Tactile Systems Technology(TCMD) - 2019 Q4 - Annual Report

PART I Business Tactile Systems Technology, Inc, a medical technology company specializing in at-home chronic disease treatments, generated $189.5 million in 2019 revenue primarily from its Flexitouch system Financial Performance (2019 vs. 2018) | Metric | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Revenue | $189.5 million | $143.8 million | +32% | | Net Income | $11.0 million | $6.6 million | +66% | - The company employs a direct-to-patient and -provider model, which allows it to capture both manufacturer and distributor margins by bypassing the traditional durable medical equipment channel[21][71] Revenue by Product Line (2019 vs. 2018) | Product Line | 2019 Revenue | % of Total | 2018 Revenue | % of Total | | :--- | :--- | :--- | :--- | :--- | | Flexitouch system | $171.3 million | 90% | $131.9 million | 92% | | Entre/Actitouch systems | $18.2 million | 10% | $11.8 million | 8% | - The company plans to discontinue the Actitouch system product line in the first quarter of 2020 due to a steady decrease in demand and sales volume[24][50] - The direct sales force grew to over 240 representatives as of December 31, 2019, up from over 200 at the end of 2018, supporting business growth[26] Market Opportunity The company targets the large and undertreated markets for lymphedema and chronic venous insufficiency (CVI) with a significant addressable market size - The number of patients diagnosed with lymphedema increased by 18% year-over-year for the 12 months ended June 30, 2019, reaching an estimated 1.3 million patients[37] Estimated U.S. Addressable Market Opportunity | Product/Indication | Estimated Market Size | | :--- | :--- | | Flexitouch system (Lymphedema) | > $5.0 billion | | Flexitouch Head and Neck system | ~$1.0 billion | | Airwear wrap (CVI) | > 3.1 million patients | Our Strategy The company's growth strategy focuses on market leadership in at-home chronic disease treatment through sales force expansion and product innovation - Key strategic elements include increasing clinician and patient awareness, expanding the direct sales team, introducing new products, developing clinical data, expanding reimbursement, and pursuing international expansion[43] Our Products The company's portfolio is led by the Flexitouch Plus system for lymphedema, alongside other compression therapy devices and wraps - The third-generation Flexitouch Plus system was introduced in 2018 and is the only pneumatic compression system with configurations for upper/lower extremities, trunk, chest, head, and neck[45][46] - The Actitouch system product line will be discontinued in Q1 2020, and a $2.5 million non-cash impairment charge was recorded in 2018[50] - In October 2018, the company licensed the intellectual property for the Airwear wrap from Sun Scientific, Inc, with a commercial release anticipated in Q1 2020[51] Clinical Results and Studies Extensive clinical data from 23 studies demonstrates the Flexitouch system's efficacy in improving outcomes and reducing healthcare costs - A 2018 study showed Flexitouch was associated with 69% lower total costs compared to conservative therapy and 85% lower costs than simple pneumatic compression devices (SPCDs)[56] - A study in JAMA Dermatology demonstrated a 79% decline in cellulitis diagnosis rates and a 37% reduction in lymphedema-related healthcare costs for patients using the Flexitouch system[58][59] - A randomized controlled trial showed Flexitouch users experienced an average edema reduction of 29%, compared to a 16% increase for SPCD users[65] Reimbursement, Payer Relations and Customer Support Process The company maintains a robust reimbursement infrastructure, with revenue sourced from private insurers, the Veterans Administration, and Medicare Revenue Mix by Payer (2019 vs. 2018) | Payer | 2019 Revenue % | 2018 Revenue % | | :--- | :--- | :--- | | Private insurers and other payers | 72% | 71% | | Veterans Administration | 17% | 20% | | Medicare | 11% | 9% | - The company is contracted or enrolled as an in-network provider with payers covering over 275 million lives in the United States[77] - The Flexitouch Plus system controller is reimbursed under HCPCS code E0652, and the Entre system controller is reimbursed under HCPCS code E0651[80] Government Regulation The company's Class II medical devices are subject to extensive regulation by the FDA and must comply with federal and state healthcare laws - All of the company's Class II devices, including the Flexitouch, Entre, and Actitouch systems, have obtained and maintain current 510(k) clearance from the FDA[97] - The company is an accredited supplier by the Accreditation Commission for Health Care, which is required for participation in federally funded healthcare programs like Medicare[107] - The company is subject to healthcare fraud and abuse laws, including the Federal Anti-Kickback Statute, the Stark Law, and the Federal False Claims Act[111][112][115] Risk Factors The company faces risks from its heavy dependence on the Flexitouch system, third-party payer reimbursement, competition, and regulatory compliance - Business Risks: The company's revenue is highly dependent on the Flexitouch system, which accounted for 90% of revenue in 2019, and patent expirations could increase competition[154][161] - Reimbursement & Regulatory Risks: The business is sensitive to changes in coverage and reimbursement from third-party payers, and non-compliance with extensive regulations could result in severe penalties[156][234] - Operational Risks: The company relies on single-source suppliers, faces competition from larger companies, is dependent on its direct sales force, and a CEO transition creates uncertainty[184][170][199] - Financial & Market Risks: Financial results are subject to seasonality, with the first quarter being the weakest, and the stock price is highly volatile[178][351] Properties The company leases and plans to expand its corporate headquarters and an additional operational facility, both located in Minneapolis, Minnesota - The company relocated its corporate headquarters in September 2019 to a new leased space that will total approximately 150,000 square feet after planned expansions[365] - An additional facility for office, assembly, and warehouse space is leased, totaling approximately 63,000 square feet after a planned expansion[368] Legal Proceedings The company is vigorously defending against a qui tam lawsuit filed by a competitor alleging violations of federal healthcare statutes - The company was served with a qui tam lawsuit by a competitor alleging violations of the Federal Anti-Kickback Statute and Federal False Claims Act, in which the United States has declined to intervene[371] - A motion to dismiss the lawsuit was denied on February 21, 2020, and the company intends to continue to vigorously defend against the suit[371] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock (TCMD) is listed on the Nasdaq and has significantly outperformed major indices since its 2016 IPO - The company's common stock has been listed on the Nasdaq Global Market under the symbol "TCMD" since July 28, 2016[375] Stock Performance Comparison (Cumulative Total Return) | Index | 7/28/2016 | 12/31/2019 | | :--- | :--- | :--- | | Tactile Systems Technology, Inc | $100 | $652 | | Nasdaq Composite Index | $100 | $174 | | Russell 2000 Index | $100 | $137 | | S&P Healthcare Equipment Select Industry Index | $100 | $174 | Selected Financial Data The company has demonstrated strong and consistent growth in revenue, net income, and total assets over the past five years Selected Consolidated Financial Data (2015-2019) | (In thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue, net | $189,492 | $143,751 | $109,283 | $84,542 | $62,872 | | Gross profit | $134,236 | $102,258 | $80,268 | $61,602 | $45,964 | | Income from operations | $10,498 | $2,990 | $3,898 | $4,272 | $3,451 | | Net income | $10,971 | $6,623 | $5,855 | $2,879 | $1,393 | | Total assets | $151,752 | $107,071 | $88,447 | $73,935 | $36,973 | | Total stockholders' equity | $112,595 | $89,270 | $72,787 | $59,639 | $(5,649) | Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue grew 32% in 2019, driven by sales force expansion, while net income increased 66% despite higher operating expenses to support growth Results of Operations In 2019, revenue increased 32% to $189.5 million with a stable gross margin of 71%, leading to a 66% rise in net income to $11.0 million Results of Operations Comparison (2019 vs. 2018) | (In thousands) | 2019 | 2018 | % Change | | :--- | :--- | :--- | :--- | | Total revenue | $189,492 | $143,751 | 32% | | Gross profit | $134,236 | $102,258 | 31% | | Gross Margin | 71% | 71% | 0 bps | | Total operating expenses | $123,738 | $99,268 | 25% | | Income from operations | $10,498 | $2,990 | 251% | | Net income | $10,971 | $6,623 | 66% | - The 32% revenue growth in 2019 was driven by a 30% increase in Flexitouch system sales and a 54% increase in Entre/Actitouch systems sales[442] - Sales and marketing expenses increased by 31% in 2019, primarily due to a $13.1 million increase in personnel-related compensation from investment in the sales team[445] - Reimbursement, general and administrative expenses included a $1.1 million one-time charge for a lease termination for the company's former corporate headquarters[447] Liquidity and Capital Resources The company maintained a strong liquidity position with $45.3 million in cash and marketable securities and an undrawn $10.0 million credit facility Cash and Liquidity Position | (In millions) | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $22.8 | $20.1 | | Marketable securities | $22.5 | $25.8 | | Total Cash & Marketable Securities | $45.3 | $45.9 | Summary of Cash Flows (2019 vs. 2018) | (In millions) | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $2.5 | $9.0 | | Net cash used in investing activities | $(2.3) | $(14.7) | | Net cash provided by financing activities | $2.5 | $1.9 | - The company has a $10.0 million revolving credit facility expiring in August 2021, with no borrowings outstanding as of December 31, 2019[476] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate risk on its short-term investment portfolio and credit risk concentrated with a few large insurers - The company's investment portfolio is primarily in short-term securities, so an immediate 100 basis point change in interest rates would not have a material effect[488] - Credit risk is concentrated, with two insurers representing approximately 17% and 13% of accounts receivable as of December 31, 2019[491] - Foreign currency risk is currently not significant as the company's business is conducted in U.S. dollars[492] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for 2017-2019, which received an unqualified opinion from its independent auditor Consolidated Balance Sheets Total assets grew to $151.8 million in 2019, driven by increases in accounts receivable, inventories, and right-of-use operating lease assets Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Current Assets | $108,335 | $84,961 | | Total Assets | $151,752 | $107,071 | | Total Current Liabilities | $21,428 | $16,076 | | Total Liabilities | $39,157 | $17,801 | | Total Stockholders' Equity | $112,595 | $89,270 | Consolidated Statements of Operations For 2019, the company reported net income of $11.0 million on total revenue of $189.5 million, resulting in diluted EPS of $0.56 Consolidated Statement of Operations (2019) | (In thousands, except per share data) | 2019 | | :--- | :--- | | Total revenue | $189,492 | | Gross profit | $134,236 | | Income from operations | $10,498 | | Net income | $10,971 | | Diluted net income per share | $0.56 | Consolidated Statements of Cash Flows In 2019, net cash from operations was $2.5 million, contributing to a $2.7 million increase in cash and cash equivalents to end the year at $22.8 million Consolidated Statement of Cash Flows (2019) | (In thousands) | 2019 | | :--- | :--- | | Net cash provided by operating activities | $2,510 | | Net cash used in investing activities | $(2,335) | | Net cash provided by financing activities | $2,496 | | Net increase in cash and cash equivalents | $2,671 | | Cash and cash equivalents – end of period | $22,770 | Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2019 - Based on an evaluation as of December 31, 2019, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[643] - Management concluded that as of December 31, 2019, the company's internal control over financial reporting was effective, based on the COSO framework[648] - The independent registered public accounting firm, Grant Thornton LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[649][652] PART III Directors, Executive Officers and Corporate Governance This section provides biographical information for the company's experienced board of directors and key executive management team - The board of directors includes Peter H. Soderberg (Chairman), William W. Burke, Raymond O. Huggenberger, Gerald R. Mattys (CEO), Richard J. Nigon, Dr. Cheryl Pegus, and Kevin H. Roche[661][662][663] - Key executive officers include Gerald R. Mattys (CEO), Robert J. Folkes (COO), Brent A. Moen (CFO), and Bryan F. Rishe (SVP, Sales)[664][669][670] PART IV Exhibits, Financial Statement Schedules This section lists the financial statements and provides an index of all exhibits filed with the Form 10-K, including material contracts - This section contains the list of financial statements filed with the report and an index of all exhibits, including corporate governance documents, material contracts, and certifications[681][683]