Tactile Systems Technology, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. The company develops and sells at-home medical devices for lymphedema and chronic venous conditions, primarily through its Flexitouch system.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $28.3 million | $22.6 million | $74.4 million | $56.1 million |
| Gross profit / margin | $20.8 million / 73% | $16.4 million / 72% | $54.2 million / 73% | $40.6 million / 73% |
| Operating income (loss) | $1.2 million | $1.0 million | $(1.0) million | $1.0 million |
| Net income | $1.3 million | $0.5 million | $3.6 million | $0.5 million |
| Diluted earnings per share | $0.07 | $0.01 | $0.19 | $(0.12) |
| Operating cash flow | Not separately reported for the quarter | $0.03 million | $4.34 million |
Q3 revenue increased 25%; nine-month revenue increased 33%. Flexitouch sales grew 35% in Q3 and 42% year to date, while combined Entre and Actitouch sales declined 36% and 20%, respectively. Flexitouch represented 93% of Q3 and 91% of nine-month revenue.
At September 30, cash and cash equivalents were $19.7 million, marketable securities $22.0 million, and net accounts receivable $14.6 million. Current assets were $71.7 million and current liabilities $14.0 million. Total liabilities were $14.6 million; the filing reports no outstanding debt. The $2.0 million bank line expired in May 2017 with no balance outstanding. Management stated available liquidity and operating cash flows should cover working capital and capital spending for at least 12 months.
Changes, outlook, and notable items
- Revenue growth was attributed to sales-force expansion, greater clinician and patient awareness, and increased payer coverage. Growth was concentrated in Flexitouch; the other product lines contracted.
- Operating expenses rose 27% in Q3 and 39% for the first nine months, including increased sales and marketing, reimbursement and administrative costs. Nine-month operating results shifted to a loss despite revenue growth.
- The nine-month $4.5 million income-tax benefit, mainly from tax deductions related to stock-based compensation, drove reported net income above pre-tax results: the company recorded a $0.8 million pre-tax loss. The benefit is an unusual and important factor in interpreting earnings.
- Operating cash flow was nearly break-even, principally reflecting increases in income taxes receivable and inventory. Investing cash outflow included $11.1 million of net marketable-security purchases and $2.0 million of capital expenditures.
- Seasonality typically reduces first-quarter demand and supports stronger third- and fourth-quarter sales among commercially insured patients as deductibles are met. No quantified revenue or earnings guidance is provided.
- The company received FDA clearance for Flexitouch Plus in June 2017. A September secondary offering of 3.795 million shares by existing holders generated no proceeds for the company. The company’s shelf registration permits up to $200 million of future securities offerings.
- Risks include changes to healthcare coverage and reimbursement, state income and sales/use-tax exposure, reliance on third-party suppliers, and customer receivable concentrations. Three insurance companies represented approximately 28%, 17%, and 6% of receivables. Three vendors together accounted for 39% of purchases for the nine-month period. Management reported no material litigation and effective disclosure controls.
Important facts for investors to verify
- Whether Flexitouch growth and payer coverage gains continue, and whether Entre/Actitouch declines persist.
- The sustainability of earnings excluding the significant stock-compensation-related tax benefit, and the effect of rising operating costs.
- Cash conversion, inventory levels, tax receivables, and collection trends given minimal year-to-date operating cash flow.
- Exposure to reimbursement or healthcare-policy changes, state tax assessments, and concentrated suppliers and insurance-company receivables.
- The impact of seasonality on fourth-quarter results; reported nine-month results are not necessarily indicative of full-year performance.