Tactile Systems Technology, Inc. — Q3 2016 Form 10-Q
Business context and reporting period
The filing covers the three and nine months ended September 30, 2016, compared with the same periods in 2015. Tactile Medical develops and sells home-use medical devices for lymphedema and chronic venous insufficiency. Flexitouch generated 86% of revenue in the first nine months of 2016. In September, the FDA cleared Flexitouch for treatment of lymphedema of the head and neck.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $22.6 million | $16.8 million | $56.1 million | $41.7 million |
| Gross margin | 72% | 73% | 73% | 72% |
| Operating income | $1.0 million | $1.5 million | $1.0 million | $0.2 million |
| Net income | $0.5 million | $0.9 million | $0.5 million | $0.1 million |
| Net income (loss) attributable to common stockholders | $0.2 million | $0.1 million | ($0.7 million) | ($1.3 million) |
| Basic / diluted EPS attributable to common stockholders | $0.01 / $0.01 | $0.05 / $0.03 | ($0.12) / ($0.12) | ($0.44) / ($0.44) |
Q3 revenue increased 35% and nine-month revenue increased 34%. Flexitouch sales rose 33% in both comparisons; ACTitouch and Entré combined increased 47% in Q3 and 44% year to date. Management attributed growth mainly to sales-force expansion, greater awareness, and increased payer coverage. Operating expenses rose 41% in Q3 and 34% year to date, led by sales and marketing and reimbursement, general and administrative costs. Q3 operating income and net income declined despite revenue growth; nine-month operating income and net income improved from 2015.
At September 30, cash and cash equivalents were $39.3 million, accounts receivable net was $13.0 million, and current assets were $61.2 million versus current liabilities of $10.7 million. Total liabilities were $10.9 million. There was no outstanding borrowing under the $2.0 million bank line of credit, which expires May 11, 2017; the filing reports no other debt. Nine-month operating cash flow was $4.3 million, investing cash outflow was $0.5 million, and financing cash inflow was $28.4 million. Cash increased by $32.2 million.
Material changes, outlook, and risks
The August 2, 2016 IPO sold 4.12 million shares at $10 per share, generating $41.2 million gross and approximately $35.4 million net proceeds. The company also paid $8.2 million of accrued Series A preferred dividends; all preferred stock converted to common stock in connection with the IPO. Stockholders’ equity was $56.1 million at quarter-end, compared with a $5.6 million deficit at December 31, 2015.
Management expects cash, cash flows from operations, and cash equivalents to meet working-capital and capital-expenditure needs for at least 12 months, while anticipating higher spending as the business expands and to meet public-company obligations. No revenue or earnings guidance is provided. The business is seasonal: demand is typically lower in Q1 and higher in Q3 and Q4 as patients meet deductibles or use flexible spending balances.
Key exposures include reimbursement and payer coverage, including the effect of a recent Medicare coverage change; estimates of Medicare and other receivables depend on historical approval rates. Flexitouch concentration, third-party manufacturing and supplier dependence, and regulatory and market risks are also relevant. Three vendors represented 36% of purchases for the first nine months of 2016. Commitments included $7.6 million of inventory purchase orders and $3.6 million of operating lease payments. The filing reports no material legal proceedings, no material change to previously disclosed risk factors, and no material change in internal controls.
Important facts for investors to verify
- Whether payer coverage and reimbursement, particularly Medicare policy, support continued sales growth and timely collections.
- Whether revenue growth translates into improved operating profitability as sales, reimbursement, and public-company costs rise.
- The quality and collectability of receivables, given management’s estimates and the importance of reimbursement approvals.
- How the company deploys IPO proceeds and manages supplier concentration, purchase commitments, and new facility lease obligations.
- Share dilution from options, restricted stock units, and the employee stock purchase plan; the filing reports approximately 18.5 million outstanding and potentially dilutive shares combined at September 30.