Tactile Systems Technology, Inc. — Q1 2023 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2023, compared with the same 2022 period. Tactile develops and sells or rents home-use medical devices, principally lymphedema systems (Flexitouch and Entre) and the AffloVest airway-clearance device. The business is seasonal, with lower demand typically in Q1 and higher revenue in Q3 and Q4.
Key financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $58.8 million | $48.0 million | +23% |
| Gross profit / margin | $41.5 million / 70.5% | $33.9 million / 70.6% | Gross profit +22%; margin slightly lower |
| Operating expenses | $45.3 million | $48.8 million | −7% |
| Operating loss | $(3.8) million | $(14.9) million | Loss narrowed |
| Net loss | $(1.9) million | $(15.6) million | Loss narrowed; includes $2.9 million tax benefit |
| Diluted loss per share | $(0.09) | $(0.78) | Improved |
| Cash from operations | $(0.5) million | $(3.2) million | Lower cash use |
Sales revenue was $52.8 million, up 28%; rental revenue was $6.1 million, down 11%. Lymphedema products generated $49.8 million (85% of revenue), up 22%; airway-clearance products generated $9.1 million (15%), up 24%. Medicare revenue increased to $18.5 million from $8.5 million, while private insurers and other payers declined to $25.4 million from $26.6 million.
Financial position and liquidity
- Cash and cash equivalents were $55.0 million at March 31, 2023, versus $21.9 million at year-end 2022. The quarter-end increase was primarily funded by a February public offering that generated $34.6 million in net proceeds.
- Net accounts receivable was approximately $71.0 million, as reported by management. Total current assets were $145.4 million and current liabilities $51.4 million.
- Credit Agreement borrowings totaled $48.3 million: $23.3 million term loan and $25.0 million revolving credit facility. The debt carried an 8.28% interest rate at quarter-end and matures September 8, 2024. The company reported compliance with financial covenants.
- Operating lease liabilities totaled $22.7 million. The company had $13.7 million in current earn-out liabilities, including $5.0 million payable by May 26, 2023, plus $250,000 imputed interest.
- Investing activities used $0.3 million; financing activities provided $33.9 million. Management said cash, cash equivalents and operating cash flows should be sufficient for working capital, capital expenditures, debt service and other requirements for at least the next 12 months.
Material changes and management commentary
- Revenue growth reflected increased sales and rentals across both product lines. Gross margin was essentially flat: higher sales-product gross profit was offset in part by lower rental gross profit, as rental revenue fell while its cost increased.
- Operating expenses fell mainly because intangible amortization and earn-out expense declined to $1.3 million from $7.1 million. The earn-out fair-value adjustment was $0.7 million, versus $6.5 million in Q1 2022.
- Sales and marketing expense rose 10% to $26.3 million, primarily from higher commercial-team compensation; R&D expense rose 47% to $2.2 million. Reimbursement, general and administrative expense fell 5% to $15.4 million.
- Other expense increased to $1.0 million from $0.5 million, primarily due to higher interest expense. The effective tax benefit rate was 60.7%; management cited expected current taxes despite a full valuation allowance and permanent tax adjustments.
- No specific full-year revenue or earnings guidance is provided in the filing. Management identifies inflation, interest rates, recession risk, reimbursement, competition, staffing and component costs among factors that may affect results. COVID-19-related impacts remain uncertain.
Risks, contingencies and unusual items
- AffloVest earn-out obligations depend partly on future U.S. revenue; the remaining contingent amount is valued using Level 3 assumptions and is subject to remeasurement. A second earn-out may be payable up to $10.0 million if targets are met.
- A purported securities class action settlement is for $5.0 million; the company stated it does not expect to fund any portion of the cash payments. Preliminary court approval followed the quarter, and final approval was scheduled for August 23, 2023. A related derivative lawsuit remains pending; the company is defending it.
- One vendor accounted for 29% of purchases in Q1 2023. Purchase orders totaling $37.4 million were outstanding for goods expected within the next year.
- The February 2023 public offering issued 2.875 million shares at $13.00 per share, increasing shares outstanding and providing net proceeds of $34.6 million.
Important facts for investors to verify
- Whether revenue growth is sustained across product lines and payer channels, and how seasonality affects subsequent-quarter results.
- Cash conversion, accounts-receivable collections, and whether operating cash flow improves without reliance on further equity financing.
- Debt repayment and refinancing plans ahead of the September 2024 maturity, including exposure to interest rates and covenant headroom.
- AffloVest performance against earn-out targets, related cash payments, and the assumptions behind the fair-value liability.
- Final approval and any subsequent developments in the class-action settlement and derivative litigation.