Tactile Systems Technology, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; filed May 8, 2017. Tactile Medical develops and sells home-use devices for lymphedema and chronic venous insufficiency. The Flexitouch system generated 88% of quarterly revenue.
Financial results and liquidity
Amounts are in millions of dollars except per-share data. Comparisons are with Q1 2016.
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $19.85 | $13.70 | +45% |
| Gross profit / margin | $14.23 / 72% | $9.89 / 72% | +44%; margin unchanged |
| Operating expenses | $17.16 | $11.68 | +47% |
| Operating loss | $(2.93) | $(1.79) | Loss increased |
| Net loss | $(1.50) | $(0.98) | Loss increased |
| Diluted loss per share | $(0.09) | $(0.45) | Not directly comparable |
| Operating cash flow | $(0.32) | $(0.86) | Cash use decreased |
- Revenue growth was led by Flexitouch sales, up 50% to $17.53 million; ACTitouch and Entré revenue increased 17% to $2.32 million.
- Sales and marketing expense rose 40% to $10.17 million, primarily with higher personnel costs and sales-force expansion. Reimbursement, general and administrative expense rose 72% to $5.87 million, including higher staffing, stock compensation, and public-company professional fees.
- At March 31, cash and cash equivalents were $20.71 million, marketable securities $20.02 million, and net current accounts receivable $11.43 million. Current assets were $60.52 million versus current liabilities of $11.11 million.
- Total liabilities were $11.68 million, including $4.86 million of accounts payable and $0.56 million of long-term warranty reserve. No line-of-credit borrowings were outstanding; the $2.0 million secured facility expired May 11, 2017.
- Investing cash use was $9.76 million, principally purchases of $9.05 million in marketable securities and $0.70 million in equipment and improvements. Financing provided $0.09 million. Cash fell by $9.99 million during the quarter.
Material changes and notable items
- Management attributed revenue growth mainly to a larger sales force and increased physician and patient awareness. Gross margin remained 72% despite higher cost of goods sold.
- Stock-based compensation increased to $0.96 million from $0.08 million, contributing to higher operating expenses.
- The company reported a $1.37 million income tax benefit; the effective tax rate was 47.7%, compared with 43.3% in Q1 2016. Management cited increased nondeductible statutory stock-option expenses.
- Per-share loss comparisons are affected by the August 2016 IPO, conversion of preferred shares, and preferred dividends recorded in Q1 2016. Weighted-average common shares were 16.88 million in Q1 2017 versus 3.29 million in Q1 2016.
- Available-for-sale marketable securities had $13,000 of net pretax unrealized losses recorded in other comprehensive loss.
Outlook, risks, and contingencies
- Management expects cash, cash equivalents, marketable securities, and operating cash flows to meet working-capital and capital-expenditure needs for at least the next 12 months; it also anticipates continued expense growth as the business expands.
- Sales are seasonal: commercial-insurance patient demand is typically lower in Q1, when deductibles reset, and higher in Q3 and Q4. Results for this quarter are not necessarily indicative of full-year results.
- Key risks include reimbursement and coverage levels, Medicare coverage changes, the ability to sustain product adoption and sales-force expansion, third-party supplier availability, competition, regulation, and development of new products. Flexitouch concentration and dependence on payer collections are notable exposures.
- Three vendors accounted for 35% of purchases in Q1 2017. Purchase commitments totaled $10.83 million; operating lease obligations totaled $3.69 million. ACTitouch royalties are payable through August 2023.
- No material-adverse-effect legal proceedings were reported, and the company stated there were no material changes to previously disclosed risk factors. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the $2.0 million bank credit facility was renewed or replaced after its May 11, 2017 expiration.
- Whether revenue growth and the expanded sales organization can continue while operating expenses exceed gross profit and the company remains loss-making.
- Cash conversion, receivable aging and collection trends, including exposure to major insurance-company payers and Medicare receivables.
- Current reimbursement coverage, payer policies, and the commercial-insurance seasonality affecting demand.
- Supplier concentration and fulfillment of the disclosed inventory purchase commitments.
- The impact of ongoing stock-based compensation, leases, and other commitments on future expenses and liquidity.