of our common stock by an unrelated third-party valuation firm;

      the prices of our convertible redeemable preferred stock sold to outside investors in arms-length transactions;

      the rights, preferences and privileges of our preferred stock relative to those of our common stock;

      the rights of freestanding warrants and other similar instruments related to our securities that are redeemable;

      the hiring of key personnel;

      the introduction of new products;

      the fact that the common stock underlying the option grants involves illiquid securities in a private company;

      the risks inherent in the development and expansion of our products and services; and

      the likelihood of achieving a liquidity event, such as an initial public offering or sale of our company given prevailing market conditions.

In valuing our common stock, since January 1, 2014, our board of directors determined the equity value of our business using the market approach valuation method and the income approach valuation method to determine the enterprise value. For 2014, our board of directors exclusively used the market approach valuation method. For 2015, these two approaches were initially weighted equally. During 2015, we received a summary valuation from the lead underwriters for this offering. In the second half of 2015 we reviewed our fair value determinations for 2015, effectively modifying our valuation approach for 2015 to include this summary valuation as a third factor in determining fair value, along with the other approaches previously considered. Our board of directors then considered the factors set forth above in reaching its determination of the fair value.

87


Table of Contents

The market approach consists of both a comparable publicly traded company methodology and an M&A transaction methodology to determine our enterprise value. The comparable publicly traded company methodology analyzes publicly traded companies similar in industry and/or business model to our company. This methodology uses these guideline companies to develop relevant market multiples and ratios, using metrics such as revenue, earnings before interest and taxes (EBIT), earnings before interest, taxes, depreciation and amortization (EBITDA), net income and/or tangible book value. These multiples and values are then applied to our corresponding financial metrics. Since no two companies are perfectly comparable, premiums or discounts may be applied to the subject company's metrics if its position in its industry is significantly different from the position of the guideline companies, or if its intangible attributes are significantly different. Our peer group of publicly traded companies used for determination of the market trading multiples consists of six companies for 2015 and five companies for 2014 that focus primarily on providing lymphedema or wound care treatment solutions or that are comparable based on our business model. There are, however, significant size and risk differences between our selected peer group of guideline public companies and us. The M&A transaction methodology uses actual prices paid in merger and acquisition transactions for companies similar to our company. Exit multiples of total purchase price paid to revenues, earnings before interest and taxes (EBIT), earnings before interest, taxes, depreciation and amortization (EBITDA), net income and/or book value may be developed for each comparable transaction, if the data is available. These multiples are then applied to our corresponding latest 12-month and projected financial metrics. The transactions used for determination of the multiples consisted of seven transactions for 2015 and seven transactions for 2014. The transactions consisted of acquired companies that were similar to our company in terms of industry, size and/or developmental stage and further refined that search to transactions in which the target company competed in an industry or supplied a service that was similar to that of our company.

The income approach determines our enterprise value on the basis of the estimated present value of our projected future cash flows and a residual value based on an exit or steady state terminal multiple, which represents the future cash flows of our company beyond the discrete projection period. The estimates for future cash flows and the residual value are considered highly complex and subjective. These future cash flows and residual are discounted to their present values using a discount rate derived from an analysis of the cost of capital of comparable publicly traded companies in our industry or similar lines of business as of each valuation date and this discount rate is adjusted to reflect the risks inherent in our cash flows. The cost of capital is calculated based on venture capital rates of return for our company's stage of development and risk profile. A venture capital rate of return of 25.0% is consistent with required returns identified in the AICPA Accounting and Valuation Guide for companies at a similar stage. Once calculated, the results of the income approach were relied upon to determine an estimated enterprise value.

Following the closing of this offering, our board of directors will determine the fair value of our common stock based on the closing market price on The NASDAQ Global Market on the date of grant.

Recent Accounting Pronouncements

Section 107 of the JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an "emerging growth company" can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption and, as a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public

88


Table of Contents

companies. Section 107 of the JOBS Act provides that we can elect to opt out of the extended transition period at any time, which election is irrevocable.

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers . The new section will replace Section 605, Revenue Recognition , and creates modifications to various other revenue accounting standards for specialized transactions and industries. The section is intended to conform revenue accounting principles with a concurrently issued International Financial Reporting Standards to reconcile previously differing treatment between U.S. practices and those of the rest of the world and to enhance disclosures related to disaggregated revenue information. The updated guidance is effective for annual reporting periods beginning on or after December 15, 2017, and interim periods within those annual periods. We will adopt the new provisions of this accounting standard at the beginning of fiscal year 2018, because early adoption is not allowed. We will further study the implications of this statement to evaluate the expected impact on our consolidated financial statements.

JOBS Act

As an "emerging growth company" under the JOBS Act, we can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption and, as a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies. Section 107 of the JOBS Act provides that we can elect to opt out of the extended transition period at any time, which election is irrevocable.

We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements under the JOBS Act. Subject to certain conditions, as an emerging growth company, we intend to rely on certain of these exemptions, including without limitation (i) reduced financial statement reporting periods, (ii) providing an auditor's attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 and (iii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an emerging growth company until the earliest of: (a) the last day of the fiscal year in which we have total annual gross revenues of $1 billion or more; (b) the last day of the fiscal year following the fifth anniversary of the date of the completion of this offering; (c) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; and (d) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

89


Table of Contents


BUSINESS

Overview

We are a medical technology company that develops and provides innovative medical devices for the treatment of chronic diseases at home. We focus on advancing the standard of care in treating chronic diseases in the home setting to improve patient outcomes and quality of life and help control rising healthcare expenditures. We possess a unique, scalable platform to deliver at-home healthcare solutions throughout the United States. This evolving care delivery model is recognized by policy-makers and payers as a key for controlling rising healthcare expenditures. Our initial area of therapeutic focus is vascular disease, with a goal of advancing the standard of care in treating lymphedema and chronic venous insufficiency. Our proprietary Flexitouch System is an at-home solution for lymphedema patients. Our proprietary ACTitouch System is a home-based solution for chronic venous insufficiency patients that may be worn throughout the day. Our products deliver cost-effective, clinically proven, long-term treatment of chronic diseases. We employ a direct-to-patient and -provider model, through which we obtain patient referrals from clinicians, manage insurance claims on behalf of our patients and their clinicians, deliver our solutions to patients and train them on the proper use of our solutions in their homes. This model allows us to directly approach patients and clinicians, whereby we disintermediate the traditional durable medical equipment channel and capture both the manufacturer and distributor margins. For the year ended December 31, 2014, we generated revenues of $47.7 million and had net income of $2.1 million. Our revenues increased 28% during the year ended December 31, 2014 compared to the year ended December 31, 2013. For the nine months ended September 30, 2015, we generated revenues of $41.7 million and had net income of $0.1 million. Our revenues increased 41% during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014.

Lymphedema is a type of chronic swelling, or edema, which occurs in the arms, legs, neck, trunk or other body parts when the lymphatic vessels are unable to adequately drain protein-rich lymph fluid from these regions. Lymphedema is progressive in nature, worsens over time, and has no known cure. Chronic venous insufficiency is a condition that occurs when the venous wall and/or valves in the veins are not working effectively, making it difficult for blood to return to the heart from the affected region. This pooling or collecting of blood in the veins can result in painful, slow-healing wounds on the lower leg, called venous leg ulcers. Patients with lymphedema or chronic venous insufficiency are typically treated by vascular surgeons, vascular medicine physicians, wound physicians, wound nurses and lymphedema therapists.

Lymphedema and chronic venous insufficiency are costly and lifelong conditions with debilitating physical and psychological impacts on patients. We estimate the addressable market opportunity for our solutions treating lymphedema and chronic venous insufficiency in the United States is approximately $4.1 billion. We believe that between three to five million people in the United States are living with lymphedema. Based on an analysis of claims data commissioned by us, we estimate approximately 700,000 patients were diagnosed with lymphedema during the 12 months ended June 30, 2014. We estimate that the addressable market opportunity for our Flexitouch System is approximately $3.5 billion in the United States, which is based on the number of patients diagnosed with lymphedema and our average selling price per device. We believe that chronic venous insufficiency afflicts approximately 8% of the U.S. population, and this percentage may rise due to the growing prevalence of obesity and cancer, as well as an aging population. Based on an analysis of claims data commissioned by us, we estimate there were over 1.5 million patients diagnosed with venous leg ulcers in the United States during the 12 months ended June 30, 2014. We estimate that our immediately addressable patient population consists of the 30% to 40% of these patients, or approximately 525,000 patients, for whom we believe reimbursement is available because their venous leg ulcers have not resolved after six months of treatment. We estimate the addressable market opportunity for our

90


Table of Contents

ACTitouch System is approximately $580 million in the United States, which is based on the number of patients diagnosed with unresolved venous leg ulcers and our average selling price per device.

A traditional treatment for lymphedema is complete decongestive therapy, consisting of manual lymphatic drainage, which is a specialized application of gentle pressure to the skin applied by a therapist that encourages drainage of lymph fluid, as well as decongestive exercises, skin care and compression with multilayered bandages, compression garments or pumps. Typically, this therapy begins with clinic visits three to five times per week for four to eight weeks, which is costly, inconvenient and time consuming. At that point, clinical improvement plateaus or reimbursement for the therapy ends and patients transition to self-administered home-based therapy. Manual lymphatic drainage is difficult for patients to self-administer due to limited range of motion and treatment techniques that are difficult to replicate, and basic pump-based compression is uncomfortable and has not demonstrated the benefits of our advanced pneumatic pump. To address these limitations, our advanced at-home Flexitouch System mimics the clinic-based manual lymphatic drainage therapy through an easy-to-use, one-hour daily, self-applied system. Peer-reviewed, published studies have shown that our Flexitouch System provides improved quality of life and clinical outcomes and delivers significant cost-savings to payers and patients. The predecessor version to our Flexitouch System received 510(k) clearance from the FDA in July 2002 and our current Flexitouch System received 510(k) clearance from the FDA in October 2006. Our Flexitouch System generated $43.7 million, or 92%, of our revenues in 2014.

The standard of care treatment for chronic venous insufficiency is compression therapy. As the disease progresses, patients may develop a venous leg ulcer, which is commonly treated using multilayered bandages to minimize swelling and enhance blood flow. A clinician applies these non-removable bandages to patients at a precise pressure and patients wear the bandages between weekly visits to the wound clinic during which the bandages are removed and reapplied. Treatment typically occurs for several months and impairs patient quality of life by limiting bathing, range of motion and other activities. Treatment efficacy is inconsistent because bandages can lose their precise pressure between treatments. Our ACTitouch System provides precise, consistent and wearable compression that a patient may apply, remove and reapply at home. This system was developed to provide maximum convenience for patients by providing them with the freedom to remain active while simultaneously receiving the benefits of sustained and intermittent pneumatic compression, which we refer to as dual-compression. In a clinical study, our ACTitouch System was shown to have comparable efficacy in healing venous leg ulcers and achieved higher patient quality of life scores, as compared to multilayered bandages. Our ACTitouch System received 510(k) clearance from the FDA in June 2013 and generated $2.4 million, or 5%, of our revenues in 2014.

To support the growth of our business, we invest heavily in our commercial infrastructure, consisting of our direct sales force, reimbursement capabilities and clinical expertise. We are a national, accredited provider of home medical equipment services approved for coverage by private payers, Medicare, the Veterans Administration and certain Medicaid programs in the United States. We market our products using a direct-to-patient and -provider model. Our direct sales force is focused on increasing clinician awareness of our solutions, and has grown from three representatives in March 2005 to over 70 people as of September 30, 2015. We also utilize over 300 licensed, independent healthcare practitioners as home trainers who educate patients on the proper use of our solutions. Our experienced reimbursement operations group of over 50 people focuses on verifying case-by-case benefits, obtaining prior authorization, billing and collecting payments from payers and providing customer support services. Our payer relationships group of over 20 people is responsible for developing relationships with payer decision-makers to educate them on our product efficacy, develop overall payer coverage policies and reimbursement criteria, manage Medicare patient claims and contracts with payers and serve as an advocacy liaison between patients, clinicians and payers

91


Table of Contents

throughout the appeals process. Our clinical team, consisting of a scientific advisory board, in-house therapists and nurses, and a medical director, serves as a resource to clinicians and patients and guides our development of clinical evidence in support of our products. We believe these investments are critical to driving patient adoption of our technologies, and together with our commercial infrastructure represents a significant competitive advantage. Health insurance coverage for our Flexitouch System and our ACTitouch System is in place with private payers, Medicare, the Veterans Administration and certain Medicaid programs. Based on our estimates, we have contracts as an in-network provider covering over 230 million lives in the United States. Over 44,000 patients have been treated with our Flexitouch System since its launch in 2002, and over 9,000 Flexitouch Systems were shipped in 2014. More than 1,800 patients were treated with our ACTitouch System during its first full year of commercialization in 2014.

Overview of the Lymphedema and Chronic Venous Insufficiency Markets

Lymphedema

The lymphatic system performs a fundamental role in maintaining health through balancing fluids and regulating immunity by removing harmful bacteria, viruses and waste products. Lymphatic structures are situated throughout the body and are comprised of a series of vessels, lymph nodes and lymphoid organs that act as a drainage system by collecting protein rich lymph fluid and sending it to the venous system. Lymph nodes are located in several areas of the body with superficial and deep lymph nodes under each arm, at the hip, in the groin, above the collar bones in the neck, in the abdomen, tonsils and spleen, and in bone marrow.

GRAPHIC

Lymphedema refers to a type of chronic swelling, or edema, which may occur in the arms, legs, neck, trunk or other body parts and causes severe and debilitating symptoms, including decreased mobility, skin breakdown, pain, increased risk of serious infection and marked psychosocial impairment, resulting in significantly negative implications for a patient's health and quality of life. The disease occurs when the lymphatic vessels are unable to adequately drain protein-rich lymph fluid from the arms, legs or other regions of the body. Any condition or procedure that damages the lymph nodes or

92


Table of Contents

lymphatic vessels, such as surgery or treatment for breast and other cancers, obesity, infection, scar tissue formation, trauma or chronic venous insufficiency can cause lymphedema. The disease may also be caused from congenital malformation of the lymphatic system. Lymphedema is progressive in nature, worsens over time, and has no known cure.

Misdiagnosis of lymphedema is fairly common, as many conditions that cause swelling are not related to lymphedema. Correct diagnosis of lymphedema may require evaluation by a physician or other healthcare provider with knowledge of lymphedema who may choose to perform diagnostic testing. Diagnostic tests for lymphedema include history and physical examination, soft tissue and vascular imaging, lymph node imaging, volume measurements, changes in electrical conductance, changes in biomechanical properties, genetic testing, and blood tests for other conditions that have similar symptoms to lymphedema. The International Society of Lymphology categorizes the progression of lymphedema from Stage 0, the least severe stage, to Stage 3, the most severe stage.

Chronic Venous Insufficiency

Chronic venous insufficiency occurs when the venous wall and/or valves in the veins are not working effectively, making it difficult for blood to return to the heart. The disease is prevalent among patients who are obese or pregnant and may also be caused by high blood pressure, trauma, lack of exercise, smoking, deep vein thrombosis and inflammation of the vein walls. As the valves deteriorate, blood leaks or flows backward, leading to increased pressure in veins, stretched and dilated vessels and pooling of blood in the veins. As blood accumulates, swelling occurs, leading to progressive tissue breakdown and venous leg ulcers. Ulcers develop in areas where blood collects as swelling interferes with the movement of oxygen and nutrients through tissues, and if left untreated, these ulcers can quickly become infected or even gangrenous. Prolonged or untreated chronic venous insufficiency may damage the lymphatic system. Physicians diagnose chronic venous insufficiency based on appearance, symptoms and imaging techniques and classify it based upon a scale endorsed by the Society for Vascular Surgery.

Market Opportunity

Lymphedema and chronic venous insufficiency are costly and lifelong conditions with debilitating physical and psychological impacts on patients. We estimate the addressable market opportunity for our solutions treating lymphedema and chronic venous insufficiency in the United States is approximately $4.1 billion. We believe that between three to five million people in the United States are living with lymphedema. Based on analysis of claims data commissioned by us, we estimate approximately 700,000 patients were diagnosed with lymphedema during the 12 months ended June 30, 2014. We estimate that the addressable market opportunity for our Flexitouch System is approximately $3.5 billion in the United States, which is based on the number of patients diagnosed with lymphedema and our average selling price per device. We believe that chronic venous insufficiency afflicts approximately 8% of the U.S. population, and this percentage may rise due to the growing prevalence of obesity and cancer, as well as an aging population. Based on an analysis of claims data commissioned by us, we estimate there were over 1.5 million patients diagnosed with venous leg ulcers in the United States during the 12 months ended June 30, 2014. We estimate that our immediately addressable patient population consists of the 30% to 40% of these patients, or approximately 525,000 patients, for whom we believe device reimbursement is available because their venous leg ulcers have not resolved after six months of treatment. We estimate the addressable market opportunity for our ACTitouch System is approximately $580 million in the United States, which is based on the number of patients diagnosed with unresolved leg venous ulcers and our average selling price per device.

93


Table of Contents

Current Treatment and Limitations

A traditional treatment for lymphedema is complete decongestive therapy consisting of manual lymphatic drainage, which is a specialized application of gentle pressure to the skin applied by a therapist that encourages drainage of lymph fluid, as well as decongestive exercises, skin care and compression with multilayered bandages, compression garments or pumps. Typically, this therapy begins with clinic visits three to five times per week for four to eight weeks, which is costly and time consuming. At that point, clinical improvement plateaus or reimbursement for the therapy ends and patients transition to self-administered home-based care. Manual lymphatic drainage is difficult for patients to self-administer due to limited range of motion and treatment techniques that are difficult to replicate, and basic pump-based compression is uncomfortable and has not demonstrated the benefits of our advanced pneumatic pump. To address these limitations, our at-home Flexitouch System mimics the clinic-based manual lymphatic drainage therapy through an advanced, easy-to-use, self-applied system. Peer-reviewed, published studies have shown that our Flexitouch System provides improved quality of life and clinical outcomes and delivers significant cost-savings to payers and patients.

The standard of care treatment for chronic venous insufficiency is compression therapy. As the disease progresses, patients may develop a venous leg ulcer, which is commonly treated using multilayered bandages to minimize swelling and enhance blood flow. A clinician applies these non-removable bandages to patients at a precise pressure and patients wear the bandages between weekly visits to the wound clinic during which they are then removed and reapplied. Treatment typically occurs for several months and impairs patient quality of life by limiting bathing, range of motion and other activities. Treatment efficacy is inconsistent because bandages can lose their precise pressure between treatments. Patients also use our ACTitouch System to administer intermittent pneumatic compression therapy to assist with the circulation of blood through affected veins. Our ACTitouch System provides precise, sustained and wearable compression that a patient may apply, remove and reapply at home, allowing patients to bathe, improve sleep and increase mobility. In a clinical study, our ACTitouch System was shown to have comparable efficacy in healing venous leg ulcers and achieved higher patient quality of life scores as compared to multilayered bandages.

Our Competitive Strengths

We focus on advancing the standard of care in treating chronic diseases at home to improve patient outcomes and quality of life and help control rising healthcare expenditures. Our executive team collectively has over 100 years of experience in healthcare, developing and commercializing innovative medical technology products. We believe that our commercialization platform and experience, combined with the following competitive strengths, should allow us to continue to grow our revenues and increase our presence in the market:

94


Table of Contents

Our Strategy

Our goal is to become a leader in the at-home treatment of chronic diseases. We intend to leverage our established platform to be a global provider of clinically proven, easy-to-use and cost-effective solutions. The key elements of our strategy include:

95


Table of Contents

Our Products

We market our Flexitouch, ACTitouch and Entré systems, as at-home therapies for the treatment of lymphedema and chronic venous insufficiency. These products have received 510(k) clearance from the FDA to be marketed in the United States. We believe our products have unique features and benefits that address the shortcomings of traditional treatments, are more cost-effective and enable more consistent and effective therapy, leading to improved patient quality of life.

96


Table of Contents

Flexitouch System

We introduced a predecessor to our Flexitouch System in the United States in 2003 and our Flexitouch System in 2006. Our Flexitouch System is a fully-automated, programmable, advanced pneumatic compression device designed for treatment of lymphedema in the home setting. Our Flexitouch System has received 510(k) clearance for the treatment of lymphedema, certain types of edema, venous insufficiencies and certain types of leg ulcers. The mechanism of action of our patented Flexitouch System is designed to mimic manual lymphatic drainage therapy, the current standard of care in patient treatment. By automating this technique, we believe our system offers an effective, cost-efficient, convenient and accessible treatment for patients.

GRAPHIC

Our Flexitouch System consists of an electronic controller unit that offers 15 treatment settings and multiple contoured garment configurations for the trunk and the arm or leg. Our Flexitouch System offers flexibility for treating upper and lower extremities, as well as the trunk and chest. The electronic controller is a pneumatic compressor with four connector outlets. Each connector has eight outflow ports into which the garment hoses are connected. Our unique garments contain 32 air chambers, are made of a soft, pliable fabric and are designed with hook-and-loop fasteners to fit snugly around affected areas for maximum comfort and optimum pressure delivery. The garments come in a variety of sizes that can be easily adjusted to patients of all sizes. When our system is activated, air passes through the hoses delivering sequential inflation and deflation to the garments, applying gentle pressure to the skin. The inflation sequence is designed to stimulate the lymphatic system moving lymph fluid from the impaired areas towards healthy regions of the body to be processed.

GRAPHIC

The electronic controller unit adjusts the amount of pressure and the timing of the pressure and release cycles. This unit is lightweight and easily portable, providing maximum convenience for at-home treatment. A typical therapy session using our Flexitouch System lasts one hour for upper extremity

97


Table of Contents

treatment and full leg and core treatment and 45 minutes for lower extremity treatment, with additional treatment options available if prescribed by a clinician.


GRAPHIC
 
GRAPHIC
 
GRAPHIC

ACTitouch System

We introduced our ACTitouch System in the United States in September 2013. Our wearable ACTitouch System combines intermittent pneumatic compression with sustained gradient compression to the lower leg, ankle and foot to improve and accelerate healing, as compared to the current standard of care, which involves sustained compression applied with compression wraps.

GRAPHIC

Our ACTitouch System consists of a compression sleeve, a control unit, an undersock and a power adapter/charger. The compression sleeve has four chambers that inflate to apply pressure to the leg, is designed with hook and loop fasteners to accommodate a wide range of leg shapes and sizes and may

98


Table of Contents

be worn under clothing and with most shoes. The control unit is concealed within the compression sleeve and monitors and adjusts the air pressure to ensure the correct level of compression is applied to the leg. It offers a therapy tracker that monitors and displays average daily use to reinforce therapy goals. The undersock is designed to draw perspiration and moisture away from the skin and has padding in key areas to provide additional comfort. The system comes with a power adapter/charger that is used to power the device directly during intermittent pneumatic compression mode or to charge the battery for ambulatory use. The battery life allows the patient to wear the system all day without recharging.

Our ACTitouch System operates in sustained compression mode or intermittent pneumatic compression mode. In sustained compression mode, the system provides sustained, graduated compression to the leg at preset pressures, and the compact, lightweight design gives patients the freedom to stay active while experiencing the benefits of a more comfortable compression therapy. The system ensures consistent compression regardless of variations in sleeve application, and throughout the day monitors and adjusts pressure automatically every 30 minutes in response to changes in leg circumference. In intermittent pneumatic compression mode, the system performs cyclic inflation/deflation sequences to preset gradient pressures. Standard daily treatment involves two hours of intermittent compression while seated or reclining and 10 hours of sustained compression while active. The system is worn throughout the day and has the advantage of being removable for bathing or showering and when driving or operating machinery. The patient removes the system for sleep, allowing the battery to be recharged overnight.

Entré System

We introduced our Entré System in the United States in February 2013 to offer a lightweight, portable pneumatic compression solution for patients who need a basic pump or who do not yet qualify for insurance coverage of an advanced compression device such as our Flexitouch System. Our Entré System is a basic pneumatic compression device used for the at-home treatment of venous disorders including lymphedema and chronic venous insufficiency, including venous leg ulcers. Our Entré System is a pump with garments covering the arm or leg with eight chambers that inflate in sequence and remain inflated for a preset time period. All chambers deflate at once. Our Entré System moves fluid from fingers or toes toward areas closer to the trunk. The system can be programmed to a variety of pressures delivering a prescribed treatment customized to meet the patient's needs.

Clinical Results and Studies

Overview

We have developed a significant body of clinical data supporting the safety and effectiveness of our products. We have sponsored 13 clinical studies in which a total of 682 patients were treated with our products and followed to assess safety, and 286 patients were followed for an extended period of six to 22 months to assess long-term efficacy.

A key part of our success is our ability to demonstrate the effectiveness of our products through funding studies that generate clinical and economic outcome data supporting our products. We intend to continue to invest in additional studies to support peer-reviewed, published articles that evidence the clinical and economic benefits of our solutions as compared to traditional treatments.

Impact on Clinical Outcomes and Healthcare Costs with Use of our Flexitouch System

A retrospective study published by the American Medical Association in JAMA Dermatology demonstrated significant improvement in key clinical endpoints and immediate cost reductions for individuals with lymphedema following receipt of our Flexitouch System. The study was conducted in

99


Table of Contents

the United States and included 718 patients with a lymphedema diagnosis who had continuous insurance coverage during the 12 months prior to and the 12 months after receiving our Flexitouch System. Patients were excluded from the study if they had a claim for a pneumatic compression device during the prior 12 month period. The patients in the study included 374 patients with cancer-related lymphedema and 344 patients with non-cancer-related lymphedema.

The study evaluated a broad, clinically relevant set of healthcare use outcomes for each patient for the 12 months before and the 12 months after receipt of our Flexitouch System, including cellulitis infections, inpatient hospitalizations, manual therapy and outpatient hospital visits. Receipt of our Flexitouch System was associated with a significant decline in the rate of cellulitis diagnosis in the cancer-related lymphedema patients of 79% (from 21.1% to 4.5%; p<.001) and in the non-cancer-related lymphedema patients of 75% (from 28.8% to 7.3%; p<.001). The inpatient hospitalization rate declined 22% in the cancer-related group (from 2.7% to 2.1%; p=.63) and declined 54% in the non-cancer-related group (from 7.0% to 3.2%; p=.02). The manual therapy rate decreased 30% in the cancer-related lymphedema patients (from 35.6% to 24.9%; p=.001) and decreased 34% in the non-cancer-related lymphedema patients (from 32.3% to 21.2%; p=.001). In addition, outpatient hospital visits declined 29% in the cancer-related patients (from 58.6% to 41.4%; p<.001) and 40% in the non-cancer-related patients (from 52.6% to 31.4%; p<.001).

The study also reviewed lymphedema-related healthcare costs for each patient in the study for the 12 months before and the 12 months after receipt of our Flexitouch System. Among the cancer-related lymphedema patients, total costs per patient, excluding durable medical equipment costs, were reduced by 37%, from $2,597 to $1,642 (p=.002) following receipt of our Flexitouch System. The greatest contributor to this change was a 54% reduction in outpatient hospital costs from $1,517 to $694 (p<.001). Total costs per non-cancer-related lymphedema patients, excluding durable medical equipment costs, were reduced by 36% from $2,937 to $1,883 (p=.007). Outpatient hospital costs for the non-cancer patients declined by 65% from $1,726 to $606 (p<.001).

Impact on Health Outcomes and Costs with Use of Pneumatic Compression Devices

A retrospective study published in the Public Library of Science Journal demonstrated a significant improvement in health outcomes for patients who were prescribed a pneumatic compression device, as well as a substantial decrease in the patient's and payer's total healthcare costs. The study was the first to evaluate overall healthcare costs of lymphedema patients and the impact of available therapeutic intervention in a large, representative national population. The study analyzed U.S. claims data from a large national insurer for 2007 through 2013 to assess the impact of using a pneumatic compression device. The study included 1,065 patients with cancer-related lymphedema. The claims data used in the study demonstrated that the prevalence of lymphedema diagnoses among cancer survivors increased from 0.95% in 2007 to 1.24% in 2013. The study population included lymphedema patients who had a claim for a simple or advanced pneumatic compression device during the time period of January 1, 2008 through November 31, 2012. Each patient in the study had at least 12 months of continuous medical and pharmacy insurance eligibility prior to and after receiving the pneumatic compression device. The below diagram depicts the selection strategy for patients included in the analysis:

GRAPHIC

100


Table of Contents

The objective of the study was to analyze the impact of using a pneumatic compression device on the health and cost outcomes of patients with cancer-related lymphedema. The study did not differentiate between the health outcomes and costs of patients who received our Flexitouch System and those who received a different pneumatic compression device. An analysis of health outcomes and costs was conducted by comparing a pre-specified set of health outcomes and costs for the 12 months before and after receipt of a pneumatic compression device. The health outcomes measured before and after receipt of a pneumatic compression device included the number of hospitalizations, the proportion of patients with hospitalizations, the proportion of patients with outpatient hospital visits, the proportion of patients with cellulitis and the proportion of patients using physical therapy. The cost outcomes measured before and after receipt of a pneumatic compression device included costs associated with the device, home health, emergency services, inpatient services, outpatient services, outpatient physical therapy, other outpatient services, office, lab, other service location and pharmacy related.

With respect to health outcomes, use of a pneumatic compression device was associated with a significant decline in the rate of hospitalizations (45% to 32%, p<0.0001). Use of a pneumatic compression device was also associated with a reduction in the rate of outpatient hospital visits (95% to 90%, p<0.0001). The percentage of patients with a lymphedema-related clinic visit decreased from 47% in the baseline period to 32% in the post-pneumatic compression device period (p<0.0001). The proportion of patients with cellulitis also declined in the post-pneumatic compression device period (28% to 22%, p<0.0003). Finally, the proportion of patients using physical therapy declined (50% to 41%, p<0.0001), primarily driven by a reduction in the use of lymphedema-related physical therapy (29% to 21%, <0.0001).

With respect to overall healthcare costs of treatment, use of a pneumatic compression device was associated with a decrease in total costs of $11,833 in the 12 months after device prescription. The largest cost decreases were achieved by a diminution of office visit costs by 36% (p<0.0001), and outpatient hospital costs by 30% (p<0.0001). Reductions were observed in lymphedema-related costs for outpatient physical therapy ($276 to $135, p<0.0001) and other outpatient services ($879 to $563, p<0.0001).

A summary of the findings of the study is presented below:

GRAPHIC

Flexitouch System Impact on Limb Volume and Patient-Reported Outcomes

A prospective study published in the European Journal of Vascular and Endovascular Surgery demonstrated that use of our Flexitouch System is associated with consistent lower extremity limb volume and pain reduction while achieving improvement in patient health outcomes. The study was conducted in the United States and collected data from a patient registry required by a third-party payer for 196 patients with lower extremity lymphedema who were prescribed our Flexitouch System from January 2009 to May 2012. The primary objective of the study was to examine the effectiveness of our Flexitouch System in reducing lower extremity limb volume, with a secondary objective of evaluating clinician-assessed and patient-reported outcomes.

101


Table of Contents

Use of our Flexitouch System was associated with a reduction in limb volume, with 88% of patients experiencing a reduction in limb volume and with 35% enjoying a reduction in limb volume of greater than 10%. Twelve percent of patients experienced an increase in limb volume.

Clinician assessment indicated that the majority of patients experienced improvement in the condition of their skin. In 168, or 86%, of the patients, a reduction in skin hardening or fibrosis was reported based on manual assessment of the skin. Based on clinical observation of function, all but three of these patients demonstrated an increased ability to perform activities of daily living. Additionally, 149, or 77%, of the patients demonstrated improved range of motion.

Patients reported a significant increase in their ability to control lymphedema through treatment with our Flexitouch System, with an increase in function and a reduction in pain. Of the 98 patients who responded, 66% reported being "very satisfied" with the treatment by our Flexitouch System and 29, or 30%, of patients reported being "satisfied" with the treatment by our Flexitouch System.

Comparison of our Flexitouch System with Pneumatic Compression Devices

A prospective, randomized controlled study published in Supportive Care in Cancer demonstrated that our Flexitouch System provides better clinical outcomes as compared to those achieved with a basic pneumatic compression device for home-based treatment of breast cancer-related lymphedema. The study was conducted in the United States and involved 36 patients. This number of participants in the study is considered to be a small sample size and a limitation of the study. The patients were randomized to our Flexitouch System or a basic pneumatic compression device used for home treatment of one-hour per day for 12 weeks. The basic pneumatic compression device used in the study was a Bio Compression 2004 Sequential Circulator pneumatic compression device. The material difference between our Flexitouch System and the Bio Compression 2004 Sequential Circulator is the ability of our Flexitouch System to apply calibrated gradient pressure. The Bio Compression 2004 Sequential Circulator is considered a segmented device without calibrated gradient pressure, which is billed under HCPCS Code E0651. Our Flexitouch System is considered a segmented device with calibrated gradient pressure, which is billed under HCPCS Code E0652. A segmented device with calibrated gradient pressure for purposes of HCPCS Codes is distinguished by a manual control on at least three outflow ports which can deliver an individually determined pressure to each segmental unit.

The primary objective of the study was to determine whether our Flexitouch System provides better outcomes, as measured by arm edema and tissue water reductions, compared to a basic pneumatic compression device in patients with arm lymphedema. The study does not reflect a comparison of our Flexitouch System to a product that is billed under the same HCPCS Code as our Flexitouch System.

Thirty-six patients with unilateral upper extremity lymphedema with at least 5% arm edema volume at the time of enrollment completed treatments over the 12-week period, with 26 patients being evaluated for edema volume change and 28 patients being evaluated for changes in arm tissue water content. Arm edema volumes were determined from arm girth measurements and suitable model calculations, and tissue water was determined based on measurements of the arm tissue. The patients were randomized into two groups of 18 patients each, with one group receiving treatment with our Flexitouch System and the other group receiving treatment using a basic pneumatic compression device. The group using our Flexitouch System experienced an average of 29% reduction in edema compared to a 16% increase in the group using a basic pneumatic compression device.

Study of Patient-Reported Satisfaction with Use of our Flexitouch System

A retrospective study published in the Oncology Nursing Forum demonstrated that patients using our Flexitouch System were "satisfied" with the device and perceived it to be beneficial in managing their lymphedema. The study was conducted in the United States and involved 155 patients with

102


Table of Contents

lymphedema. The primary objective of the study was to compare treatment protocol adherence, satisfaction and perceived changes in emotional and functional status between patients with cancer-related lymphedema and non-cancer-related lymphedema using our Flexitouch System.

Ninety percent of the 155 study patients reported being "satisfied" with our Flexitouch System. Of these patients, more than 65% reported being "extremely satisfied." The study was conducted by having patients complete a pre- and post-therapy questionnaire. Of the 286 individuals with lymphedema receiving a pre-therapy questionnaire with our Flexitouch System, 155 patients completed information in the pre- and post-therapy questionnaires required for the analyses. Of these 155 patients, 93 had cancer-related lymphedema and 62 had non-cancer-related lymphedema. Patients who acknowledged using the device as prescribed reported statistically higher levels of satisfaction (p=0.008), a pattern repeated in both lymphedema groups.

Further, 95% of patients reported a positive limb volume outcome, which was defined as a patient perceiving that limb volume had been maintained or reduced with device use. Of these patients, 42% reported limb volume decreases as much as 20%, and an additional 20% reported decreases of less than 20%. In addition, clinically and statistically significant improvements occurred in all areas of physical and emotional health (p < 0.006).

Comparison of Conventional Treatment for Venous Leg Ulcers with our ACTitouch System

A prospective, randomized study published in the International Wound Journal demonstrated that our ACTitouch System provides a comparable degree of effectiveness in venous leg ulcer healing to conventional treatment and an improved quality of life for patients. The study was conducted in the United States and Europe, involving a total of 90 patients over a 12-week period. The primary objective of the study was to evaluate the efficacy, functionality, safety, patient perceptions and impact on patient quality of life of two compression methods for venous leg ulcers, including our ACTitouch System and a traditional four-layer bandage system. Of the 90 patients, 38 patients used our ACTitouch System and 52 patients used a traditional four-layer bandage system.

The study demonstrated a comparable degree of effectiveness in venous leg ulcer healing, with healing rate differences not reaching statistical significance. The type and frequency of adverse events reported were similar between the treatment groups and there were no serious adverse events related to treatment in either group.

In addition to demonstrating a comparable degree of effectiveness in venous leg ulcer healing, this study also demonstrated that using our ACTitouch System yielded greater improvements in quality of life as compared to those using the bandage system. We believe our ACTitouch System achieved better patient acceptance because it allows greater control over therapy and gives patients the ability to remove the device as needed for key activities of daily living and personal hygiene, such as bathing and sleeping. The only area that our ACTitouch System did not rate higher than the bandage system was discreteness under clothing.

Sales and Marketing

Unlike many of our competitors, we utilize a direct-to-patient and -provider model to market our solutions directly to patients and clinics, whereby we disintermediate the traditional durable medical

103


Table of Contents

equipment channel and capture both the manufacturer and distributor margins. The below chart shows this disintermediation:

GRAPHIC

Our direct-to-patient and -provider model is comprised of a direct sales force, contract at-home trainers, reimbursement capabilities and medical expertise to expand awareness, garner referrals and obtain payment for our products. As of September 30, 2015, we employed eight sales managers and 76 full-time sales representatives who provide coverage throughout the United States. The below chart describes our U.S. direct-to-patient and -provider model.

GRAPHIC

Our marketing team leads our efforts in brand development, tradeshow attendance, educational forums, product messaging, website development, social media and advertising.

Reimbursement, Payer Relations and Customer Support Process

Private insurance payers represented approximately 74% of our revenues in 2014 and 71% of our revenues for the nine months ended September 30, 2015, while Medicare represented approximately 15% of our revenues in each of 2014 and the nine months ended September 30, 2015. Other payers, including the Veterans Administration, represented the remainder of our revenues. When we sell our solutions directly to patients, we bill third-party payers, such as private insurance or Medicare, on behalf of our patients and bill the patient for their co-payment obligations and deductibles. A recent change to the level of Medicare coverage for our products could reduce the number of Medicare patients who have access to our products, and we are seeking to have the coverage determination overturned.

As a nationwide provider, we have developed a broad expertise in obtaining billing codes, developing coverage policies, overcoming payer barriers, and obtaining authorization and payment from payers

104


Table of Contents

across all regions of the United States. Our model utilizes our strategic and operational reimbursement proficiency to meet the varying requirements of hundreds of payers across the country.

To achieve ongoing success in both the strategic and operational reimbursement arenas, we have developed two teams with specialized focus on these respective competencies. Our payer relations group is comprised of over 20 employees and is responsible for developing relationships with payer decision-makers. Specifically, this group educates payers of our product efficacy, develops overall payer coverage policies and reimbursement criteria, manages our Medicare strategy and patient claims, codes, and contracts with payers. Our payer relations team is also the advocacy liaison between patients, clinicians and payers through the appeals process. Our reimbursement operations group is comprised of over 50 employees and is responsible for verifying case-by-case benefits, obtaining prior authorization, billing and collecting payments from payers, analyzing payer data to help understand trends, developing processes and patient programs and providing customer support services.

We have strong and established payer relationships, including some of the largest private payers in the United States. Based on our estimates, we are contracted or enrolled as an in-network provider with payers covering over 230 million lives. These contracts allow us to be an in-network provider for patients, enabling them to access our systems at a competitive rate and copay comparable to other suppliers, and easing our administrative burden in processing at both authorization and when billing. We have enjoyed a consistent commercial payer approval rate of greater than 80% for the last eight years, and greater than 90% Medicare claims submitted approval rate (post-arbitration and based on the number of claims, not dollar amount of claims, submitted) since we began doing business with Medicare in 2007. We have an in-depth understanding of specific payer coverage criteria, and our submission materials are tailored to address individual payer's distinct requirements. Our dedicated customer service team is available to answer patient questions regarding reimbursement, account status, device operation and troubleshooting during normal business hours. If necessary, we will dispatch a trainer for a second time to assist patients with their training needs. We receive no additional reimbursement for patient support, but provide high-quality customer service to enhance patient comfort, satisfaction, compliance and safety with our products.

Our Flexitouch System is reimbursed under HCPCS code E0652, and our ACTitouch System and Entré System are reimbursed under HCPCS code E0651. Garments that cover various parts of the body are used with these systems and billed using HCPCS codes E0651, E0652, E0667, E0668 and E0669. As of September 30, 2015, over 600 payers have paid for our products.

Research and Clinical Operations

We are committed to ongoing research and development as part of our efforts to be at the forefront of patient preference in the area of chronic disease, especially lymphedema and chronic venous insufficiency. As of September 30, 2015 our research and development and clinical operations staff included more than 10 engineers, scientists and project managers with expertise in pneumatics, electronics, garment design, embedded software, mechanical design, sensors and manufacturing technologies. Our research and development expenses, including spending on our clinical evidence development efforts, totaled $2.4 million and $2.8 million for the years ended December 31, 2013 and 2014, respectively, and $1.9 million and $2.9 million for the nine months ended September 30, 2014 and 2015, respectively. Our current research and development efforts are focused primarily on increasing efficacy, improving design for ease-of-use, enhancing clinical functionality and reducing production costs of our solutions. Our clinical development efforts are focused on further differentiating our products from our competitors. We coordinate our development efforts with our intellectual property strategies in order to enhance our ability to obtain patent and other intellectual property protection.

105


Table of Contents

Manufacturing and Quality Assurance

Our manufacturing and quality assurance model combines our internal manufacturing resources and expertise, including assembly, quality assurance, material procurement and inventory control, with approved third-party manufacturers and suppliers of system components. Our internal manufacturing activities, located in Minneapolis, Minnesota, include quality inspection, assembly, packaging, warehousing and shipping of our products. We outsource the manufacture of components, which are produced to our specifications and shipped to our facilities for inspection and final assembly. We use third-party manufacturers and suppliers worldwide to source our components, maintaining dual-source vendors of critical components whenever possible, and leveraging competitive bids among third-party manufacturers and suppliers to control costs. We have elected to source certain key components from single sources of supply, including our ACTitouch controller. While we believe alternate sources exist for the ACTitouch controller, we have not yet qualified an alternate supplier. Quality control, risk management, efficiency and the ability to respond quickly to changing requirements are the primary goals of our manufacturing operations. We believe our manufacturing model permits us to operate with low capital expenditure requirements. We carefully manage our supply chain in an effort to take costs out of the manufacturing process, as demonstrated by a 58% reduction in controller costs for our Flexitouch System since 2008.

We manage our arrangements with our third-party manufacturers and suppliers to adjust delivery schedules and quantities of components to match our changing manufacturing requirements. We forecast our component needs based on historical trends, current utilization patterns and sales forecasts of future demand. We establish our relationships with our third-party manufacturers and suppliers through supplier contracts and purchase orders. In most cases, these supplier relationships may be terminated by either party upon short notice.

In order to mitigate against the risks related to a single-source of supply, we qualify alternative suppliers, when possible, and develop contingency plans for responding to disruptions, including maintaining adequate inventory of any single source components, along with requiring each supplier to maintain specified quantities of inventory. To date, we have not experienced material delays in obtaining any of our components, nor has the ready supply of finished products to our patients or clinicians been adversely affected by component supply issues.

We have implemented a quality management system designed to comply with FDA regulations and International Standards Organization, or ISO, standards governing medical device products. In the United States, we and certain of our manufacturers are required to manufacture our products in compliance with the FDA's Quality System Regulation, which covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage, and shipping for our products. We maintain a quality management system to control compliance with such requirements and have procedures in place designed to ensure that all products and materials purchased by us conform to our requirements and FDA regulations. As of September 30, 2015, we had 16 employees in operations, manufacturing and quality assurance. Our quality management system has been certified to ISO in 2012 and 2014, including ISO 13485:2003. Our manufactures' quality management systems also have been certified to ISO.

Order Fulfillment and Patient Training

Once we have a complete order and prior authorization from the payer, we package and ship a system, configured to their physician's prescription, directly to the patient. Our primary logistics partner is United Parcel Service, which we use for delivery and pick up of our devices. After delivery, we coordinate a visit from one of our over 300 licensed, independent contract trainers that go to our patients' homes to provide individualized training to our patients, when requested. These trainers are

106


Table of Contents

healthcare professionals, licensed in their state of residence, who we have identified through our sales and marketing interest and instructed on proper use of our products. Training visits are coordinated from our offices in Minneapolis and training sessions assigned by our staff. Upon completion of training, the independent contractor submits an invoice to us for payment for the patient's training and their travel.

Competition

The pneumatic compression pump market is a competitive industry, and we compete with a number of manufacturers and distributors of pneumatic compression pumps. Our significant manufacturing competitors are Bio Compression Systems, Inc., Lympha Press USA and Wright Therapy Products (which was recently acquired by BSN Medical GmbH). If we expand internationally, we expect that ArjoHuntleigh, an affiliate of Getinge Group, would become a competitor.

Given the growth of the pneumatic compression pump market, we expect that the industry will become increasingly competitive in the future. Manufacturing companies compete for sales to patients primarily based on product features and service.

We believe we are the only pneumatic compression home-therapy device company with a meaningful U.S. market position supported by a direct sales force. We believe our manufacturing competitors' complete reliance on home medical equipment distribution intermediaries compresses their margins and limits their ability to invest in product features that address consumer preferences. To pursue a direct-to-patient and -provider sales model, our manufacturing competitors would need to meet national accreditation and state-by-state licensing requirements and secure Medicare billing privileges, as well as compete directly with the home medical equipment providers that many rely on across their entire home care businesses.

Some of our competitors and potential competitors are large, well-capitalized companies with greater resources than we have. As a consequence, they are able to spend more aggressively on product development, marketing, sales and other product initiatives than we can. Some of these competitors have:

      significantly greater name recognition;

      established relations with healthcare professionals, customers, and third-party payers;

      established distribution networks;

      additional lines of products, and the ability to offer rebates or bundle products to offer higher discounts or other incentives to gain a competitive advantage;

      greater history in conducting research and development, manufacturing, marketing, and obtaining regulatory approval for homecare devices; and

      greater financial and human resources for product development, sales and marketing, patent litigation and customer financing.

As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. In light of our competitors' advantages, even if our technology and direct-to-patient and -provider marketing strategy is more effective than the technology and marketing strategy of our competitors, current or potential

107


Table of Contents

customers might accept competitor products and services in lieu of purchasing our products. We anticipate that we will face increased competition in the future as existing companies and competitors develop new or improved products and distribution strategies and as new companies enter the market with new technologies and distribution strategies. We may not be able to compete effectively against these organizations. Our ability to compete successfully and to increase our market share is dependent upon our reputation for providing responsive, professional and high-quality products and services and achieving strong customer satisfaction. Increased competition in the future could adversely affect our revenues, revenues growth rate, if any, margins and market share.

Government Regulation

Our systems are medical devices subject to extensive and ongoing regulation by numerous governmental authorities, principally the FDA, and corresponding state and foreign regulatory agencies.

FDA Regulation

In the United States, the FDA regulates medical devices, including the following activities that we perform, or that are performed on our behalf with respect to our devices: product design and development, pre-clinical and clinical testing, manufacturing, labeling, storage, premarket clearance or approval, record keeping, product marketing, advertising and promotion, sales and distribution, and post-marketing surveillance. Failure to comply with applicable U.S. requirements may subject us to a variety of administrative or judicial sanctions, such as warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties, and criminal prosecution. The FDA can also refuse to approve pending applications.

Unless an exemption applies, each medical device we seek to distribute commercially in the United States requires marketing authorization from the FDA prior to distribution. The two primary types of FDA marketing authorization applicable to a device are premarket notification, also called 510(k) clearance, and premarket approval. The type of marketing authorization is generally linked to the classification of the device. The FDA classifies medical devices into one of three classes — Class I, Class II or Class III — based on the degree of risk the FDA determines to be associated with a device and the level of regulatory control deemed necessary to ensure the device's safety and effectiveness. Devices requiring fewer controls because they are deemed to pose lower risk are placed in Class I or II. Class I devices are deemed to pose the least risk and are subject only to general controls applicable to all devices, such as requirements for device labeling, premarket notification, and adherence to the FDA's Good Manufacturing Practices. Class II devices are intermediate risk devices that are subject to general controls and may also be subject to special controls such as performance standards, product-specific guidance documents, special labeling requirements, patient registries, or post-market surveillance. Class III devices are those for which insufficient information exists to assure safety and effectiveness solely through general controls or if the device is a life-sustaining, life-supporting or a device of substantial importance in preventing impairment of human health, or which presents a potential, unreasonable risk of illness or injury and special controls are not adequate to assure safety and effectiveness.

Most Class I devices and some Class II devices are exempted by regulation from the 510(k) clearance requirement and can be marketed without prior authorization from the FDA. Most Class II devices (and certain Class I devices that are not exempt) are eligible for marketing through the 510(k) clearance pathway. By contrast, devices placed in Class III generally require premarket approval or 510(k) de novo clearance prior to commercial marketing. The premarket approval process is more stringent, time-consuming, and expensive than the 510(k) clearance process. However, the 510(k) clearance process has also become increasingly stringent and expensive.

108


Table of Contents

510(k) Clearance Pathway.     When a 510(k) clearance is required, we must submit a premarket notification to the FDA demonstrating that our proposed device is "substantially equivalent" to a previously cleared and legally marketed 510(k) device or a device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for the submission of a premarket approval application, which is commonly known as the "predicate device." A device is substantially equivalent if, with respect to the predicate device, it has the same intended use and has either (i) the same technological characteristics or (ii) different technological characteristics and the information submitted demonstrates that the device is as safe and effective as a legally marked device and does not raise different questions of safety or effectiveness. By law, the FDA is required to clear or deny a 510(k) premarket notification within 90 days of submission of the application. As a practical matter, clearance often takes significantly longer. The FDA may require further information, including clinical data, to make a determination regarding substantial equivalence. If the FDA determines that the device, or its intended use, is not substantially equivalent to a previously-cleared device or use, the FDA will issue a not substantially equivalent decision. This means the device cannot be cleared through the 510k process and will require marketing authorization through the premarket approval pathway. We obtained 510(k) clearance for our Flexitouch System in October 2006 and for a discontinued predecessor system in July 2002. We obtained 510(k) clearance for our ACTitouch System in June 2013 and our Entré System in May 2013.

Premarket Approval Pathway.     A premarket approval application must be submitted to the FDA if the device cannot be cleared through the 510(k) process. The premarket approval application process is much more demanding than the 510(k) premarket notification process and requires the payment of significant user fees. A premarket approval application must be supported by valid scientific evidence, which typically requires extensive data, including but not limited to technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA's satisfaction reasonable evidence of safety and effectiveness of the device.

The FDA has 45 days from its receipt of a premarket approval application to determine whether the application will be accepted for filing based on the FDA's threshold determination that it is sufficiently complete to permit substantive review. After the FDA determines that the application is sufficiently complete to permit a substantive review, the FDA will accept the application and begin its in-depth review. The FDA has 180 days to review an "accepted" premarket approval application, although this process typically takes significantly longer and may require several years to complete. During this review period, the FDA may request additional information or clarification of the information already provided. Also, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance with quality system regulations. The FDA may delay, limit or deny approval of a premarket approval application for many reasons, including:

      failure of the applicant to demonstrate that there is reasonable assurance that the medical device is safe or effective under the conditions of use prescribed, recommended or suggested in the proposed labeling;

      insufficient data from the preclinical studies and clinical trials;

      the manufacturing processes, methods, controls or facilities used for the manufacture, processing, packing or installation of the device do not meet applicable requirements.

If the FDA evaluations of both the premarket approval application and the manufacturing facilities are favorable, the FDA will either issue an approval order or an approvable letter, which usually contains

109


Table of Contents

a number of conditions that must be met in order to secure final approval of the premarket approval application. If the FDA's evaluation of the premarket approval application or manufacturing facilities is not favorable, the FDA will deny approval of the premarket approval application or issue a not approvable letter. A not approvable letter will outline the deficiencies in the application and, where practical, will identify what is necessary to make the premarket approval application. The FDA may also determine that additional clinical trials are necessary, in which case the premarket approval application may be delayed for several months or years while the trials are conducted and then the data submitted in an amendment to the premarket approval application. Once granted, premarket approval application may be withdrawn by the FDA if compliance with post approval requirements, conditions of approval or other regulatory standards is not maintained or problems are identified following initial marketing.

Clinical Trials.     Clinical trials are almost always required to support premarket approval and are sometimes required for 510(k) clearance. In the United States, these trials generally require submission of an application for an Investigational Device Exemption, or IDE, to the FDA. The IDE application must be supported by appropriate data, such as animal and laboratory testing results, showing it is safe to test the device in humans and that the testing protocol is scientifically sound. The FDA must approve the IDE in advance of trials for a specific number of patients unless the product is deemed a non-significant risk device eligible for more abbreviated IDE requirements or the clinical investigation is exempt from the IDE regulations. Clinical trials for significant risk devices may not begin until the IDE application is approved by the FDA and the appropriate institutional review boards, or IRBs, at the clinical trial sites. We, the FDA or the IRB at each site at which a clinical trial is being performed may suspend a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the benefits. Even if a trial is completed, the results of clinical testing may not demonstrate the safety and efficacy of the device, may be equivocal or may otherwise not be sufficient to obtain approval or clearance of the product.

FDA Ongoing Regulation.     Even after a device receives clearance or approval by the FDA and is placed on the market, numerous regulatory requirements apply. These include:

      establishment registration and device listing;

      quality system regulation, which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process;

      labeling regulations and the FDA prohibitions against the promotion of products for un-cleared, unapproved or "off-label" uses, and other requirements related to promotional activities;

      medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur;

      corrections and removals reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation that may present a risk to health; and

      post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device.

110


Table of Contents

After a device receives 510(k) clearance or a premarket approval, in general any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, will require a new clearance or approval. The FDA requires each manufacturer to make this determination, but the FDA can review any such decision and can disagree with a manufacturer's determination. We have modified various aspects of our systems since receiving regulatory clearance, but we believe that new 510(k) clearances are not required for these modifications. If the FDA disagrees with our determination not to seek a new 510(k) clearance, the FDA may retroactively require us to seek 510(k) clearance or premarket approval. The FDA could also require us to cease marketing and distribution and/or recall the modified device until 510(k) clearance or premarket approval is obtained. Also, in these circumstances, we may be subject to significant regulatory fines and penalties.

Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions: Warning Letters, fines, injunctions, civil or criminal penalties, recall or seizure of our products, operating restrictions, partial suspension or total shutdown of production, refusing our request for 510(k) clearance or premarket approval of new products, rescinding previously granted 510(k) clearances or withdrawing previously granted premarket approvals.

We are also subject to announced and unannounced inspections by the FDA, and these inspections may include the manufacturing facilities of our subcontractors. We were audited two times since January 2010 by the FDA and found to be in compliance with the Quality System Regulation. We cannot assure you that we can maintain a comparable level of regulatory compliance in the future at our facility.

FTC Regulation

Device advertising and promotional activity in certain circumstances is also subject to scrutiny by the Federal Trade Commission, as well as similar state consumer protection agencies, which enforce laws related to false and deceptive trade practices. A company that is found to have advertised its product in violation of these laws may be subject to liability, including monetary penalties.

Centers for Medicare and Medicaid Services

Centers for Medicare and Medicaid Services, or CMS, requires providers of product or services to attain and maintain accreditation. To attain and maintain accreditation, companies are required to institute policies and procedures that, among other things, formalize the interaction of the company with patients. Accrediting bodies that are approved by CMS will perform audits of these policies and procedures every three years. Should a company fall out of compliance with the requirements of the Accrediting body, expulsion from the Medicare program could follow. In May 2008, we became a Durable, Medical Equipment, Prosthetics, Orthotics, and Supplies accredited Medicare supplier by the Accreditation Commission for Health Care for our solutions. Our Medicare accreditation must be renewed every three years through passage of an on-site inspection. Our current accreditation with Medicare is due to expire in May 2017. Maintaining our accreditation and Medicare enrollment requires that we comply with numerous business and customer support standards. If we are found to be out of compliance with accreditation standards, our enrollment status in the Medicare program could be jeopardized, up to and including termination.

Licensure

Several states require that durable medical equipment providers be licensed in order to sell products to patients in that state. Certain of these states require that durable medical equipment providers

111


Table of Contents

maintain an in-state location. Most of our state licenses are renewed on an annual or bi-annual basis. Although we believe we are in compliance with all applicable state regulations regarding licensure requirements, if we were found to be noncompliant, we could lose our licensure in that state, which could prohibit us from selling our current or future products to patients in that state. In addition, we are subject to certain state laws regarding professional licensure. We believe that our certified clinicians are in compliance with all such state laws. If our clinicians were to be found non-compliant in a given state, we would need to modify our approach to providing education, clinical support and customer service in such state.

Fraud and Abuse Regulations

Federal Anti-Kickback and Self-Referral Laws.     The Federal Anti-Kickback Statute, among other things, prohibits the knowing and willful offer, payment, solicitation or receipt of any form of remuneration, whether directly or indirectly and overtly or covertly, in return for, or to induce the referral of an individual for the:

      furnishing or arranging for the furnishing of items or services reimbursable in whole or in part under Medicare, Medicaid or other federal healthcare programs; or

      purchase, lease, or order of, or the arrangement or recommendation of the purchasing, leasing, or ordering of any item or service reimbursable in whole or in part under Medicare, Medicaid or other federal healthcare programs.

There are a number of safe harbors to the Federal Anti-Kickback Statute. Such safe harbors permit certain payments and business practices that, although they would otherwise potentially implicate the Federal Anti-Kickback Statute, are not treated as an offense under the same if the requirements of the specific applicable safe harbor are met.

The Federal Anti-Kickback Statute applies to certain arrangements with healthcare providers, product end users, and other parties, including marketing arrangements and discounts and other financial incentives offered to our clinicians in connection with the sales of our products. Although we believe that we have structured such arrangements to be in compliance with the Anti-Kickback Statute and other applicable laws, regulatory authorities may determine that our marketing, pricing, or other activities violate the Federal Anti-Kickback Statute or other applicable laws. Noncompliance with the Federal Anti-Kickback Statute can result in civil, administrative, and criminal penalties, restrictions on our ability to operate in certain jurisdictions, and exclusion from participation in Medicare, Medicaid or other federal healthcare programs. In addition, to the extent we are found to not be in compliance, we may be required to curtail or restructure our operations. Any penalties, damages, fines, exclusions, curtailment or restructuring of our operations could adversely affect our ability to operate our business, our financial condition, and our results of operations.

The Ethics in Patient Referrals Act, commonly known as the "Stark Law," prohibits a physician from making referrals for certain "designated health services" payable by Medicare to an entity, including a company that furnishes durable medical equipment, in which the physician or an immediate family member of such physician has an ownership or investment interest or with which the physician has entered into a compensation arrangement unless an exception applies. Violation of the Stark Law could result in denial of payment, disgorgement of reimbursements received under a noncompliant arrangement, civil penalties, and exclusion from Medicare or other governmental programs. Although we believe that we have structured our provider arrangements to comply with current Stark Law requirements, these requirements are highly technical and there can be no guarantee that regulatory authorities will not determine or assert that our arrangements do not meet applicable Stark Law exceptions.

112


Table of Contents

Additionally, because some of these laws continue to evolve, we lack definitive guidance as to the application of certain key aspects of these laws as they relate to our arrangements with providers with respect to patient training. We cannot predict the final form that these regulations will take or the effect that the final regulations will have on us. As a result, our provider arrangements may ultimately be found to be non-compliant with applicable federal law.

False statements.     The federal false statements statute prohibits knowingly and willfully falsifying, concealing, or omitting a material fact or making any materially false statement in connection with the delivery of healthcare benefits, items, or services. In addition to criminal penalties, violation of this statute may result in collateral administrative sanctions, including exclusion from participation in Medicare, Medicaid, and other federal health care programs.

Federal False Claims Act and Civil Monetary Penalties Law.     The Federal False Claims Act provides, in part, that the federal government may bring a lawsuit against any person whom it believes has knowingly presented, or caused to be presented, a false or fraudulent request for payment from the federal government, or who has made a false statement or used a false record to get a claim paid or to avoid, decrease or conceal an obligation to pay money to the federal government or who has knowingly retained an overpayment. In addition, amendments in 1986 to the Federal False Claims Act have made it easier for private parties to bring "qui tam" whistleblower lawsuits against companies.

The Civil Monetary Penalties Law provides, in part, that the federal government may seek civil monetary penalties against any person that, like under the False Claims Act, presents or causes to be presented claims to a Federal health care program that the person knows or should know is for an item or services that was not provided as claimed or is false or fraudulent or that has made a false statement or used a false record to get a claim paid. The federal government may also seek civil monetary penalties for a wide variety of other conduct, including offering remuneration to influence a Medicare or Medicaid beneficiary's selection of providers and violations of the Federal Anti-Kickback Statute.

Although we believe that we are in compliance with the Federal False Claims Act as well as the Civil Monetary Penalties laws, if we are found in violation of the same, penalties include fines ranging from $5,500 to $11,000 for each false claim violation of the Federal False Claims Act and varying amounts based on the type of violation of the Civil Monetary Penalties Law), plus up to three times the amount of damages that the federal government sustained because of the act of that person. In addition, the federal government may also seek exclusion from participation in all federal health care programs.

To the extent we are found to not be in compliance, we may be required to curtail or restructure our operations. Any penalties, damages, fines, exclusions, curtailment or restructuring of our operations could adversely affect our ability to operate our business, our financial condition, and our results of operations.

The U.S. Foreign Corrupt Practices Act and Other Anti-Corruption Laws.     We may be subject to a variety of domestic and foreign anti-corruption laws with respect to our regulatory compliance efforts and operations. The U.S. Foreign Corrupt Practices Act, commonly known as the FCPA, is a criminal statute that prohibits an individual or business from paying, offering, promising or authorizing the provision of money (such as a bribe or kickback) or anything else of value (such as an improper gift, hospitality, or favor), directly or indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision in order to assist the individual or business in obtaining, retaining, or directing business or other advantages (such as favorable regulatory rulings). The FCPA also obligates companies with securities listed in the United States to comply with certain accounting provisions. Those provisions require a company such as ours to (i) maintain books and records that

113


Table of Contents

accurately and fairly reflect all transactions, expenses, and asset dispositions, and (ii) devise and maintain an adequate system of internal accounting controls sufficient to provide reasonable assurances that transactions are properly authorized, executed and recorded. The FCPA is subject to broad interpretation by the U.S. government. The past decade has seen a significant increase in enforcement activity. In addition to the FCPA, there are a number of other federal and state anti-corruption laws to which we may be subject, including, the U.S. domestic bribery statute contained in 18 USC § 201 (which prohibits bribing U.S. government officials) and the U.S. Travel Act (which in some instances addresses private-sector or commercial bribery both within and outside the United States). Also, a number of the countries in which we conduct activities have their own domestic and international anti-corruption laws, such as the UK Bribery Act 2010. There have been cases where companies have faced multi-jurisdictional liability under the FCPA and the anti-corruption laws of other countries for the same illegal act.

We could be held liable under the FCPA and other anti-corruption laws for the illegal activities of our employees, representatives, contractors, collaborators, agents, subsidiaries, or affiliates, even if we did not explicitly authorize such activity. Although we will seek to comply with anti-corruption laws, there can be no assurance that all of our employees, representatives, contractors, collaborators, agents, subsidiaries or affiliates will comply with these laws at all times. Violation of these laws could subject us to whistleblower complaints, investigations, sanctions, settlements, prosecution, other enforcement actions, disgorgement of profits, significant fines, damages, other civil and criminal penalties or injunctions, suspension and/or debarment from contracting with certain governments or other persons, the loss of export privileges, reputational harm, adverse media coverage, and other collateral consequences. In addition, our directors, officers, employees, and other representatives who engage in violations of the FCPA and certain other anti-corruption statutes may face imprisonment, fines, and penalties. If any subpoenas or investigations are launched, or governmental or other sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, financial condition, and results of operations could be materially harmed. In addition, responding to any action will likely result in a materially significant diversion of management's attention and resources and significant defense costs and other professional fees. Enforcement actions and sanctions could further harm our business, financial condition, and results of operations.

State fraud and abuse provisions.     Many states have also adopted some form of anti-kickback and anti-referral laws and false claims acts that apply regardless of payer, in addition to items and services reimbursed under Medicaid and other state programs. In some states, these laws apply and we believe that we are in compliance with such laws. Nevertheless, a determination of liability under such laws could result in fines and penalties and restrictions on our ability to operate in these jurisdictions.

State and federal transparency/reporting requirements.     As part of the Patient Protection and Affordable Care Act, the Federal government has created a transparency program known as Open Payments (the Physician Payments Sunshine Act) which requires manufacturers of drugs, devices, biologicals and medical supplies to report annually to the Centers for Medicare & Medicaid Services, or CMS, an agency within the U.S. Department of Health and Human Services, or HHS, information related to payments and other transfers of value provided to physicians and teaching hospitals and certain ownership and investment interests held by physicians and their immediate family members. Failure to submit timely, accurate and complete information may result in civil monetary penalties of up to an aggregate of $150,000 per year and up to an aggregate of $1.0 million per year for "knowing failures to report." Certain states require implementation of commercial compliance programs and compliance with the device industry's voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, impose restrictions on marketing practices, and/or prohibition and tracking and reporting of gifts, compensation and other remuneration or items of value provided to physicians and other healthcare professionals and entities.

114


Table of Contents

The laws described above impact the kinds of financial arrangements we may have with hospitals, healthcare professionals or other potential purchasers of our products. If our operations are found to be in violation of any of the laws or regulations described above or others that apply to us, we may be subject to penalties, including potentially significant criminal, civil and/or administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs, contractual damages, reputational harm, administrative burdens, diminished profits and future earnings, and the curtailment or restructuring of our operations.

HIPAA.     The Health Insurance Portability and Accountability Act of 1996, or HIPAA, established uniform standards governing the conduct of certain electronic healthcare transactions and protecting the security and privacy of individually identifiable health information maintained or transmitted by healthcare providers, health plans and healthcare clearinghouses, which are referred to as covered entities. The following standards have been promulgated under HIPAA's regulations:

      the Standards for Privacy of Individually Identifiable Health Information, which restrict the use and disclosure of individually identifiable health information, or "protected health information";

      the Standards for Electronic Transactions, which establish standards for common healthcare transactions, such as claims information, plan eligibility, payment information and the use of electronic signatures;

      the Security Standards, which require covered entities to implement and maintain certain security measures to safeguard certain electronic health information, including the adoption of administrative, physical and technical safeguards to protect such information; and

      the breach notification rules, which require covered entitles to provide notification to affected individuals, the Department of Health and Human Services, and the media in the event of a breach of unsecured protected health information.

In 2009, Congress passed the American Recovery and Reinvestment Act of 2009, or ARRA, which included sweeping changes to HIPAA, including an expansion of HIPAA's privacy and security standards. ARRA includes the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, which, among other things, made HIPAA's privacy and security standards directly applicable to business associates of covered entities. A business associate is a person or entity that performs certain functions or activities on behalf of a covered entity that involve the use or disclosure of protected health information. As a result, business associates are now subject to significant civil and criminal penalties for failure to comply with applicable standards. Moreover, HITECH creates a new requirement to report certain breaches of unsecured, individually identifiable health information and imposes penalties on entities that fail to do so. HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney fees and costs associated with pursuing federal civil actions. The 2013 final HITECH omnibus rule modifies the breach reporting standard in a manner that will likely make more data security incidents qualify as reportable breaches.

In addition to federal regulations issued under HIPAA, some states have enacted privacy and security statutes or regulations that, in certain cases, are more stringent than those issued under HIPAA. In those cases, it may be necessary to modify our planned operations and procedures to comply with the

115


Table of Contents

more stringent state laws. Most states have also adopted breach notification laws that require notification to affected individuals and certain state agencies if there is a security breach of certain individually-identifiable information. If we suffer a privacy or security breach, we could be required to expend significant resources to provide notification to the affected individuals and address the breach, as well as reputational harm associated with the breach. If we fail to comply with applicable state laws and regulations, we could be subject to additional sanctions. Any liability from failure to comply with the requirements of HIPAA, HITECH or state privacy and security statutes or regulations could adversely affect our financial condition. The costs of complying with privacy and security related legal and regulatory requirements are burdensome and could have a material adverse effect on our business, financial condition and results of operations.

Environmental Regulation

Our research and development and manufacturing processes and operations involve the controlled use of hazardous materials, including flammables, toxics, and corrosives and produce hazardous chemical waste products. We are subject to numerous foreign, federal, state, and local environmental, health and safety laws and regulations relating to, among other matters, safe working conditions, product stewardship and end-of-life handling or disposition of products, and environmental protection, including those governing the generation, storage, handling, use, transportation and disposal of hazardous or potentially hazardous materials. Some of these laws and regulations require us to obtain licenses or permits to conduct our operations. Environmental laws and regulations are complex, change frequently and have tended to become more stringent over time. Although the costs to comply with applicable laws and regulations, including requirements in the European Union relating to the restriction of use of hazardous substances in products, have not been material, we cannot predict the impact on our business of new or amended laws or regulations or any changes in the way existing and future laws and regulations are interpreted or enforced, nor can we ensure we will be able to obtain or maintain any required licenses or permits. Also, we cannot eliminate the risk of accidental contamination or discharge and any resultant injury from these materials. We do not currently maintain separate environmental liability coverage and any such contamination or discharge could result in significant cost to us in penalties, damages, and suspension of our operations.

Foreign Government Regulation

International sales of medical devices are subject to foreign governmental regulations, which vary substantially from country to country. The time required to obtain clearance or approval by a foreign country may be longer or shorter than that required for FDA clearance or approval, and the requirements may be different. Many countries also impose product standards, packaging requirements, environmental requirements, labeling requirements, and import restrictions on medical devices. Each country has its own tariff regulations, duties, and tax requirements. Failure to comply with applicable foreign regulatory requirements may subject a company to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions, criminal prosecution or other consequences.

The European Union is the primary regulator in Europe, which has adopted numerous directives and has promulgated voluntary standards regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices. Medical devices that comply with the requirements of applicable directives will be entitled to bear the CE conformity marking, indicating that the device conforms with the essential requirements of the applicable directives and, accordingly, can be commercially distributed throughout the member states of the European Union, and other countries that comply with or mirror these directives. The method of assessing conformity varies depending on the type and class of the product, but typically involves a combination of self-assessment by the manufacturer and a third-party assessment by a notified body, an independent and neutral institution

116


Table of Contents

appointed by a country to conduct the conformity assessment. This third-party assessment may consist of an audit of the manufacturer's quality system, technical or design file and specific testing of the manufacturer's device. Such an assessment may be required in order for a manufacturer to commercially distribute the product throughout these countries. Compliance establishes the presumption of conformity with the essential requirements for a CE Marking. We have the authorization to affix the CE Mark to our products and to commercialize our devices in the European Union. The notified body who inspected us, issued our ISO 13485 certification in October 2014 and our EC-Certificate in December 2014.

In March 2012, we received our Medical Device License in Canada for our Flexitouch System. Before we are permitted to sell our devices in Canada, we must submit and obtain clearance of a license application, implement and comply with ISO Standard 13485, and undergo an audit by a registrar accredited by Health Canada.

General Regulatory Compliance and Health Care Reform

The evolving regulatory and compliance environment and the need to build and maintain robust systems to comply with different compliance or reporting requirements in multiple jurisdictions increase the possibility that a healthcare company may fail to comply fully with one or more of these requirements. If our operations are found to be in violation of any of the health regulatory laws described above or any other laws that apply to us, we may be subject to penalties, including potentially significant criminal and civil and administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from participation in government healthcare programs, contractual damages, reputational harm, administrative burdens, diminished profits and future earnings, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business, financial condition, and our results of operations.

In March 2010, the Patient Protection and Affordable Care Act and Health Care and Education Reconciliation Act, which we refer to as the Patient Protection and Affordable Care Act was enacted into law in the United States. This healthcare reform, which included a number of provisions aimed at improving the quality and decreasing the cost of healthcare, has resulted in significant reimbursement cuts in Medicare payments to hospitals and other healthcare providers and in the healthcare reimbursement system evolving toward value- and outcomes-based reimbursement methodologies. It is uncertain what long-term consequences these provisions will have on patient access to new technologies and what impacts these provisions will have on Medicare reimbursement rates. Other elements of the Patient Protection and Affordable Care Act, including comparative effectiveness research, an independent payment advisory board, and payment systems reform, including shared savings pilots and other reforms, may result in fundamental changes to federal healthcare reimbursement programs. These and additional legislative or administrative reforms to the U.S. healthcare reimbursement systems may significantly reduce reimbursement or deny coverage for our medical devices, or adverse decisions relating to our products by administrators of such systems in coverage or reimbursement issues, any of which could have an adverse impact on our financial condition and results of operations.

Third-Party Reimbursement

In the United States and elsewhere, sales of medical devices depend in significant part on the availability of coverage and reimbursement to providers and patients from third-party payers. Third-party payers include private insurance plans and governmental programs. As with other medical devices, reimbursement for our products can differ significantly from payer to payer and our products are not universally covered by third-party commercial payers. Further, third-party payers continually

117


Table of Contents

review existing technologies for continued coverage and can, without notice, deny or reverse coverage for existing products.

Two principal governmental third-party payers in the United States are Medicaid and Medicare. Medicare is a federal program that provides certain hospital and medical insurance benefits to persons age 65 and over, certain disabled persons and others. In contrast, Medicaid is a medical assistance program jointly funded by federal and state governments and administered by each state pursuant to which benefits are available to certain individuals and families with low incomes and resources and who meet other eligibility requirements. The Medicare and Medicaid statutory framework is subject to administrative rulings, interpretations and discretion that affect the amount and timing of reimbursement made under Medicare and Medicaid.

CMS, which is the agency within the Department of Health and Human Services that administers both Medicare and Medicaid, has the authority to decline to cover particular products or services if it determines that they are not "reasonable and necessary" for the treatment of Medicare beneficiaries. A coverage determination for a product, which establishes the indications that will be covered, and any restrictions or limitations, can be developed at the national level by CMS through a National Coverage Determination, or NCD, or at the local level through a Local Coverage Determination, or LCD, by a regional Medicare administrative contractor, which is a private contractor that processes and pays claims on behalf of CMS for the geographic area where the services were rendered. Obtaining a coverage determination, whether an NCD or LCD, is a time-consuming, expensive and highly uncertain proposition, especially for a new device. Under an NCD that has been effective since January 14, 2002, pneumatic devices, including our products, are covered for the treatment of lymphedema or for the treatment of chronic venous insufficiency with venous stasis ulcers.

The four Medicare Administrative Contractors responsible for processing Medicare claims for durable medical equipment recently approved an LCD that significantly limits Medicare coverage of our Flexitouch System and our Entré System for certain patients. This LCD, released by the MACs on December 17, 2015, is retroactively effective, beginning December 1, 2015. The LCD increases the severity of lymphedema symptoms that a patient must exhibit before such patient is eligible for Medicare reimbursement for a pneumatic compression device. The LCD also inserts more restrictive criteria that require a patient to potentially endure a longer period of conservative therapy to prove that it fails to control their lymphedema, instead of requiring completion of just one 4-week round of conservative therapy as stated in the NCD. The LCD requires four consecutive weeks of conservative therapy with no significant improvement in symptoms during any of those four weeks. Further, the LCD does not cover use of an advanced pneumatic compression device, such as our Flexitouch System, unless the patient's lymphedema is present in the chest, trunk or abdomen. Although many patients with lymphedema likely do have some level of chest, trunk or abdominal involvement, this criteria in the LCD means that patients with lymphedema that is confined to the limb will not have access to advanced pneumatic compression devices until the lymphedema progresses to impact the trunk, chest or abdomen. The LCD pneumatic compression device coverage criteria for chronic venous insufficiency with venous stasis ulcers largely track existing NCD criteria, while defining the elements of a required conservative therapy trial. Under the new LCD, advanced pneumatic compression devices like our Flexitouch System are no longer covered at all for the treatment of venous stasis ulcers.

We are attempting to overturn the LCD by raising awareness among stakeholders, including physicians, patients and advocacy groups, of the negative consequences to patients that the LCD will cause. We believe that future expenses related to our efforts to overturn the LCD will not be material, and that we will use cash on hand to fund such expenses. Our goal is to have the Medicare Administrative Contractors rescind or revise the LCD in light of physician and patient concerns, as well as what we believe are flaws with the LCD and the process by which it was approved. If the new

118


Table of Contents

LCD is not overturned, it could have a negative impact on certain Medicare patients' access to our products, which in turn could have an adverse effect on our business and results of operations.

Private payers that reimburse for our products do so in a variety of ways, depending on the insurance plan's policies, employer and benefit manager input and contracts with their physician network. Moreover, Medicaid programs and private insurance plans are frequently influenced by Medicare coverage determinations, and we believe a reduction or elimination of coverage or reimbursement of our products by Medicare, such as the LCD discussed above or other unfavorable NCD or LCD that may go into effect in the future, would likely cause some commercial third-party payers to implement similar reductions in their coverage or reimbursement of our products. If we are unable to expand coverage of our products by additional commercial payers, or if third-party payers that currently cover or reimburse for our products reverse or limit their coverage in the future, our business and results of operations could be adversely affected.

Intellectual Property

Our intellectual property consists of patented designs and methods and proprietary know-how. In addition to the patented designs and methods discussed below, we have made significant investments in proprietary know-how, including the manufacture of fabrics and garments used in our systems and the algorithms used to manage the inflation and deflation of our systems and other functions of the controllers. To maintain and protect our proprietary technologies and products, we rely on a combination of patent, copyright, trademark, trade secret and other intellectual property laws, and confidentiality provisions in our contracts. We have a policy to enter into confidentiality agreements with employees, consultants, third parties and our advisors to protect our intellectual property and maintain our competitive position. We also require our employees and consultants to sign agreements requiring that they assign to us their interest in intellectual property such as patents and copyrights arising from their work for us. We also require all employees to sign an agreement not to compete unfairly with us during their employment and upon termination of their employment through the misuse of confidential information, soliciting employees, and soliciting customers. Despite any measures taken to protect our intellectual property, unauthorized parties may attempt to copy aspects of our systems or to obtain and use information that we regard as proprietary.

On September 14, 2012, we completed an acquisition of certain assets, including inventory, equipment and tooling and patents for the ACTitouch System and a technology known as SMM from ConvaTec, Inc. and ConvaTec Technologies, Inc., or the Sellers. The purchase price of this acquisition included $3.0 million at closing and $2.0 million at the earliest of the commercialization date or the first anniversary of the closing date. In addition, we are required to pay quarterly payments to the Sellers following the commercialization date, which was September 1, 2013, through the following sixteen quarterly calculation periods equal to 9% of sales for the ACTitouch System and 7% of sales of SMM with a guaranteed minimum amount of $45,000 for each of the first four quarterly calculation periods (year 1); $148,500 for each of next four quarterly calculation periods (year 2); and $247,750 for each of the next four quarterly calculation periods (year 3) (total of $1,765,000). For each quarterly calculation period beginning with the seventeenth quarterly calculation period and ending on the tenth anniversary of the commercialization date, we will make quarterly payments to the Sellers equal to 6% of the sale of the ACTitouch System and 5% on the sale of SMM. If ACTitouch System and SMM sales in any calendar year in years five through ten exceed $40.0 million, the sales percentage amount relating to ACTitouch System sales shall equal 6% of the sales of the ACTitouch System up to $40.0 million and 7% on the sales of the ACTitouch System over $40.0 million.

Patents

Our patent portfolio consists of three sets of patents, including patents relating to our Flexitouch System, our ACTitouch System and other compression-related technologies, each of which is described

119


Table of Contents

in further detail below. As of October 31, 2015, we owned more than 70 issued patents globally, of which 17 were issued U.S. patents. As of October 31, 2015, we owned 17 patent applications pending globally, of which 12 were patent applications pending in the United States. Our U.S. issued patents have varying patent terms expiring between 2017 and through at least 2029, subject to payment of required maintenance fees, annuities and other charges.

Flexitouch System Patent Family.     The following is a summary of patents relating to our Flexitouch System:

      On January 30, 2001, our first patent, directed to our unique wrap structure, was issued (U.S. Pat. No. 6,179,796). This patent is specifically directed to an arcuate design and other features of a garment for wrapping about a patient. This arcuate design is one of the keys to the success of our Flexitouch System, as it facilitates the movement of the lymph fluid from the damaged lymph node area to other functioning lymph node areas. Similar patents have been issued in Europe and Canada.

      On November 11, 2003, a patent directed to our preparation and drainage methodology was issued (U.S. Pat. No. 6,645,165). This second patent is directed to body preparation for receipt of lymph fluid via pressurization and depressurization of chambers, and the subsequent lymph drainage from a body extremity via select pressurization and depressurization of chambers. This preparation and subsequent drainage of the lymph fluid is another key to our Flexitouch System, as it allows stimulation of the lymphatic system to promote reabsorption of the lymph fluid.

      On March 1, 2005, a patent directed to our wrap structure and fabrication was issued (U.S. Pat. No. 6,860,862). This third patent is directed to the unique aspects of the fabrication of our wrap. In particular, a "four way stretch" and "axial stretch" of our garment allow us to stretch the patient's skin in the same manner as manual lymphatic drainage therapy.

      On November 22, 2005, a patent directed to our preparation and drainage methodology was issued (U.S. Pat. No. 6,966,884). This fourth patent is directed to a lymphedema treatment methodology, entailing optimum sequencing of air chamber inflation/deflation. Correct sequencing of the chambers is important to proper therapy. The subject method of sequencing of treatment, called 2-Phase Lymph Preparation and Drainage, prepares the trunk and extremity regions of the body prior to draining the extremity of lymph fluid.

ACTitouch System Patents.     The following is a summary of our patent families relating to our ACTitouch System:

      On October 14, 2008, a "Medical Compress" patent directed to the ornamental aspects of the compression sleeve was issued (U.S. Design Pat. No. D578,652). Similar patents have been issued in Europe, Japan, Canada, Mexico, Australia, China and Taiwan.

      On June 22, 2010, a "Proximity Detection Apparatus" patent directed to control unit proximity detection allowing a different mode of operation was issued (U.S. Pat. No. 7,741,966). Similar patents have been issued in Japan, Canada, Mexico, China and Taiwan, and an application is pending in Europe.

      On March 22, 2011, a "Compression Device for the Limb" patent directed to the storage of data related to duration of use was issued (U.S. Pat. No. 7,909,786). Similar patents

120


Table of Contents

        have been issued in Japan, Canada, Mexico, China, the United Kingdom, Germany, France, Ireland, Italy, Sweden and Taiwan.

      On May 24, 2011, a "Pressurized Medical Device" patent directed to the detection of malfunctioning pressure sensors was issued (U.S. Pat. No. 7,947,003). Similar patents have been issued in Japan, Canada, Mexico, China and Taiwan and an application is pending in Europe.

      On December 13, 2011, a "Relating to Socks" patent directed to a sock and compression device kit was issued (U.S. Pat. No. 8,075,507). Similar patents have been issued in Japan, Canada, Mexico, China, the United Kingdom, Germany, France, Ireland, Italy and Sweden.

      On July 23, 2013, a "Medical Compress" patent directed to the ornamental aspects of the compression sleeve and control unit was issued (U.S. Design Pat. No. D686,738). Similar patents have been issued in Europe, Canada, Mexico, Australia, China and Taiwan.

      On November 5, 2013, a "Compression Device for the Foot" patent directed to a Y-shaped foot wrap was issued (U.S. Pat. No. 8,574,180). Similar patents have been issued in Japan, Canada, China, the United Kingdom, Germany, France, Ireland, Sweden and Taiwan. A continuation application (U.S. Pub. No. 2014/0058302) directed to the subject matter of this patent family is pending in the United States.

      On January 28, 2014, a "Compression Device for the Limb" patent directed to the compression sleeve configuration was issued (U.S. Pat. No. 8,636,679). Similar patents have been issued in Japan, Canada, Mexico and Taiwan, an application for similar subject matter is pending in Europe, and a continuation application (U.S. Pub. No. 2014/0128787) is pending in the United States.

Trademarks

We have registered the trademarks Flexitouch, the Flexitouch and design and ACTitouch with the United States Patent and Trademark Office on the Principal Register. We rely in the United States on common law rights to the Entré, Tactile Medical and Tactile Medical design trademarks. We have not sought to register any of our trademarks in jurisdictions outside of the United States.

Employees

As of September 30, 2015, we had 238 employees, including 115 in sales and marketing, 80 in reimbursement and payer relations, 16 in manufacturing and quality assurance, 16 in general administration, finance, information technology and human resources and 11 in research and development. None of our employees are represented by a collective bargaining agreement. We believe that our employee relations are positive, as evidenced by our being selected as a Top Workplace in Minnesota by our employees for the last six years.

Facilities

We lease approximately 52,000 square feet of office and assembly space at our corporate headquarters in Minneapolis, Minnesota under a lease that expires in July 2021. We believe that our existing facilities are adequate to meet our business requirements for the near term and that additional space will be available on commercially reasonable terms, if required.

Legal Proceedings

From time to time, we may be subject to various claims and legal proceedings arising in the ordinary course of business. We are not currently a party to any legal proceedings that, in the opinion of our management, are likely to have a material adverse effect on our 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.

121


Table of Contents


MANAGEMENT

Executive Officers and Directors

The following table sets forth information concerning our directors and executive officers as of the date of this prospectus:

Name
  Age   Position

Executive Officers

       

Gerald R. Mattys

  56   Chief Executive Officer, Director

Robert J. Folkes

  53   Chief Operating Officer and Chief Financial Officer

Mary E. Anderson

  53   Vice President, Reimbursement

Bryan F. Rishe

  60   Vice President, Sales

Mary M. Thompson

  57   Vice President, Payer Relations and Government Affairs

Non-Employee Directors

       

Peter H. Soderberg

  69   Chairman of the Board

William W. Burke

  56   Director

Jordan S. Davis

  54   Director

Richard Nigon

  67   Director

Kevin H. Roche

  65   Director

Stephen I. Shapiro

  70   Director

Zubeen Shroff

  51   Director

The following is a brief description of the education and business experience of our directors and executive officers:

Executive Officers

Gerald R. Mattys has served as our Chief Executive Officer and as a member of our board of directors since 2005. From 2002 to 2004, he served as the Chief Executive Officer of Medisyn Technologies, Inc., a development stage biotechnology company. From 2000 to 2002, he was the President and Chief Executive Officer of Timm Medical Technologies, Inc., a medical device company. During the period from 1998 to 2000, he was Vice President and General Manager of Alternate Care for Mallinckrodt, Inc., a pharmaceutical and medical device company. Prior to that, he served 18 years in various roles in product management, sales, marketing and management at several medical device companies. He currently serves as an advisor to Augustine Biomedical and Design, LLC. We believe Mr. Mattys is qualified to serve on our board of directors because of his extensive industry, leadership and product development experience.

Robert J. Folkes has served as our Chief Financial Officer since joining our company in 2004 and added Chief Operating Officer responsibilities in February 2015. Prior to joining our company, Mr. Folkes was the Chief Financial Officer for Advanced Respiratory, a medical device company, from 1997 until its sale in 2003. Prior to joining Advanced Respiratory, Mr. Folkes was an Audit Senior Manager for Ernst & Young LLP.

Mary E. Anderson serves as our Vice President, Reimbursement and started with our company in 2005 as our Director of Reimbursement. Prior to joining our company, Ms. Anderson served in various roles at Advanced Respiratory, a medical device company, from 1990 until its sale in 2003, including Controller, Chief Financial Officer and Vice President of Internal Operations. Ms. Anderson began her career as an auditor with Ernst & Young LLP.

Bryan F. Rishe has served as our Vice President, Sales since 2008. From 2004 to 2008, he served as the Vice President, Sales for BSN Medical, a medical soft goods manufacturer. Mr. Rishe also served as

122


Table of Contents

the Vice President, Sales and Marketing for TFX Medical, a surgical equipment manufacturer. Prior to that, Mr. Rishe was the Western Area Manager with Surgical Laser Technologies, a specialty laser company. Mr. Rishe has held other sales leadership and business development roles with Becton Dickinson, Baxter Travenol and American Hospital Supply.

Mary M. "Maggie" Thompson has served as our Vice President, Payer Relations and Government Affairs since 2009. Prior to joining our company, Ms. Thompson served as Director of Reimbursement for Uroplasty, Inc., a medical device company, from 2005-2009. From 1998 until 2005, Ms. Thompson served as Director of Payer Relations at Advanced Respiratory, a medical device company, from 1998 until 2009. A registered nurse, Ms. Thompson first practiced nursing at Gillette Children's Hospital and at a grant-funded community clinic in St. Paul. She then worked for the Minnesota Attorney General's Office as a nurse consultant until she joined a large health plan as the Government Programs Quality Regulatory Manager working closely with the Centers for Medicare and Medicaid Services and Minnesota's Medicaid program. Ms. Thompson is active in the Alliance for Wound Care Stakeholders and is a member of Women's Business Leaders in Healthcare.

Non-Employee Directors

Peter H. Soderberg has served as a member of our board of directors since September 2012. Mr. Soderberg currently is the Managing Partner of Worthy Venture Resources, LLC., a company that seeks to add intellectual and financial capital to post start-up companies transitioning to an established national market presence. Beginning in 2006, Mr. Soderberg served as the President and Chief Executive Officer of both Hillenbrand Industries and Hill-Rom. In 2008, Hillenbrand Industries separated its two subsidiaries creating two, separately traded, public companies. Mr. Soderberg continued his role as President and Chief Executive Officer of the medical technology company, Hill-Rom Holdings, Inc. until 2010. Mr. Soderberg served on the board of Hillenbrand Industries/Hill-Rom from 2002 until his semi-retirement in 2011. Previously, he was President and Chief Executive Officer at Welch Allyn, a manufacturer of medical diagnostic equipment, for six years, and served as Group Vice President and Chief Operating Officer from 1993 to 1999. Prior to his role at Welch Allyn Mr. Soderberg's served 23 years at Johnson & Johnson, in a variety of operations, marketing and management positions, including President of Johnson & Johnson Health Management. His career also includes roles as President and Chief Executive Officer of an industrial technology company and the founder and President of a venture capital business. Mr. Soderberg currently serves on the board of directors of Greatbatch, Inc., a medical technology company. Mr. Soderberg previously served on the boards of Constellation Brands, Inc. and the Advanced Medical Technology Association. We believe he is qualified to serve on our board of directors because of his extensive industry, leadership and investment development experience.

William W. Burke has served as a member of our board of directors since September 2015. Since December 2013, he has been a consultant to companies in the medical device industry. He served as Executive Vice President & Chief Financial Officer of IDEV Technologies, a peripheral vascular devices company, from November 2009 until the company was acquired by Abbott Laboratories in August 2013. He was retained by Abbott through December 2013 to assist with post-acquisition integration. From August 2004 to December 2007, he served as Executive Vice President & Chief Financial Officer of ReAble Therapeutics, a diversified orthopedic device company which was sold to The Blackstone Group in a going private transaction in 2006 and subsequently merged with DJO Incorporated in late 2007. Mr. Burke remained with ReAble until June 2008. From 2001 to 2004, he served as Chief Financial Officer of Cholestech Corporation, a publicly traded medical diagnostic products company. Mr. Burke has served on the board of directors of LDR Holdings, a publicly traded developer of innovative spinal implants, since October 2013, and Invuity, Inc., a publicly traded developer of advanced surgical photonics devices, since May 2015. He also served as a member of the board of directors of Medical Action Industries, a publicly traded manufacturer of disposable medical products,

123


Table of Contents

from August 2004 to October 2014, when the company was acquired by Owens & Minor. Mr. Burke was selected to serve on our board of directors because of his business experience with other medical technology companies, and his experience as the chief financial officer of other companies, including other publicly traded companies.

Jordan S. Davis has served as a member of our board of directors since September 2012. Mr. Davis is a Managing Partner and co-founder of Radius Ventures, the investment advisor to the Radius Funds, a venture capital firm focused on growth equity and expansion-stage health and life sciences companies. Prior to founding Radius in 1997, from 1992 to 1996, Mr. Davis served as a Managing Director at KBL Healthcare, Inc., a health and life sciences venture capital and investment banking firm, where he also served as Vice President and Director of KBL Healthcare Acquisition Corp., a publicly traded acquisition company, which he co-founded. Mr. Davis began his career as an Associate in Morgan Stanley & Co.'s Private Wealth Management and International Sales and Trading operations. Mr. Davis founded Cambridge Heart, Inc., a medical technology company that developed and commercialized a device to non-invasively identify patients at risk of sudden cardiac death, and Voxware, Inc., a speech technology company and early entrant in the voice over IP market, both of which completed initial public offerings in 1996. Mr. Davis served on the public company board of Athersys, Inc. beginning in June 2007 and effectively resigning in June 2010, and currently serves on the board of directors of Endogastric Solutions, Inc., Healthsense, Inc., MID Surgical and HealthCorps. We believe Mr. Davis is qualified to serve on our board of directors because of his extensive industry, investment and capital markets experience.

Richard Nigon has served as a member of our board of directors since September 2012. Mr. Nigon is currently Senior Vice President of Cedar Point Capital, Inc., a private company that raises capital for early stage companies, where he has served since 2007. From February 2001 until December 2006, Mr. Nigon was a Director of Equity Corporate Finance for Miller Johnson Steichen Kinnard, a privately held investment firm, which was acquired in December 2006 by Stifel Nicolaus, a brokerage and investment banking firm. After that acquisition, Mr. Nigon became a Managing Director of Private Placements until May 2007. From February 2000 to February 2001, Mr. Nigon served as the Chief Financial Officer of Dantis, Inc., a web hosting company. Prior to joining Dantis, Mr. Nigon was employed by Ernst & Young LLP from 1970 to 2000, where he was a partner from 1981 to 2000. While at Ernst & Young, Mr. Nigon served as the Director of Ernst & Young's Twin Cities Entrepreneurial Services Group and was the coordinating partner on several publicly-traded companies in the consumer retailing and manufacturing sectors. Mr. Nigon is a Director of Northern Technologies International Corporation and Vascular Solutions, Inc. Mr. Nigon also serves as a director of several private companies. We believe Mr. Nigon is qualified to serve on our board of directors because of his extensive public accounting and auditing experience, including particular experience with emerging growth companies.

Kevin H. Roche has served as a member of our board of directors since October 2004. Mr. Roche was General Counsel of UnitedHealth Group, a health insurance provider, from 1989 to 1996, at which time he founded and operated as the Chief Executive Officer of the Ingenix division of United Health Group where he served until 2001. Following his retirement from UnitedHealth Group, Mr. Roche has spent several years assisting emerging growth companies as an investor, advisor and board member. He also serves as a Senior Advisor for Triple Tree, LLC. He currently serves as a Director of Cogentix Medical, Inc. and several private healthcare companies. We believe that Mr. Roche is qualified to serve on our board of directors because of his extensive industry and leadership experience and his experience as a board member.

Stephen I. Shapiro has served as a member of our board of directors since June 2010. From 1983 through 1999, Mr. Shapiro was a Managing Director of The Wilkerson Group, a leading medical

124


Table of Contents

products management consulting firm, with a client base including pharmaceutical, diagnostic, device and biotech companies, where he led the medical devices practice. Prior to joining The Wilkerson Group, he was Director of Advanced Research and Development and New Business Development for Becton, Dickinson and Company, and spent eight years at Union Carbide Clinical Diagnostics, becoming engineering group leader. Mr. Shapiro also serves on the board of directors of Pacific Diagnostic Laboratories, LLC, PolyRemedy, Inc., and Cambrooke Therapeutics, Inc. Mr. Shapiro was a Venture Partner with Advanced Technology Ventures (a venture capital firm focused on investments in healthcare companies) from January 2000 through January 2015. Mr. Shapiro served as a consultant to Galen Partners (a venture capital firm focused on investments in healthcare companies) as a Venture Partner from January 2000 through December 2013. We believe that Mr. Shapiro is qualified to serve on our board of directors because of his deep industry and medical science background. Mr. Shapiro, however, intends to resign from our board of directors upon the closing of this offering.

Zubeen Shroff has served as a member of our board of directors since September 2007. Mr. Shroff is a Managing Director of Galen Partners, a healthcare growth equity investment firm which he joined in 1996. Prior to joining Galen, Mr. Shroff was a Principal with The Wilkerson Group, where his client base included pharmaceutical, diagnostics, device and biotech companies, plus a select number of venture capital firms. Prior to joining The Wilkerson Group, Mr. Shroff worked at Schering-Plough France, a manufacturer of healthcare products and medicines, where he helped launch their biotech product, alpha-Interferon, in several new indications. Currently, Mr. Shroff is Treasurer and on the Executive Committee of the Board for The Westchester Medical Center Public Benefit Corporation, as well as Chairman of its Foundation. Since 2004, he has served on the Advisory Committees to Boston University Medical School and School of Public Health. Mr. Shroff is also on the Advisory Board of the Joslin Diabetes Center. In addition to the above positions, Mr. Shroff has served on the board of directors of numerous privately held Galen portfolio companies. Mr. Shroff currently serves on the board of directors of Quotient Biodiagnostics and served on the board of directors of Pet DRx Corporation until July 2010 and Encore Medical until June 2006. We believe Mr. Shroff is qualified to serve on our board of directors because of his extensive experience in providing strategic guidance to companies in the healthcare industry, particularly in the areas of medical devices, diagnostics, and capital equipment.

Board Composition

Director Independence.     Our board of directors has determined that seven of our eight directors are independent directors, as defined under the applicable rules of the NASDAQ stock market. The independent directors are Peter H. Soderberg, William W. Burke, Jordan S. Davis, Richard Nigon, Kevin H. Roche, Stephen I. Shapiro and Zubeen Shroff.

In making such determination, our board of directors considered the independence of its members in light of the beneficial ownership of these individuals and, notwithstanding their beneficial ownership, determined that it would not interfere with their exercise of independent judgment in carrying out the responsibilities of a director.

Familial Relationships.     There is no family relationship between any director, executive officer or person nominated to become a director or executive officer.

Board Structure.     Our board of directors currently is authorized to have eight members. In accordance with the terms of our amended and restated certificate of incorporation and amended and restated bylaws that will become effective upon completion of this offering, our board of directors will be divided into three classes, class I, class II and class III, with members of each class serving staggered

125


Table of Contents

three-year terms. Upon completion of this offering, the members of the classes will be divided as follows:

Upon the expiration of the term of a class of directors, directors in that class will be eligible to be elected for a new three-year term at the annual meeting of stockholders in the year in which their term expires. In accordance with the terms of our amended and restated certificate of incorporation that will become effective upon completion of this offering, our directors may be removed only for cause by the affirmative vote of the holders of at least 75% of the votes that all our stockholders would be entitled to cast in an election of directors.

Compensation Committee Interlocks and Insider Participation

No member of our compensation and organization committee is or has been our current or former officer or employee. None of our executive officers served as a director or a member of a compensation committee (or other committee serving an equivalent function) of any other entity, one of whose executive officers served as a director or member of our compensation and organization committee during 2015.

Board Committees

Our board has established four standing committees — audit, nominating and corporate governance, compensation and organization and compliance committee — each of which operates under a charter that has been approved by our board. Upon completion of this offering, each committee's charter will be available under the Corporate Governance section of our website at www.tactilemedical.com . The reference to our website address does not constitute incorporation by reference of the information contained at or available through our website, and you should not consider it to be a part of this prospectus.

The following sets forth the membership of each of our committees upon completion of this offering.

Audit Committee   Nominating and Corporate
Governance Committee
  Compensation and
Organization Committee
  Compliance Committee
Richard Nigon (Chair)   Kevin H. Roche (Chair)   Peter H. Soderberg (Chair)   Kevin H. Roche (Chair)
William W. Burke   William W. Burke   Jordan S. Davis   William W. Burke
Kevin H. Roche   Jordan S. Davis   Zubeen Shroff   Jordan S. Davis
    Richard Nigon       Richard Nigon

Audit Committee.     The audit committee's responsibilities will include:

      appointing, compensating, retaining, replacing and overseeing our independent auditor;

      pre-approving all audit and permitted non-audit services to be provided by our independent auditor;

126


Table of Contents

      assisting our board of directors in its oversight of our financial statements and other financial information to be provided by us;

      overseeing our compliance with legal and regulatory matters and aspects of our risk management processes;

      discussing with management and our independent auditors any major issues as to the adequacy of our internal controls, any actions to be taken in light of significant or material control deficiencies and the adequacy of disclosures about changes in internal control over financial reporting; and

      establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters.

Each of the members of our audit committee upon completion of this offering meets the requirements for financial literacy and possesses the financial qualifications required under the applicable rules and regulations of the SEC and the NASDAQ stock market. Our board of directors has determined that Richard Nigon is an audit committee financial expert, as defined under the applicable rules of the SEC. Each member of our audit committee upon completion of this offering satisfies the NASDAQ stock market independence standards and the independence standards of Rule 10A-3(b)(1) of the Exchange Act.

Nominating and Corporate Governance Committee.     The nominating and corporate governance committee's responsibilities will include assisting our board in:

      identifying qualified individuals to become board members;

      determining the composition of the board and its committees;

      assessing and enhancing the effectiveness of the board and individual directors; and

      developing and implementing our corporate governance guidelines.

Compensation and Organization Committee.     The compensation and organization committee's responsibilities will include:

      determining the compensation of our chief executive officer and other executive officers;

      providing oversight of our compensation policies, plans and benefit programs;

      administering our equity compensation plans;

      recommending to our board the compensation arrangements for our non-employee directors; and

      overseeing and reviewing our executive team and management succession.

Compliance Committee.     The compliance committee's responsibilities will include:

      assisting the Board in overseeing our regulatory compliance activities; and

127


Table of Contents

      monitoring and evaluating our compliance with regulatory requirements to which we are subject.

Code of Business Conduct and Ethics

We expect to adopt a code of business conduct and ethics upon completion of this offering relating to the conduct of our business by our employees, officers and directors, which will be posted on our website. We intend to disclose any amendments to the code, or any waivers of its requirements, as required by stock exchange or SEC rules, on our website.

Non-Employee Director Compensation

Prior to this offering, we did not have a formal policy for compensating our non-employee directors. However, in 2015, we reimbursed the members of our board of directors for their reasonable out-of-pocket travel expenses incurred in connection with attending meetings of our board of directors.

Our board of directors has approved a new compensation program for our non-employee directors to be effective upon completion of this offering. Under the program, our non-employee directors will receive cash compensation as follows:

We also reimburse our directors for their reasonable out-of-pocket expenses incurred in connection with attending our board and committee meetings.

In addition, upon the effectiveness of this registration statement and in connection with additional directors joining our board in the future, we expect to grant each of our non-employee directors a non-statutory stock option to purchase up to $             of shares of our common stock calculated as

128


Table of Contents

the grant date fair value of the stock-based awards computed in accordance with FASB Topic ASC 718 on the date of grant using, for purposes of awards granted upon effectiveness of this registration statement, the price per share to the public of our common stock in this offering. Each option will have an exercise price per share equal to the fair market value on the date of grant, which, for purposes of awards granted upon effectiveness of this registration statement, will be the price per share to the public of our common stock in this offering. Each stock option will vest immediately prior to the start of our company's first annual meeting of stockholders following the date of such grant, subject to such director's continued service on our board of directors as of such date. Each stock option will have a term of             years from the date of grant.

129


Table of Contents


EXECUTIVE COMPENSATION

Summary Compensation Table

The following table provides information regarding the total compensation for services rendered in all capacities that was earned by our principal executive officer and our two other most highly compensated executive officers during 2015, whom we collectively refer to as our "named executive officers."

Name and Principal Position
  Year   Salary
($)
  Non-Equity
Incentive Plan
Compensation
($)
  All Other
Compensation
($)
  Total
($)
Gerald R. Mattys   2015   340,000               (1)                          
Chief Executive Officer                    

Robert J. Folkes

 

2015

 

240,000

 

           

(1)

           

 

           
Chief Operating Officer and Chief Financial Officer                    

Bryan F. Rishe

 

2015

 

237,500

 

128,668

 

9,000

(2)

375,168
Vice President, Sales                    

(1)
Non-equity incentive plan compensation for Messrs. Mattys and Folkes has not yet been determined.

(2)
Represents amounts paid to the named executive officer for a car allowance.

Employment Agreements

While we currently have employment agreements with each of our named executive officers, we intend to enter into new agreements prior to the effectiveness of the registration statement of which this prospectus is a part.

Equity Awards

We did not grant any stock option or other equity-based awards to any of our named executive officers during 2015.

Non-Equity Incentive Plan Compensation

The non-equity incentive plan compensation that may be earned by each of our named executive officers other than Mr. Rishe during 2015 reflects their participation in our 2015 Bonus Plan. Actual payout amounts under the 2015 Bonus Plan are anticipated to be determined in March 2016. As Vice President, Sales, Mr. Rishe's 2015 bonus opportunity was subject to a separate bonus arrangement described below.

Our 2015 Bonus Plan incorporates both company financial objectives and company and departmental operational objectives. The company's performance against objectives based on 2015 revenue and 2015 operating income excluding specific board approved expenditures will determine the degree to which a bonus pool would be funded, with payouts from the bonus pool dependent upon the degree to which financial and operational objectives were achieved. The bonus pool will not be funded if operating income excluding specific board approved expenditures for 2015 is less than $        million, and threshold, target and maximum funding levels of $              million, $        million and $        million, respectively, were prescribed depending on the degree to which the financial objectives were achieved. The bonus pool will be funded at target level if 2015 revenues are        million and 2015 operating income excluding specific board approved expenditures is        million, with those metrics assigned

130


Table of Contents

relative weightings of 80% and 20%, respectively. Operational objectives generally involved measures to increase efficiencies and reimbursements and advance clinical studies and submissions.

Individual payouts from the bonus pool for more senior bonus plan participants, including the named executive officers, were based 80% on achievement of financial objectives and 20% on achievement of operational objectives.

Target level and actual payouts for 2015 for each named executive officer participating in the 2015 Bonus Plan expressed as a percentage of annual base salary are as follows:

Name
  Target Bonus as % of
Base Salary
  Actual Bonus as % of
Base Salary

Gerald R. Mattys

  65%       %

Robert J. Folkes

  35%       %

Mr. Rishe's 2015 bonus opportunity was a function of the degree to which our company achieved monthly and quarterly sales objectives and quarterly sales department expense management goals. These bonus amounts were payable to Mr. Rishe following the close of the applicable month or quarter during 2015. Mr. Rishe's maximum bonus opportunity for 2015 was approximately 69% of his base salary, and his actual payout was approximately 54% of his base salary.

Outstanding Equity Awards at Fiscal Year-End

The following table sets forth certain information regarding equity awards that have been granted to our named executive officers and that were outstanding as of December 31, 2015:

 
  Option Awards (1)   Stock Awards (2)  
Name
  Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
  Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
  Option
Exercise
Price ($)
  Option
Expiration
Date
  Number of
Shares or Units
of Stock that
Have Not
Vested (#)
  Market Value of
Shares or Units of
Stock That Have
Not Vested ($) (3)
 

Gerald R. Mattys

                      2/26/18       (5)      

                      6/4/19              

                      3/8/20              

                    4/20/21              

            (4)         10/13/23              

Robert J. Folkes

                     
2/26/18
   
(5)
     

                      6/4/19              

                      3/8/20              

                    4/20/21              

            (4)         10/13/23              

Bryan F. Rishe

                     
12/17/18
   
   
 

                      3/8/20              

                    4/20/21              

            (4)         10/13/23              

(1)
Option awards provide a recipient the right to acquire shares of our common stock.

(2)
Stock awards consist of restricted shares of our Series A preferred stock.

(3)
The market value of restricted shares of our Series A preferred stock that have not vested is based on a fair market value of $         per share as of December 31, 2015, as determined by our board of directors.

(4)
The unvested shares of common stock subject to this option will vest in 22 equal installments on the 9 th day of each month from January 2016 through October 2017.

(5)
The unvested restricted shares of our Series A preferred stock will vest upon a change in control of our company.

131


Table of Contents

Option Exercises and Stock Vested in 2015

None of our named executive officers exercised any stock options or had any other form of equity-based award vest during 2015.

Pension Benefits for 2015

We do not offer pension benefits to our named executive officers.

Non-Qualified Deferred Compensation for 2015

We do not offer non-qualified deferred compensation to our named executive officers.

Potential Payments Upon Termination or Change-in-Control

Our 2003 Stock Option Plan, which we refer to as the 2003 Plan, our 2007 Omnibus Stock Plan, which we refer to as the 2007 Plan, our restricted stock award agreements, pursuant to which restricted shares of our Series A preferred stock were granted to certain employees, which we refer to as the Series A Restricted Stock, and our 2016 Equity Incentive Plan, which we refer to as the 2016 Plan, address the effect of a grantee's termination of service or a change in control of our company on outstanding awards granted under those plans and agreements. See "— Stock Option and Other Equity Compensation Plans" below.

We expect that the new employment agreements with each of our named executive officers that we intend to enter prior to the completion of this offering will provide for payments upon termination of service or a change in control.

Stock Option and Other Equity Compensation Plans

In this section we describe our 2003 Plan, our 2007 Plan, our Series A Restricted Stock agreements, our 2016 Plan and our Employee Stock Purchase Plan, which we refer to as the ESPP. Prior to this offering, we granted stock option awards to eligible participants under the 2003 Plan and the 2007 Plan and awards of Series A Restricted Stock. Following the closing of this offering, we expect to grant awards to eligible participants under the 2016 Plan.

2003 Stock Option Plan.     Our 2003 Plan was originally approved by our board of directors and our stockholders in 2003, amended in 2005 and amended and restated in August 2006. As of                           , 2016, there were                           shares of our common stock subject to outstanding stock options under the 2003 Plan. Since the 2007 Plan became effective, no additional awards have been granted under the 2003 Plan and no additional awards will be granted under the 2003 Plan in the future.

All shares subject to awards outstanding under the 2003 Plan as of the effective date of the 2016 Plan that thereafter are forfeited, expire, are cancelled or otherwise do not result in the issuance of shares will become available for grant under the 2016 Plan in accordance with its terms. All awards outstanding under the 2003 Plan will remain outstanding in accordance with their terms and will continue to be governed by their existing terms after the completion of this offering.

Eligibility.     The 2003 Plan provides for the grant of stock options to any person that provides services to us, whether as an employee, director, consultant or advisor. Incentive and nonqualified stock options could be granted to employees, but only nonqualified stock options to other eligible participants.

132


Table of Contents

Administration.     Our compensation and organization committee administers the 2003 Plan and the awards granted under it, except for awards to our non-employee directors which are administered by our board of directors. The plan administrator (compensation and organization committee or the board, as applicable) has the authority to, among other things, make decisions and determinations related to the 2003 Plan and awards thereunder, including determining who shall receive awards, the types of awards granted and the terms and conditions of the awards and to adopt rules for the administration of the 2003 Plan. To the extent permitted by law, the plan administrator may delegate all or part of its authority under the 2003 Plan to our chief executive officer.

Stock Options.     Stock options granted under the 2003 Plan are evidenced by stock option award agreements, containing such provisions as the plan administrator deems advisable. All options still outstanding under the 2003 Plan expire not more than ten years after the date of the grant, have a per share exercise price that is equal to the fair market value of a share of our common stock as of the date the option was granted, and are fully vested and exercisable.

Upon the termination of an optionee's employment or other service relationship with us: (i) if the termination is due to death or disability, options shall immediately vest and become exercisable in full and shall remain exercisable for one year after such termination; (ii) if the termination is for "cause," outstanding options shall immediately expire upon such termination; and (iii) if the termination is for any reason other than death, disability or cause, then to the extent any outstanding options are not then vested and exercisable, they shall immediately terminate, but to the extent they are already vested and exercisable, they shall remain exercisable for three months following such termination. In no event, however, will an option remain exercisable past its originally scheduled expiration date.

Change in Control.     In the event of a change in control of our company, the plan administrator may, in its discretion, cause any outstanding option to immediately become vested and exercisable in full. The plan administrator may also cause outstanding options to be assumed or replaced by an acquirer in a merger, consolidation or sale of substantially all of the company's assets, or provide for outstanding options to be cancelled upon a change in control in exchange for a cash payment reflecting the intrinsic value of the options.

For purposes of the 2003 Plan, a "change in control" generally refers to a person acquiring beneficial ownership of 30% or more of the combined voting power of the company's voting securities; the approval by the company's stockholders of a merger, consolidation or statutory share exchange involving the company, of the sale of all or substantially all of the company's assets or of the liquidation or dissolution of the company; or a majority of the members of the company's board ceasing to be "continuing" directors. Under the 2003 Plan, "cause" is generally defined to include a material breach of any agreement between the company and the optionee, gross negligence or willful misconduct by the optionee, the optionee's conviction of a felony or crime involving moral turpitude, the optionee's willful violation of specific and lawful work-related instructions or prolonged or frequent unexcused absences from work, or fraud, theft or proven dishonesty by the optionee against the company.

Registration.     We intend to file with the SEC a registration statement on Form S-8 covering the shares of our common stock issuable under the 2003 Plan.

2007 Omnibus Stock Plan.     Our 2007 Plan was approved by our board of directors and our stockholders in 2007, was amended and restated in 2008 and was further amended in 2012 and 2014. As of                                        , 2016, there were                           shares subject to outstanding awards under the 2007 Plan, and                           shares remaining available for the grant of awards under the 2007 Plan.

133


Table of Contents

On and after the effective date of the 2016 Plan, no additional awards will be granted under the 2007 Plan. On the effective date of the 2016 Plan, any shares remaining available for the grant of awards under the 2007 Plan will be carried over into the 2016 Plan, and all shares subject to awards outstanding under the 2007 Plan on the effective date of the 2016 Plan that thereafter are forfeited, expire, are cancelled or otherwise do not result in the issuance of shares will become available for grant under the 2016 Plan in accordance with its terms. All awards outstanding under the 2007 Plan will remain outstanding in accordance with their terms and will continue to be governed by their existing terms after the completion of this offering.

Eligibility.     The 2007 Plan provides for the grant of equity-based awards to any person that provides services to us, whether as an employee, director, consultant or advisor.

Administration.     Our compensation and organization committee administers the 2007 Plan and the awards granted under it, except for awards to our non-employee directors which are administered by our board. The plan administrator (compensation and organization committee or the board, as applicable) has the authority to, among other things, make decisions and determinations related to the 2007 Plan and awards thereunder, including determining who shall receive awards, the types of awards granted and the terms and conditions of the awards, adopt rules for the administration of the 2007 Plan, interpret the 2007 Plan and amend the terms of awards thereunder. To the extent permitted by law, the plan administrator may delegate all or part of its authority under the 2007 Plan with respect to awards to persons who are not officers or directors of the company to one or more persons who are not non-employee directors.

Types of Awards.     Awards under the 2007 Plan may be in the form of stock options, stock appreciation rights, or SARs, restricted stock, performance units or other stock-based awards. Each award is to be evidenced by an award agreement containing the terms and conditions of the award. Only stock options have been granted under the 2007 Plan.

Any stock option granted under the 2007 Plan shall have a term as specified by the plan administrator, not to exceed ten years after the date of the grant in the case of an incentive stock option, and have a per share exercise price, which is determined by the plan administrator and which may not be less than the fair market value of a share of our common stock as of the date the option is granted.

Upon the termination of an optionee's employment with us: (i) options that are not then vested and exercisable shall immediately terminate; (ii) if the termination is due to death or disability, options shall remain exercisable for one year after such termination to the extent they were exercisable immediately before such termination; (iii) if the termination is for "cause," outstanding options shall immediately terminate upon such termination; and (iv) if the termination is for any reason other than death, disability or cause, then they shall remain exercisable for three months following such termination to the extent they were exercisable immediately before such termination. In no event, however, will an option remain exercisable past its originally scheduled expiration date. If a non-employee director's service relationship with the company terminates, any stock option will remain exercisable for the remainder of its scheduled term to the extent it was exercisable immediately before such termination.

Change in Control.     In the event of a change in control of our company, the plan administrator may, in its discretion, cause any outstanding option to immediately become vested and exercisable in full and to remain exercisable during its scheduled term. The plan administrator may also cause outstanding options to be assumed or replaced by an acquirer in a merger, consolidation or sale of substantially all of the company's assets, or provide for outstanding options to be cancelled upon a change in control in exchange for a cash payment reflecting the intrinsic value of the options. Unless

134


Table of Contents

otherwise provided in an agreement with our company, if the accelerated vesting of an award or payment of cash in exchange for an award that would otherwise occur in connection with a change in control would, together with any other payments to the same individual that are deemed contingent on a change in control, be characterized as a "parachute payment" under Code Section 280G, then accelerated vesting or payment of cash in exchange for an award shall be reduced to the extent necessary to avoid the imposition of the excise tax on "excess parachute payments" required by Code Section 4999.

For purposes of the 2007 Plan, "change in control" is defined in the same manner as in the 2003 Plan, except that a person must acquire beneficial ownership of 50% or more of the company's voting securities, rather than 30% or more, and a merger, consolidation or statutory share exchange involving the company, a sale of all or substantially all of the company's assets or the liquidation or dissolution of the company will constitute a change in control only upon consummation of the transaction, rather than upon stockholder approval of the transaction.

Registration.     We intend to file with the SEC a registration statement on Form S-8 covering the shares of our common stock issuable under the 2007 Plan.

Series A Restricted Stock.     In March 2009, we issued awards to certain of our employees of restricted shares of our Series A preferred stock. As of                            , 2016, there were             shares of Series A Restricted Stock subject to these outstanding awards.

The award agreements provide that until the shares of Series A Restricted Stock vest, they may not be sold, transferred or encumbered in any manner, and will be subject to forfeiture if the award recipient's employment with us terminates for any reason. The award agreements provide that shares of the Series A Restricted Stock will vest upon a change in control of our company if the holder of the Series A Restricted Stock is employed by our company on the date of the change in control. The award agreements generally define a "change in control" as involving (i) the acquisition by a person of beneficial ownership of 50% or more of the combined voting power of the company's voting securities; (ii) the consummation of a merger, consolidation, statutory share exchange or reorganization involving the company; (iii) the consummation of the sale of all or substantially all of the company's assets; (iv) a majority of the members of the company's board ceasing to be "continuing directors"; or (v) the consummation of a complete liquidation or dissolution of the company. Unless otherwise provided in a separate agreement with the company, if the vesting of Series A Restricted Stock upon a change in control would, together with any other payments to the same individual that are deemed contingent on a change in control, be characterized as a "parachute payment" under Code Section 280G, then such vesting and other payments are to be reduced to the extent necessary to avoid the imposition of the excise tax on "excess parachute payments" required by Code Section 4999. Mr. Mattys' Series A Restricted Stock also vests 45 days following his termination of employment so long as he provides a release of claims in favor of our company.

2016 Equity Incentive Plan.     Our board of directors adopted the 2016 Plan in 2016 and our stockholders approved the 2016 Plan in 2016. The purposes of the 2016 Plan are to attract and retain the best available personnel, to provide them with additional incentives and to align their interests with those of our stockholders. The material terms of the 2016 Plan are summarized below.

Share Reserve.     As of                                        , 2016, there were no stock options or other equity-based awards outstanding under the 2016 Plan. The 2016 Plan reserves                                         shares for future issuance under the plan, plus                                        shares that remained available for future grants under the 2007 Plan on the effective date of the 2016 Plan. We intend to use up to

135


Table of Contents

                                          shares for grants of stock options to our employees and directors effective upon completion of this offering with an exercise price equal to the offering price. The number of shares reserved under the 2016 Plan will increase on January 1 of each year beginning in 2017 and ending on                                         202 6 in an amount equal to the least of: (i)          % of the total number of shares outstanding as of December 31 of the immediately preceding calendar year; (ii)                             shares; or (iii) a number of shares determined by our board of directors. Shares subject to awards under the 2016 Plan, the 2007 Plan or the 2003 Plan that expire unexercised, are cancelled or forfeited, are settled for cash or otherwise do not result in the issuance of all or a portion of the shares subject to the award will again become available for grant under the 2016 Plan. If the payment of the exercise price of any award under the 2016 Plan, the 2007 Plan or the 2003 Plan is made by the tendering or withholding of shares or if any applicable tax withholding obligation arising from an award under the 2016 Plan is satisfied by the tendering or withholding of shares, the shares tendered or withheld also will again become available for grant under the 2016 Plan.

Administration of Plan.     The compensation and organization committee of our board of directors will administer the 2016 Plan, other than with respect to awards to our non-employee directors, which will be administered by the full board of directors. We refer to the compensation and organization committee or the board of directors, as applicable, as the plan administrator in this section. Subject to the terms of the 2016 Plan, the compensation and organization committee has the authority to, among other things, interpret the plan and determine who is granted awards under the plan, the types of awards granted and the terms and conditions of the awards, including the number of shares covered by awards, the vesting schedule or other restrictions applicable to awards. The committee also has the power to make any determinations and take any action necessary or desirable for the administration of the 2016 Plan.

To the extent permitted by law and stock exchange rules, the 2016 Plan permits the committee to delegate to one or more of our executive officers or non-employee directors any or all of the committee's authority under the plan with respect to awards made to individuals who are neither non-employee directors nor executive officers of our company.

Eligibility.     Our employees, non-employee directors and certain consultants and advisors who provide services to us are eligible to receive awards under the 2016 Plan. Incentive stock options may be granted only to our employees.

Equity Awards.     The 2016 Plan allows us to grant stock options, SARs, restricted stock, stock units and other stock-based awards. Each award will be evidenced by an agreement with the award recipient setting forth the terms and conditions of the award, including vesting conditions. Awards under the 2016 Plan will have a maximum term of ten years from the date of grant. The plan administrator may provide that the vesting or payment of any award will be subject to the attainment of certain performance measures established by the plan administrator, and the plan administrator will determine whether such measures have been achieved. The plan administrator at any time may amend the terms of any award previously granted, except that, in general, no amendment may be made that materially impairs the rights of any participant with respect to an outstanding award without the participant's consent. In addition, we may amend the 2016 Plan and any award agreements under the plan in order to ensure compliance with the requirements of Section 409A of the Internal Revenue Code.

      Stock Options.   Stock options permit the holder to purchase a specified number of shares of our common stock at a set price. Options granted under the 2016 Plan may be either incentive or nonqualified stock options. The exercise price of options granted under the plan generally may not be less than the fair market value of our common stock on the date of grant. Incentive stock options granted to employees who hold more than 10% of

136


Table of Contents

        the total combined voting power of our stock will have an exercise price not less than 110% of the fair market value of our common stock on the date of grant and will have a maximum term of five years. The plan administrator will determine the terms and conditions of options granted under the 2016 Plan, including exercise price and vesting and exercisability terms. The maximum number of shares subject to stock options that may be granted during a calendar year to a participant under the 2016 Plan may not exceed                                        . The maximum number of shares that may be issued upon the exercise of incentive stock options under the 2016 Plan is                                        .

      SARs.   SARs provide for payment to the holder of all or a portion of the excess of the fair market value of a specified number of shares of our common stock on the date of exercise over a specified exercise price. Payment may be made in cash or shares of our common stock or a combination of both, as determined by the plan administrator. The administrator will establish the terms and conditions of exercise, including the exercise price, of SARs granted under the plan. The maximum number of shares subject to SARs that may be granted during a calendar year to a participant under the 2016 Plan may not exceed                                        .

      Restricted Stock.   Restricted stock awards are awards of shares of our common stock that are subject to vesting and the lapse of applicable restrictions determined by the plan administrator. The plan administrator will determine whether any consideration other than services to our company must be paid for a restricted stock award. The maximum number of shares of restricted stock that may be granted during a calendar year to a participant under the 2016 Plan may not exceed                                        .

      Stock Units.   Stock units provide the holder with the right to receive, in cash or shares of our common stock or a combination of both, the fair market value of a share of our common stock and will be subject to such vesting and forfeiture conditions and other restrictions as the plan administrator determines. The administrator will determine whether any consideration other than services to our company must be paid prior to settlement of a stock unit award. The maximum number of stock units that may be granted during a calendar year to a participant under the 2016 Plan may not exceed                                        .

      Other.   The plan administrator, in its discretion, may grant other stock-based awards under the 2016 Plan. The administrator will set the terms and conditions of such awards.

Substitute Awards.     The plan administrator may grant awards under the 2016 Plan in substitution for awards granted by another entity acquired by our company or with which our company combines. The terms and conditions of these substitute awards will be comparable to the terms of the awards replaced, and may therefore differ from the terms and conditions otherwise set forth in the 2016 Plan.

Dividend and Dividend Equivalents.     No dividends, dividend equivalents or distributions will be paid with respect to stock options or SARs granted under the 2016 Plan. Other than regular cash dividends, any dividends or distributions paid with respect to the unvested portion of a restricted stock award will be subject to the same restrictions as the shares to which such dividends or distributions relate. The plan administrator may provide the holder of a stock unit award or any other stock-based award with the right to receive dividend equivalents with respect to the shares subject to the award. Any shares issued as the result of the reinvestment of dividends or the deemed reinvestment of dividend equivalents in connection with an award will be counted against, and replenish upon any subsequent forfeiture, the 2016 Plan's share reserve.

137


Table of Contents

Transferability.     Unless otherwise determined by the plan administrator, awards granted under the 2016 Plan generally are not transferable except by will or the laws of descent and distribution. The plan administrator may permit the transfer of awards other than incentive stock options pursuant to a domestic relations order or by way of gift to a family member.

Termination of Service.     Unless otherwise provided in an award agreement (and except with respect to terminations following certain corporate transactions described below under "— Change-in-Control; Corporate Transaction"), upon termination of an award recipient's service with our company, all unvested and unexercisable portions of the recipient's outstanding awards will immediately be forfeited. If an award recipient's service with our company terminates other than for cause (as defined in the 2016 Plan), death or disability, the vested and exercisable portions of the recipient's outstanding options and SARs generally will remain exercisable for three months after termination. If a recipient's service terminates due to death or disability (or if a recipient dies during the three-month period after termination of service other than for cause), the vested and exercisable portions of the recipient's outstanding options and SARs generally will remain exercisable for one year after termination. Upon termination for cause, all unexercised stock options and SARs will also be forfeited.

Change-in-Control; Corporate Transaction.     Unless otherwise provided in an award agreement, in the event of a sale of all or substantially all of our assets or a merger, consolidation, or share exchange involving our company, the surviving or successor entity may continue, assume or replace some or all of the outstanding awards under the 2016 Plan. Our award agreements with our executive officers will typically provide that if awards granted to the executive officer under the 2016 Plan are continued, assumed or replaced in connection with such a transaction and if within one year after the transaction the executive officer experiences an involuntary termination of service other than for cause, the executive officer's outstanding awards will vest in full, will immediately become fully exercisable and will remain exercisable for one year following termination. If awards granted to any participant are not continued, assumed or replaced, the plan administrator may provide: (i) that any outstanding stock option or SAR will become fully exercisable for a period of time prior to the transaction and terminate at the time of the transaction; (ii) that any outstanding restricted stock, stock units or other stock-based awards will vest immediately prior to the transaction, or (iii) for the cancellation of any outstanding award in exchange for payment to the holder of the amount of the consideration that would have been received in the transaction for the number of shares subject to the award less the aggregate exercise price (if any) of the award. In the event of a change in control (as defined in the 2016 Plan) that does not involve a merger, consolidation, share exchange, or sale of all or substantially all of our company's assets, the plan administrator, in its discretion may take such action as it deems appropriate with respect to outstanding awards, which may include providing for the cancellation of any award in exchange for payment to the holder of the amount of the consideration that would have been received in the change in control for the number of shares subject to the award less the aggregate exercise price (if any) of the award, or making adjustments to any award to reflect the change in control, including the acceleration of vesting in full or in part.

Adjustment of Awards.     In the event of an equity restructuring that affects the per share value of our common stock, including a stock dividend, stock split, spinoff, rights offering or recapitalization through an extraordinary dividend, the plan administrator will make appropriate adjustment to: (i) the number and kind of securities reserved for issuance under the 2016 Plan, (ii) the number and kind of securities subject to outstanding awards under the 2016 Plan, (iii) the exercise price of outstanding options and SARs, and (iv) any maximum limitations prescribed by the 2016 Plan as to grants of certain types of awards. The administrator may also make similar adjustments in the event of any other change in our company's capitalization, including a merger, consolidation, reorganization or liquidation.

138


Table of Contents

Amendment and Termination.     The 2016 Plan will remain in effect until the tenth anniversary of the date of the 2016 Plan, or until terminated by our board of directors, whichever occurs first. Our board of directors may terminate, suspend or amend the plan at any time, but, in general, no termination, suspension or amendment may materially impair the rights of any participant with respect to outstanding awards without the participant's consent. Awards that are outstanding on the 2016 Plan's termination date will remain in effect in accordance with the terms of the plan and the applicable award agreements. Stockholder approval of any amendment of the 2016 Plan will be obtained if required by applicable law or the rules of the applicable stock exchange.

Registration.     We intend to file with the SEC a registration statement on Form S-8 covering the shares of our common stock issuable under the 2016 Plan.

Employee Stock Purchase Plan.     Prior to the completion of this offering, we expect to adopt and our stockholders to approve our Employee Stock Purchase Plan, or ESPP. Assuming such actions occur as expected, the ESPP will terminate on the earlier of (i) the date on which all shares subject to the ESPP are issued or (ii) the date our board of directors terminates the ESPP. The purpose of the ESPP is to provide our employees with a convenient means of purchasing shares of our common stock at a discount to market prices through the use of payroll deductions. The material terms of the ESPP are summarized below.

Share Reserve.     A total of                                        shares of our common stock will initially be made available for sale under the ESPP. In addition, the ESPP provides for annual increases in the number of shares available for issuance under the ESPP on January 1 of each year beginning in 2017 and ending on                                        , 2026 in an amount equal to the least of: (i)          % of the total number of shares outstanding as of December 31 of the immediately preceding calendar year; (ii)                             shares; or (iii) a number of shares determined by our board of directors. If there is any change to our outstanding common stock, such as a recapitalization, stock dividend, stock split or similar event, appropriate adjustments will be made to the number and class of shares available under the ESPP and to the number, class and purchase price of shares subject to purchase under any pending offering.

Administration.     Our compensation and organization committee will administer the ESPP. The compensation and organization committee will have full authority to adopt rules and procedures to administer the ESPP, to interpret the provisions of the ESPP, to determine the terms and conditions of offerings under the ESPP and to designate any subsidiaries to participate in the ESPP.

Eligibility and Participation.     All of our employees (including those of any participating subsidiary) other than those subject to the 5% ownership limitation described below are eligible to participate in the ESPP. Eligible employees may enroll in the ESPP and begin participating at the start of any purchase period.

Purchase Periods.     Shares of our common stock will be offered under the ESPP through a series of offerings, each of which consists of a single purchase period of six months, or such other duration (up to 27 months) as the compensation and organization committee may prescribe. We expect that our shares will be offered under the ESPP through a series of successive six-month purchase periods that are expected to commence on                                        and                                         each year. Purchases under the ESPP are expected to occur on the last trading day of each purchase period.

Purchase Price.     The purchase price of our common stock acquired on each purchase date will be no less than 85% of the lower of (i) the closing market price per share of our common stock on the first day of the applicable purchase period or (ii) the closing market price per share of our common stock on the purchase date at the end of the applicable purchase period.

139


Table of Contents

Payroll Deductions and Stock Purchases.     Each participant may elect to have a percentage of eligible compensation between 1% and 15% withheld as a payroll deduction per pay period. The accumulated deductions will automatically be applied on each purchase date to the purchase of shares of our common stock at the purchase price in effect for that purchase date. No more than                                        shares of our common stock may be purchased by an ESPP participant on any purchase date. For purposes of the ESPP, eligible compensation means the total cash compensation paid to a participant, including base salary, bonuses, commissions and overtime pay, but excludes company 401(k) contributions and income with respect to equity-based awards.

Special Limitations.     The ESPP imposes certain limitations upon a participant's right to acquire our common stock, including the following:

      purchase rights may not be granted to any individual who owns stock (including stock purchasable under any outstanding purchase rights) possessing 5% or more of the total combined voting power or value of all classes of our stock or the stock of any of our subsidiaries; and

      a participant may not be granted rights to purchase more than $25,000 worth of our common stock (valued at the time each purchase right is granted) for each calendar year in which such purchase rights are outstanding.

Withdrawal or Termination of Purchase Rights.     A participant may withdraw from the ESPP at any time, and his or her accumulated payroll deductions will be promptly refunded. A participant's purchase right will immediately terminate upon his or her cessation of employment for any reason. Any payroll deductions that the participant may have made for the purchase period in which such cessation of employment occurs will be refunded and will not be applied to the purchase of common stock.

Transferability.     No purchase rights will be assignable or transferable by the participant, except by will or the laws of descent and distribution.

Corporate Transactions.     If our company is acquired by merger, consolidation or other reorganization, or sells all or substantially all its assets, each right to acquire shares on any purchase date scheduled to occur after the date of the consummation of the acquisition transaction shall be continued or assumed or an equivalent right shall be substituted by the surviving or successor corporation or its parent or subsidiary. If those rights are not continued, assumed or substituted, then our board of directors may terminate the ESPP or shorten the purchase period then in progress by setting a new purchase date to occur prior to the transaction.

Share Proration.     Should the total number of shares of common stock to be purchased pursuant to outstanding purchase rights on any particular purchase date exceed the number of shares remaining available for issuance under the ESPP at that time, then the compensation and organization committee will make a pro-rata allocation of the available shares on a uniform and nondiscriminatory basis.

Amendment.     Our board of directors may at any time amend or suspend the ESPP. However, our board of directors may not, without stockholder approval, amend the ESPP to (i) increase the number of shares issuable under the ESPP outside of the automatic share increase feature, or (ii) effect any other change in the ESPP that would require stockholder approval under applicable law or to maintain compliance with Code Section 423.

140


Table of Contents

401(k) Retirement Plan

We maintain a 401(k) retirement plan that is intended to be a tax-qualified defined contribution plan under Section 401(k) of the Internal Revenue Code. All of our eligible employees can participate, beginning on the first day of the month following commencement of their employment. The 401(k) plan includes a salary deferral arrangement pursuant to which participants may elect to reduce their current compensation by up to the statutorily prescribed limit, equal to $18,000 in 2016, and have the amount of the reduction contributed to the 401(k) plan. Participants who are at least 50 years old also can make "catch-up" contributions, which in 2016 may be up to an additional $6,000 above the statutory limit. We also make discretionary matching contributions to our 401(k) plan equal to 3% of the employee contributions up to 3% of the employee's salary, subject to the statutorily prescribed limit, equal to $18,000 in 2016 for all employees who have been employed at least one year, other than our named executive officers, commissioned field sales representatives and certain highly compensated employees. The match immediately vests in full.

Limitation of Liability and Indemnification

Our amended and restated certificate of incorporation, which will become effective upon completion of this offering, limits the personal liability of directors for breach of fiduciary duty to the maximum extent permitted by the DGCL and provides that no director will have personal liability to us or to our stockholders for monetary damages for breach of fiduciary duty or other duty as a director. However, these provisions do not eliminate or limit the liability of any of our directors:

      for any breach of the director's duty of loyalty to us or our stockholders;

      for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;

      for voting or assenting to unlawful payments of dividends, stock repurchases or other distributions; or

      for any transaction from which the director derived an improper personal benefit.

Any amendment to, or repeal of, these provisions will not eliminate or reduce the effect of these provisions in respect of any act, omission or claim that occurred or arose prior to such amendment or repeal. If the DGCL is amended to provide for further limitations on the personal liability of directors of corporations, then the personal liability of our directors will be further limited to the greatest extent permitted by the DGCL.

In addition, our amended and restated certificate of incorporation, which will become effective upon completion of this offering, provides that we must indemnify our directors and officers and we must advance expenses, including attorneys' fees, to our directors and officers in connection with legal proceedings, subject to very limited exceptions.

We maintain a general liability insurance policy that covers certain liabilities of our directors and executive officers arising out of claims based on acts or omissions in their capacities as directors or executive officers. In addition, we intend to enter into indemnification agreements with each of our directors and executive officers. These indemnification agreements may require us, among other things, to indemnify each such director or executive officer for some expenses, including attorneys' fees, judgments, fines and settlement amounts incurred by him or her in any action or proceeding arising out of his or her service as one of our directors or executive officers.

141


Table of Contents

Certain of our non-employee directors may, through their relationships with their employers, be insured and/or indemnified against certain liabilities incurred in their capacity as members of our board of directors.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, executive officers or persons controlling us, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

Rule 10b5-1 Sales Plans

Our directors and executive officers may adopt written plans, known as Rule 10b5-1 plans, in which they will contract with a broker to buy or sell shares of our common stock on a periodic basis. Under a Rule 10b5-1 plan, a broker executes trades pursuant to parameters established by the director or officer when entering into the plan, without further direction from the director or officer. It also is possible that the director or officer could amend or terminate the plan when not in possession of material, nonpublic information. In addition, our directors and executive officers may buy or sell additional shares outside of a Rule 10b5-1 plan when they are not in possession of material, nonpublic information.

142


Table of Contents


CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

In addition to the director and executive compensation arrangements discussed above under "Executive Compensation," we have been a party to the following transactions since January 1, 2013, in which the amount exceeded or will exceed $120,000, and in which any director, executive officer or holder of more than 5% of any class of our voting stock, or any member of the immediate family of or entities affiliated with any of them, had or will have a material interest.

Series B Preferred Stock Financing

In September and October 2012, we issued              shares of our Series B preferred stock at an issuance price of $             per share for aggregate consideration of approximately $10.4 million to a total of 18 investors, including Galen Partners and affiliated entities and Radius Ventures III LP and affiliated entities, each of which holds 5% or more of our capital stock and is represented on our board of directors, as well as certain of our directors or their affiliates, including Worthy Ventures Resources LLC (an affiliate of Peter Soderberg), Richard Nigon and Kevin Roche. In connection with the closing of the offering contemplated by this prospectus, such shares of Series B preferred stock will convert to common stock at a ratio of 1-to-             . The following table summarizes purchases of Series B preferred stock by such investors:

Stockholder Name
  Shares of Series B   Series B Total Purchase Price  

Galen Partners

        $ 4,400,131  

Radius Ventures

        $ 4,400,131  

Worthy Ventures Resources LLC

        $ 300,010  

Richard Nigon (IRA)

        $ 21,761  

Kevin Roche

        $ 21,761  

Amended and Restated Investors' Rights Agreement

In September 2012, in connection with the closing of our Series B preferred stock financing, we entered into an amended and restated investors' rights agreement with certain holders of our preferred stock, including entities with which certain of our directors are affiliated. Pursuant to this agreement, holders of our preferred stock, including certain holders of 5% of our capital stock and entities affiliated with certain of our directors, were granted certain registration rights, including the right to demand that we file a registration statement or request that their shares be covered by a registration statement that we are otherwise filing. The investors' rights agreement also provides for a right of first offer in favor of certain holders of our stock with regard to certain issuances of our capital stock. The rights of first offer will not apply to, and will terminate upon, the completion of this offering. For a more detailed description of these registration rights, see "Description of Capital Stock — Registration Rights."

Voting Agreement

We are party to a voting agreement under which certain holders of our capital stock, including entities with which certain of our directors are affiliated, have agreed to vote their shares in a certain way on certain matters, including with respect to the election of directors. The voting agreement also provides for drag-along rights requiring the stockholders party to this agreement to participate in a sale of our company or a deemed liquidation event under this agreement if any such matter is approved by a certain percentage of the stockholders party to the agreement.

Upon the completion of this offering, the voting agreement will terminate in its entirety and none of our stockholders will have any special rights regarding the election or designation of members of our board of directors or the other rights granted under this agreement.

143


Table of Contents

Right of First Refusal and Co-Sale Agreement

We are party to a right of first refusal and co-sale agreement pursuant to which our preferred stockholders, including certain holders of 5% of our capital stock and entities affiliated with certain of our directors, are granted a right of first refusal to purchase shares of our capital stock held by the stockholders party to this agreement and rights of co-sale in the event of a sale of our capital stock held by the stockholders party to this agreement. The right of first offer and co-sale agreement, and the associated rights described therein, will not apply to, and will terminate upon, the completion of this offering.

Indemnification Agreements

Our amended and restated certificate of incorporation, which will be effective upon the completion of this offering, will contain provisions limiting the liability of directors, and our amended and restated certificate of incorporation and our amended and restated bylaws will provide that we will indemnify each of our directors to the fullest extent permitted under Delaware law. Our amended and restated certificate of incorporation and amended and restated bylaws will also provide our board of directors with discretion to indemnify our employees and agents when determined appropriate by the board. In addition, we intend to enter into agreements to indemnify our directors and executive officers. For more information regarding these agreements, see "Executive Compensation — Limitation of Liability and Indemnification."

Change in Control Agreements

Certain of our executive officers will be entitled to change in control benefits pursuant to the terms of our equity incentive plans and pursuant to the terms of their employment agreements that we intend to enter into prior to the completion of this offering, as described in greater detail in "Executive Compensation — Potential Payments Upon Termination or Change-In-Control."

Executive Compensation Awards

We have approved equity compensation awards for our officers and directors to be made upon the completion of this offering. These are described in greater detail in "Executive Compensation — Stock Option and Other Equity Compensation Plans."

Directed Share Program

At our request, the underwriters have reserved for sale at the initial public offering price up to              shares of common stock, or 5% of the shares offered by this prospectus, for our employees, directors and other persons associated with us. The participants in the directed share program are subject to the 180-day lock-up restriction described in the "Underwriting" section of this prospectus, with respect to the directed shares sold to them. The number of shares of common stock available for sale to the general public in the offering will be reduced by the number of shares sold pursuant to the directed share program. Any directed shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus. The directed share program will be arranged through Piper Jaffray & Co.

Policy for Approval of Related Party Transactions

Prior to the completion of this offering, our board of directors will adopt a written statement of policy regarding transactions with related persons, which we refer to as our related person policy. Our related person policy will cover any transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships in which we were or are to be a participant, the amount involved exceeds $120,000 and a related person had or will have a direct or indirect material interest, including, without limitation, purchases of goods or services by or from the related person or entities in which the related person has a material interest, indebtedness, guarantees of indebtedness or employment by us of a related person.

144


Table of Contents


PRINCIPAL STOCKHOLDERS

The following table sets forth information with respect to the beneficial ownership of our common stock, as of                           , 2016 by each person known by us to beneficially own more than 5% of our common stock, each of our directors, each of our named executive officers and all of our current directors and executive officers as a group.

The column entitled "Percentage of Shares Beneficially Owned—Before Offering" is based on              shares of our common stock outstanding as of                           , 2016, assuming the conversion of all outstanding shares of our preferred stock into common stock immediately prior to the completion of this offering. The column entitled "Percentage of Shares Beneficially Owned—After Offering" is based on              shares of our common stock to be outstanding after this offering, assuming (a) the conversion of all outstanding shares of our preferred stock into an aggregate              shares of common stock immediately prior to the completion of this offering; (b) the issuance of             additional shares of common stock to which our Series A and Series B preferred stockholders are entitled immediately prior to the completion of this offering issuable in connection with the initial public offering, assuming an initial offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus; and (c) the issuance of              shares of common stock immediately prior to the completion of this offering to pay accrued dividends on our Series B preferred stock (assuming a closing date of                           , 2016 and an initial offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus). The table below excludes any shares of common stock that may be purchased in this offering pursuant to the directed share program or otherwise. See "Underwriting."

The number of shares beneficially owned by each stockholder is determined under rules issued by the SEC and includes voting or investment power with respect to securities. Under these rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting power or investment power. In computing the number of shares beneficially owned by an individual or entity and the percentage ownership of that person, shares of common stock subject to options, warrants or other rights held by such person that are currently exercisable, or will become exercisable within 60 days of                           , 2016, are considered outstanding, although these shares are not considered outstanding for purposes of computing the percentage ownership of any other person. Except as indicated by the footnotes below, we believe, based on information furnished to us, that the persons and entities named in the table below have sole voting and sole investment power with respect to all shares of common stock that they beneficially owned, subject to applicable community property laws.

145


Table of Contents

Unless otherwise indicated, the address of all listed stockholders is c/o Tactile Systems Technology, Inc., 1331 Tyler Street NE, Suite 200, Minneapolis, MN 55413.

 
   
  Percentage of Shares
Beneficially Owned
Name
  Number of Shares
Beneficially Owned
  Before Offering   After Offering

5% Stockholders

           

Galen Partners V L.P. (1)

           

Radius Ventures III QP LP (2)

           

Named Executive Officers and Directors

           

Peter H. Soderberg

           

Gerald R. Mattys

           

William W. Burke

           

Jordan S. Davis

           

Richard Nigon

           

Kevin H. Roche

           

Stephen I. Shapiro

           

Zubeen Shroff

           

Robert J. Folkes

           

Bryan F. Rishe

           

All executive officers and directors as a group (12 persons)

           

(1)
Galen Partners V, L.P. has one general partner, Galen Partners V, LLC, which has sole voting and investment control over the shares of our common stock held by Galen Partners V, L.P. and is the beneficial owner of the shares held by Galen Partners V, L.P. Galen Partners V, LLC has three voting partners, including Zubeen Shroff, one of our directors, David W. Jahns and L. John Wilkerson.

(2)
Jordan Davis, one of our directors, and Dan Lubin are the Managing Members of Radius Ventures III QP LP and hold the shared voting and/or dispositive power with respect to the shares of our common stock held by Radius Ventures III QP LP.

146


Table of Contents


DESCRIPTION OF CAPITAL STOCK

The following is a description of the material provisions of our capital stock, as well as other material terms of our amended and restated certificate of incorporation and amended and restated bylaws as they will be in effect as of the consummation of the offering. We refer you to the form of our amended and restated certificate of incorporation and to the form of our amended and restated bylaws, copies of which have been filed as exhibits to the registration statement of which this prospectus forms a part.

Authorized Capital

Immediately prior to the completion of this offering and the following the filing of the amended and restated certificate of incorporation, our authorized capital stock will consist of (i)               shares of common stock, par value $0.001 per share, and (ii)                shares of undesignated preferred stock, par value $0.001 per share.

As of September 30, 2015, there were issued and outstanding:

Immediately prior to the completion of this offering, all currently outstanding shares of our Series A and Series B preferred stock will be converted into shares of a single class of common stock. Our Series A preferred stock will convert to common stock at a ratio of 1-for-             and our Series B preferred stock will convert to common stock at a ratio of 1-for-             . In addition, upon completion of this offering, (a) each Series A preferred stockholder is entitled to receive the number of common shares equal to the Series A original issue price divided by the initial public offering price per share in this offering; and (b) each Series B preferred stockholder is entitled to receive the number of common shares equal to the Series B preferred stock original issue price divided by the initial public offering price per share in this offering. Therefore, we expect to issue              additional shares of common stock immediately prior to the completion of this offering that our Series A and Series B preferred stockholders are entitled to receive in connection with this initial public offering, assuming an initial offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus. Finally, immediately prior to the completion of this offering, each Series B preferred stockholder is entitled to receive the number of common shares equal to the accrued dividends on the shares of Series B preferred stock divided by the original issue price of the Series B preferred stock divided by the initial public offering price per share in this offering. Therefore, we expect to issue                                        additi onal shares of common stock to pay accrued dividends on our Series B preferred stock (assuming a closing date of                           , 2016 and an initial offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus).

147


Table of Contents

Assuming the conversion of all outstanding shares of our preferred stock into shares of common stock, assuming a closing date of                           , 2016 and an initial offering price of $              per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, immediately following the completion of this offering, we expect to have               shares of common stock and no shares of preferred stock outstanding (or              shares of common stock and no shares of preferred stock outstanding if the underwriters exercise in full their option to purchase additional shares). A $1.00 decrease (increase) in the assumed initial public offering price of $             per share would increase (decrease) the number of additional shares of common stock issuable in connection with the conversion of our preferred stock by              shares. A $1.00 decrease (increase) in the assumed initial public offering price of $             per share would increase (decrease) the number of additional shares of common stock issuable in connection with paying the accrued dividends on our Series B preferred stock by                           shares.

Common Stock

Pursuant to our amended and restated certificate of incorporation, holders of our common stock will be entitled to one vote on all matters submitted to a vote of stockholders, except as otherwise expressly provided in our amended and restated certificate of incorporation or as required by applicable law. We have not provided for cumulative voting for the election of directors. As a result, the holders of a majority of the voting shares will be able to elect all of the directors then standing for election, if they should so choose. Subject to the rights, if any, of the holders of any outstanding series of preferred stock, holders of our common stock shall be entitled to receive dividends out of any of our funds legally available when, as and if declared by the board of directors. Upon our liquidation, dissolution or winding-up, the holders of common stock would be entitled to share ratably in all assets remaining after payment of all debts and other liabilities and the satisfaction of any liquidation preferences granted to the holders of outstanding shares of preferred stock. Holders of common stock have no preemptive or conversion rights or other subscription rights.

Preferred Stock

Immediately prior to the completion of this offering, all currently outstanding shares of our Series A and Series B preferred stock will be converted into shares of a single class of common stock.

Following this offering, our amended and restated certificate of incorporation provides that we may issue up to                                        shares of preferred stock in one or more series as may be determined by our board of directors. Our board of directors has broad discretionary authority with respect to the rights of any new series of preferred stock and may establish the following with respect to the shares in each series, without any vote or action of the stockholders:

We believe that the ability of our board of directors to issue one or more series of preferred stock will provide us with flexibility in structuring possible future financings and acquisitions, and in meeting other corporate needs that may arise. The authorized shares of preferred stock, as well as authorized and unissued shares of common stock, will be available for issuance without action by our stockholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded.

148


Table of Contents

Our board of directors may authorize, without stockholder approval, the issuance of preferred stock with voting and conversion rights that could adversely affect the voting power and other rights of holders of common stock. Although our board of directors has no current intention of doing so, it could issue a series of preferred stock that could, depending on the terms of such series, impede the completion of a merger, tender offer or other takeover attempt of our company. Our board of directors could also issue preferred stock having terms that could discourage an acquisition attempt through which an acquiror may be able to change the composition of our board of directors, including a tender offer or other transaction that some, or a majority, of our stockholders might believe to be in their best interests or in which stockholders might receive a premium for their stock over the then-current market price. Any issuance of preferred stock therefore could have the effect of decreasing the market price of our common stock.

Our board of directors will make any determination to issue such shares based on its judgment as to the best interests of our company and stockholders. We have no current plan to issue any preferred stock after this offering.

Registration Rights

Following the completion of this offering, the holders of our common stock issued upon conversion of our preferred stock or their permitted transferees are entitled to certain rights with respect to registration of these shares under the Securities Act. These rights are provided under the terms of an investors' rights agreement between us and the holders of these shares, which was entered into in connection with our preferred stock financings, and include demand registration rights, piggyback registration rights and Form S-3 registration rights, subject to certain exceptions. In any registration made pursuant to such investors' rights agreement, all fees, costs and expenses of underwritten registrations will be borne by us, and all selling expenses, including underwriting discounts and commissions, will be borne by the holders of the shares being registered, subject to certain exceptions.

The registration rights terminate three years following the completion of this offering or, with respect to any particular stockholder, at such time that the stockholder can sell all of its shares during any three-month period pursuant to Rule 144 of the Securities Act.

Demand Registration Rights.     Following the completion of this offering, the holders of an aggregate of                      shares of our common stock, or their permitted transferees, are entitled to certain demand registration rights. Under the terms of the investors' rights agreement, we will be required, upon the written request at any time more than 180 days after the effective date of the registration statement of which this prospectus forms a part of holders of at least a majority of the shares that are entitled to registration rights under the investors' rights agreement and so long as the anticipated aggregate offering price of the shares to be offered and sold under such registration statement on Form S-1 is at least $10 million (net of underwriting discounts and commissions, stock transfer taxes and any other expenses of the such stockholders), to register, within 60 days after receiving such request, all of these shares plus any additional shares requested to be included in such registration requested by any other stockholders within 20 days after notice of such registration is mailed by us. We are required to effect only three registrations pursuant to this provision of the investors' rights agreement. We will not be required to effect a demand registration during the period from 60 days prior to the filing to 90 days following the effectiveness of a registration statement relating to a public offering of our securities. These registration rights are subject to specified conditions and limitations, including our ability to defer the filing of a registration statement with respect to an exercise of such Form S-3 registration rights for up to 90 days under certain circumstances.

149


Table of Contents

Piggyback Registration Rights.     Following the completion of this offering, the holders of an aggregate of              shares of our common stock or their permitted transferees are entitled to certain piggyback registration rights. If we register any of our securities for our own account after the completion of this offering, the holders of these shares are entitled to include their shares in the registration upon written request made within 20 days after notice of such registration is mailed by us. Both we and the underwriters of any underwritten offering have the right to limit the number of shares registered by these holders for marketing reasons, subject to limitations set forth in the investors' rights agreement.

Form S-3 Registration Rights.     Following the completion of this offering, the holders of an aggregate of              shares of our common stock, or their permitted transferees, are entitled to certain Form S-3 registration rights, upon the written request of the holders of at least 20% of the shares that are entitled to registration rights under the investors' rights agreement and so long as the aggregate amount of shares to be offered and sold under such registration statement on Form S-3 is at least $2.5 million (net of underwriting discounts and commissions, stock transfer taxes and any other expenses of the such stockholders). We are only obligated to file up to two registration statements on Form S-3 within a 12-month period. We will not be required to effect a demand registration during the period from 60 days prior to the filing to 90 days following the effectiveness of a registration statement relating to a public offering of our securities. These registration rights are subject to specified conditions and limitations, including our ability to defer the filing of a registration statement with respect to an exercise of such Form S-3 registration rights for up to 90 days under certain circumstances.

Anti-Takeover Effects of Delaware Law and Our Certificate of Incorporation and Bylaws

Delaware Law.     We are subject to Section 203 of the Delaware General Corporation Law. Section 203 generally prohibits a public Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless:

Section 203 defines a business combination to include:

150


Table of Contents

In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation or any entity or person affiliated with or controlling or controlled by the entity or person.

A Delaware corporation may opt out of this provision by express provision in its original certificate of incorporation or by amendment to its certificate of incorporation or bylaws approved by its stockholders. However, we have not opted out of, and do not currently intend to opt out of, this provision. The statute could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire us.

Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws.     Provisions of our amended and restated certificate of incorporation and amended and restated bylaws, each of which will become effective upon completion of this offering, may delay or discourage transactions involving an actual or potential change in control of our company or change in our management, including transactions in which stockholders might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests. Therefore, these provisions could adversely affect the price of our common stock. Among other things, our amended and restated certificate of incorporation and amended and restated bylaws:

151


Table of Contents

Our amended and restated certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, any or all internal corporate claims, which shall include claims, including claims in the right of our company, (i) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (ii) as to which Title 8 of the Delaware General Corporation Law confers jurisdiction upon the Delaware Court of Chancery, shall be brought solely and exclusively in a state court located within the State of Delaware (or, if no state court located in the State of Delaware has jurisdiction, the federal district court for the District of Delaware). It is possible that a court of law could rule that the choice of forum provision contained in our certificate of incorporation is inapplicable or unenforceable if it is challenged in a proceeding or otherwise.

The amendment of any of the above provisions, except for the provision making it possible for our board of directors to issue preferred stock and the provision prohibiting cumulative voting, would require approval by holders of at least two-thirds in voting power of the outstanding shares of stock entitled to vote thereon.

Limitation on Liability of Directors and Indemnification.     Our amended and restated certificate of incorporation limits the liability of our directors to the fullest extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except for liability for any:

These limitations of liability do not apply to liabilities arising under federal securities laws and do not affect the availability of equitable remedies such as injunctive relief or rescission.

Our amended and restated bylaws, in the form that will become effective upon the completion of this offering, provide that we will indemnify and advance expenses to our directors and officers to the fullest extent permitted by law or, if applicable, pursuant to indemnification agreements. They further provide that we may choose to indemnify other employees or agents of the corporation from time to time. Section 145(g) of the Delaware General Corporation Law and our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in connection with their services to us, regardless of whether our bylaws permit indemnification. We intend to obtain a directors' and officers' liability insurance policy prior to the completion of this offering.

152


Table of Contents

We will enter into separate indemnification agreements with our directors and officers, in addition to the indemnification provisions set forth in our bylaws. These agreements, among other things, will require us to indemnify our directors and officers for certain expenses, including attorneys' fees, judgments, fines and settlement amounts incurred by a director or officer in any action or proceeding arising out of his or her services as one of our directors or officers, including services provided to any subsidiary or any other company or enterprise to which the person provides services at our request.

At present, there is no pending litigation or proceeding involving any of our directors or officers as to which indemnification is required or permitted, and we are not aware of any threatened litigation or proceeding that may result in a claim for indemnification.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of ours pursuant to the foregoing provisions, or otherwise, in the opinion of the SEC, this indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is Computershare Trust Company, N.A.

Stock Exchange Listing

We have applied to have our common stock listed on The NASDAQ Global Market under the symbol "TCMD."

153


Table of Contents


SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there was no public market for our common stock. We cannot predict the effect, if any, that market sales of shares of our common stock or the availability of shares of our common stock for sale will have on the market price of our common stock. Sales of substantial amounts of our common stock in the public market could adversely affect the market prices of our common stock and could impair our future ability to raise capital through the sale of our equity securities.

Based on our outstanding shares as of                                        , 2016, and assuming (a) the issuance of                           shares of common stock in this offering; (b) the conversion of all outstanding shares of our preferred stock into an aggregate                           shares of common stock immediately prior to the completion of this offering; (c) the issuance of                            additional shares of common stock immediately prior to the completion of this offering issuable in connection with the conversion of our preferred stock; and (d) the issuance of              shares of common stock immediately prior to the completion of this offering to pay accrued dividends on our Series B preferred stock (assuming a closing date of                                 , 2016), upon completion of this offering, we will have outstanding a total of                  shares of our common stock (or                           shares if the underwriters' option to purchase additional shares is exercised in full). Of these shares, all of the shares sold in this offering (plus any shares sold as a result of the underwriters' exercise of their option) will be freely tradable without restriction or further registration under the Securities Act, unless those shares are purchased by our directors and officers in the directed share program or by our affiliates as that term is defined in Rule 144 under the Securities Act.

The remaining                                        sh ares of common stock to be outstanding after this offering will be "restricted securities" under Rule 144. Of these restricted securities,                                         shares will be subject to transfer restrictions for 180 days from the date of this prospectus pursuant to lock-up agreements. Restricted securities may be sold in the public market only if they have been registered or if they qualify for an exemption from registration under Rules 144 or 701 or otherwise under the Securities Act.

Lock-up Agreements

Our officers and directors and other holders of substantially all of our outstanding common stock, preferred stock, options and warrants are subject to lock-up agreements pursuant to which they have agreed, subject to limited exceptions, not to offer, sell, or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or securities convertible into or exchangeable or exercisable for shares of common stock for a period of 180 days from the date of this prospectus without the prior written consent of Piper Jaffray & Co. and William Blair & Company, L.L.C.

Rule 144

Affiliate resales of restricted securities.     In general, beginning 90 days after the effective date of the registration statement of which this prospectus is a part, a person who is an affiliate of ours, or who was an affiliate at any time during the three months before a sale, who has beneficially owned shares of our common stock for at least six months would be entitled to sell in "broker's transactions" or certain "riskless principal transactions" or to market makers, a number of shares within any three-month period that does not exceed the greater of:

154


Table of Contents

Affiliate resales under Rule 144 also are subject to the availability of current public information about us. In addition, if the number of shares being sold under Rule 144 by an affiliate during any three-month period exceeds 5,000 shares or has an aggregate sale price in excess of $50,000, the seller must file a notice on Form 144 with the SEC and NASDAQ concurrently with either the placing of a sale order with the broker or the execution directly with a market maker.

Non-affiliate resales of restricted securities.     In general, beginning 90 days after the effective date of the registration statement of which this prospectus is a part, a person who is not an affiliate of ours at the time of sale, and has not been an affiliate at any time during the three months preceding a sale, and who has beneficially owned shares of our common stock for at least six months but less than a year, is entitled to sell such shares subject only to the availability of current public information about us. If such person has held our shares for at least one year, such person can resell under Rule 144(b)(1) without regard to any Rule 144 restrictions, including the 90-day public company requirement and the current public information requirement.

Non-affiliate resales are not subject to the manner of sale, volume limitation or notice filing provisions of Rule 144.

Rule 701

In general, under Rule 701, any of an issuer's employees, directors, officers, consultants or advisors who purchases shares from the issuer in connection with a compensatory stock or option plan or other written agreement before the effective date of a registration statement under the Securities Act is entitled to sell such shares 90 days after such effective date in reliance on Rule 144. An affiliate of the issuer can resell shares in reliance on Rule 144 without having to comply with the holding period requirement, and non-affiliates of the issuer can resell shares in reliance on Rule 144 without having to comply with the current public information and holding period requirements.

The SEC has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Exchange Act, along with the shares acquired upon exercise of such options, including exercises after an issuer becomes subject to the reporting requirements of the Exchange Act.

Equity Plans

We intend to file one or more registration statements on Form S-8 under the Securities Act to register all shares of common stock subject to outstanding stock options and shares of common stock issued or issuable under our stock plans. We expect to file the registration statement covering shares offered pursuant to our stock plans on or shortly after the date of this prospectus, permitting the resale of such shares by non-affiliates in the public market without restriction under the Securities Act and the sale by affiliates in the public market, subject to compliance with the resale provisions of Rule 144.

Registration Rights

After the completion of this offering, holders of                                        shares of common stock will be entitled to specific rights to register those shares for sale in the public market. See "Description of Capital Stock — Registration Rights." Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by affiliates, immediately upon the effectiveness of the registration statement relating to such shares.

155


Table of Contents


MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS

The following discussion is a summary of the material U.S. federal income tax consequences to non-U.S. holders (as defined below) of the purchase, ownership and disposition of our common stock issued pursuant to this offering, but does not purport to be a complete analysis of all potential tax effects. The effects of other U.S. federal tax laws, such as estate and gift tax laws, and any applicable state, local or foreign tax laws are not discussed. This discussion is based on the U.S. Internal Revenue Code of 1986, as amended, or the Code, Treasury Regulations promulgated thereunder, judicial decisions, and published rulings and administrative pronouncements of the U.S. Internal Revenue Service, or the IRS, in effect as of the date of this offering. These authorities may change or be subject to differing interpretations. Any such change or differing interpretation may be applied retroactively in a manner that could adversely affect a non-U.S. holder of our common stock. We have not sought and will not seek any rulings from the IRS regarding the matters discussed below. There can be no assurance the IRS or a court will not take a contrary position regarding the tax consequences of the purchase, ownership and disposition of our common stock.

This discussion is limited to non-U.S. holders that hold our common stock as a "capital asset" within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all U.S. federal income tax consequences relevant to a non-U.S. holder's particular circumstances, including the impact of the Medicare contribution tax on net investment income. In addition, it does not address consequences relevant to non-U.S. holders subject to particular rules, including, without limitation:

156


Table of Contents

If a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) holds our common stock, the tax treatment of a partner in the partnership will depend on the status of the partner, the activities of the partnership and certain determinations made at the partner level. Accordingly, partnerships holding our common stock and the partners in such partnerships should consult their tax advisors regarding the U.S. federal income tax consequences to them of the purchase, ownership and disposition of our common stock.

THIS DISCUSSION IS FOR INFORMATION PURPOSES ONLY AND IS NOT INTENDED AS TAX ADVICE. INVESTORS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK ARISING UNDER THE U.S. FEDERAL ESTATE OR GIFT TAX LAWS OR UNDER THE LAWS OF ANY STATE, LOCAL OR NON-U.S. TAXING JURISDICTION OR UNDER ANY APPLICABLE INCOME TAX TREATY.

Definition of a Non-U.S. Holder

For purposes of this discussion, a "non-U.S. holder" is any beneficial owner of our common stock that is not a "U.S. person," a partnership, or an entity disregarded as separate from its owner, each for United States federal income tax purposes. A U.S. person is any of the following:

Distributions

As described in "Dividend Policy," we do not anticipate declaring or paying dividends to holders of our common stock in the foreseeable future. However, if we do make distributions on our common stock, such distributions of cash or property on our common stock will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Amounts not treated as dividends for U.S. federal income tax purposes will constitute a return of capital and first be applied against and reduce a non-U.S. holder's adjusted tax basis in its common stock, but not below zero. Any excess will be treated as capital gain and will be treated as described below in "— Sale or Other Taxable Disposition."

157


Table of Contents

Subject to the discussion below on backup withholding and foreign accounts, dividends paid to a non-U.S. holder of our common stock that are not effectively connected with the non-U.S. holder's conduct of a trade or business within the United States will be subject to U.S. federal withholding tax at a rate of 30% of the gross amount of the dividends (or such lower rate specified by an applicable income tax treaty).

Non-U.S. holders may be entitled to a reduction in or an exemption from withholding on dividends as a result of either (a) an applicable income tax treaty or (b) the non-U.S. holder holding our common stock in connection with the conduct of a trade or business within the United States and dividends being paid in connection with that trade or business. To claim such a reduction in or exemption from withholding, the non-U.S. holder must provide the applicable withholding agent with a properly executed (a) IRS Form W-8BEN or W-8BEN-E claiming an exemption from or reduction of the withholding tax under the benefit of an income tax treaty between the United States and the country in which the non-U.S. holder resides or is established, or (b) IRS Form W-8ECI stating that the dividends are not subject to withholding tax because they are effectively connected with the conduct by the non-U.S. holder of a trade or business within the United States, as may be applicable. These certifications must be provided to the applicable withholding agent prior to the payment of dividends and must be updated periodically. Non-U.S. holders that do not timely provide the applicable withholding agent with the required certification, but that qualify for a reduced rate under an applicable income tax treaty, may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS.

Subject to the discussions below on backup withholding and foreign accounts, if dividends paid to a non-U.S. holder are effectively connected with the non-U.S. holder's conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, the non-U.S. holder maintains a permanent establishment in the United States to which such dividends are attributable), then, although exempt from U.S. federal withholding tax (provided the non-U.S. holder provides appropriate certification, as described above), the non-U.S. holder will be subject to U.S. federal income tax on such dividends on a net income basis at the regular graduated U.S. federal income tax rates. In addition, a non-U.S. holder that is a corporation may be subject to a branch profits tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on its effectively connected earnings and profits for the taxable year that are attributable to such dividends, as adjusted for certain items. Non-U.S. holders should consult their tax advisors regarding their entitlement to benefits under any applicable income tax treaty.

Sale or Other Taxable Disposition

Subject to the discussions below on backup withholding and foreign accounts, a non-U.S. holder will not be subject to U.S. federal income tax on any gain realized upon the sale or other disposition of our common stock unless:

158


Table of Contents

Gain described in the first bullet point above will generally be subject to U.S. federal income tax on a net income basis at the regular graduated U.S. federal income tax rates. A non-U.S. holder that is a foreign corporation may also be subject to a branch profits tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) of a portion of its effectively connected earnings and profits for the taxable year, as adjusted for certain items.

A non-U.S. holder described in the second bullet point above will be subject to U.S. federal income tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on any gain derived from the disposition, which may be offset by certain U.S. source capital losses of the non-U.S. holder (even though the individual is not considered a resident of the United States) provided the non-U.S. holder has timely filed U.S. federal income tax returns with respect to such losses.

With respect to the third bullet point above, we believe we are not currently and do not anticipate becoming a USRPHC. Because the determination of whether we are a USRPHC depends on the fair market value of our USRPIs relative to the fair market value of our other business assets and our non-U.S. real property interests, however, there can be no assurance we are not a USRPHC or will not become one in the future. Even if we are or were to become a USRPHC, gain arising from the sale or other taxable disposition by a non-U.S. holder of our common stock will not be subject to U.S. federal income tax if such class of stock is "regularly traded," as defined by applicable Treasury Regulations, on an established securities market, and such non-U.S. holder owned, actually or constructively, 5% or less of such class of our stock throughout the shorter of the five-year period ending on the date of the sale or other disposition or the non-U.S. holder's holding period for such stock.

Non-U.S. holders should consult their tax advisors regarding potentially applicable income tax treaties that may provide for different rules.

Information Reporting and Backup Withholding

Subject to the discussion below on foreign accounts, a non-U.S. holder will not be subject to backup withholding with respect to payments of dividends on our common stock we make to the non-U.S. holder, provided the applicable withholding agent does not have actual knowledge or reason to know such holder is a United States person and the holder certifies its non-U.S. status, such as by providing a valid IRS Form W-8BEN, W-8BEN-E or W-8ECI, or other applicable certification. However, information returns will be filed with the IRS in connection with any dividends on our common stock paid to the non-U.S. holder, regardless of whether any tax was actually withheld. Copies of these information returns may also be made available under the provisions of a specific treaty or agreement to the tax authorities of the country in which the non-U.S. holder resides or is established.

Information reporting and backup withholding may apply to the proceeds of a sale of our common stock within the United States, and information reporting may (although backup withholding generally will not) apply to the proceeds of a sale of our common stock outside the United States conducted through certain U.S.-related financial intermediaries, in each case, unless the beneficial owner certifies under penalty of perjury that it is a non-U.S. holder on IRS Form W-8BEN, W-8BEN-E or other applicable form (and the payer does not have actual knowledge or reason to know that the beneficial owner is a U.S. person) or such owner otherwise establishes an exemption.

159


Table of Contents

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a non-U.S. holder's U.S. federal income tax liability, provided the required information is timely furnished to the IRS.

Additional Withholding Tax on Payments Made to Foreign Accounts

Withholding taxes may be imposed under the Foreign Account Tax Compliance Act, or FATCA, on certain types of payments made to non-U.S. financial institutions and certain other non-U.S. entities. Specifically, a 30% withholding tax may be imposed on dividends on, or gross proceeds from the sale or other disposition of, our common stock paid to a "foreign financial institution" or a "non-financial foreign entity" (each as defined in the Code), unless (i) the foreign financial institution undertakes certain diligence and reporting obligations, (ii) the non-financial foreign entity either certifies it does not have any "substantial United States owners" (as defined in the Code) or furnishes identifying information regarding each substantial United States owner, or (iii) the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from these rules. If the payee is a foreign financial institution and is subject to the diligence and reporting requirements in (i) above, it must enter into an agreement with the U.S. Department of the Treasury requiring, among other things, that it undertake to identify accounts held by certain "specified United States persons" or "United States-owned foreign entities" (each as defined in the Code), annually report certain information about such accounts, and withhold 30% on certain payments to non-compliant foreign financial institutions and certain other account holders. Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing FATCA may be subject to different rules.

The withholding provisions described above will generally apply to payments of dividends made any time and to payments of gross proceeds from a sale or other disposition of stock on or after January 1, 2019. Because we may not know the extent to which a distribution is a dividend for U.S. federal income tax purposes at the time it is made, for purposes of these withholding rules we may treat the entire distribution as a dividend. Prospective investors should consult their tax advisors regarding these withholding provisions.

160


Table of Contents


UNDERWRITING

Piper Jaffray & Co. and William Blair & Company, L.L.C. are acting as representatives of each of the underwriters named below. Subject to the terms and conditions set forth in an underwriting agreement among us and the underwriters, we have agreed to sell to the underwriters, and each of the underwriters has agreed, severally and not jointly, to purchase from us, the number of shares of our common stock set forth opposite its name below.

Underwriters
  Number
of Shares

Piper Jaffray & Co. 

   

William Blair & Company, L.L.C. 

   

Canaccord Genuity Inc. 

   

BTIG, LLC

   

            Total

   

Subject to the terms and conditions set forth in the underwriting agreement, the underwriters have agreed, severally and not jointly, to purchase all of the shares sold under the underwriting agreement if any of these shares are purchased. If an underwriter defaults, the underwriting agreement provides that the purchase commitments of the non-defaulting underwriters may be increased or the underwriting agreement may be terminated.

At our request, the underwriters have reserved for sale at the initial public offering price up to             shares of common stock, or         % of the shares offered by this prospectus, for our employees, directors and other persons associated with us. The participants in the directed share program are subject to the 180-day lock-up restriction described in "— No Sales of Similar Securities", below, with respect to the directed shares sold to them. The number of shares of common stock available for sale to the general public in the offering will be reduced by the number of shares sold pursuant to the directed share program. Any directed shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus. We have agreed to indemnify the underwriters against certain liabilities and expenses, including liabilities under the Securities Act, in connection with sales of the directed shares. The directed share program will be arranged through Piper Jaffray & Co.

We have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act relating to losses or claims resulting from material misstatements in or omissions from this prospectus, the registration statement of which this prospectus is a part, certain free writing prospectuses that may be used in the offering and in any marketing materials used in connection with this offering and to contribute to payments the underwriters may be required to make in respect of those liabilities.

The underwriters are offering the shares, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel, including the validity of the shares, and other conditions contained in the underwriting agreement, such as the receipt by the underwriters of officers' certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.

Commissions and Discounts

The representatives have advised us that the underwriters propose initially to offer the shares to the public at the public offering price set forth on the cover page of this prospectus and to dealers at that

161


Table of Contents

price less a concession not in excess of $             per share. After the initial offering, the public offering price, concession or any other term of this offering may be changed.

The following table shows the public offering price, underwriting discounts and commissions and proceeds before expenses to us. The information assumes either no exercise or full exercise by the underwriters of their option to purchase additional shares to cover overallotments, if any.

 
  Per Share   Without Option   With Option  

Public offering price

  $     $     $    

Underwriting discounts and commissions

  $     $     $    

Proceeds, before expenses, to us

  $     $     $    

The estimated offering expenses payable by us, exclusive of the underwriting discounts and commissions, are approximately $              million, which includes legal, accounting and printing costs and various other fees associated with the registration and listing of our common stock. We have also agreed to reimburse the underwriters for certain expenses, including an amount not to exceed $             in connection with the clearance of this offering with the Financial Industry Regulatory Authority, as set forth in the underwriting agreement.

Option to Purchase Additional Shares

The underwriters have an option, exercisable for 30 days from the date of this prospectus, to purchase up to                                        additiona l shares of common stock from us at the public offering price listed on the cover page of this prospectus, less the underwriting discounts and commissions. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of common stock offered by this prospectus. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase about the same percentage of the additional shares of common stock as the number listed next to the underwriter's name in the preceding table bears to the total number of shares of common stock listed next to the names of all underwriters in the preceding table.

No Sales of Similar Securities

We, our executive officers and directors and substantially all of our other stockholders, optionholders and warrantholders have agreed not to sell or transfer any shares of our common stock or securities convertible into, exchangeable or exercisable for, or that represent the right to receive shares of our common stock, for 180 days after the date of the prospectus used to sell our common stock without first obtaining the written consent of Piper Jaffray & Co. and William Blair & Company, L.L.C. Specifically, we and these other persons have agreed, with certain limited exceptions, not to directly or indirectly:

162


Table of Contents

The restrictions in the preceding paragraph do not apply to transfers of securities:

provided, in the case of a transfer described in bullets one through five above, that such transfer does not involve a disposition for value, and each transferee agrees to be subject to the restrictions described in the immediately preceding paragraph and that no filing by any party under Section 16(a) of the Exchange Act, shall be required or shall be made voluntarily in connection with such transfer.

In addition, the transfer restrictions described above do not apply to:

Listing

We have applied to list our common stock on The NASDAQ Global Market under the symbol "TCMD." In order to meet the requirements for listing on that exchange, the underwriters have

163


Table of Contents

undertaken to sell a minimum number of shares to a minimum number of beneficial owners as required by that exchange.

Before this offering, there has been no public market for our common stock. The initial public offering price will be determined through negotiations among us and the representatives. In addition to prevailing market conditions, the factors to be considered in determining the initial public offering price include:

An active trading market for the shares may not develop. It is also possible that after this offering the shares will not trade in the public market at or above the initial public offering price.

The underwriters have informed us that they do not intend sales to discretionary accounts to exceed 5% of the total number of shares of common stock offered by them.

Price Stabilization, Short Positions and Penalty Bids

Until the distribution of the shares is completed, SEC rules may limit underwriters and selling group members from bidding for and purchasing shares of our common stock. However, the representatives may engage in transactions that stabilize the price of our common stock, such as bids or purchases to peg, fix or maintain that price.

In connection with this offering, the underwriters may purchase and sell shares of our common stock in the open market. These transactions may include short sales, purchases on the open market to cover positions created by short sales and stabilizing transactions. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in this offering. "Covered" short sales are sales made in an amount not greater than the underwriters' overallotment option described above. The underwriters may close out any covered short position by either exercising their overallotment option or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the overallotment option. "Naked" short sales are sales in excess of the overallotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of our common stock in the open market after pricing that could adversely affect investors who purchase in this offering. Stabilizing

164


Table of Contents

transactions consist of various bids for or purchases of shares of our common stock made by the underwriters in the open market prior to the completion of this offering.

The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discounts and commissions received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions.

Similar to other purchase transactions, the underwriters' purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. The underwriters may conduct these transactions on The NASDAQ Global Market, in the over-the-counter market or otherwise.

Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor any of the underwriters make any representation that the representatives will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.

Electronic Offer, Sale and Distribution of Shares

In connection with this offering, certain of the underwriters or securities dealers may distribute prospectuses by electronic means, such as e-mail. In addition, one or more of the underwriters may facilitate Internet distribution for this offering to certain of their Internet subscription customers. Any such underwriter may allocate a limited number of shares for sale to its online brokerage customers. An electronic prospectus is available on the Internet websites maintained by any such underwriter. Other than the prospectus in electronic format, the information on the websites of any such underwriter is not part of this prospectus.

Other Relationships

The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. Certain of the underwriters and their affiliates have engaged in, and may in the future engage in, investment banking and other commercial dealings in the ordinary course of business with us or our affiliates. They have received, or may in the future receive, customary fees and commissions for these transactions.

In the ordinary course of their various business activities, the underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investment and securities activities may involve securities and/or instruments of the issuer. The underwriters and their respective affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.

165


Table of Contents

Selling Restrictions

European Economic Area.     In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a "Relevant Member State") an offer to the public of any shares of our common stock may not be made in that Relevant Member State, except that an offer to the public in that Relevant Member State of any shares of our common stock may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:

For the purposes of this provision, the expression an "offer to the public" in relation to any shares of our common stock in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any shares of our common stock to be offered so as to enable an investor to decide to purchase any shares of our common stock, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State, the expression "Prospectus Directive" means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in the Relevant Member State, and the expression "2010 PD Amending Directive" means Directive 2010/73/EU.

United Kingdom.     Each underwriter has represented and agreed that:

Hong Kong.     The common shares may not be offered or sold in Hong Kong by means of any document other than (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap. 32, Laws of Hong Kong), or (ii) to "professional investors" within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder, or (iii) in other circumstances which do not result in the document being a "prospectus" within the meaning of the Companies Ordinance (Cap. 32, Laws of Hong Kong) and no advertisement, invitation or document relating to the shares may be issued or may

166


Table of Contents

be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to common shares which are or are intended to be disposed of only to persons outside Hong Kong or only to "professional investors" within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder.

Singapore.     This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the common shares may not be circulated or distributed, nor may the common shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the "SFA"), (ii) to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A), and in accordance with the conditions specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA, in each case subject to compliance with conditions set forth in the SFA.

Where the common shares are subscribed or purchased under Section 275 of the SFA by a relevant person which is:

shares, debentures and units of shares and debentures of that corporation or the beneficiaries' rights and interest (howsoever described) in that trust shall not be transferred within six months after that corporation or that trust has acquired the common shares pursuant to an offer made under Section 275 of the SFA except:

Switzerland.     The common shares may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (the "SIX") or on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock

167


Table of Contents

exchange or regulated trading facility in Switzerland. Neither this document nor any other offering or marketing material relating to the common shares or the offering may be publicly distributed or otherwise made publicly available in Switzerland.

Neither this document nor any other offering or marketing material relating to the offering, or the common shares have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of common shares will not be supervised by, the Swiss Financial Market Supervisory Authority FINMA, and the offer of common shares has not been and will not be authorized under the Swiss Federal Act on Collective Investment Schemes ("CISA"). Accordingly, no public distribution, offering or advertising, as defined in CISA, its implementing ordinances and notices, and no distribution to any non-qualified investor, as defined in CISA, its implementing ordinances and notices, shall be undertaken in or from Switzerland, and the investor protection afforded to acquirers of interests in collective investment schemes under CISA does not extend to acquirers of common shares.

United Arab Emirates.     This offering has not been approved or licensed by the Central Bank of the United Arab Emirates (the "UAE"), Securities and Commodities Authority of the UAE and/or any other relevant licensing authority in the UAE, including any licensing authority incorporated under the laws and regulations of any of the free zones established and operating in the territory of the UAE, in particular the Dubai Financial Services Authority ("DFSA"), a regulatory authority of the Dubai International Financial Centre ("DIFC"). The offering does not constitute a public offer of securities in the UAE, DIFC and/or any other free zone in accordance with the Commercial Companies Law, Federal Law No 8 of 1984 (as amended), DFSA Offered Securities Rules and Dubai Listing Rules, accordingly, or otherwise. The common shares may not be offered to the public in the UAE and/or any of the free zones.

The common shares may be offered and issued only to a limited number of investors in the UAE or any of its free zones who qualify as sophisticated investors under the relevant laws and regulations of the UAE or the free zone concerned.

France.     This prospectus (including any amendment, supplement or replacement thereto) is not being distributed in the context of a public offering in France within the meaning of Article L. 411-1 of the French Monetary and Financial Code (Code monétaire et financier).

This prospectus has not been and will not be submitted to the French Autorité des marchés financiers (the "AMF") for approval in France and accordingly may not and will not be distributed to the public in France.

Pursuant to Article 211-3 of the AMF General Regulation, French residents are hereby informed that:

168


Table of Contents

This prospectus is not to be further distributed or reproduced (in whole or in part) in France by the recipients of this prospectus. This prospectus has been distributed on the understanding that such recipients will only participate in the issue or sale of our common stock for their own account and undertake not to transfer, directly or indirectly, our common stock to the public in France, other than in compliance with all applicable laws and regulations and in particular with Articles L. 411-1 and L. 411-2 of the French Monetary and Financial Code.

169


Table of Contents


LEGAL MATTERS

The validity of the shares of common stock offered hereby and certain other legal matters will be passed upon for us by Faegre Baker Daniels LLP, Minneapolis, Minnesota. Certain legal matters will be passed upon on behalf of the underwriters by Dorsey & Whitney LLP, Minneapolis, Minnesota.


EXPERTS

The audited financial statements included in this prospectus and elsewhere in the registration statement have been so included in reliance upon the report of Grant Thornton LLP, independent registered public accountants, upon the authority of said firm as experts in accounting and auditing.


WHERE YOU CAN FIND ADDITIONAL INFORMATION

We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered by this prospectus. This prospectus does not contain all of the information included in the registration statement, as permitted by the rules and regulations of the SEC. For further information pertaining to us and the common stock to be sold in this offering, you should refer to the registration statement and its exhibits. Whenever we make reference in this prospectus to any of our contracts, agreements or other documents, the references are not necessarily complete, and you should refer to the exhibits attached to the registration statement for copies of the actual contract, agreement or other document filed as an exhibit to the registration statement or such other document, each such statement being qualified in all respects by such reference.

Upon completion of this offering, we will be subject to the information and reporting requirements of the Exchange Act and will file annual, quarterly and current reports, proxy statements and other information with the SEC. We anticipate making these documents publicly available, free of charge, on our website as soon as reasonably practicable after filing such documents with the SEC.

You can read the registration statement and our future filings with the SEC over the Internet at the SEC's website at www.sec.gov. You may also read and copy any document we file with the SEC at its public reference facility at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at the foregoing address. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities.

170


Table of Contents


TACTILE SYSTEMS TECHNOLOGY, INC.

Index to Consolidated Financial Statements

As of and for the years ended December 31, 2013 and 2014 (audited) and
as of September 30, 2015 and for the nine month periods ended September 30, 2014 and 2015 (unaudited)

Report of Independent Registered Public Accounting Firm

    F-2

Consolidated Financial Statements

   
 

Consolidated Balance Sheets

   
F-3

Consolidated Statements of Operations

   
F-4

Consolidated Statements of Stockholders' Equity (Deficit)

   
F-5

Consolidated Statements of Cash Flows

   
F-6

Notes to the Consolidated Financial Statements

   
F-7 - F-32

F-1


Table of Contents


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders of
Tactile Systems Technology, Inc.

We have audited the accompanying consolidated balance sheets of Tactile Systems Technology, Inc. and its subsidiary, Swelling Solutions, Inc. (collectively, the "Company") as of December 31, 2014 and 2013, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the two years in the period ended December 31, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tactile Systems Technology, Inc. and subsidiary as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America.

/s/ Grant Thornton LLP

Minneapolis, Minnesota
September 25, 2015

F-2


Table of Contents


TACTILE SYSTEMS TECHNOLOGY, INC.

Consolidated Balance Sheets

(in thousands, except share data)

 
  As of
December 31,
   
   
 
 
  As of
September 30, 2015
  Pro Forma as of
September 30, 2015
 
 
  2013   2014  
 
   
   
  (unaudited)
  (unaudited)
 

Assets

                         

Current assets

   
 
   
 
   
 
   
 
 

Cash and cash equivalents

  $ 6,539   $ 5,416   $ 5,672   $    

Accounts receivable, net

    9,571     13,742     12,400        

Inventories

    2,913     3,521     5,370        

Deferred income taxes

    3,496     2,015     1,955        

Prepaid expenses

    298     423     452        

Total current assets

    22,817     25,117     25,849        

Property and equipment, net

    1,378     1,303     1,310        

Other assets

                         

Patent costs, net

    3,005     2,744     2,553        

Medicare accounts receivable — long term

    921     1,302     2,006        

Deferred income taxes

    1,082     1,005     975        

Other non-current assets

    23     23     702        

Total other assets

    5,031     5,074     6,236        

Total assets

  $ 29,226   $ 31,494   $ 33,395   $    

Liabilities and Stockholders' Equity

                         

Current liabilities

   
 
   
 
   
 
   
 
 

Accounts payable

  $ 1,960   $ 2,507   $ 3,560   $    

Current portion of notes payable

    8     9     6        

Accrued payroll and related taxes

    2,604     2,003     2,249        

Accrued expenses

    532     647     574        

Future product royalties — current

    378     924     479        

Income taxes payable

    171     100            

Total current liabilities

    5,653     6,190     6,868        

Long-term liabilities

                         

Notes payable, net of current portion

    14     4            

Deferred compensation

    199     199     193        

Future product royalties

    1,153     446     446        

Total long-term liabilities, net of current portion             

    1,366     649     639        

Total liabilities

    7,019     6,839     7,507        

Convertible preferred stock

                         

Series B convertible preferred stock, $.001 par value:
15,000,000 shares authorized, 7,708,502 shares issued and outstanding as of both December 31, 2013 and 2014, and September 30, 2015 (unaudited)

    11,221     11,894     12,428        

Series A convertible preferred stock, $.001 par value:
8,776,409 shares authorized, 8,766,359 shares issued and 8,633,535 shares outstanding as of December 31, 2013 and 2014, and September 30, 2015 (unaudited)

    18,100     19,188     20,050        

Stockholders' equity (deficit)

   
 
   
 
   
 
   
 
 

Common stock, $.001 par value:
40,000,000 shares authorized, 6,279,440 and 7,407,185 shares issued and outstanding as of December 31, 2013 and 2014, respectively, and 9,022,406 as of September 30, 2015 (unaudited)

    6     7     8        

Additional paid-in capital

    1,822     438     140        

Accumulated deficit

    (8,942 )   (6,872 )   (6,738 )      

Total stockholders' equity (deficit)

    (7,114 )   (6,427 )   (6,590 )      

Total liabilities and stockholders' equity (deficit)

  $ 29,226   $ 31,494   $ 33,395   $    

   

See accompanying notes to the consolidated financial statements.

F-3


Table of Contents


TACTILE SYSTEMS TECHNOLOGY, INC.

Consolidated Statements of Operations

(in thousands, except share data)

 
  Year Ended December 31,   Nine Months Ended
September 30,
 
 
  2013   2014   2014   2015  
 
   
   
  (unaudited)
 

Revenues, net

  $ 37,176   $ 47,736   $ 29,626   $ 41,712  

Cost of goods sold

   
9,772
   
12,715
   
8,284
   
11,839
 

Gross profit

    27,404     35,021     21,342     29,873  

Operating expenses

                         

Sales and marketing

    14,298     18,154     12,457     17,297  

Research and development

    2,443     2,843     1,931     2,922  

Reimbursement, general and administrative

    8,283     10,225     7,419     9,448  

Total operating expenses

    25,024     31,222     21,807     29,667  

Income (loss) from operations          

    2,380     3,799     (465 )   206  

Other income (expense)

   
4
   
(4

)
 
12
   
18
 

Income (loss) before income taxes

    2,384     3,795     (453 )   224  

Income tax expense (benefit)

   
(772

)
 
1,725
   
(171

)
 
90
 

Net income (loss)

    3,156     2,070     (282 )   134  

Preferred stock dividends

    1,668     1,761     1,336     1,396  

Allocation of undistributed earnings to preferred stockholders

    1,074     216          

Net income (loss) attributable to common stockholders

  $ 414   $ 93   $ (1,618 ) $ (1,262 )

Net income (loss) per share attributable to common stockholders

                         

Basic

  $ 0.07   $ 0.01   $ (0.23 ) $ (0.16 )

Diluted

    0.06     0.01     (0.23 )   (0.16 )

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

   
 
   
 
   
 
   
 
 

Basic

    6,305,401     7,025,035     6,903,792     7,992,734  

Diluted

    7,276,148     10,709,649     6,903,792     7,992,734  

Pro forma net income (loss) per share attributable to common stockholders (unaudited)

   
 
   
 
   
 
   
 
 

Basic

                         

Diluted

                         

Weighted-average shares used to compute pro forma net income (loss) per share attributable to common stockholders (unaudited)

   
 
   
 
   
 
   
 
 

Basic

                         

Diluted

                         

   

See accompanying notes to the consolidated financial statements.

F-4


Table of Contents

TACTILE SYSTEMS TECHNOLOGY, INC.

Consolidated Statements of Stockholders' Equity (Deficit)

(in thousands, except share data)

 
  Common Stock    
   
   
 
 
  Additional
Paid-In
Capital
  Accumulated
Deficit
   
 
 
  Shares   Par Value   Total  

Balances, December 31, 2012

    6,392,672   $ 6   $ 3,401   $ (12,098 ) $ (8,691 )

Stock-based compensation

            132         132  

Exercise of common stock options

    186,768         62         62  

Redemption of common shares

    (300,000 )       (105 )       (105 )

Preferred stock dividends

            (1,668 )       (1,668 )

Net income

                3,156     3,156  

Balances, December 31, 2013

    6,279,440     6     1,822     (8,942 )   (7,114 )

Stock-based compensation

            148         148  

Exercise of common stock options

    1,127,745     1     229         230  

Preferred stock dividends

            (1,761 )       (1,761 )

Net income

                2,070     2,070  

Balances, December 31, 2014

    7,407,185     7     438     (6,872 )   (6,427 )

Stock-based compensation (unaudited)

            232         232  

Exercise of common stock options and warrants (unaudited)

    1,615,221     1     866         867  

Preferred stock dividends (unaudited)

            (1,396 )       (1,396 )

Net loss (unaudited)

                134     134  

Balances, September 30, 2015 (unaudited)

    9,022,406   $ 8   $ 140   $ (6,738 ) $ (6,590 )

See accompanying notes to the consolidated financial statements.

F-5


Table of Contents


TACTILE SYSTEMS TECHNOLOGY, INC.

Consolidated Statements of Cash Flows

(in thousands)

 
  Year Ended
December 31,
  Nine Months Ended
September 30,
 
 
  2013   2014   2014   2015  
 
   
   
  (unaudited)
 

Cash flows from operating activities

                         

Net income (loss)

  $ 3,156   $ 2,070   $ (282 ) $ 134  

Adjustments to reconcile net income (loss) to net cash flows used in operating activities

                         

Depreciation and amortization

    585     706     530     622  

Deferred income taxes

    (941 )   1,558     (171 )   90  

Stock-based compensation expense

    132     148     117     232  

Deferred compensation

    (15 )           (6 )

Change in allowance for doubtful accounts

    340     500         250  

Changes in assets and liabilities

                         

Accounts receivable

    (3,408 )   (4,671 )   (383 )   1,092  

Inventories

    (884 )   (608 )   (768 )   (1,849 )

Prepaid expenses and other non-current assets

    16     (142 )   37     (708 )

Medicare accounts receivable — long term

    (921 )   (381 )       (704 )

Accounts payable

    476     547     (195 )   1,053  

Accrued payroll and related taxes

    1,116     (601 )   (1,110 )   246  

Accrued expenses

    (81 )   44     30     (173 )

Future product royalties

    4     (161 )   (135 )   (445 )

Net cash flows used in operating activities

    (425 )   (991 )   (2,330 )   (166 )

Cash flows from investing activities

                         

Purchases of property and equipment

    (364 )   (353 )   (208 )   (420 )

Patent costs

                (18 )

Net cash flows used in investing activities

    (364 )   (353 )   (208 )   (438 )

Cash flows from financing activities

                         

Payment of patent acquisition commitment

    (2,000 )            

Payments on notes payable

    (32 )   (9 )   (7 )   (7 )

Proceeds from exercise of common stock options and warrants

    62     230     222     867  

Redemption of common stock

    (105 )            

Net cash flows from (used in) financing activities                   

    (2,075 )   221     215     860  

Net change in cash and cash equivalents

    (2,864 )   (1,123 )   (2,323 )   256  

Cash and cash equivalents — beginning of year

    9,403     6,539     6,539     5,416  

Cash and cash equivalents  — end of year

  $ 6,539   $ 5,416   $ 4,216   $ 5,672  

Supplemental cash flow disclosure

                         

Cash paid for interest

  $ 6   $ 21   $ 1   $  

Cash paid for taxes

  $ 117   $ 238   $ 216   $ 226  

   

See accompanying notes to the consolidated financial statements.

F-6


Table of Contents


TACTILE SYSTEMS TECHNOLOGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Information as of September 30, 2015 and for the nine months ended September 30, 2014
and 2015 is unaudited)

(in thousands, except percentages and share data)

NOTE 1 — Summary of Significant Accounting Policies

Nature of Operations

Tactile Systems Technology, Inc. (the "Company") (doing business as Tactile Medical) is the sole manufacturer and distributor of the Flexitouch and Entré Systems, medical devices to help control symptoms of lymphedema, a chronic and progressive medical condition that is often an unintended consequence of cancer treatment, and the ACTitouch System, a medical device to treat venous leg ulcers and chronic venous insufficiency. The Company provides its products for use both in the home and in health care institutions, including hospitals and vascular, wound and lymphedema clinics throughout the United States.

Basis of Presentation

The Company was originally incorporated in Minnesota under the name Tactile Systems Technology, Inc. on January 30, 1995. During 2006, the Company set up a merger corporation and subsequently, on July 21, 2006, merged with and into this merger corporation. The resulting corporation assumed the name Tactile Systems Technology, Inc. The purpose of this merger was to reincorporate the Company in Delaware, increase the number of authorized common shares to 25 million and assign a par value of $.001 to its common stock. In September 2013, the Company began doing business as Tactile Medical.

Basis of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Swelling Solutions, Inc., after elimination of intercompany accounts and transactions.

JOBS Act Accounting Election

As an emerging growth company under the Jumpstart Our Business Startups Act, the Company is eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. The Company has elected to take advantage of the extended transition period for adopting new or revised accounting standards that have different effective dates for public and private companies until such time as those standards apply to private companies.

Unaudited Interim Consolidated Financial Statements

The accompanying balance sheet as of September 30, 2015, the consolidated statements of operations and cash flows for the nine months ended September 30, 2014 and 2015, and the consolidated statements of stockholders' equity as of September 30, 2015, are unaudited. The consolidated financial data and other information disclosed in these notes to the consolidated financial statements related to September 30, 2015, and the nine months ended September 30, 2014 and 2015, are also unaudited. The unaudited interim consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company's financial position as of September 30, 2015, and the results of its operations and cash flows for the nine

F-7


Table of Contents


TACTILE SYSTEMS TECHNOLOGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information as of September 30, 2015 and for the nine months ended September 30, 2014
and 2015 is unaudited)

(in thousands, except percentages and share data)

NOTE 1 — Summary of Significant Accounting Policies (Continued)

months ended September 30, 2014 and 2015, respectively. The results for the nine months ended September 30, 2015 are not necessarily indicative of results to be expected for the year ending December 31, 2015, or for any other interim period or for any future year. Our business may be affected by seasonality. In the first quarter of each year, when most patients have started a new insurance year and have not paid their annual deductibles, we experience substantially reduced demand for our products. We typically experience higher sales in the third and fourth quarters as a result of patients having paid their annual insurance deductibles in full, thereby reducing their out-of-pocket costs for our products, or because patients often spend the remaining balances in their flexible-spending accounts.

Unaudited Pro Forma Consolidated Balance Sheet

The unaudited pro forma consolidated balance sheet as of September 30, 2015 reflects: (i) the automatic conversion of all outstanding shares of the Company's convertible preferred stock into an aggregate of             shares of common stock immediately prior to the completion of this offering; (ii) the accrual for the payment of $         in cumulative accrued dividends to the Company's Series A convertible preferred stockholders; and (iii) the issuance of         shares of common stock to pay accrued dividends on the Company's Series B convertible preferred stock.

Unaudited Pro Forma Net Income (Loss) Per Share Attributable to Common Stockholders

Unaudited pro forma basic and diluted net income (loss) per share has been computed to give effect to: (1) the conversion of all outstanding convertible preferred stock into an aggregate of                  shares of common stock immediately prior to the completion of this offering; (2) the issuance of                  additional shares of common stock immediately prior to the completion of this offering that the Company's Series A and Series B preferred stockholders are entitled to receive in connection with this initial public offering, assuming an initial offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus; (3) the additional         shares of common stock that would have been required to be issued to generate sufficient proceeds to fund the cash payment of Series A convertible preferred stock dividends; (4) the issuance of                  shares of common stock immediately prior to the completion of this offering to pay accrued dividends on the Company's Series B convertible preferred stock (assuming a closing date of                  , 2016 and an initial offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus); and (5) the effectiveness of the Company's amended and restated certificate of incorporation and adoption of the Company's amended and restated bylaws.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an initial maturity date of 90 days or less to be cash equivalents. As of December 31, 2013 and 2014 and September 30, 2015, cash equivalents consisted of money market funds, which are stated at cost and approximate fair value. The Company maintains cash in bank accounts which, at times, may exceed the Federal

F-8


Table of Contents


TACTILE SYSTEMS TECHNOLOGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information as of September 30, 2015 and for the nine months ended September 30, 2014
and 2015 is unaudited)

(in thousands, except percentages and share data)

NOTE 1 — Summary of Significant Accounting Policies (Continued)

Depository Insurance Corporation ("FDIC") limits. The Company has not experienced any losses from maintaining balances in excess of FDIC limits.

Accounts Receivable

The majority of the Company's accounts receivable and revenues are from commercial insurance payers and government payers, such as Medicare, Veterans Administration and Medicaid.

Accounts receivable are carried net of allowances for estimated non-receipt of patient co-payment and deductible obligations and allowances for uncollectible accounts. The Company believes all accounts receivable in excess of the allowance are fully collectible. The Company does not accrue interest on a majority of the past due accounts receivable. The Company determines when accounts become past due on a customer by customer basis. If accounts receivables in excess of the provided allowance are determined uncollectible, they are charged to expense in the quarter that determination is made and accounts receivable are written off after all collection efforts have failed. A portion of the Company's claims to Medicare are initially denied, and enter the appeals process, where many are ultimately reviewed by an Administrative Law Judge. After final adjudication of all claims, approximately 90% of the claims submitted are approved (this is on a number of claims, not a dollars claimed, basis). Historically, the Company successfully appealed 90% of its initial Medicare claims denials. However, the appeal process can be lengthy, lasting more than a year in most cases. Accordingly, the Company classifies a portion of its Medicare accounts receivable as non-current based on its experience with Medicare.

Accounts receivable are carried net of allowances for estimated nonreceipt of co-payment reimbursements and allowances for uncollectible accounts. The allowance for estimated nonreceipt of co-payment reimbursements and for uncollectible accounts was $1,400 and $1,900 as of December 31, 2013 and 2014, respectively, and $2,150 as of September 30, 2015. The Company believes all unsecured accounts receivable in excess of the allowance are fully collectible. The Company does not accrue interest on a majority of the past due accounts receivable. The Company determines when accounts become past due on a customer by customer basis. If accounts receivables in excess of the provided allowance are determined uncollectible, they are charged to expense in the quarter that determination is made and accounts receivable are written off after all collection efforts have failed. The Company had accounts receivable from three insurance companies representing approximately 18%, 33% and 7% as of December 31, 2013. The Company had accounts receivable from three insurance companies representing approximately 25%, 24% and 5% of accounts receivable as of December 31, 2014. Revenues from these insurance companies accounted for 29%, 14%, and 14% of the Company's total revenues for the year ended December 31, 2013 and 31%, 15% and 12% for the year ended December 31, 2014. The Company had accounts receivable from three insurance companies representing approximately 28%, 20% and 5% of accounts receivable as of September 30, 2015. Revenues from these insurance companies accounted for 18%, 23% and 10% of the Company's total revenues for the nine months ended September 30, 2015. The Company had accounts receivable from three insurance companies representing approximately 23%, 16% and 4% of accounts receivable

F-9


Table of Contents


TACTILE SYSTEMS TECHNOLOGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information as of September 30, 2015 and for the nine months ended September 30, 2014
and 2015 is unaudited)

(in thousands, except percentages and share data)

NOTE 1 — Summary of Significant Accounting Policies (Continued)

as of September 30, 2014. Revenues from these insurance companies accounted for 27%, 20% and 11% of the Company's total revenues for the nine months ended September 30, 2014.

Accounts receivable include amounts due from Medicare totaling $2,672, $4,088 and $3,573 relating to devices shipped to patients as of December 31, 2013 and 2014, and September 30, 2015, respectively, that are waiting insurance approval. The Company estimates the devices for which it expects to receive authorization and payment based on its reimbursement history from Medicare. The Company classified $921, $1,302 and $2,006 of this receivable as of December 31, 2013 and 2014, and September 30, 2015, respectively, as noncurrent as the Company does not expect these claims will be paid within one year of shipment of the device from the respective dates due to delays with the Administrative Law Judge appeal process.

On September 3, 2015, the Company entered into a settlement agreement with the Centers for Medicare and Medicaid Services for 247 claims, representing approximately $1,457 of original claims based on the Medicare allowable rates, in which the Company had submitted a request for an Administrative Law Judge hearing in 2013. The settlement entitled us to receive a payment of approximately $851 million no later than January 21, 2016. We received this full amount during the fourth quarter of 2015. The settlement will result in a reduction in the fourth quarter of 2015 of $815 million in our accounts receivable for shipment of products to patients covered by Medicare. The settlement was part of a pilot program, facilitated by the Office of Medicare Hearings and Appeals, to address a backlog of overdue claims awaiting Administrative Law Judge adjudication. Because the settlement is part of a pilot program, the Company cannot predict whether it will be able to conclude future settlements with Medicare or achieve settlements on similar terms. Any future settlement of claims for amounts less than the corresponding amounts receivable would result in a write off.

The reserve for uncollectible co-payment reimbursements and doubtful accounts were as follows:

 
  Year Ended
December 31,
   
 
 
  Nine Months
Ended
September 30, 2015
 
 
  2013   2014  
 
   
   
  (unaudited)
 

Beginning balance

  $ 1,060   $ 1,400   $ 1,900  

Provision charged against revenues

    3,725     3,285     3,860  

Write-offs

    (3,385 )   (2,785 )   (3,610 )

Ending balance

  $ 1,400   $ 1,900   $ 2,150  

Advertising

Advertising costs are charged to operations when incurred. Advertising expense was $9 and $23 for the years ended December 31, 2013 and 2014, respectively, and $22 and $52 for the nine month periods ended September 30, 2014 and 2015, respectively.

Research and Development Costs

The Company expenses research and development costs as incurred.

F-10


Table of Contents


TACTILE SYSTEMS TECHNOLOGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information as of September 30, 2015 and for the nine months ended September 30, 2014
and 2015 is unaudited)

(in thousands, except percentages and share data)

NOTE 1 — Summary of Significant Accounting Policies (Continued)

Shipping and Handling Costs

The Company does not charge any shipping and handling costs to its customers and the shipping and handling costs incurred are included in cost of goods sold.

Product Warranty

The Company provides a warranty for its products against defects in material and workmanship for a period up to one year on garments and one to two years on controllers. The Company records a liability for future warranty claims at the time of sale for the warranty period offered to a customer. If the assumptions used in calculating the provision were to materially change, resulting in more defects than anticipated, an additional provision may be required.

The warranty reserve was as follows:

 
  Year Ended
December 31,
   
 
 
  Nine Months
Ended
September 30, 2015
 
 
  2013   2014  
 
   
   
  (unaudited)
 

Beginning balance

  $ 165   $ 200   $ 250  

Warranty provision

    123     142     128  

Processed warranty claims

    (88 )   (92 )   (88 )

Ending balance

  $ 200   $ 250   $ 290  

Inventories

Inventories are valued at the lower of cost (first-in, first-out method) or market, and consisted of the following:

 
  As of
December 31,
   
 
 
  As of
September 30, 2015
 
 
  2013   2014  
 
   
   
  (unaudited)
 

Finished goods

  $ 1,478   $ 1,628   $ 2,113  

Component parts and work-in-process

    1,435     1,893     3,257  

Ending balance

  $ 2,913   $ 3,521   $ 5,370  

F-11


Table of Contents


TACTILE SYSTEMS TECHNOLOGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information as of September 30, 2015 and for the nine months ended September 30, 2014
and 2015 is unaudited)

(in thousands, except percentages and share data)

NOTE 1 — Summary of Significant Accounting Policies (Continued)

Property and Equipment

Property and equipment are stated at cost and are being depreciated using the straight-line method over their estimated useful lives of three to five years and leasehold improvements are depreciated over the remaining life of the building lease agreement. Property and equipment consisted of the following:

 
  As of
December 31,
   
 
 
  As of
September 30, 2015
 
 
  2013   2014  
 
   
   
  (unaudited)
 

Equipment

  $ 1,521   $ 1,645   $ 1,739  

Leasehold improvements

    306     306     424  

Tooling

    540     719     861  

Furniture and fixtures

    187     237     303  

    2,554     2,907     3,327  

Less: accumulated depreciation

    (1,176 )   (1,604 )   (2,017 )

Property and equipment

  $ 1,378   $ 1,303   $ 1,310  

Major expenditures for property and equipment are capitalized. Maintenance, repairs, and minor renewals are expensed as incurred. When assets are retired or otherwise disposed of, their costs and related accumulated depreciation are removed from the accounts and resulting gains or losses are included in income. Depreciation expense was $308 and $428 for the years ended December 31, 2013 and 2014, respectively, and $322 and $413 for the nine month periods ended September 30, 2014 and 2015, respectively.

Deferred Offering Costs

Deferred offering costs, primarily consisting of legal, accounting and other direct fees and costs relating to the initial public offering, are capitalized. The deferred offering costs will be offset against the Company's planned initial public offering proceeds upon the closing of the offering. In the event the offering is terminated, all of the deferred offering costs will be expensed within income from operations. There was $679 in deferred offering costs capitalized as of September 30, 2015, in other non-current assets on the balance sheet. There were no deferred offering costs capitalized as of December 31, 2013 or 2014.

Impairment of Long-Lived Assets

The Company reviews long-lived assets, including property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be fully recoverable. The Company will record impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. To date, the Company has recorded no such losses other than the write-off of various assets acquired in the ACTitouch transaction (see Note 5).

F-12


Table of Contents


TACTILE SYSTEMS TECHNOLOGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information as of September 30, 2015 and for the nine months ended September 30, 2014
and 2015 is unaudited)

(in thousands, except percentages and share data)

NOTE 1 — Summary of Significant Accounting Policies (Continued)

Revenue Recognition

The Company recognizes revenue when persuasive evidence of a sales arrangement exists, delivery of product has occured through the transfer of title and risks of reward of ownership, the selling price is fixed or determinable and collectibility is reasonably assured.

The Company distributes its products directly to patients. For any of its products sold to patients covered by private payers, such as commercial insurance companies, the Company recognizes revenues from such sales upon shipment of its products. A product is not shipped until the Company has received a prescription from a physician for its products and, as applicable, receipt of prior authorization from payers. At shipment, the Company invoices the payer for their portion of the total product cost and the Company recognizes revenue as a percentage of the payer's invoice based on the polices and payment history of the applicable payer. The payment history of the applicable payer is drawn from the Company's actual payment experience over the last three years. Any differences in payments received as compared to the Company's estimates are recognized in the period for which it actually receives payment for the product. Over time, the Company adjusts the applicable estimates used for each payer to reflect any such differences. The Company separately invoices the patient for their payment obligation with respect to the shipped product, such as copayments and deductibles, and recognizes revenue upon sending such invoice.

For any of the its products sold to Medicare patients, the Company recognizes revenues from such sales upon shipment of its products, which can occur only after the Company has received a prescription from a physician and all applicable Medicare documentation. The Company estimates the revenue on each shipment to a Medicare patient as a percentage of the total invoice based on the payment history of each regional administrative contractor. While the Company has contracted rates with Medicare, to the extent any claims for reimbursement are denied, the Company will recognize any necessary adjustments in the period for which the adjustment is made.

Net Income (Loss) per Share Attributable to Common Stockholders

The Company uses the two-class method to compute net income (loss) per common share attributable to common stockholders because the Company has issued securities, other than common stock, that contractually entitle the holders to participate in dividends and earnings of the Company. The two-class method requires earnings for the period to be allocated between common stock and participating securities based upon their respective rights to receive distributed and undistributed earnings. All series of the Company's convertible preferred stock are considered participating securities.

Under the two-class method, for periods with net income, basic net income per share attributable to common stockholders is computed by dividing the net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share attributable to common stockholders is computed by dividing the net income attributable to common stockholders by the weighted-average number of shares of common stock and dilutive potential shares of common stock outstanding during the period. Net income attributable to common stockholders is computed by subtracting from net income the portion of current year earnings

F-13


Table of Contents


TACTILE SYSTEMS TECHNOLOGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information as of September 30, 2015 and for the nine months ended September 30, 2014
and 2015 is unaudited)

(in thousands, except percentages and share data)

NOTE 1 — Summary of Significant Accounting Policies (Continued)

that the participating securities would have been entitled to receive pursuant to their dividend rights had all of the year's earnings been distributed. No such adjustment to earnings is made during periods with a net loss, as the holders of the participating securities have no obligation to fund losses. Because the Company has reported a net loss for the nine months ended September 30, 2014 and 2015, respectively, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders for those periods as all potentially dilutive shares consisting of convertible preferred stock, stock options, and warrants were antidilutive in those periods.

Income Taxes

Income taxes are accounted for under the liability method. Deferred income taxes are provided for temporary differences between the financial reporting and the tax bases of assets and liabilities. If the Company determines in the future that it is more likely than not that the Company will realize all or a portion of the deferred tax assets, the Company will adjust the valuation allowance in the period the determination is made (Note 9).

Stock-Based Compensation

The Company accounted for all share-based payments to employees, including grants of employee stock options, based on the fair value on the date of grant expensed over the applicable vesting period.

The fair value of each option grant is determined as of grant date, utilizing the Black Scholes option pricing model. The Company uses the "simplified method" to determine the expected term of the stock option. The Company calculates expected volatility for stock options using the historical volatility of a public company of similar size and industry as the Company believes the expected volatility will approximate historical volatility. The risk-free rate for periods within the expected term of the option is based on the U.S. Treasury rate at the time of grant. The Company estimates the forfeiture rate to be 10-15% based on management's estimate of future employee turnover. Based on these valuations, the Company recognized compensation expense of $132 and $148 for the years ended December 31, 2013 and 2014, respectively, and $117 and $232 for the nine month periods ended September 30, 2014 and 2015, respectively, and the expense is included in reimbursement, general and administrative expenses. The amortization of each grant will continue over the remainder of the vesting period of each option grant. Stock-based compensation expense of outstanding options as of December 31, 2014 is expected to approximate $104, $74, $47 and $1 in each of the next four years, respectively.

F-14


Table of Contents


TACTILE SYSTEMS TECHNOLOGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information as of September 30, 2015 and for the nine months ended September 30, 2014
and 2015 is unaudited)

(in thousands, except percentages and share data)

NOTE 1 — Summary of Significant Accounting Policies (Continued)

The estimated fair value of each option grant is estimated on the date of grant using the Black Scholes pricing model with the following weighted-average assumptions used for options granted:

 
  Year Ended
December 31,
  Nine Months Ended
September 30,
 
  2013   2014   2014   2015
 
   
   
  (unaudited)

Expected term

  6 years   6 years   6 years   6 years

Expected volatility

  40%   60%   60%   50%

Risk-free interest rate

  2%   2%   2%   2%

Expected dividend yield

  0%   0%   0%   0%

Financial Instruments and Fair Value

The carrying amounts for all financial instruments approximate fair value. The carrying amounts for cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of these instruments. The fair value of short- and long-term debt (including future product royalties) approximates carrying value and has been estimated based on discounted cash flows using interest rates being offered for similar debt having the same or similar remaining maturities and collateral requirements.

Recent Accounting Pronouncement

In May 2014, the Financial Accounting Standards Board ("FASB") issued guidance creating Accounting Standards Codification ("ASC") Section 606, "Revenue from Contracts with Customers." The new section will replace Section 605, "Revenue Recognition," and creates modifications to various other revenue accounting standards for specialized transactions and industries. The section is intended to conform revenue accounting principles with a concurrently issued International Financial Reporting Standards to reconcile previously differing treatment between United States practices and those of the rest of the world and to enhance disclosures related to disaggregated revenue information. The updated guidance, which was amended July 9, 2015, is effective for annual reporting periods beginning on or after December 15, 2017, and interim periods within those annual periods. The Company will adopt the new provisions of this accounting standard at the beginning of fiscal year 2018, because early adoption is not allowed. The Company will further study the implications of this statement to evaluate the expected impact on its consolidated financial statements.

Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

F-15


Table of Contents


TACTILE SYSTEMS TECHNOLOGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information as of September 30, 2015 and for the nine months ended September 30, 2014
and 2015 is unaudited)

(in thousands, except percentages and share data)

NOTE 1 — Summary of Significant Accounting Policies (Continued)

The Company continues to refine its estimate of the Medicare accounts receivable and related revenue recognition based on information available to it related to historical approval rates.

NOTE 2 — Patent Costs, Net

The Company's patents, all of which are subject to amortization, are summarized as follows:

 
  As of
December 31,
   
 
 
  As of
September 30,
2015
 
 
  2013   2014  
 
   
   
  (unaudited)
 

Patents

  $ 3,363   $ 3,380   $ 3,398  

Less: accumulated amortization

    (358 )   (636 )   (845 )

Net patents

  $ 3,005   $ 2,744   $ 2,553  

Amortization expense was $278 for both the years ended December 31, 2013 and 2014, and $208 and $209 for the nine month periods ended September 30, 2014, and 2015, respectively. Future amortization expenses are expected as follows:

2015 (remaining)

  $ 70  

2016

    279  

2017

    279  

2018

    278  

2019

    278  

Thereafter

    1,369  

Total

  $ 2,553  

NOTE 3 — Notes Payable

On August 8, 2008, the Company entered into four promissory note agreements with a bank totaling $230 which were used to help fund the Company's relocation to its new corporate headquarters. The notes have interest rates ranging from 2% to the greater of prime plus 1.5% or 7% (7% as of both December 31, 2013 and 2014).

The minimum principal payments for the notes payable as of December 31, 2014 are as follows:

2015 (remaining)

  $ 6  

F-16


Table of Contents


TACTILE SYSTEMS TECHNOLOGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information as of September 30, 2015 and for the nine months ended September 30, 2014
and 2015 is unaudited)

(in thousands, except percentages and share data)

NOTE 4 — Accrued Expenses

Accrued expenses consisted of the following:

 
  As of
December 31,
   
 
 
  As of
September 30,
2015
 
 
  2013   2014  
 
   
   
  (unaudited)
 

Accrued warranty

  $ 200   $ 250   $ 290  

Accrued clinical

    60     160     60  

Deferred rent

    75     30      

Other

    197     207     224  

  $ 532   $ 647   $ 574  

NOTE 5 — Asset Purchase Agreement

On September 14, 2012, the Company completed an acquisition of certain assets, including inventory, equipment and tooling and patents for the ACTitouch System and a technology known as SMM. The purchase price of this acquisition included $3,000 at closing and $2,000 at the earliest of the commercialization date or the first anniversary of the closing date. In addition, the Company is required to pay quarterly payments following the commercialization date, which was September 1, 2013, through the following sixteen quarterly calculation periods equal to 9% of sales for the ACTitouch System and 7% of sales of SMM with a guaranteed minimum amount of $45 for each of the first four quarterly calculation periods (year 1); $148 for each of next four quarterly calculation periods (year 2); and $248 for each of the next four quarterly calculation periods (year 3) (total of $1,765). For each quarterly calculation period beginning with the seventeenth quarterly calculation period and ending on the tenth anniversary of the commercialization date, the Company will make quarterly payments equal to 6% of the sale of the ACTitouch product and 5% on the sale of SMM. If ACTitouch System and SMM sales in any calendar year in years five through ten exceed $40,000, the sales percentage amount shall equal 6% of the sales of product up to $40,000 and 7% on the sales of product over $40,000. The Company determined the transaction did not qualify as a purchase of a business acquisition and as such, recorded the transaction as an asset purchase which requires the Company to record the transaction at cost, including transaction costs of $285.

The Company allocated the assets acquired as follows:

Inventory (included in prepaid expenses)

  $ 327  

Equipment and tooling

    997  

Patents

    3,363  

In-process research and development (IPR&D)

    2,125  

  $ 6,812  

The net present value of the guaranteed quarterly minimum payments of $1,765 discounted at 7% (or $1,527) in the first three years from the commercialization date have been included in the acquisition price as this portion of the contingent consideration is reasonably estimated and probable.

F-17


Table of Contents


TACTILE SYSTEMS TECHNOLOGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information as of September 30, 2015 and for the nine months ended September 30, 2014
and 2015 is unaudited)

(in thousands, except percentages and share data)

NOTE 5 — Asset Purchase Agreement (Continued)

The Company allocated the cost of the technology for the SMM to IPR&D as it does not have an alternative future use and requires considerable research and development in the future to bring any potential product to market. This was charged to expense. In addition, the Company recorded a loss on impairment of assets acquired of $264 for the year ended December 31, 2012.

NOTE 6 — Line of Credit — Bank

The Company had a $2,000 line of credit with a bank that bore interest at prime (3.25% as of December 31, 2013), which expired on May 11, 2015. In May 2015, the Company renewed its credit line with Venture Bank. This transaction did not result in any debt extinguishment losses or gains. The Company's credit line bears interest based on the prime rate, which was 3.25% as of September 30, 2015, and expires on May 11, 2016. The Company's credit line is secured by substantially all its assets, including property and equipment, accounts receivable and inventory. The Company's credit line contains customary conditions to borrowing, events of default and covenants, including covenants that restrict the Company's ability to dispose of assets, merge with or acquire other entities, incur indebtedness and encumbrances. In addition, the Company complied with certain financial covenants relating to liquidity and leverage ratios until the renewal in May 2015 that released the Company from its covenant obligations. The Company was in compliance with those covenants as of December 31, 2013 and 2014. There was no outstanding balance on the line of credit as of December 31, 2013 or 2014, or as of September 30, 2015.

NOTE 7 — Commitments and Contingencies

Lease Obligation

In March 2008, the Company entered into a non-cancelable operating lease agreement for building space for its corporate headquarters which provides for monthly rent, real estate taxes and operating expenses that expired July 31, 2015. In December 2012, the Company extended its lease to July 31, 2020. In June 2013, the Company extended the lease to July 31, 2021. Rent expense was $618 and $750 for the years ended December 31, 2013 and 2014, respectively, and $546 and $623 for the nine month periods ended September 30, 2014 and 2015, respectively.

The Company also has operating lease agreements for certain computer and office equipment that expire in 2016. The leases provide an option to purchase the related equipment at fair market value at the end of the lease.

F-18


Table of Contents


TACTILE SYSTEMS TECHNOLOGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information as of September 30, 2015 and for the nine months ended September 30, 2014
and 2015 is unaudited)

(in thousands, except percentages and share data)

NOTE 7 — Commitments and Contingencies (Continued)

Future base minimum lease payments for all lease obligations are expected to be as follows for the years ending December 31:

 
  Building   Computer/Office   Total  

2015 (remaining)

  $ 121   $ 7   $ 128  

2016

    464     20     484  

2017

    475         475  

2018

    489         489  

2019

    504         504  

Thereafter

    827         827  

Total

  $ 2,880   $ 27   $ 2,907  

Major Vendors

During the year ended December 31, 2013, the Company had purchases from one vendor that accounted for 28% of total purchases. The Company had purchases from one vendor that accounted for 27% of total purchases during the year ended December 31, 2014. The Company had purchases from two vendors that accounted for 27% of total purchases for the nine months ended September 30, 2014. The Company had purchases from three vendors that accounted for 45% of total purchases for the nine months ended September 30, 2015.

Purchase Commitments

The Company issued purchase orders in March 2015 totalling $6,774 for inventory that it expects to receive between October 2015 and August 2016.

Employment Agreements

The Company has entered into employment agreements with certain officers of the Company. The agreements require severance ranging from six to twelve months as defined in the agreements for termination without cause. One severance agreement also requires an amount equal to one year of the annual bonus payable for the calendar year preceding the termination date as defined in the agreement for termination without cause.

Deferred Compensation

Deferred compensation consists of 132,824 shares of Restricted Series A Preferred Stock as of both December 31, 2013 and 2014, and 128,377 as of September 30, 2015. The restricted shares were valued at $1.50 per share and vest upon a Change in Control as defined in the Restricted Stock Agreement.

F-19


Table of Contents


TACTILE SYSTEMS TECHNOLOGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information as of September 30, 2015 and for the nine months ended September 30, 2014
and 2015 is unaudited)

(in thousands, except percentages and share data)

NOTE 7 — Commitments and Contingencies (Continued)

Retirement Plan

The Company maintains a 401(k) retirement plan for its employees in which eligible employees can contribute a percentage of their compensation. The Company may also make discretionary contributions. The Company made contributions of $0 and $82 for the years ended December 31, 2013 and 2014, respectively, and $49 and $100 for the nine month periods ended September 30, 2014, and 2015, respectively.

NOTE 8 — Stockholders' Equity

In September and October 2012, the Company received gross proceeds of $10,400 for issuance of 7,708,502 shares of its Series B Preferred Stock at $1.35 per share. The Series B Preferred Stock includes a liquidation preference of the original investment plus an accruing dividend at a rate of 6%, compounded annually, whether or not declared. The accruing dividend is payable upon a voluntary or involuntary liquidation or dissolution of the Company, upon conversion of the Series B Preferred Stock to common stock, upon redemption of the Series B Preferred Stock or at such time as the Company pays a dividend on other shares of its capital stock. The accruing dividend may be paid in cash or, at the option of the stockholder, additional shares of Series B Preferred Stock determined by dividing the amount of the accruing dividend by the Series B Preferred Stock purchase price as adjusted. There were $821 and $1,494 of undeclared cumulative preferred dividends as of December 31, 2013 and 2014, respectively, and $2,028 as of September 30, 2015. Holders of shares of Series B Preferred Stock are entitled to votes equal to the number of shares of common stock into which such Series B Preferred Stock could be converted. Purchasers of the Series B Preferred Stock received anti-dilution rights whereby if the Company issues or sells additional shares of preferred or common shares at a purchase price below $1.35 per share, the Company will issue additional shares to these purchasers of Series B Preferred Stock to effectively reduce their purchase price.

Each share of Series B Preferred Stock can be converted into equal shares of common stock at the option of the Series B Preferred Stock holder at any time. In addition, the Series B Preferred Stock shares are automatically convertible into common shares upon the sale of shares of common stock to the public at a price per share of at least $4.05 in a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, resulting in at least $30,000 of proceeds to the Company, net of underwriting discounts and commissions and after which the common stock is listed on an United States national securities exchange. Each Series B Preferred stockholder is also entitled to receive the number of common shares equal to the Series B Preferred Stock original issue price divided by the initial public offering price per share. In addition, each Series B Preferred stockholder is entitled to receive the number of common shares equal to the accrued dividends on the shares of Series B Preferred Stock divided by the original issue price of the Series B Preferred Stock divided by the initial public offering price per share.

From 2007 through 2009, the Company received gross proceeds of $12,950 for the issuance of 8,633,535 shares of its Series A Preferred Stock at $1.50 per share. The Series A Preferred Stock includes a liquidation preference of the original investment plus an accruing dividend at a rate of 6%,

F-20


Table of Contents


TACTILE SYSTEMS TECHNOLOGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information as of September 30, 2015 and for the nine months ended September 30, 2014
and 2015 is unaudited)

(in thousands, except percentages and share data)

NOTE 8 — Stockholders' Equity (Continued)

compounded annually, whether or not declared. The accruing dividend is payable upon a voluntary or involuntary liquidation or dissolution of the Company or upon conversion of the Series A Preferred Stock to common stock, upon redemption of the Series A Preferred Stock or at such time as the Company pays a dividend on other shares of its capital stock. The accruing dividend will be paid in cash. There were $5,168 and $6,256 of undeclared cumulative preferred dividends as of December 31, 2013 and 2014, respectively, and $7,118 as of September 30, 2015. Holders of shares of Series A Preferred Stock are entitled to votes equal to the number of shares of common stock into which such Series A Preferred Stock could be converted. Purchasers of the Series A Preferred Stock received anti-dilution rights whereby if the Company issues or sells additional shares of preferred or common shares at a purchase price below $1.50 per share, the Company will issue additional shares to these purchasers of Series A Preferred Stock to effectively reduce their purchase price. The Series B Preferred Stock was sold at a price less than the Series A Preferred Stock. As a result, the Company will issue 237,197 shares of Common Stock for this anti-dilution provision once a liquidation event or other conversion (including an initial public offering) has been declared.

Each share of Series A Preferred Stock can be converted into equal shares of common stock at the option of the Series A Preferred Stock holder at any time. In addition, the Series A Preferred Stock shares are automatically convertible into common shares upon the sale of shares of common stock to the public at a minimum price of $4.05 per share in a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, resulting in at least $30,000 of proceeds to the Company, net of underwriting discounts and commissions. Each Series A Preferred stockholder is also entitled to receive the number of common shares equal to the Series A Preferred Stock original issue price divided by the initial public offering price per share.

All shares of preferred stock shall be redeemed by the Company in either a lump sum or three equal annual installments any time after the Company receives notice from one of its two largest preferred stockholders after September 14, 2017. Each share of preferred stock shall be repurchased at its purchase price, as adjusted, plus all unpaid accruing dividends. The Company recorded its convertible preferred stock at fair value on the dates of issuance, net of issuance costs. As the redemption event is outside the control of the Company, all shares of convertible preferred stock have been presented outside of permanent equity. The Company has elected to recognize changes in the redemption value immediately as they occur and adjust the carrying amount of the convertible preferred stock to equal the redemption value at the end of each reporting period.

At the time of its issuance, the Company determined that the Series B and Series A preferred stock contained two embedded features: (1) optional redemption by the holder and (2) optional conversion by the holder. The Company determined that each of the embedded features met the definition of a derivative and that the Series B and Series A preferred stock should be considered an equity host for

F-21


Table of Contents


TACTILE SYSTEMS TECHNOLOGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information as of September 30, 2015 and for the nine months ended September 30, 2014
and 2015 is unaudited)

(in thousands, except percentages and share data)

NOTE 8 — Stockholders' Equity (Continued)

the purposes of assessing the embedded derivatives for potential bifurcation. The following was noted regarding these embedded features:

Optional Redemption by the Holder.     The Company determined that the redemption feature was not clearly and closely related to the equity host instrument but does not meet the definition of a derivative. As such, the redemption feature did not require bifurcation under the guidance for derivatives.

Optional Conversion by the Holder.     The optional conversion feature was determined to be clearly and closely related to the Series B and Series A preferred stock host. As such the conversion feature did not require bifurcation under ASC 815.

The Series B and Series A preferred stock was assessed under ASC 470, "Debt," to determine if there was a beneficial conversion feature, or BCF. The Company determined there was no BCF.

The following are the preferred stock per share amounts of undeclared cumulative preferred dividends:

 
  As of December 31,    
 
 
  As of September 30,
2015
 
 
  2013   2014  
 
   
   
  (unaudited)
 

Series A

  $ 0.60   $ 0.72   $ 0.82  

Series B

  $ 0.11   $ 0.19   $ 0.26  

Stock Option Plans

During 2003, the Company adopted the 2003 Plan, pursuant to which stock options to acquire an aggregate of 700,000 shares of the Company's common stock may be granted to employees, directors and consultants. In 2003, in connection with the adoption of the 2003 Stock Option Plan (the "2003 Plan"), the board of directors decided they would no longer grant any options under the 2001 Plan. On March 31, 2005, the Company increased the number of authorized shares to 1,400,000 shares. In September 2006, the Company increased the number of authorized shares to 1,800,000 shares. In general, options vest over a four-year period and expire five to ten years from the date of grant.

During 2007, the Company adopted the 2007 Omnibus Stock Option Plan (the "2007 Plan") pursuant to which stock options to acquire an aggregate of 1,600,000 shares of the Company's common stock may be granted to employees, directors, and consultants. In October 2008, the Company increased the number of authorized shares to 2,850,000. In March 2011, the Company increased the number of authorized shares to 4,850,000. In September 2012, the Company increased the number of authorized shares to 6,500,000. In October 2014, the Company increased the number of authorized shares to 6,850,000. In February 2015, the Company increased the number of authorized shares to 7,200,000. With the adoption of the 2007 Plan, the board of directors decided the Company would no longer grant any options under the 2003 Plan. In general, options granted under the 2007 Plan vest over a

F-22


Table of Contents


TACTILE SYSTEMS TECHNOLOGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information as of September 30, 2015 and for the nine months ended September 30, 2014
and 2015 is unaudited)

(in thousands, except percentages and share data)

NOTE 8 — Stockholders' Equity (Continued)

four-year period and expire ten years from the date of grant. The Company issues new shares upon the exercise of options. As of December 31, 2014 and September 30, 2015, approximately 514,000 and 174,000 shares were available for grant under the 2007 Plan.

Information regarding the Company's stock options is summarized below:

 
  Number
outstanding
  Weighted-average
exercise
price
  Aggregate
intrinsic
value
 

Options outstanding — December 31, 2012

    5,801,979   $ 0.28        

Granted

    1,503,500     0.31        

Exercised

    (186,768 )   0.32   $ 21  

Forfeited

    (159,309 )   0.44        

Options outstanding — December 31, 2013

    6,959,402     0.28        

Granted

    441,500     0.48        

Exercised

    (1,127,745 )   0.20   $ 161  

Forfeited

    (189,483 )   0.30        

Options outstanding — December 31, 2014

    6,083,674     0.31   $ 5,912  

Granted (unaudited)

    473,000     1.50        

Exercised (unaudited)

    (1,168,808 )   0.22   $ 692  

Forfeited (unaudited)

    (137,764 )   0.81        

Options outstanding — September 30, 2015 (unaudited)

    5,250,102   $ 0.42   $ 4,600  

Options exercisable — September 30, 2015 (unaudited)

    3,763,882   $ 0.32   $ 3,607  

Weighted-average fair value of options granted during the year ended December 31, 2013

        $ 0.13        

Weighted-average fair value of options granted during the year ended December 31, 2014

        $ 0.16        

Weighted-average fair value of options granted during the nine month period ended September 30, 2015 (unaudited)

        $ 0.58        

F-23


Table of Contents


TACTILE SYSTEMS TECHNOLOGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information as of September 30, 2015 and for the nine months ended September 30, 2014
and 2015 is unaudited)

(in thousands, except percentages and share data)

NOTE 8 — Stockholders' Equity (Continued)

The following table summarizes information about stock options outstanding as of December 31, 2014:

 
   
  Options outstanding   Options exercisable  
Exercise prices   Number
outstanding
  Weighted-
average remaining
contractual life-years
  Weighted-
average
exercise price
  Number
exercisable
  Weighted-
average
exercise price
 
$0.18     2,026,370     3.18   $ 0.18     2,026,370   $ 0.18  
$0.24     1,062,304     8.07   $ 0.24     539,867   $ 0.24  
$0.26     537,000     5.23   $ 0.26     537,000   $ 0.26  
$0.34     1,000,000     8.79   $ 0.34     296,036   $ 0.34  
$0.48     425,500     9.32   $ 0.48       $ 0.48  
$0.55     1,027,500     6.48   $ 0.55     922,109   $ 0.55  
$1.50     5,000     0.07   $ 1.50     5,000   $ 1.50  
$0.18 - $1.50     6,083,674     6.12   $ 0.31     4,326,382   $ 0.29  

The following table summarizes information about stock options outstanding as of September 30, 2015 (unaudited):

 
   
  Options outstanding   Options exercisable  
Exercise prices   Number
outstanding
  Weighted-
average remaining
contractual life-years
  Weighted-
average
exercise price
  Number
exercisable
  Weighted-
average
exercise price
 
$0.18     1,237,620     2.72   $ 0.18     1,237,620   $ 0.18  
$0.24     771,501     7.33   $ 0.24     470,273   $ 0.24  
$0.26     492,000     4.49   $ 0.26     492,000   $ 0.26  
$0.34     1,000,000     8.04   $ 0.34     486,948   $ 0.34  
$0.48     392,914     8.60   $ 0.48     146,126   $ 0.48  
$0.55     932,067     5.69   $ 0.55     930,915   $ 0.55  
$1.50     424,000     9.41   $ 1.50       $ 1.50  
$0.18 - $1.50     5,250,102     6.08   $ 0.42     3,763,882   $ 0.32  

F-24


Table of Contents


TACTILE SYSTEMS TECHNOLOGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information as of September 30, 2015 and for the nine months ended September 30, 2014
and 2015 is unaudited)

(in thousands, except percentages and share data)

NOTE 8 — Stockholders' Equity (Continued)

The following summarizes additional information about the Company's stock options:

 
  As of
December 31,
   
 
 
  As of
September 30,
2015
 
Number of:
  2013   2014  
 
   
   
  (unaudited)
 

Non-vested options beginning of the year

    1,634,735     2,241,331     1,757,992  

Non-vested options end of the year

    2,241,331     1,757,992     1,486,220  

Vested options

    690,639     909,339     543,717  

 
  As of
December 31,
   
 
 
  As of
September 30,
2015
 
Weighted-average grant date fair value of:
  2013   2014  
 
   
   
  (unaudited)
 

Non-vested options beginning of the year

  $ 0.16   $ 0.21   $ 0.15  

Non-vested options end of the year

  $ 0.15   $ 0.16   $ 0.98  

Vested options

  $ 0.18   $ 0.19   $ 0.16  

Forfeited options

  $ 0.16   $ 0.16   $ 0.30  

Stock Warrants

The Company has also issued warrants to purchase shares of common stock which are summarized below:

 
  Number
outstanding
  Weighted-average
exercise
price
 

Warrants outstanding — December 31, 2012

    487,353   $ 1.36  

Exercised

         

Expired

         

Warrants outstanding — December 31, 2013

    487,353     1.36  

Exercised

         

Expired

         

Warrants outstanding — December 31, 2014

    487,353     1.36  

Exercised (unaudited)

    446,413     1.36  

Expired (unaudited)

         

Warrants outstanding — September 30, 2015 (unaudited)

    40,940   $ 1.35  

F-25


Table of Contents


TACTILE SYSTEMS TECHNOLOGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information as of September 30, 2015 and for the nine months ended September 30, 2014
and 2015 is unaudited)

(in thousands, except percentages and share data)

NOTE 8 — Stockholders' Equity (Continued)

Information regarding the warrants outstanding is as follows:

 
   
   
  As of September 30, 2015  
 
  As of December 31, 2014  
 
  (unaudited)
 
Range of
exercise prices
  Warrants   Weighted-average remaining
contractual
life-years
  Warrants   Weighted-average remaining
contractual
life-years
 
$1.25     278,640     0.78     24,583     0.03  
$1.50     208,713     2.57     16,357     1.82  
$1.25 - $1.50     487,353     1.55     40,940     0.74  

NOTE 9 — Income Taxes

As of December 31, 2014, the Company had net operating loss carryforwards of approximately $1,100 for federal income tax purposes that are available to offset future taxable income and begin to expire in the year 2018. The use of the net operating loss in future years may be limited under Sections 382 and 383 of the Internal Revenue Code if significant ownership changes have occurred.

The provision for income tax expense (benefit) consisted of the following:

 
  Year Ended December 31,   Nine Months Ended September 30,  
 
  2013   2014   2014   2015  
 
   
   
  (unaudited)
 

Current income taxes (benefit)

  $ 169   $ 167   $   $  

Deferred income taxes (benefit)

    939     1,558     (171 )   90  

Change in valuation allowance

    (1,880 )            

Total provision (benefit) for income taxes

  $ (772 ) $ 1,725   $ (171 ) $ 90  

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 purposes including depreciation and amortization, vacation accruals, deductions related to allowances for doubtful accounts, and net operating loss carryforwards.

F-26


Table of Contents


TACTILE SYSTEMS TECHNOLOGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information as of September 30, 2015 and for the nine months ended September 30, 2014
and 2015 is unaudited)

(in thousands, except percentages and share data)

NOTE 9 — Income Taxes (Continued)

The components of the Company's deferred tax assets are as follows:

 
  As of December 31,    
 
 
  As of
September 30, 2015
 
 
  2013   2014  
 
   
   
  (unaudited)
 

Deferred tax assets:

                   

Net operating loss carryforwards

  $ 2,013   $ 874   $ 741  

Accounts receivable and inventory reserves

    753     977     1,031  

Intangible assets

    891     886     861  

Accrued liabilities

    810     243     256  

Other

    111     40     41  

Gross deferred tax assets

    4,578     3,020     2,930  

Less valuation allowance

             

Net deferred tax assets

  $ 4,578   $ 3,020   $ 2,930  

Net deferred tax assets — current

  $ 3,496   $ 2,015   $ 1,955  

Net deferred tax assets — long term

    1,082     1,005     975  

Net deferred tax assets

  $ 4,578   $ 3,020   $ 2,930  

The Company regularly assesses the likelihood that the deferred tax assets will be recovered from future taxable earnings. The Company considers projected future taxable earnings and ongoing tax planning strategies, then records a valuation allowance to reduce the carrying value of the net deferred taxes to an amount that is more likely than not to be realized. The amount of the valuation allowance reduction as of December 31, 2013 was based on the Company's projected discounted taxable earnings. For the year ended December 31, 2013, based upon its current year earnings and estimates of future profitability, the Company determined it would be able to realize its deferred tax assets in the future and therefore decreased the remaining valuation allowance. The decrease in the valuation allowance was $1,880 for the year ended December 31, 2013.

F-27


Table of Contents


TACTILE SYSTEMS TECHNOLOGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information as of September 30, 2015 and for the nine months ended September 30, 2014
and 2015 is unaudited)

(in thousands, except percentages and share data)

NOTE 9 — Income Taxes (Continued)

A reconciliation of income tax expense (benefit) to the statutory federal tax rate of 34% is as follows:

 
  Year Ended December 31,   Nine Months Ended September 30,  
 
  2013   2014   2014   2015  
 
   
   
  (unaudited)
 

Tax benefit at statutory rate

    34.0 %   34.0 %   (34.0 )%   34.0 %

State income taxes, net of federal benefit

    2.1     3.0     (5.0 )   4.8  

Permanent differences

    4.3     3.9     61.0     164.6  

Other and uncertain tax positions

    6.0     4.5     (60.0 )   (163.0 )

Valuation allowance

    (68.7 )            

Net effective rate

    (22.3 )%   45.4 %   (38.0 )%   40.4 %

The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the 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.

With few exceptions, the Company is no longer subject to U.S. federal, state or local income tax examinations by tax authorities for the years before 2011. The Company is not currently under examination by any taxing jurisdiction. In the event of any future tax assessments, the Company has elected to record the income taxes and any related interest and penalties as income tax expense on the Company's statement of operations.

F-28


Table of Contents


TACTILE SYSTEMS TECHNOLOGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information as of September 30, 2015 and for the nine months ended September 30, 2014
and 2015 is unaudited)

(in thousands, except percentages and share data)

NOTE 10 — Net Income (Loss) Per Share Attributable to Common Stockholders

The following table sets forth the computation of the Company's basic and diluted net income (loss) per share attributable to common stockholders.

 
  Year Ended December 31,   Nine Months Ended September 30,  
 
  2013   2014   2014   2015  
 
   
   
  (unaudited)
  (unaudited)
 

Net income (loss)

  $ 3,156   $ 2,070   $ (282 ) $ 134  

Preferred stock dividends

    (1,668 )   (1,761 )   (1,336 )   (1,396 )

Allocation of undistributed earnings to preferred stockholders

    (1,074 )   (216 )        

Net income (loss) attributable to common stockholders

  $ 414   $ 93   $ (1,618 ) $ (1,262 )

Weighted average shares outstanding

   
6,305,401
   
7,025,035
   
6,903,792
   
7,992,734
 

Effect of common stock options

    970,747     3,684,614          

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

    7,276,148     10,709,649     6,903,792     7,992,734  

Net income (loss) per share — Basic

 
$

0.07
 
$

0.01
 
$

(0.23

)

$

(0.16

)

Net income (loss) per share — Diluted

    0.06     0.01     (0.23 )   (0.16 )

The following potentially dilutive securities outstanding were excluded from the computation of weighted shares outstanding for the years ended December 31, 2013 and 2014, and have been excluded from the computations of diluted weighted-average shares outstanding for the nine month periods ended September 30, 2014 and 2015, because such securities have an antidilutive impact due to losses reported:

 
  Year Ended December 31,   Nine Months Ended
September 30,
 
 
  2013   2014   2014   2015  
 
   
   
  (unaudited)
  (unaudited)
 

Convertible preferred stock outstanding

    16,342,037     16,342,037     16,342,037     16,342,037  

Common stock options

    3,351,535     7,870     6,111,918     5,250,102  

Common stock warrants

    487,353     487,353     487,353     40,940  

    20,180,925     16,837,260     22,941,308     21,633,079  

F-29


Table of Contents


TACTILE SYSTEMS TECHNOLOGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information as of September 30, 2015 and for the nine months ended September 30, 2014
and 2015 is unaudited)

(in thousands, except percentages and share data)

NOTE 11 — Unaudited Pro Forma Net Income Per Share Attributable to Common Stockholders

The following table sets forth the computation of the Company's unaudited pro forma basic and diluted net income per share attributable to common stockholders during the year ended December 31, 2014, and nine months ended September 30, 2015 after giving effect to (a) the conversion of all outstanding preferred stock into an aggregate of             shares of common stock immediately prior to the completion of this offering; (b) the issuance of             additional shares of common stock immediately prior to the completion of the offering that the Company's Series A and Series B preferred stockholders are entitled to receive in connection with its initial public offering, assuming an initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus; (c) the additional             shares of common stock that would have been required to be issued to generate sufficient proceeds to fund the cash payment of Series A convertible preferred stock dividends; (d) the issuance of             shares of common stock immediately prior to the completion of this offering to pay accrued dividends on Series B preferred stock (assuming a closing date of                        , 2016 and assuming an initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus); and (e) the effectiveness of the Company's amended and restated certificate of incorporation and adoption of the Company's amended and restated bylaws. Unaudited pro forma net income (loss) per share attributable to common stockholders is computed using the weighted average number of common shares outstanding after giving effect to the items set forth above as if such events had occurred at the beginning of the period presented.

F-30


Table of Contents

NOTE 11 — Unaudited Pro Forma Net Income Per Share Attributable to Common Stockholders

 
  Year Ended
December 31,
2014
  Nine Months Ended
September 30,
2015
 
 
  (unaudited)
  (unaudited)
 

Numerator:

             

Net income

  $ 2,070   $ 134  

Denominator

             

Weighted average shares used in computing net income per share attributable to common stock, basic

    7,025,035     7,992,734  

Pro forma adjustment to reflect conversion of convertible preferred stock into common stock

             

Pro forma adjustment to reflect the issuance of additional shares of common stock to the Series A and Series B preferred stockholders

             

Pro forma adjustment to reflect the additional shares of common stock that would have been issued to generate sufficient proceeds to fund the cash payment of the Series A convertible preferred stock dividends

             

Pro forma adjustment to reflect the issuance of additional shares of common stock for the payment of cumulative but unpaid dividends to the Series B preferred stockholders

             

Pro forma weighted average shares used in computing net income per share attributable to common stockholders, basic

             

Effect of common stock options and warrants

             

Pro forma weighted average shares used in computing net income per share attributable to common stockholders, diluted

             

Pro forma net income per common share attributable to common stockholders:

   
 
   
 
 

Basic

  $   $  

Diluted

  $   $  

F-31


Table of Contents

NOTE 12 — Subsequent Events

For the audited consolidated financial statements, management has reviewed and evaluated material subsequent events from the consolidated balance sheet date of December 31, 2014, through the consolidated financial statements' issue date of September 25, 2015. No subsequent events have been identified for disclosure except as disclosed.

NOTE 13 — Subsequent Events (unaudited)

For the interim consolidated financial statements as of September 30, 2015, and for the nine months then ended, the Company has evaluated events through November 11, 2015, which is the date the interim consolidated financial statements were available to be issued. No subsequent events have been identified for disclosure.

F-32


GRAPHIC


Table of Contents

             Shares

TACTILE SYSTEMS TECHNOLOGY, INC.

Common Stock

LOGO


PROSPECTUS


Piper Jaffray

William Blair

Canaccord Genuity

BTIG

   

                           , 2016


Table of Contents


PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13.    Other Expenses of Issuance and Distribution.

The following table sets forth the costs and expenses, other than the underwriting discounts and commissions, payable by us in connection with the sale of common stock being registered. All amounts shown are estimates, except the SEC registration fee, the Financial Industry Regulatory Authority, Inc. filing fee and stock exchange listing fee.

 
  Amount  

SEC registration fee

  $ 8,685.38  

FINRA fee

    *  

Stock exchange initial listing fee

    *  

Blue sky fees and expenses

    *  

Legal fees and expenses

    *  

Accounting fees and expenses

    *  

Printing and engraving expenses

    *  

Transfer agent and registrar fees and expenses

    *  

Miscellaneous

    *  

Total expenses

  $ *  

*To
*To be filed by amendment

Item 14.    Indemnification of Directors and Officers.

We are a corporation organized under the laws of the State of Delaware. Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to an action by reason of the fact that he or she was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful, except that, in the case of an action by or in right of the corporation, no indemnification may generally be made in respect of any claim as to which such person is adjudged to be liable to the corporation. Our amended and restated bylaws, which will become effective upon completion of this offering, provide that we will indemnify and advance expenses to our directors and officers (and may choose to indemnify and advance expenses to other employees and other agents) to the fullest extent permitted by law; provided, however, that if we enter into an indemnification agreement with such directors or officers, such agreement controls.

Section 102(b)(7) of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duties as a director, except for liability for any:

      breach of a director's duty of loyalty to the corporation or its stockholders;

      act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;

II-1


Table of Contents

      unlawful payment of dividends, stock repurchases or redemption of shares; or

      transaction from which the director derives an improper personal benefit.

Our amended and restated certificate of incorporation, which will become effective upon completion of this offering, provides that our directors are not personally liable for breaches of fiduciary duties to the fullest extent permitted by the Delaware General Corporation Law.

These limitations of liability do not apply to liabilities arising under federal securities laws and do not affect the availability of equitable remedies such as injunctive relief or rescission.

Section 145(g) of the Delaware General Corporation Law permits a corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the corporation. Our amended and restated bylaws, which will become effective upon completion of this offering, permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in connection with their services to us, regardless of whether our bylaws permit indemnification. We intend to obtain a directors' and officers' liability insurance policy prior to the completion of this offering.

As permitted by the Delaware General Corporation Law, we intend to enter into indemnification agreements with each of our directors and officers that require us to indemnify such persons against various actions including, but not limited to, third-party actions where such director or officer, by reason of his or her corporate status, is a party or is threatened to be made a party to an action, or by reason of anything done or not done by such director or officer in any such capacity. We intend to indemnify directors and officers against all costs, judgments, penalties, fines, liabilities, amounts paid in settlement by or on behalf such directors and officers, and for any expenses actually and reasonably incurred by such directors and officers in connection with such action, if such directors or officers acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal proceeding, had no reasonable cause to believe their conduct was unlawful. We also intend to advance to our directors and officers expenses (including attorney's fees) incurred by such directors or officers in advance of the final disposition of any action after the receipt by us of a statement or statements from directors or officers requesting such payment or payments from time to time, provided that such statement or statements are accompanied by an undertaking, by or on behalf of such directors or officers, to repay such amount if it shall ultimately be determined that they are not entitled to be indemnified against such expenses by us.

The indemnification agreements will also set forth certain procedures that will apply in the event of a claim for indemnification or advancement of expenses, including, among others, provisions about providing notice to us of any action in connection with which a director or officer seeks indemnification or advancement of expenses from us, and provisions concerning the determination of entitlement to indemnification or advancement of expenses.

Prior to the completion of this offering we plan to enter into an underwriting agreement, which will provide that the underwriters are obligated, under some circumstances, to indemnify our directors, officers and controlling persons against specified liabilities.

Item 15.    Recent Sales of Unregistered Securities.

In the three years preceding the filing of this registration statement, we issued the securities indicated below that were not registered under the Securities Act. All of the following securities are deemed

II-2


Table of Contents

restricted securities for purposes of the Securities Act. All certificates representing the issued shares of capital stock described in this Item 15 included appropriate legends setting forth that the securities have not been registered and the applicable restrictions on transfer.

Issuance of Preferred Stock

In September and October 2012, we sold              shares of our Series B preferred stock at the price of $             per share, for aggregate consideration of $10.4 million. No underwriters were involved in the foregoing sales of securities. We believe the offers, sales and issuances of these securities were exempt from registration under the Securities Act by virtue of Section 4(a)(2) and Regulation D promulgated thereunder relative to transactions by an issuer not involving any public offering, to the extent an exemption from such registration was required. The purchasers of the securities in each of these transactions represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were placed upon the stock certificates issued in these transactions. All purchasers had general access, through their relationships with us, to information about us. The sales of these securities were made without any general solicitation or advertising.

Issuance of Common Stock

From January 1, 2015 through November 30, 2015, we issued              shares of our common stock upon the exercise of previously issued warrants at an exercise price of $             per share for aggregate consideration of $625,823. We believe the offers, sales and issuance of the above securities were exempt from registration under the Securities Act in reliance on Section 4(a)(2) because the transactions were pursuant to outstanding warrants. The purchasers of the securities in each of these transactions represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were placed upon the stock certificates issued in these transactions. All purchasers had general access, through their relationships with us, to information about us. The sales of these securities were made without any general solicitation or advertising.

From January 1, 2015 through November 30, 2015, we also issued              shares of our common stock upon the exercise of previously issued options at an exercise price of $             per share for aggregate consideration of $264,593. We believe the offers, sales and issuance of the above securities were exempt from registration under the Securities Act in reliance on Rule 701 because the transactions were pursuant to compensatory benefit plans or contracts relating to compensation as provided under such rule. The purchasers of the securities in each of these transactions represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were placed upon the stock certificates issued in these transactions. All purchasers had general access, through their relationships with us, to information about us. The sales of these securities were made without any general solicitation or advertising.

Stock Option Grants

From January 1, 2012 through                           , 2016, we granted stock options to purchase an aggregate of                           shares of our common stock at a weighted-average exercise price of $             per share, to certain of our employees, directors and consultants in connection with services provided to us by these individuals. We believe the offers, sales and issuance of the above securities were exempt from registration under the Securities Act in reliance on Rule 701 because the transactions were pursuant to compensatory benefit plans or contracts relating to compensation as provided under such rule or pursuant to Section 4(a)(2) under the Securities Act relative to transactions

II-3


Table of Contents

by an issuer not involving any public offering, to the extent an exemption from such registration was required.

Item 16.    Exhibits and Financial Statement Schedules.

See the Exhibit Index following the signature page.

Item 17.    Undertakings.

The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes that:

(1)
For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

(2)
For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(3)
For the purpose of determining liability under the Securities Act to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

(4)
In a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if

II-4


Table of Contents

      the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

      (i)
      Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;

      (ii)
      Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

      (iii)
      The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

      (iv)
      Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

II-5


Table of Contents


SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in Minneapolis, Minnesota, on this 25 th day of January, 2016.

    TACTILE SYSTEMS TECHNOLOGY, INC.

 

 

By:

 

/s/ GERALD R. MATTYS  
       
Gerald R. Mattys
Chief Executive Officer


POWERS OF ATTORNEY

We, the undersigned officers and directors of Tactile Systems Technology, Inc., hereby severally constitute and appoint Gerald R. Mattys and Robert J. Folkes, and each of them singly (with full power to each of them to act alone), our true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution in each of them for him and in his name, place and stead, and in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement (or any other registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933), and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as full to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities held on the dates indicated.

Signature
 
Title
 
Date

 

 

 

 

 
/s/ GERALD R. MATTYS

Gerald R. Mattys
  Chief Executive Officer (principal executive officer) and Director   January 25, 2016

/s/ ROBERT J. FOLKES

Robert J. Folkes

 

Chief Operating Officer and Chief Financial Officer (principal financial and accounting officer)

 

January 25, 2016

/s/ PETER H. SODERBERG

Peter H. Soderberg

 

Chairman of the Board of Directors

 

January 25, 2016

/s/ WILLIAM W. BURKE

William W. Burke

 

Director

 

January 25, 2016

/s/ JORDAN S. DAVIS

Jordan S. Davis

 

Director

 

January 25, 2016

/s/ RICHARD NIGON

Richard Nigon

 

Director

 

January 25, 2016

/s/ KEVIN H. ROCHE

Kevin H. Roche

 

Director

 

January 25, 2016

/s/ STEPHEN I. SHAPIRO

Stephen I. Shapiro

 

Director

 

January 25, 2016

/s/ ZUBEEN SHROFF

Zubeen Shroff

 

Director

 

January 25, 2016

II-6


Table of Contents


EXHIBIT INDEX

Exhibit No.   Description
  1.1*   Form of Underwriting Agreement
  2.1   Asset Sale and Purchase Agreement, dated as of September 14, 2012, by and between Tactile Systems Technology, Inc., Swelling Solutions, Inc., ConvaTec Inc. and ConvaTec Technologies, Inc.^
  3.1*   Amended and Restated Certificate of Incorporation (to be effective upon completion of the offering)
  3.2*   Amended and Restated Bylaws (to be effective upon completion of the offering)
  3.3*   Amended and Restated Certificate of Incorporation (currently in effect)
  3.4   Amended and Restated Bylaws (currently in effect)
  4.1*   Specimen Certificate representing shares of common stock
  4.2*   Amended and Restated Investors' Rights Agreement dated September 14, 2012
  5.1*   Opinion of Faegre Baker Daniels LLP
  10.1#   2003 Stock Option Plan
  10.2#   Form of Incentive Stock Option Agreement under 2003 Stock Option Plan
  10.3#   Form of Non-Statutory Stock Option Agreement (Employee) under 2003 Stock Option Plan
  10.4#   Form of Non-Statutory Stock Option Agreement (Director) under 2003 Stock Option Plan
  10.5#   2007 Omnibus Stock Plan
  10.6#   Form of Incentive Stock Option Agreement under 2007 Omnibus Stock Plan
  10.7#   Form of Non-Statutory Stock Option Agreement (Employee) under 2007 Omnibus Stock Plan
  10.8#   Form of Non-Statutory Stock Option Agreement (Directors) under 2007 Omnibus Stock Plan
  10.9#   Form of Non-Statutory Stock Option Agreement (Consultants) under 2007 Omnibus Stock Plan
  10.10#   Form of Restricted Stock Agreement
  10.11*#   2016 Equity Incentive Plan
  10.12*#   Form of Option Agreement under 2016 Equity Incentive Plan
  10.13*#   Form of Restricted Stock Agreement under 2016 Equity Incentive Plan
  10.14*#   Employee Stock Purchase Plan
  10.15*#   Non-Employee Director Compensation Policy
  10.16*#   Form of Director and Officer Indemnification Agreement
  10.17*#   Form of Employment Agreement between Tactile Systems Technology, Inc. and its named executive officers
  10.18*   Promissory Note, dated as of May 11, 2014, as amended May 11, 2015, by and between Tactile Systems Technology, Inc. and Venture Bank
  21.1   Subsidiaries
  23.1   Consent of Grant Thornton LLP
  23.2*   Consent of Faegre Baker Daniels LLP (included in Exhibit 5.1)
  24.1   Power of Attorney (included in signature page)

*
To be filed by amendment.

^
Schedules to this exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule will be furnished supplementally to the Securities and Exchange Commission upon request.

#
Indicates management contract or compensatory plan or arrangement.

II-7




Exhibit 2.1

 

EXECUTION VERSION

 

ASSET SALE AND PURCHASE AGREEMENT

 

by and between

 

Tactile Systems Technology, Inc.,

 

Swelling Solutions, Inc.,

 

ConvaTec Inc.

 

and

 

ConvaTec Technologies, Inc.

 


 

SEPTEMBER 14, 2012

 



 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

ARTICLE 1

DEFINITIONS AND CONSTRUCTION

1

 

 

 

Section 1.1

Definitions

1

Section 1.2

Additional Defined Terms

6

Section 1.3

Construction

7

 

 

 

ARTICLE 2

THE TRANSACTION

8

 

 

 

Section 2.1

Sale and Purchase of Purchased Assets

8

Section 2.2

Excluded Assets

8

Section 2.3

Assumed Liabilities

9

Section 2.4

Excluded Liabilities

9

Section 2.5

Consideration

9

Section 2.6

Commercialization Payment

10

Section 2.7

Sales Percentage Amount

10

Section 2.8

Allocation of Purchase Price

12

Section 2.9

Closing

13

Section 2.10

Closing Deliveries

13

Section 2.11

Default Interest

14

Section 2.12

Removal of Purchased Assets

14

Section 2.13

Consents

14

Section 2.14

Set-off

15

 

 

 

ARTICLE 3

REPRESENTATIONS AND WARRANTIES OF THE SELLERS

15

 

 

 

Section 3.1

Organization and Good Standing

15

Section 3.2

Authority and Enforceability

16

Section 3.3

No Conflict

16

Section 3.4

Purchased Assets

16

Section 3.5

Intellectual Property

16

Section 3.6

Contracts

18

Section 3.7

Tax Matters

18

Section 3.8

Governmental Authorizations

19

Section 3.9

Compliance with Laws

19

Section 3.10

Legal Proceedings

19

Section 3.11

FDA and Regulatory Compliance

19

Section 3.12

Inventory

20

Section 3.13

Products and Materials

21

Section 3.14

Brokers Fees

21

 

i



 

Section 3.15

Anti-Bribery Laws

21

Section 3.16

Cidron Healthcare Limited

22

Section 3.17

Disclaimer of Other Representations and Warranties

22

Section 3.18

No Other Provisions

22

 

 

 

ARTICLE 4

REPRESENTATIONS AND WARRANTIES OF THE PURCHASER

22

 

 

 

Section 4.1

Organization and Good Standing

22

Section 4.2

Authority and Enforceability

23

Section 4.3

No Conflict

23

Section 4.4

Legal Proceedings

23

Section 4.5

Brokers Fees

23

Section 4.6

Financial Capacity

23

Section 4.7

Independent Investigation

23

 

 

 

ARTICLE 5

COVENANTS

24

 

 

 

Section 5.1

Access and Investigation

24

Section 5.2

Operation of the Project

24

Section 5.3

Consents and Filings

25

Section 5.4

Sellers’ Names, Assets and Information

25

Section 5.5

Nonsolicitation

26

Section 5.6

Noncompetition

26

Section 5.7

Exclusivity

28

Section 5.8

Insurance

28

Section 5.9

Successors in Interest

28

Section 5.10

Books and Records

28

Section 5.11

Confidentiality

28

Section 5.12

Public Announcements

29

Section 5.13

Further Actions

30

Section 5.14

Bulk Transfer Laws

30

Section 5.15

Transfer Taxes

30

Section 5.16

Data Room

30

Section 5.17

Employees and Consultants

30

 

 

 

ARTICLE 6

CONDITIONS PRECEDENT TO OBLIGATION TO CLOSE

31

 

 

 

Section 6.1

Conditions to the Obligation of the Purchaser

31

Section 6.2

Conditions to the Obligation of the Sellers

31

 

 

 

ARTICLE 7

TERMINATION

32

 

 

 

Section 7.1

Termination Events

32

Section 7.2

Effect of Termination

32

 

ii



 

Section 7.3

Certain Effects of Termination

33

 

 

 

ARTICLE 8

INDEMNIFICATION

33

 

 

 

Section 8.1

Indemnification by ConvaTec

33

Section 8.2

Indemnification by the Purchaser

33

Section 8.3

Claim Procedure

33

Section 8.4

Survival

34

Section 8.5

Limitations on Liability

34

Section 8.6

Exclusive Remedy

36

 

 

 

ARTICLE 9

GENERAL PROVISIONS

36

 

 

 

Section 9.1

Notices

36

Section 9.2

Amendment

37

Section 9.3

Waiver and Remedies

37

Section 9.4

Entire Agreement

37

Section 9.5

Assignment Successors and No Third Party Rights

37

Section 9.6

Severability

38

Section 9.7

Exhibits and Schedules

38

Section 9.8

Interpretation

38

Section 9.9

Expenses

38

Section 9.10

Governing Law

38

Section 9.11

Specific Performance

38

Section 9.12

Jurisdiction and Service of Process

38

Section 9.13

Waiver of Jury Trial

39

Section 9.14

No Joint Venture

39

Section 9.15

Counterparts

39

Section 9.16

Guarantee

39

 

Exhibits

 

Exhibit A

 

Bill of Sale

 

 

 

Exhibit B

 

Assignment and Assumption Agreement

 

 

 

Exhibit C

 

Patent Assignment

 

 

 

Exhibit D

 

Software Assignment

 

iii



 

EXECUTION VERSION

 

ASSET SALE AND PURCHASE AGREEMENT

 

This Asset Sale and Purchase Agreement (the “ Agreement ”) is made as of September 14, 2012 by and between ConvaTec Inc., a Delaware corporation (“ ConvaTec ”), ConvaTec Technologies, Inc., a Nevada corporation (“ CTI ”, and CTI and ConvaTec together being the “ Sellers ” and each individually a “ Seller ”), Swelling Solutions, Inc., a Delaware corporation (the “ Purchaser ”), and, solely with respect to Section 9.16, Tactile Systems Technology, Inc., a Delaware corporation (“ Parent ”).

 

Recitals

 

A.                                     The Sellers are engaged in the design, development and clinical testing of (a) the Amadeus adaptive compression therapy device for the treatment of chronic venous insufficiency and venous leg ulcers (the “ Amadeus Device ”), (b) the SMM platform technology entailed in the patents set forth in Part B of Schedule 2.1(d), for a materials-based approach to compression therapy (the “ SMM Platform ”), and (c) the Products (as hereinafter defined, and the Amadeus Device, the SMM Platform and the Products together being the “ Project ”).

 

B.                                     The Sellers desire to sell, convey, assign, transfer and deliver to the Purchaser, and the Purchaser desires to purchase and acquire from the Sellers, all of the assets of the Sellers primarily relating to the Project, and the Purchaser agrees to assume certain liabilities of the Sellers.

 

Agreement

 

NOW, THEREFORE, intending to be legally bound and in consideration of the mutual provisions set forth in this Agreement and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

 

ARTICLE 1
DEFINITIONS AND CONSTRUCTION

 

Section 1.1                                     Definitions .  For the purposes of this Agreement, the Ancillary Agreements and the Project:

 

Acquisition ” means any of the following transactions or series of related transactions: the sale, lease, exchange, transfer, license, acquisition or disposition of the Project or any material Purchased Assets.

 

Acquisition Proposal ” means any offer, proposal, inquiry or indication of interest from any Person contemplating or otherwise relating to any Acquisition.

 

Affiliate ” means, with respect to a specified Person, a Person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with, the specified Person.  In addition to the foregoing, if the specified Person is an individual, the term “Affiliate” also includes (a) the individual’s spouse, (b) the members of the immediate family (including parents, siblings and children) of the individual or of the individual’s spouse and (c) any corporation, limited liability company, general or limited partnership, trust, association or other business or investment entity that directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with any of the foregoing individuals.  For purposes of this definition, the term “control” (including the terms “controlling,” “controlled by” and “under common control with”) means the

 



 

possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise.  Furthermore, for purposes of this definition, when applied to the Sellers, the term “Affiliate” shall include only (and for so long only as they control, are controlled by or are under common control with the Sellers) Cidron Healthcare Limited and its direct and indirect subsidiaries and shall not include the shareholders of Cidron Healthcare Limited, or any of the direct and indirect subsidiaries (other than Cidron Healthcare Limited and its direct and indirect subsidiaries) of such shareholders.

 

Ancillary Agreements ” means, collectively, the Bill of Sale, the Assignment and Assumption Agreement, the Patent Assignment, the Software Assignment and any other agreement entered into in connection with the transactions contemplated hereby.

 

Annual Period ” means a period beginning on the Commercialization Payment Date and ending on the last day of the fourth Quarterly Calculation Period after the Commercialization Payment Date, and thereafter each period consisting of four consecutive Quarterly Calculation Periods.

 

Business Day ” means any day other than Saturday, Sunday or any day on which banking institutions in New York City or Minneapolis, Minnesota are closed either under applicable Law or action of any Governmental Authority.

 

Code ” means the Internal Revenue Code of 1986.

 

Commercialization ” means the earlier of the date on which (a) a Product is shipped or (b) an invoice for a Product is sent, in either case with respect to the actual sale of a Product in normal commercial sales or distribution channels.  When used as a verb, “ Commercializing ” means to engage in Commercialization and “ Commercialize ” and “ Commercialized ” shall have a corresponding meaning.

 

Commercially Reasonable Efforts ” means the efforts that a prudent Person desirous of achieving a result would use in similar circumstances to achieve such result as promptly as reasonable under the circumstances, taking into account any associated expenditure of resources (financial or other) and the expected benefit to such Person; provided, however, that a Person required to use Commercially Reasonable Efforts under or in connection with this Agreement will not be thereby required to dispose of any portion of, or make any material change to, its business.

 

Contract ” means any written or oral contract, agreement, lease, license, commitment, understanding, franchise, warranty, guaranty, mortgage, note, bond or other instrument or consensual obligation that is legally binding.

 

Encumbrance ” means any charge, claim, mortgage, encumbrance, pledge, security interest, or other lien.

 

First Commercialization Date ” means the first date upon which Commercialization occurs.

 

GAAP ” means United States generally accepted accounting principles.

 

Governmental Authority ” means any (a) nation, region, state, county, city, town, village, district or other jurisdiction, (b) federal, state, local, municipal, foreign or other government, (c) governmental or quasi-governmental authority of any nature (including any governmental agency, branch, department or other entity and any court or other tribunal), (d) multinational organization exercising judicial, legislative or regulatory power or (e) body exercising, or entitled to exercise, any administrative, executive, judicial, arbitral, legislative, police, regulatory or taxing authority or power of any nature of any federal, state,

 

2



 

local, municipal, foreign or other government, including any self-regulatory organization and any arbitrator.

 

Governmental Authorization ” means any approval, consent, ratification, waiver, license, permit, registration or other authorization issued or granted by any Governmental Authority.

 

Guaranteed Minimum Sales Percentage Amount ” means an amount equal to (a) $45,000 for each of the first four Quarterly Calculation Periods; (b) $148,500 for each of the fifth, sixth, seventh and eighth Quarterly Calculation Periods; and (c) $247,750 for each of the ninth, tenth, eleventh and twelfth Quarterly Calculation Periods.

 

Independent Valuation of Restricted Business ” means a valuation of a Restricted Business as contemplated by Section 5.6(c) of this Agreement, which valuation will be prepared by a reputable nationally recognized investment bank jointly selected by the Purchaser and ConvaTec, which valuation will set forth the purchase price at which such investment bank believes the Restricted Business could be sold to a third party in an arms’ length transaction, taking into account the efforts of the Sellers to sell the Restricted Business within the 12-month period after Sellers acquire the Restricted Business.  Each of Purchaser, on the one hand, and the Sellers, on the other hand, will pay fifty percent (50%) of all fees and costs incurred by the aforesaid investment bank in the preparation of the Independent Valuation of Restricted Business.

 

Intellectual Property ” means all of the following anywhere in the world and all legal rights, title or interest in the following arising under Law: (a) all patents and applications for patents and all related reissues, reexaminations, divisions, renewals, extensions, provisionals, continuations and continuations in part; (b) all copyrights, copyright registrations and copyright applications, copyrightable works and all other corresponding rights; (c) all mask works, mask work registrations and mask work applications and all other corresponding rights; (d) all trade dress and trade names, logos, Internet addresses and domain names, trademarks and service marks and related registrations and applications, including any intent to use applications, supplemental registrations and any renewals or extensions, all other indicia of commercial source or origin and all goodwill associated with any of the foregoing; (e) all inventions (whether patentable or unpatentable and whether or not reduced to practice), know how, technology, technical data, trade secrets, specifications, test results, methods, ideas or concepts, confidential business information, manufacturing and production processes and techniques, research and development information, financial, marketing and business data, pricing and cost information, business and marketing plans, advertising and promotional materials, customer, distributor, reseller and supplier lists and information, correspondence, records, and other documentation, and other proprietary information of every kind; (f) all computer software (including source and object code), firmware, development tools, algorithms, files, records, analysis, technical drawings and related documentation, data and manuals; and (g) all databases and data collections.

 

IRS ” means the United States Internal Revenue Service and, to the extent relevant, the United States Department of Treasury.

 

Judgment ” means any order, injunction, judgment, decree, ruling, assessment or arbitration award of any Governmental Authority.

 

Knowledge ” means, with respect to the Sellers, the actual knowledge, after reasonable inquiry, of any of the executive officers or senior managerial employees of the Sellers listed in Section 1.1(a) of the Seller Disclosure Schedule. For purposes hereof, “reasonable inquiry” shall not include any obligation to make inquiries other than of the executive officers and senior managerial employees of the Sellers and

 

3



 

any other employees of Sellers with primary responsibility for the applicable facts or circumstances referenced in this Agreement.

 

Law ” means any constitution, law, statute, treaty, rule, regulation, ordinance, code, Order, governmental requirement or rule of law (including common law) enacted, promulgated or imposed by any Governmental Authority.

 

Liability ” means any liability or obligation, whether known or unknown, absolute or contingent, accrued or unaccrued, liquidated or unliquidated, due or to become due.

 

Loss ” means any losses, damages, Judgments, fines, penalties, costs or expenses (including reasonable attorney’s or other professional fees and expenses) but excluding (a) any exemplary or punitive damages and (b) any special, indirect, or consequential damages, lost profits, loss of revenue, lost sales, or amounts calculated as a multiple of earnings, profits, revenue, sales or other measure, in each case that are not reasonably foreseeable by the Indemnifying Party.

 

Material Adverse Effect ” means any event, change, circumstance, effect or other matter that has a material adverse effect on (a) the Purchased Assets or the Project, in each case taken as a whole, or (b) the ability of the Sellers to consummate timely the transactions contemplated by this Agreement; provided, however, that none of the following, either alone or in combination, will constitute, or be considered in determining whether there has been, a Material Adverse Effect (except to the extent that any of the following in clauses (i) or (ii) has a disproportionate impact on the Purchased Assets or the Project): any event, change, circumstance, effect or other matter resulting from or related to (i) changes in Laws, GAAP or enforcement or interpretation thereof, (ii) changes in financial markets, general economic conditions (including prevailing interest rates, exchange rates, commodity prices and fuel costs) or political conditions, (iii) any action taken or failed to be taken in accordance with the express terms of this Agreement or at the request of the Purchaser, or (iv) the execution or delivery of this Agreement, the consummation of the transactions contemplated by this Agreement or the public announcement or other publicity with respect to any of the foregoing.

 

Non-SMM Product ” means any Product other than an SMM Product.

 

Permitted Encumbrance ” means any (a) carrier’s, warehousemen’s, mechanic’s, materialmen’s and other similar liens with respect to amounts that are not yet due and payable or that are being contested in good faith, or (b) liens for Taxes that are not yet due and payable or that are being contested in good faith.

 

Person ” means an individual or an entity, including a corporation, limited liability company, general or limited partnership, trust, association or other business or investment entity, or any Governmental Authority.

 

Prime Rate ” means the prime rate reported from time to time in the “Money Rates” (or successor) section of the Wall Street Journal .

 

Proceeding ” means any action, arbitration, audit, examination, investigation, hearing, litigation or suit (whether civil, criminal, administrative, judicial or investigative, whether formal or informal, and whether public or private) commenced, brought, conducted or heard by or before, or otherwise involving, any Governmental Authority.

 

4



 

Product ” means the Amadeus Device, the SMM Platform and any other product the design for which, or of the manufacturing of which, is wholly or partly derived (other than in an immaterial respect) from the Purchased Intellectual Property.

 

Quarterly Calculation Period ” means the time period from the Commercialization Payment Date until the last day of the calendar quarter following the calendar quarter in which the Commercialization Payment Date occurs and thereafter, each three-month period ending on the last day of each calendar quarter during the Percentage Payments Period; provided that the last Quarterly Calculation Period will end on the tenth anniversary of the Commercialization Payment Date.

 

Restricted Business ” means the design, development, marketing or sale of any portable compression therapy device for the treatment of chronic swelling, lymphedema (or lymphoedema), venous insufficiency and venous leg ulcers that is either battery operated or electrically operated.

 

Sales ” means, with respect to a Product for any period, revenues recognized by Purchaser in accordance with GAAP, for the sale of Products after deduction of (a) ordinary and customary trade discounts or rebates given or credited with respect to such sales and consistent with industry standard practices, including discounts imposed by applicable Law (including Medicaid); (b) credits, returns, refunds or allowances (including wholesaler and retailer returns or any copayments) actually allowed; (c) freight, postage, insurance and duties paid for and separately identified on the invoice or other documentation maintained in the ordinary course of business actually paid and not paid separately or otherwise reimbursed by the customer; and (d) value added Taxes, sales Taxes, use Taxes, occupation or excise Taxes, other consumption Taxes, customs duties and compulsory payments to Governmental Authorities imposed on the production, importation, exportation, use or sale of any Products the obligation of payment of which is on the Purchaser or any of its Affiliates.

 

Schedule ” means the Seller Disclosure Schedule or the Purchaser Disclosure Schedule, as the context requires.

 

SMM Product ” means any Product the design for which, or of the manufacturing of which, is either (a) primarily derived from the SMM Platform, or (b) partly derived (other than in an immaterial respect) from the SMM Platform, if a greater proportion of the Purchased Intellectual Property used in such Product is from the SMM Platform rather than from any Purchased Intellectual Property that is not from the SMM Platform.

 

Subsidiary ” means, with respect to a specified Person, any corporation or other Person of which securities or other interests having the power to elect a majority of that corporation’s or other Person’s board of directors or similar governing body, or otherwise having the power to direct the business and policies of that corporation or other Person (other than securities or other interests having such power only upon the happening of a contingency that has not occurred) are held by the specified Person or one or more of its Subsidiaries.  When used in this Agreement without reference to a particular Person, “Subsidiary” means a Subsidiary of a Seller.

 

Tax ” means (a) any federal, state, local, foreign or other tax, charge, fee, duty (including customs duty), levy or assessment, including any income, gross receipts, net proceeds, alternative or add-on minimum, corporation, ad valorem, turnover, real property, personal property (tangible or intangible), sales, use, franchise, excise, value added, stamp, leasing, lease, user, transfer, fuel, excess profits, profits, occupational, premium, interest equalization, windfall profits, severance, license, registration, payroll, environmental (including taxes under Section 59A of the Code), capital stock, capital duty, disability, estimated, gains, wealth, welfare, employee’s income withholding, other withholding, unemployment or social security or other tax of whatever kind (including any fee, assessment or other charges in the nature

 

5


 

of or in lieu of any tax) that is imposed by any Governmental Authority, (b) any interest, fines, penalties or additions resulting from, attributable to, or incurred in connection with any items described in this paragraph or any related contest or dispute and (c) any Liability for the Taxes of another Person.

 

Tax Return ” means any report, return, declaration, claim for refund, or information return or statement related to Taxes, including any schedule or attachment thereto, and including any amendment thereof.

 

Section 1.2                                     Additional Defined Terms .  For purposes of this Agreement and the Ancillary Agreements, the following terms have the meanings specified in the indicated Section of this Agreement:

 

Defined Terms

 

Section

Adjustment Amount

 

2.7(g) 

Agreement

 

Preamble

Amadeus Device

 

Preamble

Annual Sales Threshold

 

2.7(d) 

Anti-Bribery Laws

 

3.15(a) 

Assignment and Assumption Agreement

 

2.10(a)

Assumed Liabilities

 

2.3

Bill of Sale

 

2.10(a)

Claim Notice

 

8.3(a)

Closing

 

2.9

Closing Date

 

2.9

Closing Payment

 

2.5

Commercialization Payment

 

2.6(a)

Commercialization Payment Date

 

2.6(a)

Confidentiality Agreement

 

5.11(a) 

ConvaTec

 

Preamble

CTI

 

Preamble

Deductible

 

8.5(a)

Defaulting Party

 

2.11

Equipment

 

2.1(c)

Excluded Assets

 

2.2

Excluded Liabilities

 

2.4

FDA

 

3.11

FDCA

 

3.11(a) 

Financial Buyer

 

5.6(d)

Included Contracts

 

2.1(b)

Initial Sales Payment Period

 

2.7(a)

Initial Sales Percentage Amount

 

2.7(a)

Indemnified Party

 

8.3(a)

Indemnifying Party

 

8.3(a)

Independent Accounting Firm

 

2.7(f)

Insurance Policy

 

5.8

Inventory

 

2.1(a)

Large Acquisition

 

5.6(c)

Non-Financial Buyer

 

5.6(d)

Non-SMM Product Sales

 

2.7(a)

Parent

 

Preamble

Patent Assignment

 

2.10(a)

Payment Date

 

2.14(a)

 

6



 

Defined Terms

 

Section

Percentage Payments Determination Report

 

2.7(e)

Percentage Payments Period

 

2.7(c)

Permitted Acquisition

 

5.6(c)

PPDR

 

2.7(e)

Project

 

Preamble

Project Information

 

5.11(b)

Purchase of a Restricted Business

 

5.6(c)

Purchase Price

 

2.5

Purchased Assets

 

2.1

Purchased Intellectual Property

 

2.1(d)

Purchaser

 

Preamble

Purchaser Disclosure Schedule

 

Article 4

Purchaser Indemnified Parties

 

8.1

Purchaser Information

 

5.4(e)

Restricted Period

 

5.6(a)

Relevant Acquisition

 

5.6(c)

Sales Payment Period

 

2.7(c)

Sales Percentage Amount

 

2.7(c)

Seller

 

Preamble

Seller Disclosure Schedule

 

Article 3

Seller Facility

 

2.12

Seller Indemnified Parties

 

8.2

Seller Information

 

5.4(d)

Seller Marks

 

5.4(a)

Seller Sale

 

5.6(d)

Sellers

 

Preamble

SMM Platform

 

Preamble

SMM Product Sales

 

2.7(a)

Software Assignment

 

2.10(a)

Successor

 

5.9

Third Party Claim

 

8.3(b)

Transfer Taxes

 

5.15

 

Section 1.3                                     Construction .  Any reference in this Agreement to an “Article,” “Section,” “Exhibit” or “Schedule” refers to the corresponding Article, Section, Exhibit or Schedule of or to this Agreement, unless the context indicates otherwise.  The table of contents and the headings of Articles and Sections are provided for convenience only and are not intended to affect the construction or interpretation of this Agreement.  All words used in this Agreement are to be construed to be of such gender or number as the circumstances require.  The words “including,” “includes,” or “include” are to be read as listing non-exclusive examples of the matters referred to, whether or not words such as “without limitation” or “but not limited to” are used in each instance.  Where this Agreement states that a party “shall”, “will” or “must” perform in some manner or otherwise act or omit to act, it means that the party is legally obligated to do so in accordance with this Agreement.  Any reference to a statute is deemed also to refer to any amendments or successor legislation as in effect at the relevant time.  Any reference to a Contract or other document as of a given date means the Contract or other document as amended, supplemented and modified from time to time through such date.  Any reference to “Dollars” or “$” means U.S. dollars.

 

7



 

ARTICLE 2
THE TRANSACTION

 

Section 2.1                                     Sale and Purchase of Purchased Assets .  In accordance with the provisions of this Agreement and except as set forth in Section 2.2, at the Closing, the Sellers will sell, convey, assign, transfer and deliver to the Purchaser, and the Purchaser will purchase and acquire from the Sellers, free and clear of all Encumbrances except Permitted Encumbrances, all of the Sellers’ right, title and interest in and to all of the assets of the Sellers primarily relating to the Project, including the following assets (collectively, the “ Purchased Assets ”):

 

(a)                                  all inventory of the Project as of the Closing Date (collectively, the “ Inventory ”), including the inventory set forth on Schedule 2.1(a);

 

(b)                                  except as set forth on Schedule 2.2(g), all of the rights of the Sellers under all Contracts primarily relating to the Project (collectively, the “ Included Contracts ”), including the Contracts set forth on Schedule 2.1(b);

 

(c)                                   all machinery, equipment, tooling and other items of tangible personal property owned by the Sellers primarily relating to the Project (collectively, the “ Equipment ”), including the machinery and equipment set forth on Schedule 2.1(c);

 

(d)                                  the Intellectual Property primarily relating to the Project (collectively, the “Purchased Intellectual Property”), including the Intellectual Property set forth on Schedule 2.1(d) and any rights Sellers might have to the names “ACT” and “Adaptive Compression Therapy”, and including all of Sellers’ rights with respect to past, present or future infringements thereof;

 

(e)                                   all marketing, product packaging, designs, photography and similar items primarily relating to the sale or marketing of the Products;

 

(f)                                    books and records primarily relating to the Project, including records relating to regulatory approvals obtained or applications made before the Closing Date; and

 

(g)                                   to the extent transferable under applicable Law, all Governmental Authorizations held by the Sellers to the extent necessary for and primarily relating to the operation of the Project.

 

Section 2.2                                     Excluded Assets .  Notwithstanding the terms of Section 2.1, the Sellers will not sell, convey, assign, transfer or deliver to the Purchaser, and the Purchaser will not purchase or acquire, and the Purchased Assets do not include, any assets other than the Purchased Assets, including but not limited to any of the following assets (the “ Excluded Assets ”):

 

(a)                                  all cash, cash equivalents, bank deposits, investment accounts, lockboxes, certificates of deposit, marketable securities, bank accounts, corporate credit cards and other similar cash items of the Sellers;

 

(b)                                  all notes and accounts receivable of the Sellers;

 

(c)                                   all minute books, records, stock ledgers, Tax records and all other materials that the Sellers are required by Law to retain (provided that copies of such records shall, to the extent legally permissible and to the extent that they constitute Purchased Intellectual Property or Purchased Assets, be provided to the Purchaser);

 

8



 

(d)                                  all financial books and records with respect to the Project and the Purchased Assets, including receipts and invoices (provided that the Sellers shall, as soon as reasonably practicable following receipt of an itemized request from Purchaser, provide to Purchaser copies of those itemized financial records so requested by Seller to be provided);

 

(e)                                   the shares of the capital stock of the Sellers and their Affiliates and all of the Sellers’ or any of their Affiliates’ ownership interest in any Subsidiary or other Person;

 

(f)                                    all insurance policies, binders and claims and rights thereunder and proceeds thereof;

 

(g)                                   all rights under all Contracts of the Sellers set forth on Schedule 2.2(g) and all Contracts of the Sellers other than the Included Contracts;

 

(h)                                  all intellectual property rights of the Sellers other than the Purchased Intellectual Property;

 

(i)                                      all inventory of the Sellers other than the Inventory;

 

(j)                                     all machinery, equipment and other items of tangible personal property of the Sellers other than the Equipment;

 

(k)                                  all real property and rights in respect of real property;

 

(l)                                      all rights arising under any Excluded Liability; and

 

(m)                              all rights of the Sellers under this Agreement or any of the Ancillary Agreements.

 

Section 2.3                                     Assumed Liabilities .  In accordance with the provisions of this Agreement, at the Closing, the Purchaser will assume and pay or perform and discharge when due only the following Liabilities of the Sellers to the extent relating to the Project or the Purchased Assets (the “ Assumed Liabilities ”):

 

(a)                                  all Liabilities of the Sellers arising on or after the Closing Date under the Included Contracts and the Governmental Authorizations included in the Purchased Assets, but only to the extent that such Liabilities do not arise from or relate to any breach by the Sellers of any obligations under any provision of any of the Included Contracts or Governmental Authorizations that occurred on or before the Closing Date; and

 

(b)                                  all other Liabilities arising out of, relating to or incurred in connection with (i) the ownership or use of the Purchased Assets after the Closing Date or the operation of the Project after the Closing Date, (ii) the use by the Purchaser or its permitted licensees of Purchased Intellectual Property after the Closing Date and (iii) any other condition arising after the Closing Date with respect to the Purchased Assets.

 

Section 2.4                                     Excluded Liabilities .  Notwithstanding any other provision of this Agreement or any other writing to the contrary, the Purchaser is assuming only the Assumed Liabilities and is not assuming any other Liability of the Sellers of whatever nature, whether presently in existence or arising hereafter (the “ Excluded Liabilities ”).

 

Section 2.5                                     Consideration .  The consideration for the Purchased Assets consists of (a) the payment at the Closing of $3,000,000 (the “ Closing Payment ”), (b) the Commercialization Payment to be

 

9



 

paid in accordance with Section 2.6, (c) the Initial Sales Percentage Amounts and Sales Percentage Amounts, as applicable, to be paid in accordance with Section 2.7 (the amounts set forth in clauses (a), (b) and (c), the “ Purchase Price ”), and (d) the assumption of the Assumed Liabilities.

 

Section 2.6                                     Commercialization Payment.

 

(a)                                  In addition to the Closing Payment, the Initial Sales Percentage Amounts and the Sales Percentage Amounts, the Purchaser shall pay to Sellers, as part of the Purchase Price, the amount of $2,000,000 (the “ Commercialization Payment ”), payable within five Business Days after the Commercialization Payment Date.  For purposes hereof, the “ Commercialization Payment Date ” shall mean the date that is the earlier of (i) the First Commercialization Date and (ii) the first anniversary of the Closing Date.

 

(b)                                  Any payment pursuant to this Section 2.6 shall be made by wire transfer of immediately available funds in U.S. dollars to the account(s) specified by the Sellers no later than two Business Days prior to the due date for such payment.  Except as set forth in Section 2.14, no payment made pursuant to this Section 2.6 will be subject to deduction, withholding or offset for any reason.

 

(c)                                   The Purchaser shall use its reasonable best efforts to manufacture and Commercialize the Amadeus Device as promptly as practicable after the Closing Date and shall use its Commercially Reasonable Efforts to explore the commercial viability of the SMM Platform.  From and after the Closing Date, the Purchaser shall deliver to ConvaTec on or before each six month anniversary of the Closing Date a brief report setting forth the status of the Project and the anticipated date(s) for Commercializing any Product.

 

Section 2.7                                     Sales Percentage Amount .  In addition to the Closing Payment and the Commercialization Payment, for the Percentage Payments Period, the Purchaser shall, as part of the Purchase Price, make payments to Sellers as set forth below:

 

(a)                                  For each of the first sixteen (16) Quarterly Calculation Periods (the “ Initial Sales Payment Period ”), the Purchaser shall pay to Sellers an amount (each, an “ Initial Sales Percentage Amount ”) equal to nine percent (9%) of Sales of Non-SMM Products (the “ Non-SMM Product Sales ”) and seven percent (7%) of Sales of SMM Products (the “ SMM Product Sales ”) during such Quarterly Calculation Period; provided that, subject to Section 2.7(b) below, if the Initial Sales Percentage Amount is less than the Guaranteed Minimum Sales Percentage Amount for any of the first twelve (12) Quarterly Calculation Periods, the Purchaser shall pay to Sellers the Guaranteed Minimum Sales Percentage Amount for that Quarterly Calculation Period.

 

(b)                                  If during any of the first twelve (12) Quarterly Calculation Periods Sellers or their respective Affiliates conduct a Restricted Business in the United States, then thereafter the proviso in Section 2.7(a) shall not apply and the Purchaser shall not be required to pay any further Guaranteed Minimum Sales Percentage Amounts to Sellers notwithstanding that the Initial Sales Percentage Amount may be less than the Guaranteed Minimum Sales Percentage Amount for any of the remaining Quarterly Calculation Periods in the first twelve (12) Quarterly Calculation Periods.  If during any of the first twelve (12) Quarterly Calculation Periods Sellers or their respective Affiliates conduct a Restricted Business anywhere outside the United States, then the proviso in Section 2.7(a) shall continue to apply and the Purchaser shall be required to pay the applicable Guaranteed Minimum Sales Percentage Amount to Sellers if the Initial Sales Percentage Amount is less than the Guaranteed Minimum Sales Percentage Amount for any of the remaining Quarterly Calculation Periods in the first twelve (12) Quarterly Calculation Periods; provided, however, that for purposes hereof the Guaranteed Minimum Sales Percentage Amount shall be reduced by sixty percent (60%).

 

10



 

(c)                                   For each Quarterly Calculation Period beginning with the seventeenth Quarterly Calculation Period and ending on the tenth anniversary of the Commercialization Payment Date (the “ Sales Payment Period ” and, together with the Initial Sales Payment Period, the “ Percentage Payments Period ”), the Purchaser shall pay to Sellers an amount (each, a “ Sales Percentage Amount ”) equal to six percent (6%) of Non-SMM Product Sales and five percent (5%) of SMM Product Sales during such Quarterly Calculation Period, subject to clause (d) below.

 

(d)                                  If (i) Non-SMM Product Sales plus (ii) SMM Product Sales in a calendar year during the Sales Payment Period exceed Forty Million Dollars ($40,000,000) (the “ Annual Sales Threshold ”), then the Sales Percentage Amount relating to Non-SMM Product Sales payable by the Purchaser to ConvaTec in respect of such calendar year shall equal six percent (6%) of Non-SMM Product Sales during such calendar year up to the Annual Sales Threshold and shall equal seven percent (7%) of Non-SMM Product Sales during such calendar year in excess of the Annual Sales Threshold.

 

(e)                                   The Purchaser shall prepare a “ Percentage Payments Determination Report ” or “ PPDR ” for the Sellers setting forth the calculation of the Initial Sales Percentage Amount or the Sales Percentage Amount, as applicable, for each Quarterly Calculation Period.  Each PPDR shall conform substantially to the format set forth in Schedule 2.7(e)  attached hereto, and be in accordance with the definition of “Sales” set forth in Section 1.1, and shall contain the information reasonably necessary to calculate the Initial Sales Percentage Amount or the Sales Percentage Amount, as applicable, for such Quarterly Calculation Period.  To the extent a Quarterly Calculation Period straddles a calendar year end during the Sales Payment Period, the Purchaser shall ensure that the PPDR for such Quarterly Calculation Period contains sufficient detail for purposes of application of the provisions of clause (d) above.  All moneys reported in the PPDR shall be in U.S. dollars, or in both a foreign currency and U.S. dollars.  If the Purchaser or any of its Affiliates receives payment for a Product in a currency other than U.S. dollars, then for purposes of converting the relevant Initial Sales Percentage Amount or the Sales Percentage Amount, as applicable, in respect thereof, such other currency shall be converted into U.S. dollars at the applicable rate of exchange of Citibank N.A., in New York, New York, on the last Business Day of the last month of the Quarterly Calculation Period in which the relevant sale occurred.  Within forty-five (45) calendar days following the end of each Quarterly Calculation Period during the Percentage Payments Period, the Purchaser shall deliver to the Sellers the PPDR, along with payment, by wire transfer of immediately available funds to an account designated by ConvaTec, of an amount equal to the Initial Sales Percentage Amount or the Sales Percentage Amount, as applicable, for such Quarterly Calculation Period, as set forth in the PPDR.

 

(f)                                    Sellers may object in writing to a PPDR for a Quarterly Calculation Period only within twenty calendar days of delivery of the PPDR for the last Quarterly Calculation Period in each Annual Period.  If ConvaTec objects in writing to any individual PPDR within such period, then the parties will act in good faith to resolve among themselves any objections to the PPDR.  If they are unable to do so within thirty (30) calendar days after ConvaTec’s notice of objection, then either party may submit the dispute to a mutually agreed-upon independent accounting firm of recognized national standing, which firm is not the regular auditing firm of or otherwise providing material services to the Purchaser or the Sellers or any of their respective Affiliates.  If the Purchaser and ConvaTec are unable to jointly select such independent accounting firm within ten (10) days after the dispute is submitted to the accounting firm, the Purchaser, on the one hand, and ConvaTec, on the other hand, will each select an independent accounting firm of recognized national standing and such selected accounting firms will select a third independent accounting firm of recognized national standing, which firm is not the regular auditing firm of or otherwise providing material services to the Purchaser or the Sellers or any of their respective Affiliates; provided, however, that if either the Purchaser, on the one hand, or ConvaTec, on the other hand, fail to select such independent accounting firm during this 10-day period, then the parties agree that the independent accounting firm selected by the other party will be the independent accounting firm selected by the parties for purposes of this Section 2.7 (such selected independent accounting firm,

 

11



 

whether pursuant to this sentence or the preceding sentence, the “ Independent Accounting Firm ”).  The Purchaser and ConvaTec will instruct the Independent Accounting Firm to render its determination with respect to the items in dispute in a written report that specifies the conclusions of the Independent Accounting Firm as to each item in dispute and the resulting Initial Sales Percentage Amount or the Sales Percentage Amount, as applicable.  The Purchaser and ConvaTec will each use their Commercially Reasonable Efforts to cause the Independent Accounting Firm to render its determination within thirty (30) days after referral of the items to such firm or as soon thereafter as reasonably practicable.  The Independent Accounting Firm’s determination of the Adjustment Amount as set forth in its report will be final and binding on the parties for purposes of this Section 2.7.  The fees and expenses of the Independent Accounting Firm shall be borne entirely by the Purchaser if a PPDR is adjusted by greater than four percent (4%) in the Sellers’ favor.  If the relevant PPDR is adjusted by four percent (4%) or less, the fees and expenses of the Independent Accounting Firm shall be borne entirely by ConvaTec.

 

(g)                                   The “ Adjustment Amount ,” with respect to any dispute, will be equal to (i) the Initial Sales Percentage Amount or the Sales Percentage Amount, as applicable, as determined in accordance with Section 2.7(f) for such Quarterly Calculation Period, minus (ii) the amount previously paid by the Purchaser to ConvaTec with respect to the Purchaser’s original Percentage Payments Determination Report for such Quarterly Calculation Period, plus (iii) interest at the Prime Rate plus 3% per annum, accruing on the basis of the actual number of days elapsed and a 365-day year, beginning on the 30th day of the month following the Quarterly Calculation Period for which the Percentage Payments Determination Report was disputed by ConvaTec and ending on the date payment is required pursuant to Section 2.7(h).

 

(h)                                  Any payment to Sellers of an Adjustment Amount will be effected by wire transfer of immediately available funds to an account designated by ConvaTec.  Such payment will be made within five Business Days following the final determination of the relevant Initial Sales Percentage Amount or Sales Percentage Amount, as applicable, in accordance with Section 2.7(f).  Except as set forth in Section 2.14, no payment made pursuant to this Section 2.7 will be subject to deduction, withholding or offset for any reason.

 

(i)                                      During the Percentage Payments Period, the Purchaser shall provide ConvaTec and its respective advisers, and the Independent Accounting Firm (in the event of any dispute pursuant to Section 2.7(f)) with reasonable access during normal business hours to books and records and cooperation and assistance as may be reasonably required to enable ConvaTec and the Independent Accounting Firm to calculate each Initial Sales Percentage Amount or Sales Percentage Amount, as applicable, and confirm each Percentage Payments Determination Report.

 

(j)                                     During the Percentage Payments Period, the Purchaser agrees to use Commercially Reasonable Efforts to promote and sell Products, in the United States, Europe and elsewhere, in a manner consistent with such efforts undertaken by Purchaser with respect to its products.

 

Section 2.8                                     Allocation of Purchase Price .  The Sellers and the Purchaser agree that the sum of the Purchase Price plus the Assumed Liabilities (and subsequent adjustments, if any) will be allocated among the Purchased Assets as of the Closing Date in accordance with Schedule 2.8.  Each of the Sellers and the Purchaser will (a) timely file all forms (including IRS Form 8594) and Tax Returns required to be filed in connection with such allocation, (b) be bound by such allocation for purposes of determining Taxes, (c) prepare and file, or cause to be prepared and filed, its Tax Returns on a basis consistent with such allocation and (d) take no position, or cause no position to be taken, inconsistent with such allocation on any applicable Tax Return, in any Proceeding before any Governmental Authority, in any report made for Tax, financial accounting or any other purposes, in any litigation, or otherwise.  If the allocation set forth on Schedule 2.8 is disputed by any Governmental Authority, the party receiving notice of such

 

12



 

dispute will promptly notify the other party hereto concerning the existence and resolution of such dispute.

 

Section 2.9                                     Closing .  The closing of the transactions contemplated by this Agreement (the “ Closing ”) will take place at the offices of Baker & McKenzie LLP, 300 East Randolph Street, Chicago, Illinois, at 10:00 a.m., local time, as soon as practicable, but in any event not later than the third Business Day immediately following the date on which the last of the conditions set forth in Article 6 has been satisfied or waived (other than those conditions that by their nature can only be satisfied at the Closing), or at such other time and place as ConvaTec and the Purchaser may agree in writing.  The date on which the Closing actually occurs is referred to in this Agreement as the “ Closing Date .”

 

Section 2.10                              Closing Deliveries.

 

(a)                                  At the Closing, the Sellers will deliver or cause to be delivered to the Purchaser:

 

(i)                                      a bill of sale in the form of Exhibit A (the “ Bill of Sale ”) duly executed by the Sellers;

 

(ii)                                   an assignment and assumption agreement in the form of Exhibit B (the “ Assignment and Assumption Agreement ”) duly executed by the Sellers;

 

(iii)                                an assignment of all patents and patent applications included in the Purchased Intellectual Property in the form of Exhibit C (the “ Patent Assignment ”) duly executed by the Sellers;

 

(iv)                               an assignment of all software included in the Purchased Intellectual Property in the form of Exhibit D (the “ Software Assignment ”) duly executed by the Sellers;

 

(v)                                  a certificate, dated as of the Closing Date, duly executed by the Sellers confirming the satisfaction of the conditions specified in Sections 6.1(a) and 6.1(b); and

 

(vi)                               such other instruments of sale, transfer, conveyance and assignment as the Purchaser reasonably requests for the purpose of consummating the transactions contemplated by this Agreement.

 

(b)                                  At the Closing, the Purchaser will deliver or cause to be delivered to the Sellers:

 

(i)                                      the Closing Payment by wire transfer of immediately available funds in U.S. dollars to the account(s) specified by ConvaTec no later than two Business Days prior to the Closing Date;

 

(ii)                                   the Assignment and Assumption Agreement duly executed by the Purchaser;

 

(iii)                                the Bill of Sale, the Patent Assignment and the Software Assignment, if any, that call for a signature by the Purchaser, duly executed by the Purchaser;

 

(iv)                               a certificate, dated as of the Closing Date, duly executed by the Purchaser confirming the satisfaction of the conditions specified in Sections 6.2(a) and 6.2(b); and

 

(v)                                  such other instruments of assumption as ConvaTec reasonably requests for the purpose of consummating the transactions contemplated by this Agreement.

 

13



 

Section 2.11                              Default Interest .  If any party that is required to pay any sum under this Agreement fails to pay such sum on the due date for payment (the “ Defaulting Party ”), it shall pay interest on such sum for the period from and including such due date through the date of actual payment (after as well as before any applicable Judgment), at the rate of 10% per annum.  Interest under this Section 2.11 shall accrue on the basis of the actual number of days elapsed and a 365-day year and shall be paid by the Defaulting Party on demand.  Unpaid interest shall not compound.  The accrual or receipt by the non-defaulting party of interest under this Section 2.11 shall not constitute a waiver by the non­defaulting party of any right or remedy it may otherwise have under this Agreement.

 

Section 2.12                              Removal of Purchased Assets .  Promptly but in any event no later than sixty (60) calendar days following the Closing Date, the Purchaser will (a) prepare for relocation such Purchased Assets located at any facilities currently occupied by the Sellers or any Affiliate of the Sellers (each such facility, a “ Seller Facility ”) and relocate such Purchased Assets from the relevant Seller Facility and (b) be responsible for all data transfer, delivery, transmission and reformatting expenses related to the acquisition of the Purchased Assets; provided that if Purchaser does not relocate the Purchased Assets within 60 calendar days after the Closing Date, Purchaser will following that date begin to pay reasonable fees for storing such Purchased Assets and after 120 calendar days after the Closing Date, Sellers may ship such Purchased Assets to Purchaser at Purchaser’s reasonable expense.  Subject to the provisions of this Agreement, the Sellers will, and will cause their Affiliates to, cooperate with the Purchaser and provide the Purchaser all assistance reasonably requested by the Purchaser in connection with the planning and implementation of the transfer of any Purchased Assets or any portion of any of them to such location as the Purchaser will designate.  The Purchased Assets will be transported by or on behalf of the Purchaser, and until all of the Purchased Assets are removed from a Seller Facility, the Sellers will permit, and will cause their Affiliates to permit, the Purchaser and its authorized agents or representatives, upon prior notice, to have reasonable access to such Seller Facility during normal business hours to the extent necessary to disconnect, detach, remove, package and crate the Purchased Assets for transport.  The Purchaser will be responsible for transporting and reinstalling the Purchased Assets at such location(s) as the Purchaser will determine.  All risk of loss as to the Purchased Assets will be borne by, and will pass to, the Purchaser as of the Closing.  After the Closing Date, Purchaser will be able to remove any Purchased Assets that are in the possession, custody or control of any Person other than Sellers from the location at which such Person has possession, custody or control of such Purchased Assets without the payment of any fees or expenses by Purchaser to such Person, other than any such fees and expenses that may arise from new arrangements entered into directly between Purchaser and such Persons.

 

Section 2.13                              Consents .  Notwithstanding any other provision of this Agreement, this Agreement does not effect an assignment of any Included Contract if an attempted assignment thereof, without the consent of a third party thereto, would constitute a breach or other contravention thereof or would be ineffective with respect to any party thereto.  As to any such Included Contract, the Sellers and the Purchaser will use Commercially Reasonable Efforts to obtain as promptly as practicable after the Closing the consent of the other parties to the assignment of such Included Contract or, if required, novation thereof to the Purchaser or, alternatively, written confirmation from such parties reasonably satisfactory to the Sellers and the Purchaser that such consent is not required.  In no event, however, will the Sellers or any of their Affiliates be obligated to pay any money to any Person or to offer or grant other financial or other accommodations to any Person in connection with obtaining any consent, waiver, confirmation, novation or approval with respect to any such Included Contract.  If any consent, waiver, confirmation, novation or approval is not obtained with respect to any such Included Contract, then the Sellers and the Purchaser will cooperate to establish an agency type or other similar arrangement reasonably satisfactory to the Sellers and the Purchaser under which the Purchaser would obtain, to the extent practicable, all rights, and assume the corresponding Liabilities thereunder (including by means of subcontracting, sublicensing or subleasing arrangement) or under which the Sellers would enforce, for the

 

14



 

benefit of the Purchaser, with the Purchaser assuming and agreeing to pay the Sellers’ Liabilities and expenses, any and all rights of the Sellers against a third party to any such Included Contract.  In such event (i) the Sellers will promptly pay to the Purchaser when received all moneys relating to the period on or after the Closing Date received by it under any Included Contract not transferred pursuant to this Section 2.13 and (ii) the Purchaser will promptly pay, perform or discharge when due any Liabilities arising thereunder after the Closing Date but not transferred to the Purchaser pursuant to this Section 2.13.  The failure by the Purchaser or the Sellers to obtain any required consent, waiver, confirmation, novation or approval with respect to any Included Contract will not relieve any party from its obligation to consummate at the Closing the transactions contemplated by this Agreement.

 

Section 2.14                              Set-off.

 

(a)                                  If the Purchaser in good faith gives notice to ConvaTec of a claim under Section 8.1 prior to the date that any Commercialization Payment or Initial Sales Percentage Amount or the Sales Percentage Amount, as applicable, would otherwise be due (each a “ Payment Date ”) then, subject to the Indemnity Cap, to the extent that such claim has been settled or otherwise determined but has not been paid by or on behalf of ConvaTec prior to any Payment Date, the Purchaser will be entitled to set off the amount equal to the payment required to be paid to the Purchaser pursuant to such settlement or determination against the relevant Commercialization Payment or Percentage Payment Amount.

 

(b)                                  For the purposes of Section 2.14(a):

 

(i)                                      a claim shall be regarded as “ settled ” where it is the subject of an agreement in writing between ConvaTec and the Purchaser (or their respective attorneys);

 

(ii)                                   a claim will be regarded as “ determined ” if a court of competent jurisdiction has awarded judgment to the Purchaser in respect of the claim, even if the Sellers have a right of appeal with respect to such judgment.

 

(c)                                   If Purchaser sets off a determined claim amount against a Commercialization Payment, Initial Sales Percentage Amount or Sales Percentage Amount, as applicable, and Purchaser’s relevant determined claim is subsequently overturned on appeal by the judgment of a court of competent jurisdiction, then Purchaser shall promptly, and in any event within five (5) Business Days after such appeal judgment, pay to ConvaTec the amount of the relevant Commercialization Payment, Initial Sales Percentage Amount or Sales Percentage Amount, as applicable, that was withheld by Purchaser, even if Purchaser has a right of appeal with respect to such judgment, together with interest on such amount at the rate of 5% per annum, accruing on the basis of the actual number of days elapsed and a 365-day year, beginning on the date of the relevant set-off and ending on the date payment is required pursuant to this Section 2.14( c).

 

ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE SELLERS

 

The Sellers jointly and severally represent and warrant to the Purchaser as follows, except as set forth on the disclosure schedule delivered by the Sellers to the Purchaser concurrently with the execution and delivery of this Agreement and dated as of the date of this Agreement (the “ Seller Disclosure Schedule ”):

 

Section 3.1                                     Organization and Good Standing .  Each Seller is a corporation duly organized, validly existing and in good standing under the Laws of the state of its incorporation, and has all requisite corporate power and authority to conduct its business as presently conducted.

 

15


 

Section 3.2                                     Authority and Enforceability .  Each Seller has all requisite corporate power and authority to execute and deliver this Agreement and each Ancillary Agreement to which it is a party and to perform its obligations under this Agreement and each such Ancillary Agreement.  The execution, delivery and performance of this Agreement and each Ancillary Agreement to which each Seller is a party and the consummation of the transactions contemplated hereby and thereby by each Seller have been duly authorized by all necessary action on the part of such Seller.  Each Seller has duly and validly executed and delivered this Agreement and, on or prior to the Closing, such Seller will have duly and validly executed and delivered each Ancillary Agreement to which it is a party.  Assuming the due authorization, execution and delivery of this Agreement and the Ancillary Agreements by the Purchaser and the other parties thereto, this Agreement constitutes, and at the Closing each Ancillary Agreement to which each Seller is a party will constitute, the valid and binding obligation of such Seller, enforceable against such Seller in accordance with its terms, subject to (a) Laws of general application relating to bankruptcy, insolvency and the relief of debtors and (b) Laws governing specific performance, injunctive relief and other equitable remedies.

 

Section 3.3                                     No Conflict .  Except for the requirements of any antitrust Laws (if and to the extent any of the foregoing Laws may apply), neither the execution, delivery and performance of this Agreement and any Ancillary Agreement by the Sellers, nor the consummation by the Sellers of the transactions contemplated by this Agreement, will (a) conflict with or violate either Seller’s certificate of incorporation or bylaws, (b) result in a breach or default under, or create in any Person the right to terminate, cancel, accelerate or modify, or require any notice, consent or waiver under, any Included Contract, (c) violate any Law or Judgment applicable to either Seller (to the extent it relates to the Project), the Project or the Purchased Assets or (d) require either Seller to obtain any Governmental Authorization or make any filing with any Governmental Authority.

 

Section 3.4                                     Purchased Assets.

 

(a)                                  The Sellers have good and marketable title to, or in the case of leased assets, valid leasehold interests in, all of the tangible personal property included in the Purchased Assets, free and clear of all Encumbrances other than Permitted Encumbrances.

 

(b)                                  Except as set forth in Section 3.4(b) of the Seller Disclosure Schedule, the Purchased Assets comprise all material assets necessary to manufacture the Amadeus Device; provided, however, that no representation is given as to the production capacity of the Purchased Assets.  Except as set forth in Section 3.4(b) of the Seller Disclosure Schedule, the Included Contracts constitute all of the contracts and agreements used for the Project as now being conducted by the Sellers.

 

(c)                                   All machinery and equipment included in the Purchased Assets is in good condition and repair in all material respects, normal wear and tear excepted, and is suitable for the purpose of manufacturing the Amadeus Device.  Except as set forth in Section 3.4(c) of the Seller Disclosure Schedule, none of the Purchased Assets is in the possession, custody or control of any Person other than the Sellers.

 

Section 3.5                                     Intellectual Property .

 

(a)                                  Section 3.5(a) of the Seller Disclosure Schedule sets forth an accurate and complete list (by name and, where applicable, registration number and jurisdiction of registration, application, certification and filing) of all registered patents, trademarks, trade names, copyrights and domain names, and applications therefor, and software, included in the Purchased Intellectual Property.

 

16



 

(b)                                  The Sellers are the sole owners of all right, title and interest in the Purchased Intellectual Property, free and clear of all Encumbrances other than Permitted Encumbrances; provided that no representation or warranty is given in this Section 3.5(b) as to infringement of any Intellectual Property rights of any other Person (in respect of which Section 3.5(g) is the sole applicable representation and warranty of the Sellers).

 

(c)                                   Except as set forth on Section 3.5(c) of the Seller Disclosure Schedule, the Purchased Intellectual Property is free of all payment obligations and other Encumbrances.

 

(d)                                  All necessary registration, maintenance and renewal fees in connection with each item of Purchased Intellectual Property required to be listed in Section 3.5(a) of the Seller Disclosure Schedule have been paid and all necessary documents and certificates have been filed with the relevant patent, copyright, trademark or other authorities for purposes of maintaining such item of Purchased Intellectual Property.

 

(e)                                   Except as set forth on Section 3.5(e) of the Seller Disclosure Schedule, Sellers own, possess or have sufficient rights to all rights in the Purchased Intellectual Property that are required to manufacture the Amadeus Device; provided that no representation or warranty is given in this Section 3.5(e) as to infringement of any Intellectual Property rights of any other Person (in respect of which Section 3.5(g) is the sole applicable representation and warranty of the Sellers).

 

(f)                                    Sellers do not own, possess, or have rights in any Intellectual Property, other than the Purchased Intellectual Property, that the Purchaser would infringe or misappropriate by making, using, selling, or otherwise commercializing any of the Products or the Purchased Intellectual Property relating to the Project.

 

(g)                                   To the Sellers’ Knowledge, none of the Products infringe any Intellectual Property rights of any other Person, or contain or use any Intellectual Property misappropriated from any Person.

 

(h)                                  To the Sellers’ Knowledge, no other Person is infringing, violating or misappropriating any of the Purchased Intellectual Property.  The Sellers have not commenced or threatened any Proceeding, or asserted any allegation or claim, against any Person for infringement or misappropriation of the Purchased Intellectual Property or breach of any Contract involving the Purchased Intellectual Property.

 

(i)                                      The Sellers have not received notice of any pending or threatened Proceeding or any allegation or claim in which any Person alleges that the Project has violated any Person’s Intellectual Property.  Further, Sellers have not received a written offer from any other Person proposing to grant a license to Sellers to Intellectual Property of said other Person purported to relate to the Project.  Sellers have not received in writing or otherwise any complaint, claim or notice from any Person (other than patent officials) suggesting that any of the Intellectual Property embodied in the Project is invalid, unpatentable or unenforceable.  There are no pending disputes between the Sellers and any other Person (other than patent officials) relating to the Purchased Intellectual Property.

 

(j)                                     Sellers have taken Commercially Reasonable Efforts to maintain the secrecy of all confidential information relating to the Project.  To Sellers’ Knowledge, all Persons who have received confidential information relating to the Project have entered into written confidentiality agreements with the Seller to protect the secret or confidential status of such information.  To Sellers’ Knowledge, no confidential Project information of Sellers has been subject to any breach, misappropriation, unauthorized disclosure, or unauthorized access or use by any Person.

 

17



 

(k)                                  The Purchased Intellectual Property was: (i) developed by Sellers; (ii) developed by employees, consultants, contractors, subcontractors or others who have executed appropriate instruments of assignment in favor of Sellers as assignee that have conveyed to Sellers ownership of all of their Intellectual Property embodied in the Purchased Intellectual Property; or (iii) acquired in connection with acquisitions transferring title to the Intellectual Property embodied in the Purchased Intellectual Property.

 

(l)                                      Sellers currently have the sole and exclusive right to: (i) bring actions for past, present and future infringement, dilution, misappropriation or unauthorized use of the Purchased Intellectual Property in any country or other geographic area in the world; and (ii) receive all proceeds from the foregoing, including licenses, royalties income, payments, claims, damages and proceeds of any such suit.

 

(m)                              Except for any Included Contracts, no licenses or other rights under the Purchased Intellectual Property have been granted by Sellers, or retained by any third persons, including but not limited to any prior owners, or inventors.

 

(n)                                  Except as set forth on Section 3.5(n) of the Seller Disclosure Schedule, and except in respect of the SMM Platform prior to November 10, 2008, no government funding, facilities of a university, college, educational institution or research center, or funding from third Persons, was used in the development of any Purchased Intellectual Property.

 

(o)                                  Part B of Schedule 2.1(d) sets forth all of the patents included in the Purchased Intellectual Property that relate to the SMM Platform.

 

(p)                                  Sellers make no representation or warranty with respect to the names “ACT” and “Adaptive Compression Therapy”.

 

(q)                                  This Section 3.5 constitutes the sole and exclusive representations and warranties of the Sellers with respect to any matters relating to Intellectual Property.

 

Section 3.6                                     Contracts.

 

(a)                                  Section 3.6(a) of the Seller Disclosure Schedule sets forth an accurate and complete list as of the date hereof of each written Included Contract and a summary of the material terms of each oral Included Contract.

 

(b)                                  The Sellers have made available to the Purchaser an accurate and complete copy of each Included Contract.  With respect to each such Included Contract, neither the Sellers, nor, to the Sellers’ Knowledge, any other party to the Included Contract is in material breach or material default under the Included Contract.  Each Included Contract is legal, valid, binding and enforceable as to the Sellers and, to the Knowledge of the Sellers, each other party thereto, in accordance with its terms except to the extent it has previously expired in accordance with its terms and subject to (i) Laws of general application relating to bankruptcy, insolvency and the relief of debtors, and (ii) rules of Law governing specific performance, injunctive relief and other equitable remedies.

 

Section 3.7                                     Tax Matters.

 

(a)                                  (i) All Tax Returns required to be filed by the Sellers with respect to the Purchased Assets have been timely filed, (ii) all Taxes shown on such Tax Returns with respect to the Purchased Assets have been paid and (iii) no Governmental Authority has proposed to make or has made any material adjustment with respect to Taxes primarily attributable to the Purchased Assets.

 

18



 

(b)                                  The Sellers have properly and timely withheld, collected or deposited all amounts required to be withheld, collected or deposited in respect of Taxes relating to the Purchased Assets.

 

(c)                                   There are no Tax liens on any of the Purchased Assets.  The Sellers have not received any notice or inquiry from any Governmental Authority in any jurisdiction where the Sellers do not currently file Tax Returns to the effect that the Sellers are currently required to file Tax Returns with respect to the Purchased Assets or that the Purchased Assets are otherwise currently subject to taxation by such jurisdiction.  No federal, state, local or foreign Tax audits or other Tax Proceedings are pending or being conducted, nor have the Sellers received any notice from any Governmental Authority that any such Tax audit or other Tax Proceeding is pending or threatened, in any case with respect to Taxes attributable to the Purchased Assets.

 

(d)                                  This Section 3.7 constitutes the sole and exclusive representations and warranties of the Sellers with respect to any matters relating to Taxes.

 

Section 3.8                                     Governmental Authorizations .  Section 3.8 of the Seller Disclosure Schedule lists all material Governmental Authorizations that the Sellers have obtained in connection with the Project prior to the date hereof.  The Sellers are in material compliance with all Governmental Authorizations listed on Section 3.8 of the Seller Disclosure Schedule, and all such Governmental Authorizations are in full force and effect.  There has been no default on the part of Sellers with respect to, and no event has occurred which, with the giving of notice or the lapse of time, or both, would constitute a breach of, impose any condition to the issuance, maintenance, renewal or continuance of any Governmental Authorization listed on Section 3.8 of the Seller Disclosure Schedule.  Except as set forth on Section 3.8 of the Seller Disclosure Schedule, the Sellers have not made an assignment of the rights of any such Governmental Authorizations to any third party, and such Governmental Authorizations are free and clear of all Encumbrances.  There has been no decision by the Sellers not to renew any material Governmental Authorization relating to the Project.

 

Section 3.9                                     Compliance with Laws .  The conduct of the Project by the Sellers is in material compliance with all Laws applicable to the conduct of the Project or the ownership or use of the Purchased Assets.

 

Section 3.10                              Legal Proceedings .  There is no Proceeding pending or, to the Sellers’ Knowledge, threatened against the Sellers with respect to the Project or any Purchased Asset.  The Sellers are not subject to any outstanding Judgment relating to the Project.  Since November 10, 2008, no notice has been received by Sellers claiming any violation of any Law or Governmental Authorization relating to the Project.

 

Section 3.11                              FDA and Regulatory Compliance .  Section 3.11 of the Seller Disclosure Schedule sets forth the status of each filing or application filed with the U.S. Food and Drug Administration (the “FDA”) and any other comparable non-U.S. Governmental Authority with respect to the Products.  Except as set forth on Section 3.11 of the Seller Disclosure Schedule:

 

(a)                                  The Project is being conducted in substantial compliance with all medical device Laws, including (i) the federal Food, Drug, and Cosmetic Act, as amended (including the rules and regulations promulgated thereunder, the “FDCA”), (ii) any comparable foreign Laws, and (iii) state licensing, disclosure and reporting requirements.

 

(b)                                  All pre-clinical and clinical investigations conducted or sponsored by the Sellers relating to the Project were conducted or are being conducted in compliance in all material respects with all applicable Laws administered or issued by the applicable Governmental Authorities, including, where

 

19



 

applicable (i) FDA standards for conducting non-clinical laboratory studies contained in Title 21 part 58 of the Code of Federal Regulations and (ii) applicable FDA standards for the design, conduct, performance, monitoring, auditing, recording, analysis and reporting of clinical trials contained in Title 21 parts 50, 54, 56, 812 and 820 of the Code of Federal Regulations.  The Sellers have not received any information from the FDA or any other Governmental Authority with jurisdiction over the marketing, sale, use, handling and control, safety, efficacy, reliability, or manufacturing of the Products which expressly threatened the denial of any application for marketing approval currently pending before the FDA or such other Governmental Authority.

 

(c)                                   All material reports, documents, claims, permits and notices required to be filed, maintained or furnished to the FDA or any other Governmental Authority by the Sellers have been so filed, maintained or furnished.  All such reports, documents, claims, permits and notices were complete and accurate in all material respects on the date filed (or were corrected in or supplemented by a subsequent filing) such that no liability exists with respect to such filing.  The Sellers have not, and to the Knowledge of the Sellers, no officer, employee, agent or distributor of the Sellers or any of its Subsidiaries has, made an untrue statement of a material fact or a fraudulent statement to the FDA or any other Governmental Authority, failed to disclose a material fact required to be disclosed to the FDA or any other Governmental Authority, or committed an act, made a statement, or failed to make a statement that, at the time such disclosure was made, would reasonably be expected to provide a basis for the FDA or any other Governmental Authority to invoke its policy respecting “Fraud, Untrue Statements of Material Facts, Bribery, and Illegal Gratuities”, set forth in 56 Fed. Reg. 46191 (September 10, 1991) or any similar policy.

 

(d)                                  As to each Product subject to the FDCA and the regulations of the FDA promulgated thereunder, or similar foreign Laws and regulations of any other foreign jurisdiction that is or has been developed, manufactured, tested, distributed and/or marketed by or on behalf of the Sellers, each such Product is being or has been developed, manufactured, tested, distributed and/or marketed in substantial compliance with all applicable requirements under the FDCA and the regulations of the FDA promulgated thereunder, and similar foreign Laws and regulations, including those relating to investigational use, or marketing approval to market a Product, good manufacturing practices, good clinical practices, good laboratory practices, labeling, advertising, record keeping, filing of reports and security.

 

(e)                                   Except as set forth in Section 3.11 of the Seller Disclosure Schedule, there have been no recalls, field notifications or seizures ordered or adverse regulatory actions taken or threatened in writing by the FDA or any other Governmental Authority with respect to any of the Products, including, to the Knowledge of the Sellers, during the time period of production, processing, packaging or storage for any Product, any facilities where any such Product is produced, processed, packaged or stored.

 

(f)                                    The Sellers have not received any notice or other communication that (i) the FDA or any other Governmental Authority has commenced, or threatened to initiate, any action to withdraw its investigational device exemption, premarket clearance, premarket approval, rights or other approval or request the recall of any Product or (ii) alleges any violation of applicable Law by the Sellers with respect to any Product.

 

Section 3.12                              Inventory .  All of the inventory of the Project as of five Business Days prior to the date of this Agreement is set forth on Schedule 2.1(a) and there has been no material changes to the Inventory since such date.

 

20



 

Section 3.13                              Products and Materials.

 

(a)                                  The Sellers have disclosed to Purchaser:

 

(i)                                      All locations at which tangible Purchased Assets are located (including locations owned or controlled by third parties); and

 

(ii)                                   All locations at which any Product clinical or other trials (including observational studies) are being conducted.

 

(b)                                  Except as set forth on Section 3.13(b) of the Seller Disclosure Schedule, the Sellers have granted access to, or made available to, Purchaser a true, correct and complete copy of all documentation in the Sellers’ possession, relating to all present and past Products clinical or other human trials (including observational studies), consistent with the Health Insurance Portability and Accountability Act of 1996, as amended, and other such Laws governing privacy of human subjects.

 

(c)                                   Schedule 2.1(c) is a true, correct and complete list of the Equipment as of the date of this Agreement.

 

(d)                                  The specifications and manufacturing documentation for the Amadeus Device (a copy of which has been made available to Purchaser) is complete and accurate in all material respects.  Such documentation includes all data and know-how used or held for use by the Sellers to manufacture the Amadeus Device and is current, accurate in all material respects, and sufficient in detail and content to identify and explain the designs, concepts and processes described therein.

 

(e)                                   No material product liability claim has been made against any Seller arising out of, relating to, or resulting from any injury to any individual or property as a result of the ownership, possession, or use of any Product sold or distributed by Seller before the Closing Date.  Sellers have not received notice as to any claim for personal injury or death, any claim for property, economic, punitive, or exemplary damages, any claim for contribution or indemnification, or any claim for injunctive relief, in each case in connection with any product sold by Sellers.

 

Section 3.14                              Brokers Fees .  The Sellers have not incurred any Liability to pay any fees or commissions to any broker, finder or agent in connection with any of the transactions contemplated by this Agreement for which the Purchaser would become liable or obligated.

 

Section 3.15                              Anti-Bribery Laws.

 

(a)                                  Since April 1, 2007, no Seller, nor any officer, director, or employee of the Sellers, nor any agent or representative of the Sellers, acting in such capacity, has, in connection with the Project, directly or indirectly violated or taken any act in furtherance of violating any provision of the Foreign Corrupt Practices Act of 1977 (as amended), the U.K. Bribery Act 2010 or any other anti-bribery or anti­corruption Laws of any jurisdiction applicable to the Project (collectively, the “ Anti-Bribery Laws ”), such as by making, offering or promising, directly or indirectly, any contribution, gift, bribe, rebate, loan, payoff, influence payment, kickback or other payment, or promise of payment, of anything of value, to any Government Official for the purpose of inducing such Government Official to do any act or make any decision in his or her or its official capacity (including a decision to fail to perform his or her or its official function) or use his or her or its influence with a Governmental Authority in order to affect any act or decision of such Governmental Authority for the purpose of assisting any Person to obtain or retain any business in connection with the Project, or to facilitate the Project or for any other improper purpose in connection with the Project (e.g., to obtain a tax rate lower than allowed by Law).

 

21



 

(b)                                  For purposes of this Section 3.15, the term “ Government Official ” shall mean any: (i) officer or employee of a Governmental Authority (including any state-owned or state-controlled enterprise) or of a public international organization; (ii) holder of public office, candidate for public office, political party, official of a political party or member of a royal family; or (iii) Person acting for or on behalf of any Governmental Authority.

 

Section 3.16                              Cidron Healthcare Limited .  Cidron Healthcare Limited directly or indirectly owns all of the outstanding equity interests in the Sellers and any other Persons that are related to the Sellers and that conduct business under the trade name “ConvaTec.” Cidron Healthcare Limited is not a wholly owned subsidiary, directly or indirectly, of any other Person.

 

Section 3.17                              Disclaimer of Other Representations and Warranties .  The representations and warranties set forth in this Article 3 are the only representations and warranties made by the Sellers with respect to the Project, the Purchased Assets, the Assumed Liabilities or any other matter relating to the transactions contemplated by this Agreement.  Except as specifically set forth in this Article 3, (a) the Sellers are selling the Purchased Assets to the Purchaser “as is” and “where is” and with all faults, and make no warranty, express or implied, as to any matter whatsoever relating to the Project, the Purchased Assets, the Assumed Liabilities or any other matter relating to the transactions contemplated by this Agreement including as to (i) merchantability or fitness for any particular use or purpose, (ii) the operation of the Project by the Purchaser after the Closing in any manner or (iii) the probable success or profitability of the Project after the Closing, and (b) other than the indemnification obligations of the Sellers set forth in Article 8, neither the Sellers nor any of their Affiliates, or any of their respective officers, directors, employees, agents, representatives or stockholders, will have, or will be subject to, any Liability or indemnification obligation to the Purchaser or any other Person resulting from the distribution to the Purchaser or its Affiliates or representatives of, or the Purchaser’s use of, any information relating to the Project, including any descriptive memoranda, summary business descriptions or any information, documents or material made available to the Purchaser or its Affiliates or representatives, whether orally or in writing, in certain “data rooms,” management presentations, functional “break-out” discussions, responses to questions submitted on behalf of the Purchaser or in any other form in expectation of the transactions contemplated by this Agreement.

 

Section 3.18                              No Other Provisions .  The Sellers hereby acknowledge and agree that other than the representations and warranties set forth in Article 4 or the covenants set forth in this Agreement, neither the Purchaser nor any of its Affiliates, or any of their respective officers, directors, employees, agents, representatives or stockholders, make or have made any representation or warranty, express or implied, at law or in equity, or covenant as to any matter whatsoever relating to the Project, the Purchased Assets, the Assumed Liabilities or any other matter relating to the transactions contemplated by this Agreement, including as to (a) the operation of the Project by the Purchaser after the Closing in any manner or (b) the probable success or profitability of the Project after the Closing.

 

ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER

 

The Purchaser represents and warrants to the Sellers as follows, except as set forth on the disclosure schedule delivered by the Purchaser to the Sellers concurrently with the execution and delivery of this Agreement and dated as of the date of this Agreement (the “ Purchaser Disclosure Schedule ”):

 

Section 4.1                                     Organization and Good Standing .  The Purchaser is a corporation duly organized, validly existing and in good standing under the Laws of the State of Delaware, and has all requisite corporate power and authority to conduct its business as it is presently conducted.  The Parent is a corporation duly organized, validly existing and in good standing under the Laws of the State of

 

22



 

Delaware, and has all requisite corporate power and authority to conduct its business as it is presently conducted.

 

Section 4.2                                     Authority and Enforceability .  Each of the Purchaser and the Parent has all requisite corporate power and authority to execute and deliver this Agreement and each Ancillary Agreement to which it is a party and to perform its obligations under this Agreement and each such Ancillary Agreement.  The execution, delivery and performance of this Agreement and each Ancillary Agreement to which the Purchaser or the Parent is a party and the consummation of the transactions contemplated hereby and thereby have been duly authorized by all necessary action on the part of the Purchaser and the Parent.  Each of the Purchaser and the Parent has duly and validly executed and delivered this Agreement and, on or prior to the Closing, each of the Purchaser and the Parent will have duly and validly executed and delivered each Ancillary Agreement to which it is a party.  Assuming the due authorization, execution and delivery of this Agreement and the Ancillary Agreements by the Sellers and the other parties thereto, this Agreement constitutes, and at the Closing each Ancillary Agreement to which the Purchaser and the Parent is a party will constitute, the valid and binding obligation of the Purchaser and the Parent, enforceable against the Purchaser and the Parent in accordance with its terms, subject to (a) Laws of general application relating to bankruptcy, insolvency and the relief of debtors and (b) Laws governing specific performance, injunctive relief and other equitable remedies.

 

Section 4.3                                     No Conflict .  Except for the requirements of any antitrust Law (if and to the extent any of the foregoing Laws may apply), and except in any case that would not have a material adverse effect on the ability of the Purchaser or the Parent to perform its obligations under this Agreement or on the ability of the Purchaser to consummate the transactions contemplated by this Agreement, neither the Purchaser’s nor the Parent’s execution, delivery and performance of this Agreement and any Ancillary Agreement to which the Purchaser or the Parent is a party, nor the consummation by the Purchaser of the transactions contemplated by this Agreement, will (a) conflict with or violate the Purchaser’s or the Parent’s certificate of incorporation, bylaws or other organizational documents, (b) result in a breach or default under, or create in any Person the right to terminate, cancel, accelerate or modify, or require any notice, consent or waiver under, any Contract to which the Purchaser or the Parent is a party or by which the Purchaser or the Parent is bound and that is material to the Purchaser or the Parent, (c) violate any Law or Judgment applicable to the Purchaser or the Parent or (d) require the Purchaser or the Parent to obtain any Governmental Authorization or make any filing with any Governmental Authority.

 

Section 4.4                                     Legal Proceedings .  There is no Proceeding pending or, to the Purchaser’s knowledge, threatened against the Purchaser or the Parent that questions or challenges the validity of this Agreement or that may prevent, delay, make illegal or otherwise interfere with the ability of the Purchaser to consummate any of the transactions contemplated by this Agreement.

 

Section 4.5                                     Brokers Fees .  Neither the Purchaser nor the Parent nor any Person acting on behalf of either the Purchaser or the Parent has incurred any Liability to pay any fees or commissions to any broker, finder or agent in connection with any of the transactions contemplated by this Agreement.

 

Section 4.6                                     Financial Capacity .  The Purchaser has, and will have on the Closing Date and on the Commercialization Payment Date, immediately available cash in an amount sufficient to pay the Closing Payment at Closing and to pay the Commercialization Payment in accordance with Section 2.6.  The Purchaser knows of no circumstance or condition that it expects will prevent the availability at the Closing and at the Commercialization Payment Date of the requisite financing to consummate the transactions contemplated by this Agreement on the terms set forth in this Agreement.

 

Section 4.7                                     Independent Investigation .  The Purchaser has conducted its own independent investigation, review and analysis of the Project, operations, assets, liabilities, results of operations,

 

23



 

financial condition and prospects of the Project as it has deemed appropriate, which investigation, review and analysis was done by the Purchaser and its Affiliates and representatives.  The Purchaser acknowledges that it and its Affiliates and representatives have been provided adequate access to the personnel, properties, premises and records of the Project for such purpose.  In entering into this Agreement, the Purchaser acknowledges that it has relied solely upon the aforementioned investigation, review and analysis and not on any factual representations or opinions of any Seller or any Affiliates of any Seller or their representatives (except the representations and warranties set forth in Article 3).  The Purchaser hereby acknowledges and agrees that (a) other than the representations and warranties set forth in Article 3, neither the Sellers nor any of their Affiliates, or any of their respective officers, directors, employees, agents, representatives or stockholders, make or have made any representation or warranty, express or implied, at law or in equity, as to any matter whatsoever relating to the Project, the Purchased Assets, the Assumed Liabilities or any other matter relating to the transactions contemplated by this Agreement including as to (i) merchantability or fitness for any particular use or purpose, (ii) the operation of the Project by the Purchaser after the Closing in any manner or (iii) the probable success or profitability of the Project after the Closing, and (b) other than the indemnification obligations of the Sellers set forth in Article 8, neither the Sellers nor any of their Affiliates, or any of their respective officers, directors, employees, agents, representatives or stockholders, will have or will be subject to any Liability or indemnification obligation to the Purchaser or any other Person resulting from the distribution to the Purchaser or its Affiliates or representatives of, or the Purchaser’s use of, any information relating to the Project or any other matter relating to the transactions contemplated by this Agreement, including any descriptive memoranda, summary business descriptions or any information, documents or material made available to the Purchaser or its Affiliates or representatives, whether orally or in writing, in certain “data rooms,” management presentations, functional “break-out” discussions, responses to questions submitted on behalf of the Purchaser or in any other form in expectation of the transactions contemplated by this Agreement.

 

ARTICLE 5
COVENANTS

 

Section 5.1                                     Access and Investigation .  Until the Closing and upon reasonable advance notice from the Purchaser, the Sellers will allow the Purchaser and its representatives reasonable access during normal business hours and without unreasonable interference with the operation of the Project to (a) such materials and information about the Project as the Purchaser may reasonably request and (b) specified members of management of the Project as the parties may reasonably agree.  Notwithstanding the foregoing clause (b), the Purchaser will not, and will not permit its Affiliates and representatives to, contact or otherwise communicate with, either orally or in writing, any employee, officer, director or supplier of the Project without the prior consent of ConvaTec, which consent may be provided in writing, by electronic mail or via telephone confirmation by Michael McNally or such other Person as ConvaTec may designate in writing to the Purchaser

 

Section 5.2                                     Operation of the Project .

 

(a)                                  Until the Closing, except as otherwise set forth in this Agreement or the Seller Disclosure Schedule or as otherwise consented to by the Purchaser (which consent will not be unreasonably withheld, conditioned or delayed), the Sellers will conduct the Project in the ordinary course of business in all material respects consistent with prior practice.

 

(b)                                  Until the Closing, except as otherwise set forth in this Agreement or the Seller Disclosure Schedule or as otherwise consented to by the Purchaser, the Sellers will not sell, lease or license, or permit any Encumbrance on, any of the Purchased Assets other than in the ordinary course of business.

 

24



 

Section 5.3                                     Consents and Filings .

 

(a)                                  Subject to the terms and conditions of this Agreement, each of the parties will use their respective Commercially Reasonable Efforts (i) to take promptly, or cause to be taken, all actions, and to do promptly, or cause to be done, all things necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement and (ii) as promptly as practicable after the date of this Agreement, to obtain all Governmental Authorizations from, and make all filings with, all Governmental Authorities, and to obtain all other consents, waivers, approvals and other authorizations from, all other third parties, that are necessary or advisable in connection with the authorization, execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement.

 

(b)                                  The Sellers and the Purchaser will promptly notify the other of any communication it or any of its Affiliates receives from any Governmental Authority relating to the transactions contemplated by this Agreement, and will permit the other party to review in advance any proposed communication by such party to any Governmental Authority.  None of the parties will agree to participate in any meeting with any Governmental Authority in respect of any filings, investigation or other inquiry unless it consults with the other parties in advance and, to the extent permitted by such Governmental Authority, gives the other parties the opportunity to attend and participate at such meeting.  The Sellers and the Purchaser will coordinate and cooperate fully with each other in exchanging such information and providing such assistance as the other party may reasonably request in connection with the foregoing.  The Sellers and the Purchaser will provide each other with copies of all correspondence, filings or communications between them or any of their representatives, on the one hand, and any Governmental Authority or members of its staff, on the other hand, with respect to this Agreement and the transactions contemplated by this Agreement.

 

Section 5.4                                     Sellers’ Names, Assets and Information .

 

(a)                                  From and after the Closing, the Purchaser will use Commercially Reasonable Efforts to remove or cause to be removed “ConvaTec” or other similar mark and any other trademark, design or logo previously or currently used by the Sellers or any of their Affiliates (the “ Seller Marks ”) from all assets of the Project; provided , however , that in no event will the Purchaser or any of its Affiliates use the Seller Marks after the six-month anniversary of the Closing Date.

 

(b)                                  The Purchaser acknowledges and agrees that the Sellers are the owners of the Seller Marks and all goodwill attached thereto.  This Agreement does not give the Purchaser or any of its Affiliates the right to use the Seller Marks except in accordance with this Agreement.  The Purchaser will not, and will not cause or permit any of its Affiliates to, attempt to register the Seller Marks nor to register anywhere in the world a mark that is the same as or similar to the Seller Marks.

 

(c)                                   In no event will the Purchaser or any of its Affiliates advertise or hold itself out as a Seller or any Affiliate of a Seller after the Closing.

 

(d)                                  If, at any time after the Closing, the Purchaser or any of its Affiliates possesses any information belonging to or concerning a Seller or any Affiliate of a Seller that is not part of the Purchased Assets and does not relate to the Project (such information, the “ Seller Information ”), the Purchaser will promptly transfer, or cause to be transferred, such Seller Information to the Sellers (without retaining a copy thereof, except as required by applicable Law).  For the purposes of this Agreement, Seller Information includes written, graphical or machine-readable information that relates to trade secrets, product plans, software, vendor and customer information, business plans and data stored electronically.

 

25


 

(e)                                   If, at any time after the Closing, the Sellers or any of their Affiliates possesses any information that is part of the Purchased Assets (such information, the “ Purchaser Information ”), the Sellers will promptly transfer, or cause to be transferred, such Purchaser Information to the Purchaser (without retaining a copy thereof, except as required by applicable Law).  For the purposes of this Agreement, Purchaser Information includes written, graphical or machine-readable information that relates to trade secrets, product plans, software, vendor and customer information, business plans and data stored electronically.

 

Section 5.5                                     Nonsolicitation .  Unless otherwise agreed to in writing by ConvaTec, during the period commencing on the date of this Agreement and ending on the second anniversary of the Closing Date (or, if this Agreement is terminated prior to the Closing, ending on the second anniversary of the date of termination), the Purchaser will not, directly or indirectly, for itself or on behalf of or in conjunction with any other Person, nor will it permit any of its Subsidiaries, Affiliates, directors, officers, employees, agents, advisors or representatives to, directly or indirectly, call upon any Person who is, at the time the Person is called upon, an employee of a Seller or any Affiliate of a Seller, for the purpose or with the intent of soliciting such employee away from or out of the employ of a Seller or any Affiliate of a Seller to be employed by the Purchaser or any of its Affiliates or Subsidiaries.  Notwithstanding this Section 5.5, nothing in this Agreement prohibits or otherwise restricts the Purchaser or any of its Subsidiaries or Affiliates from performing, permitting or otherwise being involved in: (a) general solicitation for employment (including in any newspaper or magazine, over the internet or by any search or employment agency) if not specifically directed towards any employee of the Sellers or (b) hiring of an individual where the initial contact with such individual regarding such hiring primarily arose from (x) any such general solicitation or (y) initial contact by such individual that was unsolicited by the Purchaser or any Subsidiary or Affiliate of the Purchaser.

 

Section 5.6                                     Noncompetition .

 

(a)                                  During the period commencing on the Closing Date and ending on the five year anniversary of the Closing Date (the “ Restricted Period ”), subject to Sections 5.6(b) and (c), the Sellers will not, and they will not cause or permit any of their Affiliates to, directly or indirectly, engage in the Restricted Business.

 

(b)                                  Notwithstanding the foregoing, this Section 5.6 will not prohibit (i) the Sellers or any Affiliate of the Sellers, directly or through any Affiliate, from conducting any business activities conducted by them as of the date of this Agreement (other than the Project) and (ii) the Sellers or any Affiliate of the Sellers, directly or through any Affiliates, from investing in or holding less than five percent of the outstanding voting stock or other ownership interests of any Person that engages in the Restricted Business.

 

(c)                                   In addition to the foregoing, the Sellers agree that during the Restricted Period, the Sellers will not acquire (whether by acquisition of assets, merger or otherwise), and will not cause or permit any of their Affiliates to acquire, any interest in, or manage or operate any Person for whom revenues from the Restricted Business (i) represented an amount greater than the lesser of (A) 25% of such entity’s aggregate revenues during such entity’s last fiscal year or (B) US$25,000,000, or (ii) is reasonably projected to represent an amount greater than the lesser of (A) 25% of such entity’s aggregate revenues during such entity’s next fiscal year or (B) US$25,000,000 (a “ Relevant Acquisition ”); provided , however , that a Seller or any Affiliate of a Seller may make a Relevant Acquisition if (x) its primary purpose in making such Relevant Acquisition is not to exploit for profit such Restricted Business, and (y) the relevant Seller or such Affiliate of such Seller uses its good faith, reasonable best efforts to dispose of the entity or portion thereof whose business constituted the Restricted Business within 12 months after the consummation of such Relevant Acquisition, irrespective of whether such disposition is

 

26



 

ultimately consummated; and provided further , however , that if the consideration payable by the relevant Seller or its applicable Affiliate(s) for the Relevant Acquisition exceeds US$250,000,000 (a “ Large Acquisition ”), then the relevant Seller or its applicable Affiliate(s) may make that Large Acquisition and thereafter continue with the Restricted Business entailed therein.  If Sellers or their respective Affiliates conduct a Restricted Business, (i) Purchaser will have no obligation to make any payments of an Initial Sales Percentage Amount or Sales Percentage Amount, as applicable, with respect to Sales conducted on any continent where Sellers or their applicable Affiliates are engaging in the Restricted Business during any Quarterly Calculation Period, and (ii) Purchaser’s obligations under Section 2.7(j) will be terminated.  If after such 12-month period, the disposition required to be sought in respect of a Relevant Acquisition (other than any Large Acquisition) has not been consummated, ConvaTec will promptly so notify the Purchaser, and the Purchaser may, within 60 days of receipt of such notice, notify ConvaTec that it requires ConvaTec to obtain an Independent Valuation of Restricted Business.  Within 60 days of receipt of a copy of such Independent Valuation of Restricted Business, the Purchaser may notify ConvaTec that the Purchaser will, subject to obtaining customary regulatory approvals, purchase the Restricted Business that is the subject matter of the Independent Valuation of Restricted Business from ConvaTec and ConvaTec’s relevant Affiliates as soon as practicable thereafter for a purchase price payable in immediately available funds equal to ninety-five percent (95%) of the amount of the Independent Valuation of Restricted Business (a “ Purchase of a Restricted Business ”).  During the Restricted Period, the Sellers may make any acquisition (whether by acquisition of assets, merger or otherwise), and may cause or permit any of their Affiliates to make any acquisition of any Person for which the Restricted Business is below the levels specified in subclauses (i) and (ii) of this subsection (c) (a “ Permitted Acquisition ”).  If ConvaTec or any of its Affiliates makes a Permitted Acquisition or a Large Acquisition, or in the case of a Relevant Acquisition (other than a Large Acquisition) until such time as a Purchase of a Restricted Business has occurred, ConvaTec, its relevant Affiliate(s) and the Person acquired may continue with the Restricted Business.

 

(d)                                  If a Seller Sale is consummated by a Non-Financial Buyer, references to “Affiliates” in this Section 5.6 will be deemed to mean the Non-Financial Buyer consummating such Seller Sale and its Affiliates (for so long only as such Non-Financial Buyer and its Affiliates (other than Cidron Healthcare Limited and its direct and indirect subsidiaries) control, are controlled by or are under common control with the Sellers), and Purchaser’s remedies if this Section 5.6 is breached by such Non-Financial Buyer or its Affiliates will be limited to the provisions set forth in the second sentence of Section 5.6(c).  For the avoidance of doubt, references to “Affiliates” in this Section 5.6 and Purchaser’s remedies upon a breach of this Section 5.6 by Sellers or their Affiliates will not be changed or amended if any Seller Sale is consummated by a buyer that is not a Non-Financial Buyer.  “ Seller Sale ” means the direct or indirect sale or transfer of the outstanding equity interests of Sellers or all or substantially all of the assets of Sellers to a Person that is not an Affiliate of Seller during any Quarterly Calculation Period.  “ Non-Financial Buyer ” means any Person, other than any Person that is a private equity or venture capital firm or entity or otherwise a financial buyer that will hold the equity interests or assets acquired in a Seller Sale as a separate portfolio company of such Person, that (i) consummates a Seller Sale and (ii) is not engaged in a Restricted Business at the time such Seller Sale is consummated.

 

(e)                                   Each Seller acknowledges and agrees that the restrictive covenants and other agreements contained in this Section 5.6 are an essential part of this Agreement and the transactions contemplated hereby, constitute a material inducement to Purchaser’s entering into and performing its obligations under this Agreement and the Ancillary Agreements, are an essential part of Purchaser’s willingness to pay the Purchase Price and are necessary for Purchaser to realize the value of the Project.  It is the intention of the parties that if any of the restrictions or covenants contained herein is held to cover a geographic area or to be for a length of time that is not permitted by Law, or is in any way construed to be too broad or to any extent invalid, such provision shall not be construed to be null, void and of no effect, but to the extent such provision would then be valid or enforceable under Law, such provision shall be construed and

 

27



 

interpreted or reformed to provide for a restriction or covenant having the maximum enforceable geographic area, time period and other provisions as shall be valid and enforceable under Law.  In addition to the rights set forth above, each Seller acknowledges that the rights of Purchaser under this Section 5.6 are unique and recognizes and affirms that in the event of a breach of this Agreement by any Seller or their Affiliates, money damages may be inadequate and the non-breaching party may have no adequate remedy at Law.  Accordingly, notwithstanding anything in this Agreement to the contrary, each Seller agrees that Purchaser shall have the right, in addition to any other rights and remedies existing in its favor at Law or in equity, to enforce its rights and each Seller’s obligations hereunder not only by an action or actions for damages but also by an action or actions for specific performance, injunctive and/or other equitable relief (without posting of bond or other security).

 

Section 5.7                                     Exclusivity .  Until the Closing, neither the Sellers nor any Affiliate, representative or advisor of the Sellers will take any action to solicit, initiate, encourage or support any proposal or offer from, participate in any negotiations with, or furnish any non-public information to, any Person (other than the Purchaser), regarding any Acquisition.  The Sellers will, and will cause their Affiliates, representatives and advisors to, promptly cease and cause to be terminated any such negotiations in progress as of the date of this Agreement.  Until the Closing, if the Sellers or any of their Affiliates, representatives or advisors hereafter receives any Acquisition Proposal or any request for information reasonably likely to lead to an Acquisition Proposal, the Sellers will promptly (and in any event within two Business Days) notify the Purchaser thereof orally and in writing, including information as to the identity of the offeror or Person making such Acquisition Proposal or request and the material terms of such Acquisition Proposal or request.

 

Section 5.8                                     Insurance .  Effective from and after the Closing Date, the Purchaser hereby agrees that it shall carry a product liability insurance policy (the “ Insurance Policy ”) covering the Project, the Amadeus Device and each other Product in an amount of not less than U.S.$2,000,000 until the tenth anniversary of the Commercialization Payment Date.

 

Section 5.9                                     Successors in Interest .  The Purchaser agrees that (i) it shall not merge, consolidate, or otherwise combine with, or sell, convey, transfer or assign all or substantially all of the assets then used in connection with the Amadeus Device, any other Product or the Project to, any Person, or (ii) license or grant to any Person, or otherwise permit any Person to exercise, all or substantially all of the Purchaser’s right to market or sell any Product or the Project, unless in each case such Person (the “ Successor ”) assumes in writing (which shall be addressed to, and directly enforceable by, ConvaTec) prior to the consummation of any such transaction any and all of the Purchaser’s obligations under this Agreement and the Ancillary Agreements.  Following any such assumption, the Purchaser and such other Person shall be and remain jointly and severally liable to the Sellers for the performance of the Purchaser’s obligations under this Agreement and the Ancillary Agreements.  The obligations of the Purchaser under this Section 5.9 shall continue in full force and effect for so long as any liability or obligation of the Purchaser under this Agreement, or any Ancillary Agreement remains outstanding or unperformed in any respect.

 

Section 5.10                              Books and Records .  The Purchaser will, and will cause its Affiliates to, following the Closing make available to the Sellers, the Affiliates of the Sellers and their respective representatives all information reasonably necessary for Sellers and their Affiliates to prepare their respective Tax returns and financial statements and to conduct any audits in connection therewith.

 

Section 5.11                              Confidentiality .

 

(a)                                  The parties agree to continue to abide by that certain Confidentiality Agreement between ConvaTec and the Purchaser dated June 30, 2011, as amended from time to time (the “ Confidentiality

 

28



 

Agreement ”), which will survive until the Closing, at which time the Confidentiality Agreement will terminate; provided, however, that if this Agreement is, for any reason, terminated prior to the Closing, the Confidentiality Agreement will continue in full force and effect in accordance with its terms.

 

(b)                                  For a period of three years after the Closing, the Sellers will, and will cause their Affiliates to, and will instruct their respective directors, officers, employees, representatives and advisors to, hold in confidence, unless compelled to disclose by judicial or administrative process or by other requirements of Law, and not use all non-public documents and information relating to the Project, including the Purchaser Information (the “Project Information”), except to the extent that such Project Information (i) can be shown to have been in the public domain through no fault of the Sellers or any of their Affiliates or (ii) was later lawfully acquired by the Sellers or any of their Affiliates from sources other than those related to its prior ownership of the Project.  Notwithstanding the foregoing, in no event will this Section 5.11(b) limit or otherwise restrict the right of a Seller or any Affiliate of a Seller to disclose such Project Information (w) to its and its Affiliates’ respective directors, officers, employees, agents and advisors to the extent reasonably required to facilitate the negotiation, execution, delivery or performance of this Agreement and the Ancillary Agreements, (x) to any Governmental Authority or arbitrator to the extent necessary in connection with any Proceeding relating to the enforcement of this Agreement or any Ancillary Agreement, (y) in connection with its indemnification obligations under this Agreement, including the defense of any Third Party Claim, and (z) as permitted in accordance with Section 5.12.  If any Governmental Authority or arbitrator requires disclosure of Project Information in connection with any Proceeding, the Sellers will, to the extent permitted by Law, give Purchaser prompt notice of such request so that the Purchaser may, at its sole expense, seek an appropriate protective order for the Project Information.

 

(c)                                   For a period of three years after the Closing, Parent and the Purchaser will, and will cause their Affiliates to, and will instruct their respective directors, officers, employees, representatives and advisors to, hold in confidence, unless compelled to disclose by judicial or administrative process or by other requirements of Law, and not use all non-public documents and Information included in the Seller Information, except to the extent that such Seller Information (i) can be shown to have been in the public domain through no fault of Purchaser, Parent or any of their Affiliates or (ii) was later lawfully acquired by Purchaser, Parent or any of their Affiliates from sources other than those related to its prior ownership of the Seller Information.  Notwithstanding the foregoing, in no event will this Section 5.11(c) limit or otherwise restrict the right of Purchaser, Parent, or any of their respective Affiliates to disclose such Seller Information (w) to its and its Affiliates’ respective directors, officers, employees, agents and advisors to the extent reasonably required to facilitate the negotiation, execution, delivery or performance of this Agreement and the Ancillary Agreements, (x) to any Governmental Authority or arbitrator to the extent necessary in connection with any Proceeding relating to the enforcement of this Agreement or any Ancillary Agreement, (y) in connection with its indemnification obligations under this Agreement, including the defense of any Third Party Claim, and (z) as permitted in accordance with Section 5.12.  If any Governmental Authority or arbitrator requires disclosure of Seller Information in connection with any Proceeding, Parent and the Purchaser will, to the extent permitted by Law, give Sellers prompt notice of such request so that the Sellers may, at their sole expense, seek an appropriate protective order for the Seller Information.

 

Section 5.12                              Public Announcements .  Each party agrees not to issue any press release or make any other public announcement relating to this Agreement without the prior written approval of the other party, except that each of ConvaTec and the Purchaser reserves the right, without the other party’s prior consent, to make any public disclosure it believes in good faith is required by applicable securities Laws or securities listing standards (in which case the disclosing party agrees to use Commercially Reasonable Efforts to advise the other party prior to making the disclosure).

 

29



 

Section 5.13                              Further Actions .  Subject to the other express provisions of this Agreement, upon the request of any party to this Agreement, the other parties will execute and deliver such other documents, instruments and agreements as the requesting party may reasonably require for the purpose of carrying out the intent of this Agreement and the transactions contemplated by this Agreement.  For the avoidance of doubt, Sellers will, at their expense, take all actions necessary to cause the patents included in the Purchased Intellectual Property and transferred pursuant to the Patent Assignment to be registered in the name of the applicable Seller promptly after the Closing so that such patents may be further assigned to Purchaser.

 

Section 5.14                              Bulk Transfer Laws .  The Purchaser hereby waives compliance by the Sellers with any applicable bulk sale or bulk transfer Laws of any jurisdiction in connection with the transactions contemplated by this Agreement.

 

Section 5.15                              Transfer Taxes .  Each of Purchaser, on the one hand, and the Sellers, on the other hand, will pay in a timely manner fifty percent of all applicable sales, use, transfer, conveyance, documentary, recording, notarial, value added, excise, registration, stamp, gross receipts and similar Taxes and fees (“ Transfer Taxes ”), arising out of or in connection with or attributable to the transactions effected pursuant to this Agreement and the Ancillary Agreements, including expenses and fees relating to registering Purchased Intellectual Property in the name of the Purchaser or its designee, regardless of whether such Transfer Taxes, expenses and fees are imposed by Law on the Purchaser, the Purchased Assets or the Sellers or any Affiliate of the Sellers.  Any Tax Returns that must be filed in connection with any Transfer Taxes will be prepared by the Sellers; provided, however, that the Sellers will deliver such Tax Returns for the Purchaser’s review and approval (not to be unreasonably withheld, conditioned or delayed) at least ten Business Days prior to the applicable due date.  Purchaser shall deliver, if applicable, any exemption documentation for any Transfer Taxes to Seller in a timely manner.  The parties will cooperate with each other in the provision of any information or preparation of any documentation that may be necessary or useful for obtaining any available mitigation, reduction or exemption from any such Transfer Taxes.

 

Section 5.16                              Data Room .  Within ten (10) Business Days after the Closing Date, the Sellers shall provide to the Purchaser an electronic copy of all information contained in the electronic data room (including using its Commercially Reasonable Efforts to provide, to the extent reasonably practicable, documents readable and usable by the program in which they were initially prepared rather than as a pdf or other format that restricts editing of the documents) maintained by the Sellers relating to the transactions contemplated hereby.

 

Section 5.17                              Employees and Consultants .

 

(a)                                  The Purchaser shall be provided access to, and the services of, Ian Tabron (or, if Ian Tabron is no longer an employee or consultant of ConvaTec or any of its Affiliates, the individual who succeeds to the duties and responsibilities of Ian Tabron) for purposes of providing transition services related to the Project (i) for seven Business Days of his time, at no cost to the Purchaser, during the first month after the Closing Date; (ii) for up to seven Business Days of his time, for a fee of $1,000 per day, during the second month after the Closing Date; and (iii) for up to two Business Days per month of his time, for the next four months thereafter, for a fee of $1,000 per day.  Within 30 days after the end of each month in respect of which fees are payable, ConvaTec will submit an invoice to the Purchaser for such services provided during the previous month.  The Business Days allocable to the Purchaser as referenced in subclauses (i), (ii) and (iii) in the previous sentence shall include time spent travelling by Ian Tabron in connection with the provision of his services to the Purchaser.  The Purchaser will also reimburse ConvaTec for all reasonable expenses incurred by Ian Tabron (or other applicable employee) in providing such services, including for any travel required to be done at the Purchaser’s request, subject to ConvaTec

 

30



 

providing receipts or other reasonable supporting evidence thereof and provided that such costs may not exceed $5,000 per month without the prior written consent of the Purchaser; provided, further, however, that it shall not constitute a breach of this Section 5.17(a) if Ian Tabron’s (or other applicable employee’s) services are not provided to the Purchaser as a result of the Purchaser not approving travel expenses in accordance with the foregoing.  The Purchaser agrees that, for any flight scheduled for a duration of eight hours or more, Ian Tabron (or other applicable employee) shall be entitled to travel business class and that the expenses thereof are reasonable expenses for purposes hereof.  Such expenses will be included in the monthly invoices referred to above.  The Purchaser will pay all amounts due pursuant to this section 5.l7(a) within 30 days after receipt of each such invoice hereunder.

 

(b)                                  If the Purchaser desires to retain Landy Toth as an employee, independent contractor or consultant in connection with the Project, Sellers will waive confidentiality or other restrictions owed to Sellers and their Affiliates by Mr. Toth to the extent necessary to enable Mr. Toth to be able to perform the relevant services for the Purchaser in connection with the Project.

 

ARTICLE 6
CONDITIONS PRECEDENT TO OBLIGATION TO CLOSE

 

Section 6.1                                     Conditions to the Obligation of the Purchaser .  The obligation of the Purchaser to consummate the transactions contemplated by this Agreement is subject to the satisfaction, on or before the Closing Date, of each of the following conditions (any of which may be waived by the Purchaser, in whole or in part):

 

(a)                                  Accuracy of Representations and Warranties .  The representations and warranties of the Sellers in Article 3 must be true and correct in all material respects as of the Closing (except to the extent any such representation or warranty speaks as of the date of this Agreement or any other specific date, in which case such representation or warranty must have been true and correct in all respects as of such date);

 

(b)                                  Performance of Covenants .  All of the covenants and obligations that the Sellers are required to perform or comply with under this Agreement on or before the Closing Date must have been duly performed and complied with in all material respects;

 

(c)                                   No Action .  There must not be in effect any Law or Judgment that would prohibit or make illegal the consummation of the transactions contemplated by this Agreement or cause the transactions contemplated by this Agreement to be rescinded following consummation; and

 

(d)                                  Transaction Documents .  The Sellers must have delivered or caused to be delivered each document that Section 2.10(a) requires them to deliver.

 

Section 6.2                                     Conditions to the Obligation of the Sellers .  The obligation of the Sellers to consummate the transactions contemplated by this Agreement is subject to the satisfaction, on or before the Closing Date, of each of the following conditions (any of which may be waived by ConvaTec, in whole or in part):

 

(a)                                  Accuracy of Representations and Warranties .  The representations and warranties of the Purchaser in Article 4 must be true and correct in all material respects as of the Closing (except to the extent any such representation or warranty speaks as of the date of this Agreement or any other specific date, in which case such representation or warranty must have been true and correct in all material respects as of such date);

 

31



 

(b)                                  Performance of Covenants .  All of the covenants and obligations that the Purchaser is required to perform or comply with under this Agreement on or before the Closing Date must have been duly performed and complied with in all material respects;

 

(c)                                   No Action .  There must not be in effect any Law or Judgment that would prohibit or make illegal the consummation of the transactions contemplated by this Agreement or cause the transactions contemplated by this Agreement to be rescinded following consummation; and

 

(d)                                  Transaction Documents .  The Purchaser must have delivered or caused to be delivered to the Sellers each document that Section 2.10(b) requires it to deliver.

 

ARTICLE 7
TERMINATION

 

Section 7.1                                     Termination Events .  This Agreement may, by written notice given before or at the Closing, be terminated:

 

(a)                                  by mutual consent of the Purchaser and ConvaTec;

 

(b)                                  by the Purchaser (so long as the Purchaser is not then in material breach of any of its representations, warranties or covenants contained in this Agreement) if there has been a breach of any of the Sellers’ representations, warranties or covenants contained in this Agreement, which would result in the failure of a condition set forth in Section 6.1(a) or Section 6.1(b), and which breach has not been cured within 15 days after written notice of the breach has been delivered to the Sellers from the Purchaser;

 

(c)                                   by ConvaTec (so long as the Sellers are not then in material breach of any of their representations, warranties or covenants contained in this Agreement) if there has been a breach of any of the Purchaser’s representations, warranties or covenants contained in this Agreement, which would result in the failure of a condition set forth in Section 6.2(a) or Section 6.2(b), and which breach has not been cured within 15 days after written notice of the breach has been delivered to the Purchaser from ConvaTec;

 

(d)                                  by either the Purchaser or ConvaTec if any Governmental Authority has issued a nonappealable final Judgment or taken any other nonappealable final action, in each case having the effect of permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement; provided , however , that the right to terminate this Agreement under this Section 7.1(d) will not be available to any party whose failure to fulfill any material covenant under this Agreement has been the cause of or resulted in the action or event described in this Section 7.1(d) occurring;

 

(e)                                   by the Purchaser if the Closing has not occurred (other than through the failure of the Purchaser to comply fully with its obligations under this Agreement) on or before September 30, 2012; or

 

(f)                                    by ConvaTec if the Closing has not occurred (other than through the failure of the Sellers to comply fully with their obligations under this Agreement) on or before September 30, 2012.

 

Section 7.2                                     Effect of Termination .  If this Agreement is terminated pursuant to Section 7.1, this Agreement and all rights and obligations of the parties under this Agreement automatically end without Liability against any party or its Affiliates, except that (a) Section 5.11(a) ( Confidentiality ), Section 5.12 ( Public Announcements ), Section 7.3 ( Certain Effects of Termination ), Article 9 ( General Provisions ) (except for Section 9.11 ( Specific Performance )) and this Section 7.2 will remain in full force

 

32



 

and survive any termination of this Agreement and (b) if this Agreement is terminated by a party because of the knowing and intentional breach of this Agreement by the other party or because one or more of the conditions to the terminating party’s obligations under this Agreement is not satisfied as a result of the other party’s knowing and intentional failure to comply with its obligations under this Agreement, the terminating party’s right to pursue all legal remedies will survive such termination unimpaired.

 

Section 7.3                                     Certain Effects of Termination .  If the Purchaser or ConvaTec terminates this Agreement pursuant to Section 7.1, the Purchaser will comply with the Confidentiality Agreement regarding the return and/or destruction of any information furnished to the Purchaser in connection with this Agreement.

 

ARTICLE 8
INDEMNIFICATION

 

Section 8.1                                     Indemnification by ConvaTec .  If the Closing occurs, and subject to the limitations expressly set forth in Sections 8.4 and 8.5, ConvaTec will indemnify, defend and hold harmless the Purchaser and its directors, officers, employees, agents, representatives, stockholders and Affiliates (collectively, the “ Purchaser Indemnified Parties ”) from and against any and all Losses incurred by the Purchaser Indemnified Parties arising or resulting from (a) any breach of any representation or warranty set forth in Article 3 or any certificate relating thereto, (b) any breach of any covenant of the Sellers set forth in this Agreement, (c) any Excluded Liability and (d) the failure of Sellers to comply with bulk sale or bulk transfer Laws in connection with the transactions contemplated by this Agreement.

 

Section 8.2                                     Indemnification by the Purchaser .  If the Closing occurs, and subject to the limitations expressly set forth in Sections 8.4 and 8.5, the Purchaser will indemnify, defend and hold harmless the Sellers and their respective directors, officers, employees, agents, representatives, stockholders and Affiliates (collectively, the “ Seller Indemnified Parties ”) from and against any and all Losses incurred by the Seller Indemnified Parties arising or resulting from (a) any breach of any representation or warranty set forth in Article 4 or any certificate related thereto, (b) any breach of any covenant of the Purchaser set forth in this Agreement and (c) any Assumed Liability.

 

Section 8.3                                     Claim Procedure .

 

(a)                                  A party that seeks indemnity under this Article 8 (an “ Indemnified Party ”) will give written notice (a “ Claim Notice ”) to the party from whom indemnification is sought (an “ Indemnifying Party ”) whether the Losses sought arise from matters solely between the parties or from Third Party Claims described in Section 8.3(b).  The Claim Notice must contain (i) a brief description and, if known, the estimated amount of any Losses incurred or reasonably expected to be incurred by the Indemnified Party, (ii) a reasonable explanation of the basis for the Claim Notice to the extent of the facts then known by the Indemnified Party and (iii) a demand for payment of those Losses.

 

(b)                                  If the Indemnified Party seeks indemnity under this Article 8 in response to a claim or Proceeding by another Person not a party to this Agreement (a “ Third Party Claim ”), then the Indemnified Party will give a Claim Notice to the Indemnifying Party promptly and in any event within thirty days after the Indemnified Party has received notice or otherwise learns of the assertion of such Third Party Claim and will include in the Claim Notice (i) a brief description of the facts constituting the basis for such Third Party Claim and the amount of the damages claimed by the other Person, in each case to the extent known to the Indemnified Party and (ii) the assertion of the claim or the notice of the commencement of any Proceeding relating to such Third Party Claim; provided , however , that no delay or deficiency on the part of the Indemnified Party in so notifying the Indemnifying Party will relieve the

 

33



 

Indemnifying Party of any Liability under this Agreement except to the extent such delay or deficiency actually prejudices the rights of the Indemnifying Party with respect thereto.

 

(c)                                   In the event of a Third Party Claim, the Indemnifying Party will be entitled to participate in the defense thereof and, if it so chooses, assume at any time control of the defense thereof with counsel reasonably satisfactory to the Indemnified party by giving to the Indemnified Party written notice of its intention to assume control of the defense of such Third Party Claim; provided , however , that the Indemnified Party may participate in the defense of such Third Party Claim with its own counsel at its own expense.

 

(d)                                  The Indemnifying Party will not agree to any settlement of, or consent to the entry of any Judgment (other than a Judgment of dismissal on the merits without costs) arising from, any such Third Party Claim without the prior written consent of the Indemnified Party; provided , however , that the consent of the Indemnified Party will not be required if the Indemnifying Party agrees in writing to pay any amounts payable pursuant to such settlement or any Judgment and such settlement or Judgment includes a full, complete and unconditional release of the Indemnified Party from further Liability and does not impose any injunctive relief or criminal penalties on the Indemnified Party.  The Indemnified Party will not agree to any settlement of, or the entry of any Judgment (other than a Judgment of dismissal on the merits without costs) arising from, any such Third Party Claim without the prior written consent of the Indemnifying Party, unless the Indemnifying Party fails to defend the Indemnified Party pursuant to the terms of this Section 8.3.

 

Section 8.4                                     Survival .  All representations and warranties contained in this Agreement will survive the Closing until the date that is thirty (30) months after the Closing Date, except that the representations and warranties set forth in Sections 3.1, 3.2, 3.3, 3.4(a), 3.7, 3.14, 4.1, 4.2, 4.3 and 4.5 will survive the Closing until the date that is 30 days after expiration of the applicable statute of limitations period.  All covenants contained in this Agreement will survive the Closing until the expiration of the applicable statute of limitations or for such shorter period explicitly specified therein, except that for such covenants that survive for such shorter period, breaches thereof will survive until the expiration of the applicable statute of limitations.  All claims for indemnification under this Agreement must be asserted pursuant to a Claim Notice given prior to the expiration of the applicable survival period set forth in this Section 8.4; provided , however , that any representation, warranty or covenant that is the subject of a claim for indemnification which is asserted pursuant to a Claim Notice given after the Closing Date within the survival period specified in this Section 8.4 will survive until, but only for purposes of, the resolution of such claim.

 

Section 8.5                                     Limitations on Liability .

 

(a)                                  Deductibles .  Notwithstanding anything to the contrary contained in this Agreement (except that the following limitations will only apply to Losses arising under Sections 8.1(a) and 8.2(a) (other than Losses arising with respect to breaches of Sections 3.1, 3.2, 3.3, 3.4(a), 3.5(b), 3.7, 3.14, 4.1, 4.2, 4.3, 4.5 and 4.6, with respect to which such limitations will not apply) and will accordingly not apply to Losses arising under Section 8.1(b), (c) and (d) and Section 8.2(b) and (c)):

 

(i)                                      no indemnification payments will be made by or on behalf of ConvaTec under this Agreement until the aggregate amount of Losses for which ConvaTec would (but for this clause (i) be liable thereunder exceeds $100,000 (such amount being, the “ Deductible ”), and then only to the extent of such excess over the Deductible; and

 

(ii)                                   no indemnification payments will be made by or on behalf of the Purchaser under this Agreement until the aggregate amount of Losses for which the Purchaser would (but for this

 

34



 

clause (ii)) be liable thereunder exceeds the Deductible, and then only to the extent of such excess over the Deductible.

 

(b)                                  Caps .  Notwithstanding anything to the contrary contained in this Agreement (except that the following limitations will only apply to Losses arising under Sections 8.1(a) and 8.2(a) (other than Losses arising with respect to breaches of Sections 3.1, 3.2, 3.3, 3.4(a), 3.5(b), 3.5(e), 3.5(f), 3.5(g), 3.5(i), 3.7, 3.14, 4.1, 4.2, 4.3, 4.5 and 4.6, with respect to which such limitations will not apply) and will accordingly not apply to Losses arising under Section 8.1(b), (c) and (d) and Section 8.2(b) and (c)):

 

(i)                                      the aggregate total amount in respect of which ConvaTec will be liable to indemnify and hold harmless the Purchaser Indemnified Parties pursuant to this Agreement will not exceed $3,000,000; and

 

(ii)                                   the aggregate total amount in respect of which the Purchaser will be liable to indemnify and hold harmless the Seller Indemnified Parties pursuant to this Agreement will not exceed $3,000,000.

 

(c)                                   Aggregate Caps on ConvaTec’s Liability .

 

(i)                                      Notwithstanding anything to the contrary contained in this Agreement, the aggregate total amount in respect of which ConvaTec will be liable to indemnify and hold harmless the Purchaser Indemnified Parties pursuant to Section 8.1(a) (other than with respect to breaches of Sections 3.1, 3.2, 3.3, 3.4(a), 3.7 and 3.14, with respect to which such limitation will not apply) will not exceed $5,000,000.

 

(ii)                                   Notwithstanding anything to the contrary contained in this Agreement, the aggregate total amount in respect of which ConvaTec will be liable to indemnify and hold harmless the Purchaser Indemnified Parties pursuant to Sections 8.1(a), (b) and (d) of this Agreement, will not exceed an amount equal to the Purchase Price, as such Purchase Price may be increased by the payment of any amounts after the Closing Date.

 

(d)                                  Tax Refunds, Insurance Proceeds and Other Payments .  The amount of any and all Losses for which indemnification is provided pursuant to this Article 8 will be net of any Tax benefit actually received and utilized by an Indemnified Party arising from the deductibility of any such payment of such Liability (taking into account any Tax cost or reduction in such Tax benefits by reason of receipt of the indemnification payment) and any amounts of any insurance proceeds, indemnification payments, contribution payments or reimbursements actually received by the Indemnified Party with respect to such Losses or any of the circumstances giving rise thereto.  In connection therewith, if, at any time following payment in full by the Indemnifying Party of any amounts of Losses due under this Agreement, the Indemnified Party receives any insurance proceeds, indemnification payments, contribution payments or reimbursements relating to the circumstances giving rise to such Losses, the Indemnified Party will promptly remit to the Indemnifying Party such proceeds, payments or reimbursements in an amount not to exceed the amount of the corresponding indemnification payment made by the Indemnifying Party.  The Purchaser will use (and will cause its Affiliates to use) Commercially Reasonable Efforts to collect the proceeds of any available insurance which would have the effect of reducing any Losses (in which case the net proceeds thereof will reduce the Losses).

 

(e)                                   Mitigation .  The Indemnified Party will use its Commercially Reasonable Efforts to mitigate any Losses with respect to which it may be entitled to seek indemnification pursuant to this Agreement.

 

35


 

Section 8.6                                     Exclusive Remedy .  From and after the Closing, other than with respect to fraud (provided any such claim of fraud is not based on a standard of recklessness, willful ignorance, negligence or similar lesser standard of intent) the sole and exclusive remedy of the Purchaser for money damages for any matter arising out of the transactions contemplated by this Agreement will be pursuant to the indemnification obligations set forth in Article 8.

 

ARTICLE 9
GENERAL PROVISIONS

 

Section 9.1                                     Notices .  All notices and other communications under this Agreement must be in writing and are deemed duly delivered (a) when delivered if delivered personally or by nationally recognized overnight courier service (costs prepaid), (b) upon electronic confirmation of receipt if sent by facsimile with confirmation of transmission by the transmitting equipment (or, the first Business Day following such transmission if the date of transmission is not a Business Day) or (c) five days after mailing, if sent by United States of America certified or registered mail, return receipt requested; in each case to the following addresses or facsimile numbers and marked to the attention of the individual (by name or title) designated below (or to such other address, facsimile number or individual as a party may designate by notice to the other party):

 

If to the Sellers:

 

ConvaTec Inc.
100 Headquarters Park Drive
Skillman, NJ 08558
USA
Facsimile: 908-904-2373
Attention: Company Secretary

 

with copies (which will not constitute notice) to:

 

Michael S. McNally
ConvaTec Inc.
Facsimile: 908-904-2373

 

and

 

Baker & McKenzie LLP
One Prudential Plaza, Suite 3500
130 East Randolph Drive
Chicago, IL, 60601
Attention: Edward J. West Esq.
Facsimile: 312-698-2702

 

If to the Purchaser:

 

Tactile Systems Technology Inc.
1331 Tyler Street NE, Suite 200
Minneapolis, MN 55413
Attention: Gerald Mattys, Chief Executive Officer
Facsimile: 612-355-5101

 

36



 

with a copy (which will not constitute notice) to:

 

Faegre Baker Daniels LLP
2200 Wells Fargo Center
90 South Seventh Street
Minneapolis, MN 55402
Attention: Jonathan Zimmerman
Facsimile: 612-766-1600

 

Section 9.2                                     Amendment .  This Agreement may not be amended, supplemented or otherwise modified except in a written document signed by each party to be bound by the amendment and that identifies itself as an amendment to this Agreement.

 

Section 9.3                                     Waiver and Remedies .  The parties may (a) extend the time for performance of any of the obligations or other acts of the other party to this Agreement, (b) waive any inaccuracies in the representations and warranties of the other party to this Agreement contained in this Agreement or (c) waive compliance with any of the covenants or conditions for the benefit of such party contained in this Agreement.  (i) Any such extension or waiver by a party to this Agreement will be valid only if set forth in a written document signed on behalf of the party against whom the extension or waiver is to be effective; (ii) no extension or waiver will apply to any time for performance, inaccuracy in any representation or warranty, or noncompliance with any covenant or condition, as the case may be, other than that which is specified in the written extension or waiver; and (iii) no failure or delay by a party in exercising any right or remedy under this Agreement or any of the documents delivered pursuant to this Agreement, and no course of dealing between the parties, operates as a waiver of such right or remedy, and no single or partial exercise of any such right or remedy precludes any other or further exercise of such right or remedy or the exercise of any other right or remedy.  Except as provided in Section 8.6, any enumeration of a party’s rights and remedies in this Agreement is not intended to be exclusive, and a party’s rights and remedies are intended to be cumulative to the extent permitted by law and include any rights and remedies authorized in law or in equity.

 

Section 9.4                                     Entire Agreement .  This Agreement (including the Schedules and Exhibits hereto and the documents and instruments referred to in this Agreement that are to be delivered at the Closing) constitutes the entire agreement between the parties and supersedes any prior understandings, agreements or representations by or between the parties, or either of them, written or oral, with respect to the subject matter of this Agreement.  Notwithstanding the foregoing, the Confidentiality Agreement will remain in effect in accordance with its terms as modified pursuant to Section 5.11.

 

Section 9.5                                     Assignment Successors and No Third Party Rights .  This Agreement binds and benefits the parties and their respective successors and assigns, except that no party may assign any rights under this Agreement, or delegate any performance of its obligations under this Agreement whether by operation of law or otherwise, without the prior written consent of the other party (except that (i) Purchaser may assign or delegate performance of its obligations without the prior written consent of Sellers if any Person to whom Purchaser assigns or delegates its obligations hereunder complies with Section 5.9, in which event Purchaser and such Person shall be and remain jointly and severally liable to the Sellers for the performance of the Purchaser’s obligations under this Agreement and the Ancillary Agreements and (ii) in the event of a Seller Sale, the Sellers may assign to the buyer in such Seller Sale the Sellers’ rights to receive performance of any obligations of Purchaser under this Agreement remaining to be performed after the date of consummation of such Seller Sale if the buyer in such Seller Sale assumes in writing (which shall be addressed to, and directly enforceable by, Purchaser) prior to the consummation of any such Seller Sale any and all of the Sellers’ obligations under this Agreement and the Ancillary Agreements).  Any purported assignment or delegation in contravention of the foregoing

 

37



 

shall be void.  Nothing expressed or referred to in this Agreement will be construed to give any Person, other than the parties to this Agreement, any legal or equitable right, remedy or claim under or with respect to this Agreement or any provision of this Agreement except such rights as may inure to a successor or permitted assignee under this Section 9.5.

 

Section 9.6                                     Severability .  If any provision of this Agreement is held invalid, illegal or unenforceable, the remaining provisions of this Agreement remain in full force and effect, if the essential terms and conditions of this Agreement for each party remain valid, binding and enforceable.

 

Section 9.7                                     Exhibits and Schedules .  The Exhibits and Schedules to this Agreement are incorporated herein by reference and made a part of this Agreement.  The Seller Disclosure Schedule and the Purchaser Disclosure Schedule are arranged in sections and paragraphs corresponding to the numbered and lettered sections and paragraphs of Article 3 and Article 4, respectively.  The disclosure in any section or paragraph of the Seller Disclosure Schedule or the Purchaser Disclosure Schedule, and those in any amendment or supplement thereto, will be deemed to relate to each other provision of Article 3 or Article 4, respectively, to the extent that the applicability of such disclosure to any other provision of Article 3 or Article 4, as applicable, is reasonably apparent on the face of such disclosure.

 

Section 9.8                                     Interpretation .  In the negotiation of this Agreement, each party has received advice from its own attorney.  The language used in this Agreement is the language chosen by the parties to express their mutual intent, and no provision of this Agreement will be interpreted for or against either party because that party or its attorney drafted the provision.

 

Section 9.9                                     Expenses .  Except as set forth in this Agreement, whether or not the transactions contemplated by this Agreement are consummated, each party will pay its own direct and indirect expenses incurred by it in connection with the preparation and negotiation of this Agreement and the consummation of the transactions contemplated by this Agreement, including all fees and expenses of its advisors and representatives.

 

Section 9.10                              Governing Law .  Unless any Exhibit or Schedule specifies a different choice of law, the internal laws of the State of Delaware (without giving effect to any choice or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of laws of any other jurisdiction) govern all matters arising out of or relating to this Agreement and its Exhibits and Schedules and the transactions contemplated by this Agreement, including its validity, interpretation, construction, performance and enforcement and any disputes or controversies arising therefrom or related thereto.

 

Section 9.11                              Specific Performance .  The parties agree that irreparable damage may occur in the event that any of the provisions of this Agreement were not performed by a party in accordance with their specific terms or were otherwise breached by such party.  The parties accordingly agree that, prior to the termination of this Agreement pursuant to Section 7.1, in addition to any other remedy to which a party is entitled at law or in equity, each party is entitled to injunctive relief to prevent breaches of this Agreement by the other party and otherwise to enforce specifically the provisions of this Agreement against such other party.  Each party expressly waives any requirement that the other party obtain any bond or provide any indemnity in connection with any action seeking injunctive relief or specific enforcement of the provisions of this Agreement.

 

Section 9.12                              Jurisdiction and Service of Process .  Any action or Proceeding arising out of or relating to this Agreement or the transactions contemplated by this Agreement must be brought in the courts of the State of Illinois or, if it has or can acquire jurisdiction, in the United States Federal Court in the Northern District of Illinois.  Each of the parties knowingly, voluntarily and irrevocably submits to the

 

38



 

exclusive jurisdiction of each such court in any such action or proceeding and waives any objection it may now or hereafter have to venue or to convenience of forum.  Each party to this Agreement may make service on the other party by sending or delivering a copy of the process to the party to be served at the address and in the manner provided for the giving of notices in Section 9.1.  Nothing in this Section 9.12, however, affects the right of a party to serve legal process in any other manner permitted by law.

 

Section 9.13                              Waiver of Jury Trial .  Each of the parties knowingly, voluntarily and irrevocably waives, to the fullest extent permitted by law, all right to trial by jury in any action, proceeding or counterclaim (whether based on contract, tort or otherwise) arising out of or relating to this Agreement or the transactions contemplated by this Agreement or the actions of either party to this Agreement in negotiation, execution and delivery, performance or enforcement of this Agreement.

 

Section 9.14                              No Joint Venture .  Nothing in this Agreement creates a joint venture or partnership between the parties.  This Agreement does not authorize either party (a) to bind or commit, or to act as an agent, employee or legal representative of, the other party, except as may be specifically set forth in other provisions of this Agreement, or (b) to have the power to control the activities and operations of the other party.  The parties are independent contractors with respect to each other under this Agreement.  Each party agrees not to hold itself out as having any authority or relationship contrary to this Section 9.14.

 

Section 9.15                              Counterparts .  The parties may execute this Agreement in multiple counterparts, each of which constitutes an original as against the party that signed it, and all of which together constitute one agreement.  This Agreement is effective upon delivery of one executed counterpart from each party to the other party.  The signatures of all parties need not appear on the same counterpart.  The delivery of signed counterparts by facsimile or email transmission that includes a copy of the sending party’s signature(s) is as effective as signing and delivering the counterpart in person.

 

Section 9.16                              Guarantee .  Parent irrevocably, unconditionally and absolutely guaranties to the Sellers the prompt payment and performance by Purchaser of all of its obligations under this Agreement.  Parent waives any and all defenses, claims, setoffs and discharges with respect to such obligations, except the defense of discharge by payment and performance in full and any defense available to Purchaser that is provided for in this Agreement.  Parent will not exercise or enforce any right of contribution, reimbursement, recourse, or subrogation as to any such obligations against Purchaser until all such obligations have been fully paid and performed.

 

[Signature page follows.]

 

39



 

The parties have executed and delivered this Agreement as of the date indicated in the first sentence of this Agreement.

 

 

CONVATEC INC.

 

 

 

 

 

By:

/s/ Bradford Barton

 

Name:

Bradford Barton

 

Title:

President, Americas

 

 

 

 

 

CONVATEC TECHNOLOGIES, INC.

 

 

 

 

 

By:

/s/ Timothy Winston

 

Name:

Timothy Winston

 

Title:

Treasurer

 

 

 

 

 

SWELLING SOLUTIONS, INC.

 

 

 

 

 

By:

/s/ Gerald R. Mattys

 

Name:

Gerald R. Mattys

 

Title:

CEO

 

 

Solely with respect to Section 9.16:

 

 

TACTILE SYSTEMS TECHNOLOGY, INC.

 

 

 

 

 

By:

/s/ Gerald R. Mattys

 

 

Name:

Gerald R. Mattys

 

Title:

CEO

 

 

[Signature Page to the Asset and Sale Purchase Agreement]

 


 

Exhibit A

 

BILL OF SALE

 

This Bill of Sale, dated as of September 14, 2012 (the “ Bill of Sale ”), is delivered pursuant to the Closing under the Asset Sale and Purchase Agreement (the “ Purchase Agreement ”), dated as of September 14, 2012, by and among ConvaTec Inc., a Delaware corporation (“ ConvaTec ”), ConvaTec Technologies, Inc., a Nevada corporation (“ CTI ”, and CTI and ConvaTec together being the “Sellers” and each individually a “ Sellers ”), Swelling Solutions, Inc., a Delaware corporation (the “ Purchaser ”), and Tactile Systems Technology, Inc., a Delaware corporation. Capitalized terms used in this Bill of Sale without definition have the respective meanings given to them in the Purchase Agreement.

 

Pursuant to the Purchase Agreement, the Sellers have agreed to sell, convey, assign, transfer and deliver to the Purchaser, and the Purchaser has agreed to purchase and acquire from the Sellers, the Purchased Assets. The Purchaser and the Sellers now seek to consummate the assignment, conveyance and transfer of such Purchased Assets.

 

NOW, THEREFORE, intending to be legally bound and in consideration of the mutual provisions set forth in this Bill of Sale and in the Purchase Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

 

Section 1                                               Sale and Transfer of Purchased Assets .  The Sellers hereby sell, convey, assign, transfer and deliver to the Purchaser all of the Purchased Assets.

 

Section 2                                               Power of Attorney .  The Sellers hereby constitute and appoint the Purchaser as the Sellers’ true and lawful agent and attorney-in-fact, with full power of substitution and resubstitution, in whole or in part, in the name and stead of Sellers but on behalf and for the benefit of the Purchaser and its successors and assigns, to demand, receive and collect any and all of the Purchased Assets and to give receipts and releases for and in respect of the same, and from time to time to institute and prosecute in the Sellers’ name, or otherwise for the benefit of the Purchaser and its successors and assigns, any and all proceedings at law, in equity or otherwise, which the Purchaser or its successors or assigns may deem proper for the collection or recovery of any of the Purchased Assets or for the collection and enforcement of any claim or right of any kind hereby sold, assigned, conveyed and transferred, or intended so to be, and to take any other actions and make, sign, execute, acknowledge and deliver any documents and instruments as may from time to time be necessary or appropriate to assign to the Purchaser and its successors and assigns the Purchased Assets and all rights granted to the Purchaser under the Purchase Agreement. The Sellers declare that the foregoing powers are coupled with an interest and are and will be irrevocable by the Sellers or by its dissolution or in any manner or for any reason whatsoever. Nothing in the Section 2 will be deemed a waiver of any remedies otherwise available.

 

Section 3                                               General .  This Bill of Sale (a) is irrevocable and effective upon the Sellers’ signatures to and delivery of a manually signed copy of this Bill of Sale or facsimile or email transmission of the signatures to this Bill of Sale in connection with the Closing, if and only if the Closing is completed, (b) benefits and binds the parties to the Purchase Agreement and their respective successors and assigns, (c) does not modify or affect, and is subject to, the provisions of the Purchase Agreement and (d) may be signed in counterparts as provided in Article 9.15 of the Purchase Agreement. In the event of any conflict or inconsistency between the provisions of the Purchase Agreement and the provisions of this Bill of Sale, the provisions of the Purchase Agreement will control.

 

[Signature page follows.]

 



 

The undersigned has signed this Bill of Sale on the date first set forth above.

 

 

CONVATEC INC.

 

 

 

 

 

By:

 

 

Name:

 

Title:

 

 

 

 

 

CONVATEC TECHNOLOGIES, INC.

 

 

 

 

 

By:

 

 

Name:

 

Title:

 

 

 

 

 

SWELLING SOLUTIONS,  INC.

 

 

 

 

 

By:

 

 

Name:

 

Title:

 

[Signature Page to the Bill of Sale]

 



 

Exhibit B

 

ASSIGNMENT AND ASSUMPTION AGREEMENT

 

This Assignment and Assumption Agreement, dated as of September 14, 2012 (the “ Agreement ”), is delivered pursuant to the Closing under the Asset Sale and Purchase Agreement (the “ Purchase Agreement ”), dated as of September 14, 2012, by and among ConvaTec Inc., a Delaware corporation (“ ConvaTec ”), ConvaTec Technologies, Inc., a Nevada corporation (“ CTI ”, and CTI and ConvaTec together being the “ Sellers ” and each individually a “ Seller ”), Swelling Solutions, Inc., a Delaware corporation (the “ Purchaser ”), and Tactile Systems Technology, Inc., a Delaware corporation. Capitalized terms used in this Agreement without definition have the respective meanings given to them in the Purchase Agreement.

 

Pursuant to the Purchase Agreement, the Sellers have agreed to assign and the Purchaser has agreed to assume and pay or perform and discharge when due the Assumed Liabilities. The Purchaser and the Sellers now seek to consummate the assignment and assumption of such Assumed Liabilities.

 

NOW, THEREFORE, intending to be legally bound and in consideration of the mutual provisions set forth in this Agreement and in the Purchase Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

 

Section 1                                               Assignment and Assumption of Assumed Liabilities .  The Sellers hereby assign, sell, transfer and set over (collectively, the “ Assignment ”) to the Purchaser the Assumed Liabilities. The Purchaser hereby accepts the Assignment and assumes and agrees to pay or perform and discharge when due only the Assumed Liabilities. Notwithstanding the foregoing, the Purchaser does not assume, or agree to pay or perform and discharge when due, any Liabilities of the Sellers (including, without limitation, the Excluded Liabilities) other than the Assumed Liabilities, and the parties hereto agree that all such Liabilities, other than the Assumed Liabilities, will remain the sole responsibility of the Sellers.

 

Section 2                                               General .  This Agreement (a) is irrevocable and effective upon the Purchaser’s signature to and delivery of a manually signed copy of this Agreement or facsimile or email transmission of the signature to this Agreement in connection with the Closing, if and only if the Closing is completed, (b) benefits and binds the parties to the Purchase Agreement and their respective successors and assigns, (c) does not modify or affect, and is subject to, the provisions of the Purchase Agreement and (d) may be signed in counterparts as provided in Article 9.15 of the Purchase Agreement. In the event of any conflict or inconsistency between the provisions of the Purchase Agreement and the provisions of this Agreement, the provisions of the Purchase Agreement will control.

 

[Signature page follows]

 



 

The undersigned has signed this Agreement on the date first set forth above.

 

 

CONVATEC INC.

 

 

 

 

 

By:

 

 

Name:

 

Title:

 

 

 

 

 

CONVATEC TECHNOLOGIES, INC.

 

 

 

 

 

By:

 

 

Name:

 

Title:

 

 

 

 

 

SWELLING SOLUTIONS,  INC.

 

 

 

 

 

By:

 

 

Name:

 

Title:

 

[Signature Page to the Assignment and Assumption Agreement]

 


 

Exhibit C

 

PATENT ASSIGNMENT

 

This Patent Assignment, dated as of September 14, 2012, is delivered pursuant to the Closing under that certain Asset Sale and Purchase Agreement (the “ Purchase Agreement ”) dated as of September 14, 2012, between ConvaTec Inc., a Delaware corporation (“ ConvaTec ”), ConvaTec Technologies, Inc., a Nevada corporation (“ CTI ”), Swelling Solutions, Inc., a Delaware corporation (the “ Purchaser ”), and Tactile Systems Technology, Inc., a Delaware corporation. Capitalized terms used in this Patent Assignment without definition have the respective meanings given to them in the Purchase Agreement.

 

CTI has delivered this instrument signed by CTI to enable the Purchaser to file it with any appropriate Governmental Authority to indicate ownership of Intellectual Property described below and for the other purposes set forth in this instrument. This instrument supplements and is in addition to all other rights of the Purchaser under the Purchase Agreement and other instruments of transfer delivered in connection with the Purchase Agreement.

 

NOW, THEREFORE, for good and valuable consideration, receipt of which CTI acknowledges, and by signing and delivering this instrument, CTI sells, assigns, transfers, conveys, and delivers to the Purchaser all of CTI’s right, title, and interest in and to:

 

(a)                                  the patents, patent applications and invention disclosures specifically listed in Annex A to this Patent Assignment; and

 

(b)                                  the following properties and rights with respect to all patents and patent applications so listed in Annex A:

 

(i)                                      the inventions claimed or described in the patents or patent applications;

 

(ii)                                   any patents in the United States and anywhere else in the world and patent applications in the United States and anywhere else in the world that have been or may be granted or filed, respectively, with respect to those inventions, including without limitation all foreign patents and patent applications that may claim priority based on and correspond to the patents or patent applications listed in Annex A;

 

(iii)                                all divisions, renewals, reissues, continuations, extensions, continuations-in-part of the foregoing patents or patent applications, or other or further applications based in whole or in part upon the inventions, patents, or patent applications;

 

(iv)                               all income, royalties, damages and payments due or payable to CTI with respect to the patents, including without limitation unpaid damages and payments for past, present and future infringements of any patent; and

 

(v)                                  all rights to sue and recover damages and payments for past (to the extent CTI has such rights), present and future infringements of any of the patents, including the right to fully and entirely replace CTI in all related matters.

 

CTI represents and warrants to Purchaser that ConvaTec does not own any right, title or interest in the Purchased Intellectual Property described in this Patent Assignment.

 

The foregoing rights in and under the patents and patent applications shall apply to the full end of their terms as fully as CTI would have held the same in the absence of this Patent Assignment. As of the date set forth below, the Purchaser has succeeded to all right, title and standing of CTI to (a) receive all

 



 

rights and benefits pertaining to the patents and patent applications described above and (b) commence, prosecute, defend and settle all claims and take all actions that the Purchaser, in its sole discretion, may elect in relation to the patents, patent applications and rights described above.

 

CTI, its successors, and legal representatives will make, execute, and deliver without any further consideration any and all other instruments in writing, including any and all further application papers, affidavits, assignments, and other documents relating to the assets listed in Annex A, and generally do all things deemed reasonably necessary to assign assets listed in Annex A to Purchaser, the entire right, title and interest in and to, and/or ownership interest in and to, the assets listed in Annex A, including all benefits, privileges, and advantages, that were sold, assigned and conveyed to Purchaser, or intended so to be, to the extent CTI has such rights. Purchaser shall be responsible for the recordation of this Patent Assignment from CTI to Purchaser for assets listed in Annex A in all jurisdictions.

 

This Patent Assignment (a) is irrevocable and effective upon CTI’s signature to and delivery of a manually signed copy of this instrument or facsimile or email transmission of the signature to this instrument in connection with the Closing, if and only if the Closing is completed, (b) benefits and binds the parties to the Purchase Agreement and their respective successors and assigns, and (c) does not modify or affect, and is subject to, the provisions of the Purchase Agreement.

 

[Signature page follows]

 

2



 

The undersigned has signed this Patent Assignment on                                                 , 2012.

 

 

 

CONVATEC TECHNOLOGIES, INC.

 

 

 

 

 

By:

 

 

Name:

 

Title:

 

 

STATE OF:

COUNTY OF:

 

On                              before me,                             (the undersigned notary), personally appeared                personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument.

 

Witness my hand and official seal.

 

 

 

 

Notary Public

 

 

 

My commission expires:

 

 

 

 

 

 

 

(Notary Seal)

 

[Signature Page to the Patent Assignment Agreement]

 



 

Exhibit D

 

SOFTWARE ASSIGNMENT

 

This Software Assignment, dated September 14, 2012, is delivered pursuant to the Closing under that certain Asset Sale and Purchase Agreement (the “ Purchase Agreement ”) dated as of September 14, 2012, between ConvaTec Inc., a Delaware corporation (“ ConvaTec ”), ConvaTec Technologies, Inc., a Nevada corporation (“CTI”), Swelling Solutions, Inc., a Delaware corporation (the “ Purchaser ”), and Tactile Systems Technology, Inc., a Delaware corporation. Capitalized terms used in this Software Assignment without definition have the respective meanings given to them in the Purchase Agreement.

 

CTI has delivered this instrument signed by ConvaTec and CTI to enable the Purchaser to file it with any appropriate Governmental Authority to indicate ownership of Intellectual Property described below and for the other purposes set forth in this instrument. This instrument supplements and is in addition to all other rights of the Purchaser under the Purchase Agreement and other instruments of transfer delivered in connection with the Purchase Agreement.

 

NOW, THEREFORE, for good and valuable consideration, receipt of which CTI acknowledge, and by signing and delivering this instrument, ConvaTec and CTI sell, assign, transfer, convey, and deliver to the Purchaser all of ConvaTec’s and CTI’s right, title, and interest in and to: the software items specifically listed in Annex A to this Software Assignment together with all related documentation, developer’s notes and similar materials and all Intellectual Property in and to all of the foregoing, to the extent that such documentation, notes and materials exist and are sold, assigned, transferred, conveyed and delivered pursuant to the Purchase Agreement.

 

The foregoing rights in and under the software items shall apply to the full end of their terms as fully as ConvaTec and/or CTI would have held the same in the absence of this assignment. As of the date set forth below, the Purchaser has succeeded to all right, title and standing of ConvaTec and/or CTI to (a) receive all rights and benefits pertaining to the software items described above and (b) commence, prosecute, defend and settle all claims and take all actions that the Purchaser, in its sole discretion, may elect in relation to the software items and rights described above. Except as expressly set forth in .the Purchase Agreement, the software items, together with all related documentation, developer’s notes and similar materials are assigned “as-is” and without warranty of any kind.

 

This Software Assignment (a) is irrevocable and effective upon ConvaTec’s and CTI’s signature to and delivery of a manually signed copy of this instrument or facsimile or email transmission of the signature to this instrument in connection with the Closing, if and only if the Closing is completed, (b) benefits and binds the parties to the Purchase Agreement and their respective successors and assigns, (c) does not modify or affect, and is subject to, the provisions of the Purchase Agreement and (d) may be signed in counterparts as provided in Article 9.15 of the Purchase Agreement.

 

[Signature page follows.]

 



 

The undersigned has signed this Software Assignment on                            , 2012.

 

 

CONVETEC INC.

 

CONVATEC TECHNOLOGIES, INC.

 

 

 

 

 

 

By:

 

 

By:

 

Name:

 

 

Name:

 

Title:

 

 

Title:

 

 

 

STATE OF:

COUNTY OF:

 

On                              before me,                             (the undersigned notary), personally appeared                personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument.

 

Witness my hand and official seal.

 

 

 

 

Notary Public

 

 

 

My commission expires:

 

 

 

 

 

(Notary Seal)

 

[Signature Page to the Software Assignment]

 



 

ANNEX A TO SOFTWARE ASSIGNMENT

 

Amadeus Device Software (all versions)

 

Amadeus PC Client Software (all versions)

 

Amadeus device two pressure profile version software (all versions)

 

NOTE:   With respect to the first two items, only Amadeus Device Software Version 2.10 and Amadeus PC Client Software Version 1.8 are compatible and functional with the Product. With respect to the third item, a version that is compatible and functional with the Product remains under development. All previous versions of the first two software items and all versions of the third software item were part of the development and initial testing of the Product and have never been validated or incorporated in the Product as they require additional modifications.

 

3




Exhibit 3.4

 

TACTILE SYSTEMS TECHNOLOGY, INC.
AMENDED AND RESTATED BY-LAWS

 

Adopted January 21, 2011


 

ARTICLE I
Stockholders

 

Section 1.1.                                 Annual Meetings.  An annual meeting of stockholders will be held for the election of directors at such date, time and place, either within or without the State of Delaware, as may be designated by resolution of the Board of Directors from time to time.  Any proper business may be transacted at the annual meeting.

 

Section 1.2.                                 Special Meetings.   Special meetings of stockholders for any purpose or purposes may be called at any time only by the Chairman, the Chief Executive Officer, the President, or the Secretary and will be called by any such officer at the request in writing of a majority of the Board of Directors.  Such request must state the purpose or purposes of the meeting.

 

Section 1.3.                                 Notice of Meetings.   Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting must be given that will state the place, date and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called.  Unless otherwise provided by applicable law or regulation, the certificate of incorporation or these bylaws, the written notice of any meeting must be given not less than ten nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting.  If mailed, such notice will be deemed to be given when deposited in the United States mail, postage prepaid, directed to the stockholder at the stockholder’s address as it appears on records of the corporation.

 

Section 1.4.                                 Adjournments.   Any meeting of stockholders, annual or special, may adjourn from time to time to reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken.  At the adjourned meeting the corporation may transact any business that might have been transacted at the original meeting.  If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting must be given to each stockholder of record entitled to vote at the meeting.

 

Section 1.5.                                 Quorum.   Except as otherwise provided by law or regulation, the certificate of incorporation or these bylaws, at each meeting of stockholders the presence in person or by proxy of the holders of shares of stock having at least a majority of the votes that could be cast by the holders of all outstanding shares of stock entitled to vote at the meeting will constitute a quorum.  In the absence of a quorum, the stockholders so present may, by majority vote, adjourn the meeting from time to time in the manner provided in Section 1.4 of these bylaws until a quorum attends.  The corporation will not vote shares of its own stock belonging to the corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the corporation, nor will any such shares be counted for quorum purposes.  However, the previous sentence will not limit the right of the corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity.

 

Section 1.6.                                 Organization.   Meetings of stockholders will be presided over by the Chairman of the Board, if any, or in such person’s absence by the Vice Chairman of the Board, if any, or in such person’s absence by the Chief Executive Officer, or in such person’s absence by the President (if not the Chief Executive Officer), or in such person’s absence by a Vice President, or in the absence of the foregoing persons by a chairman designated by the Board of Directors, or in the absence of such designation by a chairman chosen at the meeting.  The Secretary will act as secretary of the meeting, but in such person’s absence the chairman of the meeting may appoint any person to act as secretary of the meeting.  The chairman of the meeting will announce at the meeting of stockholders the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote.

 

Section 1.7.                                 Voting.  Except as otherwise provided by the certificate of incorporation, each stockholder entitled to vote at any meeting of stockholders is entitled to one vote for each share of stock held by such person that has voting power upon the matter in question. Voting at meetings of stockholders need not be by written ballot and, unless otherwise required by law, need not be conducted by inspectors of election unless so determined by the holders of shares of stock having a majority of the votes that could be cast by the holders of all

 

B- 1



 

outstanding shares of stock entitled to vote thereon that are present in person or by proxy at such meeting.  At all meetings of stockholders for the election of directors, a plurality of the votes cast will be sufficient to elect.  All other elections and questions will, unless otherwise provided by applicable law or regulation, the certificate of incorporation or these bylaws, be decided by the vote of the holders of shares of stock having a majority of the votes that are present in person or represented by proxy at the meeting and entitled to vote on the election or question.

 

Section 1.8.                                 Proxies.   Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for him or her by proxy in any manner, including without limitation via telephone, Internet or such other manner as permitted by Section 212 of the Delaware General Corporation Law, as amended from time to time, provided that such authorization sets forth or contains information from which the Corporation can determine that the authorization was granted by the stockholder.  If the authorization is granted in a manner other than in a written form, the proxy holder will provide such reasonable verification as required by the corporation. A proxy will be irrevocable only if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power.  A stockholder may revoke any proxy that is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or by delivering a proxy in accordance with applicable law bearing a later date to the Secretary of the corporation.

 

Section 1.9.  Fixing Date for Determination of Stockholders of Record .

 

(a)                                  The Board of Directors may fix a record date to determine the stockholders entitled to:

 

(1)                                  notice of or to vote at any meeting of stockholders or any adjournment thereof;

 

(2)                                  express consent to corporate action in writing without a meeting;

 

(3)                                  receive payment of any dividend or other distribution or allotment of any rights; or

 

(4)                                  exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action.

 

(b)                                  A record date will not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors.

 

(c)                                   The record date:

 

(1)                                  in the case of determination of stockholders entitled to vote at any meeting of stockholders or adjournment thereof, will, unless otherwise required by law, not be more than 60 nor less than ten days before the date of such meeting;

 

(2)                                  in the case of determination of stockholders entitled to express consent to corporate action in writing without a meeting, will not be more than ten days from the date upon which the resolution fixing the record date is adopted by the Board of Directors; and

 

(3)                                  in the case of any other action, will not be more than 60 days prior to such other action.

 

(d)                                  If no record date is fixed:

 

(1)                                  the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders will be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held;

 

(2)                                  the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting when no prior action of the Board of Directors is required by law will be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation in accordance with applicable law, or, if prior action by the Board of Directors is required by law, will be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action; and

 

(3)                                  the record date for determining stockholders for any other purpose will be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.

 

B- 2



 

(e)                                   A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders will apply to any adjournment of the meeting although the Board of Directors may fix a new record date for the adjourned meeting.

 

Section 1.10.                          List of Stockholders Entitled to Vote.   The Secretary will prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder.  Such list will be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place will be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held.  The list will also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present.  Upon the willful neglect or refusal of the directors to produce such a list at any meeting for the election of directors, they will be ineligible for election to any office at such meeting.  The stock ledger will be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list of stockholders or the books of the corporation, or to vote in person or by proxy at any meeting of stockholders.

 

Section 1.11.                          Action By Consent of Stockholders.   Unless otherwise restricted by the certificate of incorporation, any action required or permitted to be taken at any annual or special meeting of the stockholders may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted.  Any such executed consents must be delivered (by hand or by certified or registered mail, return receipt requested) to the corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of minutes of stockholders are recorded.  Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent will be given to those stockholders who have not consented in writing.

 

Section 1.12.                          Conduct of Meetings.   The Board of Directors of the corporation may adopt by resolution such rules and regulations for the conduct of the meeting of stockholders as it deems appropriate.  The chairman of any meeting of stockholders may prescribe such rules, regulations and procedures and do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting, except to the extent inconsistent with such rules and regulations as adopted by the Board of Directors.  Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the chairman of the meeting, may include, without limitation, the following: (1) the establishment of an agenda or order of business for the meeting; (2) rules and procedures for maintaining order at the meeting and the safety of those present; (3) limitations on attendance at or participation in the meeting to stockholders of record of the corporation, their duly authorized and constituted proxies or such other persons as the chairman of the meeting shall determine; (4) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (5) limitations on the time allotted to questions or comments by participants.  Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders are not required to be held in accordance with the rules of parliamentary procedure.

 

Section 1.13                             Advance Notice of Stockholder Business.   As provided in Section 1.2, the business conducted at any special meeting of stockholders will be limited to the purposes stated in the notice of the special meeting.  At any annual meeting of stockholders, only such business (other than the nomination and election of directors, which will be subject to Section 1.14) may be conducted that is appropriate for consideration at the meeting and that has been brought before the meeting (1) by or at the direction of the Board of Directors, or (2) by any stockholder of the corporation entitled to vote at the meeting who complies with the notice procedures in this Section 1.13.

 

(a)                                  Timing of Notice .   For business to be properly brought before any annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation.  To be timely, a stockholder’s notice must be delivered to the Secretary, or mailed and received at the principal executive office of the corporation, not less than 90 days before the first anniversary of the date of the preceding year’s annual meeting of stockholders.  If, however, the date of the annual meeting of stockholders is more than 30 days before or after such anniversary date, notice by a stockholder will be considered timely only if delivered or mailed and received not less than 90 days before such annual meeting or, if later, within ten days after the first public announcement of the date of such

 

B- 3



 

annual meeting.  Except to the extent otherwise required by law, the adjournment of an annual meeting of stockholders will not commence a new time period for the giving of a stockholder’s notice as required above.

 

(b)                                  Content of Notice .   For each matter a stockholder proposes to bring before a meeting of stockholders, the stockholder’s notice must state: (1) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (2) the name and address, as they appear on the corporation’s books, of the stockholder proposing such business, (3) the class or series (if any) and number of shares of the corporation that are beneficially owned by the stockholder, (4) any material interest of the stockholder in such business, and (5) a representation that the stockholder is a holder of record of shares entitled to vote at the meeting and intends to appear in person or by proxy at the meeting to make the proposal.

 

(c)                                   Consequences of Failure to Give Timely Notice .   Notwithstanding anything in these bylaws to the contrary, no business (other than the nomination and election of directors) will be conducted at any annual meeting of stockholders except in accordance with the procedures set forth in this Section 1.13.  If the officer of the corporation chairing the meeting determines that any business proposed to be conducted at the meeting was not properly brought before the meeting in accordance with the procedures described in this Section 1.13, then such officer must declare as such to the meeting and such business will not be transacted.

 

(d)                                  Public Announcement .   For purposes of this Section 1.13 and Section 1.14, “public announcement” means disclosure (1) when made in a press release reported by the Dow Jones News Service, Associated Press, or comparable national news service, (2) when filed in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14, or 15(d) of the Securities Exchange Act of 1934, or (3) when mailed or otherwise delivered as the notice of the meeting pursuant to Section 1.3.

 

(e)                                   Compliance with Law .   Notwithstanding the foregoing provisions of this Section 1.13, a stockholder must also comply with all applicable requirements of Delaware law and the Securities Exchange Act of 1934 and the rules and regulations thereunder with respect to the matters set forth in this Section 1.13.

 

Section 1.14                             Advance Notice of Stockholder Nominees.   Only persons who are nominated in accordance with the procedures set forth in this Section 1.14 will be eligible for election as directors.  Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors or by any stockholder of the corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures in this Section 1.14.

 

(a)                                  Timing of Notice .   Nominations by stockholders must be made pursuant to timely notice in writing to the Secretary of the corporation.  To be timely, a stockholder’s notice of nominations must be delivered to the Secretary of the corporation, or mailed and received at the principal executive office of the corporation, not less than 90 days before the first anniversary of the date of the preceding year’s annual meeting of stockholders.  If, however, the date of the annual meeting of stockholders is more than 30 days before or after such anniversary date, notice by a stockholder will be timely only if so delivered or so mailed and received not less than 90 days before such annual meeting or, if later, within ten days after the first public announcement of the date of such annual meeting.  If a special meeting of stockholders of the corporation is called in accordance with Section 1.2 for the purpose of electing one or more directors to the Board of Directors, then a stockholder’s notice of nomination must be delivered to the Secretary of the corporation, or mailed and received at the principal executive office of the corporation, not less than 90 days before such special meeting or, if later, within ten days after the first public announcement of the date of such special meeting.  Except to the extent otherwise required by law, the adjournment of a regular or special meeting of stockholders will not commence a new time period for the giving of a stockholder’s notice as described above.

 

(b)                                  Content of Notice .   A stockholder’s notice to the corporation of nominations for a regular or special meeting of stockholders must set forth (1) as to each person whom the stockholder proposes to nominate for election or re-election as a director:  (a) such person’s name, age, business address and residence address and principal occupation or employment, (b) all other information relating to such

 

B- 4



 

person that is required to be disclosed in solicitations of proxies for election of directors, or that is otherwise required, pursuant to Regulation 14A under the Securities Exchange Act of 1934, and (c) such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected; and (2) as to the stockholder giving the notice:  (a) the name and address, as they appear on the corporation’s books, of such stockholder, (b) the class or series (if any) and number of shares of the corporation that are beneficially owned by such stockholder, and (c) a representation that the stockholder is a holder of record of shares of the corporation entitled to vote for the election of directors and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice.  At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director must furnish to the Secretary of the corporation the information required to be set forth in a stockholder’s notice of nomination that pertains to a nominee.

 

(c)                                   Consequences of Failure to Give Timely Notice .   Notwithstanding anything in these bylaws to the contrary, no person will be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this Section 1.14.  If a nomination was not made in accordance with the procedures prescribed in this Section 1.14, the officer of the corporation chairing the meeting will determine and declare as such to the meeting and the defective nomination will be disregarded.

 

ARTICLE II
Board of Directors

 

Section 2.1.                                 Number; Qualification.  The Board of Directors will fix from time to time the number of Directors constituting the Board of Directors.  Directors need not be stockholders.

 

Section 2.2.                                 Initial Directors; Resignation; Vacancies.   The Board of Directors will initially consist of the persons named as directors by the incorporator.  Any director may resign at any time upon written notice to the corporation.  Any newly created directorship or any vacancy occurring in the Board of Directors for any cause may be filled by a majority of the remaining members of the Board of Directors, even if such majority is less than a quorum, or by a plurality of the votes cast at a meeting of stockholders.  Each director so elected will hold office until the expiration of the term of office of the director whom such person has replaced or until such person’s successor is elected and qualified.

 

Section 2.3.                                 Regular Meetings.   Regular meetings of the Board of Directors may be held at such places within or without the State of Delaware and at such times as the Board of Directors may from time to time determine, and if so determined notices thereof need not be given.

 

Section 2.4.                                 Special Meetings.   Special meetings of the Board of Directors may be held at any time or place within or without the State of Delaware whenever called by the Chairman, the Chief Executive Officer, the President, any Vice President, the Secretary, or by any two members of the Board of Directors.  Notice of a special meeting of the Board of Directors must be given by the person or persons calling the meeting at least 48 hours before the special meeting.

 

Section 2.5.                                 Telephonic Meetings Permitted.  Members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting thereof by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this bylaw shall constitute presence in person at such meeting.

 

Section 2.6.                                 Quorum: Vote Required for Action.   At all meetings of the Board of Directors a majority of the whole Board of Directors will constitute a quorum for the transaction of business.  Except in cases in which the certificate of incorporation or these bylaws otherwise provide, the vote of a majority of the directors present at a meeting at which a quorum is present will be the act of the Board of Directors.

 

Section 2.7.                                 Organization.   Meetings of the Board of Directors will be presided over by the Chairman of the Board, if any, or in such person’s absence by the Vice Chairman of the Board, if any, or in such person’s absence by the Chief Executive Officer, or in such person’s absence by the President (if not the Chief Executive Officer), or in such person’s absence by a chairman chosen at the meeting.  The Secretary will act as secretary of the meeting, but in such person’s absence the chairman of the meeting may appoint any person to act as secretary of the meeting.

 

B- 5



 

Section 2.8.                                 Informal Action by Directors.   Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board of Directors or such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or such committee.

 

ARTICLE III
Committees

 

Section 3.1.                                 Committees.   The Board of Directors may, by resolution passed by a majority of the whole Board of Directors, designate one or more committees, each committee to consist of one or more of the directors of the corporation.  The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee.  In the absence or disqualification of a member of the committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he, she, or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any such absent or disqualified members.  Any such committee, to the extent permitted by law and to the extent provided in the resolution of the Board of Directors, will have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation.

 

Section 3.2.                                 Committee Rules.   Unless the Board of Directors otherwise provides, each committee designated by the Board of Directors may make, alter and repeal rules for the conduct of its business.  In the absence of such rules each committee will conduct its business in the same manner as the Board of Directors conducts its business pursuant to Article II of these bylaws.

 

ARTICLE IV
Officers

 

Section 4.1.                                 Executive Officers; Election; Qualifications; Term of Office; Resignation; Removal; Vacancies.   The Board of Directors will elect a Chief Executive Officer and Secretary, and it may, if it so determines, choose a Chairman of the Board and a Vice Chairman of the Board from among its members.  The Board of Directors may also choose one or more Presidents, one or more Vice Presidents, one or more Assistant Secretaries, a Treasurer and one or more Assistant Treasurers.  Each such officer will hold office until his or her successor is elected and qualified or until such person’s earlier resignation or removal.  Any officer may resign at any time upon written notice to the corporation.  The Board of Directors may remove any officer with or without cause at any time, but such removal will be without prejudice to the contractual rights of such officer, if any, with the corporation.  Any number of offices may be held by the same person.  Any vacancy occurring in any office of the corporation by death, resignation, removal or otherwise may be filled for the unexpired portion of the term by the Board of Directors at any regular or special meeting.

 

Section 4.2.                                 Powers and Duties of Executive Officers.  The officers of the corporation will have such powers and duties in the management of the corporation as may be prescribed in a resolution by the Board of Directors and, to the extent not so provided, as generally pertain to their respective offices, subject to the control of the Board of Directors.

 

ARTICLE V
Stock

 

Section 5.1.                                 Certificates.   Every holder of stock will be entitled to have a certificate signed by or in the name of the corporation by the Chairman or Vice Chairman of the Board of Directors, if any, or the Chief Executive Officer, the President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the corporation certifying the number of shares owned by such person in the corporation.  Any of or all the signatures on the certificate may be a facsimile.  In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he or she was such officer, transfer agent, or registrar at the date of issue.

 

Section 5.2.                                 Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificates.   The corporation may issue a new stock certificate in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate,

 

B- 6



 

or such person’s legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate.

 

ARTICLE VI
Indemnification

 

Section 6.1.                                 Right to Indemnification.   The corporation will indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a “proceeding”) by reason of the fact that he or she, or a person for whom such person is the legal representative, is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses (including attorneys’ fees) reasonably incurred by such person.  Unless otherwise provided in the certificate of incorporation, the corporation will indemnify a person in connection with a proceeding (or part thereof) initiated by such person only if the proceeding (or part thereof) was authorized by the Board of Directors of the corporation.

 

Section 6.2.                                 Prepayment of Expenses.   Unless otherwise provided in the certificate of incorporation, the corporation will pay the expenses of a director or officer (including attorneys’ fees) incurred in defending any proceeding in advance of its final disposition, but only if the director or officer promises to repay all amounts advanced if it is determined that the director or officer is not entitled to be indemnified under this Article VI or otherwise.

 

Section 6.3.                                 Claims.   If a claim for indemnification or payment of expenses under this Article VI is not paid within 60 days after a written claim therefor has been received by the corporation, the claimant may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, will be entitled to be paid the expense of prosecuting such claim.  In any such action the corporation has the burden of proving that the claimant was not entitled to the requested indemnification or payment of expenses under applicable law.

 

Section 6.4.                                 Nonexclusivity of Rights.   The rights conferred on any person by this Article VI are not exclusive of any other rights that such person may have or hereafter acquire under any statute, provision of the certificate of incorporation, these bylaws, agreement, vote of stockholders or disinterested directors or otherwise.

 

Section 6.5.                                 Other Indemnification.   The corporation’s obligation, if any, to indemnify any person who was or is serving at its request as a director, officer, employee or agent of another entity will be reduced by any amount such person may collect as indemnification from such other entity.

 

Section 6.6.                                 Amendment or Repeal.  Any repeal or modification of the foregoing provisions of this Article VI will not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification.

 

ARTICLE VII
Miscellaneous

 

Section 7.1.                                 Fiscal Year.   The fiscal year of the corporation will be determined by resolution of the Board of Directors.

 

Section 7.2.                                 Seal.  The corporation has no seal.

 

Section 7.3.                                 Waiver of Notice of Meetings of Stockholders, Directors and Committees.   Any written waiver of notice, signed by the person entitled to notice, whether before or after the time stated therein, will be deemed equivalent to notice.  Attendance of a person at a meeting will constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened.  Except as required by law or these bylaws, neither the business to be transacted at, nor the purpose of, any regular, annual, or special meeting of the stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice.

 

B- 7



 

Section 7.4.                                 Interested Directors; Quorum.

 

(a)                                  No transaction between the corporation and one or more of its directors or officers, or between the corporation and any other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, will be voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof that authorizes the transaction, or solely because any such director’s or officer’s votes are counted for such purpose, if:

 

(1)                                  the material facts as to the director’s or officer’s relationship or interest and as to the transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or

 

(2)                                  the material facts as to the director’s or officer’s relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or

 

(3)                                  the contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified by the Board of Directors, a committee thereof, or the stockholders.

 

(b)                                  Interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee that authorizes the contract or transaction.

 

Section 7.5.                                 Form of Records.   Any records maintained by the corporation in the regular course of its business, including its stock ledger, books of account and minute books, may be kept in electronic format, provided that the records so kept can be converted into clearly legible form within a reasonable time.

 

Section 7.6.                                 Amendment of Bylaws.  These bylaws may be altered or repealed, and new bylaws made, in the manner prescribed in the certificate of incorporation.

 

B- 8




Exhibit 10.1

 

TACTILE SYSTEMS TECHNOLOGY, INC.

 

2003 STOCK OPTION PLAN
(AS AMENDED AND RESTATED AUGUST 23, 2006)

 

1.                                       PURPOSE .  The purpose of this 2003 Stock Option Plan (the “ Plan ”) is to promote the interests of Tactile Systems Technology, Inc., a Minnesota corporation (the “ Company ”), and its shareholders by providing employees of the Company and any parent or subsidiaries thereof, and any other individuals and entities who provide services to the Company or any parent or subsidiaries in the capacity of non-employee directors or advisors or consultants, with an opportunity to acquire a proprietary interest in the Company and thereby develop a stronger incentive to put forth maximum effort for the continued success and growth of the Company.  In addition, the opportunity to acquire a proprietary interest in the Company will aid in attracting and retaining personnel of outstanding ability.

 

2.                                       ADMINISTRATION .

 

(a)                                  GENERAL This Plan will be administered by a committee of two or more directors of the Company (the “ Committee ”) appointed by the Company’s Board of Directors (the “ Board ”).  If the Board has not appointed a committee to administer this Plan, then the Board will constitute the Committee.  The Committee will have the power, subject to the limitations contained in this Plan, to fix any terms and conditions for the grant or exercise of any award under this Plan.  A majority of the members of the Committee will constitute a quorum for any meeting of the Committee, and the acts of a majority of the members present at any meeting at which a quorum is present or the acts unanimously approved in writing by all members of the Committee will be the acts of the Committee.  Subject to the provisions of this Plan, the Committee may from time to time adopt such rules for the administration of this Plan as it deems appropriate.  The decision of the Committee on any matter affecting this Plan, or the rights and obligations arising under this Plan or any award granted hereunder, will be final, conclusive and binding upon all persons, including without limitation the Company, shareholders and optionees.

 

(b)                                  INDEMNIFICATION . To the full extent permitted by law, (i) no member of the Committee or person to whom authority under this Plan is delegated will be liable for any action, omission or determination taken or made in good faith with respect to this Plan or any award granted hereunder (including, if an option that was intended to qualify as an incentive stock option in fact does not meet the requirements of the Code to so qualify) and (ii) the members of the Committee and each person to whom authority under this Plan is delegated will be entitled to defense and indemnification by the Company against and from any claim or loss incurred by such member or person by reason of any such actions and determinations.  The Company will advance the costs of defense subject to any agreements the Company believes are appropriate for repayment in the event the member or other person is found not to have acted in good faith.  This subparagraph (b) will survive any termination of this Plan.

 

(c)                                   DELEGATION OF AUTHORITY .  To the extent permitted by law, the Committee may delegate all or any part of its authority under this Plan to the Chief Executive Officer of the Company for purposes of granting and administering awards.  To the extent permitted by law, the Chief Executive Officer of the Company may, in turn, delegate all or a portion of the delegated authority to such other officer or officers of the Company as the Chief Executive Officer may determine.

 

(d)                                  COMMITTEE COMPOSITION AND DELEGATION WHEN COMPANY IS PUBLIC .  From and after the time, if any, that the Company has a class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), any options granted to persons subject to Section 16 of the Exchange Act will be granted by the Board or a committee consisting of at least two or more Non-Employee Directors, in accordance with Rule 16b-3 under the Exchange Act, and any options intended to qualify as performance-based compensation within the meaning of Section 162(m) will be granted by a committee consisting of two or more Outside Directors, as defined in and in accordance with Section 162(m) of the Internal Revenue Code of 1986, as amended (the “ Code ”).  From

 

1



 

and after the time, if any, that the Company has a class of securities registered under Section 12 of the Exchange Act, any authority delegated to the Chief Executive Officer or another officer of the Company pursuant to subparagraph 2(c) above will not extend to granting and administering awards to persons who are then subject to the reporting requirements of Section 16 of the Exchange Act (“ Section 16 Individuals ”).

 

(e)                                   ACTION BY BOARD REQUIRED FOR NON-EMPLOYEE DIRECTOR AWARDS .  Notwithstanding subparagraphs 2(a) and 2(c) above, any grant of awards hereunder to any director of the Company who is not an employee of the Company or any parent or subsidiary thereof at the time of grant (“ Non-Employee Director Award ”), and any action taken by the Company with respect to any Non-Employee Director Award, including any amendment thereto, and any acceleration of the vesting of any option constituting a Non-Employee Director Award, any extension of the time within which any option constituting a Non-Employee Director Award may be exercised, any determination pursuant to paragraph 8 relating to the payment of the purchase price of Shares (as defined in paragraph 3 below) subject to an option constituting a Non-Employee Director Award, or any action pursuant to paragraph 9 relating to the payment of withholding taxes, if any, through the use of Shares with respect to a Non-Employee Director Award will be subject to prior approval by the Board, in which case no further action by the Committee will be required.

 

3.                                       SHARES .  The shares that may be made subject to awards granted under this Plan will be authorized and unissued shares of Common Stock of the Company (“ Shares ,” and each individually a “ Share ”), and they will not exceed 1,800,000 Shares in the aggregate, subject to adjustment as provided in paragraph 13 below, except that, if any option lapses or terminates for any reason before such option has been completely exercised, the Shares covered by the unexercised portion of such option may again be made subject to options granted under this Plan.  An option may not be exercisable for a fraction of a Share.

 

4.                                       ELIGIBLE PARTICIPANTS .  Options may be granted under this Plan to any employee of the Company, or any parent or subsidiary thereof, including any such person who is also an officer or director of the Company or any parent or subsidiary thereof.  Non-statutory stock options (as defined in subparagraph 5(a) below) also may be granted to (i) any director of the Company or any parent or subsidiary thereof, (ii) other individuals or entities who are not employees but who provide services to the Company or a parent or subsidiary thereof in the capacity of an advisor, consultant or vendor, and (iii) any individual or entity that the Company desires to induce to become an employee, advisor, consultant or vendor, but any such grant will be contingent upon such individual or entity becoming employed by the Company or a parent or subsidiary thereof.  In the event that a parent or subsidiary of the Company is spun off, divested or otherwise ceases to be a parent or subsidiary of the Company, the employment of all optionees who are employees, advisors, consultants, vendors or directors of such parent or subsidiary will be deemed terminated.  References herein to “employment” and similar terms (except “employee”) will include the providing of services in the capacity of an advisor, consultant, vendor or as a director.  The employees and other individuals and entities to whom options may be granted pursuant to this paragraph 4 are referred to herein as “ Eligible Participants .”

 

5.                                       TERMS AND CONDITIONS OF OPTIONS .

 

(a)                                  GENERAL Subject to the terms and conditions of this Plan, the Committee may, from time to time during the term of this Plan, grant to such Eligible Participants as the Committee may determine options to purchase such number of Shares of the Company on such terms and conditions as the Committee may determine.  In determining the Eligible Participants to whom options may be granted and the number of Shares to be covered by each option, the Committee may take into account the nature of the services rendered by the respective Eligible Participants, their present and potential contributions to the success of the Company, and such other factors as the Committee in its sole discretion may deem relevant.  The date and time of approval by the Committee of the granting of an option will be considered

 

2



 

the date and the time of the grant of such option.  The Committee in its sole discretion may designate whether an option granted to an employee is to be considered an “incentive stock option” (as that term is defined in Section 422 of the Code) or a “non-statutory stock option” (an option granted under this Plan that is not intended to be an incentive stock option).  The Committee may grant both incentive stock options and non-statutory stock options to the same employee.  However, if an incentive stock option and a non-statutory stock option are awarded simultaneously, such options will be deemed to have been awarded in separate grants, will be clearly identified, and in no event will the exercise of one such option affect the right to exercise the other.  If the aggregate Fair Market Value (as defined in paragraph 7 below) of Shares with respect to which incentive stock options are exercisable for the first time by any employee during any calendar year (under all incentive stock option plans of the Company and its parent and subsidiary corporations) exceeds $100,000, such options to the extent of such excess will be treated as non-statutory stock options.  Notwithstanding the foregoing, no options granted under this Plan may qualify as incentive stock options unless this Plan is approved by the shareholders of the Company within twelve months after the effective date of this Plan.

 

(b)                                  PURCHASE PRICE The purchase price of each Share subject to an option granted pursuant to this paragraph 5 will be fixed by the Committee, subject, however, to the remainder of this subparagraph 5(b).  For non-statutory stock options, such purchase price may be set at any price the Committee may determine; provided, however, that such purchase price may be not less than 85% of the Fair Market Value of a Share on the date of grant.  For incentive stock options, such purchase price may be no less than 100% of the Fair Market Value of a Share on the date of grant, provided that if such incentive stock option is granted to an employee who owns, or is deemed under Section 424(d) of the Code to own, at the time such option is granted, stock of the Company (or of any parent or subsidiary of the Company) possessing more than 10% of the total combined voting power of all classes of stock therein (a “ 10% Shareholder ”), such purchase price may be not less than 110% of the Fair Market Value of a Share on the date of grant.  The Committee may, in its sole discretion, reduce the purchase price of any option, subject to the consent of the optionee if such repricing would result in an incentive stock option no longer qualifying as an incentive stock option.

 

(c)                                   VESTING Each option agreement provided for in paragraph 6 will specify when each option granted under this Plan may become exercisable with respect to the Shares covered by the option.  Notwithstanding the provisions of any option agreement provided for in paragraph 6, the Committee may, in its sole discretion, at any time accelerate the vesting of all or any portion of any option granted under this Plan and declare at any time that all or any portion of any option granted under this Plan will be immediately exercisable.

 

(d)                                  TERMINATION .  Except as provided otherwise in the option agreement, as amended from time to time, each option granted pursuant to this paragraph 5 will expire, and all rights to purchase Shares thereunder will terminate, on the earliest of:

 

(i)                                      ten years after the date such option is granted (or in the case of an incentive stock option granted to a 10% Shareholder, five years after the date such option is granted) or on such date prior thereto as may be fixed by the Committee on or before the date such option is granted or thereafter agreed upon with the optionee;

 

(ii)                                   the expiration of the period after the termination of the optionee’s employment within which the option is exercisable as specified in paragraph 10(b) or 10(c), whichever is applicable (provided that the Committee may, in any option agreement provided for in paragraph 6 or by Committee action with respect to any outstanding option, extend the periods specified in paragraph 10(b) or 10(c));

 

(iii)                                at the election of the Company, upon termination of an optionee’s employment by the Company or a parent or subsidiary thereof for Cause (as hereinafter defined), or if it is determined by the Company within ten days after termination of the

 

3



 

optionee’s employment by the optionee, such as the optionee’s resignation, that Cause existed for termination by the Company;

 

(iv)                               the date, if any, fixed for cancellation pursuant to paragraph 11(c) or 12 below.

 

(e)                                   RESCISSION .  If any option is exercised, and prior to the delivery of the certificate representing the Shares so purchased, it is determined that Cause for termination by the Company existed, then the Company may rescind the option exercise by the optionee and the option will terminate at the election of the Company.

 

6.                                       OPTION AGREEMENTS .  All options granted under this Plan will be evidenced by a written agreement in such form or forms as the Committee may from time to time determine, which agreement will, among other things, designate whether the options being granted thereunder are non-statutory stock options or incentive stock options.

 

7.                                       FAIR MARKET VALUE For purposes of this Plan, the “ Fair Market Value ” of a Share at a specified date will, unless otherwise expressly provided in this Plan, mean the closing or last sale price of a Share on the date immediately preceding such date or, if no sale of Shares will have occurred on that date, on the next preceding day on which a sale of Shares occurred, on the Composite Tape for listed shares on the New York Stock Exchange, American Stock Exchange or other recognized national securities exchange or, if Shares are not quoted on the Composite Tape for listed shares on the New York Stock Exchange, American Stock Exchange or other recognized national securities exchange, on the Nasdaq National Market or any similar system then in use or, if Shares are not included in the Nasdaq National Market or any similar system then in use, on the Nasdaq SmallCap Market or any similar system then in use, provided that if the Shares in question are not quoted on any such system, Fair Market Value will be what the Committee determines in good faith to be 100% of the fair market value of a Share as of the date in question.  Notwithstanding anything stated in this paragraph 7, if the applicable securities exchange or system has closed for the day by the time the determination is being made, all references in this paragraph to the date immediately preceding the date in question will be deemed to be references to the date in question.

 

8.                                       MANNER OF EXERCISE OF OPTIONS .

 

(a)                                  GENERAL .  A person entitled to exercise an option granted under this Plan may, subject to its terms and conditions and the terms and conditions of this Plan, exercise it in whole at any time, or in part from time to time, by delivery to the Company at its principal executive office, to the attention of its Secretary, of written notice of exercise, specifying the number of Shares with respect to which the option is being exercised and payment of the purchase price of the Shares.  The granting of an option to a person will give such person no rights as a shareholder except as to Shares issued to such person.

 

(b)                                  PAYMENT .  The consideration to be paid for the Shares, including the method(s) of payment, will be determined by the Committee (and, in the case of an incentive stock option, will be determined at the time of grant) and may consist entirely of (i) cash (including check, bank draft or money order); (ii) delivery of optionee’s promissory note with such recourse, interest, security and redemption provisions as the Committee determines to be appropriate and as required pursuant to the law of the Company’s state of incorporation; (iii) cancellation of indebtedness; (iv) delivery to the Company of unencumbered Shares having an aggregate Fair Market Value on the date of exercise equal to the exercise price for the total number of Shares as to which the option is exercised; (v) authorization of the Company to retain from the total number of Shares as to which the option is exercised that number of Shares having a Fair Market Value on the date of exercise equal to the exercise price for the total number of shares as to which the option is exercised; (vi) such other consideration and method of payment for the issuance of Shares to the extent permitted under applicable law; or (vii) any combination of the methods

 

4



 

of payments described above.  Notwithstanding the foregoing, no person will be permitted to pay any portion of the purchase price with Shares, or by authorizing the Company to retain Shares upon exercise of the option, if the Committee, in its sole discretion, determines that payment in such manner is undesirable nor may the Company permit an optionee who is an executive officer or director of the Company to pay for the Shares by delivery of a promissory note from and after such time, if any, that the Company (i) has a class of securities registered under Section 12 of the Exchange Act, (ii) is required to file reports under Section 15(d) of the Exchange Act or (iii) that has filed a registration statement that has not yet become effective under the Securities Act, as defined below.  Except for delivery of a promissory note by an optionee as provided above, the purchase price of the Shares with respect to which an option is being exercised will be payable in full at the time of exercise, provided that, to the extent permitted by law, the holder of an option may simultaneously exercise an option and sell all or a portion of the Shares thereby acquired pursuant to a brokerage or similar relationship and use the proceeds from such sale to pay the purchase price of such Shares.

 

9.                                       TAX WITHHOLDING .  Delivery of Shares upon exercise of any non-statutory stock option granted under this Plan will be subject to any required withholding taxes.  A person exercising a non-statutory stock option may, as a condition precedent to receiving the Shares, be required to pay the Company a cash amount equal to the amount of any required withholdings.  In lieu of all or any part of such a cash payment, the Committee may, but will not be required to, provide in any option agreement provided for in paragraph 6 (or provide by Committee action with respect to any outstanding option) that a person exercising an option may cover all or any part of the required withholdings, and any additional withholdings up to the amount needed to cover the individual’s full FICA and federal, state and local income tax liability with respect to income arising from the exercise of the option, through the delivery to the Company of unencumbered Shares, through a reduction in the number of Shares delivered to the person exercising the option or through a subsequent return to the Company of Shares delivered to the person exercising the option (in each case, such Shares having an aggregate Fair Market Value on the date of exercise equal to the amount of the withholding taxes being paid through such delivery, reduction or subsequent return of Shares).

 

10.                                TRANSFERABILITY AND TERMINATION OF EMPLOYMENT .

 

(a)                                  TRANSFERABILITY .  During the lifetime of an optionee, only such optionee or his or her guardian or legal representative may exercise options granted under this Plan, and no option granted under this Plan will be assignable or transferable by the optionee otherwise than by will or the laws of descent and distribution or, with respect only to non-statutory stock options, pursuant to a domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder; provided, however, that any optionee may transfer a non-statutory stock option granted under this Plan to a member or members of his or her immediate family (i.e., his or her children, grandchildren and spouse) or to one or more trusts for the benefit of such family members or partnerships, limited liability companies or other entities in which such family members are the only beneficial owners, if (i) the option agreement with respect to such options expressly so provides either at the time of initial grant or by amendment to an outstanding option agreement, (ii) the optionee does not receive any consideration for the transfer and (iii) the transfer would not have an adverse effect on the Company, such as any loss of Subchapter S tax status, if applicable.  Any option held by any such transferee will continue to be subject to the same terms and conditions that were applicable to such option immediately prior to its transfer and may be exercised by such transferee as and to the extent that such option has become exercisable and has not terminated in accordance with the provisions of this Plan and the applicable option agreement.  For purposes of any provision of this Plan relating to notice to an optionee or to vesting or termination of an option upon the death, disability or termination of employment of an optionee, the references to “optionee” will mean the original grantee of an option and not any transferee.

 

5



 

(b)                                  TERMINATION OF EMPLOYMENT DURING LIFETIME .   During the lifetime of an optionee who is an employee of the Company or any parent or subsidiary thereof at the time of grant of an option, an option granted to such optionee may be exercised only while the optionee is employed by the Company or by a parent or subsidiary thereof, and only if such optionee has been continuously so employed since the date the option was granted, except that, unless terminated sooner due to another provision of the Plan or the option agreement:

 

(i)                                      an option will continue to be exercisable for three months after termination of the optionee’s employment but only to the extent that the option was exercisable immediately prior to such optionee’s termination of employment; provided, however, that if termination of the optionee’s employment will have been for Cause (as hereinafter defined), any option held by such optionee will expire, and all rights to purchase Shares thereunder will terminate, immediately upon such termination; for purposes of this paragraph 10(b)(i), and paragraphs 5(d) and (e) of this Plan, “ Cause ” will be deemed to exist upon (A) a material breach by the optionee of the terms of any non-competition/non-solicitation /invention assignment or other agreement between the Company and the optionee governing the employment or other business relationship between the Company and the optionee, (B) gross negligence or willful misconduct by the optionee, (C) conviction of the optionee of, or the entry of a pleading of guilty or nolo contendere by the optionee to, any crime involving moral turpitude or any felony, (D) willful violation of specific and lawful instructions from the Board or the Company’s Chief Executive Officer that are reasonably related to the optionee’s employment by the Company, (E) fraud, embezzlement, theft or proven dishonesty against the Company, and (F) prolonged or frequent unexcused absences from work other than due to a disability;

 

(ii)                                   in the case of an optionee who is disabled (as hereinafter defined) while employed, an option will continue to be exercisable for one year after termination of such optionee’s employment as a result of such disability; and

 

(iii)                                as to any optionee whose termination occurs following a declaration pursuant to paragraph 12 below, an option may be exercised at any time permitted by such declaration.

 

(c)                                   TERMINATION UPON DEATH .   With respect to an optionee whose employment terminates by reason of death, any option granted to such optionee may be exercised within one year after the death of such optionee.

 

(d)                                  VESTING UPON DISABILITY OR DEATH .  In the event of the disability (as hereinafter defined) or death of an optionee, any option granted to such optionee that was not previously exercisable will become immediately exercisable in full if (i) the disabled or deceased optionee will have been continuously employed by the Company or a parent or subsidiary thereof between the date such option was granted and the date of such disability or death and (ii) the option agreement with respect to such option expressly so provides either at the time of initial grant or by amendment to an outstanding option agreement.  “ Disability ” of an optionee will mean any physical or mental incapacitation whereby such optionee is therefore unable for a period of twelve consecutive months or for an aggregate of twelve months in any twenty-four consecutive month period to perform his or her duties for the Company or any parent or subsidiary thereof.  “ Disabled ,” with respect to any optionee, will mean that such optionee has incurred a Disability.

 

(e)                                   TRANSFERS AND LEAVES OF ABSENCE .  Neither the transfer of employment of a person to whom an option is granted between any combination of the Company, a parent corporation or a subsidiary thereof, nor a leave of absence granted to such person and approved by the Committee, will be deemed a termination of employment for purposes of this Plan.  The terms “parent” or “parent corporation” and “subsidiary” as used in this Plan will have the meaning ascribed to “parent corporation”

 

6


 

and “subsidiary corporation”, respectively, in Sections 424(e) and (f) of the Code.  For purposes of this Plan, a change in status between different classes of eligible participants, such as a change in status from an employee to a consultant or from a consultant to an employee, will not be deemed a termination of employment for purposes of this Plan.

 

(f)                                    RIGHT TO TERMINATE EMPLOYMENT .   Nothing contained in this Plan, or in any option granted pursuant to this Plan, will confer upon any optionee any right to continued employment by the Company or any parent or subsidiary of the Company or limit in any way the right of the Company or any such parent or subsidiary to terminate such optionee’s employment at any time.

 

(g)                                   EXPIRATION DATE .   In no event will any option be exercisable at any time after the time it will have expired in accordance with paragraph 5(d) of this Plan.  When an option is no longer exercisable, it will be deemed to have lapsed or terminated and will no longer be outstanding.

 

11.                                CHANGE IN CONTROL .

 

(a)                                  DEFINITION.  For purposes of this Plan, a “ Change in Control ” of the Company will be deemed to occur if any of the following occur:

 

(1)                                  Any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) after the effective date of this Plan first acquires or becomes a “beneficial owner” (as defined in Rule 13d-3 or any successor rule under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company’s then outstanding securities entitled to vote generally in the election of directors (“ Voting Securities ”), provided, however, that the following will not constitute a Change in Control pursuant to this paragraph (a)(1):

 

(A)                                any acquisition of Shares or Voting Securities of the Company directly from the Company;

 

(B)                                any acquisition or beneficial ownership by the Company or a subsidiary;

 

(C)                                any acquisition or beneficial ownership by any employee benefit plan (or related trust) sponsored or maintained by the Company or one or more of its subsidiaries;

 

(D)                                any acquisition or beneficial ownership by any corporation with respect to which, immediately following such acquisition, more than 70% of both the combined voting power of the Company’s then outstanding Voting Securities and the Shares of the Company is then beneficially owned by all or substantially all of the persons who beneficially owned Voting Securities and Shares of the Company immediately prior to such acquisition in substantially the same proportions as their ownership of such Voting Securities and Shares, as the case may be, immediately prior to such acquisition;

 

(2)                                  A majority of the members of the Board of Directors of the Company will not be Continuing Directors.  “ Continuing Directors ” will mean:  (A) individuals who, on the date hereof, are directors of the Company, (B) individuals elected as directors of the Company subsequent to the date hereof for whose election proxies will have been solicited by the Board of Directors of the Company, (C) individuals elected as directors of the Company subsequent to the date hereof pursuant to a nomination or board representation right of preferred shareholders of the Company or (D) any individual elected or appointed by the Board of Directors of the Company to fill vacancies on the Board of Directors of the Company caused by death or resignation (but not by removal) or to fill newly-created directorships;

 

7



 

(3)                                  Approval by the shareholders of the Company of a reorganization, merger or consolidation of the Company or a statutory exchange of outstanding Voting Securities of the Company, unless, immediately following such reorganization, merger, consolidation or exchange, all or substantially all of the persons who were the beneficial owners, respectively, of Voting Securities and Shares of the Company immediately prior to such reorganization, merger, consolidation or exchange beneficially own, directly or indirectly, more than 70% of, respectively, the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors and the then outstanding shares of common stock, as the case may be, of the corporation that is the issuer of such securities held by the shareholders of the Company after such reorganization, merger, consolidation or exchange in substantially the same proportions as their ownership, immediately prior to such reorganization, merger, consolidation or exchange, of the Voting Securities and Shares of the Company, as the case may be; or

 

(4)                                  Approval by the shareholders of the Company of (x) a complete liquidation or dissolution of the Company or (y) the sale or other disposition of all or substantially all of the assets of the Company (in one or a series of transactions), other than to a corporation with respect to which, immediately following such sale or other disposition, more than 70% of, respectively, the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and the then outstanding shares of common stock of such corporation is then beneficially owned, directly or indirectly, by all or substantially all of the persons who were the beneficial owners, respectively, of the Voting Securities and Shares of the Company immediately prior to such sale or other disposition in substantially the same proportions as their ownership, immediately prior to such sale or other disposition, of the Voting Securities and Shares of the Company, as the case may be.

 

(b)                                  ACCELERATION OF VESTING .  If and to the extent so provided in an option agreement provided for in paragraph 6 or by Committee action with respect to any outstanding option, and notwithstanding anything in subparagraph 5(c) above to the contrary, if a Change in Control of the Company may occur, then such option, if not already exercised in full or otherwise terminated, expired or cancelled, will become immediately exercisable as provided in the option agreement or Committee action and will remain exercisable during the remaining term thereof or as may be provided in the option agreement or, subject to consent of the optionee, by Committee action.

 

(c)                                   CASH PAYMENT .  If a Change in Control of the Company will or is to occur, then, so long as a majority of the members of the Board are Continuing Directors, the Committee, in its sole discretion, and without the consent of the holder of any option affected thereby, may determine that some or all outstanding options will be cancelled as of the effective date of any such Change in Control.  The Committee may further determine that the holder or holders of such cancelled options will receive, with respect to some or all of the Shares subject to such options, as of the date of such cancellation, cash in an amount, for each Share subject to an option, equal to the excess of the per Share Fair Market Value of such Shares immediately prior to such Change in Control of the Company over the exercise price per Share of such options.

 

(d)                                  LIMITATION ON CHANGE IN CONTROL PAYMENTS .   Notwithstanding anything in subparagraph 11(b) or 11(c) above or paragraph 12 below to the contrary, if, with respect to an optionee, the acceleration of the exercisability of an option or the payment of cash in exchange for all or part of an option as provided in subparagraph 11(b) or 11(c) above or paragraph 12 below (which acceleration or payment could be deemed a “payment” within the meaning of Section 280G(b)(2) of the Code), together with any other payments which such optionee has the right to receive from the Company or any corporation which is a member of an “affiliated group” (as defined in Section 1504(a) of the Code

 

8



 

without regard to Section 1504(b) of the Code) of which the Company is a member, would constitute a “parachute payment” (as defined in Section 280G(b)(2) of the Code), then, unless otherwise provided in the applicable option agreement, such acceleration of exercisability and payments pursuant to subparagraph 11(b) or 11(c) above or paragraph 12 below will be reduced to the largest amount as, in the sole judgment of the Committee, will result in no portion of such payments being subject to the excise tax imposed by Section 4999 of the Code.  The Committee, with the consent of the optionee, may waive the provisions of this subparagraph 11(d).

 

12.                                DISSOLUTION, LIQUIDATION, MERGER .  In the event of (a) the proposed dissolution or liquidation of the Company, (b) a proposed sale of substantially all of the assets of the Company or (c) a proposed merger or consolidation of the Company with or into any other entity, regardless of whether the Company is the surviving corporation, or a proposed statutory share exchange with any other entity (the actual effective date of the dissolution, liquidation, sale, merger, consolidation or exchange being herein called an “ Event ”), the Committee may, but will not be obligated to, either (i) if the Event is a merger, consolidation or statutory share exchange, make appropriate provision for the protection of outstanding options granted under this Plan by the substitution, in lieu of such options, of options to purchase appropriate voting common stock (the “ Survivor’s Stock ”) of the corporation surviving any such merger, consolidation or statutory share exchange or, if appropriate, the parent corporation of the Company or such surviving corporation, or, alternatively, by the delivery of a number of shares of the Survivor’s Stock which has a Fair Market Value as of the effective date of such merger, consolidation or statutory share exchange equal to the product of (x) the excess of (A) the Event Proceeds per Share (as hereinafter defined) covered by the option as of such effective date over (B) the exercise price per Share of the Shares subject to such option, times (y) the number of Shares covered by such option, or (ii) declare, at least ten days prior to the Event, and provide written notice to each optionee of the declaration, that each outstanding option, whether or not then exercisable, will be cancelled at the time of, or immediately prior to the occurrence of, the Event (unless it will have been exercised prior to the occurrence of the Event).  In connection with any declaration pursuant to clause (ii) of the preceding sentence, the Committee may, but will not be obligated to, cause payment to be made, within twenty days after the Event, for each cancelled option to each holder of an option that is cancelled, of cash equal to the amount (if any), for each Share covered by the cancelled option, by which the Event Proceeds per Share (as hereinafter defined) exceeds the exercise price per Share covered by such option.  At the time of any declaration pursuant to clause (ii) of the first sentence of this paragraph 12, each option that has not previously expired pursuant to subparagraph 5(d)(i), 5(d)(ii) or 5(d)(iii) of this Plan or been cancelled pursuant to paragraph 11(c) of this Plan will immediately become exercisable to the extent provided by the option agreement or declaration by the Committee and each holder of such an option will have the right, during the period preceding the time of cancellation of the option, to exercise his or her option as to all or any part of the Shares as to which the option is exercisable.  In the event of a declaration pursuant to clause (ii) of the first sentence of this paragraph 12, each outstanding option granted pursuant to this Plan that may not have been exercised prior to the Event will be cancelled at the time of, or immediately prior to, the Event, as provided in the declaration, subject to the payment obligations of the Company provided in this paragraph 12.  Notwithstanding the foregoing, no person holding an option will be entitled to the payment provided in this paragraph 12 if such option will have expired pursuant to subparagraph 5(d)(i), 5(d)(ii) or 5(d)(iii) of this Plan or been cancelled pursuant to paragraph 11(c) of this Plan.  In addition, in the event of the proposed dissolution or liquidation of the Company, the Committee may provide that any Company repurchase option applicable to the Shares will lapse as to all such Shares, provided that the proposed dissolution or liquidation takes place at the time and in the manner provided.  For purposes of this paragraph 12, “ Event Proceeds per Share ” will mean the cash plus the fair market value, as determined in good faith by the Committee, of the non-cash consideration to be received per Share by the shareholders of the Company upon the occurrence of the Event.  If the Event provides for an earn-out or similar provision, the Committee may, in its sole discretion, elect to estimate the present fair market value of the earn-out or similar right and pay such amount in cash to the optionee.

 

9



 

13.                                ADJUSTMENTS .  In the event of any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, or extraordinary dividend or divestiture (including a spin-off), or any other change in the corporate structure or Shares of the Company, the Committee (or if the Company does not survive any such transaction, a comparable committee of the Board of Directors of the surviving corporation) may, without the consent of any holder of an option, make such adjustment as it determines in its discretion to be appropriate as to the number and kind of securities subject to and reserved under this Plan and, in order to prevent dilution or enlargement of rights of participants in this Plan, the number and kind of securities issuable upon exercise of outstanding options and the exercise price thereof.  In the absence of action of the Committee to the contrary, the number of Shares issuable under this Plan, and the number of Shares and the purchase price of each Share subject to an outstanding option, will be automatically adjusted to reflect any forward or reverse stock split of the Common Stock or dividend on Common Stock payable in Common Stock.  The Committee can determine in its absolute discretion whether an option entitles any optionee to receive a right to purchase securities of any entity spun off from the Company.

 

14.                                SUBSTITUTE OPTIONS .  Options may be granted under this Plan from time to time in substitution for, or assumption of, stock options or comparable rights held by employees of other entities who are about to become employees of the Company, or any parent or subsidiary thereof, or whose employer is about to become a subsidiary of the Company, as the result of a merger or consolidation of the Company or a subsidiary of the Company with another entity, the acquisition by the Company or a subsidiary of the Company of all or substantially all the assets of another entity or the acquisition by the Company or a subsidiary of the Company of at least 50% of the issued and outstanding stock or comparable interests of another entity.  The terms and conditions of the substitute options so granted may vary from the terms and conditions set forth in this Plan to such extent as the Committee at the time of the grant may deem appropriate to conform, in whole or in part, to the provisions of the stock options or comparable rights in substitution for, or assumption of, which they are granted.

 

15.                                COMPLIANCE WITH LEGAL REQUIREMENTS .

 

(a)                                  GENERAL .   No Shares distributable under this Plan may be issued and delivered unless the issuance of such Shares complies with all applicable legal requirements including, without limitation, compliance with the provisions of applicable state securities laws, the Securities Act of 1933, as amended (the “ Securities Act ”), and the Exchange Act.  The optionee will have no right to require the Company, and the Company will have no obligation, to register the issuance or sale of any Share that may be acquired pursuant to exercise of an option granted under this Plan under the Securities Act, or under any other law or regulation.  The Company may place legends on stock certificates issued under this Plan as may be necessary or appropriate in order to comply with applicable securities laws or agreements to which the Shares are subject, including, but not limited to, legends restricting the transfer of the Shares.

 

(b)                                  RULE 16B-3 .   With respect to Section 16 Individuals, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the Exchange Act.  To the extent any provision of this Plan or action by the Committee fails to so comply, it will be deemed null and void, to the extent permitted by law and deemed advisable by the Committee.

 

(c)                                   DELIVERY OF FINANCIAL INFORMATION .  The Company will, to the extent necessary to comply with applicable state securities laws, deliver financial statements of the Company to an optionee at least annually.

 

16.                                RESTRICTIONS ON SHARES .  At the discretion of the Committee, the Company may reserve to itself and its assignees in the option agreement (a) a right of first refusal to purchase all Shares that an optionee (or a subsequent transferee) may propose to transfer to a third party, (b) a right to repurchase a portion of or all Shares held by an optionee upon the optionee’s termination of employment or service with the Company or its parent, subsidiary or affiliate for any reason within a specified time (but not to exceed ninety (90) days of the later of termination or exercise of the option, if required by

 

10



 

applicable laws), (c) the right to require the optionee from time to time to execute and deliver shareholder, voting or similar agreements to which holders of a majority of the Common Stock are parties, (d) the right to require the optionee to agree not to take any action that would cause the Company not to qualify for Subchapter S tax status, if applicable, and (e) the right of the Company to require the optionee from time to time to execute and deliver underwriter lock up agreements.  The price to be paid upon any purchase or repurchase of Shares pursuant to clause (a) or (b) above will be determined by the Committee.  This paragraph 16 is not a limitation on the provisions that may be included in any option agreement. Shares may be repurchased at the optionee’s original purchase price provided that, so long as required by applicable laws, such right to repurchase as to employees lapses at the rate of at least twenty percent (20%) of the Shares subject to the option per year over five years from the date that the option is granted (without respect to the date that the option was exercised or became exercisable).

 

17.                                GOVERNING LAW .   To the extent that federal laws do not otherwise control, this Plan and all determinations made and actions taken under this Plan will be governed by the laws of the State of Minnesota, without regard to the conflicts of law provisions thereof, and construed accordingly.

 

18.                                AMENDMENT AND DISCONTINUANCE OF PLAN .  The Board may at any time amend, suspend or terminate this Plan; provided, however, that no amendment to this Plan will, without the consent of the holder of the option, adversely alter or impair any option previously granted under this Plan.  To the extent considered necessary to comply with applicable provisions of the Code or other applicable laws, rules or regulations, any such amendments to this Plan may be made subject to approval by the shareholders of the Company.

 

19.                                TERM .

 

(a)                                  EFFECTIVE DATE This Plan was initially effective as of November 18, 2003.  This Plan was amended on April 27, 2005.  The amendment and restatement of the Plan is being submitted for approval by the shareholders of the Company on or about August 23, 2006 and will only be effective as of the date of such approval.

 

(b)                                  TERMINATION .   This Plan will remain in effect until all Shares subject to it are distributed or this Plan is terminated under paragraph 18 above.  No award of an incentive stock option may be made under this Plan more than ten years after the effective date of this Plan (or such other limit as may be required by the Code) if such limitation is necessary to qualify the option as an incentive stock option.

 

11




Exhibit 10.2

 

TACTILE SYSTEMS TECHNOLOGY, INC.

 

Incentive Stock Option Agreement

(Under the 2003 Stock Option Plan)

 

Name of Optionee:

 

 

 

No. of Shares Covered:

Date of Grant:

 

 

Exercise Price Per Share:

Expiration Date:

 

 

Exercise Schedule (Cumulative):

 

 

 

This Option will vest as to [       ] of the Shares subject to this Option on [        ]. This Option will vest for [     ] of the remaining Shares subject to this Option on the 1 st  day of each month, commencing on [         ] and continuing until this Option is fully vested.

 

This is an Incentive Stock Option Agreement (the “ Agreement ”) between Tactile Systems Technology, Inc. a Delaware corporation (the “ Company ”), and the optionee identified above (the “ Optionee ”) effective as of the date of grant specified above.

 

BACKGROUND

 

A.  The Company maintains the Tactile Systems Technology, Inc. 2003 Stock Option Plan (the “ Plan ”).

 

B.  Under the Plan, the Board of Directors of the Company (the “ Board ”) or a committee of two or more directors of the Company (the “ Committee ”) appointed by the Board administers the Plan and has the authority to determine the awards to be granted under the Plan (if the Board has not appointed a committee to administer the Plan, then the Board shall constitute the Committee).

 

C.  The Committee has determined that the Optionee is eligible to receive an award under the Plan in the form of an incentive stock option (the “ Option ”);

 

D.  The Company hereby grants the Option to the Optionee under the terms and conditions as follows.

 

TERMS AND CONDITIONS *

 

1.                                       Grant .  The Optionee is granted the Option to purchase the number of Shares specified at the beginning of this Agreement.

 

2.                                       Exercise Price .  The price to the Optionee of each Share subject to the Option will be the exercise price specified at the beginning of this Agreement (which price shall not be less than the Fair Market Value as of the date of grant or, if the Optionee owns or is deemed to own stock possessing more than 10% of the combined voting power of all classes of stock of the Company, 110% of the Fair Market Value as of the date of grant).

 


*                  Unless the context indicates otherwise, terms that are not defined in this Agreement shall have the meaning set forth in the Plan as it currently exists or as it is amended in the future.

 



 

3.                                       Incentive Stock Option .  The Option is intended to be an “incentive stock option” within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “ Code ”), provided that if the Option or part thereof fails to qualify as an incentive stock option, it will be treated as a non-statutory stock option.

 

4.                                       Exercise Schedule .  The Option will vest and become exercisable as to the number of Shares and on the dates specified in the exercise schedule at the beginning of this Agreement; provided, that the Optionee is employed by the Company on such date.  The exercise schedule will be cumulative; thus, to the extent the Option has not already been exercised and has not expired, terminated or been cancelled, the Optionee or the person otherwise entitled to exercise the Option as provided herein may at any time, and from time to time, purchase all or any portion of the Shares then purchasable under the exercise schedule.

 

The Option may also be exercised in full (notwithstanding the exercise schedule) under the circumstances described in Section 8 of this Agreement if it has not expired prior thereto.

 

5.                                       Expiration .  The Option shall expire at 5:00 p.m. Central Time on the earliest of:

 

(a)           The expiration date specified at the beginning of this Agreement (which date shall not be later than ten years after the date of grant or, if the Optionee owns or is deemed to own stock possessing more than 10% of the combined voting power of all classes of stock of the Company, five years after the date of grant) or thereafter agreed upon with the Optionee;

 

(b)           The expiration of the period after the termination of employment of the Optionee within which the Option can be exercised (as specified in Section 7 of this Agreement), provided that the Committee may extend any such period following the termination of employment during which the Option can be exercised;

 

(c)           At the election of the Company, upon termination of the Optionee’s employment for Cause or if it is determined by the Company within ten days after termination of the Optionee’s employment by the Optionee, such as Optionee’s resignation, that Cause existed for termination by the Company; or

 

(d)           The date (if any) fixed for cancellation pursuant to paragraph 11(c) or 12 of the Plan.

 

In no event may anyone exercise the Option, in whole or in part, after it has expired, notwithstanding any other provision of this Agreement.

 

In addition, if the Option is exercised, and prior to the delivery of the certificate representing the Shares so purchased, it is determined that Cause for termination existed, then the Company may rescind the Option exercise by the Optionee and the Option shall terminate at the election of the Company.

 

6.                                       Procedure to Exercise Option .

 

Notice of Exercise .  The Option may be exercised by delivering written notice of exercise to the Company at the principal executive office of the Company, to the attention of the Company’s Secretary, in the form attached to this Agreement.  The notice shall state the number of Shares to be purchased, and shall be signed by the person exercising the Option.  If the person exercising the Option is not the Optionee, he/she also must submit appropriate proof of his/her right to exercise the Option.

 

Tender of Payment .  Upon giving notice of any exercise hereunder, the Optionee shall provide for payment of the purchase price of the Shares being purchased through one or a combination of the following methods:

 

(a)           Cash (including check, bank draft or money order);

 

2



 

(b)           Cancellation of indebtedness owed to the Optionee by the Company or any parent or subsidiary thereof;

 

(c)           To the extent permitted by law, through a broker-assisted cashless exercise in which the Optionee simultaneously exercises the Option and sells all or a portion of the Shares thereby acquired pursuant to a brokerage or similar relationship and uses the proceeds from such sale to pay the purchase price of such Shares;

 

(d)           By delivery to the Company of unencumbered Shares having an aggregate Fair Market Value on the date of exercise equal to the purchase price of such Shares; or

 

(e)           By authorizing the Company to retain, from the total number of Shares as to which the Option is exercised, that number of Shares having a Fair Market Value on the date of exercise equal to the purchase price for the total number of Shares as to which the Option is exercised.

 

Notwithstanding the foregoing, the Optionee shall not be permitted to pay any portion of the purchase price with Shares, or by authorizing the Company to retain Shares upon exercise of the Option, if the Committee, in its sole discretion, determines that payment in such manner is undesirable.

 

Delivery of Certificates .  As soon as practicable after the Company receives the notice and purchase price provided for above, it shall deliver to the person exercising the Option, in the name of such person, a certificate or certificates representing the Shares being purchased.  The Company shall pay any original issue or transfer taxes with respect to the issue or transfer of the Shares and all fees and expenses incurred by it in connection therewith.  All Shares so issued shall be fully paid and nonassessable.  Notwithstanding anything to the contrary in this Agreement, no certificate for Shares distributable under the Plan shall be issued and delivered unless the issuance of such certificate complies with all applicable legal requirements including, without limitation, compliance with the provisions of applicable state securities laws, the Securities Act and the Exchange Act.

 

7.                                       Employment Requirement .  The Option may be exercised only while the Optionee remains employed with the Company or a parent or subsidiary thereof, and only if the Optionee has been continuously so employed since the date the Option was granted; provided that :

 

(a)           The Option may be exercised for three months after termination of the Optionee’s employment if such cessation of employment is for a reason other than death or disability, but only to the extent that it was exercisable immediately prior to termination of employment, provided that if termination of the Optionee’s employment shall have been for Cause, the Option shall expire, and all rights to purchase Shares hereunder shall terminate, immediately upon such termination.

 

(b)           The Option may be exercised for one year after termination of the Optionee’s employment if such termination of employment is because of death or disability of the Optionee.

 

(c)           If the Optionee’s employment terminates after a declaration made pursuant to paragraph 12 of the Plan in connection with an Event, the Option may be exercised at any time permitted by such declaration.

 

Notwithstanding the above, the Option may not be exercised after it has expired.

 

8.                                       Acceleration of Vesting .

 

Death or Disability.   In the event of the death or disability of the Optionee, any portion of the Option that was not previously exercisable shall become immediately exercisable in full if the

 

3



 

Optionee shall have been continuously employed by the Company or a parent or subsidiary thereof between the date the Option was granted and the date of such death or disability.

 

Change in Control .  If a Change in Control of the Company is consummated, then, at the discretion of the Committee, the Option, if not already exercised in full or otherwise terminated, expired or cancelled, may become immediately exercisable in full and remain exercisable during the remaining term of the Option.

 

Event .  In the event of an Event, at the time of any declaration pursuant to clause (ii) of the first sentence of paragraph 12 of the Plan, the Option, if not already exercised in full or otherwise terminated, expired or cancelled, shall become immediately exercisable in full and shall remain exercisable during the period preceding the time of cancellation of the Option pursuant to such declaration.

 

Discretionary Acceleration .  Notwithstanding any other provisions of this Agreement to the contrary, the Committee may, in its sole discretion, declare at any time that the Option shall be immediately exercisable.

 

9.                                       Limitation on Transfer .  During the lifetime of the Optionee, only the Optionee or his/her guardian or legal representative may exercise the Option.  The Option may not be assigned or transferred by the Optionee otherwise than by will or the laws of descent and distribution.

 

10.                                No Stockholder Rights Before Exercise .  No person shall have any of the rights of a stockholder of the Company with respect to any Share subject to the Option until the Share actually is issued to him/her upon exercise of the Option.

 

11.                                Discretionary Adjustment .  In the event of any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, or extraordinary dividend or divestiture (including a spin-off), or any other change in the corporate structure or Shares of the Company, the Committee (or if the Company does not survive any such transaction, a comparable committee of the Board of Directors of the surviving corporation) may, without the consent of the Optionee, make such adjustment as it determines in its discretion to be appropriate as to the number and kind of securities subject to and reserved under the Plan and, in order to prevent dilution or enlargement of rights of the Optionee, the number and kind of securities issuable upon exercise of the Option and the exercise price hereof.

 

12.                                Transfer of Shares — Tax Effects .  The Optionee hereby acknowledges that if any Shares received pursuant to the exercise of any portion of the Option are sold within two years from the date of grant or within one year from the effective date of exercise of the Option, or if certain other requirements of the Code are not satisfied, such Shares will be deemed under the Code not to have been acquired by the Optionee pursuant to an “incentive stock option” as defined in the Code; and that the Company shall not be liable to the Optionee in the event the Option for any reason is deemed not to be an “incentive stock option” within the meaning of the Code.

 

13.                                Interpretation of This Agreement .  All decisions and interpretations made by the Committee with regard to any question arising hereunder or under the Plan shall be binding and conclusive upon the Company and the Optionee.  If there is any inconsistency between the provisions of this Agreement and the Plan, the provisions of the Plan shall govern.

 

14.                                Discontinuance of Employment .  This Agreement shall not give the Optionee a right to continued employment with the Company or any parent or subsidiary of the Company, and the Company or any such parent or subsidiary employing the Optionee may terminate his/her employment at any time and otherwise deal with the Optionee without regard to the effect it may have upon him/her under this Agreement.

 

4



 

15.                                Option Subject to Plan, Certificate of Incorporation and By-Laws .  The Optionee acknowledges that the Option and the exercise thereof is subject to the Plan, the Certificate of Incorporation, as amended from time to time, and the By-Laws, as amended from time to time, of the Company, and any applicable federal or state laws, rules or regulations.

 

16.                                Obligation to Reserve Sufficient Shares .  The Company shall at all times during the term of the Option reserve and keep available a sufficient number of Shares to satisfy this Agreement.

 

17.                                Binding Effect .  This Agreement shall be binding in all respects on the heirs, representatives, successors and assigns of the Optionee.

 

18.                                Choice of Law .  This Agreement is entered into under the laws of the State of Minnesota and shall be construed and interpreted thereunder (without regard to its conflict of law principles).

 

19.                                Tax Consequences .

 

(a)           The Optionee may incur tax liability as a result of the Optionee’s purchase or disposition of the Shares.  THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THE OPTION OR DISPOSING OF THE SHARES.

 

(b)           Notwithstanding the Company’s good faith determination of the Fair Market Value of the Company’s common stock for purposes of determining the exercise price per Share of the Option, the taxing authorities may assert that the fair market value of the Company’s common stock on the date of grant was greater than the exercise price per Share.  The Option may fail to qualify as an incentive stock option if the exercise price per Share of the Option is less than the fair market value of the Company’s common stock on the date of grant.  In addition, under Section 409A of the Code, if the exercise price per Share of the Option is less than the fair market value of the Company’s common stock on the date of grant, the Option may be treated as a form of deferred compensation and the Optionee may be subject to an additional 20% tax, plus interest and possible penalties.  The Optionee is encouraged to consult a tax adviser regarding the potential impact of Section 409A of the Code.

 

20.                                Amendment to Meet the Requirements of Section 409A .  The Optionee acknowledges that the Company, in the exercise of its sole discretion and without the consent of the Optionee, may amend or modify this Agreement in any manner and delay the payment of any amounts payable pursuant to this Agreement to the minimum extent necessary to meet the requirements of Section 409A of the Code as amplified by any Internal Revenue Service or U.S. Treasury Department regulations or guidance as the Company deems appropriate or advisable.

 

5



 

The Optionee and the Company have executed this Agreement as of date of grant stated above.

 

 

OPTIONEE

 

 

 

 

 

 

 

 

 

TACTILE SYSTEMS TECHNOLOGY, INC.

 

 

 

 

 

By:

 

 

 

Gerald R. Mattys

 

 

Chief Executive Officer

 

6



 

                   , 20  

 

TACTILE SYSTEMS TECHNOLOGY, INC.

4824 Park Glen Road

Minneapolis, Minnesota  55416

 

Ladies and Gentlemen:

 

I hereby exercise the following option (the “ Option ”) granted to me under the Tactile Systems Technology, Inc. 2003 Stock Option Plan (the “ Plan ”) with respect to the number of shares of Common Stock of Tactile Systems Technology, Inc. (the “ Company ”) indicated below:

 

Name:

 

 

 

Date of Grant of Option:

 

 

 

Exercise Price Per Share:

 

 

 

Number of Shares With Respect to Which the Option is Hereby Exercised:

 

 

 

Total Exercise Price:

 

 

o             Enclosed with this letter is a check, bank draft or money order in the amount of the Total Exercise Price.

 

o             I elect to pay the Total Exercise Price through cancellation of indebtedness owed to me by the Company or by a parent or subsidiary of the Company as provided in paragraph 8 of the Plan.

 

o             I hereby agree to pay the Total Exercise Price within five business days of the date hereof and, as stated in the attached Broker’s Letter, I have delivered irrevocable instructions to                                        to promptly deliver to the Company the amount of sale or loan proceeds from the Shares to be issued pursuant to this exercise necessary to satisfy my obligation hereunder to pay the Total Exercise Price.

 

o             Enclosed with this letter is a certificate evidencing unencumbered Shares (duly endorsed in blank) having an aggregate Fair Market Value (as defined in the Plan) equal to or in excess of the Total Exercise Price.

 

o             I elect to pay the Total Exercise Price through a reduction in the number of Shares delivered to me upon this exercise of the Option as provided in paragraph 8 of the Plan.

 

If I am enclosing Shares with this letter, I hereby represent and warrant that I am the owner of such Shares free and clear of all liens, security interests and other restrictions or encumbrances.  I agree that I will pay any required withholding taxes in connection with this exercise as provided in paragraph 9 of the Plan.

 

Please issue a certificate (the “ Certificate ”) for the number of Shares with respect to which the Option is being exercised in the name of the person indicated below and deliver the Certificate to the address indicated below:

 



 

Name in Which to Issue Certificate:

 

 

Address to Which Certificate Should be

 

Delivered:

 

 

 

 

 

 

 

 

 

 

Principal Mailing Address for Holder of the Certificate (if different from above):

 

 

 

 

 

 

 

 

 

Very truly yours,

 

 

 

 

 

Signature

 

 

 

 

 

Name, please print

 

 

 

 

 

Social Security Number

 



 

                   , 20  

 

TACTILE SYSTEMS TECHNOLOGY, INC.

4824 Park Glen Road

Minneapolis, Minnesota  55416

 

Ladies and Gentlemen:

 

Name of Optionee:

 

 

 

Date of Grant of Option:

 

 

 

Exercise Price Per Share:

 

 

 

Number of Shares With Respect to Which the Option is to be Exercised:

 

 

 

Total Exercise Price:

 

 

 

 

The above Optionee has requested that we finance the exercise of the above Option to purchase Shares of Common Stock of Tactile Systems Technology, Inc. (the “ Company ”) and has given us irrevocable instructions to promptly deliver to the Company the amount of sale or loan proceeds from the Shares to be issued pursuant to such exercise to satisfy the Optionee’s obligation to pay the Total Exercise Price.

 

 

Very truly yours,

 

 

 

 

 

Broker Name

 

 

 

 

 

By

 

 




Exhibit 10.3

 

TACTILE SYSTEMS TECHNOLOGY, INC.

2003 Stock Option Plan

 

Non-Statutory Stock Option Agreement

(Employee)

 

Name of Optionee:

 

 

 

 

 

No. of Shares Covered:

 

Date of Grant:

 

 

 

Exercise Price Per Share:

 

Expiration Date:

 

 

 

Exercise Schedule (Cumulative):

 

 

 

 

 

 

Date(s) of

 

No. of Shares as to Which

Exercisability

 

Option Becomes Exercisable

 

 

 

 

 

 

 

 

 

 

This is a Non-Statutory Stock Option Agreement (the “ Agreement ”) between Tactile Systems Technology, Inc., a Minnesota corporation (the “ Company ”), and the optionee identified above (the “ Optionee ”) effective as of the date of grant specified above.

 

BACKGROUND

 

A.  The Company maintains the Tactile Systems Technology, Inc. 2003 Stock Option Plan (the “ Plan ”).

 

B.  Under the Plan, the Board of Directors of the Company (the “ Board ”) or a committee of two or more directors of the Company (the “ Committee ”) appointed by the Board administers the Plan and has the authority to determine the awards to be granted under the Plan (if the Board has not appointed a committee to administer the Plan, then the Board shall constitute the Committee).

 

C.  The Committee has determined that the Optionee is eligible to receive an award under the Plan in the form of a non-statutory stock option (the “ Option ”).

 

D.  The Company hereby grants the Option to the Optionee under the terms and conditions as follows.

 

TERMS AND CONDITIONS *

 

1.                                       Grant .  The Optionee is granted the Option to purchase the number of Shares specified at the beginning of this Agreement.

 


*                  Unless the context indicates otherwise, terms that are not defined in this Agreement shall have the meaning set forth in the Plan as it currently exists or as it is amended in the future.

 



 

2.                                       Exercise Price .  The price to the Optionee of each Share subject to the Option will be the exercise price specified at the beginning of this Agreement.

 

3.                                       Non-Statutory Stock Option .  The Option is not intended to be an “incentive stock option” within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “ Code ”).

 

4.                                       Exercise Schedule .  The Option will vest and become exercisable as to the number of Shares and on the dates specified in the exercise schedule at the beginning of this Agreement.  The exercise schedule will be cumulative; thus, to the extent the Option has not already been exercised and has not expired, terminated or been cancelled, the Optionee or the person otherwise entitled to exercise the Option as provided herein may at any time, and from time to time, purchase all or any portion of the Shares then purchasable under the exercise schedule.

 

The Option may also be exercised in full (notwithstanding the exercise schedule) under the circumstances described in Section 8 of this Agreement if it has not expired prior thereto.

 

5.                                       Expiration .  The Option will expire at 5:00 p.m. Central Time on the earliest of:

 

(a)           The expiration date specified at the beginning of this Agreement [which date shall not be later than ten years after the date of grant];

 

(b)           The expiration of the period after the termination of employment of the Optionee within which the Option can be exercised (as specified in Section 7 of this Agreement);

 

(c)           At the election of the Company, upon termination of the Optionee’s employment for Cause or if it is determined by the Company within ten days after termination of the Optionee’s employment by the Optionee, such as Optionee’s resignation, that Cause existed for termination by the Company; or

 

(d)           The date (if any) fixed for cancellation pursuant to paragraph 11(c) or 12 of the Plan.

 

In no event may anyone exercise the Option, in whole or in part, after it has expired, notwithstanding any other provision of this Agreement.

 

In addition, if the Option is exercised, and prior to the delivery of the certificate representing the Shares so purchased, it is determined that Cause for termination existed, then the Company may rescind the Option exercise by the Optionee and the Option shall terminate at the election of the Company.

 

6.                                       Procedure to Exercise Option .

 

Notice of Exercise .  The Option may be exercised by delivering written notice of exercise to the Company at the principal executive office of the Company, to the attention of the Company’s Secretary, in the form attached to this Agreement.  The notice shall state the number of Shares to be purchased, and shall be signed by the person exercising the Option.  If the person exercising the Option is not the Optionee, he/she also must submit appropriate proof of his/her right to exercise the Option.

 

Tender of Payment .  Upon giving notice of any exercise hereunder, the Optionee shall provide for payment of the purchase price of the Shares being purchased through one or a combination of the following methods:

 

(a)           Cash (including check, bank draft or money order);

 

(b)           Delivery of the Optionee’s promissory note with such recourse, interest, security and redemption provisions as the Committee determines to be appropriate and as required pursuant to the law of the Company’s state of incorporation;

 

2



 

(c)           Cancellation of indebtedness owed to the Optionee by the Company or any parent or subsidiary thereof;

 

(d)           To the extent permitted by law, through a broker-assisted cashless exercise in which the Optionee simultaneously exercises the Option and sells all or a portion of the Shares thereby acquired pursuant to a brokerage or similar relationship and uses the proceeds from such sale to pay the purchase price of such Shares;

 

(e)           By delivery to the Company of unencumbered Shares having an aggregate Fair Market Value on the date of exercise equal to the purchase price of such Shares; or

 

(f)            By authorizing the Company to retain, from the total number of Shares as to which the Option is exercised, that number of Shares having a Fair Market Value on the date of exercise equal to the purchase price for the total number of Shares as to which the Option is exercised.

 

Notwithstanding the foregoing, the Optionee shall not be permitted to pay any portion of the purchase price with Shares, or by authorizing the Company to retain Shares upon exercise of the Option, if the Committee, in its sole discretion, determines that payment in such manner is undesirable nor may the Company permit the Optionee, if he or she is an executive officer or director of the Company, to pay for the Shares by delivery of a promissory note from an after such time, if any, that the Company (i) has a class of securities registered under Section 12 of the Exchange Act, (ii) is required to file reports under Section 15(d) of the Exchange Act or (iii) that has filed a registration statement that has not yet become effective under the Securities Act.

 

Delivery of Certificates .  As soon as practicable after the Company receives the notice and purchase price provided for above, it shall deliver to the person exercising the Option, in the name of such person, a certificate or certificates representing the Shares being purchased.  The Company shall pay any original issue or transfer taxes with respect to the issue or transfer of the Shares and all fees and expenses incurred by it in connection therewith.  All Shares so issued shall be fully paid and nonassessable.  Notwithstanding anything to the contrary in this Agreement, no certificate for Shares distributable under the Plan shall be issued and delivered unless the issuance of such certificate complies with all applicable legal requirements including, without limitation, compliance with the provisions of applicable state securities laws, the Securities Act and the Exchange Act.

 

7.                                       Employment Requirement .  The Option may be exercised only while the Optionee remains employed with the Company or a parent or subsidiary thereof, and only if the Optionee has been continuously so employed since the date the Option was granted; provided that :

 

(a)           The Option may be exercised for three months after termination of the Optionee’s employment if such cessation of employment is for a reason other than death or disability, but only to the extent that it was exercisable immediately prior to termination of employment, provided that if termination of the Optionee’s employment shall have been for Cause, the Option shall expire, and all rights to purchase Shares hereunder shall terminate, immediately upon such termination.

 

(b)           The Option may be exercised for one year after termination of the Optionee’s employment if such termination of employment is because of death or disability of the Optionee.

 

(c)           If the Optionee’s employment terminates after a declaration made pursuant to paragraph 12 of the Plan in connection with an Event, the Option may be exercised at any time permitted by such declaration.

 

Notwithstanding the above, the Option may not be exercised after it has expired.

 

3



 

8.                                       Acceleration of Vesting .

 

Death or Disability.   In the event of the death or disability of the Optionee, any portion of the Option that was not previously exercisable shall become immediately exercisable in full if the Optionee shall have been continuously employed by the Company or a parent or subsidiary thereof between the date the Option was granted and the date of such death or disability.

 

Change in Control .  If a Change in Control of the Company shall or is to occur, then, in the Committee’s sole discretion, the Option, if not already exercised in full or otherwise terminated, expired or cancelled, may become immediately exercisable in full and/or remain exercisable during the remaining term of the Option.

 

Event .  In the event of an Event, at the time of any declaration pursuant to clause (ii) of the first sentence of paragraph 12 of the Plan, the Option, if not already exercised in full or otherwise terminated, expired or cancelled, may at the Committee’s sole discretion, become immediately exercisable in full and/or shall remain exercisable during the period preceding the time of cancellation of the Option pursuant to such declaration.

 

Discretionary Acceleration .  Notwithstanding any other provisions of this Agreement to the contrary, the Committee may, in its sole discretion, declare at any time that the Option shall be immediately exercisable.

 

9.                                       Limitation on Transfer .  During the lifetime of the Optionee, only the Optionee or his/her guardian or legal representative may exercise the Option.  The Option may not be assigned or transferred by the Optionee otherwise than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder; provided, however, that the Optionee may transfer the Option to a member or members of his/her immediate family (i.e., his/her children, grandchildren and spouse) or to one or more trusts for the benefit of such family members or partnerships in which such family members are the only partners, if the Optionee does not receive any consideration for the transfer.  The Option held by any such transferee shall continue to be subject to the same terms and conditions that were applicable to the Option immediately prior to its transfer and may be exercised by such transferee as and to the extent that the Option has become exercisable and has not terminated in accordance with the provisions of the Plan and this Agreement.

 

10.                                No Stockholder Rights Before Exercise .  No person shall have any of the rights of a stockholder of the Company with respect to any Share subject to the Option until the Share actually is issued to him/her upon exercise of the Option.

 

11.                                Discretionary Adjustment .  In the event of any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, or extraordinary dividend or divestiture (including a spin-off), or any other change in the corporate structure or Shares of the Company, the Committee (or if the Company does not survive any such transaction, a comparable committee of the Board of Directors of the surviving corporation) may, without the consent of the Optionee, make such adjustment as it determines in its discretion to be appropriate as to the number and kind of securities subject to and reserved under the Plan and, in order to prevent dilution or enlargement of rights of the Optionee, the number and kind of securities issuable upon exercise of the Option and the exercise price hereof.

 

12.                                Tax Withholding .  Delivery of Shares upon exercise of the Option shall be subject to any required withholding taxes.  As a condition precedent to receiving Shares upon exercise of the Option, the Optionee may be required to pay to the Company, in accordance with the provisions of paragraph 9 of the Plan, an amount equal to the amount of any required withholdings.  In lieu of all or any part of such a cash payment, a person exercising the Option may cover all or any part of the required withholdings, and any additional withholdings up to the amount needed to cover

 

4



 

                                                the individual’s full FICA and federal, state and local income tax liability with respect to income arising from the exercise of the Option, through the delivery to the Company of unencumbered Shares, through a reduction in the number of Shares delivered to the person exercising the Option or through a subsequent return to the Company of Shares delivered to the person exercising the Option (in each case, such Shares having an aggregate Fair Market Value on the date of exercise equal to the amount of the withholding taxes being paid through such delivery, reduction or subsequent return of Shares).  Notwithstanding the foregoing, no person shall be permitted to pay any such withholdings with Shares, or through a reduction in the number of Shares to be delivered upon exercise of the Option, if the Committee, in its sole discretion, determines that payment in such manner is undesirable.

 

13.                                Interpretation of This Agreement .  All decisions and interpretations made by the Committee with regard to any question arising hereunder or under the Plan shall be binding and conclusive upon the Company and the Optionee.  If there is any inconsistency between the provisions of this Agreement and the Plan, the provisions of the Plan shall govern.

 

14.                                Discontinuance of Employment .  This Agreement shall not give the Optionee a right to continued employment with the Company or any parent or subsidiary of the Company, and the Company or any such parent or subsidiary employing the Optionee may terminate his/her employment at any time and otherwise deal with the Optionee without regard to the effect it may have upon him/her under this Agreement.

 

15.                                Option Subject to Plan, Certificate of Incorporation and By-Laws .  The Optionee acknowledges that the Option and the exercise thereof is subject to the Plan, the Certificate of Incorporation, as amended from time to time, and the By-Laws, as amended from time to time, of the Company, and any applicable federal or state laws, rules or regulations.

 

16.                                Obligation to Reserve Sufficient Shares .  The Company shall at all times during the term of the Option reserve and keep available a sufficient number of Shares to satisfy this Agreement.

 

17.                                Binding Effect .  This Agreement shall be binding in all respects on the heirs, representatives, successors and assigns of the Optionee.

 

18.                                Choice of Law .  This Agreement is entered into under the laws of the State of Minnesota and shall be construed and interpreted thereunder (without regard to its conflict of law principles).

 

The Optionee and the Company have executed this Agreement as of             , 20  .

 

 

OPTIONEE

 

 

 

 

 

 

 

 

 

TACTILE SYSTEMS TECHNOLOGY, INC.

 

 

 

 

 

By:

 

 

Name:

 

 

Its:

 

 

5



 

                     , 20  

 

TACTILE SYSTEMS TECHNOLOGY, INC.

3601 Minnesota Street, Suite 800

Edina, MN 55435

 

Ladies and Gentlemen:

 

I hereby exercise the following option (the “ Option ”) granted to me under the Tactile Systems Technology, Inc. 2003 Stock Option Plan (the “ Plan ”) with respect to the number of shares of Common Stock of Tactile Systems Technology, Inc. (the “ Company ”) indicated below:

 

Name:

 

 

 

 

 

Date of Grant of Option:

 

 

 

 

 

Exercise Price Per Share:

 

 

 

 

 

Number of Shares With Respect to Which the Option is Hereby Exercised:

 

 

 

 

 

Total Exercise Price:

 

 

 

o             Enclosed with this letter is a check, bank draft or money order in the amount of the Total Exercise Price.

 

o             Enclosed with this letter is my executed promissory note, in the form provided to me by the Company, payable to the Company in the amount of the Total Exercise Price as provided in paragraph 8 of the Plan.

 

o             I elect to pay the Total Exercise Price through cancellation of indebtedness owed to me by the Company or by a parent or subsidiary of the Company as provided in paragraph 8 of the Plan.

 

o             I hereby agree to pay the Total Exercise Price within five business days of the date hereof and, as stated in the attached Broker’s Letter, I have delivered irrevocable instructions to                                   to promptly deliver to the Company the amount of sale or loan proceeds from the Shares to be issued pursuant to this exercise necessary to satisfy my obligation hereunder to pay the Total Exercise Price.

 

o             Enclosed with this letter is a certificate evidencing unencumbered Shares (duly endorsed in blank) having an aggregate Fair Market Value (as defined in the Plan) equal to or in excess of the Total Exercise Price.

 

o             I elect to pay the Total Exercise Price through a reduction in the number of Shares delivered to me upon this exercise of the Option as provided in paragraph 8 of the Plan.

 

If I am enclosing Shares with this letter, I hereby represent and warrant that I am the owner of such Shares free and clear of all liens, security interests and other restrictions or encumbrances.  I agree that I will pay any required withholding taxes in connection with this exercise as provided in paragraph 9 of the Plan.

 



 

Please issue a certificate (the “ Certificate ”) for the number of Shares with respect to which the Option is being exercised in the name of the person indicated below and deliver the Certificate to the address indicated below:

 

Name in Which to Issue Certificate:

 

 

 

Address to Which Certificate Should be Delivered:

 

 

 

 

 

 

 

Principal Mailing Address for Holder of the Certificate (if different from above):

 

 

 

Very truly yours,

 

 

 

 

 

Signature

 

 

 

 

 

Name, please print

 

 

 

 

 

Social Security Number

 

2



 

                     , 20  

 

TACTILE SYSTEMS TECHNOLOGY, INC.

3601 Minnesota Street, Suite 800

Edina, MN 55435

 

Ladies and Gentlemen:

 

Name of Optionee:

 

 

 

Date of Grant of Option:

 

 

 

Exercise Price Per Share:

 

 

 

Number of Shares With Respect to Which the Option is to be Exercised:

 

 

 

Total Exercise Price:

 

 

The above Optionee has requested that we finance the exercise of the above Option to purchase Shares of Common Stock of Tactile Systems Technology, Inc. (the “ Company ”) and has given us irrevocable instructions to promptly deliver to the Company the amount of sale or loan proceeds from the Shares to be issued pursuant to such exercise to satisfy the Optionee’s obligation to pay the Total Exercise Price.

 

 

Very truly yours,

 

 

 

 

 

Broker Name

 

 

 

 

 

By

 

 

3




Exhibit 10.4

 

TACTILE SYSTEMS TECHNOLOGY, INC.

 

Non-Statutory Stock Option Agreement

(Under the 2003 Stock Option Plan - Director)

 

Name of Optionee:

 

 

 

No. of Shares Covered:

Date of Grant:

 

 

Exercise Price Per Share:

Expiration Date:

 

 

Exercise Schedule (Cumulative):

 

 

Date(s) of
Exercisability

 

No. of Shares as to Which
Option Becomes Exercisable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This is a Non-Statutory Stock Option Agreement (the “ Agreement ”) between Tactile Systems Technology, Inc., a Minnesota corporation (the “ Company ”), and the optionee identified above (the “ Optionee ”) effective as of the date of grant specified above.

 

BACKGROUND

 

A.                                     The Company maintains the Tactile Systems Technology, Inc. 2003 Stock Option Plan (the “ Plan ”).

 

B.                                     Under the Plan, the Board of Directors of the Company (the “ Board ”) or a committee of two or more directors of the Company (the “ Committee ”) appointed by the Board administers the Plan and has the authority to determine the awards to be granted under the Plan (if the Board has not appointed a committee to administer the Plan, then the Board shall constitute the Committee).

 

C.                                     The Committee has determined that the Optionee is eligible to receive an award under the Plan in the form of a non-statutory stock option (the “ Option ”).

 

D.                                     The Company hereby grants the Option to the Optionee under the terms and conditions as follows.

 

TERMS AND CONDITIONS *

 

1.                                       Grant .  The Optionee is granted the Option to purchase the number of Shares specified at the beginning of this Agreement.

 


*                                          Unless the context indicates otherwise, terms that are not defined in this Agreement shall have the meaning set forth in the Plan as it currently exists or as it is amended in the future.

 



 

2.                                       Exercise Price .  The price to the Optionee of each Share subject to the Option will be the exercise price specified at the beginning of this Agreement.

 

3.                                       Non-Statutory Stock Option .  The Option is not intended to be an “incentive stock option” within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “ Code ”).

 

4.                                       Exercise Schedule .  The Option will vest and become exercisable as to the number of Shares and on the dates specified in the exercise schedule at the beginning of this Agreement, in each case only if the Optionee was providing Services to the Company (as defined in Section 7 of this Agreement) on such date.  The exercise schedule will be cumulative; thus, to the extent the Option has not already been exercised and has not expired, terminated or been cancelled, the Optionee or the person otherwise entitled to exercise the Option as provided herein may at any time, and from time to time, purchase all or any portion of the Shares then purchasable under the exercise schedule.

 

The Option may also be exercised in full (notwithstanding the exercise schedule) under the circumstances described in Section 7 of this Agreement if it has not expired prior thereto.

 

5.                                       Expiration .  The Option will expire at 5:00 p.m. Central Time on the earliest of:

 

(a)                                  The expiration date specified at the beginning of this Agreement;

 

(b)                                  The expiration of the period after the termination of Service of the Optionee to the Company within which the Option can be exercised (as specified in Section 7 of this Agreement);

 

(c)                                   At the election of the Company, upon termination of the Optionee’s Service to the Company for Cause or if it is determined by the Company within ten days after termination of the Optionee’s Service to the Optionee, such as Optionee’s resignation, that Cause existed for termination by the Company; or

 

(d)                                  The date (if any) fixed for cancellation pursuant to paragraph 11(c) or 12 of the Plan.

 

In no event may anyone exercise the Option, in whole or in part, after it has expired, notwithstanding any other provision of this Agreement.

 

6.                                       Procedure to Exercise Option .

 

Notice of Exercise .  The Option may be exercised by delivering written notice of exercise to the Company at the principal executive office of the Company, to the attention of the Company’s Secretary, in the form attached to this Agreement.  The notice shall state the number of Shares to be purchased, and shall be signed by the person exercising the Option.  If the person exercising the Option is not the Optionee, he/she also must submit appropriate proof of his/her right to exercise the Option.

 

Tender of Payment .  Upon giving notice of any exercise hereunder, the Optionee shall provide for payment of the purchase price of the Shares being purchased through one or a combination of the following methods:

 

(a)                                  Cash (including check, bank draft or money order);

 

(b)                                  Cancellation of indebtedness owed to the Optionee by the Company or any parent or subsidiary thereof;

 

(c)                                   To the extent permitted by law, through a broker-assisted cashless exercise in which the Optionee simultaneously exercises the Option and sells all or a portion of the Shares thereby acquired pursuant to a brokerage or similar relationship and uses the proceeds from such sale to pay the purchase price of such Shares;

 

2



 

(d)                                  By delivery to the Company of unencumbered Shares having an aggregate Fair Market Value on the date of exercise equal to the purchase price of such Shares; or

 

(e)                                   By authorizing the Company to retain, from the total number of Shares as to which the Option is exercised, that number of Shares having a Fair Market Value on the date of exercise equal to the purchase price for the total number of Shares as to which the Option is exercised.

 

Notwithstanding the foregoing, the Optionee shall not be permitted to pay any portion of the purchase price with Shares, or by authorizing the Company to retain Shares upon exercise of the Option, if the Committee, in its sole discretion, determines that payment in such manner is undesirable nor may the Company permit the Optionee, if he or she is an executive officer or director of the Company, to pay for the Shares by delivery of a promissory note from an after such time, if any, that the Company (i) has a class of securities registered under Section 12 of the Exchange Act, (ii) is required to file reports under Section 15(d) of the Exchange Act or (iii) that has filed a registration statement that has not yet become effective under the Securities Act.

 

Delivery of Certificates .  As soon as practicable after the Company receives the notice and purchase price provided for above, it shall deliver to the person exercising the Option, in the name of such person, a certificate or certificates representing the Shares being purchased.  The Company shall pay any original issue or transfer taxes with respect to the issue or transfer of the Shares and all fees and expenses incurred by it in connection therewith.  All Shares so issued shall be fully paid and nonassessable.  Notwithstanding anything to the contrary in this Agreement, no certificate for Shares distributable under the Plan shall be issued and delivered unless the issuance of such certificate complies with all applicable legal requirements including, without limitation, compliance with the provisions of applicable state securities laws, the Securities Act and the Exchange Act.

 

7.                                       Service Requirement .  The Option may be exercised only while the Optionee provides services to the Company as a member of its Board of Directors (such director services are referred to collectively in this Agreement as “ Service ” or “ Services ”) and only if the Optionee has been continuously providing such Services since the date the Option was granted; provided that :

 

(a)                                  The Option may be exercised for three months after termination of the Optionee’s Service with the Company if such cessation of the Optionee’s Service is for a reason other than death or disability, but only to the extent that it was exercisable immediately prior to termination of Service to the Company, provided that if termination of the Optionee’s Service shall have been for Cause, the Option shall expire, and all rights to purchase Shares hereunder shall terminate, immediately upon such termination.

 

(b)                                  The Option may be exercised for one year after termination of the Optionee’s Service if such termination of Service is because of death or disability of the Optionee.

 

(c)                                   If the Optionee’s Service terminates after a declaration made pursuant to paragraph 12 of the Plan in connection with an Event, the Option may be exercised at any time permitted by such declaration.

 

Notwithstanding the above, the Option may not be exercised after it has expired.

 

8.                                       Acceleration of Vesting .

 

Death or Disability.   In the event of the death or disability of the Optionee, any portion of the Option that was not previously exercisable shall become immediately exercisable in full if the Optionee shall have been continuously providing Services to the Company or a parent or subsidiary thereof between the date the Option was granted and the date of such death or disability.

 

3



 

Change in Control .  If a Change in Control of the Company shall or is to occur, then, at the discretion of the Committee, the Option, if not already exercised in full or otherwise terminated, expired or cancelled, may become immediately exercisable in full and/or remain exercisable during the remaining term of the Option.

 

Event .  In the event of an Event, at the time of any declaration pursuant to clause (ii) of the first sentence of paragraph 12 of the Plan, the Option, if not already exercised in full or otherwise terminated, expired or cancelled, may, at the discretion of the Committee, become immediately exercisable in full and/or remain exercisable during the period preceding the time of cancellation of the Option pursuant to such declaration.

 

Discretionary Acceleration .  Notwithstanding any other provisions of this Agreement to the contrary, the Committee may, in its sole discretion, declare at any time that the Option shall be immediately exercisable.

 

9.                                       Limitation on Transfer .  During the lifetime of the Optionee, only the Optionee or his/her guardian or legal representative may exercise the Option.  The Option may not be assigned or transferred by the Optionee otherwise than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder; provided, however, that the Optionee may transfer the Option to a member or members of his/her immediate family (i.e., his/her children, grandchildren and spouse) or to one or more trusts for the benefit of such family members or partnerships in which such family members are the only partners, if the Optionee does not receive any consideration for the transfer.  The Option held by any such transferee shall continue to be subject to the same terms and conditions that were applicable to the Option immediately prior to its transfer and may be exercised by such transferee as and to the extent that the Option has become exercisable and has not terminated in accordance with the provisions of the Plan and this Agreement.

 

10.                                No Shareholder Rights Before Exercise .  No person shall have any of the rights of a shareholder of the Company with respect to any Share subject to the Option until the Share actually is issued to him/her upon exercise of the Option.

 

11.                                Discretionary Adjustment .  In the event of any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, or extraordinary dividend or divestiture (including a spin-off), or any other change in the corporate structure or Shares of the Company, the Committee (or if the Company does not survive any such transaction, a comparable committee of the Board of Directors of the surviving corporation) may, without the consent of the Optionee, make such adjustment as it determines in its discretion to be appropriate as to the number and kind of securities subject to and reserved under the Plan and, in order to prevent dilution or enlargement of rights of the Optionee, the number and kind of securities issuable upon exercise of the Option and the exercise price hereof.

 

12.                                Tax Withholding .  Delivery of Shares upon exercise of the Option shall be subject to any required withholding taxes.  As a condition precedent to receiving Shares upon exercise of the Option, the Optionee may be required to pay to the Company, in accordance with the provisions of paragraph 9 of the Plan, an amount equal to the amount of any required withholdings.  In lieu of all or any part of such a cash payment, a person exercising the Option may cover all or any part of the required withholdings, and any additional withholdings up to the amount needed to cover the individual’s full FICA and federal, state and local income tax liability with respect to income arising from the exercise of the Option, through the delivery to the Company of unencumbered Shares, through a reduction in the number of Shares delivered to the person exercising the Option or through a subsequent return to the Company of Shares delivered to the person exercising the Option (in each case, such Shares having an aggregate Fair Market Value on the date of exercise equal to the amount of the withholding taxes being paid through such delivery, reduction or

 

4



 

subsequent return of Shares).  Notwithstanding the foregoing, no person shall be permitted to pay any such withholdings with Shares, or through a reduction in the number of Shares to be delivered upon exercise of the Option, if the Committee, in its sole discretion, determines that payment in such manner is undesirable.

 

13.                                Interpretation of This Agreement .  All decisions and interpretations made by the Committee with regard to any question arising hereunder or under the Plan shall be binding and conclusive upon the Company and the Optionee.  If there is any inconsistency between the provisions of this Agreement and the Plan, the provisions of the Plan shall govern.

 

14.                                Option Subject to Plan, Articles of Incorporation and By-Laws .  The Optionee acknowledges that the Option and the exercise thereof is subject to the Plan, the Articles of Incorporation, as amended from time to time, and the By-Laws, as amended from time to time, of the Company, and any applicable federal or state laws, rules or regulations.

 

15.                                Obligation to Reserve Sufficient Shares .  The Company shall at all times during the term of the Option reserve and keep available a sufficient number of Shares to satisfy this Agreement.

 

16.                                Binding Effect .  This Agreement shall be binding in all respects on the heirs, representatives, successors and assigns of the Optionee.

 

17.                                Choice of Law .  This Agreement is entered into under the laws of the State of Minnesota and shall be construed and interpreted thereunder (without regard to its conflict of law principles).

 

18.                                Tax Consequences .

 

(a)                                  The Optionee may incur tax liability as a result of the Optionee’s purchase or disposition of the Shares.  THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THE OPTION OR DISPOSING OF THE SHARES.

 

(b)                                  Notwithstanding the Company’s good faith determination of the Fair Market Value of the Company’s common stock for purposes of determining the exercise price per Share of the Option, the taxing authorities may assert that the fair market value of the Company’s common stock on the date of grant was greater than the exercise price per Share.  Under Section 409A of the Code, if the exercise price per Share of the Option is less than the fair market value of the Company’s common stock on the date of grant, the Option may be treated as a form of deferred compensation and the Optionee may be subject to an additional 20% tax, plus interest and possible penalties.  The Optionee is encouraged to consult a tax adviser regarding the potential impact of Section 409A of the Code.

 

19.                                Amendment to Meet the Requirements of Section 409A .  The Optionee acknowledges that the Company, in the exercise of its sole discretion and without the consent of the Optionee, may amend or modify this Agreement in any manner and delay the payment of any amounts payable pursuant to this Agreement to the minimum extent necessary to meet the requirements of Section 409A of the Code as amplified by any Internal Revenue Service or U.S. Treasury Department regulations or guidance as the Company deems appropriate or advisable.

 

5



 

The Optionee and the Company have executed this Agreement as of date of grant stated above.

 

 

OPTIONEE

 

 

 

 

 

 

 

 

 

 

 

TACTILE SYSTEMS TECHNOLOGY, INC.

 

 

 

 

 

By

 

 

Name:

 

 

Its:

 

 

6



 

                    , 20     

 

TACTILE SYSTEMS TECHNOLOGY, INC.

 

4824 Park Glen Road

 

Minneapolis, Minnesota 55416

 

 

 

Ladies and Gentlemen:

 

 

I hereby exercise the following option (the “ Option ”) granted to me under the Tactile Systems Technology, Inc. 2003 Stock Option Plan (the “ Plan ”) with respect to the number of shares of Common Stock of Tactile Systems Technology, Inc. (the “ Company ”) indicated below:

 

Name:

 

 

 

Date of Grant of Option:

 

 

 

Exercise Price Per Share:

 

 

 

Number of Shares With Respect to Which the Option is Hereby Exercised:

 

 

 

Total Exercise Price:

 

 

o                                     Enclosed with this letter is a check, bank draft or money order in the amount of the Total Exercise Price.

 

o                                     I elect to pay the Total Exercise Price through cancellation of indebtedness owed to me by the Company or by a parent or subsidiary of the Company as provided in paragraph 8 of the Plan.

 

o                                     I hereby agree to pay the Total Exercise Price within five business days of the date hereof and, as stated in the attached Broker’s Letter, I have delivered irrevocable instructions to                                   to promptly deliver to the Company the amount of sale or loan proceeds from the Shares to be issued pursuant to this exercise necessary to satisfy my obligation hereunder to pay the Total Exercise Price.

 

o                                     Enclosed with this letter is a certificate evidencing unencumbered Shares (duly endorsed in blank) having an aggregate Fair Market Value (as defined in the Plan) equal to or in excess of the Total Exercise Price.

 

o                                     I elect to pay the Total Exercise Price through a reduction in the number of Shares delivered to me upon this exercise of the Option as provided in paragraph 8 of the Plan.

 

If I am enclosing Shares with this letter, I hereby represent and warrant that I am the owner of such Shares free and clear of all liens, security interests and other restrictions or encumbrances.  I agree that I will pay any required withholding taxes in connection with this exercise as provided in paragraph 9 of the Plan.

 



 

Please issue a certificate (the “ Certificate ”) for the number of Shares with respect to which the Option is being exercised in the name of the person indicated below and deliver the Certificate to the address indicated below:

 

Name in Which to Issue Certificate:

 

 

Address to Which Certificate Should be

 

Delivered:

 

 

 

 

 

 

 

 

 

 

Principal Mailing Address for Holder of
the Certificate (if different from above):

 

 

 

 

 

 

 

 

 

Very truly yours,

 

 

 

 

 

Signature

 

 

 

 

 

Name, please print

 

 

 

 

 

Social Security Number

 

2



 

                    , 20     

 

TACTILE SYSTEMS TECHNOLOGY, INC.

4824 Park Glen Road

Minneapolis, Minnesota 55416

 

Ladies and Gentlemen:

 

Name of Optionee:

 

 

 

Date of Grant of Option:

 

 

 

Exercise Price Per Share:

 

 

 

Number of Shares With Respect to Which

 

the Option is to be Exercised:

 

 

 

Total Exercise Price:

 

 

The above Optionee has requested that we finance the exercise of the above Option to purchase Shares of Common Stock of Tactile Systems Technology, Inc. (the “ Company ”) and has given us irrevocable instructions to promptly deliver to the Company the amount of sale or loan proceeds from the Shares to be issued pursuant to such exercise to satisfy the Optionee’s obligation to pay the Total Exercise Price.

 

 

Very truly yours,

 

 

 

 

 

Broker Name

 

 

 

 

 

By

 

 




Exhibit 10.5

 

 

 

December 6, 2012

 

TACTILE SYSTEMS TECHNOLOGY, INC.

2007 OMNIBUS STOCK PLAN

(Amended and Restated October 21, 2008;
Further Amended September 14, 2012)

 

 

 



 

To Recipients Of Awards Under The

Tactile Systems Technology, Inc.

2007 Omnibus Stock Plan

 

You have received an award under the Tactile Systems Technology, Inc. 2007 Omnibus Stock Plan.  Awards under the plan may be in the form of stock options, stock appreciation rights, performance units, restricted stock or other stock-based awards.  A copy of the plan is attached as Exhibit A .  You have also executed an agreement covering the additional terms of your award.  The plan and your agreement together contain your rights and obligations as the recipient of an award under the plan.  The company suggests that you read the plan and your agreement carefully, if you have not already done so.  This document summarizes the material features of the plan.  This summary is qualified by the text of the plan and by the specific terms of the agreement entered into between you and the company with respect to any award granted under the plan.

 

General Information About The Plan

 

The purpose of the plan is to motivate key personnel to produce a superior return for the company’s stockholders by offering them an opportunity to realize stock appreciation, by facilitating their ownership of common stock and by rewarding them for achieving a high level of corporate performance.  The plan is also intended to facilitate recruiting and retaining key personnel, including outside directors, consultants, and advisors, of outstanding ability.

 

There are 6,499,865 shares of common stock available for awards under the plan.  This number is subject to adjustment for future stock splits, stock dividends and similar changes in the capitalization of the company.  The plan will remain in effect until all stock subject to it has been distributed or until all awards have expired or lapsed.  In addition, the board of directors may terminate the plan at any time, subject to the conditions stated in the plan.

 

The plan is not subject to the Employee Retirement Income Security Act of 1974 and is not a “qualified plan” under Section 401(a) of the Internal Revenue Code of 1986.

 

Plan Administration

 

The plan is administered by a committee of two or more non-employee members of the board of directors, or by action of the board of directors as permitted in the plan.  In the event of a conflict between a permitted action of the board of directors and an action of the committee, the action of the board of directors controls.  The committee has the authority to interpret the plan and any award or agreement made under the plan.  The committee also has the authority, subject to the terms of the plan, to establish, amend, waive and rescind any rules relating to the plan.  The committee is also responsible for determining when and to whom awards will be granted, the form of each award, the amount of each award and any other terms of an award, consistent with the plan.

 

Members of the committee are designated by the board of directors and serve on the committee for an indefinite term, at the discretion of the board of directors.  The committee may delegate all or any portion of its authority to persons who are not non-employee directors solely for purposes of determining and administering awards to persons who are not insiders of the company.

 

Eligibility

 

All of the employees and persons who provide services to the company and its affiliates, including directors, advisors and consultants, are eligible to receive awards under the plan.  The selection of those to whom awards under the plan are made is within the sole discretion of the committee.

 

Types Of Awards Under The Plan

 

The types of awards that may be granted under the plan include incentive stock options (also known as ISOs), non-statutory stock options (which are similar to stock options previously known as non-qualified stock options), stock appreciation rights, performance units, restricted stock and other stock-based awards.  The following is a brief description of the material characteristics of each type of award.

 

Incentive and Non-Statutory Stock Options.   Incentive stock options are options designated by the committee as incentive stock options that comply with the requirements of Section 422 of the Internal Revenue Code of 1986 or any successor provision.  Non-statutory stock options are all options other than incentive stock options.  Stock options may be granted and exercised at such times as the committee may determine.  The purchase price of each share subject to an option shall be determined by the committee and set forth in the agreement, and, except where determined

 

1



 

otherwise by the committee, shall not be less than 100% of the fair market value of a share as of the date the option is granted.  Each option shall be exercisable in whole or in part on the terms provided in the agreement.  In no event shall any option be exercisable at any time after the expiration of its term.  When an option is no longer exercisable, it shall be deemed to have lapsed or terminated.

 

The purchase price of the shares with respect to which an option is exercised shall be payable in full at the time of exercise.  The purchase price may be payable in cash, by delivery or tender of shares having a fair market value as of the date the option is exercised equal to the purchase price of the shares being purchased pursuant to the option, or a combination thereof, as determined by the committee, but no fractional shares will be issued or accepted.  A participant exercising a stock option shall not be permitted to pay any portion of the purchase price with shares if, in the opinion of the committee, payment in such manner could have adverse financial accounting consequences for the company.

 

With respect to incentive stock options, the committee retains full authority to impose other conditions, limitations or provisions where needed to qualify the option as an incentive stock option.  For example, the Internal Revenue Code currently includes the following requirements for a stock option to qualify as an incentive stock option:

 

·                   the purchase price of each share subject to an incentive stock option shall not be less than 100% of the fair market value of a share as of the date the incentive stock option is granted;

 

·                   the aggregate fair market value of the shares with respect to which incentive stock options held by an individual first become exercisable in any calendar year shall also not exceed $100,000 (or such other limit required by law) - any stock options exceeding this limit will be treated as non-statutory stock options;

 

·                   an incentive stock option will not be exercisable more than 10 years after the date of grant (or such other limit imposed by law); and

 

·                   the recipient of an incentive stock option must be an employee of the company on the date of grant.

 

In addition, no participant may receive an incentive stock option under the plan if, at the time the award is granted, the participant owns shares possessing more than 10% of the total combined voting power of all classes of stock of the company or its subsidiaries, unless (1) the exercise price for that incentive stock option is at least 110% of the fair market value of the shares subject to that incentive stock option on the date of grant and (2) that option is not exercisable after the date five years from the date of grant.

 

Stock Appreciation Rights and Performance Units .   The recipient of a stock appreciation right receives, upon exercise of the right and subject to the terms and conditions specified by the committee, all or a portion of the excess of the fair market value of a specified number of shares as of the date of exercise of the right over a specified price that shall not be less than 100% of the fair market value of such shares as of the date of grant of the right.  Payment shall be made upon exercise of a stock appreciation right, subject to terms and conditions imposed by the committee in the agreement.  No stock appreciation right shall be exercisable at any time after the expiration of its term, and when a stock appreciation right is no longer exercisable, it shall be deemed to have lapsed or terminated.

 

An award of performance units under the plan entitles the recipient to future payments of cash, shares or a combination of cash and shares, as determined by the committee, based upon the achievement of pre-established performance targets.  The committee shall determine the extent to which performance targets have been attained and the amount of payment due for such satisfaction.

 

Note that an agreement may permit an acceleration of the performance cycle, and an adjustment of performance targets and payments with respect to some or all of the performance units awarded to a participant, upon the occurrence of certain events, which may, but need not include, without limitation, a fundamental change in the company as defined in the plan, the participant’s death or retirement or other events affecting the capitalization of our company.

 

Restricted Stock and Other Stock-Based Awards The committee may award restricted stock under the plan, which is stock subject to specified restrictions on transfer and conditions of forfeiture.  A holder of restricted stock shall have all the other rights of a stockholder, including the right to receive dividends and the right to vote.

 

2



 

The committee may also award stock or other awards, such as securities convertible into stock and phantom securities.  The granting of such awards is within the discretion of the committee.

 

Acceleration of Awards, Lapse of Restrictions, Forfeiture

 

The committee may provide in an award agreement for the lapse or waiver of restrictions or conditions on restricted stock or other awards, or acceleration of the vesting of stock options, stock appreciation rights and other awards, or acceleration of the term with respect to which the achievement of performance targets for performance units is determined in the event of a fundamental change in the corporate structure of the company, upon a change of control of the company or upon the participant’s death, disability or retirement.

 

If the participant’s employment or other relationship with the company or its affiliates is terminated for any reason, then any unexercised portion of the award will generally be forfeited, except as provided in the award agreement or by the committee.

 

Adjustments, Modifications, Termination

 

The board of directors may at any time terminate, suspend or modify the plan.  And, except as where stated otherwise in the plan, the committee may at any time alter or amend any or all agreements under the plan to the extent permitted by law.  No termination, suspension, or modification of the plan will materially and adversely affect any right acquired by a participant before the date of such termination, suspension, or modification.  However, any and all adjustments made in response to changes in the capitalization of the company will be conclusively presumed to not adversely affect any rights of award recipients.  If the company experiences a change in capitalization, a fundamental change, or any other relevant change as described in the plan, the committee may make appropriate adjustments to the awards in order to prevent enlargement of rights or inappropriate dilution of rights.

 

Federal Tax Considerations (United States Only)

 

This section summarizes the material federal income tax consequences that may result from awards made under the plan.  Because this is only a summary, issues that are material to you may not be discussed.  Furthermore, the tax laws are subject to legislative changes and new or revised administrative or judicial interpretations.  You may also incur foreign, state or local tax consequences that are not discussed in this summary.

 

Therefore, you are encouraged to review with your own tax adviser the tax status of your award.  You are also encouraged to consult your tax advisor before exercising any award regarding the tax consequences of the proposed exercise.

 

Incentive Stock Options.   You will realize no taxable income, and the company will not be entitled to any related deduction, when you are granted an incentive stock option.  If certain statutory employment and holding period conditions are satisfied before you dispose of the shares acquired pursuant to the exercise of such an option, then you will generally not realize any taxable income upon the exercise of such an option and the company will not be entitled to any deduction in connection with such exercise, subject to any possible applicable requirements based upon alternative minimum tax regulations discussed later in this section.  Upon disposition of the shares after expiration of the statutory holding periods, any gain or loss you realize will be a capital gain or loss.  The company will not be entitled to a deduction with respect to a disposition of the shares by a recipient after the expiration of the statutory holding periods.

 

Except in the event of death, if you dispose of the shares acquired upon exercise of an incentive stock option before the expiration of the statutory holding periods, you will be considered to have realized as compensation, taxable as ordinary income in the year of disposition in an amount, not exceeding the gain realized on such disposition, equal to the difference between the exercise price and the fair market value of the shares on the date of exercise of the option.  The company will be entitled to a deduction at the same time and in the same amount as you are deemed to have realized ordinary income.  Any gain realized on the disposition in excess of the amount treated as compensation or any loss realized on the disposition will constitute capital gain or loss, respectively.  If you pay the exercise price with shares that were originally acquired pursuant to the exercise of an incentive stock option and the statutory holding periods for the shares have not been met, you will be treated as having made a disqualifying disposition of such shares, and the tax consequences of such disqualifying disposition will be as described above.

 

The foregoing discussion applies only for regular tax purposes.  For alternative minimum tax purposes, an incentive stock option will be treated as if it were a non-statutory stock option, the tax consequences of which are discussed below.

 

3



 

Non-Statutory Stock Options .   You will realize no taxable income, and the company will not be entitled to any related deduction, when any non-statutory stock option is granted under the plan.  Upon exercise of a non-statutory stock option, you will realize ordinary income, and the company will be entitled to a deduction, equal to the excess of the fair market value of the shares on the date of exercise over the exercise price.  Upon disposition of the shares, any additional gain or loss realized by you will be taxed as a capital gain or loss.

 

Stock Appreciation Rights and Performance Units.   Generally, you will realize no income upon the award of a stock appreciation right or performance units.  You will realize ordinary income, and the company will be entitled to a corresponding deduction, when cash or shares are delivered to you upon exercise of a stock appreciation right or in payment of the performance unit award.  The amount of ordinary income and deduction will be the amount of cash, plus fair market value of the shares received on the date you receive them.  Upon a subsequent disposition of shares you receive, any additional gain or loss you realize will be taxed as capital gain or loss.

 

Restricted Stock and Other Stock-Based Awards.   Unless you file an election to be taxed under Section 83(b) of the Internal Revenue Code, the following federal tax consequences will generally apply to an award of restricted stock:

 

·                   you will not realize income upon the grant of the restricted stock;

 

·                   you will realize ordinary income, and the company will be entitled to a corresponding deduction, when the restrictions on your stock have been removed or have expired; and

 

·                   the amount of your ordinary income and the company’s deduction will be the fair market value of the stock on the date the restrictions are removed or expire.

 

If you elect to be taxed under Section 83(b) or if you were awarded unrestricted stock, then the tax consequences to you and us will be determined as of the date of the grant of the stock, rather than as of the date of the removal or expiration of the restrictions.

 

With respect to awards of unrestricted stock, generally (a) you will realize ordinary income and the company will be entitled to a corresponding deduction upon the grant of the unrestricted stock and (b) the amount of the ordinary income and deduction will be the fair market value of such unrestricted stock on the date of the grant.

 

When you dispose of restricted or unrestricted stock, the difference between the amount you receive upon the disposition and the fair market value of the shares on the date you realized ordinary income will be taxed as a capital gain or loss.

 

Withholding.   The plan permits the company to withhold from cash awards, and to require you to pay us, cash sufficient to cover any required withholding taxes.  In lieu of cash, the committee may permit you to cover withholding obligations through a reduction in the number of shares delivered to you or through your surrender to the company of shares of the company’s common stock that you own.

 

Section 409A :  Under Section 409A of the Internal Revenue Code, if the exercise price or grant price of an award is less than the fair market value of the Company’s common stock on the date of grant or the terms of the award otherwise violate the safe harbors of Section 409A of the Internal Revenue Code, the award may be treated as a form of deferred compensation and you may be subject to an additional 20% tax, plus interest and possible penalties.  You are encouraged to consult a tax adviser regarding the potential impact of Section 409A of the Internal Revenue Code.

 

Restrictions on Transfer of Awards

 

Except as provided otherwise in the plan, the only person who may exercise an option, stock appreciation right, or receive payments pursuant to performance units or any other award, is the participant who received such award under this plan.

 

No award of restricted stock (before the expiration of the restrictions), options, stock appreciation rights, performance units or other award, may be sold, assigned, transferred, exchanged or otherwise encumbered except under the following limited circumstances:

 

·                   transfers or grants to a successor’s in interest in the event of the participant’s death;

 

4



 

·                   pursuant to a qualified domestic relations order as defined in the Internal Revenue Code of 1986 or Title 1 of the Employee Retirement Income Security Act of 1974; or

 

·                   the committee specifically authorizes a transfer of the interest in the award where no consideration accompanies the transfer.

 

Any attempted transfer not permitted by the plan is ineffective.  And, where a transfer is authorized, the transferee continues to be subject to the terms and conditions of the award as existed immediately before the transfer.

 

Resale Considerations

 

Shares of stock acquired under the plan are not registered under the Securities Act of 1933 or the securities laws of any state.  Consequently, any person acquiring the shares must bear the economic risk of the investment for an indefinite period of time, and the shares cannot be sold unless they are subsequently registered under the Securities Act of 1933 and applicable state securities laws, or an exemption from such registration is available.

 

Prospective acquirers of the shares are advised to seek independent legal advice of their own choice regarding the requirements imposed by the Securities Act of 1933 and by state securities laws and other legal matters relevant to the shares.  A legend will be placed on the shares stating that such securities have not been registered under the Securities Act of 1933 or under other securities laws and may not be sold or otherwise disposed of without such registration or the availability of any exemption therefrom, according to an opinion of counsel satisfactory to the company.

 

Where You Can Find More Information

 

You may request, in writing or orally, a copy of any additional information regarding the company, the plan or the committee, at no cost, by contacting the company at the following address:

 

Chief Executive Officer

Tactile Systems Technology, Inc.

1331 Tyler Street NE, Suite 200

Minneapolis, MN 55413

Telephone:  (612) 355-5201

 

5



 

EXHIBIT A

 

TACTILE SYSTEMS TECHNOLOGY, INC.
2007 OMNIBUS STOCK PLAN

 

Originally approved by the stockholders on October 25, 2007
Amended and restated by stockholders on October 21, 2008
Amendment No. 1 by stockholders September 14, 2012

 

1.                                       Purpose .  The purpose of the Tactile Systems Technology, Inc. 2007 Omnibus Stock Plan (the “ Plan ”) is to promote the interests of the Company and its stockholders by providing key personnel of the Company and its Affiliates with an opportunity to acquire a proprietary interest in the Company and reward them for achieving a high level of performance and thereby develop a stronger incentive to put forth maximum effort for the continued success and growth of the Company and its Affiliates.  In addition, the opportunity to acquire a proprietary interest in the Company will aid in attracting and retaining key personnel of outstanding ability.  The Plan is also intended to provide Outside Directors with an opportunity to acquire a proprietary interest in the Company, to compensate Outside Directors, consultants and advisors for their contribution to the Company and to aid in attracting and retaining Outside Directors and qualified consultants and advisors.

 

2.                                       Definitions .

 

2.1                                The capitalized terms used elsewhere in the Plan have the meanings set forth below.

 

(a)                                  Affiliate ” means any corporation that is a “parent corporation” or “subsidiary corporation” of the Company, as those terms are defined in Code Sections 424(e) and (f), or any successor provisions.

 

(b)                                  Agreement ” means a written contract (i) consistent with the terms of the Plan entered into between the Company or an Affiliate and a Participant and (ii) containing the terms and conditions of an Award in such form and not inconsistent with the Plan as the Committee shall approve from time to time, together with all amendments thereto, which amendments may be unilaterally made by the Company (with the approval of the Committee) unless such amendments are deemed by the Committee to be materially adverse to the Participant and not required as a matter of law.

 

(c)                                   Award ” or “ Awards ” means a grant made under the Plan in the form of Restricted Stock, Options, Stock Appreciation Rights, Performance Units,  Stock or any other stock-based award.

 

(d)                                  Board ” means the Board of Directors of the Company.

 

(e)                                   Code ” means the Internal Revenue Code of 1986, as amended and in effect from time to time or any successor statute.

 

(f)                                    Committee ” means two or more directors designated by the Board to administer the Plan under Section 3.1 of the Plan.  From and after the time, if any, that the Company has a class of securities registered under Section 12 of the Exchange Act, Committee means two or more Non-Employee Directors designated by the Board to administer the Plan under Section 3.1 of the Plan.  If the Board has not designated a committee to administer the Plan, then the Board will constitute the Committee.

 

(g)                                   Company ” means Tactile Systems Technology, Inc., a Delaware corporation, or any successor to all or substantially all of its businesses by merger, consolidation, purchase of assets or otherwise.

 

(h)                                  Effective Date ” means the date specified in Section 12.1 of the Plan.

 

(i)                                      Employee ” means an employee (including an officer or director who is also an employee) of the Company or an Affiliate.

 

A- 1



 

(j)                                     Exchange Act ” means the Securities Exchange Act of 1934, as amended and in effect from time to time or any successor statute.

 

(k)                                  Fair Market Value ” as of any date means, unless otherwise expressly provided in the Plan:

 

(i)                                      the closing sale price of a Share on the date in question, or, if no sale of Shares shall have occurred on that date, on the next preceding day on which a sale of Shares occurred

 

(A)                                on the composite tape for New York Stock Exchange listed shares, or

 

(B)                                if the Shares are not quoted on the composite tape for New York Stock Exchange listed shares, on the principal United States Securities Exchange registered under the Exchange Act on which the Shares are listed, or

 

(C)                                if the Shares are not listed on any such exchange, on the National Association of Securities Dealers, Inc. Automated Quotations National Market System or any system then in use, or

 

(ii)                                   if clause (i) is inapplicable, the mean between the closing “bid” and the closing “asked” quotation of a Share on the date immediately preceding that date, or, if no closing bid or asked quotation is made on that date, on the next preceding day on which a closing bid and asked quotation is made, on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or

 

(iii)                                if clauses (i) and (ii) are inapplicable, what the Committee determines in good faith and in a manner consistent with Code Section 409A to be 100% of the fair market value of a Share on that date.

 

However, if the applicable securities exchange or system has closed for the day at the time the event occurs that triggers a determination of Fair Market Value, whether the grant of an Award, the exercise of an Option or Stock Appreciation Right or otherwise, all references in this paragraph to the “date immediately preceding that date” shall be deemed to be references to “that date.”  In the case of an Incentive Stock Option, if this determination of Fair Market Value is not consistent with the then current regulations of the Secretary of the Treasury, Fair Market Value shall be determined in accordance with those regulations.  The determination of Fair Market Value shall be subject to adjustment as provided in Section 16 of the Plan.

 

(l)                                      Fundamental Change ” means a dissolution or liquidation of the Company, a sale of substantially all of the assets of the Company, a merger or consolidation of the Company with or into any other corporation, regardless of whether the Company is the surviving corporation, or a statutory share exchange involving capital stock of the Company.

 

(m)                              Incentive Stock Option ” means any Option designated as such and granted in accordance with the requirements of Code Section 422 or any successor provision.

 

(n)                                  Insider ” as of a particular date means any person who, as of that date is an officer of the Company as defined under Exchange Act Rule 16a-1(f) or its successor provision.

 

(o)                                  Non-Employee Director ” means a member of the Board who is considered a non-employee director within the meaning of Exchange Act Rule 16b-3(b)(3) or its successor provision and an outside director for purposes of Code Section 162(m).

 

(p)                                  Non-Statutory Stock Option ” means an Option other than an Incentive Stock Option.

 

(q)                                  Option ” means a right to purchase Stock, including both Non-Statutory Stock Options and Incentive Stock Options.

 

(r)                                     Outside Director ” means a director who is not an Employee.

 

A- 2



 

(s)                                    Participant ” means a person or entity to whom an Award is or has been made in accordance with the Plan.

 

(t)                                     Performance Cycle ” means the period of time as specified in an Agreement over which Performance Units are to be earned.

 

(u)                                  Performance Units ” means an Award made pursuant to Section 11 of the Plan.

 

(v)                                  Plan ” means this 2007 Omnibus Stock Plan, as may be amended and in effect from time to time.

 

(w)                                Restricted Stock ” means Stock granted under Section 7 of the Plan so long as such Stock remains subject to one or more restrictions.

 

(x)                                  Share ” means a share of Stock.

 

(y)                                  Stock ” means the common stock of the Company.

 

(z)                                   Stock Appreciation Right ” means a right, the value of which is determined in relation to the appreciation in value of Shares pursuant to an Award granted under Section 10 of the Plan.

 

(aa)                           Subsidiary ” means a “subsidiary corporation,” as that term is defined in Code Section 424(f) or any successor provision.

 

(bb)                           Successor ” with respect to a Participant means the legal representative of an incompetent Participant, and if the Participant is deceased the estate of the Participant or the person or persons who may, by bequest or inheritance, or pursuant to the terms of an Award, acquire the right to exercise an Option or Stock Appreciation Right or to receive cash and/or Shares issuable in satisfaction of an Award in the event of the Participant’s death.

 

(cc)                             Term ” means the period during which an Option or Stock Appreciation Right may be exercised or the period during which the restrictions or terms and conditions placed on Restricted Stock or any other Award are in effect.

 

(dd)         “ Transferee ” means any member of the Participant’s immediate family ( i.e. , his or her children, step-children, grandchildren and spouse) or one or more trusts for the benefit of such family members or partnerships in which such family members are the only partners.

 

2.2                                Gender and Number .  Except when otherwise indicated by the context, reference to the masculine gender shall include, when used, the feminine gender and any term used in the singular shall also include the plural.

 

3.                                       Administration and Indemnification .

 

3.1                                Administration .

 

(a)                                  The Committee shall administer the Plan.  The Committee shall have exclusive power to (i) make Awards, (ii) determine when and to whom Awards will be granted, the form of each Award, the amount of each Award, and any other terms or conditions of each Award consistent with the Plan, and (iii) determine whether, to what extent and under what circumstances, Awards may be settled, paid or exercised in cash, Shares or other Awards, or other property or canceled, forfeited or suspended.  Each Award shall be subject to an Agreement authorized by the Committee.  A majority of the members of the Committee shall constitute a quorum for any meeting of the Committee, and acts of a majority of the members present at any meeting at which a quorum is present or the acts unanimously approved in writing by all members of the Committee shall be the acts of the Committee.  Notwithstanding the foregoing, the Board shall have the sole and exclusive power to administer the Plan with respect to Awards granted to Outside Directors and, except to the extent that the grant or exercise of such authority would cause any Award or transaction to become subject to (or lose an exemption under) the short-swing profit recovery provisions of Section 16 of the Exchange Act, the Board may, at any time and from time to time, without any further action of the Committee, exercise

 

A- 3



 

the powers and duties of the Committee under the Plan.  To the extent that any permitted action taken by the Board conflicts with action taken by the Committee, the Board action will control.

 

(b)                                  Solely for purposes of determining and administering Awards to Participants who are not Insiders, the Committee may delegate all or any portion of its authority under the Plan to one or more persons who are not Non-Employee Directors.

 

(c)                                   To the extent within its discretion and subject to Sections 15 and 16 of the Plan, other than price, the Committee may amend the terms and conditions of any outstanding Award.

 

(d)                                  The Committee’s interpretation of the Plan and of any Award or Agreement made under the Plan and all related decisions or resolutions of the Board or Committee shall be final and binding on all parties with an interest therein.  Consistent with its terms, the Committee shall have the power to establish, amend or waive regulations to administer the Plan.  In carrying out any of its responsibilities, the Committee shall have discretionary authority to construe the terms of the Plan and any Award or Agreement made under the Plan.

 

(e)                                   From and after the time, if any, that the Company has a class of securities registered under Section 12 of the Exchange Act, it is the intent that the Plan and all Awards granted pursuant to it shall be administered by the Committee so as to permit the Plan and Awards to comply with Exchange Act Rule 16b-3, except in such instances as the Committee, in its discretion, may so provide.  If any provision of the Plan or of any Award would otherwise frustrate or conflict with the intent expressed in this Section 3.1(d), that provision to the extent possible shall be interpreted and deemed amended in the manner determined by the Committee so as to avoid the conflict.  To the extent of any remaining irreconcilable conflict with this intent, the provision shall be deemed void as applicable to Insiders to the extent permitted by law and in the manner deemed advisable by the Committee.

 

(f)                                    It is the intent that the Plan and all Awards granted pursuant to it will not provide for the deferral of compensation within the meaning of Code Section 409A, and the Plan shall be administered in accordance with this intent.  If the Committee determines that any Award may be subject to Code Section 409A, the Board or the Committee may adopt such amendments to the Plan and the applicable Award agreement, or adopt other policies and procedures or take other actions that the Board or the Committee determines are necessary or appropriate to exempt the Award from Code Section 409A.

 

3.2                                Indemnification .  Each person who is or shall have been a member of the Committee, or of the Board, and any other person to whom the Committee delegates authority under the Plan, shall be indemnified and held harmless by the Company, to the extent permitted by law, against and from any loss, cost, liability or expense that may be imposed upon or reasonably incurred by such person in connection with or resulting from any claim, action, suit or proceeding to which such person may be a party or in which such person may be involved by reason of any action taken or failure to act, made in good faith, under the Plan and against and from any and all amounts paid by such person in settlement thereof, with the Company’s approval, or paid by such person in satisfaction of any judgment in any such action, suit or proceeding against such person, provided such person shall give the Company an opportunity, at the Company’s expense, to handle and defend the same before such person undertakes to handle and defend it on such person’s own behalf.  The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such person or persons may be entitled under the Company’s Certificate of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.

 

4.                                       Shares Available Under the Plan .

 

(a)                                  The number of Shares available for distribution under the Plan shall not exceed 6,499,865 (subject to adjustment pursuant to Section 16 of the Plan).

 

(b)                                  Any Shares subject to the terms and conditions of an Award under the Plan that are not used because the terms and conditions of the Award are not met may again be used for an Award

 

A- 4


 

under the Plan; provided however, that Shares with respect to which a Stock Appreciation Right has been exercised whether paid in cash and/or in Shares may not again be awarded under the Plan.

 

(c)                                   Any unexercised or undistributed portion of any terminated, expired, exchanged, or forfeited Award, or any Award settled in cash in lieu of Shares (except as provided in Section 4(b) of the Plan) shall be available for further Awards.

 

(d)                                  For the purposes of computing the total number of Shares granted under the Plan, the following rules shall apply to Awards payable in Shares where appropriate:

 

(i)                                      each Option shall be deemed to be the equivalent of the maximum number of Shares that may be issued upon exercise of the particular Option;

 

(ii)                                   an Award (other than an Option) payable in some other security shall be deemed to be equal to the number of Shares to which it relates;

 

(iii)                                where the number of Shares available under the Award is variable on the date it is granted, the number of Shares shall be deemed to be the maximum number of Shares that could be received under that particular Award; and

 

(iv)                               where two or more types of Awards (all of which are payable in Shares) are granted to a Participant in tandem with each other, such that the exercise of one type of Award with respect to a number of Shares cancels at least an equal number of Shares of the other, each such joint Award shall be deemed to be the equivalent of the maximum number of Shares available under the largest single Award.

 

Additional rules for determining the number of Shares granted under the Plan may be made by the Committee as it deems necessary or desirable.

 

(e)                                   No fractional Shares may be issued under the Plan; however, cash shall be paid in lieu of any fractional Share in settlement of an Award.

 

5.                                       Eligibility .  Participation in the Plan shall be limited to Employees and to individuals or entities who are not Employees but who provide services to the Company or an Affiliate,  including services provided in the capacity of a consultant, advisor or director.  The granting of Awards is solely at the discretion of the Committee, except that Incentive Stock Options may only be granted to Employees.  References herein to “employed,” “employment” or similar terms (except “Employee”) shall include the providing of services in any capacity or as a director or director emeritus. Neither the transfer of employment of a Participant between any of the Company or its Affiliates, nor a leave of absence granted to such Participant and approved by the Committee, shall be deemed a termination of employment for purposes of the Plan.

 

6.                                       General Terms of Awards .

 

6.1                                Amount of Award .  Each Agreement shall set forth the number of Shares of Restricted Stock, Stock or Performance Units subject to the Agreement, or the number of Shares to which the Option subject to the Agreement applies or with respect to which payment upon the exercise of the Stock Appreciation Right subject to the Agreement is to be determined, as the case may be, together with such other terms and conditions applicable to the Award as determined by the Committee acting in its sole discretion.

 

6.2                                Term .  Each Agreement, other than those relating solely to Awards of Shares without restrictions, shall set forth the Term of the Option, Stock Appreciation Right, Restricted Stock or other Award or the Performance Cycle for the Performance Units, as the case may be.  Acceleration of the expiration of the applicable Term is permitted, upon such terms and conditions as shall be set forth in the Agreement, which may, but need not, include, without limitation, acceleration in the event of the Participant’s death or retirement.  Acceleration of the Performance Cycle of the Performance Units will be subject to Section 11.2 of the Plan.

 

6.3                                Transferability .  Except as provided in this Section, during the lifetime of a Participant to whom an Award is granted, only that Participant (or that Participant’s legal representative) may exercise an Option or Stock Appreciation Right, or receive payment with respect to Performance Units or any other

 

A- 5



 

Award.  No Award of Restricted Stock (before the expiration of the restrictions), Options, Stock Appreciation Rights, Performance Units or other Award may be sold, assigned, transferred, exchanged or otherwise encumbered other than to a Successor in the event of a Participant’s death or pursuant to a qualified domestic relations order as defined in the Code or Title 1 of the Employee Retirement Income Security Act of 1974, as amended (“ ERISA ”), or the rules thereunder; any attempted transfer in violation of this Section 6.3 shall be of no effect.  Notwithstanding the immediately preceding sentence, the Committee, in an Agreement or otherwise at its discretion, may provide that the Award (other than Incentive Stock Options) may be transferable to a Transferee if the Participant does not receive any consideration for the transfer.  Any Award held by a Transferee shall continue to be subject to the same terms and conditions that were applicable to that Award immediately before the transfer thereof to the Transferee.  For purposes of any provision of the Plan relating to notice to a Participant or to acceleration or termination of an Award upon the death, disability or termination of employment of a Participant, the references to “Participant” shall mean the original grantee of an Award and not any Transferee.

 

6.4                                Termination of Employment .  Except as otherwise determined by the Committee or provided by the Committee in an Agreement, in case of a Participant’s termination of employment, the following provisions shall apply:

 

(a)                                  Options and Stock Appreciation Rights .

 

(i)                                      If a Participant’s employment or other relationship with the Company and its Affiliates terminates because of the Participant’s death, then any Option or Stock Appreciation Right that has not expired or been terminated shall remain exercisable for one year after Participant’s death, but, unless otherwise provided in the Agreement, only to the extent that such Option or Stock Appreciation Right was exercisable immediately prior to Participant’s death.

 

(ii)                                   If a Participant’s employment or other relationship with the Company and its Affiliates terminates because the Participant is disabled (within the meaning of Section 22(e)(3) of the Code), then any Option or Stock Appreciation Right that has not expired or been terminated shall remain exercisable for one year after Participant’s termination of employment resulting from Participant’s disability, but, unless otherwise provided in the Agreement, only to the extent that such Option or Stock Appreciation Right was exercisable immediately prior to such Participant’s termination of employment resulting from Participant’s disability.

 

(iii)                                If a Participant’s employment or other relationship with the Company and its Affiliates terminates for any reason other than death or disability, then any Option or Stock Appreciation Right that has not expired or been terminated shall remain exercisable for 90 days after termination of the Participant’s employment or other relationship with the Company, whichever occurs later, but, unless otherwise provided in the Agreement, only to the extent that such Option or Stock Appreciation Right was exercisable immediately prior to such Participant’s termination of employment or other relationship with the Company.

 

(iv)                               Notwithstanding Sections 6.4(a)(i), (ii) and (iii) of the Plan, in no event shall an Option or a Stock Appreciation Right be exercisable after the expiration of the Term of such Award.  Any Option or Stock Appreciation Right that is not exercised within the periods set forth in Sections 6.4 (i), (ii) and (iii) of the Plan, except as otherwise provided by the Committee in the Agreement, shall terminate as of the end of the periods described in such Sections.

 

(b)                                  Performance Units .  If a Participant’s employment or other relationship with the Company and its Affiliates terminates during a Performance Cycle because of death or disability, or under other circumstances provided by the Committee in its discretion in the Agreement or otherwise, the Participant, unless the Committee shall otherwise provide in the Agreement, shall be entitled to a payment with respect to the Performance Units at the end of the Performance Cycle based upon the extent to which achievement of performance targets was satisfied at the end of such period (as determined at the end of the Performance Cycle) and prorated for the portion of the Performance

 

A- 6



 

Cycle during which the Participant was employed by the Company or its Affiliates.  Except as provided in this Section 6.4(b) or in the Agreement, if a Participant’s employment or other relationship with the Company and its Affiliates terminates during a Performance Cycle, then such Participant shall not be entitled to any payment with respect to that Performance Cycle.

 

(c)                                   Restricted Stock Awards .  Unless otherwise provided in the Agreement, in case of a Participant’s death or disability, any Shares of Restricted Stock as to which restrictions have not lapsed as of the date of the Participant’s termination of employment shall terminate at the date of the Participant’s termination of employment and such Shares of Restricted Stock shall be forfeited to the Company.

 

6.5                                Rights as Stockholder .  Each Agreement shall provide that a Participant shall have no rights as a stockholder with respect to any securities covered by an Award unless and until the date the Participant becomes the holder of record of the Stock, if any, to which the Award relates.

 

7.                                       Restricted Stock Awards .

 

(a)                                  An Award of Restricted Stock under the Plan shall consist of Shares subject to restrictions on transfer and conditions of forfeiture, which restrictions and conditions shall be included in the applicable Agreement.  The Committee may provide for the lapse or waiver of any such restriction or condition based on such factors or criteria as the Committee, in its sole discretion, may determine.

 

(b)                                  Except as otherwise provided in the applicable Agreement, each Stock certificate issued with respect to an Award of Restricted Stock shall either be deposited with the Company or its designee, together with an assignment separate from the certificate, in blank, signed by the Participant, or bear such legends with respect to the restricted nature of the Restricted Stock evidenced thereby as shall be provided for in the applicable Agreement.

 

(c)                                   The Agreement shall describe the terms and conditions by which the restrictions and conditions of forfeiture upon awarded Restricted Stock shall lapse.  Upon the lapse of the restrictions and conditions, Shares free of restrictive legends, if any, relating to such restrictions shall be issued to the Participant or a Successor or Transferee.

 

(d)                                  A Participant or a Transferee with a Restricted Stock Award shall have all the other rights of a stockholder including, but not limited to, the right to receive dividends and the right to vote the Shares of Restricted Stock.

 

8.                                       Other Awards .  The Committee may from time to time grant Stock and other Awards under the Plan including, without limitation, those Awards pursuant to which Shares are or may in the future be acquired, Awards denominated in Stock units, securities convertible into Stock and phantom securities.  The Committee, in its sole discretion, shall determine the terms and conditions of such Awards provided that such Awards shall not be inconsistent with the terms and purposes of the Plan.  The Committee may, at its sole discretion, direct the Company to issue Shares subject to restrictive legends and/or stop transfer instructions that are consistent with the terms and conditions of the Award to which the Shares relate.

 

9.                                       Stock Options .

 

9.1                                Terms of All Options .

 

(a)                                  An Option shall be granted pursuant to an Agreement as either an Incentive Stock Option or a Non-Statutory Stock Option.  The purchase price of each Share subject to an Option shall be determined by the Committee and set forth in the Agreement, but shall not be less than 100% of the Fair Market Value of a Share as of the date the Option is granted (except as provided in Sections 9.2 and 20 of the Plan or as otherwise determined by the Committee in its discretion).

 

(b)                                  The purchase price of the Shares with respect to which an Option is exercised shall be payable in full at the time of exercise, provided that to the extent permitted by law, the Agreement may permit some or all Participants to simultaneously exercise Options and sell the Shares thereby acquired pursuant to a brokerage or similar relationship and use the proceeds from the sale as

 

A- 7



 

payment of the purchase price of the Shares.  The purchase price may be payable in cash, by delivery or tender of Shares having a Fair Market Value as of the date the Option is exercised equal to the purchase price of the Shares being purchased pursuant to the Option, or a combination thereof, as determined by the Committee, but no fractional Shares will be issued or accepted.  Provided, however, that a Participant exercising a stock option shall not be permitted to pay any portion of the purchase price with Shares if, in the opinion of the Committee, payment in such manner could have adverse financial accounting consequences for the Company or is otherwise not desirable.

 

(c)                                   Each Option shall be exercisable in whole or in part on the terms provided in the Agreement.  In no event shall any Option be exercisable at any time after the expiration of its Term.  When an Option is no longer exercisable, it shall be deemed to have lapsed or terminated.

 

9.2                                Incentive Stock Options .  In addition to the other terms and conditions applicable to all Options:

 

(a)                                  the purchase price of each Share subject to an Incentive Stock Option shall not be less than 100% of the Fair Market Value of a Share as of the date the Incentive Stock Option is granted if this limitation is necessary to qualify the Option as an Incentive Stock Option (except as provided in Section 19 of the Plan);

 

(b)                                  the aggregate Fair Market Value (determined as of the date the Option is granted) of the Shares with respect to which Incentive Stock Options held by an individual first become exercisable in any calendar year (under the Plan and all other incentive stock option plans of the Company and its Affiliates) shall not exceed $100,000 (or such other limit as may be required by the Code) if this limitation is necessary to qualify the Option as an Incentive Stock Option and to the extent any Option granted to a Participant exceeds this limit the Option shall be treated as a Non-Statutory Stock Option;

 

(c)                                   an Incentive Stock Option shall not be exercisable more than 10 years after the date of grant (or such other limit as may be required by the Code) if this limitation is necessary to qualify the Option as an Incentive Stock Option;

 

(d)                                  the Agreement covering an Incentive Stock Option shall contain such other terms and provisions that the Committee determines necessary to qualify this Option as an Incentive Stock Option; and

 

(e)                                   the recipient of an Incentive Stock Option must be an employee of the Company on the date of grant; and

 

(f)                                    notwithstanding any other provision of the Plan to the contrary, no Participant may receive an Incentive Stock Option under the Plan if, at the time the Award is granted, the Participant owns (after application of the rules contained in Code Section 424(d), or its successor provision), Shares possessing more than 10% of the total combined voting power of all classes of stock of the Company or its Subsidiaries, unless (i) the exercise price for that Incentive Stock Option is at least 110% of the Fair Market Value of the Shares subject to that Incentive Stock Option on the date of grant and (ii) that Option is not exercisable after the date five years from the date that Incentive Stock Option is granted.

 

10.                                Stock Appreciation Rights .  An Award of a Stock Appreciation Right shall entitle the Participant (or a Successor or Transferee), subject to terms and conditions determined by the Committee, to receive upon exercise of the Stock Appreciation Right all or a portion of the excess of (i) the Fair Market Value of a specified number of Shares as of the date of exercise of the Stock Appreciation Right over (ii) a specified price that shall not be less than 100% of the Fair Market Value of such Shares as of the date of grant of the Stock Appreciation Right.  A Stock Appreciation Right may be granted in connection with part or all of, in addition to, or completely independent of an Option or any other Award under the Plan.  If issued in connection with a previously or contemporaneously granted Option, the Committee may impose a condition that exercise of a Stock Appreciation Right cancels a pro rata portion of the Option with which it is connected and vice versa.  Each Stock Appreciation Right may be exercisable in whole or in part on the terms provided in the Agreement.  No Stock Appreciation Right shall be exercisable at any time after the expiration of its Term.  When a Stock Appreciation Right is no longer exercisable, it shall be deemed to have lapsed or terminated.  Upon exercise of a

 

A- 8



 

Stock Appreciation Right, payment to the Participant or a Successor or Transferee shall be made at such time or times as shall be provided in the Agreement in the form of cash, Shares or a combination of cash and Shares as determined by the Committee.  The Agreement may provide for a limitation upon the amount or percentage of the total appreciation on which payment (whether in cash and/or Shares) may be made in the event of the exercise of a Stock Appreciation Right.

 

11.                                Performance Units .

 

11.1                         Initial Award .

 

(a)                                  An Award of Performance Units under the Plan shall entitle the Participant or a Successor or Transferee to future payments of cash, Shares or a combination of cash and Shares, as determined by the Committee, based upon the achievement of pre-established performance targets.  These performance targets may, but need not, include, without limitation, targets relating to one or more of the Company’s or a group’s, unit’s, Affiliate’s or an individual’s performance.  The Agreement may establish that a portion of a Participant’s Award will be paid for performance that exceeds the minimum target but falls below the maximum target applicable to the Award.  The Agreement shall also provide for the timing of the payment.

 

(b)                                  Following the conclusion or acceleration of each Performance Cycle, the Committee shall determine the extent to which (i) performance targets have been attained, (ii) any other terms and conditions with respect to an Award relating to the Performance Cycle have been satisfied and (iii) payment is due with respect to an Award of Performance Units.  Any payment determined to be due shall be made within such period of time after the end of the Performance Cycle so as to qualify the payment for the short-term deferral exemption from Code Section 409A.

 

11.2                         Acceleration and Adjustment .  The Agreement may permit an acceleration of the Performance Cycle and an adjustment of performance targets and payments with respect to some or all of the Performance Units awarded to a Participant, upon the occurrence of certain events, which may, but need not include, without limitation, a Fundamental Change, a recapitalization, a change in the accounting practices of the Company, a change in the Participant’s title or employment responsibilities, the Participant’s death or retirement or, with respect to payments in Shares with respect to Performance Units, a reclassification, stock dividend, stock split or stock combination as provided in Plan Section 16.  The Agreement also may provide for a limitation on the value of an Award of Performance Units that a Participant may receive.

 

12.                                Effective Date and Duration of the Plan .

 

12.1                         Effective Date .  Upon its adoption by the Board, the Plan shall be submitted for approval by the stockholders of the Company and shall be effective as of the date of such approval (which date is set forth on the first page of the Plan).

 

12.2                         Duration of the Plan .  The Plan shall remain in effect until all Stock subject to it shall be distributed, all Awards have expired or lapsed, the Plan is terminated pursuant to Section 15 of the Plan or the tenth anniversary of the Effective Date (the “ Termination Date ”); provided, however, that Awards made before the Termination Date may be exercised, vested or otherwise effectuated beyond the Termination Date unless limited in the Agreement or otherwise.  No Award of an Incentive Stock Option shall be made more than 10 years after the Effective Date (or such other limit as may be required by the Code) if this limitation is necessary to qualify the Option as an Incentive Stock Option.  The date and time of approval by the Committee of the granting of an Award shall be considered the date and time at which the Award is made or granted.

 

13.                                Plan Does Not Affect Employment Status .

 

(a)                                  Status as an eligible Employee shall not be construed as a commitment that any Award will be made under the Plan to that eligible Employee or to eligible Employees generally.

 

(b)                                  Nothing in the Plan or in any Agreement or related documents shall confer upon any Employee or Participant any right to continue in the employment of the Company or any Affiliate or constitute any contract of employment or affect any right that the Company or any Affiliate may have to change such person’s compensation, other benefits, job responsibilities, or title, or to terminate the employment of such person with or without cause.

 

A- 9



 

14.                                Tax Withholding .  The Company shall have the right to withhold from any cash payment under the Plan to a Participant or other person (including a Successor or a Transferee) an amount sufficient to cover any required withholding taxes.  The Company shall have the right to require a Participant or other person receiving Shares under the Plan to pay the Company a cash amount sufficient to cover any required withholding taxes before actual receipt of those Shares.  In lieu of all or any part of a cash payment from a person receiving Shares under the Plan, the Committee may permit the individual to cover all or any part of the required withholdings through a reduction of the number of Shares delivered or delivery or tender return to the Company of Shares held by the Participant or other person, in each case valued in the same manner as used in computing the withholding taxes under the applicable laws.

 

15.                                Amendment, Modification and Termination of the Plan .

 

(a)                                  The Board may at any time and from time to time terminate, suspend or modify the Plan.  Except as limited in (b) below, the Committee may at any time alter or amend any or all Agreements under the Plan to the extent permitted by law.

 

(b)                                  No termination, suspension, or modification of the Plan will materially and adversely affect any right acquired by any Participant or Successor or Transferee under an Award granted before the date of termination, suspension, or modification, unless otherwise agreed to by the Participant in the Agreement or otherwise, or required as a matter of law.  It will be conclusively presumed that neither (i) any adjustment for changes in capitalization provided for in Section 16 of the Plan, nor (ii) any amendment to the Plan or an Award Agreement contemplated by Section 3.1(f) hereof, will adversely affect these rights.

 

16.                                Adjustment for Changes in Capitalization .  Subject to any required action by the Company’s stockholders, appropriate adjustments, so as to prevent enlargement of rights or inappropriate dilution (i) in the aggregate number and type of Shares available for Awards under the Plan, (ii) in the number and type of Shares and amount of cash subject to Awards then outstanding, and (iii) in the exercise price as to any outstanding Options shall be made by the Committee in its sole discretion to give effect to adjustments made in the number or type of Shares through a Fundamental Change (subject to Section 17 of the Plan), recapitalization, reclassification, stock dividend, stock split, stock combination or other relevant change, provided that fractional Shares shall be rounded to the nearest whole Share.

 

17.                                Fundamental Change .  In the event of a proposed Fundamental Change, the Committee may, but shall not be obligated to:

 

(a)                                  if the Fundamental Change is a merger or consolidation or statutory share exchange, make appropriate provision for the protection of the outstanding Options and Stock Appreciation Rights by the substitution of options, stock appreciation rights and appropriate voting common stock of the corporation surviving any merger or consolidation or, if appropriate, the parent corporation of the Company or such surviving corporation, provided that such substitution will be effected in a manner that will not result in the grant of a new Option or Stock Appreciation Right under Code Section 409A; or

 

(b)                                  at least ten days before the occurrence of the Fundamental Change, declare, and provide written notice to each holder of an Option or Stock Appreciation Right of the declaration, that each outstanding Option and Stock Appreciation Right, whether or not then exercisable, shall be canceled at the time of, or immediately before the occurrence of the Fundamental Change in exchange for payment to each holder of an Option or Stock Appreciation Right, within ten days after the Fundamental Change, of cash equal to (i) for each Share covered by the canceled Option, the amount, if any, by which the Fair Market Value (as defined in this Section) per Share exceeds the exercise price per Share covered by such Option or (ii) for each Stock Appreciation Right, the price determined pursuant to Section 10, except that Fair Market Value of the Shares as of the date of exercise of the Stock Appreciation Right, as used in clause (i) of Section 10 of the Plan, shall be deemed to mean Fair Market Value for each Share with respect to which the Stock Appreciation Right is calculated determined in the manner hereinafter referred to in this Section.  At the time of the declaration provided for in the immediately preceding sentence, each Stock Appreciation Right and each Option shall immediately become exercisable in full and each person holding an Option or a Stock Appreciation Right shall have the right, during the period preceding the time of cancellation of the Option or Stock Appreciation Right, to exercise the Option as to all or any part of the Shares

 

A- 10



 

covered thereby or the Stock Appreciation Right in whole or in part, as the case may be.  In the event of a declaration pursuant to this Section 17(b), each outstanding Option and Stock Appreciation Right granted pursuant to the Plan that shall not have been exercised before the Fundamental Change shall be canceled at the time of, or immediately before, the Fundamental Change, as provided in the declaration.  Notwithstanding the foregoing, no person holding an Option or a Stock Appreciation Right shall be entitled to the payment provided for in this Section 17(b) if such Option or Stock Appreciation Right shall have terminated, expired or been cancelled.  For purposes of this Section only, “Fair Market Value” per Share means the cash plus the fair market value, as determined in good faith by the Committee, of the non-cash consideration to be received per Share by the stockholders of the Company upon the occurrence of the Fundamental Change.

 

18.                                Change in Control .

 

(a)                                  Definition A “ Change in Control ” of the Company shall be deemed to occur if any of the following occur:

 

(1)                                  Any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) after the effective date of this Plan first acquires or becomes a “beneficial owner” (as defined in Rule 13d-3 or any successor rule under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding securities entitled to vote generally in the election of directors (“ Voting Securities ”), provided, however, that the following shall not constitute a Change in Control pursuant to this paragraph (a)(1):

 

(A)                                any acquisition of Shares or Voting Securities of the Company directly from the Company,

 

(B)                                any acquisition or beneficial ownership by the Company or a Subsidiary,

 

(C)                                any acquisition or beneficial ownership by any employee benefit plan (or related trust) sponsored or maintained by the Company or one or more of its subsidiaries,

 

(D)                                any acquisition or beneficial ownership by any corporation with respect to which, immediately following such acquisition, more than 50% of both the combined voting power of the Company’s then outstanding Voting Securities and the Shares are then beneficially owned by all or substantially all of the persons who beneficially owned Voting Securities and Shares immediately prior to such acquisition in substantially the same proportions as their ownership of such Voting Securities and Shares, as the case may be, immediately prior to such acquisition;

 

(2)                                  A majority of the members of the Board of Directors of the Company shall not be Continuing Directors.  “ Continuing Directors ” shall mean:  (A) individuals who, on the date hereof, are directors of the Company, (B) individuals elected as directors of the Company subsequent to the date hereof for whose election proxies shall have been solicited by the Board, (C) individuals elected as directors of the Company subsequent to the date hereof pursuant to a nomination or board representation right of preferred shareholders of the Company or (D) any individual elected or appointed by the Board to fill vacancies on the Board caused by death or resignation (but not by removal) or to fill newly-created directorships;

 

(3)                                  Consummation of a reorganization, merger or consolidation of the Company or a statutory exchange of outstanding Voting Securities, unless, immediately following such reorganization, merger, consolidation or exchange, all or substantially all of the persons who were the beneficial owners, respectively, of Voting Securities and

 

A- 11



 

Shares of the Company immediately prior to such reorganization, merger, consolidation or exchange beneficially own, directly or indirectly, more than 70% of, respectively, the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors and the then outstanding shares of common stock, as the case may be, of the corporation that is the issuer of such securities held by the shareholders of the Company after such reorganization, merger, consolidation or exchange in substantially the same proportions as their ownership, immediately prior to such reorganization, merger, consolidation or exchange, of the Voting Securities and Shares, as the case may be; or

 

(4)                                  Consummation of (x) a complete liquidation or dissolution of the Company or (y) the sale or other disposition of all or substantially all of the assets of the Company (in one or a series of transactions), other than to a corporation with respect to which, immediately following such sale or other disposition, more than 70% of, respectively, the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and the then outstanding shares of common stock of such corporation is then beneficially owned, directly or indirectly, by all or substantially all of the persons who were the beneficial owners, respectively, of the Voting Securities and Shares immediately prior to such sale or other disposition in substantially the same proportions as their ownership, immediately prior to such sale or other disposition, of the Voting Securities and Shares, as the case may be.

 

(b)                                  Acceleration of Vesting .  If and to the extent so provided in an Agreement or by Committee action with respect to any outstanding Option, Restricted Stock or Stock Appreciation Right, and notwithstanding anything in Section 17 to the contrary, if a Change in Control shall occur, then such Option, Restricted Stock or Stock Appreciation Right, if not already exercised or vested in full or otherwise terminated, expired or cancelled, may become immediately exercisable and fully vested as provided in the Agreement or Committee action and may remain exercisable during the remaining term thereof or as may be provided in the Agreement or, subject to consent of the Participant, by Committee action.  For the avoidance of doubt, unless otherwise provided in an Agreement or specifically by Committee action as set forth above, no Option, Restricted Stock or Stock Appreciation Right will accelerate in exercisability or vesting upon a Change in Control.

 

(c)                                   Cash Payment .  If a Change in Control shall or is to occur, then, so long as a majority of the members of the Board are Continuing Directors, the Committee, in its sole discretion, and without the consent of the Participant affected thereby, may determine that some or all outstanding Options, unvested Restricted Stock or Stock Appreciation Rights shall be cancelled as of the effective date of any such Change in Control.  The Committee may further determine that the holder or holders of such cancelled Options, unvested Restricted Stock or Stock Appreciation Rights shall receive, with respect to some or all of the Shares subject to such Options, unvested Restricted Stock or Stock Appreciation Rights, as of the date of such cancellation, cash in an amount, for (i) each Share subject to an Option or Stock Appreciation Right, equal to the excess of the per Share Fair Market Value of such Shares immediately prior to such Change in Control over the exercise price per Share of such Options or Stock Appreciation Rights and (ii) for each unvested Share of Restricted Stock, equal to the per Share Fair Market Value of such Shares immediately prior to such Change in Control.

 

(d)                                  Limitation on Change in Control Payments .   Notwithstanding anything in Sections 17, 18(b) or 18(c) to the contrary, if, with respect to an Option, unvested Restricted Stock or Stock Appreciation Right, the acceleration of the exercisability or vesting of such Award or the payment of cash in exchange for all or part of an such Award as provided in Sections 17, 18(b) or 18(c) (which acceleration or payment could be deemed a “payment” within the meaning of Code Section 280G(b)(2)), together with any other payments which such Participant has the right to receive from the Company or any corporation which is a member of an “affiliated group” (as defined in Code Section 1504(a) without regard to Code Section 1504(b)) of which the Company is a member, would constitute a “parachute payment” (as defined in Code Section 280G(b)(2)), then, unless otherwise provided in an agreement with the Company, such acceleration of exercisability or vesting and payments pursuant to Sections 17, 18(b) or 18(c) shall be reduced to the largest amount as, in the sole judgment of the Committee, will result in no portion of such

 

A- 12



 

payments being subject to the excise tax imposed by Code Section 4999.  The Committee, with the consent of the Participant, may waive the provisions of this Section 18(d).

 

19.                                Forfeitures .  An Agreement may provide that if a Participant has received or been entitled to payment of cash, delivery of Shares, or a combination thereof pursuant to an Award within six months before the Participant’s termination of employment with the Company and its Affiliates, the Committee, in its sole discretion, may require the Participant to return or forfeit the cash and/or Shares received with respect to the Award (or its economic value as of (i) the date of the exercise of Options or Stock Appreciation Rights, (ii) the date of, and immediately following, the lapse of restrictions on Restricted Stock or the receipt of Shares without restrictions or (iii) the date on which the right of the Participant to payment with respect to Performance Units vests, as the case may be) in the event of certain occurrences specified in the Agreement.  The Committee’s right to require forfeiture must be exercised within 90 days after discovery of such an occurrence but in no event later than 15 months after the Participant’s termination of employment with the Company and its Affiliates.  The occurrences may, but need not, include competition with the Company or any Affiliate, unauthorized disclosure of material proprietary information of the Company or any Affiliate, a violation of applicable business ethics policies of the Company or Affiliate or any other occurrence specified in the Agreement within the period or periods of time specified in the Agreement.

 

20.                                Corporate Mergers, Acquisitions, Etc .  The Committee may also grant Options, Stock Appreciation Rights, Restricted Stock or other Awards under the Plan in substitution for, or in connection with the assumption of, existing options, stock appreciation rights, restricted stock or other award granted, awarded or issued by another corporation and assumed or otherwise agreed to be provided for by the Company pursuant to or by reason of a transaction involving a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation to which the Company or a Subsidiary is a party.  The terms and conditions of the substitute Awards may vary from the terms and conditions set forth in the Plan to the extent that the Board at the time of the grant may deem appropriate to conform, in whole or in part, to the provisions of the awards in substitution for which they are granted, but will be effected in a manner that will not result in the grant of a new Option or Stock Appreciation Right under Code Section 409A.

 

21.                                Unfunded Plan .  The Plan shall be unfunded and the Company shall not be required to segregate any assets that may at any time be represented by Awards under the Plan.  Neither the Company, its Affiliates, the Committee, nor the Board of Directors shall be deemed to be a trustee of any amounts to be paid under the Plan nor shall anything contained in the Plan or any action taken pursuant to its provisions create or be construed to create a fiduciary relationship between the Company and/or its Affiliates, and a Participant or Successor or Transferee.  To the extent any person acquires a right to receive an Award under the Plan, this right shall be no greater than the right of an unsecured general creditor of the Company.

 

22.                                Limits of Liability .

 

(a)                                  Any liability of the Company to any Participant with respect to an Award shall be based solely upon contractual obligations created by the Plan and the Award Agreement.

 

(b)                                  Except as may be required by law, neither the Company nor any member of the Board of Directors or of the Committee, nor any other person participating in any determination of any question under the Plan, or in the interpretation, administration or application of the Plan, shall have any liability to any party for any action taken, or not taken, in good faith under the Plan.

 

23.                                Compliance with Applicable Legal Requirements .  No certificate for Shares distributable pursuant to the Plan shall be issued and delivered unless the issuance of the certificate complies with all applicable legal requirements including, without limitation, compliance with the provisions of applicable state securities laws, the Securities Act of 1933, as amended and in effect from time to time or any successor statute, the Exchange Act and the requirements of the exchanges on which the Company’s Shares may, at the time, be listed.

 

24.                                Deferrals and Settlements .  The Committee may require or permit Participants to elect to defer the issuance of Shares or the settlement of Awards in cash under such rules and procedures as it may establish under the Plan, consistent with the requirements of Code Section 409A.  It may also provide that deferred settlements include the payment or crediting of interest on the deferral amounts.

 

25.                                Other Benefit and Compensation Programs .  Payments and other benefits received by a Participant under an Award made pursuant to the Plan shall not be deemed a part of a Participant’s regular, recurring compensation

 

A- 13



 

for purposes of the termination, indemnity or severance pay laws of any country and shall not be included in, nor have any effect on, the determination of benefits under any other employee benefit plan, contract or similar arrangement provided by the Company or an Affiliate unless expressly so provided by such other plan, contract or arrangement, or unless the Committee expressly determines that an Award or portion of an Award should be included to accurately reflect competitive compensation practices or to recognize that an Award has been made in lieu of a portion of competitive cash compensation.

 

26.                                Beneficiary Upon Participant’s Death .  To the extent that the transfer of a Participant’s Award at his or her death is permitted under an Agreement, a Participant’s Award shall be transferable at death to the estate or to the person who acquires the right to succeed to the Award by bequest or inheritance.

 

27.                                Requirements of Law .

 

(a)                                  To the extent that federal laws do not otherwise control, the Plan and all determinations made and actions taken pursuant to the Plan shall be governed by the laws of the State of Delaware without regard to its conflicts-of-law principles and shall be construed accordingly.

 

(b)                                  If any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not effect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.

 

28.                                Delivery of Financial Information .  The Company will, to the extent necessary to comply with applicable state securities laws, deliver financial statements of the Company to a Participant at least annually.

 

29.                                Restrictions on Shares .  Notwithstanding any other provision of the Plan, at the discretion of the Committee, the Company may reserve to itself and its assignees in the option agreement (a) a right of first refusal to purchase all Shares that a Participant (or a subsequent transferee) may propose to transfer to a third party, (b) a right to repurchase a portion of or all Shares held by a Participant upon the Participant’s termination of employment or service with the Company or its parent, subsidiary or affiliate for any reason within a specified time (but not to exceed 90 days of the later of termination or exercise of the award, if required by applicable laws), (c) the right to require the Participant from time to time to execute and deliver stockholder, voting or similar agreements, (d) the right to require the Participant to agree not to take any action that would cause the Company not to qualify for Subchapter S tax status, if applicable, and (e) the right of the Company to require the Participant from time to time to execute and deliver underwriter lock up agreements.  The price to be paid upon any purchase or repurchase of Shares pursuant to clause (a) or (b) above will be determined by the Committee, and any such purchase or repurchase will be effected on terms that are consistent with maintaining the status of Shares as “service recipient stock” for purposes of Code Section 409A.  This paragraph 29 is not a limitation on the provisions that may be included in any Agreement.  Shares may be repurchased at the Participant’s original purchase price provided that, if required by applicable laws, such right to repurchase as to employees lapses at the rate of at least 20% of the Shares subject to the Award per year over five years from the date that the Award is granted (without respect to the date that the Award was exercised or became exercisable).

 

A- 14




Exhibit 10.6

 

TACTILE SYSTEMS TECHNOLOGY, INC.

 

Incentive Stock Option Agreement

(Under the 2007 Omnibus Stock Plan)

 

Name of Optionee:

 

 

 

 

 

No. of Shares Covered:

 

Date of Grant:

 

 

 

Exercise Price Per Share:

 

Expiration Date:

 

 

 

Exercise Schedule (Cumulative):

This option shall vest as to [Insert number of shares equal to 25% of the total shares] shares on [insert date of one year anniversary of the date of grant] . The remaining Shares shall vest as to [1/48 th  of the total shares] shares each month commencing on [insert date of 13 th  month anniversary of the date of grant] and continuing until this option is fully vested.

 

This is an Incentive Stock Option Agreement (the “ Agreement ”) between Tactile Systems Technology, Inc., a Delaware corporation (the “ Company ”), and the optionee identified above (the “ Optionee ”) effective as of the date of grant specified above.

 

RECITALS

 

A.                                     The Company maintains the Tactile Systems Technology, Inc. 2007 Omnibus Stock Plan (the “ Plan ”).

 

B.                                     Pursuant to the Plan, the board of directors of the Company (the “ Board ”) or a committee of two or more directors of the Company (the “ Committee ”) appointed by the Board administers the Plan and has the authority to determine the awards to be granted under the Plan (if the Board has not appointed a committee to administer the Plan, then the Board shall constitute the Committee).

 

C.                                     The Committee has determined that the Optionee is eligible to receive an award under the Plan in the form of an incentive stock option (the “ Option ”).

 

The Company hereby grants this Option to the Optionee under the terms and conditions as follows.

 

TERMS AND CONDITIONS *

 

1.                                       Grant .  The Optionee is granted this Option to purchase the number of Shares specified at the beginning of this Agreement.

 

2.                                       Exercise Price .  The price to the Optionee of each Share subject to this Option shall be the exercise price specified at the beginning of this Agreement.

 

3.                                       Incentive Stock Option .  This Option is intended to be an “incentive stock option” within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “ Code ”); provided

 


*                                          Unless the context indicates otherwise, terms that are not defined in this Agreement shall have the meaning set forth in the Plan as it currently exists or as it is amended in the future.

 



 

that if the Option or part thereof fails to qualify as an incentive stock option, it will be treated as a non-statutory stock option.

 

4.                                       Exercise Schedule .  This Option shall vest and become exercisable as to the number of Shares and on the dates specified in the exercise schedule at the beginning of this Agreement.  The exercise schedule shall be cumulative; thus, to the extent this Option has not already been exercised and has not expired, terminated or been cancelled, the Optionee or the person otherwise entitled to exercise this Option as provided herein may at any time, and from time to time, purchase all or any portion of the Shares then purchasable under the exercise schedule.

 

This Option may also be exercised in full (notwithstanding the exercise schedule) under the circumstances described in Section 8 of this Agreement if it has not expired prior thereto.

 

5.                                       Expiration .  This Option shall expire at 5:00 p.m. Central Time on the earliest of:

 

(a)                                  The expiration date specified at the beginning of this Agreement (which date shall not be later than ten years after the date of grant or, if the Optionee owns or is deemed to own stock possessing more than 10% of the combined voting power of all classes of stock of the Company, five years after the date of grant);

 

(b)                                  The expiration of the period after the termination of employment of the Optionee within which the Option can be exercised (as specified in Section 7 of this Agreement);

 

(c)                                   Termination of the Optionee’s employment for Cause.  “ Cause ” shall be deemed to exist upon (i) an act or acts of dishonesty undertaken by Optionee and intended to result in substantial gain or personal enrichment of Optionee at the expense of the Company; (ii) unlawful conduct or gross misconduct that is willful and deliberate on Optionee’s part and that, in either event, is materially injurious to the Company; (iii) the conviction of Optionee of a felony; or (iv) material breach by Optionee of any terms and conditions of any employment or non-competition/non-solicitation agreement between the Optionee and the Company not caused by the Company, which breach has not been cured by Optionee within ten days after written notice thereof to Optionee from the Company; or

 

(d)                                  The date (if any) fixed for cancellation pursuant to Section 17 of the Plan.

 

In no event may anyone exercise this Option, in whole or in part, after it has expired, notwithstanding any other provision of this Agreement.  In addition, if the Option is exercised, and prior to the delivery of the certificate representing the Shares so purchased, it is determined that Cause for termination existed, then the Company may rescind the Option exercise by the Optionee and the Option shall terminate at the election of the Company.

 

6.                                       Procedure to Exercise Option .

 

Notice of Exercise .  This Option may be exercised by delivering written notice of exercise to the Company at the principal executive office of the Company, to the attention of the Company’s Chief Executive Officer, in the form attached to this Agreement.  The notice shall state the number of Shares to be purchased, and shall be signed by the person exercising this Option.  If the person exercising this Option is not the Optionee, he/she also must submit appropriate proof of his/her right to exercise this Option.

 

Tender of Payment .  Upon giving notice of any exercise hereunder, the Optionee shall provide for payment of the purchase price of the Shares being purchased through one or a combination of the following methods:

 

(a)                                  Cash (including check, bank draft or money order);

 

2



 

(b)                                  To the extent permitted by law, through a broker-assisted cashless exercise in which the Optionee simultaneously exercises the Option and sells all or a portion of the Shares thereby acquired pursuant to a brokerage or similar relationship and uses the proceeds from such sale to pay the purchase price of such Shares;

 

(c)                                   By delivery to the Company of unencumbered Shares having an aggregate Fair Market Value on the date of exercise equal to the purchase price of such Shares; or

 

(d)                                  By authorizing the Company to retain, from the total number of Shares as to which the Option is exercised, that number of Shares having a Fair Market Value on the date of exercise equal to the purchase price for the total number of Shares as to which the Option is exercised.

 

Notwithstanding the foregoing, the Optionee shall not be permitted to pay any portion of the purchase price with Shares, or by authorizing the Company to retain Shares upon exercise of the Option, if the Committee, in its sole discretion, determines that payment in such manner is undesirable.

 

Delivery of Certificates .  As soon as practicable after the Company receives the notice and purchase price provided for above, it shall deliver to the person exercising this Option, in the name of such person, a certificate or certificates representing the Shares being purchased.  The Company shall pay any original issue or transfer taxes with respect to the issue or transfer of the Shares and all fees and expenses incurred by it in connection therewith.  All Shares so issued shall be fully paid and nonassessable.  Notwithstanding anything to the contrary in this Agreement, no certificate for Shares distributable under the Plan shall be issued and delivered unless the issuance of such certificate complies with all applicable legal requirements including, without limitation, compliance with the provisions of applicable state securities laws, the Securities Act of 1933, as amended (the “ Securities Act ”) and the Exchange Act.

 

7.                                       Employment Requirement .  This Option may be exercised only while the Optionee remains employed with the Company or a parent or subsidiary thereof, and only if the Optionee has been continuously so employed since the date of this Agreement; provided that :

 

(a)                                  This Option may be exercised for 90 days following the day the Optionee’s employment by the Company ceases if such cessation of employment is for a reason other than death or disability, but only to the extent that it was exercisable immediately prior to termination of employment; provided, that if termination of the Optionee’s employment shall have been for Cause, the Option shall expire, and all rights to purchase Shares hereunder shall terminate, immediately upon such termination.

 

(b)                                  This Option may be exercised within one year after the Optionee’s employment by the Company ceases if such cessation of employment is because of death or disability of the Optionee, but only to the extent it was exercisable immediately prior to cessation of employment.

 

(c)                                   If the Optionee’s employment terminates after a declaration made pursuant to Section 17 of the Plan in connection with Fundamental Change , the Option may be exercised at any time permitted by such declaration.

 

Notwithstanding the above, the Option may not be exercised after it has expired.

 

8.                                       Acceleration of Vesting .

 

Fundamental Change .  In the event of a Fundamental Change the Committee may, but shall not be obligated to:

 

3



 

(a)                                  if the Fundamental Change is a merger or consolidation or statutory share exchange, make appropriate provision for the protection of this Option by the substitution for this Option of options or voting common stock of the corporation surviving any merger or consolidation or, if appropriate, the parent corporation of the Company or such surviving corporation; or

 

(b)                                  at least ten days before the occurrence of the Fundamental Change, declare, and provide written notice to the Optionee of the declaration, that this Option, whether or not then exercisable, shall be canceled at the time of, or immediately before the occurrence of, the Fundamental Change (unless it shall have been exercised prior to the occurrence of the Fundamental Change).  In connection with any such declaration, the Committee may, but shall not be obligated to, cause payment to be made to the Optionee of cash equal to, for each Share covered by the canceled Option, the amount, if any, by which the Fair Market Value per Share exceeds the exercise price per Share covered by this Option.  At the time of any such declaration, this Option shall immediately become exercisable in full and the Optionee shall have the right, during the period preceding the time of cancellation of this Option, to exercise this Option as to all or any part of the Shares covered by this Option.  In the event of a declaration pursuant to this subsection, to the extent this Option has not been exercised prior to the Fundamental Change, the unexercised part of this Option shall be canceled at the time of, or immediately before, the Fundamental Change, as provided in the declaration.  Notwithstanding the foregoing, the holder of this Option shall not be entitled to the payment provided for in this subsection if this Option shall have expired pursuant to Section 5 above or been cancelled.  For purposes of this subsection only, “ Fair Market Value ” per Share has the meaning set forth in Section 17 of the Plan.

 

Change in Control .  If a Change in Control of the Company shall occur, then, at the sole discretion of the Company, the Option, if not already exercised in full or otherwise terminated, expired or cancelled, may become immediately exercisable in full and remain exercisable during the remaining term of the Option.

 

Discretionary Acceleration .  Notwithstanding any other provisions of this Agreement to the contrary, the Committee may, in its sole discretion, declare at any time that the Option shall be immediately exercisable.

 

Possible Tax Effect of Acceleration .  If acceleration of this Option results in the vesting of Shares with a Fair Market Value in excess of $100,000 in any given year, then this Option shall not be deemed an “incentive stock option” within the meaning of Section 422 of the Code to the extent the Fair Market Value of vested Shares exceeds $100,000 in such year.

 

9.                                       Limitation on Transfer .  During the lifetime of the Optionee, only the Optionee or his/her guardian or legal representative may exercise the Option.  The Option may not be assigned or transferred by the Optionee otherwise than by will or the laws of descent and distribution.

 

10.                                No Stockholder Rights Before Exercise .  No person shall have any of the rights of a stockholder of the Company with respect to any Share subject to the Option until the Share actually is issued to him/her upon exercise of the Option.

 

11.                                Lock-Up Period .

 

(a)                                  The Optionee agrees that the Optionee will not offer, pledge, sell, contract to sell, sell any option, sell any contract to purchase, purchase any option, purchase any contract to sell, grant any option, right, or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any Shares (or any other Company securities) or enter into any

 

4



 

swap, hedging, or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any Shares (or any other Company securities) held by the Optionee (other than those included in the registration) for a period specified by the representative of the underwriters of the Company’s capital stock (or any other Company securities, collectively, the “ Stock ”) not to exceed 90 days (180 days in the case of an initial public offering), plus any additional periods required by the Financial Industry Regulatory Authority, after the effective date of any Company registration statement filed under the Securities Act.

 

(b)                                  The Optionee agrees to execute and deliver such other agreements as may be reasonably requested by the Company or the underwriter to the extent that such agreements are consistent with the foregoing or that are necessary to give further effect to the provisions set forth in Section 11(a).  In addition, if requested by the Company or the representative of the underwriters of Stock, the Optionee will provide, within 10 days of such request, such information as may be required by the Company or such representative in connection with the completion of any public offering of the Company’s securities pursuant to a registration statement filed under the Securities Act.

 

(c)                                   The obligations described in this Section 11 will not apply to a registration relating solely to employee benefit plans on Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a Commission Rule 145 transaction on Form S-4 or similar forms that may be promulgated in the future.  The Company may impose stop-transfer instructions with respect to the shares of Stock subject to the foregoing restriction until the end of such period, as applicable.

 

12.                                Discretionary Adjustment .  In the event of any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, or extraordinary dividend or divestiture (including a spin-off), or any other change in the corporate structure or Shares of the Company, the Committee (or if the Company does not survive any such transaction, a comparable committee of the Board of Directors of the surviving corporation) shall, without the consent of the Optionee, make such adjustment as it determines in its discretion to be appropriate as to the number and kind of securities subject to and reserved under the Plan and, in order to prevent dilution or enlargement of rights of the Optionee, the number and kind of securities issuable upon exercise of the Option and the exercise price hereof.

 

13.                                Transfer of Shares — Tax Effects .  The Optionee hereby acknowledges that if any Shares received pursuant to the exercise of any portion of the Option are sold within two years from the date of grant or within one year from the effective date of exercise of the Option, or if certain other requirements of the Code are not satisfied, such Shares will be deemed under the Code not to have been acquired by the Optionee pursuant to an “incentive stock option” as defined in the Code; and that the Company shall not be liable to the Optionee in the event the Option for any reason is deemed not to be an “incentive stock option” within the meaning of the Code.

 

14.                                Tax Consequences .

 

(a)                                  The Optionee may incur tax liability as a result of the Optionee’s purchase or disposition of the Shares.  THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THE OPTION OR DISPOSING OF THE SHARES.

 

(b)                                  Notwithstanding the Company’s good faith determination of the Fair Market Value of the Company’s common stock for purposes of determining the exercise price per Share of the Option, the taxing authorities may assert that the fair market value of the Company’s common stock on the date of grant was greater than the exercise price per Share.  The Option may fail to

 

5



 

qualify as an incentive stock option if the exercise price per Share of the Option is less than the fair market value of the Company’s common stock on the date of grant.  In addition, under Section 409A of the Code, if the exercise price per Share of the Option is less than the fair market value of the Company’s common stock on the date of grant, the Option may be treated as a form of deferred compensation and the Optionee may be subject to an additional 20% tax, plus interest and possible penalties.  The Optionee is encouraged to consult a tax adviser regarding the potential impact of Section 409A of the Code.

 

15.                                Amendment to Meet the Requirements of Section 409A .  The Optionee acknowledges that the Company, in the exercise of its sole discretion and without the consent of the Optionee, may amend or modify this Agreement in any manner and delay the payment of any amounts payable pursuant to this Agreement to the minimum extent necessary to meet the requirements of Section 409A of the Code as amplified by any Internal Revenue Service or U.S. Treasury Department regulations or guidance as the Company deems appropriate or advisable.

 

16.                                Interpretation of This Agreement .  All decisions and interpretations made by the Committee with regard to any question arising hereunder or under the Plan shall be binding and conclusive upon the Company and the Optionee.  If there is any inconsistency between the provisions of this Agreement and the Plan, the provisions of the Plan shall govern.

 

17.                                Discontinuance of Employment .  This Agreement shall not give the Optionee a right to continued employment with the Company or any parent or subsidiary of the Company, and the Company or any such parent or subsidiary employing the Optionee may terminate his/her employment at any time and otherwise deal with the Optionee without regard to the effect it may have upon him/her under this Agreement.

 

18.                                Option Subject to Plan, Certificate of Incorporation and By-Laws .  The Optionee acknowledges that the Option and the exercise thereof is subject to the Plan, the Certificate of Incorporation, as amended from time to time, and the By-Laws, as amended from time to time, of the Company, and any applicable federal or state laws, rules or regulations.

 

19.                                Binding Effect .  This Agreement shall be binding in all respects on the heirs, representatives, successors and assigns of the Optionee.

 

20.                                Choice of Law .  This Agreement is entered into under the laws of the State of Delaware and shall be construed and interpreted thereunder (without regard to its conflict of law principles).

 

21.                                Right of First Refusal and Execution of Stockholder Agreements .  At the discretion of the Committee, the Company is hereby granted (a) a right of first refusal to purchase all Shares that the Optionee (or a subsequent transferee) may propose to transfer to a third party and (b) the right to require the Optionee from time to time to execute and deliver stockholder, voting or similar agreements.

 

[ Remainder of page left blank intentionally — signature page follows ]

 

6



 

IN WITNESS WHEREOF, the Optionee and the Company have executed this Agreement as of the date of grant.

 

 

OPTIONEE

 

 

 

 

 

 

 

 

 

TACTILE SYSTEMS TECHNOLOGY, INC.

 

 

 

 

By

 

 

Name:

 

 

Its:

 

 

7



 

                    , 20     

 

To:  Tactile Systems Technology, Inc.

 

Ladies and Gentlemen:

 

I hereby exercise the following option (the “ Option ”) granted to me under the Tactile Systems Technology, Inc. 2007 Omnibus Stock Plan (the “ Plan ”) with respect to the number of shares of Common Stock of Tactile Systems Technology, Inc. (the “ Company ”) indicated below:

 

Name:

 

 

 

Date of Grant of Option:

 

 

 

Exercise Price Per Share:

 

 

 

Number of Shares With Respect to Which the Option is Hereby Exercised:

 

 

 

Total Exercise Price:

 

 

 

 

o                                     Enclosed with this letter is a check, bank draft or money order in the amount of the Total Exercise Price.

 

o                                     I hereby agree to pay the Total Exercise Price within five business days of the date hereof and, as stated in the attached Broker’s Letter, I have delivered irrevocable instructions to                                   to promptly deliver to the Company the amount of sale or loan proceeds from the Shares to be issued pursuant to this exercise necessary to satisfy my obligation hereunder to pay the Total Exercise Price.

 

o                                     Enclosed with this letter is a certificate evidencing unencumbered Shares (duly endorsed in blank) having an aggregate Fair Market Value (as defined in the Plan) equal to or in excess of the Total Exercise Price.

 

o                                     I elect to pay the Total Exercise Price through a reduction in the number of Shares delivered to me upon this exercise of the Option as provided in Section 14 of the Plan.

 

If I am enclosing Shares with this letter, I hereby represent and warrant that I am the owner of such Shares free and clear of all liens, security interests and other restrictions or encumbrances.  I agree that I will pay any required withholding taxes in connection with this exercise.

 



 

Please issue a certificate (the “ Certificate ”) for the number of Shares with respect to which the Option is being exercised in the name of the person indicated below and deliver the Certificate to the address indicated below:

 

Name in Which to Issue Certificate:

 

 

Address to Which Certificate Should be

 

Delivered:

 

 

Principal Mailing Address for Holder of the Certificate (if different from above):

 

 

 

Very truly yours,

 

 

 

 

 

Signature

 

 

 

 

 

Name, please print

 

 

 

 

 

Social Security Number

 

 

 

 

 

 

 

 

 

Address

 

 

 

 

 

Phone Number

 

2



 

                    , 20   

 

To:  Tactile Systems Technology, Inc.

 

Ladies and Gentlemen:

 

Name of Optionee:

 

 

 

Date of Grant of Option:

 

 

 

Exercise Price Per Share:

 

 

 

Number of Shares With Respect to Which the Option is to be Exercised:

 

 

 

Total Exercise Price:

 

 

 

 

The above Optionee has requested that we finance the exercise of the above Option to purchase Shares of Common Stock of Tactile Systems Technology, Inc. (the “ Company ”) and has given us irrevocable instructions to promptly deliver to the Company the amount of sale or loan proceeds from the Shares to be issued pursuant to such exercise to satisfy the Optionee’s obligation to pay the Total Exercise Price.

 

 

Very truly yours,

 

 

 

 

 

Broker Name

 

 

 

 

 

 

 

By

 

 

Name

 

 

Its

 

 




Exhibit 10.7

 

TACTILE SYSTEMS TECHNOLOGY, INC.

 

Non-Statutory Stock Option Agreement [Employee]

(Under the 2007 Omnibus Stock Plan)

 

Name of Optionee:

 

 

 

 

 

No. of Shares Covered:

 

Date of Grant:

 

 

 

Exercise Price Per Share:

 

Expiration Date:

 

 

 

Exercise Schedule (Cumulative):

 

This option shall vest as to [Insert number of shares equal to 25% of the total shares] shares on [insert date of one year anniversary of the date of grant] . The remaining Shares shall vest as to [1/48 th  of the total shares] shares each month commencing on [insert date of 13 th  month anniversary of the date of grant] and continuing until this option is fully vested.

 

This is a Non-Statutory Stock Option Agreement (the “ Agreement ”) between Tactile Systems Technology, Inc., a Delaware corporation (the “ Company ”), and the optionee identified above (the “ Optionee ”) effective as of the date of grant specified above.

 

RECITALS

 

A.                                     The Company maintains the Tactile Systems Technology, Inc. 2007 Omnibus Stock Plan (the “ Plan ”).

 

B.                                     Pursuant to the Plan, the Board of Directors of the Company (the “ Board ”) or a committee of two or more directors of the Company (the “ Committee ”) appointed by the Board administers the Plan and has the authority to determine the awards to be granted under the Plan (if the Board has not appointed a committee to administer the Plan, then the Board shall constitute the Committee).

 

C.                                     The Committee has determined that the Optionee is eligible to receive an award under the Plan in the form of a non-statutory stock option (the “ Option ”).

 

The Company hereby grants this Option to the Optionee under the terms and conditions as follows.

 

TERMS AND CONDITIONS *

 

1.                                       Grant .  The Optionee is granted this Option to purchase the number of Shares specified at the beginning of this Agreement.

 

2.                                       Exercise Price .  The price to the Optionee of each Share subject to this Option shall be the exercise price specified at the beginning of this Agreement.

 

3.                                       Non-Statutory Stock Option .  This Option is not intended to be an “incentive stock option” within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “ Code ”).

 


*                                          Unless the context indicates otherwise, terms that are not defined in this Agreement shall have the meaning set forth in the Plan as it currently exists or as it is amended in the future.

 



 

4.                                       Exercise Schedule .  This Option shall vest and become exercisable as to the number of Shares and on the dates specified in the exercise schedule at the beginning of this Agreement.  The exercise schedule shall be cumulative; thus, to the extent this Option has not already been exercised and has not expired, terminated or been cancelled, the Optionee or the person otherwise entitled to exercise this Option as provided herein may at any time, and from time to time, purchase all or any portion of the Shares then purchasable under the exercise schedule.

 

This Option may also be exercised in full (notwithstanding the exercise schedule) under the circumstances described in Section 8 of this Agreement if it has not expired prior thereto.

 

5.                                       Expiration .  This Option shall expire at 5:00 p.m. Central Time on the earliest of:

 

(a)                                  The expiration date specified at the beginning of this Agreement;

 

(b)                                  The expiration of the period after the termination of employment of the Optionee within which the Option can be exercised (as specified in Section 7 of this Agreement);

 

(c)                                   Termination of the Optionee’s employment for Cause.  “ Cause ” shall be deemed to exist upon (i) an act or acts of dishonesty undertaken by Optionee and intended to result in substantial gain or personal enrichment of Optionee at the expense of the Company; (ii) unlawful conduct or gross misconduct that is willful and deliberate on Optionee’s part and that, in either event, is materially injurious to the Company; (iii) the conviction of Optionee of a felony; or (iv) material breach by Optionee of any terms and conditions of any employment or non-competition/non-solicitation agreement between the Optionee and the Company not caused by the Company, which breach has not been cured by Optionee within ten days after written notice thereof to Optionee from the Company; or

 

(d)                                  The date (if any) fixed for cancellation pursuant to Section 17 of the Plan.

 

In no event may anyone exercise this Option, in whole or in part, after it has expired, notwithstanding any other provision of this Agreement.  In addition, if the Option is exercised, and prior to the delivery of the certificate representing the Shares so purchased, it is determined that Cause for termination existed, then the Company may rescind the Option exercise by the Optionee and the Option shall terminate at the election of the Company.

 

6.                                       Procedure to Exercise Option .

 

Notice of Exercise .  This Option may be exercised by delivering written notice of exercise to the Company at the principal executive office of the Company, to the attention of the Company’s Chief Executive Officer, in the form attached to this Agreement.  The notice shall state the number of Shares to be purchased, and shall be signed by the person exercising this Option.  If the person exercising this Option is not the Optionee, he/she also must submit appropriate proof of his/her right to exercise this Option.

 

Tender of Payment .  Upon giving notice of any exercise hereunder, the Optionee shall provide for payment of the purchase price of the Shares being purchased through one or a combination of the following methods:

 

(a)                                  Cash (including check, bank draft or money order);

 

(b)                                  To the extent permitted by law, through a broker-assisted cashless exercise in which the Optionee simultaneously exercises the Option and sells all or a portion of the Shares thereby acquired pursuant to a brokerage or similar relationship and uses the proceeds from such sale to pay the purchase price of such Shares;

 

2



 

(c)                                   By delivery to the Company of unencumbered Shares having an aggregate Fair Market Value on the date of exercise equal to the purchase price of such Shares; or

 

(d)                                  By authorizing the Company to retain, from the total number of Shares as to which the Option is exercised, that number of Shares having a Fair Market Value on the date of exercise equal to the purchase price for the total number of Shares as to which the Option is exercised.

 

Notwithstanding the foregoing, the Optionee shall not be permitted to pay any portion of the purchase price with Shares, or by authorizing the Company to retain Shares upon exercise of the Option, if the Committee, in its sole discretion, determines that payment in such manner is undesirable.

 

Delivery of Certificates .  As soon as practicable after the Company receives the notice and purchase price provided for above, it shall deliver to the person exercising this Option, in the name of such person, a certificate or certificates representing the Shares being purchased.  The Company shall pay any original issue or transfer taxes with respect to the issue or transfer of the Shares and all fees and expenses incurred by it in connection therewith.  All Shares so issued shall be fully paid and nonassessable.  Notwithstanding anything to the contrary in this Agreement, no certificate for Shares distributable under the Plan shall be issued and delivered unless the issuance of such certificate complies with all applicable legal requirements including, without limitation, compliance with the provisions of applicable state securities laws, the Securities Act of 1933, as amended (the “ Securities Act ”) and the Exchange Act.

 

7.                                       Employment Requirement .  This Option may be exercised only while the Optionee remains employed with the Company or a parent or subsidiary thereof, and only if the Optionee has been continuously so employed since the date of this Agreement; provided that :

 

(a)                                  This Option may be exercised for 90 days following the day the Optionee’s employment by the Company ceases if such cessation of employment is for a reason other than death or disability, but only to the extent that it was exercisable immediately prior to termination of employment; provided, that if termination of the Optionee’s employment shall have been for Cause, the Option shall expire, and all rights to purchase Shares hereunder shall terminate, immediately upon such termination.

 

(b)                                  This Option may be exercised within one year after the Optionee’s employment by the Company ceases if such cessation of employment is because of death or disability of the Optionee, but only to the extent it was exercisable immediately prior to cessation of employment.

 

(c)                                   If the Optionee’s employment terminates after a declaration made pursuant to Section 17 of the Plan in connection with Fundamental Change , the Option may be exercised at any time permitted by such declaration.

 

Notwithstanding the above, the Option may not be exercised after it has expired.

 

8.                                       Acceleration of Vesting .

 

Fundamental Change .  In the event of a Fundamental Change the Committee may, but shall not be obligated to:

 

(a)                                  if the Fundamental Change is a merger or consolidation or statutory share exchange, make appropriate provision for the protection of this Option by the substitution for this Option of options or voting common stock of the corporation surviving any merger or

 

3



 

consolidation or, if appropriate, the parent corporation of the Company or such surviving corporation; or

 

(b)                                  at least ten days before the occurrence of the Fundamental Change, declare, and provide written notice to the Optionee of the declaration, that this Option, whether or not then exercisable, shall be canceled at the time of, or immediately before the occurrence of, the Fundamental Change (unless it shall have been exercised prior to the occurrence of the Fundamental Change).  In connection with any such declaration, the Committee may, but shall not be obligated to, cause payment to be made to the Optionee of cash equal to, for each Share covered by the canceled Option, the amount, if any, by which the Fair Market Value per Share exceeds the exercise price per Share covered by this Option.  At the time of any such declaration, this Option shall immediately become exercisable in full and the Optionee shall have the right, during the period preceding the time of cancellation of this Option, to exercise this Option as to all or any part of the Shares covered by this Option.  In the event of a declaration pursuant to this subsection, to the extent this Option has not been exercised prior to the Fundamental Change, the unexercised part of this Option shall be canceled at the time of, or immediately before, the Fundamental Change, as provided in the declaration.  Notwithstanding the foregoing, the holder of this Option shall not be entitled to the payment provided for in this subsection if this Option shall have expired pursuant to Section 5 above or been cancelled.  For purposes of this subsection only, “ Fair Market Value ” per Share has the meaning set forth in Section 17 of the Plan.

 

Change in Control .  If a Change in Control of the Company shall occur, then, at the sole discretion of the Company, the Option, if not already exercised in full or otherwise terminated, expired or cancelled, may become immediately exercisable in full and remain exercisable during the remaining term of the Option.

 

Discretionary Acceleration .  Notwithstanding any other provisions of this Agreement to the contrary, the Committee may, in its sole discretion, declare at any time that the Option shall be immediately exercisable.

 

9.                                       Limitation on Transfer .  During the lifetime of the Optionee, only the Optionee or his/her guardian or legal representative may exercise the Option.  The Option may not be assigned or transferred by the Optionee otherwise than by will or the laws of descent and distribution.

 

10.                                No Stockholder Rights Before Exercise .  No person shall have any of the rights of a stockholder of the Company with respect to any Share subject to the Option until the Share actually is issued to him/her upon exercise of the Option.

 

11.                                Lock-Up Period .

 

(a)                                  The Optionee agrees that the Optionee will not offer, pledge, sell, contract to sell, sell any option, sell any contract to purchase, purchase any option, purchase any contract to sell, grant any option, right, or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any Shares (or any other Company securities) or enter into any swap, hedging, or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any Shares (or any other Company securities) held by the Optionee (other than those included in the registration) for a period specified by the representative of the underwriters of the Company’s capital stock (or any other Company securities, collectively, the “ Stock ”) not to exceed 90 days (180 days in the case of an initial public offering) after the effective date of any Company registration statement filed under the Securities Act.

 

4



 

(b)                                  The Optionee agrees to execute and deliver such other agreements as may be reasonably requested by the Company or the underwriter to the extent that such agreements are consistent with the foregoing or that are necessary to give further effect to the provisions set forth in Section 11(a).  In addition, if requested by the Company or the representative of the underwriters of Stock, the Optionee will provide, within 10 days of such request, such information as may be required by the Company or such representative in connection with the completion of any public offering of the Company’s securities pursuant to a registration statement filed under the Securities Act.

 

(c)                                   The obligations described in this Section 11 will not apply to a registration relating solely to employee benefit plans on Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a Commission Rule 145 transaction on Form S-4 or similar forms that may be promulgated in the future.  The Company may impose stop-transfer instructions with respect to the shares of Stock subject to the foregoing restriction until the end of such 90-day or 180-day period, as applicable.

 

12.                                Discretionary Adjustment .  In the event of any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, or extraordinary dividend or divestiture (including a spin-off), or any other change in the corporate structure or Shares of the Company, the Committee (or if the Company does not survive any such transaction, a comparable committee of the Board of Directors of the surviving corporation) may, without the consent of the Optionee, make such adjustment as it determines in its discretion to be appropriate as to the number and kind of securities subject to and reserved under the Plan and, in order to prevent dilution or enlargement of rights of the Optionee, the number and kind of securities issuable upon exercise of the Option and the exercise price hereof.

 

13.                                Tax Withholding .  Delivery of Shares upon exercise of this Option shall be subject to any required withholding taxes.  As a condition precedent to receiving Shares upon exercise of this Option, the Optionee may be required to pay to the Company, in accordance with the provisions of the Plan, an amount equal to the amount of any required withholdings.

 

14.                                Tax Consequences .

 

(a)                                  The Optionee may incur tax liability as a result of the Optionee’s purchase or disposition of the Shares.  THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THE OPTION OR DISPOSING OF THE SHARES.

 

(b)                                  Notwithstanding the Company’s good faith determination of the Fair Market Value of the Company’s common stock for purposes of determining the exercise price per Share of the Option, the taxing authorities may assert that the fair market value of the Company’s common stock on the date of grant was greater than the exercise price per Share.  Under Section 409A of the Code, if the exercise price per Share of the Option is less than the fair market value of the Company’s common stock on the date of grant, the Option may be treated as a form of deferred compensation and the Optionee may be subject to an additional 20% tax, plus interest and possible penalties.  The Optionee is encouraged to consult a tax adviser regarding the potential impact of Section 409A of the Code.

 

15.                                Amendment to Meet the Requirements of Section 409A .  The Optionee acknowledges that the Company, in the exercise of its sole discretion and without the consent of the Optionee, may amend or modify this Agreement in any manner and delay the payment of any amounts payable pursuant to this Agreement to the minimum extent necessary to meet the requirements of Section 409A of the Code as amplified by any Internal Revenue Service or U.S. Treasury Department regulations or guidance as the Company deems appropriate or advisable.

 

5



 

16.                                Interpretation of This Agreement .  All decisions and interpretations made by the Committee with regard to any question arising hereunder or under the Plan shall be binding and conclusive upon the Company and the Optionee.  If there is any inconsistency between the provisions of this Agreement and the Plan, the provisions of the Plan shall govern.

 

17.                                Discontinuance of Employment .  This Agreement shall not give the Optionee a right to continued employment with the Company or any parent or subsidiary of the Company, and the Company or any such parent or subsidiary employing the Optionee may terminate his/her employment at any time and otherwise deal with the Optionee without regard to the effect it may have upon him/her under this Agreement.

 

18.                                Option Subject to Plan, Certificate of Incorporation and By-Laws .  The Optionee acknowledges that the Option and the exercise thereof is subject to the Plan, the Certificate of Incorporation, as amended from time to time, and the By-Laws, as amended from time to time, of the Company, and any applicable federal or state laws, rules or regulations.

 

19.                                Binding Effect .  This Agreement shall be binding in all respects on the heirs, representatives, successors and assigns of the Optionee.

 

20.                                Choice of Law .  This Agreement is entered into under the laws of the State of Delaware and shall be construed and interpreted thereunder (without regard to its conflict of law principles).

 

21.                                Right of First Refusal and Execution of Stockholder Agreements .  At the discretion of the Committee, the Company is hereby granted (a) a right of first refusal to purchase all Shares that the Optionee (or a subsequent transferee) may propose to transfer to a third party and (b) the right to require the Optionee from time to time to execute and deliver stockholder, voting or similar agreements.

 

**FOR ALL FOREIGN EMPLOYEES:

 

22.                                Arbitration .  Any dispute arising out of or relating to this Agreement or the alleged breach of it, or the making of this Agreement, including claims of fraud in the inducement, shall be discussed between the disputing parties in a good faith effort to arrive at a mutual settlement of any such controversy.  If, notwithstanding, such dispute cannot be resolved, such dispute shall be settled by binding arbitration.  Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof.  Arbitration will be conducted pursuant to the provisions of this Agreement, and the commercial arbitration rules of the American Arbitration Association, unless such rules are inconsistent with the provisions of this Agreement.  Limited civil discovery shall be permitted for the production of documents and taking of depositions.  Unresolved discovery disputes may be brought to the attention of the arbitrator who may dispose of such dispute.  The arbitrator shall have the authority to award any remedy or relief that a court of the state of Delaware could order or grant; provided, however, that punitive or exemplary damages shall not be awarded.  Unless otherwise agreed by the parties, the place of any arbitration proceedings shall be Hennepin or Ramsey County, Minnesota, United States of America.

 

**FOR UK EMPLOYEES:

 

23.                                Securities Law Compliance .  The exercise of all or a portion of this Option shall only be effective at such time as counsel to the Company shall have determined that the issuance and delivery of common stock pursuant to such exercise will not violate any United States’ federal or state securities or other laws, or the applicable securities or other laws of England or the United Kingdom.  The Optionee may be required by the Company, as a condition of the effectiveness of any exercise of this Option, to agree in writing that (i) all common stock to be acquired pursuant to such exercise shall be held for the Optionee’s own account without a view to any further

 

6


 

distribution thereof, until such time that such common stock is registered and freely tradable under applicable United States’ federal and state securities laws, or the applicable securities laws of England or the United Kingdom, or proposed to be sold in a transaction exempt from the registration requirements of such laws, which exempt status shall be confirmed by an opinion of counsel to the Optionee (such opinion and counsel shall be satisfactory in all respects to counsel for the Company), (ii) the certificates for all shares of common stock issued upon exercise of this Option shall bear an appropriate legend respecting the noted restrictions on transferability, and (iii) such shares of common stock will not in any event be actually transferred or disposed of except in compliance with applicable United States’ federal and state securities laws, or the applicable securities laws of England or the United Kingdom.

 

24.                                United Kingdom Tax Matters .

 

(a)                                  This Option is a nonqualified option under the United States’ Internal Revenue Code of 1986, as amended.  The Company does not make any representation regarding whether the Option is tax-qualified under the tax laws of England or the United Kingdom and provides no assurances as to the tax consequences of this Option under the tax laws of England or the United Kingdom.

 

(b)                                  The Optionee represents that the Optionee has had an opportunity to consult with his or her advisors respecting the tax treatment of this Option under the tax laws of England or the United Kingdom, and is not relying on the Company for advice in this regard.

 

(c)                                   In order to permit the Company to comply with all applicable United States’ federal or state income tax laws or regulations, or the applicable tax laws and regulations of England or the United Kingdom, the Company may take such action as it deems appropriate to insure that, if necessary, all applicable payroll, income or other taxes are withheld from any amounts payable by the Company to the Optionee.  If the Company is unable to withhold such taxes, for whatever reason, the Optionee hereby agrees to pay to the Company an amount equal to the amount the Company would otherwise be required to withhold under applicable tax laws and regulations.

 

The Optionee agrees to indemnify the Company against any liability it may incur for secondary Class I National Insurance Contributions and agrees that the Company may recover from the Optionee (in such manner as the Company may determine and notify to the Optionee at any time before this Option is first exercised) the whole or any part of any such contributions payable as a result of the Option being exercised.

 

25.                                Blue Sky Limitation .  Notwithstanding anything in this Agreement to the contrary, in the event the Company makes any public offering of its securities and determines in its sole discretion that it is necessary to reduce the number of issued but unexercised stock purchase rights so as to comply with any securities law limitations within the United States, Canada, England or the United Kingdom with respect thereto, the Board shall have the right (i) to accelerate the exercisability of this Option and the date on which this Option must be exercised, provided that the Company gives the Optionee 15 days’ prior written notice of such acceleration, and (ii) to cancel any portion of this Option or any other option granted to Optionee pursuant to the Plan that is not exercised prior to or contemporaneously with such public offering.  Notice shall be deemed given when delivered personally or when deposited in the United States mail, first class postage prepaid and addressed to the Optionee at the address of the Optionee on file with the Company.

 

**FOR CANADIAN EMPLOYEES:

 

23.                                Securities Law Compliance .  The exercise of all or a portion of this Option shall only be effective at such time as counsel to the Company shall have determined that the issuance and delivery of

 

7



 

common stock pursuant to such exercise will not violate any United States’ federal or state securities or other laws, or the applicable securities or other laws of Canada (federal or provincial).  The Optionee may be required by the Company, as a condition of the effectiveness of any exercise of this Option, to agree in writing that (i) all common stock to be acquired pursuant to such exercise shall be held for the Optionee’s own account without a view to any further distribution thereof, until such time that such common stock is registered and freely tradable under applicable United States’ federal and state securities laws, or the applicable securities laws of Canada (federal or provincial) or proposed to be sold in a transaction exempt from the registration requirements of such laws, which exempt status shall be confirmed by an opinion of counsel to the Optionee (such opinion and counsel shall be satisfactory in all respects to counsel for the Company), (ii) the certificates for all shares of common stock issued upon exercise of this Option shall bear an appropriate legend respecting the noted restrictions on transferability, and (iii) such shares of common stock will not in any event be actually transferred or disposed of except in compliance with applicable United States’ federal and state securities laws or the applicable securities laws of Canada (federal or provincial).

 

24.                                Canadian Tax Matters .

 

(a)                                  This Option is a nonqualified option under the United States’ Internal Revenue Code of 1986, as amended.  The Company does not make any representation regarding whether the Option is tax-qualified under the tax laws of Canada (federal or provincial) and provides no assurances as to the tax consequences of this Option under the tax laws of Canada (federal or provincial).

 

(b)                                  The Optionee represents that the Optionee has had an opportunity to consult with his or her advisors respecting the tax treatment of this Option under the tax laws of Canada (federal or provincial), and is not relying on the Company for advice in this regard.

 

(c)                                   In order to permit the Company to comply with all applicable United States’ federal or state income tax laws or regulations, or the applicable tax laws and regulations of Canada (federal or provincial), the Company may take such action as it deems appropriate to insure that, if necessary, all applicable payroll, income or other taxes are withheld from any amounts payable by the Company to the Optionee.  If the Company is unable to withhold such taxes, for whatever reason, the Optionee hereby agrees to pay to the Company an amount equal to the amount the Company would otherwise be required to withhold under applicable tax laws and regulations.

 

25.                                Blue Sky Limitation .  Notwithstanding anything in this Agreement to the contrary, in the event the Company makes any public offering of its securities and determines in its sole discretion that it is necessary to reduce the number of issued but unexercised stock purchase rights so as to comply with any securities law limitations within the United States, Canada, England or the United Kingdom with respect thereto, the Board shall have the right (i) to accelerate the exercisability of this Option and the date on which this Option must be exercised, provided that the Company gives the Optionee 15 days’ prior written notice of such acceleration, and (ii) to cancel any portion of this Option or any other option granted to Optionee pursuant to the Plan that is not exercised prior to or contemporaneously with such public offering.  Notice shall be deemed given when delivered personally or when deposited in the United States mail, first class postage prepaid and addressed to the Optionee at the address of the Optionee on file with the Company.

 

26.                                Governing Language .  The parties hereto confirm their express wish that this Agreement and all documents and agreements directly or indirectly relating hereto be drawn up in the English language.  Les parties reconnaissent leur volonté expresse que la présente ainsi que tous les documents et contrats s’y rattachant directement ou indirectement soient rédigés en anglais .

 

8



 

[ Remainder of page left blank intentionally — signature page follows ]

 

9



 

IN WITNESS WHEREOF, the Optionee and the Company have executed this Agreement as of the date of grant.

 

 

OPTIONEE

 

 

 

 

 

 

 

TACTILE SYSTEMS TECHNOLOGY, INC.

 

 

 

 

 

 

 

By

 

 

Name:

 

 

Its:

 

 

10



 

                    , 20   

 

To:  Tactile Systems Technology, Inc.

 

Ladies and Gentlemen:

 

I hereby exercise the following option (the “ Option ”) granted to me under the Tactile Systems Technology, Inc. 2007 Omnibus Stock Plan (the “ Plan ”) with respect to the number of shares of Common Stock of Tactile Systems Technology, Inc. (the “ Company ”) indicated below:

 

Name:

 

 

 

Date of Grant of Option:

 

 

 

Exercise Price Per Share:

 

 

 

Number of Shares With Respect to Which the Option is Hereby Exercised:

 

 

 

Total Exercise Price:

 

 

 

 

o                                     Enclosed with this letter is a check, bank draft or money order in the amount of the Total Exercise Price.

 

o                                     I hereby agree to pay the Total Exercise Price within five business days of the date hereof and, as stated in the attached Broker’s Letter, I have delivered irrevocable instructions to                                   to promptly deliver to the Company the amount of sale or loan proceeds from the Shares to be issued pursuant to this exercise necessary to satisfy my obligation hereunder to pay the Total Exercise Price.

 

o                                     Enclosed with this letter is a certificate evidencing unencumbered Shares (duly endorsed in blank) having an aggregate Fair Market Value (as defined in the Plan) equal to or in excess of the Total Exercise Price.

 

o                                     I elect to pay the Total Exercise Price through a reduction in the number of Shares delivered to me upon this exercise of the Option as provided in Section 14 of the Plan.

 

If I am enclosing Shares with this letter, I hereby represent and warrant that I am the owner of such Shares free and clear of all liens, security interests and other restrictions or encumbrances.  I agree that I will pay any required withholding taxes in connection with this exercise.

 



 

Please issue a certificate (the “ Certificate ”) for the number of Shares with respect to which the Option is being exercised in the name of the person indicated below and deliver the Certificate to the address indicated below:

 

Name in Which to Issue Certificate:

 

 

 

Address to Which Certificate Should be

 

Delivered:

 

 

 

 

 

 

 

 

 

Principal Mailing Address for Holder of the Certificate (if different from above):

 

 

 

 

 

 

 

 

 

Very truly yours,

 

 

 

 

 

Signature

 

 

 

 

 

Name, please print

 

 

 

 

 

Social Security Number

 

 

 

 

 

 

 

 

 

Address

 

 

 

 

 

Phone Number

 

2



 

             , 20   

 

To:  Tactile Systems Technology, Inc.

 

Ladies and Gentlemen:

 

Name of Optionee:

 

 

 

Date of Grant of Option:

 

 

 

Exercise Price Per Share:

 

 

 

Number of Shares With Respect to Which the Option is to be Exercised:

 

 

 

Total Exercise Price:

 

 

 

 

The above Optionee has requested that we finance the exercise of the above Option to purchase Shares of Common Stock of Tactile Systems Technology, Inc. (the “ Company ”) and has given us irrevocable instructions to promptly deliver to the Company the amount of sale or loan proceeds from the Shares to be issued pursuant to such exercise to satisfy the Optionee’s obligation to pay the Total Exercise Price.

 

 

Very truly yours,

 

 

 

 

 

Broker Name

 

 

 

 

 

 

 

By

 

 

Name

 

 

Its

 

 




Exhibit 10.8

 

TACTILE SYSTEMS TECHNOLOGY, INC.

Non-Statutory Stock Option Agreement [Directors]

(Under the 2007 Omnibus Stock Plan)

 

Name of Optionee:

 

 

 

No. of Shares Covered:

 

Date of Grant:

 

 

 

Exercise Price Per Share:

 

Expiration Date:

 

Exercise Schedule (Cumulative):

 

This option shall vest as to [Insert number of shares equal to 25% of the total shares] shares on [insert date of one year anniversary of the date of grant] . The remaining Shares shall vest as to [1/48 th  of the total shares] shares each month commencing on [insert date of 13 th  month anniversary of the date of grant] and continuing until this option is fully vested.

 

This is a Non-Statutory Stock Option Agreement (the “ Agreement ”) between Tactile Systems Technology, Inc., a Delaware corporation (the “ Company ”), and the optionee identified above (the “ Optionee ”) effective as of the date of grant specified above.

 

RECITALS

 

A.                                     The Company maintains the Tactile Systems Technology, Inc. 2007 Omnibus Stock Plan (the “ Plan ”).

 

B.                                     Pursuant to the Plan, the Board of Directors of the Company (the “ Board ”) or a committee of two or more directors of the Company (the “ Committee ”) appointed by the Board administers the Plan and has the authority to determine the awards to be granted under the Plan (if the Board has not appointed a committee to administer the Plan, then the Board shall constitute the Committee).

 

C.                                     The Committee has determined that the Optionee is eligible to receive an award under the Plan in the form of a non-statutory stock option (the “ Option ”).

 

The Company hereby grants this Option to the Optionee under the terms and conditions as follows.

 

TERMS AND CONDITIONS *

 

1.                                       Grant .  The Optionee is granted this Option to purchase the number of Shares specified at the beginning of this Agreement.

 

2.                                       Exercise Price .  The price to the Optionee of each Share subject to this Option shall be the exercise price specified at the beginning of this Agreement.

 

3.                                       Non-Statutory Stock Option .  This Option is not intended to be an “incentive stock option” within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “ Code ”).

 


*                                          Unless the context indicates otherwise, terms that are not defined in this Agreement shall have the meaning set forth in the Plan as it currently exists or as it is amended in the future.

 



 

4.                                       Exercise Schedule .  This Option shall vest and become exercisable as to the number of Shares and on the dates specified in the exercise schedule at the beginning of this Agreement.  The exercise schedule shall be cumulative; thus, to the extent this Option has not already been exercised and has not expired, terminated or been cancelled, the Optionee or the person otherwise entitled to exercise this Option as provided herein may at any time, and from time to time, purchase all or any portion of the Shares then purchasable under the exercise schedule.

 

This Option may also be exercised in full (notwithstanding the exercise schedule) under the circumstances described in Section 8 of this Agreement if it has not expired prior thereto.

 

5.                                       Expiration .  This Option shall expire at 5:00 p.m. Central Time on the earliest of:

 

(a)                                  The expiration date specified at the beginning of this Agreement;

 

(b)                                  The expiration of the period after the termination of Service of the Optionee within which the Option can be exercised (as specified in Section 7 of this Agreement);

 

(c)                                   Termination of the Optionee’s Service for Cause.  “ Cause ” shall be deemed to exist upon (i) an act or acts of dishonesty undertaken by Optionee and intended to result in substantial gain or personal enrichment of Optionee at the expense of the Company; (ii) unlawful conduct or gross misconduct that is willful and deliberate on Optionee’s part and that, in either event, is materially injurious to the Company; (iii) the conviction of Optionee of a felony; or (iv) material breach by Optionee of any terms and conditions of any consulting, services, advisory board, confidentiality, employment or non-competition/non-solicitation agreement between the Optionee and the Company not caused by the Company, which breach has not been cured by Optionee within ten days after written notice thereof to Optionee from the Company; or

 

(d)                                  The date (if any) fixed for cancellation pursuant to Section 17 of the Plan.

 

In no event may anyone exercise this Option, in whole or in part, after it has expired, notwithstanding any other provision of this Agreement.  In addition, if the Option is exercised, and prior to the delivery of the certificate representing the Shares so purchased, it is determined that Cause for termination existed, then the Company may rescind the Option exercise by the Optionee and the Option shall terminate at the election of the Company.

 

6.                                       Procedure to Exercise Option .

 

Notice of Exercise .  This Option may be exercised by delivering written notice of exercise to the Company at the principal executive office of the Company, to the attention of the Company’s Chief Executive Officer, in the form attached to this Agreement.  The notice shall state the number of Shares to be purchased, and shall be signed by the person exercising this Option.  If the person exercising this Option is not the Optionee, he/she also must submit appropriate proof of his/her right to exercise this Option.

 

Tender of Payment .  Upon giving notice of any exercise hereunder, the Optionee shall provide for payment of the purchase price of the Shares being purchased through one or a combination of the following methods:

 

(a)                                  Cash (including check, bank draft or money order);

 

(b)                                  To the extent permitted by law, through a broker-assisted cashless exercise in which the Optionee simultaneously exercises the Option and sells all or a portion of the Shares thereby acquired pursuant to a brokerage or similar relationship and uses the proceeds from such sale to pay the purchase price of such Shares;

 

2



 

(c)                                   By delivery to the Company of unencumbered Shares having an aggregate Fair Market Value on the date of exercise equal to the purchase price of such Shares; or

 

(d)                                  By authorizing the Company to retain, from the total number of Shares as to which the Option is exercised, that number of Shares having a Fair Market Value on the date of exercise equal to the purchase price for the total number of Shares as to which the Option is exercised.

 

Notwithstanding the foregoing, the Optionee shall not be permitted to pay any portion of the purchase price with Shares, or by authorizing the Company to retain Shares upon exercise of the Option, if the Committee, in its sole discretion, determines that payment in such manner is undesirable.

 

Delivery of Certificates .  As soon as practicable after the Company receives the notice and purchase price provided for above, it shall deliver to the person exercising this Option, in the name of such person, a certificate or certificates representing the Shares being purchased.  The Company shall pay any original issue or transfer taxes with respect to the issue or transfer of the Shares and all fees and expenses incurred by it in connection therewith.  All Shares so issued shall be fully paid and nonassessable.  Notwithstanding anything to the contrary in this Agreement, no certificate for Shares distributable under the Plan shall be issued and delivered unless the issuance of such certificate complies with all applicable legal requirements including, without limitation, compliance with the provisions of applicable state securities laws, the Securities Act of 1933, as amended (the “ Securities Act ”) and the Exchange Act.

 

7.                                       Service Requirement Service ” or “ Services ” means providing services to the Company as a member of its board of directors.  If the Optionee’s Service terminates after a declaration made pursuant to Section 17 of the Plan in connection with Fundamental Change, the Option may be exercised at any time permitted by such declaration.  Notwithstanding the above, the Option may not be exercised after it has expired.

 

8.                                       Acceleration of Vesting .

 

Fundamental Change .  In the event of a Fundamental Change the Committee may, but shall not be obligated to:

 

(a)                                  if the Fundamental Change is a merger or consolidation or statutory share exchange, make appropriate provision for the protection of this Option by the substitution for this Option of options or voting common stock of the corporation surviving any merger or consolidation or, if appropriate, the parent corporation of the Company or such surviving corporation; or

 

(b)                                  at least ten days before the occurrence of the Fundamental Change, declare, and provide written notice to the Optionee of the declaration, that this Option, whether or not then exercisable, shall be canceled at the time of, or immediately before the occurrence of, the Fundamental Change (unless it shall have been exercised prior to the occurrence of the Fundamental Change).  In connection with any such declaration, the Committee may, but shall not be obligated to, cause payment to be made to the Optionee of cash equal to, for each Share covered by the canceled Option, the amount, if any, by which the Fair Market Value per Share exceeds the exercise price per Share covered by this Option.  At the time of any such declaration, this Option shall immediately become exercisable in full and the Optionee shall have the right, during the period preceding the time of cancellation of this Option, to exercise this Option as to all or any part of the Shares covered by this Option.  In the event of a declaration pursuant to this subsection, to the extent this Option has not been exercised prior to the Fundamental Change, the

 

3



 

                                                unexercised part of this Option shall be canceled at the time of, or immediately before, the Fundamental Change, as provided in the declaration.  Notwithstanding the foregoing, the holder of this Option shall not be entitled to the payment provided for in this subsection if this Option shall have expired pursuant to Section 5 above or been cancelled.  For purposes of this subsection only, “ Fair Market Value ” per Share has the meaning set forth in Section 17 of the Plan.

 

Change in Control .  If a Change in Control of the Company shall occur, then the Option, if not already exercised in full or otherwise terminated, expired or cancelled, will become immediately exercisable in full and remain exercisable during the remaining term of the Option.

 

Discretionary Acceleration .  Notwithstanding any other provisions of this Agreement to the contrary, the Committee may, in its sole discretion, declare at any time that the Option shall be immediately exercisable.

 

9.                                       Limitation on Transfer .  During the lifetime of the Optionee, only the Optionee or his/her guardian or legal representative may exercise the Option.  The Option may not be assigned or transferred by the Optionee otherwise than by will or the laws of descent and distribution.

 

10.                                No Stockholder Rights Before Exercise .  No person shall have any of the rights of a stockholder of the Company with respect to any Share subject to the Option until the Share actually is issued to him/her upon exercise of the Option.

 

11.                                Lock-Up Period .

 

(a)                                  The Optionee agrees that the Optionee will not offer, pledge, sell, contract to sell, sell any option, sell any contract to purchase, purchase any option, purchase any contract to sell, grant any option, right, or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any Shares (or any other Company securities) or enter into any swap, hedging, or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any Shares (or any other Company securities) held by the Optionee (other than those included in the registration) for a period specified by the representative of the underwriters of the Company’s capital stock (or any other Company securities, collectively, the “ Stock ”) not to exceed 90 days (180 days in the case of an initial public offering) after the effective date of any Company registration statement filed under the Securities Act.

 

(b)                                  The Optionee agrees to execute and deliver such other agreements as may be reasonably requested by the Company or the underwriter to the extent that such agreements are consistent with the foregoing or that are necessary to give further effect to the provisions set forth in Section 11(a).  In addition, if requested by the Company or the representative of the underwriters of Stock, the Optionee will provide, within 10 days of such request, such information as may be required by the Company or such representative in connection with the completion of any public offering of the Company’s securities pursuant to a registration statement filed under the Securities Act.

 

(c)                                   The obligations described in this Section 11 will not apply to a registration relating solely to employee benefit plans on Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a Commission Rule 145 transaction on Form S-4 or similar forms that may be promulgated in the future.  The Company may impose stop-transfer instructions with respect to the shares of Stock subject to the foregoing restriction until the end of such 90-day or 180-day period, as applicable.

 

4



 

12.                                Discretionary Adjustment .  In the event of any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, or extraordinary dividend or divestiture (including a spin-off), or any other change in the corporate structure or Shares of the Company, the Committee (or if the Company does not survive any such transaction, a comparable committee of the Board of Directors of the surviving corporation) may, without the consent of the Optionee, make such adjustment as it determines in its discretion to be appropriate as to the number and kind of securities subject to and reserved under the Plan and, in order to prevent dilution or enlargement of rights of the Optionee, the number and kind of securities issuable upon exercise of the Option and the exercise price hereof.

 

13.                                Tax Withholding .  Delivery of Shares upon exercise of this Option shall be subject to any required withholding taxes.  As a condition precedent to receiving Shares upon exercise of this Option, the Optionee may be required to pay to the Company, in accordance with the provisions of the Plan, an amount equal to the amount of any required withholdings.

 

14.                                Tax Consequences .

 

(a)                                  The Optionee may incur tax liability as a result of the Optionee’s purchase or disposition of the Shares.  THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THE OPTION OR DISPOSING OF THE SHARES.

 

(b)                                  Notwithstanding the Company’s good faith determination of the Fair Market Value of the Company’s common stock for purposes of determining the exercise price per Share of the Option, the taxing authorities may assert that the fair market value of the Company’s common stock on the date of grant was greater than the exercise price per Share.  Under Section 409A of the Code, if the exercise price per Share of the Option is less than the fair market value of the Company’s common stock on the date of grant, the Option may be treated as a form of deferred compensation and the Optionee may be subject to an additional 20% tax, plus interest and possible penalties.  The Optionee is encouraged to consult a tax adviser regarding the potential impact of Section 409A of the Code.

 

15.                                Amendment to Meet the Requirements of Section 409A .  The Optionee acknowledges that the Company, in the exercise of its sole discretion and without the consent of the Optionee, may amend or modify this Agreement in any manner and delay the payment of any amounts payable pursuant to this Agreement to the minimum extent necessary to meet the requirements of Section 409A of the Code as amplified by any Internal Revenue Service or U.S. Treasury Department regulations or guidance as the Company deems appropriate or advisable.

 

16.                                Interpretation of This Agreement .  All decisions and interpretations made by the Committee with regard to any question arising hereunder or under the Plan shall be binding and conclusive upon the Company and the Optionee.  If there is any inconsistency between the provisions of this Agreement and the Plan, the provisions of the Plan shall govern.

 

17.                                Discontinuance of Service .  This Agreement shall not give the Optionee a right to employment or to continued Service with the Company or any parent or subsidiary of the Company, and the Company or any such parent or subsidiary engaging or employing the Optionee may terminate his/her Service at any time and otherwise deal with the Optionee without regard to the effect it may have upon him/her under this Agreement.

 

18.                                Option Subject to Plan, Certificate of Incorporation and By-Laws .  The Optionee acknowledges that the Option and the exercise thereof is subject to the Plan, the Certificate of Incorporation, as amended from time to time, and the By-Laws, as amended from time to time, of the Company, and any applicable federal or state laws, rules or regulations.

 

5



 

19.                                Binding Effect .  This Agreement shall be binding in all respects on the heirs, representatives, successors and assigns of the Optionee.

 

20.                                Choice of Law .  This Agreement is entered into under the laws of the State of Delaware and shall be construed and interpreted thereunder (without regard to its conflict of law principles).

 

21.                                Right of First Refusal and Execution of Stockholder Agreements .  At the discretion of the Committee, the Company is hereby granted (a) a right of first refusal to purchase all Shares that the Optionee (or a subsequent transferee) may propose to transfer to a third party and (b) the right to require the Optionee from time to time to execute and deliver stockholder, voting or similar agreements, including as a condition to exercising this Option.

 

**FOR ALL FOREIGN CONSULTANTS:

 

22.                                Arbitration .  Any dispute arising out of or relating to this Agreement or the alleged breach of it, or the making of this Agreement, including claims of fraud in the inducement, shall be discussed between the disputing parties in a good faith effort to arrive at a mutual settlement of any such controversy.  If, notwithstanding, such dispute cannot be resolved, such dispute shall be settled by binding arbitration.  Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof.  Arbitration will be conducted pursuant to the provisions of this Agreement, and the commercial arbitration rules of the American Arbitration Association, unless such rules are inconsistent with the provisions of this Agreement.  Limited civil discovery shall be permitted for the production of documents and taking of depositions.  Unresolved discovery disputes may be brought to the attention of the arbitrator who may dispose of such dispute.  The arbitrator shall have the authority to award any remedy or relief that a court of the state of Delaware could order or grant; provided, however, that punitive or exemplary damages shall not be awarded.  Unless otherwise agreed by the parties, the place of any arbitration proceedings shall be Hennepin or Ramsey County, Minnesota, United States of America.

 

**FOR UK CONSULTANTS:

 

23.                                Securities Law Compliance .  The exercise of all or a portion of this Option shall only be effective at such time as counsel to the Company shall have determined that the issuance and delivery of common stock pursuant to such exercise will not violate any United States’ federal or state securities or other laws, or the applicable securities or other laws of England or the United Kingdom.  The Optionee may be required by the Company, as a condition of the effectiveness of any exercise of this Option, to agree in writing that (i) all common stock to be acquired pursuant to such exercise shall be held for the Optionee’s own account without a view to any further distribution thereof, until such time that such common stock is registered and freely tradable under applicable United States’ federal and state securities laws, or the applicable securities laws of England or the United Kingdom, or proposed to be sold in a transaction exempt from the registration requirements of such laws, which exempt status shall be confirmed by an opinion of counsel to the Optionee (such opinion and counsel shall be satisfactory in all respects to counsel for the Company), (ii) the certificates for all shares of common stock issued upon exercise of this Option shall bear an appropriate legend respecting the noted restrictions on transferability, and (iii) such shares of common stock will not in any event be actually transferred or disposed of except in compliance with applicable United States’ federal and state securities laws, or the applicable securities laws of England or the United Kingdom.

 

24.                                United Kingdom Tax Matters .

 

(a)                                  This Option is a nonqualified option under the United States’ Internal Revenue Code of 1986, as amended.  The Company does not make any representation regarding whether the Option is tax-qualified under the tax laws of England or the United Kingdom and provides

 

6



 

                                                no assurances as to the tax consequences of this Option under the tax laws of England or the United Kingdom.

 

(b)                                  The Optionee represents that the Optionee has had an opportunity to consult with his or her advisors respecting the tax treatment of this Option under the tax laws of England or the United Kingdom, and is not relying on the Company for advice in this regard.

 

(c)                                   In order to permit the Company to comply with all applicable United States’ federal or state income tax laws or regulations, or the applicable tax laws and regulations of England or the United Kingdom, the Company may take such action as it deems appropriate to insure that, if necessary, all applicable payroll, income or other taxes are withheld from any amounts payable by the Company to the Optionee.  If the Company is unable to withhold such taxes, for whatever reason, the Optionee hereby agrees to pay to the Company an amount equal to the amount the Company would otherwise be required to withhold under applicable tax laws and regulations.

 

The Optionee agrees to indemnify the Company against any liability it may incur for secondary Class I National Insurance Contributions and agrees that the Company may recover from the Optionee (in such manner as the Company may determine and notify to the Optionee at any time before this Option is first exercised) the whole or any part of any such contributions payable as a result of the Option being exercised.

 

25.                                Blue Sky Limitation .  Notwithstanding anything in this Agreement to the contrary, in the event the Company makes any public offering of its securities and determines in its sole discretion that it is necessary to reduce the number of issued but unexercised stock purchase rights so as to comply with any securities law limitations within the United States, Canada, England or the United Kingdom with respect thereto, the Board shall have the right (i) to accelerate the exercisability of this Option and the date on which this Option must be exercised, provided that the Company gives the Optionee 15 days’ prior written notice of such acceleration, and (ii) to cancel any portion of this Option or any other option granted to Optionee pursuant to the Plan that is not exercised prior to or contemporaneously with such public offering.  Notice shall be deemed given when delivered personally or when deposited in the United States mail, first class postage prepaid and addressed to the Optionee at the address of the Optionee on file with the Company.

 

**FOR CANADIAN CONSULTANTS:

 

23.                                Securities Law Compliance .  The exercise of all or a portion of this Option shall only be effective at such time as counsel to the Company shall have determined that the issuance and delivery of common stock pursuant to such exercise will not violate any United States’ federal or state securities or other laws, or the applicable securities or other laws of Canada (federal or provincial).  The Optionee may be required by the Company, as a condition of the effectiveness of any exercise of this Option, to agree in writing that (i) all common stock to be acquired pursuant to such exercise shall be held for the Optionee’s own account without a view to any further distribution thereof, until such time that such common stock is registered and freely tradable under applicable United States’ federal and state securities laws, or the applicable securities laws of Canada (federal or provincial) or proposed to be sold in a transaction exempt from the registration requirements of such laws, which exempt status shall be confirmed by an opinion of counsel to the Optionee (such opinion and counsel shall be satisfactory in all respects to counsel for the Company), (ii) the certificates for all shares of common stock issued upon exercise of this Option shall bear an appropriate legend respecting the noted restrictions on transferability, and (iii) such shares of common stock will not in any event be actually transferred or disposed of except in compliance with applicable United States’ federal and state securities laws or the applicable securities laws of Canada (federal or provincial).

 

7


 

24.                                Canadian Tax Matters .

 

(a)                                  This Option is a nonqualified option under the United States’ Internal Revenue Code of 1986, as amended.  The Company does not make any representation regarding whether the Option is tax-qualified under the tax laws of Canada (federal or provincial) and provides no assurances as to the tax consequences of this Option under the tax laws of Canada (federal or provincial).

 

(b)                                  The Optionee represents that the Optionee has had an opportunity to consult with his or her advisors respecting the tax treatment of this Option under the tax laws of Canada (federal or provincial), and is not relying on the Company for advice in this regard.

 

(c)                                   In order to permit the Company to comply with all applicable United States’ federal or state income tax laws or regulations, or the applicable tax laws and regulations of Canada (federal or provincial), the Company may take such action as it deems appropriate to insure that, if necessary, all applicable payroll, income or other taxes are withheld from any amounts payable by the Company to the Optionee.  If the Company is unable to withhold such taxes, for whatever reason, the Optionee hereby agrees to pay to the Company an amount equal to the amount the Company would otherwise be required to withhold under applicable tax laws and regulations.

 

25.                                Blue Sky Limitation .  Notwithstanding anything in this Agreement to the contrary, in the event the Company makes any public offering of its securities and determines in its sole discretion that it is necessary to reduce the number of issued but unexercised stock purchase rights so as to comply with any securities law limitations within the United States, Canada, England or the United Kingdom with respect thereto, the Board shall have the right (i) to accelerate the exercisability of this Option and the date on which this Option must be exercised, provided that the Company gives the Optionee 15 days’ prior written notice of such acceleration, and (ii) to cancel any portion of this Option or any other option granted to Optionee pursuant to the Plan that is not exercised prior to or contemporaneously with such public offering.  Notice shall be deemed given when delivered personally or when deposited in the United States mail, first class postage prepaid and addressed to the Optionee at the address of the Optionee on file with the Company.

 

26.                                Governing Language .  The parties hereto confirm their express wish that this Agreement and all documents and agreements directly or indirectly relating hereto be drawn up in the English language.  Les parties reconnaissent leur volonté expresse que la présente ainsi que tous les documents et contrats s’y rattachant directement ou indirectement soient rédigés en anglais .

 

[ Remainder of page left blank intentionally — signature page follows ]

 

8



 

IN WITNESS WHEREOF, the Optionee and the Company have executed this Agreement as of the date of grant.

 

 

OPTIONEE

 

 

 

 

 

 

 

 

 

TACTILE SYSTEMS TECHNOLOGY, INC.

 

 

 

By

 

 

Name:

 

 

Its:

 

 

9



 

                   , 20     

 

To:  Tactile Systems Technology, Inc.

 

Ladies and Gentlemen:

 

I hereby exercise the following option (the “ Option ”) granted to me under the Tactile Systems Technology, Inc. 2007 Omnibus Stock Plan (the “ Plan ”) with respect to the number of shares of Common Stock of Tactile Systems Technology, Inc. (the “ Company ”) indicated below:

 

Name:

 

 

 

Date of Grant of Option:

 

 

 

Exercise Price Per Share:

 

 

 

Number of Shares With Respect to Which the Option is Hereby Exercised:

 

 

 

Total Exercise Price:

 

 

o                                     Enclosed with this letter is a check, bank draft or money order in the amount of the Total Exercise Price.

 

o                                     I hereby agree to pay the Total Exercise Price within five business days of the date hereof and, as stated in the attached Broker’s Letter, I have delivered irrevocable instructions to                                                        to promptly deliver to the Company the amount of sale or loan proceeds from the Shares to be issued pursuant to this exercise necessary to satisfy my obligation hereunder to pay the Total Exercise Price.

 

o                                     Enclosed with this letter is a certificate evidencing unencumbered Shares (duly endorsed in blank) having an aggregate Fair Market Value (as defined in the Plan) equal to or in excess of the Total Exercise Price.

 

o                                     I elect to pay the Total Exercise Price through a reduction in the number of Shares delivered to me upon this exercise of the Option as provided in Section 14 of the Plan.

 

If I am enclosing Shares with this letter, I hereby represent and warrant that I am the owner of such Shares free and clear of all liens, security interests and other restrictions or encumbrances.  I agree that I will pay any required withholding taxes in connection with this exercise.

 



 

Please issue a certificate (the “ Certificate ”) for the number of Shares with respect to which the Option is being exercised in the name of the person indicated below and deliver the Certificate to the address indicated below:

 

Name in Which to Issue Certificate:

 

 

 

Address to Which Certificate Should be Delivered:

 

 

 

 

 

 

 

 

 

 

 

Principal Mailing Address for Holder of the Certificate (if different from above):

 

 

 

 

 

 

 

 

 

 

Very truly yours,

 

 

 

Signature

 

 

 

Name, please print

 

 

 

 

 

Social Security Number

 

 

 

 

 

 

 

 

 

Address

 

 

 

 

 

Phone Number

 

2



 

                   , 20     

 

To:  Tactile Systems Technology, Inc.

 

Ladies and Gentlemen:

 

Name of Optionee:

 

 

 

Date of Grant of Option:

 

 

 

Exercise Price Per Share:

 

 

 

Number of Shares With Respect to Which the Option is to be Exercised:

 

 

 

Total Exercise Price:

 

 

The above Optionee has requested that we finance the exercise of the above Option to purchase Shares of Common Stock of Tactile Systems Technology, Inc. (the “ Company ”) and has given us irrevocable instructions to promptly deliver to the Company the amount of sale or loan proceeds from the Shares to be issued pursuant to such exercise to satisfy the Optionee’s obligation to pay the Total Exercise Price.

 

 

Very truly yours,

 

 

 

Broker Name

 

 

 

 

 

By

 

 

Name

 

 

Its

 

 




Exhibit 10.9

 

TACTILE SYSTEMS TECHNOLOGY, INC.

Non-Statutory Stock Option Agreement [Consultants]

(Under the 2007 Omnibus Stock Plan)

 

Name of Optionee:

 

 

 

No. of Shares Covered:

Date of Grant:

 

 

Exercise Price Per Share:

Expiration Date:

 

 

Exercise Schedule (Cumulative):

 

 

This option shall vest as to [Insert number of shares equal to 25% of the total shares] shares on [insert date of one year anniversary of the date of grant] . The remaining Shares shall vest as to [1/48 th  of the total shares] shares each month commencing on [insert date of 13 th  month anniversary of the date of grant] and continuing until this option is fully vested.

 

This is a Non-Statutory Stock Option Agreement (the “ Agreement ”) between Tactile Systems Technology, Inc., a Delaware corporation (the “ Company ”), and the optionee identified above (the “ Optionee ”) effective as of the date of grant specified above.

 

RECITALS

 

A.                                     The Company maintains the Tactile Systems Technology, Inc. 2007 Omnibus Stock Plan (the “ Plan ”).

 

B.                                     Pursuant to the Plan, the Board of Directors of the Company (the “ Board ”) or a committee of two or more directors of the Company (the “ Committee ”) appointed by the Board administers the Plan and has the authority to determine the awards to be granted under the Plan (if the Board has not appointed a committee to administer the Plan, then the Board shall constitute the Committee).

 

C.                                     The Committee has determined that the Optionee is eligible to receive an award under the Plan in the form of a non-statutory stock option (the “ Option ”).

 

The Company hereby grants this Option to the Optionee under the terms and conditions as follows.

 

TERMS AND CONDITIONS *

 

1.                                       Grant .  The Optionee is granted this Option to purchase the number of Shares specified at the beginning of this Agreement.

 

2.                                       Exercise Price .  The price to the Optionee of each Share subject to this Option shall be the exercise price specified at the beginning of this Agreement.

 

3.                                       Non-Statutory Stock Option .  This Option is not intended to be an “incentive stock option” within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “ Code ”).

 


*                                          Unless the context indicates otherwise, terms that are not defined in this Agreement shall have the meaning set forth in the Plan as it currently exists or as it is amended in the future.

 



 

4.                                       Exercise Schedule .  This Option shall vest and become exercisable as to the number of Shares and on the dates specified in the exercise schedule at the beginning of this Agreement.  The exercise schedule shall be cumulative; thus, to the extent this Option has not already been exercised and has not expired, terminated or been cancelled, the Optionee or the person otherwise entitled to exercise this Option as provided herein may at any time, and from time to time, purchase all or any portion of the Shares then purchasable under the exercise schedule.

 

This Option may also be exercised in full (notwithstanding the exercise schedule) under the circumstances described in Section 8 of this Agreement if it has not expired prior thereto.

 

5.                                       Expiration .  This Option shall expire at 5:00 p.m. Central Time on the earliest of:

 

(a)                                  The expiration date specified at the beginning of this Agreement;

 

(b)                                  The expiration of the period after the termination of Service (as defined below) of the Optionee within which the Option can be exercised (as specified in Section 7 of this Agreement);

 

(c)                                   Termination of the Optionee’s Service to the Company for Cause.  “ Cause ” shall be deemed to exist upon (i) an act or acts of dishonesty undertaken by Optionee and intended to result in substantial gain or personal enrichment of Optionee at the expense of the Company; (ii) unlawful conduct or gross misconduct that is willful and deliberate on Optionee’s part and that, in either event, is materially injurious to the Company; (iii) the conviction of Optionee of a felony; or (iv) material breach by Optionee of any terms and conditions of any consulting, independent contractor, employment, confidentiality or non-competition/non-solicitation agreement between the Optionee and the Company not caused by the Company, which breach has not been cured by Optionee within ten days after written notice thereof to Optionee from the Company; or

 

(d)                                  The date (if any) fixed for cancellation pursuant to Section 17 of the Plan.

 

In no event may anyone exercise this Option, in whole or in part, after it has expired, notwithstanding any other provision of this Agreement.  In addition, if the Option is exercised, and prior to the delivery of the certificate representing the Shares so purchased, it is determined that Cause for termination existed, then the Company may rescind the Option exercise by the Optionee and the Option shall terminate at the election of the Company.

 

6.                                       Procedure to Exercise Option .

 

Notice of Exercise .  This Option may be exercised by delivering written notice of exercise to the Company at the principal executive office of the Company, to the attention of the Company’s Chief Executive Officer, in the form attached to this Agreement.  The notice shall state the number of Shares to be purchased, and shall be signed by the person exercising this Option.  If the person exercising this Option is not the Optionee, he/she also must submit appropriate proof of his/her right to exercise this Option.

 

Tender of Payment .  Upon giving notice of any exercise hereunder, the Optionee shall provide for payment of the purchase price of the Shares being purchased through one or a combination of the following methods:

 

(a)                                  Cash (including check, bank draft or money order);

 

(b)                                  To the extent permitted by law, through a broker-assisted cashless exercise in which the Optionee simultaneously exercises the Option and sells all or a portion of the Shares thereby acquired pursuant to a brokerage or similar relationship and uses the proceeds from such sale to pay the purchase price of such Shares;

 

2



 

(c)                                   By delivery to the Company of unencumbered Shares having an aggregate Fair Market Value on the date of exercise equal to the purchase price of such Shares; or

 

(d)                                  By authorizing the Company to retain, from the total number of Shares as to which the Option is exercised, that number of Shares having a Fair Market Value on the date of exercise equal to the purchase price for the total number of Shares as to which the Option is exercised.

 

Notwithstanding the foregoing, the Optionee shall not be permitted to pay any portion of the purchase price with Shares, or by authorizing the Company to retain Shares upon exercise of the Option, if the Committee, in its sole discretion, determines that payment in such manner is undesirable.

 

Delivery of Certificates .  As soon as practicable after the Company receives the notice and purchase price provided for above, it shall deliver to the person exercising this Option, in the name of such person, a certificate or certificates representing the Shares being purchased.  The Company shall pay any original issue or transfer taxes with respect to the issue or transfer of the Shares and all fees and expenses incurred by it in connection therewith.  All Shares so issued shall be fully paid and nonassessable.  Notwithstanding anything to the contrary in this Agreement, no certificate for Shares distributable under the Plan shall be issued and delivered unless the issuance of such certificate complies with all applicable legal requirements including, without limitation, compliance with the provisions of applicable state securities laws, the Securities Act of 1933, as amended (the “ Securities Act ”) and the Exchange Act.

 

7.                                       Service Requirement .  The Option may be exercised only while the Optionee provides services to the Company as a consultant, employee, independent contractor or member of its board of directors (such services are referred to collectively in this Agreement as “ Service ” or “ Services ”) and only if the Optionee has been continuously providing such Services since the date the Option was granted; provided that :

 

(a)                                  This Option may be exercised for 90 days following the day the Optionee’s Service to the Company ceases if such cessation of Service is for a reason other than death or disability, but only to the extent that it was exercisable immediately prior to cessation of Service.

 

(b)                                  This Option may be exercised within one year after the Optionee’s Service to the Company ceases if such cessation of Service is because of death or disability of the Optionee, but only to the extent it was exercisable immediately prior to cessation of Service.

 

(c)                                   If the Optionee’s Service terminates after a declaration made pursuant to Section 17 of the Plan in connection with Fundamental Change, the Option may be exercised at any time permitted by such declaration.

 

Notwithstanding the above, the Option may not be exercised after it has expired.

 

8.                                       Acceleration of Vesting .

 

Fundamental Change .  In the event of a Fundamental Change the Committee may, but shall not be obligated to:

 

(a)                                  if the Fundamental Change is a merger or consolidation or statutory share exchange, make appropriate provision for the protection of this Option by the substitution for this Option of options or voting common stock of the corporation surviving any merger or consolidation or, if appropriate, the parent corporation of the Company or such surviving corporation; or

 

3



 

(b)                                  at least ten days before the occurrence of the Fundamental Change, declare, and provide written notice to the Optionee of the declaration, that this Option, whether or not then exercisable, shall be canceled at the time of, or immediately before the occurrence of, the Fundamental Change (unless it shall have been exercised prior to the occurrence of the Fundamental Change).  In connection with any such declaration, the Committee may, but shall not be obligated to, cause payment to be made to the Optionee of cash equal to, for each Share covered by the canceled Option, the amount, if any, by which the Fair Market Value per Share exceeds the exercise price per Share covered by this Option.  At the time of any such declaration, this Option shall immediately become exercisable in full and the Optionee shall have the right, during the period preceding the time of cancellation of this Option, to exercise this Option as to all or any part of the Shares covered by this Option.  In the event of a declaration pursuant to this subsection, to the extent this Option has not been exercised prior to the Fundamental Change, the unexercised part of this Option shall be canceled at the time of, or immediately before, the Fundamental Change, as provided in the declaration.  Notwithstanding the foregoing, the holder of this Option shall not be entitled to the payment provided for in this subsection if this Option shall have expired pursuant to Section 5 above or been cancelled.  For purposes of this subsection only, “ Fair Market Value ” per Share has the meaning set forth in Section 17 of the Plan.

 

Change in Control .  If a Change in Control of the Company shall occur, then, at the sole discretion of the Company, the Option, if not already exercised in full or otherwise terminated, expired or cancelled, may become immediately exercisable in full and remain exercisable during the remaining term of the Option.

 

Discretionary Acceleration .  Notwithstanding any other provisions of this Agreement to the contrary, the Committee may, in its sole discretion, declare at any time that the Option shall be immediately exercisable.

 

9.                                       Limitation on Transfer .  During the lifetime of the Optionee, only the Optionee or his/her guardian or legal representative may exercise the Option.  The Option may not be assigned or transferred by the Optionee otherwise than by will or the laws of descent and distribution.

 

10.                                No Stockholder Rights Before Exercise .  No person shall have any of the rights of a stockholder of the Company with respect to any Share subject to the Option until the Share actually is issued to him/her upon exercise of the Option.

 

11.                                Lock-Up Period .

 

(a)                                  The Optionee agrees that the Optionee will not offer, pledge, sell, contract to sell, sell any option, sell any contract to purchase, purchase any option, purchase any contract to sell, grant any option, right, or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any Shares (or any other Company securities) or enter into any swap, hedging, or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any Shares (or any other Company securities) held by the Optionee (other than those included in the registration) for a period specified by the representative of the underwriters of the Company’s capital stock (or any other Company securities, collectively, the “ Stock ”) not to exceed 90 days (180 days in the case of an initial public offering) after the effective date of any Company registration statement filed under the Securities Act.

 

(b)                                  The Optionee agrees to execute and deliver such other agreements as may be reasonably requested by the Company or the underwriter to the extent that such agreements are

 

4



 

consistent with the foregoing or that are necessary to give further effect to the provisions set forth in Section 11(a).  In addition, if requested by the Company or the representative of the underwriters of Stock, the Optionee will provide, within 10 days of such request, such information as may be required by the Company or such representative in connection with the completion of any public offering of the Company’s securities pursuant to a registration statement filed under the Securities Act.

 

(c)                                   The obligations described in this Section 11 will not apply to a registration relating solely to employee benefit plans on Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a Commission Rule 145 transaction on Form S-4 or similar forms that may be promulgated in the future.  The Company may impose stop-transfer instructions with respect to the shares of Stock subject to the foregoing restriction until the end of such 90-day or 180-day period, as applicable.

 

12.                                Discretionary Adjustment .  In the event of any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, or extraordinary dividend or divestiture (including a spin-off), or any other change in the corporate structure or Shares of the Company, the Committee (or if the Company does not survive any such transaction, a comparable committee of the Board of Directors of the surviving corporation) may, without the consent of the Optionee, make such adjustment as it determines in its discretion to be appropriate as to the number and kind of securities subject to and reserved under the Plan and, in order to prevent dilution or enlargement of rights of the Optionee, the number and kind of securities issuable upon exercise of the Option and the exercise price hereof.

 

13.                                Tax Withholding .  Delivery of Shares upon exercise of this Option shall be subject to any required withholding taxes.  As a condition precedent to receiving Shares upon exercise of this Option, the Optionee may be required to pay to the Company, in accordance with the provisions of the Plan, an amount equal to the amount of any required withholdings.

 

14.                                Tax Consequences .

 

(a)                                  The Optionee may incur tax liability as a result of the Optionee’s purchase or disposition of the Shares.  THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THE OPTION OR DISPOSING OF THE SHARES.

 

(b)                                  Notwithstanding the Company’s good faith determination of the Fair Market Value of the Company’s common stock for purposes of determining the exercise price per Share of the Option, the taxing authorities may assert that the fair market value of the Company’s common stock on the date of grant was greater than the exercise price per Share.  Under Section 409A of the Code, if the exercise price per Share of the Option is less than the fair market value of the Company’s common stock on the date of grant, the Option may be treated as a form of deferred compensation and the Optionee may be subject to an additional 20% tax, plus interest and possible penalties.  The Optionee is encouraged to consult a tax adviser regarding the potential impact of Section 409A of the Code.

 

15.                                Amendment to Meet the Requirements of Section 409A .  The Optionee acknowledges that the Company, in the exercise of its sole discretion and without the consent of the Optionee, may amend or modify this Agreement in any manner and delay the payment of any amounts payable pursuant to this Agreement to the minimum extent necessary to meet the requirements of Section 409A of the Code as amplified by any Internal Revenue Service or U.S. Treasury Department regulations or guidance as the Company deems appropriate or advisable.

 

16.                                Interpretation of This Agreement .  All decisions and interpretations made by the Committee with regard to any question arising hereunder or under the Plan shall be binding and conclusive upon the

 

5



 

Company and the Optionee.  If there is any inconsistency between the provisions of this Agreement and the Plan, the provisions of the Plan shall govern.

 

17.                                Discontinuance of Service .  This Agreement shall not give the Optionee a right to employment or continued Service with the Company or any parent or subsidiary of the Company, and the Company or any such parent or subsidiary engaging the Optionee may terminate his/her Service at any time and otherwise deal with the Optionee without regard to the effect it may have upon him/her under this Agreement.

 

18.                                Option Subject to Plan, Certificate of Incorporation and By-Laws .  The Optionee acknowledges that the Option and the exercise thereof is subject to the Plan, the Certificate of Incorporation, as amended from time to time, and the By-Laws, as amended from time to time, of the Company, and any applicable federal or state laws, rules or regulations.

 

19.                                Binding Effect .  This Agreement shall be binding in all respects on the heirs, representatives, successors and assigns of the Optionee.

 

20.                                Choice of Law .  This Agreement is entered into under the laws of the State of Delaware and shall be construed and interpreted thereunder (without regard to its conflict of law principles).

 

21.                                Right of First Refusal and Execution of Stockholder Agreements .  At the discretion of the Committee, the Company is hereby granted (a) a right of first refusal to purchase all Shares that the Optionee (or a subsequent transferee) may propose to transfer to a third party and (b) the right to require the Optionee from time to time to execute and deliver stockholder, voting or similar agreements.

 

**FOR ALL FOREIGN CONSULTANTS:

 

22.                                Arbitration .  Any dispute arising out of or relating to this Agreement or the alleged breach of it, or the making of this Agreement, including claims of fraud in the inducement, shall be discussed between the disputing parties in a good faith effort to arrive at a mutual settlement of any such controversy.  If, notwithstanding, such dispute cannot be resolved, such dispute shall be settled by binding arbitration.  Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof.  Arbitration will be conducted pursuant to the provisions of this Agreement, and the commercial arbitration rules of the American Arbitration Association, unless such rules are inconsistent with the provisions of this Agreement.  Limited civil discovery shall be permitted for the production of documents and taking of depositions.  Unresolved discovery disputes may be brought to the attention of the arbitrator who may dispose of such dispute.  The arbitrator shall have the authority to award any remedy or relief that a court of the state of Delaware could order or grant; provided, however, that punitive or exemplary damages shall not be awarded.  Unless otherwise agreed by the parties, the place of any arbitration proceedings shall be Hennepin or Ramsey County, Minnesota, United States of America.

 

**FOR UK CONSULTANTS:

 

23.                                Securities Law Compliance .  The exercise of all or a portion of this Option shall only be effective at such time as counsel to the Company shall have determined that the issuance and delivery of common stock pursuant to such exercise will not violate any United States’ federal or state securities or other laws, or the applicable securities or other laws of England or the United Kingdom.  The Optionee may be required by the Company, as a condition of the effectiveness of any exercise of this Option, to agree in writing that (i) all common stock to be acquired pursuant to such exercise shall be held for the Optionee’s own account without a view to any further distribution thereof, until such time that such common stock is registered and freely tradable under applicable United States’ federal and state securities laws, or the applicable securities laws of

 

6



 

England or the United Kingdom, or proposed to be sold in a transaction exempt from the registration requirements of such laws, which exempt status shall be confirmed by an opinion of counsel to the Optionee (such opinion and counsel shall be satisfactory in all respects to counsel for the Company), (ii) the certificates for all shares of common stock issued upon exercise of this Option shall bear an appropriate legend respecting the noted restrictions on transferability, and (iii) such shares of common stock will not in any event be actually transferred or disposed of except in compliance with applicable United States’ federal and state securities laws, or the applicable securities laws of England or the United Kingdom.

 

24.                                United Kingdom Tax Matters .

 

(a)                                  This Option is a nonqualified option under the United States’ Internal Revenue Code of 1986, as amended.  The Company does not make any representation regarding whether the Option is tax-qualified under the tax laws of England or the United Kingdom and provides no assurances as to the tax consequences of this Option under the tax laws of England or the United Kingdom.

 

(b)                                  The Optionee represents that the Optionee has had an opportunity to consult with his or her advisors respecting the tax treatment of this Option under the tax laws of England or the United Kingdom, and is not relying on the Company for advice in this regard.

 

(c)                                   In order to permit the Company to comply with all applicable United States’ federal or state income tax laws or regulations, or the applicable tax laws and regulations of England or the United Kingdom, the Company may take such action as it deems appropriate to insure that, if necessary, all applicable payroll, income or other taxes are withheld from any amounts payable by the Company to the Optionee.  If the Company is unable to withhold such taxes, for whatever reason, the Optionee hereby agrees to pay to the Company an amount equal to the amount the Company would otherwise be required to withhold under applicable tax laws and regulations.

 

The Optionee agrees to indemnify the Company against any liability it may incur for secondary Class I National Insurance Contributions and agrees that the Company may recover from the Optionee (in such manner as the Company may determine and notify to the Optionee at any time before this Option is first exercised) the whole or any part of any such contributions payable as a result of the Option being exercised.

 

25.                                Blue Sky Limitation .  Notwithstanding anything in this Agreement to the contrary, in the event the Company makes any public offering of its securities and determines in its sole discretion that it is necessary to reduce the number of issued but unexercised stock purchase rights so as to comply with any securities law limitations within the United States, Canada, England or the United Kingdom with respect thereto, the Board shall have the right (i) to accelerate the exercisability of this Option and the date on which this Option must be exercised, provided that the Company gives the Optionee 15 days’ prior written notice of such acceleration, and (ii) to cancel any portion of this Option or any other option granted to Optionee pursuant to the Plan that is not exercised prior to or contemporaneously with such public offering.  Notice shall be deemed given when delivered personally or when deposited in the United States mail, first class postage prepaid and addressed to the Optionee at the address of the Optionee on file with the Company.

 

**FOR CANADIAN CONSULTANTS:

 

23.                                Securities Law Compliance .  The exercise of all or a portion of this Option shall only be effective at such time as counsel to the Company shall have determined that the issuance and delivery of common stock pursuant to such exercise will not violate any United States’ federal or state securities or other laws, or the applicable securities or other laws of Canada (federal or provincial).

 

7


 

The Optionee may be required by the Company, as a condition of the effectiveness of any exercise of this Option, to agree in writing that (i) all common stock to be acquired pursuant to such exercise shall be held for the Optionee’s own account without a view to any further distribution thereof, until such time that such common stock is registered and freely tradable under applicable United States’ federal and state securities laws, or the applicable securities laws of Canada (federal or provincial) or proposed to be sold in a transaction exempt from the registration requirements of such laws, which exempt status shall be confirmed by an opinion of counsel to the Optionee (such opinion and counsel shall be satisfactory in all respects to counsel for the Company), (ii) the certificates for all shares of common stock issued upon exercise of this Option shall bear an appropriate legend respecting the noted restrictions on transferability, and (iii) such shares of common stock will not in any event be actually transferred or disposed of except in compliance with applicable United States’ federal and state securities laws or the applicable securities laws of Canada (federal or provincial).

 

24.                                Canadian Tax Matters .

 

(a)                                  This Option is a nonqualified option under the United States’ Internal Revenue Code of 1986, as amended.  The Company does not make any representation regarding whether the Option is tax-qualified under the tax laws of Canada (federal or provincial) and provides no assurances as to the tax consequences of this Option under the tax laws of Canada (federal or provincial).

 

(b)                                  The Optionee represents that the Optionee has had an opportunity to consult with his or her advisors respecting the tax treatment of this Option under the tax laws of Canada (federal or provincial), and is not relying on the Company for advice in this regard.

 

(c)                                   In order to permit the Company to comply with all applicable United States’ federal or state income tax laws or regulations, or the applicable tax laws and regulations of Canada (federal or provincial), the Company may take such action as it deems appropriate to insure that, if necessary, all applicable payroll, income or other taxes are withheld from any amounts payable by the Company to the Optionee.  If the Company is unable to withhold such taxes, for whatever reason, the Optionee hereby agrees to pay to the Company an amount equal to the amount the Company would otherwise be required to withhold under applicable tax laws and regulations.

 

25.                                Blue Sky Limitation .  Notwithstanding anything in this Agreement to the contrary, in the event the Company makes any public offering of its securities and determines in its sole discretion that it is necessary to reduce the number of issued but unexercised stock purchase rights so as to comply with any securities law limitations within the United States, Canada, England or the United Kingdom with respect thereto, the Board shall have the right (i) to accelerate the exercisability of this Option and the date on which this Option must be exercised, provided that the Company gives the Optionee 15 days’ prior written notice of such acceleration, and (ii) to cancel any portion of this Option or any other option granted to Optionee pursuant to the Plan that is not exercised prior to or contemporaneously with such public offering.  Notice shall be deemed given when delivered personally or when deposited in the United States mail, first class postage prepaid and addressed to the Optionee at the address of the Optionee on file with the Company.

 

26.                                Governing Language .  The parties hereto confirm their express wish that this Agreement and all documents and agreements directly or indirectly relating hereto be drawn up in the English language.  Les parties reconnaissent leur volonté expresse que la présente ainsi que tous les documents et contrats s’y rattachant directement ou indirectement soient rédigés en anglais .

 

[ Remainder of page left blank intentionally — signature page follows ]

 

8



 

IN WITNESS WHEREOF, the Optionee and the Company have executed this Agreement as of the date of grant.

 

 

OPTIONEE

 

 

 

 

 

 

 

 

 

TACTILE SYSTEMS TECHNOLOGY, INC.

 

 

 

 

 

By

 

 

Name:

 

 

Its:

 

 

9



 

                                            , 20     

 

To:  Tactile Systems Technology, Inc.

 

Ladies and Gentlemen:

 

I hereby exercise the following option (the “ Option ”) granted to me under the Tactile Systems Technology, Inc. 2007 Omnibus Stock Plan (the “ Plan ”) with respect to the number of shares of Common Stock of Tactile Systems Technology, Inc. (the “ Company ”) indicated below:

 

Name:

 

 

 

Date of Grant of Option:

 

 

 

Exercise Price Per Share:

 

 

 

Number of Shares With Respect to Which the Option is Hereby Exercised:

 

 

 

Total Exercise Price:

 

 

o                                     Enclosed with this letter is a check, bank draft or money order in the amount of the Total Exercise Price.

 

o                                     I hereby agree to pay the Total Exercise Price within five business days of the date hereof and, as stated in the attached Broker’s Letter, I have delivered irrevocable instructions to                                                           to promptly deliver to the Company the amount of sale or loan proceeds from the Shares to be issued pursuant to this exercise necessary to satisfy my obligation hereunder to pay the Total Exercise Price.

 

o                                     Enclosed with this letter is a certificate evidencing unencumbered Shares (duly endorsed in blank) having an aggregate Fair Market Value (as defined in the Plan) equal to or in excess of the Total Exercise Price.

 

o                                     I elect to pay the Total Exercise Price through a reduction in the number of Shares delivered to me upon this exercise of the Option as provided in Section 14 of the Plan.

 

If I am enclosing Shares with this letter, I hereby represent and warrant that I am the owner of such Shares free and clear of all liens, security interests and other restrictions or encumbrances.  I agree that I will pay any required withholding taxes in connection with this exercise.

 



 

Please issue a certificate (the “ Certificate ”) for the number of Shares with respect to which the Option is being exercised in the name of the person indicated below and deliver the Certificate to the address indicated below:

 

Name in Which to Issue Certificate:

 

 

 

Address to Which Certificate Should be Delivered:

 

 

 

 

 

 

 

 

 

Principal Mailing Address for Holder of the Certificate

 

(if different from above):

 

 

 

 

 

 

 

 

 

Very truly yours,

 

 

 

 

 

Signature

 

 

 

 

 

Name, please print

 

 

 

 

 

Social Security Number

 

 

 

 

 

 

 

 

 

Address

 

 

 

 

 

Phone Number

 

2



 

                   , 20     

 

To:  Tactile Systems Technology, Inc.

 

Ladies and Gentlemen:

 

Name of Optionee:

 

 

 

Date of Grant of Option:

 

 

 

Exercise Price Per Share:

 

 

 

Number of Shares With Respect to Which the Option is to

 

be Exercised:

 

 

 

Total Exercise Price:

 

 

The above Optionee has requested that we finance the exercise of the above Option to purchase Shares of Common Stock of Tactile Systems Technology, Inc. (the “ Company ”) and has given us irrevocable instructions to promptly deliver to the Company the amount of sale or loan proceeds from the Shares to be issued pursuant to such exercise to satisfy the Optionee’s obligation to pay the Total Exercise Price.

 

 

Very truly yours,

 

 

 

 

 

Broker Name

 

 

 

 

 

By

 

 

Name

 

 

Its

 

 




Exhibit 10.10

 

TACTILE SYSTEMS TECHNOLOGY, INC.

Restricted Stock Agreement

 

Full Name of Employee: [           ]

No. of Shares of Series A Preferred Stock Covered: [       ]

Date of Issuance: March 3, 2009

Vesting Schedule:

 

 

 

All Shares subject to this Agreement will vest immediately in full upon the terms described in Section 2 of this Agreement.

 

This Restricted Stock Agreement is made as of the date of issuance set forth above (the “ Effective Date ”), between Tactile Systems Technology, Inc., a Delaware corporation (the “ Company ”), and the employee set forth above (the “ Employee ”).

 

A.                                     The Company desires to give the Employee an inducement to acquire a proprietary interest in the Company and an added incentive to advance the interests of the Company by granting the Employee restricted shares of Series A Preferred Stock of the Company (including the shares of the Company’s common stock issuable upon conversion of the shares of Series A Preferred Stock, the “ Shares ”), on the terms and conditions and subject to the restrictions set forth herein; and

 

B.                                     The Company and the Employee desire to enter into this Agreement to set forth the terms and conditions of such grant.

 

Now, therefore, the Company and the Employee mutually agree as follows:

 

1.                                       GRANT OF RESTRICTED STOCK .

 

(a)                                  Subject to the terms and conditions of this Agreement, the Company has granted to the Employee the number of Shares specified at the beginning of this Agreement.  Such Shares are subject to the restrictions provided for in this Agreement and are referred to collectively as the “ Restricted Shares ” and each as a “ Restricted Share. ”  The term “Restricted Shares” also refers to all securities received by the Employee in replacement of or in connection with the Restricted Shares acquired hereby pursuant to a recapitalization, reclassification, stock dividend, stock split, stock combination or other relevant event.

 

(b)                                  Each Restricted Share will be evidenced by a duly issued stock certificate (which may represent more than one Restricted Share) registered in the name of the Employee.  The Employee will have all rights of a stockholder of the Company with respect to each Restricted Share (including the right to receive dividends and other distributions, if any).  However, all restrictions provided for in this Agreement will apply to each Restricted Share and to any other securities distributed with respect to such Restricted Share.  No Restricted Share may be sold, transferred, pledged, hypothecated or otherwise encumbered or disposed of until such Restricted Share has vested in the Employee in accordance with all terms and conditions of this Agreement.  Each Restricted Share will remain restricted and subject to forfeiture to the Company unless and until such Restricted Share has vested in the Employee in accordance with all of the terms and conditions of this Agreement.  Each stock certificate evidencing any Restricted Share may contain such legends and stock transfer instructions or limitations as may be determined or authorized by the Company in its sole discretion.  The Company may, in its sole discretion, retain custody of any such certificate throughout the period during which any restrictions are in effect and require, as a condition to issuing any such certificate, that the Employee tender to the Company a stock power duly executed in blank relating to such custody.

 

1



 

2.                                       VESTING .  If the Employee remains continuously employed by the Company or a parent or subsidiary thereof until a Change in Control, then the Restricted Shares will vest upon a Change in Control.  A “ Change in Control ” of the Company shall be deemed to occur if any of the following occur:

 

(a)                                  Any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) after the Effective Date first acquires or becomes a “beneficial owner” (as defined in Rule 13d-3 or any successor rule under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding securities entitled to vote generally in the election of directors (“ Voting Securities ”), provided, however, that the following shall not constitute a Change in Control pursuant to this Section 2(a):

 

(A)                                any acquisition of shares of the Company’s capital stock or Voting Securities of the Company directly from the Company,

 

(B)                                any acquisition or beneficial ownership by the Company or a subsidiary of the Company,

 

(C)                                any acquisition or beneficial ownership by any employee benefit plan (or related trust) sponsored or maintained by the Company or one or more of its subsidiaries,

 

(D)                                any acquisition or beneficial ownership by any corporation with respect to which, immediately following such acquisition, more than 50% of both the combined voting power of the Company’s then outstanding Voting Securities and the shares of the Company’s capital stock are then beneficially owned by all or substantially all of the persons who beneficially owned Voting Securities and shares of the Company’s capital stock immediately prior to such acquisition in substantially the same proportions as their ownership of such Voting Securities and shares of the Company’s capital stock, as the case may be, immediately prior to such acquisition;

 

(b)                                  A majority of the members of the board of directors of the Company shall not be Continuing Directors.  “ Continuing Directors ” shall mean:  (A) individuals who, on the Effective Date, are directors of the Company, (B) individuals elected as directors of the Company subsequent to the date hereof for whose election proxies shall have been solicited by the board of directors, (C) individuals elected as directors of the Company subsequent to the date hereof pursuant to a nomination or board representation right of preferred stockholders of the Company or (D) any individual elected or appointed by the board of directors to fill vacancies on the board of directors caused by death or resignation (but not by removal) or to fill newly-created directorships;

 

(c)                                   Consummation of a reorganization, merger or consolidation of the Company or a statutory exchange of outstanding Voting Securities, unless, immediately following such reorganization, merger, consolidation or exchange, all or substantially all of the persons who were the beneficial owners, respectively, of Voting Securities and shares of the Company’s capital stock immediately prior to such reorganization, merger, consolidation or exchange beneficially own, directly or indirectly, more than 70% of, respectively, the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors and the then outstanding shares of common stock, as the case may be, of the corporation that is the issuer of such securities held by the stockholders of the Company after such reorganization, merger, consolidation or exchange in substantially the same proportions as their ownership, immediately

 

2



 

prior to such reorganization, merger, consolidation or exchange, of the Voting Securities and shares of the Company’s capital stock, as the case may be; or

 

(d)                                  Consummation of (x) a complete liquidation or dissolution of the Company or (y) the sale or other disposition of all or substantially all of the assets of the Company (in one or a series of transactions), other than to a corporation with respect to which, immediately following such sale or other disposition, more than 70% of, respectively, the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and the then outstanding shares of common stock of such corporation is then beneficially owned, directly or indirectly, by all or substantially all of the persons who were the beneficial owners, respectively, of the Voting Securities and shares of the Company’s capital stock immediately prior to such sale or other disposition in substantially the same proportions as their ownership, immediately prior to such sale or other disposition, of the Voting Securities and shares of the Company’s capital stock, as the case may be.

 

3.                                       ISSUANCE OF UNRESTRICTED SHARES .   Upon the vesting of any Restricted Shares, such vested Restricted Shares will no longer be subject to forfeiture as provided in Section 4, but will continue to be subject to the provisions of Section 6.

 

4.                                       FORFEITURE .  If (a) the Employee’s employment with the Company, or a parent or subsidiary thereof, is terminated for any reason, whether by the Company with or without cause, voluntarily or involuntarily by the Employee or otherwise, or (b) the Employee attempts to transfer or otherwise dispose of any of the Restricted Shares or the Restricted Shares become subject to attachment or any similar involuntary process, in violation of this Agreement, then any Restricted Shares that have not previously vested will be forfeited by the Employee to the Company, the Employee will thereafter have no right, title or interest whatever in such Restricted Shares, and, if the Company does not have custody of any and all certificates representing Restricted Shares so forfeited, the Employee must immediately return to the Company any and all certificates representing Restricted Shares so forfeited.  Additionally, the Employee must deliver to Company a stock power duly executed in blank relating to any and all certificates representing Restricted Shares forfeited to the Company in accordance with the previous sentence or, if such stock power has previously been tendered to the Company, the Company will be authorized to deem such previously tendered stock power delivered, and the Company will be authorized to cancel any and all certificates representing Restricted Shares so forfeited and issue and deliver to the Employee a new certificate for any Shares which vested prior to forfeiture.

 

5.                                       LOCK-UP .

 

(a)                                  The Employee agrees that the Employee will not offer, pledge, sell, contract to sell, sell any option, sell any contract to purchase, purchase any option, purchase any contract to sell, grant any option, right, or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any Shares (or any other Company securities) or enter into any swap, hedging, or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any Shares (or any other Company securities) held by the Employee (other than those included in the registration) for a period specified by the representative of the underwriters of the Company’s capital stock (or any other Company securities, collectively, the “ Stock ”) not to exceed 90 days (180 days in the case of an initial public offering), plus any additional periods required by the Financial Industry Regulatory Authority, after the effective date of any Company registration statement filed under the Securities Act of 1933 (the “ Securities Act ”).

 

(b)                                  The Employee agrees to execute and deliver such other agreements as may be reasonably requested by the Company or the underwriter to the extent that such agreements are consistent with the foregoing or that are necessary to give further effect to the provisions set forth in Section 5(a).  In addition, if requested by the Company or the

 

3



 

 

representative of the underwriters of shares of the Company’s capital stock, the Employee will provide, within 10 days of such request, such information as may be required by the Company or such representative in connection with the completion of any public offering of the Company’s securities pursuant to a registration statement filed under the Securities Act.

 

(c)                                   The obligations described in this Section 5 will not apply to a registration relating solely to employee benefit plans on Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a Commission Rule 145 transaction on Form S-4 or similar forms that may be promulgated in the future.  The Company may impose stop-transfer instructions with respect to the Shares subject to the foregoing restriction until the end of such period, as applicable.

 

6.                                       TRANSFER RESTRICTIONS .

 

(a)                                  The Employee understands that, notwithstanding the vesting of the Restricted Shares under Section 2 of this Agreement, none of the Shares issued to the Employee pursuant to this Agreement have been (nor are anticipated to be) registered under the Securities Act, or any state securities laws, in reliance upon exemptions from registration.  The Shares, therefore, cannot be sold unless they are subsequently registered under the Securities Act or the Employee obtains an opinion of counsel satisfactory to the Company that such sale may be effected without violation of applicable federal or state securities laws.  A legend to this effect will be placed on the certificates evidencing the Shares.

 

(b)                                  The Company is not required (1) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (2) to treat as owner of such Shares or to accord the right to vote or pay dividends to any transferee to whom such Shares have been so transferred.

 

7.                                       LIMITATION ON CHANGE IN CONTROL PAYMENTS .  Notwithstanding anything in this Agreement to the contrary, if, with respect to the Employee, the vesting of Restricted Shares as provided in Section 2 (which acceleration could be deemed a “payment” within the meaning of Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the “ Code ”)), together with any other payments which the Employee has the right to receive from the Company or any corporation which is a member of an “affiliated group” (as defined in Section 1504(a) of the Code without regard to Section 1504(b) of the Code) of which the Company is a member, would constitute a “parachute payment” (as defined in Section 280G(b)(2) of the Code), then the “payments” to the Employee will be reduced to the largest amount as will result in no portion of such “payments” being subject to the excise tax imposed by Section 4999 of the Code.  Without limiting the prior sentence, the Employee will have the discretion to determine which “payments” will be reduced so that no portion of such “payments” are subject to the excise tax imposed by Section 4999 of the Code.  Notwithstanding anything to the contrary in this Section 7, if the Employee is subject to a separate agreement with the Company that expressly addresses the potential application of Section 280G or 4999 of the Code (including, without limitation, that “payments” under such agreement or otherwise will be reduced, that such “payments” will not be reduced or that such “payments” will be “grossed up” for tax purposes), then this Section 7 will not apply, and any “payments” to the Employee pursuant to this Agreement will be treated as “payments” arising under such separate agreement.

 

8.                                       EMPLOYMENT .  This Agreement does not give the Employee any right to continued employment with the Company or any parent or subsidiary thereof, and the Company or any parent or subsidiary thereof employing the Employee may terminate such employment or otherwise treat the Employee without regard to the effect it may have upon the Employee or any Restricted Shares under this Agreement.

 

9.                                       TAX WITHHOLDING .  The parties to this Agreement recognize that the Company or a parent or subsidiary of the Company may be obligated to withhold federal and state income taxes or other taxes upon the vesting of the Restricted Shares, or, in the event that the Employee elects under Section 83(b) of the

 

4



 

Code to report the receipt of the Restricted Shares as income in the year of receipt, upon the Employee’s receipt of the Restricted Shares.  The Employee agrees that, at such time, if the Company or a parent or subsidiary is required to withhold such taxes, the Employee will promptly pay in cash upon demand to the Company, or the parent or subsidiary having such obligation, such amounts as shall be necessary to satisfy such obligation.

 

10.                                AMENDMENT TO MEET THE REQUIREMENTS OF SECTION 409A .  The Employee acknowledges that the Company, in the exercise of its sole discretion and without the consent of the Employee, may amend or modify this Agreement in any manner and delay the payment of any amounts payable pursuant to this Agreement to the minimum extent necessary to meet the requirements of Section 409A of the Code as amplified by any Internal Revenue Service or U.S. Treasury Department regulations or guidance as the Company deems appropriate or advisable.  The Employee further acknowledges that the Company has directed the Employee to seek independent advice regarding the applicable provisions of the Code and the income and other tax laws of any municipality, state or foreign country in which the Employee may reside.

 

11.                                DISCRETIONARY ADJUSTMENT .  In the event of any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of Shares, rights offering, or extraordinary dividend or divestiture (including a spin-off), or any other change in the corporate structure or Shares of the Company, the Company’s board of directors or a committee thereof (or if the Company does not survive any such transaction, the board of directors or a comparable committee of the board of directors of the surviving corporation) may, without the consent of the Employee, make such adjustment as it determines in its discretion to be appropriate as to the number and kind of securities subject to and reserved under this Agreement and, in order to prevent dilution or enlargement of rights of the Employee, the number and kind of securities issuable upon lapse of the forfeiture restrictions of the Restricted Shares.

 

12.                                MISCELLANEOUS .  This Agreement is binding in all respects on the Employee’s heirs, representatives, successors and assigns.  This Agreement will be governed by and construed in accordance with the laws of the State of Delaware.  This Agreement contains all terms and conditions with respect to the subject matter hereof and no amendment, modification or other change hereto will be of any force or effect unless and until set forth in a writing executed by the Employee and the Company.  The provisions of Sections 5 through 14 will survive vesting of the Restricted Shares.

 

13.                                SHARES SUBJECT TO CERTIFICATE OF INCORPORATION AND BY-LAWS .  The Employee acknowledges that the Shares granted under this Agreement are subject to the Company’s certificate of incorporation, as amended from time to time, and by-laws, as amended from time to time and any applicable federal or state laws, rules or regulations.

 

14.                                EXECUTION OF STOCKHOLDER AGREEMENTS .  At the discretion of the Company’s board of directors or a committee thereof, the Company is hereby granted (a) a right of first refusal to purchase all Shares that the Employee (or a subsequent transferee) may propose to transfer to a third party and (b) the right to require the Employee from time to time (including as a condition to receipt of the Shares) to execute and deliver stockholder, voting, right of first-refusal and co-sale or similar agreements (including in the forms in effect as of the Effective Date.

 

5



 

The Employee and the Company have executed this Agreement as of the Effective Date.

 

 

TACTILE SYSTEMS TECHNOLOGY, INC.

 

 

 

 

 

 

 

 

Gerald Mattys

NAME:

 

 

Chief Executive Officer

 

6




EXHIBIT 21.1

 

List of Subsidiaries

 

Name of Company

 

State or Other Jurisdiction of
Incorporation/Organization

 

 

 

Swelling Solutions, Inc.

 

Delaware

 




Exhibit 23.1

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We have issued our report dated September 25, 2015, with respect to the consolidated financial statements of Tactile Systems Technology, Inc. contained in the Registration Statement and Prospectus. We consent to the use of the aforementioned report in the Registration Statement and Prospectus, and to the use of our name as it appears under the caption “Experts.”

 

/s/ GRANT THORNTON LLP

 

 

 

Minneapolis, Minnesota

 

January 25, 2016