Tactile Systems Technology, Inc. (Nasdaq: TCMD) — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are principally with fiscal 2021. The company develops and sells home-use medical devices for lymphedema and chronic venous insufficiency, and airway-clearance therapy. Its Flexitouch and Entre products are sold or rented directly to patients; AffloVest is sold through respiratory durable medical equipment distributors.
Financial performance and liquidity
| Metric | 2022 | 2021 |
|---|---|---|
| Revenue | $246.8 million | $208.1 million |
| Gross profit / gross margin | $176.0 million / 71% | $148.2 million / 71% |
| Operating loss | $12.8 million | $1.8 million |
| Net loss | $17.9 million; $0.89 per diluted share | $11.8 million; $0.60 per diluted share |
| Cash from operating activities | $5.2 million | $2.6 million |
| Cash and cash equivalents at year-end | $21.9 million | $28.2 million |
- Revenue grew 19%. Lymphedema product revenue increased 5% to $212.3 million, or 86% of total revenue; airway-clearance revenue, primarily AffloVest, rose to $34.5 million, or 14%.
- Operating expenses increased 26% to $188.7 million. Sales and marketing rose 23% to $106.4 million, largely due to higher personnel costs and commercial-team expansion. Research and development increased 25% to $7.1 million.
- Intangible-asset amortization and earn-out expense rose to $14.4 million from $0.7 million, primarily reflecting an $11.9 million increase in the estimated fair value of AffloVest earn-out liabilities. Interest expense also increased.
- Year-end current assets were $119.8 million and current liabilities were $64.3 million. Net accounts receivable, including non-current receivables, totaled approximately $77.9 million.
- Debt outstanding was $49.0 million: $24.0 million term loan and $25.0 million revolving credit facility. The facility matures September 8, 2024; the reported rate on outstanding borrowings was 7.41% at year-end. The company reported compliance with financial covenants.
- The company reported $5.0 million of operating cash flow despite the net loss, supported by noncash expenses and partly offset by increased receivables, lease investment and inventory. Cash declined $6.3 million during the year.
Changes, outlook and material items
- AffloVest, acquired in September 2021, accounted for most of the 2022 revenue increase. The company began manufacturing and shipping AffloVest from its Minnesota facility in May 2022.
- Lymphedema revenue was affected by restricted clinic access and sales-force staffing challenges, particularly in the first quarter, amid lingering COVID-19 impacts. Management reported some recovery later in 2022.
- Management stated that cash, cash flows and available resources should be sufficient for working capital, capital expenditures and debt service for at least the next 12 months. It did not provide numerical revenue or earnings guidance in the provided filing text.
- An AffloVest earn-out amendment set a $10.0 million initial earn-out, with $5.0 million paid in 2022 and $5.0 million plus $0.25 million imputed interest due by May 26, 2023. A further payment of up to $10.0 million may be due based on specified revenue performance. The reported year-end earn-out liability was $13.1 million.
- The company recorded a $2.4 million income tax expense despite a pretax loss, and a $17.8 million valuation allowance against deferred tax assets, citing cumulative losses and uncertainty about realization.
- A securities class action settlement memorandum of understanding provided for a $5 million settlement; the company said it did not expect to fund any portion. The settlement remained subject to agreement on non-monetary terms and court approval. A related derivative action was being defended.
- Key risks include payer coverage and reimbursement changes, Medicare claim denials and lengthy appeals, concentration in lymphedema products, supplier dependence, sales-force recruitment and retention, regulation and compliance, cybersecurity, and variable-rate debt. The company reported $33.2 million in Medicare Flexitouch receivables, including $23.1 million classified as long-term due to appeals timing.
- Revenue is seasonal: commercial-insurance demand is typically weaker in the first quarter and stronger in the third and fourth quarters as patients meet deductibles. The company also cited exposure to interest-rate changes and the LIBOR transition.
Important facts for investors to verify
- Whether Medicare and commercial-payer collections, denials and appeals support the assumptions used to recognize revenue and value receivables; this was the auditor’s critical audit matter.
- AffloVest revenue growth, gross contribution and the ultimate amount and timing of earn-out payments, including the effect of remeasurement on reported earnings.
- Progress in restoring lymphedema sales growth, recruiting and retaining sales personnel, and maintaining clinic access and referral activity.
- Debt-service capacity, covenant headroom, the 2024 maturity and sensitivity to benchmark-rate changes; management reported covenant compliance and adequate resources for at least 12 months.
- Status and final terms of the securities settlement and related derivative litigation, along with any resulting financial or disclosure effects.
Audit and controls: The auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2022. Management also concluded that disclosure controls and internal control over financial reporting were effective.