Tactile Systems Technology, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; unaudited. Tactile Medical develops and sells or rents at-home compression therapy devices. The Flexitouch system generated 89% of Q2 revenue and 88% of first-half revenue.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $35.1m | $45.2m | $78.8m | $82.8m |
| Gross profit / margin | $24.9m / 71% | $31.5m / 70% | $56.0m / 71% | $57.8m / 70% |
| Operating expenses | $32.9m | $28.5m | $68.4m | $56.5m |
| Operating income (loss) | $(8.0)m | $3.0m | $(12.4)m | $1.2m |
| Net income (loss) | $(13.9)m | $2.8m | $(15.2)m | $4.3m |
| Diluted EPS | $(0.72) | $0.14 | $(0.79) | $0.22 |
| Operating cash flow | Not separately provided for Q2 | $(8.0)m | $0.9m |
Q2 revenue fell 22%; first-half revenue declined 5%. Q2 sales revenue decreased 24% and rental revenue decreased 13%. First-half Flexitouch revenue fell 7%, partly offset by 17% growth in other products, primarily Entre. Gross margin improved by one percentage point in both comparative periods, which management attributed primarily to payer mix.
Q2 operating expenses rose 16%, led by higher reimbursement, general and administrative costs. First-half expenses increased 21%, including higher sales-force, occupancy, depreciation, legal and professional costs. The company recorded income tax expense of $5.9m in Q2 and $3.0m for the first half, despite pre-tax losses; management cited changes in projected taxable income and lower tax benefits from stock-based compensation.
Balance sheet and liquidity
- At June 30, cash and cash equivalents were $31.3m, marketable securities $6.0m, and current assets $104.6m; current liabilities were $20.5m.
- Total assets were $141.5m, total liabilities $38.1m, and stockholders’ equity $103.4m. The filing reports no outstanding borrowings under the credit facility.
- Operating cash flow was $(8.0)m for the first half, versus $0.9m provided in 2019. Cash increased $8.6m to $31.3m, mainly reflecting $16.5m of marketable-security maturities and other investing and financing cash flows.
- The company had a $10.0m revolving credit facility, expiring August 3, 2021, and reported compliance with its financial covenants. Management stated available liquidity and expected operating cash flows, together with the facility, should meet working-capital and capital-expenditure needs for at least 12 months.
Material changes, outlook and risks
- COVID-19: Management attributed the revenue downturn from March onward to restricted clinician access, fewer patient consultations, and temporary clinic closures. The company shifted to virtual patient training and meetings and inactivated independent healthcare practitioners acting as at-home trainers. It reported no material supply-chain impact to date, but could not estimate the pandemic’s long-term effects.
- Airwear discontinuation: The company decided in Q2 to discontinue the Airwear wrap and recorded a $4.0m non-cash impairment ($3.6m of long-lived assets and $0.4m of inventory). Sun Scientific terminated the related license effective July 31, 2020; no early termination penalty was incurred.
- Leadership and operations: A new President and CEO was appointed effective June 8, 2020. The company reported a 250-person direct sales force and planned to continue expanding it in the second half of 2020. COVID-19 suspended patient recruitment for clinical studies; the filing gives no expected restart date.
- Guidance: No numerical revenue or earnings guidance is provided. Management noted that 2020 seasonality may differ from prior years because of the pandemic.
- Contingency: A competitor’s qui tam lawsuit alleges violations involving Medicare and Medicaid claims and retaliation under the False Claims Act. The United States declined to intervene; the company says the allegations are without merit and intends to defend the case. The complaint seeks damages, penalties, fees and costs; the filing does not provide a clear estimate of potential loss.
- Other items: The company received $1.2m in COVID-19 provider relief funds and was evaluating their financial-statement treatment. It also recorded a $2.6m income tax receivable related to carrying back net operating losses under the CARES Act.
Investor verification priorities
- Track whether clinician access, patient consultations and revenue recover, particularly Flexitouch sales and rentals.
- Verify operating cash flow, inventory growth, receivables and collections, and the company’s ability to maintain covenant compliance and liquidity.
- Review the effects of the Airwear impairment and discontinuation, and confirm the treatment and reporting obligations for the $1.2m provider relief payment.
- Monitor the qui tam litigation, including the pending motion concerning the company’s counterclaims and any developments in potential exposure.
- Assess the CEO transition, sales-force expansion, and timing of resumed clinical studies.