Tactile Systems Technology, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The company develops and sells or rents at-home medical devices for lymphedema and venous conditions, primarily through its Flexitouch system. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $37.6 million | $26.8 million | +40% |
| Gross profit | $26.3 million | $19.5 million | +34% |
| Gross margin | 69.8% | 72.8% | Down 3.0 percentage points |
| Operating loss | $1.8 million | $1.8 million | Approximately unchanged |
| Net income (loss) | $1.5 million | $(0.05) million | Improved |
| Diluted earnings per share | $0.08 | $0.00 | — |
| Cash provided by (used in) operations | $1.3 million | $(2.2) million | Improved |
- Sales revenue was $30.8 million, up 30%; rental revenue was $6.8 million, up 112%. Flexitouch accounted for 91% of total revenue in both periods.
- Sales gross margin was 70%, versus 73%; rental gross margin was 71%, versus 72%. Management attributed margin pressure to pricing under a large private-insurer contract, payer and product mix, and amortization of newly licensed assets.
- Sales and marketing expense rose 38% to $17.4 million, principally reflecting higher headcount and related costs. Reimbursement, general and administrative expense rose 27% to $9.4 million. Research and development expense declined 11% to $1.3 million.
- Net income despite a pretax loss of $1.6 million reflected a $3.1 million income tax benefit. The filing attributes the benefit primarily to tax deductions from share-based compensation; the effective tax benefit rate was 189.7%.
- Stock-based compensation expense was $2.8 million, compared with $1.5 million a year earlier. Operating cash flow also reflected working-capital movements associated with the new lease accounting and rental arrangements.
Financial position and liquidity
- At March 31, 2019, cash and cash equivalents were $23.5 million and marketable securities were $21.4 million. Net accounts receivable was $21.7 million, with an additional $2.2 million of long-term Medicare receivables and $3.4 million net investment in leases.
- Total current assets were $85.8 million; current liabilities were $17.3 million. Total assets were $113.5 million and total liabilities were $21.5 million.
- No borrowings were outstanding under the $10 million revolving credit facility, which expires August 3, 2021. The company reported compliance with its financial covenants. It said available cash, securities, operating cash flows and credit capacity should cover working capital and capital expenditures for at least the next 12 months.
- Cash increased $3.4 million during the quarter. Investing cash flow was positive $3.7 million, largely from $4.5 million in marketable-security maturities; financing cash flow was negative $1.5 million, mainly from taxes paid on net share settlement of restricted stock units.
Material changes, outlook and risks
- Revenue growth reflected salesforce expansion, Medicare-channel growth, greater physician and patient awareness, and expanded payer coverage. The salesforce exceeded 210 employees, up from more than 160 a year earlier.
- Adoption of ASC 842 on January 1, 2019 changed rental accounting: new rental agreements are treated as sales-type leases, with revenue and related cost recognized at lease commencement. Management said this accounting change contributed 10 percentage points to year-over-year revenue growth. Prior-period results were not restated, so reported rental growth is not fully comparable.
- The company reports first-quarter seasonality: demand from commercially insured patients is typically lower early in the insurance year, with higher revenue often occurring in the third and fourth quarters. No formal revenue or earnings guidance is provided in this filing.
- The company plans to discontinue Actitouch in the second half of 2019 and expected to begin selling its licensed Airwear wrap in the second half of 2019. Actitouch inventory and intangible assets had been fully impaired in 2018.
- Future headquarters commitments of $19.9 million were not yet included in recognized lease obligations; the move was expected in Q4 2019. Separately, purchase orders totaled $19.5 million for goods expected to be received April through December 2019.
- Three vendors accounted for 40% of purchases in the quarter. Receivables were also concentrated: three insurers represented approximately 30%, 14% and 8% of accounts receivable.
- A competitor-filed qui tam lawsuit alleges violations involving Medicare and Medicaid claims and alleged retaliation under the False Claims Act. The U.S. government declined to intervene. The company says the allegations are without merit and intends to defend the case; it filed a motion to dismiss on April 5, 2019. Potential damages and other relief are sought, but the filing does not provide a clear estimate of exposure.
- Management identified risks including reimbursement access, competition, supplier dependence, regulation, tariffs, and the ability to execute growth, product-development and acquisition plans. It reported effective disclosure controls and no material change in internal controls during the quarter.
Important facts for investors to verify
- How much reported rental growth reflects underlying demand versus ASC 842’s commencement-date revenue recognition, and how this accounting transition will affect comparisons through year-end.
- Whether revenue growth and margins can be sustained as payer mix, insurer pricing and commercial-insurance seasonality change.
- The timing and cash-flow implications of the $19.9 million future-headquarters commitment and $19.5 million purchase commitments.
- Developments in the qui tam litigation, including any rulings, settlement discussions or updated assessment of potential exposure.
- Execution of the Actitouch discontinuation and Airwear launch, and the extent to which Flexitouch concentration and insurer/vendor concentration affect results.