Tactile Systems Technology, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Amounts are in U.S. dollars; financial statement figures are in thousands unless stated otherwise.
Business context
Tactile Medical develops and sells home-use medical devices for lymphedema and chronic venous insufficiency. Its products are Flexitouch, Entre and Actitouch. The company sells primarily in the United States through clinician referrals and relies on third-party manufacturers for components and some manufacturing. Flexitouch generated 92% of Q2 revenue and 91% of first-half revenue.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $26.3m | $19.7m | $46.1m | $33.4m |
| Gross profit / margin | $19.2m / 73% | $14.4m / 73% | $33.5m / 73% | $24.3m / 73% |
| Operating income (loss) | $0.7m | $1.8m | ($2.2m) | $0.006m |
| Net income | $3.8m | $1.0m | $2.3m | $0.008m |
| Diluted EPS | $0.20 | $0.04 | $0.12 | ($0.30) |
| Operating cash flow | Not presented separately | Not presented separately | ($3.0m) | $0.7m |
- Q2 revenue increased 33%; first-half revenue increased 38%. Flexitouch sales rose 43% in Q2 and 46% year to date, supported by sales-force expansion, greater awareness and expanded payer coverage. Combined Actitouch and Entre sales fell 28% in Q2 and 9% year to date.
- Gross margin held at 73%. Operating expenses grew 47% in both the quarter and first half, outpacing revenue growth. Q2 operating income consequently fell to $0.7m; first-half operations recorded a $2.2m loss.
- Reported net income benefited materially from income tax benefits of $3.0m in Q2 and $4.4m in the first half, primarily related to share-based compensation tax deductions. Without that unusual tax benefit, reported net income would have been substantially lower; the filing does not provide an adjusted earnings figure.
- Stock-based compensation expense was $1.2m in Q2 and $2.1m in the first half, up from $0.1m and $0.2m, respectively, in the comparable periods.
Cash, liquidity and obligations
- At June 30, cash and cash equivalents were $18.1m and marketable securities were $21.0m, for combined balances of $39.1m. Net accounts receivable was $12.9m; current assets were $66.8m and current liabilities $11.1m.
- First-half operating cash use was $3.0m, reflecting working-capital movements including lower income-tax and payroll-related accruals and higher inventory. Investing cash use was $11.7m, primarily $10.0m net purchases of marketable securities and $1.5m of equipment and tooling. Financing provided $2.1m, mainly from employee stock-plan share issuance and option exercises.
- Cash declined $12.6m during the first half, while marketable securities rose from $11.0m at year-end 2016 to $21.0m. The decline in cash therefore includes the movement of funds into investments.
- The company reported no debt outstanding. Its $2.0m bank credit line expired May 11, 2017 without a balance. Management believed cash, securities and operating cash flows would be sufficient for working capital and capital expenditures for at least the next 12 months.
- Contractual and commercial commitments totaled $11.5m, including $8.1m of inventory purchase commitments and $3.4m of operating lease obligations.
Changes, outlook and risks
- Compared with the prior-year periods, revenue grew strongly, but operating expenses rose faster and operating performance weakened. First-half net income improved from near break-even, largely because of the share-based-compensation-related tax benefit.
- Management provided no specific revenue or earnings guidance. It expected expenses to continue increasing as the business expands and noted additional public-company costs. The filing cautions that interim results are not necessarily indicative of full-year results.
- Sales are seasonal: commercial-insurance demand is typically lower in Q1 and stronger in Q3 and Q4 as patients meet deductibles and use flexible spending balances.
- Key business risks include dependence on Flexitouch, payer coverage and reimbursement, healthcare-policy changes, competition, execution of sales-force growth, and reliance on third-party suppliers. Three vendors accounted for 36% of purchases in both the Q2 and first-half 2017 periods.
- The company added a risk factor concerning healthcare reform: changes to coverage or reimbursement could reduce demand or increase pricing pressure. It reported no legal proceeding considered likely to have a material adverse effect and no material change in internal controls; disclosure controls were assessed as effective.
Most important facts for investors to verify
- Whether Flexitouch growth and expanded payer coverage continue, and whether declines in Actitouch and Entre persist.
- How much reported profitability depends on share-based compensation tax benefits, and whether operating income recovers as expenses grow.
- Whether operating cash flow improves as inventory and accrued-liability movements normalize; distinguish cash balances from marketable securities and investment purchases.
- Any changes in reimbursement policy, healthcare reform, customer concentration or supplier availability that could affect sales and margins.
- The company’s seasonal sales pattern and its ability to fund $8.1m of inventory commitments and lease obligations while continuing to expand.