Tactile Systems Technology, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited results; amounts below are in millions of dollars unless otherwise stated.
Business context
Tactile Medical develops and sells or rents at-home compression devices, primarily the Flexitouch system for lymphedema and related conditions, and the Entre system. Flexitouch generated 87% of third-quarter revenue and 88% of nine-month revenue. The company operates in one reportable segment and sells in the United States.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $49.1 | $49.6 | $127.9 | $132.4 |
| Gross profit | $35.0 | $35.4 | $91.0 | $93.1 |
| Gross margin | 71% | 71% | 71% | 70% |
| Operating income (loss) | $1.8 | $3.2 | $(10.6) | $4.4 |
| Net income (loss) | $2.4 | $2.4 | $(12.7) | $6.7 |
| Diluted earnings (loss) per share | $0.12 | $0.12 | $(0.66) | $0.34 |
| Cash from operating activities | Not separately provided for quarter | $(2.2) | $2.4 |
Q3 sales revenue was $42.6 million, down 1%; rental revenue was $6.5 million, down 3%. Flexitouch revenue declined 4% in the quarter and 6% year to date, while other-product revenue, primarily Entre, increased 26% and 21%, respectively. Q3 net income was nearly unchanged year over year despite lower operating income, partly reflecting a $0.8 million income tax benefit versus $0.9 million of tax expense a year earlier.
Nine-month operating expenses rose 15% to $101.6 million. Reimbursement, general and administrative expense increased 34% to $37.8 million, including a $3.6 million Airwear-related long-lived-asset impairment charge. Sales and marketing expense rose 6% to $59.9 million, mainly reflecting continued investment in the field sales organization. The filing reports $4.0 million of total non-cash Airwear impairment, including $0.4 million recorded in cost of revenue.
Financial position and liquidity
- At September 30, cash and cash equivalents were $42.2 million, versus $22.8 million at December 31, 2019. Accounts receivable totaled $43.1 million, including $7.1 million non-current; inventory was $22.4 million.
- Current assets were $114.1 million and current liabilities $25.6 million. Total liabilities were $48.6 million, including $21.9 million of operating lease liabilities.
- The company had no borrowings under its $10.0 million revolving credit facility, which expires August 3, 2021; it was in compliance with financial covenants. The facility is secured by substantially all company and subsidiary assets.
- Nine-month operating cash flow was negative $2.2 million. Investing activities provided $20.7 million, primarily from $22.5 million in maturities of marketable securities; financing activities provided $1.0 million. Ending cash increased $19.4 million.
- Management stated that cash, cash flows from operations and the credit facility were expected to meet working-capital and capital-expenditure needs for at least the next 12 months, while noting uncertainty from COVID-19.
Material changes, outlook and risks
- COVID-19: Restricted clinic access, fewer consultations and treatments, and temporary facility closures continued to constrain revenue. The company shifted patient training and education to virtual formats, inactivated independent at-home trainers in Q2, and reported that clinical-study recruitment was suspended. Management could not estimate the pandemic’s long-term impact; supply had not been materially disrupted through the reporting period, but future disruption remained possible.
- Airwear discontinued: The company chose to focus on its core Flexitouch and Entre franchises, recorded the impairment in Q2, and the related license was terminated effective July 31, 2020.
- Leadership: A new CEO took office June 8, 2020. Q3 general and administrative expense included $0.4 million of severance related to the COO’s departure.
- Guidance: The filing gives no specific revenue or earnings guidance. Management planned to continue expanding the direct sales force in Q4 2020 and expected virtual clinician and patient interactions to continue while the pandemic persisted.
- Contingencies: A competitor’s qui tam action alleges violations involving Medicare and Medicaid claims and related retaliation; the company disputes the allegations and is defending the case. A securities class action filed September 29, 2020 alleges misleading statements during May 2018–June 2020; the company said it intended to seek dismissal. Outcomes and potential financial effects are not quantified in the filing.
- Government support: The company received $1.2 million from initial CARES Act provider relief funds and was evaluating their financial-statement treatment. It also collected $2.9 million in Q3 related to carryback of prior-year NOLs.
- Other identified risks include reimbursement and payer coverage, executive-transition impacts, competition, supplier concentration, and the continuing effects of the pandemic. Two vendors represented 33% of purchases for the first nine months of 2020.
Most important facts for investors to verify
- Whether clinic access, patient volumes and sales recover, and whether virtual training sustains demand and patient adoption.
- Whether the year-to-date revenue decline and operating loss persist, including the trajectory of Flexitouch versus Entre.
- Cash conversion and working-capital trends, particularly receivables, inventories and lease investments, given negative operating cash flow.
- The treatment and any conditions or obligations related to the $1.2 million provider-relief payment, and the durability of the $2.9 million tax refund benefit.
- Developments and potential exposure in the qui tam and securities lawsuits, as well as the impact of leadership changes and stock-based compensation.
- Liquidity and covenant headroom as the revolving facility approaches its August 2021 expiry; also assess lease obligations and $20.5 million of purchase orders due for goods expected within a year.