Tactile Systems Technology, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Financial amounts are in U.S. dollars; unless indicated otherwise, amounts below are in millions. The company develops and sells home-use medical devices, principally Flexitouch and Entre compression systems. It acquired the AffloVest respiratory therapy business on September 8, 2021.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $52.5 | $49.1 | $146.3 | $127.9 |
| Gross profit | $37.0 | $35.0 | $103.4 | $91.0 |
| Gross margin | 70% | 71% | 71% | 71% |
| Operating income (loss) | $(1.4) | $1.8 | $(5.5) | $(10.6) |
| Net income (loss) | $(3.4) | $2.4 | $(4.3) | $(12.7) |
| Diluted earnings (loss) per share | $(0.17) | $0.12 | $(0.22) | $(0.66) |
- Revenue increased 7% in Q3 and 14% year to date. For the first nine months, Flexitouch revenue was $126.5 million, Entre was $18.9 million, and AffloVest contributed $0.9 million. Rental revenue rose 22% year to date to $22.1 million.
- Q3 operating results turned from income to loss as operating expenses rose 16% to $38.3 million, outpacing gross-profit growth. Sales and marketing increased 14%; general and administrative increased 16%, including AffloVest transaction costs. The Q3 tax provision was $1.9 million despite a pretax loss, contributing to the net loss.
- Year-to-date net loss improved by $8.4 million versus 2020. The comparison benefited in part from the prior-year $4.0 million Airwear impairment and a 2021 tax benefit, including research and development tax credits.
- Cash flow: Operating activities used $3.0 million in the first nine months, versus $2.2 million used in 2020. Investing activities used $81.2 million, primarily for the AffloVest acquisition; financing activities provided $58.8 million, principally from borrowings.
- Liquidity and debt: Cash and equivalents were $22.4 million at September 30, down from $47.9 million at December 31, 2020. Current assets were $106.6 million and current liabilities $31.3 million. Borrowings were $55.0 million: a $30.0 million term loan and $25.0 million revolver. The facilities mature September 8, 2024; borrowings bore interest at LIBOR plus 2.8% at quarter-end. The company reported compliance with its financial covenants.
Material changes, outlook and risks
- The AffloVest acquisition was funded with cash and debt. The company paid $80.0 million at closing, subject to a subsequent $0.2 million working-capital return. Purchase accounting recorded $53.5 million of intangible assets and $31.1 million of goodwill. Up to $20.0 million in revenue-based earn-outs may be payable; their recorded fair value at quarter-end was $6.4 million.
- Management said Delta-variant-related clinic restrictions, patient cancellations and staff absenteeism disrupted recovery in Q3. A challenging labor market also hindered sales-force recruiting and retention. The company reported fewer direct sales representatives than a year earlier, while its broader commercial team grew to more than 335 employees.
- Management gave no specific revenue or earnings guidance in the provided filing text. It expects cash, operating cash flows and available credit to be sufficient for working capital and capital expenditures for at least the next 12 months. It plans to continue expanding its commercial organization into 2022.
- COVID-19 effects remain difficult to predict; the company noted that 2021 seasonality may differ from historical patterns. Other risks include reimbursement and payer coverage, competition, supplier dependence, inflation-related costs and potential disruption from vaccination requirements. Two vendors accounted for 36% of purchases in Q3; one vendor accounted for 24% year to date.
- Two significant legal matters remain pending: a False Claims Act qui tam case, with summary-judgment motions pending on the remaining claim, and a securities class action, with a motion to dismiss pending. The company said it intends to defend the qui tam matter and believes the remaining allegations are without merit.
- Other items to note: the company recorded a $1.4 million income-tax benefit for the nine-month period, but a $1.9 million tax expense in Q3. It also disclosed $28.4 million of purchase orders expected to be received within the next year and $0.5 million of tax contingencies. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether clinic access, patient volumes and sales-force hiring recover, and how those factors affect revenue and profitability.
- AffloVest’s post-acquisition sales performance, integration and manufacturing transition from IBC, along with the likelihood and potential amount of earn-out payments.
- Debt repayment capacity, interest-rate exposure, covenant headroom and remaining revolver availability.
- The durability of payer reimbursement and coverage, and the outcomes of the pending legal proceedings and New York tax examination.
- Whether inventory growth, receivables and lease investments affect operating cash flow; operating cash use was $3.0 million for the first nine months.