Business context and reporting period
Tactile Systems Technology, Inc. (Tactile Medical; Nasdaq: TCMD) filed this Form 10-K for the fiscal year ended December 31, 2019. The company develops and sells home-use medical devices for lymphedema and chronic venous insufficiency, using a direct-to-patient and provider model. Flexitouch generated 90% of 2019 revenue, leaving the business highly reliant on one product.
Financial performance and position
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue | $189.5 million | $143.8 million | +32% |
| Gross profit / margin | $134.2 million / 71% | $102.3 million / 71% | Gross profit +31% |
| Operating income | $10.5 million | $3.0 million | Improved |
| Net income | $11.0 million | $6.6 million | +66% |
| Diluted EPS | $0.56 | $0.34 | +$0.22 |
| Operating cash flow | $2.5 million | $9.0 million | Down $6.5 million |
Cash and cash equivalents were $22.8 million and marketable securities were $22.5 million at year-end 2019, versus $20.1 million and $25.8 million, respectively, a year earlier. Working capital was $86.9 million. The company had no borrowings under its $10 million revolving credit facility and reported compliance with its financial covenants. Total liabilities were $39.2 million, including $16.6 million of operating lease liabilities. The facility is secured by substantially all company assets and expires August 2021.
Operating cash flow fell despite higher net income, chiefly reflecting increases in accounts receivable, inventory and net investment in leases. Total accounts receivable, including non-current balances, was approximately $37.6 million; $4.2 million of Medicare receivables was classified as non-current because appeals may take more than a year. FY 2019 capital expenditures and intangible-asset spending included $5.4 million of property and equipment purchases and $0.5 million of intangible-asset costs.
Fourth-quarter 2019 revenue was $57.1 million, gross profit $41.1 million, operating income $6.0 million and net income $4.3 million. In fourth-quarter 2018, those figures were $46.4 million, $32.0 million, $2.1 million and $2.4 million, respectively. Revenue is typically strongest in the third and fourth quarters and weakest in the first quarter due to commercial-insurance deductibles and flexible spending account use.
Changes versus the prior comparable period
- Flexitouch revenue rose 30% to $171.3 million; it represented 90% of revenue, versus 92% in 2018. Entre and Actitouch combined revenue rose 54% to $18.2 million.
- Operating expenses increased 25% to $123.7 million, primarily due to continued investment in sales, training and reimbursement operations. Sales and marketing expense increased 31% to $78.9 million.
- Gross margin was flat year over year at 71%. Operating income improved to $10.5 million from $3.0 million.
- Income tax expense was $0.2 million in 2019, compared with a $3.1 million tax benefit in 2018; the filing attributes the change mainly to reduced tax benefits from share-based compensation.
- Rental revenue increased 78% to $26.6 million. Comparability is affected by adoption of ASC 842: qualifying rental arrangements commencing in 2019 were treated as sales-type leases, with revenue recognized at commencement rather than over the rental term.
Outlook, risks and unusual items
Management expects revenue to grow through greater awareness, sales-force expansion, marketing, clinical evidence and expanded reimbursement, while anticipating continued private-payer pricing pressure and some near-term gross-margin pressure. No specific 2020 revenue or earnings guidance is provided. Airwear began limited-market sales in the fourth quarter of 2019, with commercial release anticipated in the first quarter of 2020. The company plans to discontinue Actitouch in the first quarter of 2020 after declining demand; it recorded a $2.5 million non-cash impairment in 2018.
Management stated that cash, marketable securities, operating cash flow and the credit facility should meet working-capital and capital needs for at least 12 months. Key risks include reimbursement and Medicare claim denials, payer pricing pressure, Flexitouch product concentration and expired U.S. patents covering aspects of that system, dependence on suppliers, seasonality, regulatory and healthcare fraud-and-abuse compliance, and the long Medicare appeals process. A qui tam lawsuit alleges violations of anti-kickback and false-claims laws and unlawful retaliation; the company denies the allegations and intends to defend itself. Its motion to dismiss was denied February 21, 2020; the United States declined to intervene.
CEO Gerald Mattys notified the company on January 10, 2020 of his intention to retire no later than December 31, 2020; the board was conducting a successor search. The filing also identifies the then-recent novel coronavirus outbreak as a potential source of supply-chain and demand disruption. Unusual 2019 items included a $1.1 million loss on termination of the former headquarters lease. The company adopted lease accounting standard ASC 842 in 2019. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; the auditor identified revenue transaction-price estimation, particularly Medicare collections, as a critical audit matter.
Most important facts for investors to verify
- Whether Flexitouch growth and payer coverage can be sustained given its 90% share of revenue and the expiration of related U.S. patents.
- How much Medicare receivables will ultimately be collected, and how appeals timing or denials could affect cash flow and revenue estimates.
- Whether rental-revenue growth is comparable after the ASC 842 accounting change, and how the sales-type lease mix affects cash conversion.
- Whether cash generation improves as receivables, inventory and rental investments grow, and whether lease commitments and capital spending remain manageable.
- Progress on Airwear commercialization, Actitouch discontinuation, and the CEO succession; also monitor developments in the qui tam litigation.