Tactile Systems Technology, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with the three months ended March 31, 2017. Tactile Medical develops and sells home-use devices for lymphedema and chronic venous insufficiency. Flexitouch generated 91% of quarterly revenue.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $26.8 million | $19.9 million; up 35% |
| Gross profit / margin | $19.5 million / 73% | $14.2 million / 72% |
| Operating expenses | $21.4 million | $17.2 million; up 25% |
| Operating loss | $1.8 million | $2.9 million |
| Net loss | $50,000 | $1.5 million |
| Income tax benefit | $1.7 million | $1.4 million |
| Cash from operations | $(2.2) million | $(0.3) million |
| Cash and cash equivalents | $25.3 million at March 31 | $24.0 million at December 31, 2017 |
| Marketable securities | $15.9 million at March 31 | $19.9 million at December 31, 2017 |
Cash, cash equivalents and marketable securities totaled $41.2 million at quarter-end. Current assets were $75.2 million and current liabilities $12.7 million. The company reported no debt; its former $2.0 million bank line expired in May 2017 with no balance outstanding. Management said available liquidity and expected operating cash flows should meet working-capital and capital-expenditure needs for at least 12 months.
Material changes and operating drivers
- Flexitouch revenue increased 40% to $24.5 million; Entre and Actitouch revenue was nearly flat at $2.3 million combined. Management attributed Flexitouch growth to salesforce expansion, growth in the Veterans Administration channel, increased awareness, and broader payer coverage.
- VA revenue rose to 23% of total revenue from 18%; Medicare revenue declined to 7% from 12%.
- Operating expenses grew 25%, reflecting added sales, marketing, reimbursement, payer-relations and corporate personnel, marketing initiatives, clinical studies, engineering consulting and professional fees.
- Net loss narrowed substantially, but the $1.7 million tax benefit—primarily related to tax-deductible stock-based compensation—was a major factor. Pre-tax loss was $1.7 million.
- Operating cash use increased year over year. Inventory rose $3.6 million, which management linked to preparation for the next-generation Flexitouch commercial launch; accounts receivable fell $3.6 million, while payroll accruals fell $1.9 million, mainly due to payment of 2017 bonuses.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management expects ongoing investment and expenditure growth as the business expands; it identifies sales and marketing, domestic or international expansion, competition, clinical research, product development and potential acquisitions as factors affecting capital needs.
- First-quarter demand is seasonally lower for commercially insured patients who have not yet met annual deductibles; sales typically strengthen in the third and fourth quarters. This seasonality does not apply to Medicare, Medicaid or VA purchases.
- Flexitouch product concentration, reliance on reimbursement and payer coverage, and third-party sourcing and manufacturing are relevant business risks. Two vendors accounted for 33% of purchases in Q1 2018. Three insurers represented approximately 48% of receivables, based on the filing’s stated concentrations.
- Purchase commitments totaled $10.7 million, expected to be received from April through December 2018; operating lease obligations totaled $2.9 million. Actitouch royalties are generally 6% of related quarterly revenue through August 2023, subject to stated terms.
- The company disclosed an approximately $88,000 unrecognized state tax benefit related to state tax liabilities and said it was pursuing settlements. The IRS was examining the company’s 2016 federal return. Management reported no legal proceedings likely to have a material adverse effect and no material change to previously disclosed risk factors.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Flexitouch growth and expanded payer coverage continue, given that one product accounts for 91% of revenue.
- Whether the next-generation Flexitouch launch proceeds as planned and whether the inventory build converts into sales without material excess or obsolescence.
- How Medicare and VA revenue mix, reimbursement policies and concentrated insurer receivables evolve.
- How much of future reported earnings depends on stock-based-compensation tax benefits, and the outcome of the IRS examination and state tax settlements.
- Whether operating cash use and the $10.7 million purchase commitment remain consistent with management’s stated liquidity outlook.