Tactile Systems Technology, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The company develops and sells or rents at-home medical compression products, principally the Flexitouch system, for chronic vascular conditions. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $43.7 | $37.6; up 16% |
| Gross profit / margin | $31.1 / 71% | $26.3 / 70% |
| Operating expenses | $35.5 | $28.1; up 27% |
| Operating loss | $(4.5) | $(1.8) |
| Net income (loss) | $(1.3); $(0.07) per diluted share | $1.5; $0.08 per diluted share |
| Cash from operations | $0.9 | $1.3 |
| Cash and cash equivalents, March 31 | $32.3 | $22.8 at December 31, 2019 |
| Marketable securities, March 31 | $12.5 | $22.5 at December 31, 2019 |
Cash increased by $9.5 million during the quarter, primarily reflecting $10.0 million of marketable-security maturities; investing cash flow was $9.6 million. The company reported $30.8 million of current accounts receivable. It had no borrowings under its $10 million revolving credit facility, which expires August 3, 2021, and reported compliance with its financial covenants. Total liabilities were $42.5 million, including $16.4 million of operating lease liabilities; the company reported no other debt borrowings.
Changes versus the prior-year quarter
- Sales revenue rose 22% to $37.6 million, while rental revenue fell 11% to $6.1 million. Flexitouch revenue increased 13% to $38.6 million; other products, primarily Entre, increased 45% to $5.1 million.
- Sales and marketing expense grew 32% to $23.0 million, principally from investment in the field sales team, patient training and marketing. R&D expense rose 31% to $1.7 million; reimbursement, general and administrative expense increased 16% to $10.9 million.
- Gross margin improved by approximately one percentage point to 71%, but higher operating expenses contributed to a larger operating loss and a swing from net income to net loss.
- Revenue mix shifted: Flexitouch accounted for 88% of revenue versus 91% a year earlier. Medicare revenue increased to $6.4 million from $4.1 million; Veterans Administration revenue declined to $7.1 million from $7.7 million.
Outlook, risks and unusual items
- COVID-19: The company said the pandemic negatively affected its business, particularly from March, as clinics restricted access, reduced consultations or temporarily closed. It could not reasonably estimate the longer-term impact. Management said the first two months of 2020 were ahead of expectations, but March revenue was disrupted.
- The company continued manufacturing as an essential business, shifted to remote work and virtual patient interactions, and said its supply chain had not yet been materially affected and safety stock supported short- and mid-term demand. It cautioned that future supply disruption could not be ruled out.
- Patient recruitment for clinical studies was suspended, with no expected restart date. Management said payer flexibility for virtual interactions had increased with select payers, but the future business impact was unclear.
- The company stated that cash, securities, operating cash flows and its credit facility were expected to be sufficient for working capital and capital expenditures for at least the next 12 months. It provided no specific revenue or earnings guidance.
- Seasonality typically weighs on first-quarter demand because patients have not met annual insurance deductibles; the company cautioned that COVID-19 could alter normal seasonal patterns.
- The CARES Act allowed the company to carry back net operating losses and record a $2.6 million income tax receivable. The quarter included a $2.9 million income tax benefit.
- A qui tam lawsuit brought by a competitor alleges violations involving Medicare and Medicaid claims and alleged retaliation. The United States declined to intervene; the court denied the company’s motion to dismiss in February 2020. The company filed an answer and counterclaims in March, disputes the allegations and intends to defend itself.
- Commitments include $33.8 million of purchase orders for goods expected within one year and $14.3 million of additional building-lease commitments for leases not yet commenced. The company also identified CEO transition and key-personnel matters among its forward-looking risks.
Investor facts to verify
- How pandemic-related limits on clinician access and patient consultations affected revenue after March 31, 2020, and whether virtual interactions sustained demand.
- Whether the company maintained adequate liquidity and covenant compliance as operations and cash flows evolved; also monitor the unused credit facility’s August 2021 expiry.
- Progress in restoring clinical-study recruitment and any changes in payer coverage or reimbursement requirements.
- Developments, potential exposure and legal costs in the qui tam case, which remained unresolved in this filing.
- Execution against substantial purchase orders and future lease commitments, alongside continued commercial spending and operating losses.