Tactile Systems Technology(TCMD) - 2020 Q2 - Quarterly Report

Report Overview This section provides an overview of the company's Form 10-Q filing, forward-looking statements, and associated risks Filing Information and Company Details This section provides the cover page details for the Form 10-Q filing, identifying Tactile Systems Technology, Inc. as the registrant, its incorporation state (Delaware), principal executive offices, telephone number, and common stock trading symbol (TCMD) on The Nasdaq Stock Market. It also confirms the company is a large accelerated filer and not a shell company, with 19,413,004 shares outstanding as of July 31, 2020 - Tactile Systems Technology, Inc. (TCMD) filed its Form 10-Q for the quarterly period ended June 30, 2020[1][2] Company Filing Details | Detail | Value | | :----- | :---- | | Trading Symbol | TCMD | | Exchange | The Nasdaq Stock Market | | Filer Status | Large accelerated filer | | Shares Outstanding (as of July 31, 2020) | 19,413,004 | Forward-Looking Information This section outlines the nature of forward-looking statements within the report, emphasizing that actual results may differ materially due to various known and unknown risks and uncertainties. It advises readers to review the 'Risk Factors' section and other SEC filings. Key risks highlighted include the COVID-19 pandemic's impact, liquidity, reimbursement, CEO transition, competition, supply chain, and regulatory changes - The report contains forward-looking statements regarding business, operations, and financial performance, which are subject to known and unknown risks and uncertainties[11] - Impacts of the COVID-19 pandemic on business, financial condition, and results of operations[13] - Adequacy of liquidity to pursue business objectives[13] - Ability to obtain reimbursement from third-party payers[13] - Chief Executive Officer transition and potential impact on business and strategic direction[13] - Loss or retirement of key executives[13] - Adverse economic conditions or intense competition[13] - Loss of a key supplier[13] - Adverse federal, state, and local government regulation[13] - Technological obsolescence of products[13] PART I—FINANCIAL INFORMATION This part presents the company's unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures Item 1. Financial Statements This item provides the unaudited condensed consolidated financial statements, including the balance sheets, statements of operations, comprehensive (loss) income, stockholders' equity, and cash flows, along with detailed notes explaining the company's business, accounting policies, and specific financial line items - The financial statements are unaudited and prepared in accordance with GAAP for interim reporting, not necessarily indicative of full-year results[30][31] Condensed Consolidated Balance Sheets Presents the company's financial position, detailing assets, liabilities, and equity at specific reporting dates Condensed Consolidated Balance Sheet Highlights (In thousands) | Item | June 30, 2020 | December 31, 2019 | Change ($) | Change (%) | | :-------------------------------- | :------------ | :---------------- | :--------- | :--------- | | Cash and cash equivalents | $31,341 | $22,770 | $8,571 | 37.6% | | Marketable securities | $6,013 | $22,464 | $(16,451) | (73.2)% | | Total current assets | $104,576 | $108,335 | $(3,759) | (3.5)% | | Total assets | $141,530 | $151,752 | $(10,222) | (6.7)% | | Total current liabilities | $20,486 | $21,428 | $(942) | (4.4)% | | Total liabilities | $38,145 | $39,157 | $(1,012) | (2.6)% | | Total stockholders' equity | $103,385 | $112,595 | $(9,210) | (8.2)% | Condensed Consolidated Statements of Operations Presents the company's financial performance, detailing revenues, expenses, and net income or loss over specific periods Condensed Consolidated Statements of Operations Highlights (In thousands, except per share data) | Item | 3 Months Ended June 30, 2020 | 3 Months Ended June 30, 2019 | Change ($) | Change (%) | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | Change ($) | Change (%) | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- | :--------------------------- | :--------------------------- | :--------- | :--------- | | Total revenue | $35,120 | $45,200 | $(10,080) | (22.3)% | $78,795 | $82,817 | $(4,022) | (4.9)% | | Gross profit | $24,912 | $31,505 | $(6,593) | (20.9)% | $55,985 | $57,763 | $(1,778) | (3.1)% | | Total operating expenses | $32,875 | $28,463 | $4,412 | 15.5% | $68,399 | $56,529 | $11,870 | 21.0% | | (Loss) income from operations | $(7,963) | $3,042 | $(11,005) | N.M. | $(12,414) | $1,234 | $(13,648) | N.M. | | Net (loss) income | $(13,850) | $2,785 | $(16,635) | N.M. | $(15,157) | $4,257 | $(19,414) | N.M. | | Basic EPS | $(0.72) | $0.15 | $(0.87) | N.M. | $(0.79) | $0.23 | $(1.02) | N.M. | | Diluted EPS | $(0.72) | $0.14 | $(0.86) | N.M. | $(0.79) | $0.22 | $(1.01) | N.M. | Condensed Consolidated Statements of Comprehensive (Loss) Income Presents the company's comprehensive income or loss, including net income and other comprehensive income items Condensed Consolidated Statements of Comprehensive (Loss) Income (In thousands) | Item | 3 Months Ended June 30, 2020 | 3 Months Ended June 30, 2019 | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net (loss) income | $(13,850) | $2,785 | $(15,157) | $4,257 | | Total other comprehensive (loss) income | $(9) | $25 | $3 | $48 | | Comprehensive (loss) income | $(13,859) | $2,810 | $(15,154) | $4,305 | Condensed Consolidated Statements of Stockholders' Equity Details changes in the company's stockholders' equity, including stock-based compensation and comprehensive income Stockholders' Equity Changes (In thousands) | Item | Balances, Dec 31, 2019 | Stock-based compensation | Exercise of options/RSUs | Taxes paid for RSU settlement | ESPP shares issued | Comprehensive (loss) income | Balances, June 30, 2020 | | :-------------------------------- | :----------------------- | :----------------------- | :----------------------- | :---------------------------- | :------------------ | :---------------------------- | :---------------------- | | Additional paid-in capital | $91,874 | $5,124 | $548 | $(1,553) | $1,825 | — | $97,818 | | Retained earnings | $20,676 | — | — | — | — | $(15,157) | $5,519 | | Total stockholders' equity | $112,595 | $5,124 | $548 | $(1,553) | $1,825 | $(15,154) | $103,385 | Condensed Consolidated Statements of Cash Flows Presents the company's cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (In thousands) | Cash Flow Activity | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | Change ($) | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------- | | Net cash (used in) provided by operating activities | $(7,980) | $851 | $(8,831) | | Net cash provided by investing activities | $15,731 | $3,714 | $12,017 | | Net cash provided by financing activities | $820 | $376 | $444 | | Net increase in cash and cash equivalents | $8,571 | $4,941 | $3,630 | | Cash and cash equivalents – end of period | $31,341 | $25,040 | $6,301 | Notes to the Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures for the condensed consolidated financial statements, covering the company's business, accounting policies, financial instruments, commitments, contingencies, and equity-related transactions. It highlights the impact of COVID-19, the discontinuation of the Airwear wrap product line, and changes in revenue recognition for sales-type leases - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP for interim financial reporting and SEC rules, and include the accounts of Tactile Systems Technology, Inc. and its wholly owned subsidiary, Swelling Solutions, Inc.[30][32] Note 1. Nature of Business and Operations This section describes Tactile Medical's core business as a manufacturer and distributor of medical devices for lymphedema and venous insufficiency, highlighting the seasonality of its business and the potential impact of COVID-19 on 2020 trends - Tactile Medical is the sole manufacturer and distributor of Flexitouch® and Entre™ systems, medical devices for lymphedema and venous insufficiency, used for at-home treatment[26] - The company's business is affected by seasonality, with reduced demand in Q1 and higher revenue in Q3/Q4, primarily due to patient insurance deductibles. COVID-19 may significantly alter 2020 seasonality trends[29] Note 2. Basis of Presentation This section outlines the principles of consolidation, the impact of COVID-19 on operations, the use of estimates in financial reporting, and the definition of comprehensive (loss) income Principles of Consolidation Outlines the consolidation of financial statements for the company and its wholly-owned subsidiary - The financial statements consolidate Tactile Systems Technology, Inc. and its wholly owned subsidiary, Swelling Solutions, Inc., eliminating all intercompany balances and transactions[32] Risks and Uncertainties (COVID-19) Details the significant negative impacts and operational adjustments due to the COVID-19 pandemic - The COVID-19 pandemic has negatively affected the U.S. economy and the company's business, with long-term impacts currently unestimable[33] - Modified operations with rotational shifts and stringent safety measures (face masks, social distancing, temperature checks)[35] - Incorporated remote and flexible work arrangements, including online training for new sales representatives[35] - Continued employee travel and contact restrictions[35] - Collaborated with payers to modify coverage requirements for virtual patient interactions[35] - Transitioned to a "no contact" virtual patient training model, inactivating independent healthcare practitioners[35] - Transitioned large, in-person medical education programs to virtual meetings[35] Use of Estimates Highlights the reliance on management estimates and assumptions in financial statement preparation - Financial statements require management estimates and assumptions, which may lead to actual results differing from reported amounts[37] Comprehensive (Loss) Income Defines comprehensive income as net income adjusted for specific unrealized gains and losses - Comprehensive (loss) income includes net (loss) income adjusted for unrealized gains and losses on available-for-sale marketable securities and related taxes[38] Note 3. Summary of Significant Accounting Policies This section confirms no material changes in significant accounting policies during the six months ended June 30, 2020, except for the discontinuation of the Airwear wrap product line and the adoption of ASU 2016-13 - No material changes in significant accounting policies during the six months ended June 30, 2020, except as noted[39] Impairment of Long-Lived Assets Details the non-cash impairment charge related to the discontinuation of the Airwear wrap product line - In Q2 2020, the company discontinued the Airwear wrap product line to focus on core Flexitouch and Entre franchises[41] - A $4.0 million non-cash impairment charge was recorded to fully write-off the inventory ($0.4 million) and long-lived assets ($3.6 million) of the Airwear wrap[41] Recently Adopted Accounting Pronouncements Discusses the adoption of new accounting standards and their impact on financial statements - ASU 2016-13 (CECL model) was adopted on January 1, 2020, with no impact on the financial statements[42] Accounting Pronouncements Issued Not Yet Adopted Outlines accounting pronouncements issued but not yet adopted by the company - The company is evaluating ASU No. 2019-12, "Income Taxes (Topic 740) — Simplifying the Accounting for Income Taxes," effective for fiscal years beginning after December 15, 2020[43] Note 4. Marketable Securities Provides details on the company's marketable securities, including changes in holdings and unrealized gains Marketable Securities (In thousands) | Item | June 30, 2020 | December 31, 2019 | Change ($) | Change (%) | | :-------------------------------- | :------------ | :---------------- | :--------- | :--------- | | U.S. government and agency obligations | $6,013 | $19,963 | $(13,950) | (69.9)% | | Corporate debt securities | — | $2,501 | $(2,501) | (100.0)% | | Total Marketable securities | $6,013 | $22,464 | $(16,451) | (73.2)% | - Net pre-tax unrealized gains for marketable securities were recorded as a component of accumulated other comprehensive income. No sales of marketable securities occurred during the six months ended June 30, 2020[44] Note 5. Inventories Details the composition and changes in the company's inventory balances Inventories (In thousands) | Item | June 30, 2020 | December 31, 2019 | Change ($) | Change (%) | | :-------------------------------- | :------------ | :---------------- | :--------- | :--------- | | Finished goods | $9,730 | $6,508 | $3,222 | 49.5% | | Component parts and work-in-process | $15,096 | $12,551 | $2,545 | 20.3% | | Total inventories | $24,826 | $19,059 | $5,767 | 30.3% | Note 6. Intangible Assets Presents the company's intangible assets, including patents and customer accounts, and related amortization Intangible Assets (In thousands) | Item | June 30, 2020 | December 31, 2019 | Change ($) | Change (%) | | :-------------------------------- | :------------ | :---------------- | :--------- | :--------- | | Patents (Net) | $291 | $3,939 | $(3,648) | (92.6)% | | Defensive intangible assets (Net) | $790 | $875 | $(85) | (9.7)% | | Customer accounts (Net) | $75 | $88 | $(13) | (14.8)% | | Patents pending | $518 | $410 | $108 | 26.3% | | Total intangible assets | $1,674 | $5,312 | $(3,638) | (68.5)% | - Amortization expense was $0.1 million for each of the three months ended June 30, 2020 and 2019, and $0.3 million for each of the six months ended June 30, 2020 and 2019[47] Note 7. Accrued Expenses Details the company's accrued expenses, including warranty, legal, and travel costs Accrued Expenses (In thousands) | Item | June 30, 2020 | December 31, 2019 | Change ($) | Change (%) | | :-------------------------------- | :------------ | :---------------- | :--------- | :--------- | | Warranty | $1,347 | $1,218 | $129 | 10.6% | | Legal and consulting | $817 | $617 | $200 | 32.4% | | Travel and business | $457 | $776 | $(319) | (41.1)% | | Lease termination costs | — | $1,200 | $(1,200) | (100.0)% | | Total | $3,743 | $4,498 | $(755) | (16.8)% | Note 8. Warranty Reserves Outlines the activity and balance of the company's warranty reserves Warranty Reserve Activity (In thousands) | Item | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | Change ($) | Change (%) | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- | | Beginning balance | $3,759 | $2,572 | $1,187 | 46.1% | | Warranty provision | $1,277 | $857 | $420 | 49.0% | | Processed warranty claims | $(828) | $(427) | $(401) | 93.9% | | Ending balance | $4,208 | $3,002 | $1,206 | 40.2% | Note 9. Credit Agreement Details the company's revolving credit facility and compliance with financial covenants - The company has a $10.0 million revolving credit facility, with potential to increase to $35.0 million, expiring August 3, 2021[51] - As of June 30, 2020, and the filing date, there were no outstanding borrowings, and the company was in compliance with all financial covenants[51][52] Note 10. Commitments and Contingencies This section details the company's lease obligations, major vendor relationships, purchase commitments, and retirement plan contributions - The company leases property and equipment under operating leases, with ROU assets and liabilities recorded for terms greater than 12 months[53] Lease Obligations Details the company's lease commitments, including new headquarters leases and termination costs - In December 2019, the company terminated the lease for its former corporate headquarters, incurring a $1.1 million net loss[56] - New corporate headquarters leases commenced in September 2019, with additional space to be occupied in the second half of 2020 and 2021[57] Operating Lease Liabilities (In thousands) | Item | June 30, 2020 | December 31, 2019 | Change ($) | Change (%) | | :-------------------------------- | :------------ | :---------------- | :--------- | :--------- | | Right of use operating lease assets | $15,126 | $15,885 | $(759) | (4.8)% | | Operating lease liabilities (Current) | $1,508 | $1,454 | $54 | 3.7% | | Operating lease liabilities (Non-current) | $14,798 | $15,134 | $(336) | (2.2)% | | Total Operating lease liabilities | $16,306 | $16,588 | $(282) | (1.7)% | - As of June 30, 2020, the company has additional lease commitments of $13.9 million for uncommenced building leases[60] Major Vendors Identifies major vendors and their significant contribution to total purchases - Two major vendors accounted for 33% and 32% of total purchases for the three and six months ended June 30, 2020, respectively[62] Purchase Commitments Outlines the company's future purchase commitments for goods - The company had $24.4 million in purchase commitments for goods expected within the next year as of June 30, 2020[63] Retirement Plan Details the company's discretionary contributions to its 401(k) retirement plan - Discretionary contributions to the 401(k) plan were $0.1 million for each of the three and six months ended June 30, 2020 and 2019[64] Note 11. Stockholders' Equity This section details the company's equity incentive plan, stock-based compensation expenses, and awards granted to the new President and CEO - The 2016 Equity Incentive Plan authorizes grants of stock options, RSUs, and other awards, with 4,709,363 shares available for future grant as of June 30, 2020[65] - A new President and CEO was appointed effective June 8, 2020, and will receive restricted stock units and stock option awards under the 2016 Plan, with specific vesting conditions[67] Stock-Based Compensation Details the company's stock-based compensation expense across various categories Stock-Based Compensation Expense (In thousands) | Expense Category | 3 Months Ended June 30, 2020 | 3 Months Ended June 30, 2019 | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Cost of revenue | $105 | $76 | $187 | $174 | | Sales and marketing expenses | $1,233 | $1,067 | $2,479 | $2,233 | | Research and development expenses | $94 | $100 | $182 | $180 | | Reimbursement, general and administrative expenses | $964 | $1,031 | $2,276 | $2,470 | | Total stock-based compensation expense | $2,396 | $2,274 | $5,124 | $5,057 | Stock Options Outlines the expense and unrecognized compensation related to stock options Stock Option Expense (In thousands) | Period | Stock Option Expense | | :-------------------------------- | :------------------- | | 3 Months Ended June 30, 2020 | $1,000 | | 3 Months Ended June 30, 2019 | $700 | | 6 Months Ended June 30, 2020 | $1,800 | | 6 Months Ended June 30, 2019 | $1,400 | - As of June 30, 2020, $8.5 million of unrecognized pre-tax stock option expense remains, to be recognized over a weighted-average period of 2.3 years[70] Time-Based Restricted Stock Units Details the expense and unrecognized compensation for time-based restricted stock units Time-Based Restricted Stock Unit Expense (In thousands) | Period | Time-Based RSU Expense | | :-------------------------------- | :--------------------- | | 3 Months Ended June 30, 2020 | $1,400 | | 3 Months Ended June 30, 2019 | $1,000 | | 6 Months Ended June 30, 2020 | $2,600 | | 6 Months Ended June 30, 2019 | $1,900 | - As of June 30, 2020, $8.6 million of unrecognized pre-tax compensation expense for time-based RSUs is expected to be recognized over a weighted-average period of 2.1 years[72] Performance-Based Restricted Stock Units Details the expense and unrecognized compensation for performance-based restricted stock units Performance-Based Restricted Stock Unit Expense (In thousands) | Period | PSU Expense (Benefit) | | :-------------------------------- | :-------------------- | | 3 Months Ended June 30, 2020 | $(300) | | 3 Months Ended June 30, 2019 | $500 | | 6 Months Ended June 30, 2020 | $100 | | 6 Months Ended June 30, 2019 | $1,200 | - The Q2 2020 benefit includes a $1.0 million adjustment due to 2019 PSUs falling below the minimum performance target[75] - As of June 30, 2020, $1.9 million of unrecognized pre-tax compensation expense for PSUs is expected to be recognized over a weighted-average period of 2.1 years[75] Employee Stock Purchase Plan Describes the Employee Stock Purchase Plan and related compensation expense - The ESPP allows employees to purchase common stock at 85% of the lower of the closing market price on the first or last trading day of each six-month purchase period[77] - As of June 30, 2020, 1,618,335 shares were available for future issuance under the ESPP[78] ESPP Stock-Based Compensation Expense (In thousands) | Period | ESPP Expense | | :-------------------------------- | :----------- | | 3 Months Ended June 30, 2020 | $300 | | 3 Months Ended June 30, 2019 | $200 | | 6 Months Ended June 30, 2020 | $600 | | 6 Months Ended June 30, 2019 | $500 | Note 12. Revenue Provides a detailed breakdown of revenue by product category and payer type Revenue by Product Category (In thousands) | Product Category | 3 Months Ended June 30, 2020 | 3 Months Ended June 30, 2019 | Change ($) | Change (%) | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | Change ($) | Change (%) | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- | :--------------------------- | :--------------------------- | :--------- | :--------- | | Flexitouch system | $31,127 | $40,959 | $(9,832) | (24.0)% | $69,713 | $75,068 | $(5,355) | (7.1)% | | Other products (primarily Entre) | $3,993 | $4,241 | $(248) | (5.8)% | $9,082 | $7,749 | $1,333 | 17.2% | | Total Revenue | $35,120 | $45,200 | $(10,080) | (22.3)% | $78,795 | $82,817 | $(4,022) | (4.9)% | Revenue by Payer (In thousands) | Payer | 3 Months Ended June 30, 2020 | 3 Months Ended June 30, 2019 | Change ($) | Change (%) | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | Change ($) | Change (%) | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- | :--------------------------- | :--------------------------- | :--------- | :--------- | | Private insurers and other payers | $25,668 | $32,143 | $(6,475) | (20.1)% | $55,905 | $58,025 | $(2,120) | (3.7)% | | Veterans Administration | $4,322 | $8,255 | $(3,933) | (47.6)% | $11,380 | $15,925 | $(4,545) | (28.5)% | | Medicare | $5,130 | $4,802 | $328 | 6.8% | $11,510 | $8,867 | $2,643 | 29.8% | | Total | $35,120 | $45,200 | $(10,080) | (22.3)% | $78,795 | $82,817 | $(4,022) | (4.9)% | - Rental agreements initiated after January 1, 2019, are recognized as sales-type leases, with revenue and cost of revenue recognized upon lease commencement[82][83] Note 13. Income Taxes Details the company's income tax expense or benefit and effective tax rates Income Tax Expense (Benefit) (In thousands) | Period | Income Tax Expense (Benefit) | Effective Tax Rate | | :-------------------------------- | :--------------------------- | :----------------- | | 3 Months Ended June 30, 2020 | $5,923 | 75% | | 3 Months Ended June 30, 2019 | $422 | 14% | | 6 Months Ended June 30, 2020 | $3,045 | 25% | | 6 Months Ended June 30, 2019 | $(2,691) | (172)% | - The change in effective tax rate is primarily due to a change in projected taxable income and proportionately lower benefits for stock-based compensation[88][89] Note 14. Net Income Per Share Presents the company's basic and diluted net income per share calculations Net (Loss) Income Per Share | Item | 3 Months Ended June 30, 2020 | 3 Months Ended June 30, 2019 | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net (loss) income | $(13,850) | $2,785 | $(15,157) | $4,257 | | Basic EPS | $(0.72) | $0.15 | $(0.79) | $0.23 | | Diluted EPS | $(0.72) | $0.14 | $(0.79) | $0.22 | - Common stock equivalents (restricted stock units, stock options, performance stock units, ESPP) totaling 1,330,395 for Q2 2020 and 1,327,074 for H1 2020 were excluded from diluted EPS as they were anti-dilutive due to the net loss[92] Note 15. Fair Value Measurements Describes the company's fair value measurements hierarchy and asset valuations - Fair value measurements use a three-level hierarchy, with money market mutual funds and U.S. government/agency obligations valued using Level 1 inputs[93][94] - The fair value of intangible assets related to the Airwear wrap product line was re-measured to $0 as of June 30, 2020, due to impairment[96] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance and condition, highlighting the significant impact of the COVID-19 pandemic on revenue and operations. It details the results of operations for the three and six months ended June 30, 2020, compared to 2019, and discusses liquidity, capital resources, and the effects of the CARES Act - As of June 30, 2020, principal liquidity sources were $31.3 million in cash and cash equivalents, $6.0 million in marketable securities, and $30.6 million in net accounts receivable[134] - The company believes its current capital resources, including the Credit Agreement, will be sufficient to meet working capital and capital expenditure requirements for at least the next twelve months, despite the COVID-19 pandemic[147] Coronavirus (COVID-19) Impact Details the significant negative impacts and operational adjustments due to the COVID-19 pandemic - The COVID-19 pandemic has negatively impacted the global economy and the company's business, with long-term effects currently unestimable[98] - Modified manufacturing shifts and implemented stringent safety measures[99] - Incorporated remote and flexible work arrangements[99] - Continued employee travel and contact restrictions[99] - Collaborated with payers for virtual patient interactions[99] - Moved to a "no contact" virtual patient training model, inactivating independent healthcare practitioners[99] - Transitioned medical education programs to virtual meetings[99] Overview of Business and Products Provides an overview of the company's medical device products, strategic focus, and sales force adjustments - Tactile Medical develops and provides innovative medical devices (Flexitouch and Entre systems) for chronic diseases, primarily lymphedema and chronic venous insufficiency, with a focus on at-home care[100] - The Flexitouch system is the primary revenue driver, accounting for 88% and 91% of revenue in H1 2020 and H1 2019, respectively[101] - The company discontinued the Airwear wrap product line in Q2 2020 to focus on core franchises, leading to a $4.0 million non-cash impairment charge[103] - The direct sales force grew to 250 employees as of June 30, 2020, and the company transitioned to a "no contact" virtual patient training model due to COVID-19[104][105] Results of Operations Comparison This section provides a detailed comparison of the company's financial performance for the three and six months ended June 30, 2020, versus 2019. It highlights significant revenue declines, increased operating expenses (especially G&A due to impairment), and a shift from net income to net loss, largely driven by the COVID-19 pandemic and the Airwear wrap discontinuation Revenue Analysis Analyzes the company's revenue performance, highlighting declines due to the COVID-19 pandemic Revenue Performance (In thousands) | Item | 3 Months Ended June 30, 2020 | 3 Months Ended June 30, 2019 | Change ($) | Change (%) | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | Change ($) | Change (%) | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- | :--------------------------- | :--------------------------- | :--------- | :--------- | | Total revenue | $35,120 | $45,200 | $(10,080) | (22)% | $78,795 | $82,817 | $(4,022) | (5)% | | Flexitouch system revenue | $31,127 | $40,959 | $(9,832) | (24)% | $69,713 | $75,068 | $(5,355) | (7)% | | Other products (Entre) revenue | $3,993 | $4,241 | $(248) | (6)% | $9,082 | $7,749 | $1,333 | 17% | - The decrease in revenue was primarily attributable to the COVID-19 pandemic, which limited access to clinician customers and patients[116][117] - Veterans Administration revenue decreased by 47.6% in Q2 2020 and 28.5% in H1 2020[118] - Medicare revenue increased by 6.8% in Q2 2020 and 29.8% in H1 2020[118] Cost of Revenue and Gross Margin Analysis Analyzes the cost of revenue and gross margin, noting impacts from sales declines and impairment charges Cost of Revenue and Gross Margin (In thousands) | Item | 3 Months Ended June 30, 2020 | 3 Months Ended June 30, 2019 | Change ($) | Change (%) | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | Change ($) | Change (%) | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------- | :--------- | :--------------------------- | :--------------------------- | :--------- | :--------- | | Total cost of revenue | $10,208 | $13,695 | $(3,487) | (25)% | $22,810 | $25,054 | $(2,244) | (9)% | | Gross profit | $24,912 | $31,505 | $(6,593) | (21)% | $55,985 | $57,763 | $(1,778) | (3)% | | Gross margin rate | 71% | 70% | 1% | 1.4% | 71% | 70% | 1% | 1.4% | - The decrease in cost of revenue was primarily due to lower Flexitouch system sales/rentals and a $0.4 million inventory impairment charge for the Airwear wrap[122] Sales and Marketing Expenses Analysis Details changes in sales and marketing expenses, driven by personnel costs and reduced external activities Sales and Marketing Expenses (In thousands) | Period | Sales and Marketing Expenses | Change ($) | Change (%) | | :-------------------------------- | :--------------------------- | :--------- | :--------- | | 3 Months Ended June 30, 2020 | $17,398 | $(1,020) | (6)% | | 3 Months Ended June 30, 2019 | $18,418 | | | | 6 Months Ended June 30, 2020 | $40,368 | $4,559 | 13% | | 6 Months Ended June 30, 2019 | $35,809 | | | - Q2 2020 decrease driven by[124] - $1.7 million reduction in external patient training[124] - $0.8 million reduction in travel and entertainment[124] - $0.6 million decrease from reduced tradeshows and professional services[124] - Partially offset by $2.1 million increase in personnel-related compensation[124] - H1 2020 increase driven by[125] - $5.8 million increase in personnel-related compensation expense[125] - Partially offset by $1.2 million reduction in other sales associated expenses (patient training, travel)[125] Research and Development Expenses Analysis Analyzes R&D expenses, noting impacts from clinical study slowdowns and team investments Research and Development Expenses (In thousands) | Period | R&D Expenses | Change ($) | Change (%) | | :-------------------------------- | :------------- | :--------- | :--------- | | 3 Months Ended June 30, 2020 | $1,105 | $(129) | (10)% | | 3 Months Ended June 30, 2019 | $1,234 | | | | 6 Months Ended June 30, 2020 | $2,789 | $274 | 11% | | 6 Months Ended June 30, 2019 | $2,515 | | | - Q2 2020 decrease primarily due to slowing clinical studies activities as a result of COVID-19[128] - H1 2020 increase primarily due to Q1 investments in R&D team and clinical studies, partially offset by COVID-19 related slowdown[129] Reimbursement, General and Administrative Expenses Analysis Details changes in G&A expenses, primarily due to impairment charges and increased occupancy costs Reimbursement, General and Administrative Expenses (In thousands) | Period | Reimbursement, G&A Expenses | Change ($) | Change (%) | | :-------------------------------- | :-------------------------- | :--------- | :--------- | | 3 Months Ended June 30, 2020 | $14,372 | $5,561 | 63% | | 3 Months Ended June 30, 2019 | $8,811 | | | | 6 Months Ended June 30, 2020 | $25,242 | $7,037 | 39% | | 6 Months Ended June 30, 2019 | $18,205 | | | - Key drivers for increase[130][131] - $3.6 million impairment charge for Airwear wrap long-lived assets[130][131] - Increased occupancy costs, depreciation expense, legal and professional fees ($1.7 million in Q2, $2.5 million in H1)[130][131] - Increased personnel-related compensation expense ($0.3 million in Q2, $0.9 million in H1) due to increased headcount[130][131] Other Income, Net Analysis Analyzes other income, net, primarily influenced by interest income and a one-time gain Other Income, Net (In thousands) | Period | Other Income, Net | Change ($) | Change (%) | | :-------------------------------- | :---------------- | :--------- | :--------- | | 3 Months Ended June 30, 2020 | $36 | $(129) | (78)% | | 3 Months Ended June 30, 2019 | $165 | | | | 6 Months Ended June 30, 2020 | $302 | $(30) | (9)% | | 6 Months Ended June 30, 2019 | $332 | | | - Other income was primarily impacted by interest income on marketable securities and a one-time gain on a cost method investment in Q1 2020[132] Income Taxes Analysis Analyzes income tax expense, primarily due to changes in tax-deductible share-based compensation Income Tax Expense (Benefit) (In thousands) | Period | Income Tax Expense (Benefit) | | :-------------------------------- | :--------------------------- | | 3 Months Ended June 30, 2020 | $5,923 | | 3 Months Ended June 30, 2019 | $422 | | 6 Months Ended June 30, 2020 | $3,045 | | 6 Months Ended June 30, 2019 | $(2,691) | - The change in income tax expense was primarily due to a decrease in tax-deductible share-based compensation activity[133] Liquidity and Capital Resources This section discusses the company's cash flows, credit agreement details, assessment of capital adequacy, impact of the CARES Act, and other financial commitments and policies Cash Flows Analysis Analyzes the company's cash flows from operating, investing, and financing activities Cash Flow Summary (In thousands) | Activity | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | Change ($) | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------- | | Operating activities | $(7,980) | $851 | $(8,831) | | Investing activities | $15,731 | $3,714 | $12,017 | | Financing activities | $820 | $376 | $444 | | Net increase in cash and cash equivalents | $8,571 | $4,941 | $3,630 | - Net cash used in operating activities for H1 2020 was $8.0 million, primarily due to a net loss of $15.2 million and a $7.7 million net decrease in operating assets and liabilities, partially offset by $14.8 million in non-cash adjustments[136] - Net cash provided by investing activities for H1 2020 was $15.7 million, mainly from $16.5 million in proceeds from marketable securities maturities[138] - Net cash provided by financing activities for H1 2020 was $0.8 million, from $2.4 million in stock option/ESPP proceeds, offset by $1.6 million in taxes paid for RSU settlements[140] Credit Agreement Details Details the company's revolving credit facility and compliance with financial covenants - The company has a $10.0 million revolving credit facility, with potential to increase to $35.0 million, expiring August 3, 2021[144] - As of June 30, 2020, and the filing date, there were no outstanding borrowings, and the company was in compliance with all financial covenants[144][145] Adequacy of Capital Resources Assessment Assesses the sufficiency of the company's liquidity sources to meet future capital requirements - The company believes its current liquidity sources are sufficient to meet working capital and capital expenditure requirements for at least the next twelve months[147] - Future capital requirements depend on factors including[146][149] - Impact of the COVID-19 pandemic[146][149] - Sales and marketing resources for market penetration[146][149] - Expansion of operations[146][149] - Costs associated with clinical research and new product development[146][149] - Use of capital for acquisitions or licenses[146][149] CARES Act Impact Outlines the financial impacts of the CARES Act, including NOL carrybacks and relief funds - The CARES Act enabled the company to carry back NOLs, leading to a $2.6 million income tax receivable in Q1 2020[151] - The company received $1.2 million in relief funds for healthcare providers under the CARES Act and is evaluating its financial statement impact[152] Contractual and Commercial Commitments Summary Confirms no material changes to contractual and commercial commitments - No material changes to contractual and commercial commitments since December 31, 2019[153] Off-Balance Sheet Arrangements Confirms the absence of off-balance sheet arrangements - The company has no off-balance sheet arrangements, special purpose entities, undisclosed borrowings, debt, derivative contracts, or synthetic leases[154] Recent Accounting Pronouncements Refers to detailed disclosures on recent accounting pronouncements - Refer to Note 3 for details on recent accounting pronouncements[155] Critical Accounting Policies and Estimates Highlights critical accounting policies and estimates relying on management's judgment - Critical accounting policies and estimates are discussed in the Annual Report on Form 10-K, highlighting their importance and reliance on management's judgment[156] Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in the company's market risks since December 31, 2019, as previously discussed in the Annual Report on Form 10-K - No material changes in market risks since December 31, 2019[157] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of June 30, 2020, and concluded they were effective at a reasonable assurance level. There were no material changes in internal control over financial reporting during the quarter Evaluation of Disclosure Controls and Procedures Confirms the effectiveness of disclosure controls and procedures as evaluated by management - As of June 30, 2020, the CEO and CFO concluded that disclosure controls and procedures were effective at the reasonable assurance level[158] Changes in Internal Control over Financial Reporting Confirms no material changes in internal control over financial reporting during the quarter - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2020[159] PART II—OTHER INFORMATION This part covers legal proceedings, risk factors, equity security sales, defaults, mine safety disclosures, other information, exhibits, and signatures Item 1. Legal Proceedings The company is subject to various legal claims in the ordinary course of business. A significant ongoing case is a qui tam action filed in February 2019, alleging violations of the Federal Anti-Kickback Statute and False Claims Act. The company denies the allegations and is vigorously defending the lawsuit, with a motion to dismiss counterclaims currently pending - The company is defending against a qui tam action filed in February 2019, alleging violations of the Federal Anti-Kickback Statute and False Claims Act[161] - The United States declined to intervene in the action, and the company believes the allegations are without merit[161] Item 1A. Risk Factors This section updates the risk factors, emphasizing that the COVID-19 pandemic is likely to impact and exacerbate many existing risks. It details potential negative impacts of the pandemic, including reduced product demand, reimbursement issues, inability to conduct virtual operations, supply chain disruptions, workforce limitations, and increased cybersecurity risks, all of which could materially adversely affect the business - The COVID-19 pandemic is expected to adversely affect the business, financial condition, and results of operations, and may exacerbate or trigger existing risk factors[163] - Further reduced demand for products[165][167] - Reductions in coverage or reimbursement of products by payers[165][167] - Inability to effectively conduct virtual patient demonstrations and trainings[165][167] - Continued restricted access to clinicians and healthcare facilities[165][167] - Disruptions to the supply chain[165][167] - Limitations on workforce ability to perform duties[165][167] - Increased risks of cybersecurity attacks[165][167] - Increased unemployment rates leading to reduced insurance coverage[165][167] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no recent unregistered sales of preferred or common stock. The company received net proceeds of approximately $35.4 million from its initial public offering in August 2016, which were held in a diversified portfolio of liquid investments. There has been no material change in the planned uses of these proceeds - No recent unregistered sales of equity securities[169] - Net proceeds of approximately $35.4 million from the August 2016 IPO were held in liquid investments, with no material change in planned uses[171][172] Item 3. Defaults Upon Senior Securities This item is not applicable to the company - Not applicable[173] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[174] Item 5. Other Information This section discloses the termination of the License Agreement with Sun Scientific, Inc. for the Airwear wrap, effective July 31, 2020, due to failure to meet minimum net sales. This follows the company's strategic decision in Q2 2020 to discontinue the Airwear wrap product line and focus on core franchises, which resulted in a $4.0 million non-cash impairment charge - The License Agreement with Sun Scientific, Inc. for the Airwear wrap was terminated effective July 31, 2020, due to the company not meeting minimum net sales requirements[176] - The termination follows a Q2 2020 strategic decision to discontinue the Airwear wrap product line, resulting in a $4.0 million non-cash impairment charge to write-off inventory and long-lived assets[177] Item 6. Exhibits This section lists all exhibits filed as part of the Quarterly Report on Form 10-Q, including organizational documents, offer letters, certifications (e.g., CEO/CFO certifications), and XBRL financial statements - The exhibit index lists documents such as amended certificates of incorporation and by-laws, an offer letter for the new CEO, CEO/CFO certifications, and Inline XBRL financial statements[181] Signatures This section contains the required signatures for the Form 10-Q, confirming the registrant's due authorization for filing, signed by the Chief Financial Officer - The report is signed by Brent A. Moen, Chief Financial Officer, on behalf of Tactile Systems Technology, Inc.[185]