Revenue

9 Months Ended

Sep. 30, 2019

Revenue

Revenue

Note 12. Revenue

We derive our revenue from the sale and rental of our Flexitouch, Entre and Actitouch systems to our customers in the United States. While our primary source of revenue is from the sale of our products, a portion of our revenue is derived from patients who obtain our products under rental arrangements. (See description below for additional information on rental revenue as it relates to ASC 842.) These arrangements are primarily for rentals of the Flexitouch system and arise from transactions with private insurers and other payers.

The following table presents our revenue, inclusive of sales and rental revenue, disaggregated by product:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands)	2019		2018		2019		2018
Revenue
Flexitouch system	$	44,699	$	33,330	$	119,767	$	89,216
Entre/Actitouch systems		4,913		2,992		12,662		8,087
Total	$	49,612	$	36,322	$	132,429	$	97,303
Percentage of total revenue
Flexitouch system		90 %		92 %		90 %		92 %
Entre/Actitouch systems		10 %		8 %		10 %		8 %
Total		100 %		100 %		100 %		100 %

Our revenue from third party payers, inclusive of sales and rental revenue, for the three and nine months ended September 30, 2019 and 2018, is summarized in the following table:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands)	2019		2018		2019		2018
Private insurers and other payers	$	35,909	$	25,934	$	93,932	$	69,358
Veterans Administration		7,764		6,863		23,690		19,877
Medicare		5,939		3,525		14,807		8,068
Total	$	49,612	$	36,322	$	132,429	$	97,303

Our rental revenue is derived from rent-to-purchase arrangements that typically range from three to ten months. Under ASC 840, our rental revenue was recognized as month-to-month, cancelable leases; however, because title transfers to the patient, with whom we have the contract, upon the termination of the lease term and because collectability is probable, under ASC 842, these are recognized as sales-type leases. Each rental agreement contains two components, the controller and related garments, both of which are interdependent and recognized as one lease component.

In accordance with applicable guidance, we continue to recognize rental agreements commencing prior to December 31, 2018, on a month-to-month basis as an operating lease until they are completed, which we anticipate to be in the fourth quarter of this fiscal year. Those rental agreements initiated subsequent to January 1, 2019, are recorded as sales-type leases in accordance with ASC 842, whereby rental revenue and cost of rental revenue are recognized upon the lease commencement date. Total rental revenue in the three and nine months ended September 30, 2019 includes both operating and sales-type lease revenue. Operating lease revenue was $0.6 million and $4.8 million for the three and nine months ended September 30, 2019, respectively. Rental revenue related to operating leases under ASC 840 includes garment revenue of approximately $0.4 million and $1.0 million previously included as sales revenue for the three and nine months ended September 30, 2018, respectively.

The revenue and associated cost of revenue of sales-type leases are recognized on the lease commencement date and a net investment in leases is recorded on the Condensed Consolidated Balance Sheet. We bill the patients’ insurance payers monthly over the duration of the rental term. We record the net investment in leases and recognize revenue upon commencement of the lease in the amount of the expected consideration to be received through the monthly payments. Similar to our sales revenue, the transaction price is impacted by multiple factors, including the terms and conditions contracted by various third party payers. As the rental contract resides with the patients, we have elected the portfolio approach, at the payer level, to determine the expected consideration, which considers the impact of early terminations. While the contract is with the patient, in certain circumstances, the third party payer elects an initial rental period with an option to extend. We assess the likelihood of extending the lease at the onset of the lease to determine if the option is reasonably certain to be exercised. As the lease is short-term in nature, we anticipate collection of substantially all of the net investment within the first year of the lease agreement. Completion of these payments represents the fair market value of the equipment, and as such, interest income is not applicable.

Sales-type lease revenue and the associated cost of revenue for the three and nine months ended September 30, 2019, was:

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
(In thousands)	2019		2019
Sales-type lease revenue	$	6,088	$	15,088
Cost of sales-type lease revenue		1,932		5,358
Gross profit	$	4,156	$	9,730