Tactile Systems Technology, Inc. — Q2 2016 Form 10-Q
Business and period. The company develops and sells home-use medical devices, primarily the Flexitouch system for lymphedema, plus ACTitouch and Entre systems for venous conditions. This filing covers the quarter and six months ended June 30, 2016; financial figures below are unaudited. Flexitouch generated 86% of first-half revenue.
Financial performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $19.7M, up 34% year over year | $33.4M, up 34% |
| Gross profit / margin | $14.4M / 73%, versus $10.4M / 70% | $24.3M / 73%, versus $17.5M / 70% |
| Operating income (loss) | $1.8M, versus $0.2M | $6K, versus $(1.3)M |
| Net income (loss) | $988K, versus $138K | $8K, versus $(742)K |
| Net income (loss) attributable to common stockholders | $177K, or $0.05 basic / $0.04 diluted per share; prior-year loss of $328K | $(1.0)M, or $(0.30) per share; prior-year loss of $1.7M |
First-half operating expenses increased 29% to $24.3M, including sales and marketing of $14.9M (+34%), research and development of $2.0M (+11%), and reimbursement, general and administrative expenses of $7.4M (+26%). Quarterly income available to common stockholders was reduced by preferred dividends and an allocation of undistributed earnings to preferred holders.
Cash, liquidity and obligations
- At June 30, cash and cash equivalents were $6.7M; accounts receivable, net, was $12.6M; current assets were $27.5M and current liabilities $7.9M.
- First-half operating cash flow was $(138)K, investing cash flow $(399)K, and financing cash flow $196K; cash declined $341K to $6.7M.
- No debt was outstanding. A secured $2.0M bank credit line was available through May 11, 2017.
- Commitments included $3.7M of operating lease payments, $9.6M of inventory purchase commitments, and $495K of future product royalties as of June 30.
Changes, outlook and risks
- Revenue growth was driven mainly by Flexitouch sales, which rose 34% in Q2 and 33% in the first half. Management attributed growth to sales-force expansion, greater awareness, and broader payer coverage. Gross margin improved by 3 percentage points in both comparison periods, primarily due to product mix.
- Sales and marketing and reimbursement-related staffing and other operating costs increased as the company expanded its commercial and patient-services infrastructure. The business is seasonal: demand is typically lower in Q1 and stronger in Q3 and Q4 as patients meet deductibles or use remaining flexible-spending balances.
- Management said existing cash, cash equivalents, and operating cash flows were expected to cover working-capital and capital needs for at least 12 months, and anticipated higher costs as a public company. No specific revenue or earnings guidance was provided.
- On August 2, 2016, after quarter-end, the company completed its IPO, selling 4.12M shares at $10 per share and receiving approximately $35.8M in net proceeds. It also paid $8.2M in accrued Series A dividends; preferred stock converted to common stock in connection with the offering. These events are not reflected in the June 30 actual balance sheet.
- Key risks include reliance on reimbursement and payer coverage, Medicare coverage changes, estimates of Medicare and other receivables, dependence on third-party suppliers, and concentration of purchases: three vendors represented 35% of first-half purchases. The filing reports no material legal proceedings or material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of reported revenue growth reflects sales-force expansion and broader payer coverage, and whether growth is sustainable given the company’s reliance on Flexitouch.
- The quality and collectability of receivables, including Medicare claims, and any effects of reimbursement or coverage changes.
- Post-IPO cash and share-count effects, including the preferred-stock conversion and dividend payments; the filing reports 16,772,879 common shares outstanding as of September 7, 2016.
- Whether operating cash flow improves as the business grows, and the timing and fulfillment of the $9.6M inventory purchase commitments.
- The filing’s stated 12-month liquidity outlook was made before the IPO proceeds; assess it alongside the subsequent financing and the company’s ongoing operating needs.