Tactile Systems Technology, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; filed August 7, 2023. The company develops and sells at-home medical devices, primarily for lymphedema (Flexitouch and Entre) and chronic respiratory conditions (AffloVest).
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $68.3m | $59.6m | $127.2m | $107.6m |
| Gross profit / margin | $48.3m / 70.7% | $43.2m / 72.5% | $89.8m / 70.6% | $77.1m / 71.6% |
| Operating income (loss) | $2.1m | $(4.1)m | $(1.7)m | $(19.0)m |
| Net income (loss) | $(0.1)m | $(4.6)m | $(2.0)m | $(20.2)m |
| Operating cash flow | Not presented quarterly | $13.4m | $(0.9)m |
- Q2 revenue grew 15% year over year; six-month revenue grew 18%. Lymphedema products generated $60.0m in Q2 and $109.8m year to date; airway-clearance products generated $8.3m and $17.4m, respectively.
- For the first six months, sales revenue rose 22% to $112.6m, while rental revenue fell 4% to $14.6m. Q2 sales and rental revenue were $59.8m and $8.5m.
- Gross margin declined year over year in both periods, mainly reflecting higher cost of revenue, including AffloVest contribution and inbound freight costs. Rental gross profit also decreased.
- Cash and cash equivalents were $63.2m at June 30, up from $21.9m at year-end 2022. Current assets were $149.6m versus current liabilities of $48.5m. Cash plus current and non-current accounts receivable totaled approximately $125.2m.
- Six-month investing cash outflow was $1.1m. Financing provided $29.0m, principally including $34.6m net proceeds from a February 2023 stock offering, offset in part by a $5.0m earn-out payment and $1.5m of term-loan repayments.
- Borrowings under the credit agreement totaled $47.5m at June 30; the reported interest rate was 8.81%. Balance-sheet note payable and revolver amounts sum to approximately $47.4m.
Material changes and drivers
- Revenue growth reflected stronger lymphedema sales and rentals and higher AffloVest sales. Medicare revenue increased to $16.4m in Q2 and $34.9m for the half-year, compared with $9.9m and $18.4m in 2022; private-insurer and other-payer revenue was comparatively flat for the half-year.
- Operating results improved substantially year over year. Lower intangible-asset amortization and earn-out expense contributed: six-month expense fell to $2.5m from $8.8m, principally because the prior-year period included a larger earn-out fair-value adjustment.
- Other expense rose to $1.8m for the half-year from $1.0m, primarily due to higher interest expense. Q2 income tax expense of $1.3m contributed to the near-break-even quarterly net result; the six-month tax benefit was $1.6m.
- In February 2023, the company issued 2.875m shares at $13 per share, receiving $34.6m net proceeds. Shares outstanding at June 30 were 23.46m, versus 20.25m at December 31, 2022.
Outlook, risks and contingencies
- No numerical revenue or earnings guidance is provided. Management expects cash, cash equivalents and operating cash flows to cover working capital, capital expenditure, debt service and other needs for at least the next 12 months.
- Management describes seasonal demand: commercial-insurance purchases and rentals are typically weaker in Q1 and stronger in Q3 and Q4 as patients meet deductibles and use flexible spending accounts.
- On August 1, 2023, a credit-agreement amendment extended maturity to August 1, 2026, added an $8.25m term loan used to pay down the revolver, eliminated the liquidity covenant and established leverage, EBITDA and fixed-charge coverage covenants beginning September 30, 2023. The filing reports post-amendment debt as $46.75m in the notes and Item 5, but $47.75m in MD&A; verify the correct figure.
- The company had $43.1m of purchase orders outstanding for expected delivery within a year. Two vendors accounted for 30% of purchases in Q2; one vendor accounted for 24% for the six-month period.
- The AffloVest earn-out liability was $9.3m at June 30, subject to a maximum $10m second earn-out based on revenue targets. The remaining payment is estimated using a Level 3 Monte Carlo model and may change with assumptions and results.
- A securities class action settlement for $5m was awaiting final court approval; the company stated it did not expect to fund any portion. A related derivative action had a non-binding settlement-in-principle on most material terms, with finalization pending.
- Risks cited include reimbursement and payer coverage, economic weakness and inflation, interest rates, competition, supplier concentration, component costs, staffing, regulation, product development, and lingering COVID-19 effects. Management reported no material change to previously disclosed risk factors and no material change in internal control during the quarter.
Important facts for investors to verify
- Reconcile the post-August 1 debt figure: $46.75m in the notes and Item 5 versus $47.75m in MD&A.
- Track the new credit covenants and the company’s ability to meet leverage, minimum EBITDA and fixed-charge coverage requirements.
- Assess whether revenue growth and cash generation persist after considering seasonality, working-capital movements, and the one-time equity offering proceeds.
- Monitor gross-margin pressure, interest expense and the remaining AffloVest earn-out valuation and payment outcome.
- Confirm final court approval and resolution of the securities and derivative litigation settlements.