Tactile Systems Technology, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; audited annual financial statements. The filing also reports fourth-quarter results. Tactile Medical develops and sells home-use compression devices, primarily for lymphedema and chronic venous insufficiency. The company completed its IPO on August 2, 2016.
Financial performance and position
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $84.5 million | $62.9 million |
| Gross profit / margin | $61.6 million / 73% | $46.0 million / 73% |
| Operating income / margin | $4.3 million / 5% | $3.5 million / 5% |
| Net income | $2.9 million | $1.4 million |
| Net income attributable to common stockholders | $1.6 million | $(0.5) million |
| Basic / diluted EPS attributable to common stockholders | $0.18 / $0.15 | $(0.15) / $(0.15) |
| Operating cash flow | $7.0 million | $2.4 million |
Revenue grew 34% year over year. Flexitouch generated $73.4 million (87% of revenue), up 34%; ACTitouch and Entré combined generated $11.1 million (13%), up 37%. Fourth-quarter revenue was $28.5 million versus $21.2 million in Q4 2015; Q4 operating income was $3.3 million versus $3.2 million, and net income attributable to common stockholders was $2.4 million versus $0.3 million.
At year-end, cash and cash equivalents were $30.7 million, marketable securities $11.0 million, working capital $50.4 million, and total assets $73.9 million. Net accounts receivable was $15.0 million, including $2.8 million of long-term Medicare receivables. The company had no debt outstanding and had a $2.0 million secured credit line, due to expire May 11, 2017. IPO proceeds were $41.2 million gross and approximately $35.4 million net; $8.2 million of accrued preferred dividends were paid in cash. The company reported no off-balance-sheet arrangements.
Changes versus prior periods
- Revenue rose from $62.9 million in 2015 and $47.7 million in 2014, driven mainly by Flexitouch growth, sales-force expansion, awareness-building, and broader payer coverage.
- Gross margin remained approximately 73%. Operating expenses rose 35% to $57.3 million, including higher sales and marketing costs (up 38%) and reimbursement, general and administrative costs (up 39%).
- Net income increased to $2.9 million from $1.4 million in 2015. The effective tax rate fell to 33% from 57%, partly due to early adoption of share-based-payment accounting guidance.
- Operating cash flow improved to $7.0 million from $2.4 million. Investing cash outflow increased to $11.8 million, principally due to $11.0 million of marketable-security purchases; financing cash flow was $28.5 million, primarily reflecting the IPO.
- Preferred stock converted to common stock at the IPO; year-end stockholders’ equity was $59.6 million versus a $5.6 million deficit in 2015.
Outlook, commentary, and risks
- Management expects revenue growth from market awareness, sales-force expansion, marketing and support, clinical evidence, reimbursement expansion, and potential international sales. It also anticipates continued payer pricing pressure and slight near-term gross-margin pressure. No numerical revenue or earnings guidance is provided.
- Management said cash, marketable securities, and operating cash flows should fund working capital and capital expenditures for at least the next 12 months. Planned product work included new Flexitouch garments and controller improvements targeted for the second half of 2017.
- Medicare’s 2015 local coverage determination tightened eligibility for pneumatic compression devices and removed coverage for advanced devices for venous stasis ulcers. The company reported no significant negative effect on Medicare fee-for-service business to date, but warned that further impact or similar private-payer restrictions could hurt results.
- Revenue concentration is significant: Flexitouch accounted for 87% of revenue in both 2016 and 2015. The company disclosed that key U.S. Flexitouch patents expire in 2017, creating potential competition risk.
- Medicare receivables face lengthy appeals; $2.8 million of Flexitouch-related Medicare receivables was classified as long-term. A prior Medicare settlement in 2015 recovered approximately $0.9 million on claims originally totaling $1.5 million; future settlements are uncertain.
- Other material risks include reimbursement and regulatory changes, reliance on third-party suppliers (including a single-source ACTitouch controller supplier not yet replaced or qualified), competition, clinical-evidence and adoption uncertainty, and maintaining Medicare accreditation, which was due for renewal in May 2017. Management reported no legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- Whether revenue growth and margins persist as sales and administrative costs rise and payer pricing faces pressure.
- Developments in Medicare LCD coverage, private-payer policy adoption, and the collection and aging of Medicare receivables.
- Flexitouch patent expirations, competitive response, and progress on new product features and indications.
- Renewal of Medicare accreditation and continuity of supply for the ACTitouch controller.
- Use of IPO proceeds, liquidity after operating and investment needs, and the status or renewal of the $2.0 million credit line.