Tactile Systems Technology, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 28, 2019. The filing also reports fourth-quarter results. The company develops and sells home-use medical devices, primarily for lymphedema and chronic venous insufficiency, through a U.S. direct-to-patient and provider model.
Financial performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $143.8 million | $109.3 million |
| Gross profit / margin | $102.3 million / 71% | $80.3 million / 73% |
| Operating income / margin | $3.0 million / 2% | $3.9 million / 4% |
| Net income / diluted EPS | $6.6 million / $0.34 | $5.9 million / $0.31 |
| Operating cash flow | $9.0 million | $4.2 million |
| Cash and cash equivalents | $20.1 million | $24.0 million |
| Marketable securities | $25.8 million | $19.9 million |
| Total debt at year-end | None | None |
Working capital was $68.9 million and total assets were $107.1 million at year-end. The company reported $89.3 million in stockholders’ equity. Investing cash outflow was $14.7 million, including $5.4 million for patents and other intangible assets and $4.2 million for property and equipment. Cash declined by $3.9 million during the year.
Fourth quarter: Revenue was $46.4 million, versus $34.9 million in Q4 2017; operating income was $2.1 million versus $4.9 million, and net income was $2.4 million versus $2.2 million.
Business changes and comparisons
- Revenue rose 32%, led by Flexitouch sales, up 31% to $131.9 million. Flexitouch represented 92% of revenue, unchanged as a share from 2017. Management cited sales-force expansion, a new large private-insurer contract, Flexitouch Plus and Veterans Administration channel growth.
- Entre and Actitouch combined revenue increased 32% to $11.8 million, but Actitouch demand had declined over three years. The company plans to discontinue Actitouch in the second half of 2019.
- Gross margin fell to 71% from 73%, primarily due to lower pricing under a new large private-insurer contract, alongside higher production costs and a $0.7 million Actitouch inventory write-off.
- Operating expenses increased 30% to $99.3 million, including a 36% increase in sales and marketing. Operating income declined 23% despite revenue growth, reflecting investment in commercial infrastructure and higher expenses.
- Net income benefited from a $3.1 million income-tax benefit, primarily tied to tax-deductible share-based compensation. Stock-based compensation expense increased to $8.0 million from $4.2 million.
Outlook, risks and unusual items
- Management expects continued revenue growth from greater awareness, sales-force expansion, reimbursement coverage and new products, while anticipating payer pricing pressure and a slight near-term decline in gross margin. The filing provides no specific numerical revenue or earnings guidance.
- The company plans to begin selling the licensed Airwear compression wrap in the second half of 2019. It paid Sun Scientific a $4.0 million initiation fee and agreed to royalties on qualifying product sales.
- Liquidity outlook: management said cash, cash equivalents, marketable securities, operating cash flow and the credit facility should meet working-capital and capital-expenditure needs for at least the next 12 months. A $10 million revolving facility, expiring August 2021, had no borrowings at year-end; substantially all assets secure it, and financial covenants apply.
- A $2.5 million non-cash impairment fully wrote off Actitouch inventory and intangible assets ($0.7 million and $1.8 million, respectively) following the planned product discontinuation.
- A competitor filed a qui tam complaint alleging Anti-Kickback Statute and False Claims Act violations related to Medicare and Medicaid claims, and unlawful retaliation. The U.S. government declined to intervene; the company disputes the allegations and intends to defend itself. The complaint seeks damages, penalties, fees and costs.
- Key risks include dependence on Flexitouch, payer reimbursement and coverage decisions, Medicare claim appeals, seasonality (typically weaker first-quarter demand and stronger third- and fourth-quarter sales), competition, supplier concentration, tariffs and trade policy, and expiration of certain U.S. Flexitouch patents in 2017.
- The company became a large accelerated filer and ceased to qualify as an emerging growth company for 2018. Management and the auditor reported effective internal control over financial reporting; the financial statement audit opinion was unqualified.
Important facts for investors to verify
- Whether Flexitouch growth and the new insurer contract can offset pricing pressure and continued concentration in one product.
- The size, timing and collectability of Medicare receivables: $2.6 million of Flexitouch-related Medicare receivables awaited approval, including $1.9 million classified as long-term.
- Progress and economics of the Airwear launch, including royalties and the transition away from Actitouch.
- Developments in the qui tam lawsuit and any related reimbursement, compliance or litigation exposure.
- Whether operating cash flow keeps pace with growth, given rising receivables and commitments, including $14.9 million of purchase orders expected to be fulfilled in 2019.