Tactile Systems Technology, Inc. — Q3 2018 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and nine months ended September 30, 2018, compared with the corresponding 2017 periods. Tactile Medical sells home-use compression therapy devices, primarily Flexitouch, for lymphedema and chronic venous insufficiency. Flexitouch generated 92% of revenue in the first nine months of 2018. The business is seasonal, with typically stronger demand in the third and fourth quarters among commercially insured patients.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $36.3m | $28.3m | $97.3m | $74.4m |
| Gross profit / margin | $26.2m / 72% | $20.8m / 73% | $70.2m / 72% | $54.2m / 73% |
| Operating income (loss) | $1.4m | $1.2m | $0.9m | ($1.0m) |
| Net income | $1.7m | $1.3m | $4.3m | $3.6m |
| Diluted EPS | $0.09 | $0.07 | $0.22 | $0.19 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $3.7m | $0.03m |
At September 30, 2018, cash and cash equivalents were $23.1m, marketable securities $22.8m, net accounts receivable $20.2m, and current assets $89.2m against current liabilities of $16.8m. Total assets were $101.7m; total liabilities were $18.3m. The company reported no borrowings under its new $10m revolving credit facility. The facility is secured by substantially all company and subsidiary assets and includes financial covenants; the company reported compliance at quarter-end.
Material changes versus prior comparable periods
- Quarterly revenue rose 28%; nine-month revenue rose 31%. Flexitouch sales increased 27% for the quarter and 31% year to date. Management attributed growth to salesforce expansion, Veterans Administration channel growth, greater awareness, and broader payer coverage.
- Sales and marketing costs grew 43% in Q3 and 34% year to date, reflecting higher staffing, stock compensation, travel, recruiting, and Flexitouch Plus launch and training costs. The salesforce exceeded 185 people at quarter-end.
- Gross margin declined about one percentage point in both comparisons. Management cited the Flexitouch Plus launch and a national payer contract rate reduction effective July 1, 2018.
- Nine-month operating results improved from a $1.0m loss to $0.9m income, while net income increased 18%. The nine-month tax benefit was $3.1m, primarily reflecting tax benefits from share-based compensation; this materially affected reported net income.
- Operating cash flow improved to $3.7m, but inventories increased $3.9m, partly associated with the Flexitouch Plus launch. Cash and cash equivalents decreased $0.8m from year-end.
Outlook, commentary, risks and unusual items
- No specific revenue, earnings, or cash-flow guidance is provided. Management said cash, marketable securities, operating cash flows, and the credit facility should cover working capital and capital expenditure needs for at least the next 12 months, while anticipating continued spending as the business grows.
- On May 22, 2018, the company acquired certain Wright Therapy Products assets and intellectual property for approximately $875,000, plus a potential earn-out tied to revenue metrics.
- After quarter-end, the company paid Sun Scientific a $4.0m initiation fee for a license to certain intellectual property, with additional royalties on related product sales and a conditional payment if specified sales are achieved. Management did not consider the contingency threshold probable as of September 30.
- Also after quarter-end, the company signed a 10-year, six-month lease for new Minneapolis headquarters space, with initial base rent of approximately $106,000 per month, rising over the term. It expects rent expense to begin in Q1 2019 and intends to sublease its existing headquarters space.
- Key risks include payer coverage and reimbursement rates, dependence on Flexitouch and a concentrated supplier base, rising labor and operating costs, tariffs and trade restrictions, managing rapid growth, and compliance with increased public-company requirements. The company expects to lose emerging-growth-company status and become a large accelerated filer on December 31, 2018, increasing reporting and compliance obligations.
- Stock-based compensation was $5.6m for the first nine months, including a $0.6m charge related to modification of a former executive’s awards. The company reported no legal proceedings expected by management to have a material adverse effect and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth and payer coverage expansion continue, particularly given the company’s reliance on Flexitouch and seasonal demand.
- The ongoing effect of payer rate reductions, product mix, and Flexitouch Plus costs on gross margin.
- Cash conversion and working-capital needs, especially inventory growth and receivables; also review customer concentration, as three insurers represented approximately 55% of receivables at quarter-end.
- The financial impact of the Sun Scientific license, its sales-based royalties, and the new headquarters lease.
- Supplier concentration and the potential effects of tariffs, labor costs, and the transition to large-accelerated-filer reporting requirements.