Tactile Systems Technology(TCMD) - 2022 Q4 - Annual Report

Table of Contents This section provides an organized listing of all chapters and their corresponding page numbers within the report Special Note Regarding Forward-Looking Information This section provides cautionary statements regarding forward-looking information, highlighting inherent risks and uncertainties Forward-Looking Statements and Risk Factors This section warns that forward-looking statements are subject to risks, including economic conditions, reimbursement, and supply chain issues - The report contains forward-looking statements that are subject to significant risks and uncertainties, and readers are cautioned not to place undue reliance on them[14][17] - Key risk factors include impacts of inflation, rising interest rates, recession, ability to obtain reimbursement, adverse economic conditions, supply chain issues, regulatory compliance, loss of key executives, technological obsolescence, and the effects of the COVID-19 pandemic[16] Risk Factors Summary This section provides a high-level overview of the principal risks that could materially and adversely affect the company's business, financial condition, and operating results Risks Related to Business, Operations and Strategy This section outlines key business risks, including economic conditions, reimbursement, supply chain, product reliance, and IT security - Current or worsening economic conditions (inflation, rising interest rates, recession) could adversely affect business and financial condition[22] - Inability to achieve and maintain adequate levels of coverage or reimbursement for products would adversely affect business and results of operations[22] - High dependence on lymphedema products, which generated 86% of revenue in 2022, poses a significant risk if these products fail to achieve wide market acceptance[22] - Increasing dependence on sophisticated information technology makes the company vulnerable to cyber-attacks and data breaches, which could adversely affect business[22] - The COVID-19 pandemic has had, and may continue to have, an adverse effect on business, financial condition, and results of operations due to reduced patient visits and staffing challenges[22] Government Regulation, Compliance and Legal Risks This section details extensive regulatory and legal risks, including FDA compliance, fraud and abuse laws, and the need for licenses - The company is subject to extensive federal and state regulation, including FDA requirements for marketing and commercial distribution, and failure to comply could lead to severe sanctions[22] - Compliance with state and federal fraud and abuse laws (anti-kickback, false claims, anti-inducement) is critical, as violations could result in substantial penalties and adversely affect business[26] - Maintaining necessary licenses and accreditations for its direct-to-patient and -provider model is essential, as failure to do so would adversely affect the business[26] Financial Condition, Credit and Tax Risks This section covers financial risks, including internal control failures, indebtedness, interest rate changes, and restrictive covenants - Failure to maintain proper and effective internal control over financial reporting could impair the ability to produce accurate and timely financial statements, harming operating results and stock value[26] - The level of indebtedness under the credit facility may adversely impact the company, and the phase-out or replacement of LIBOR could increase interest expenses[26] Risks Related to Ownership of Our Common Stock This section addresses risks related to common stock ownership, primarily focusing on potential price volatility and investor losses - The trading price of the common stock has been and could continue to be highly volatile, potentially leading to substantial losses for purchasers[25] PART I This part provides a comprehensive overview of the company's business, risk factors, properties, and legal proceedings Item 1. Business Tactile Medical is a medical technology company providing at-home devices for chronic diseases, achieving $246.8 million in revenue in 2022 with a $17.9 million net loss - Tactile Medical's mission is to help people with chronic diseases live better and care for themselves at home, focusing on vascular disease (lymphedema, CVI) and chronic respiratory conditions[27] - The company employs a direct-to-patient and -provider model for lymphedema products and a durable medical equipment (DME) distribution model for respiratory therapy products[28] Consolidated Financial Performance | Metric | 2022 (Millions) | 2021 (Millions) | Change (%) | | :--------------------- | :-------------- | :-------------- | :--------- | | Revenue | $246.8 | $208.1 | 19% | | Net Loss | $(17.9) | $(11.8) | 51% | Overview This section provides a general introduction to the company's history, therapeutic focus areas, product revenue breakdown, and patient reach - Tactile Medical was reincorporated as a Delaware corporation in 2006 and began doing business as 'Tactile Medical' in September 2013[27] - The company's therapeutic focus areas include vascular disease (lymphedema, chronic venous insufficiency), oncology (lymphedema in cancer survivors), and airway clearance therapy for chronic respiratory conditions[27] - Lymphedema products (Flexitouch and Entre systems) generated $212.3 million (86%) of revenue in 2022, while AffloVest airway clearance products generated $34.5 million (14%) of revenue in 2022[32][33] - The company expanded its field staff to 287 employees as of December 31, 2022, up from 262 in 2021, to support lymphedema and airway clearance products[34] - As of December 31, 2022, the company had served over 65,000 patients with compression therapy devices in 2022, and cumulatively over 395,000 patients since launch[37] Coronavirus (COVID-19) This section discusses the negative impacts of the COVID-19 pandemic on business operations and the ongoing uncertainties regarding its long-term effects - The COVID-19 pandemic negatively affected the business, causing a decline in patient visits to healthcare facilities and clinics, and staffing challenges in 2021 and Q1 2022[39] - The long-term impact of the pandemic remains uncertain, with no reliable estimates on its duration, recovery sustainability, or severity of resurgences[40] Overview of Lymphedema and Chronic Venous Insufficiency This section defines lymphedema and chronic venous insufficiency, outlining their causes, symptoms, and progression - Lymphedema is a chronic, progressive swelling caused by lymphatic system impairment, leading to severe symptoms like swelling, decreased mobility, skin breakdown, pain, and increased infection risk, with no known cure[42][43] - Chronic Venous Insufficiency (CVI) occurs when venous valves are ineffective, hindering blood return to the heart, and can lead to phlebolymphedema when combined with lymphatic insufficiency[29][45] Market Opportunity (Lymphedema and CVI) This section quantifies the market opportunity for lymphedema and chronic venous insufficiency products in the U.S - Over 20 million people in the U.S. are estimated to live with lymphedema due to CVI, cancer-related, and primary lymphedema[47] - The market opportunity for the Flexitouch head and neck system is approximately $1 billion in the U.S., targeting over 75% of the 430,000 head and neck cancer survivors[48] Current Treatment and Limitations (Lymphedema and CVI) This section describes existing treatments for lymphedema and CVI, highlighting their limitations and the need for improved therapies - Traditional lymphedema treatment (Complete Decongestive Therapy) is costly, inconvenient, and difficult for self-administration, with simple pumps lacking clinical benefits of advanced pneumatic pumps[49] - Standard CVI treatment involves compression therapy (stockings, wraps), which can be challenging to apply and inconsistent in efficacy, especially for venous leg ulcers[51] - Consensus guidance from independent societies in 2022 recommended sequential pneumatic compression for lymphedema patients (92% agreement) and considering CVI patients (stages C3-C6) as lymphedema patients (72% agreement)[52] Overview of Bronchiectasis and Cystic Fibrosis This section provides definitions and characteristics of bronchiectasis and cystic fibrosis, two chronic respiratory conditions - Bronchiectasis is a COPD-associated condition causing inflamed, damaged, and scarred bronchi, leading to trapped mucus and chronic infections[53] - Cystic fibrosis is an inherited disease causing thickened mucus in the lungs and other organs, leading to lung damage and breathing difficulties[54] Market Opportunity (Bronchiectasis and Cystic Fibrosis) This section estimates the market size and growth for bronchiectasis and cystic fibrosis treatments in the U.S - Over 500,000 U.S. adults are diagnosed with bronchiectasis, a market growing in high single-digits annually, with over 4 million COPD patients potentially affected[55] - Over 30,000 people in the U.S. have cystic fibrosis, with 77% using High Frequency Chest Wall Oscillation (HFCWO) as standard of care airway clearance therapy[56] Current Treatment and Limitations (Bronchiectasis and Cystic Fibrosis) This section discusses current airway clearance therapies for bronchiectasis and cystic fibrosis, noting challenges in adherence and effectiveness - Airway clearance therapies (ACT) use physical or mechanical means to mobilize mucus, but adherence and effectiveness are significant challenges for patients with chronic respiratory conditions[57] - AffloVest is a portable HFCWO therapy vest with eight oscillating motors targeting all lung lobes to loosen and mobilize secretions[58] Our Strategy This section outlines the company's strategic goals to lead in at-home chronic disease treatment through awareness, direct sales, innovation, and reimbursement expansion - The company's goal is to be a leader in at-home treatment of underserved chronic diseases by increasing awareness, utilizing direct sales and customer support, demonstrating ongoing innovation, developing clinical and economic outcome data, and expanding third-party reimbursement[59] Our Products This section describes the company's key products, including the Flexitouch Plus, Entre systems, Kylee™ app, and AffloVest, for lymphedema and respiratory conditions - The Flexitouch Plus system is an automated, programmable advanced pneumatic compression device (APCD) for lymphedema, phlebolymphedema, lipedema, and venous insufficiencies, offering 17 treatment settings and multiple garment configurations[61][62] - The Entre system is a basic pneumatic compression device for venous disorders, including lymphedema and CVI, targeting patients needing a simple pump or not yet qualifying for advanced devices[64] - Kylee™ is a mobile application launched in 2022 to help patients learn about lymphedema, track symptoms and treatment, and share progress with doctors, with Flexitouch Plus controllers now including Bluetooth capability for data reporting[65][67] - AffloVest, acquired in September 2021, is the first truly portable high-frequency chest wall oscillation (HFCWO) vest, battery-powered and designed for airway clearance in chronic respiratory conditions[68] Clinical Results and Studies This section presents clinical and economic outcome data supporting the efficacy and safety of the company's products through various studies - The company invests in studies to generate clinical and economic outcome data, with over 25 studies and 2,100 subjects supporting the efficacy and safety of its products[69] - Flexitouch system use in phlebolymphedema patients was associated with 69% lower per patient per year total costs compared to conservative therapy, driven by fewer hospitalizations and lower inpatient/outpatient costs[71] - A JAMA Dermatology study showed Flexitouch system use led to a 79% decline in cellulitis diagnosis for cancer-related lymphedema and a 75% decline for non-cancer-related lymphedema, with significant cost reductions[73][74] - A prospective study demonstrated Flexitouch system use resulted in statistically significant limb volume reduction (88% of patients), improved skin condition, increased ability to perform daily activities, and improved range of motion[76] - A randomized controlled trial showed the Flexitouch system provided better clinical outcomes (29% average edema reduction) compared to a simple pneumatic compression device (16% increase) for breast cancer-related lymphedema[80] - AffloVest clinical evidence includes studies showing improved lung function (FVC, FEV1, FEF) in cystic fibrosis patients and significant reductions in hospitalizations (96.2%), ER visits (82.4%), and antibiotic usage (87.3%) for patients with retained pulmonary secretions[89][91] Sales and Marketing This section details the company's sales and marketing models, including direct-to-patient/provider for lymphedema and DME for respiratory products - The company uses a direct-to-patient and -provider model for lymphedema products, marketing directly to patients and clinics, and a respiratory DME channel for AffloVest[94][95] - As of December 31, 2022, the company employed a field staff of 287 Tactile employees, including sales representatives and managers, supporting both lymphedema and respiratory therapies[100] Reimbursement, Payer Relations and Customer Support Process This section explains the company's reimbursement strategies, payer relations, and customer support processes for its medical devices Payer Type Revenue Share | Payer Type | 2022 Revenue Share | 2021 Revenue Share | | :-------------------------- | :----------------- | :----------------- | | Private insurers and other | 57% | 68% | | Medicare | 19% | 17% | | Veterans Administration | 10% | 13% | | DME distributors | 14% | 2% | - The company is an accredited provider with contracts or enrollment covering nearly 275 million lives in the U.S., maintaining a commercial payer approval rate greater than 80% and Medicare claims approval rate greater than 90% for the last six years[104] - Flexitouch Plus is reimbursed under HCPCS code E0652, Entre under E0651, and AffloVest under E0483, with head and neck garments currently lacking specific billing codes[105][106] Research and Clinical Operations This section describes the company's R&D efforts focused on product efficacy, ease-of-use, clinical functionality, and cost reduction - R&D efforts focus on increasing efficacy, improving ease-of-use design, enhancing clinical functionality, and reducing production costs, with expenses totaling $7.1 million in 2022 and $5.7 million in 2021[107] Manufacturing and Quality Assurance This section outlines the company's manufacturing model, combining internal resources with third-party suppliers, and its quality management system compliance - The manufacturing model combines internal resources (assembly, QA, procurement) with third-party manufacturers for components, maintaining dual-source vendors for critical parts[108] - The company's quality management system complies with FDA regulations and ISO 13485:2016 standards, and it received MDSAP certification in 2021[111] Order Fulfillment and Patient Education This section details the process for order fulfillment and patient education for both lymphedema and airway clearance products - For Flexitouch and Entre, systems are shipped directly to patients after order and documentation, followed by virtual or in-person training by employee trainers[112] - AffloVest products are shipped to DME providers or directly to patients, with DME providers responsible for delivery and patient support[113] Competition This section identifies key competitors in the pneumatic compression pump and airway clearance markets - Key competitors in the pneumatic compression pump market include Bio Compression Systems, Inc. and Lympha Press USA, with others like Koya Medical, Inc. and Aria Health[114] - The company believes it is the only pneumatic compression home-therapy device company with a meaningful U.S. market position supported by a direct sales force[116] - Competitors in the airway clearance market include Baxter (formerly Hill-Rom), Philips Medical, and Electromed[118] Government Regulation This section describes the extensive federal and state regulations governing medical devices, including FDA, FTC, CMS, and fraud and abuse laws - Medical devices are subject to extensive FDA regulation covering design, testing, manufacturing, labeling, marketing, and post-marketing surveillance[119][120] - Flexitouch, Entre, and AffloVest systems are Class II devices requiring 510(k) clearance, which the company has obtained and maintains[122] - The company is subject to FTC regulation for advertising, CMS accreditation requirements for federal healthcare programs, and state licensure for DME providers[130][131][132] - Extensive fraud and abuse laws (Federal Anti-Kickback Statute, Stark Law, False Claims Act, Civil Monetary Penalties Law) and HIPAA privacy/security standards apply, with non-compliance leading to severe penalties[133][135][139][148] Third-Party Reimbursement This section discusses the critical role of third-party payer coverage and reimbursement for medical device sales, including Medicare policies - Sales of medical devices depend significantly on coverage and reimbursement from third-party payers (private insurance, Medicare, Medicaid), which can differ greatly and are subject to review and change[158] - Medicare covers pneumatic compression devices for lymphedema or CVI with venous stasis ulcers under an NCD, with additional criteria set by LCDs[160] - Medicare business accounted for 19% of revenue in 2022, up from 17% in 2021, and a reduction in Medicare coverage could trigger similar reductions from commercial payers[160][163] Intellectual Property This section details the company's intellectual property portfolio, including patents, trademarks, and trade secrets, and their expiration dates - The company's IP includes patented designs and methods, and proprietary know-how, protected by patents, copyrights, trademarks, and trade secrets[164] - As of December 31, 2022, the company owned about 188 issued patents globally (62 U.S.) and 30 pending patent applications globally (9 U.S.), with U.S. patents expiring between 2023 and 2040[165] - Key registered trademarks include Tactile Medical, Flexitouch, Entre, AffloVest, and AffloVest Pro[166] Seasonality This section explains the seasonal fluctuations in business demand, influenced by patient insurance deductibles and spending patterns - The business is affected by seasonality, with reduced demand in Q1 due to new insurance year deductibles and higher revenue in Q3 and Q4 as patients meet deductibles or exhaust flexible spending accounts[168] Human Capital Resources This section provides an overview of the company's employee count and its human capital management strategies, including total rewards and DEI initiatives - As of December 31, 2022, the company had 982 employees, with 566 based throughout the U.S. and 416 in Minneapolis[168] - Human capital management focuses on total rewards (competitive salary/benefits, ESPP, paid leave), diversity, equity, and inclusion, fair labor practices, health and safety, and talent recruitment/retention[169][170][171][172] Available Information This section indicates where the company's public filings and reports can be accessed, including the SEC website and its corporate website - The company files annual, quarterly, and current reports with the SEC, available on sec.gov and its corporate website, www.tactilemedical.com[174](index=174&type=chunk)[175] Item 1A. Risk Factors This section details various risks, categorized by business operations, regulation, financial condition, intellectual property, and common stock ownership, that could adversely affect the company - The company faces risks from economic downturns, inability to secure adequate reimbursement, reliance on single-source suppliers, and high dependence on lymphedema products (86% of 2022 revenue)[177][178][183][188] - Significant regulatory risks include extensive FDA oversight, compliance with fraud and abuse laws (Anti-Kickback, False Claims, HIPAA), and the potential for recalls or sanctions due to non-compliance[240][245][259][275][294] - Financial risks include potential for internal control failures, adverse impacts from indebtedness and interest rate changes (e.g., LIBOR phase-out), and the need for substantial additional funding[315][317][323] - Intellectual property risks involve challenges in global patent protection, patent expiration (e.g., Flexitouch system patents expired in 2017), potential for infringement lawsuits, and the difficulty of protecting trade secrets[333][337][342][345][354] - Risks related to common stock ownership include high price volatility, anti-takeover provisions in charter documents, and potential for reduced trading volume if analyst coverage declines[365][369][371] Risks Related to Our Business, Operations and Strategy This section outlines specific risks concerning the company's business model, operational execution, and strategic initiatives Government Regulation, Compliance and Legal Risks This section details the regulatory and legal challenges, including compliance with healthcare laws and potential litigation, impacting the company Financial Condition, Credit and Tax Risks This section addresses risks related to the company's financial health, credit arrangements, and tax obligations Risks Related to Our Intellectual Property This section discusses risks associated with protecting and enforcing the company's intellectual property rights Risks Related to Ownership of Our Common Stock This section highlights risks pertinent to investors holding the company's common stock, including market volatility Item 1B. Unresolved Staff Comments This item confirms the absence of any unresolved comments from the SEC staff regarding the company's filings Item 2. Properties The company leases approximately 150,000 square feet for its Minneapolis headquarters and an additional 63,000 square feet for operations - The company leases approximately 150,000 square feet for its corporate headquarters in Minneapolis, Minnesota, with the lease expiring in February 2031[374] - An additional 63,000 square feet of office, assembly, and warehouse space is leased in Minneapolis, with that lease expiring in March 2027[375] Item 3. Legal Proceedings Information on legal proceedings is incorporated by reference from Note 12 of the consolidated financial statements - Legal proceedings information is detailed in Note 12 – 'Commitments and Contingencies' of the consolidated financial statements[376] Item 4. Mine Safety Disclosures This item is not applicable to the company's operations PART II This part covers market information for common equity, selected financial data, management's discussion and analysis, financial statements, and controls and procedures Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities This section details the common stock market, including Nasdaq listing, stockholder information, and a stock performance graph - The company's common stock is listed on The Nasdaq Stock Market LLC under the symbol 'TCMD' since July 28, 2016[380] - As of February 17, 2023, there were approximately 31 holders of record of the common stock[381] - No recent sales of unregistered securities or issuer purchases of equity securities have occurred[382][383] Cumulative Total Stockholder Return (Indexed to $100) | Index | 12/31/2017 | 12/31/2018 | 12/31/2019 | 12/31/2020 | 12/31/2021 | 12/31/2022 | | :------------------------------------ | :--------- | :--------- | :--------- | :--------- | :--------- | :--------- | | Tactile Systems Technology, Inc. | $100 | $157 | $233 | $155 | $66 | $40 | | Nasdaq Composite Index | 100 | 96 | 130 | 187 | 227 | 152 | | Russell 2000 Index | 100 | 88 | 109 | 129 | 146 | 115 | | S&P Healthcare Equipment Select Industry Index | 100 | 109 | 134 | 178 | 184 | 140 | Item 6. Selected Financial Data This item is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial condition and results of operations, including COVID-19 impacts, business overview, and liquidity - Revenue increased by $38.7 million (19%) to $246.8 million in 2022, primarily driven by a $29.4 million increase in airway clearance product sales (AffloVest) and a $9.4 million (5%) increase in lymphedema product sales[432] - Net loss increased by 51% to $17.9 million in 2022, compared to $11.8 million in 2021[431][401] - Gross margin remained stable at 71% for both 2022 and 2021[437] - Operating expenses increased by 26% to $188.7 million in 2022, mainly due to a $13.7 million increase in intangible asset amortization and earn-out expenses related to the AffloVest acquisition[431][442] - Net cash provided by operating activities was $5.2 million in 2022, compared to $2.6 million in 2021[449][450] - As of December 31, 2022, the company had $21.9 million in cash and cash equivalents and $49.0 million in outstanding borrowings under its credit facility[448][462] Coronavirus (COVID-19) This section discusses the ongoing negative impacts of the COVID-19 pandemic on the company's business and financial performance - The COVID-19 pandemic negatively impacted the business, particularly in 2021 and Q1 2022, due to reduced patient visits and staffing challenges, with ongoing consequences remaining uncertain[390] Overview This section provides a summary of Tactile Medical's business, product lines, commercial infrastructure, and key financial results for 2022 - Tactile Medical is a medical technology company providing innovative at-home medical devices for chronic diseases like lymphedema, chronic venous insufficiency, and chronic respiratory conditions[392] - Lymphedema products (Flexitouch and Entre systems) accounted for 86% of revenue in 2022, while AffloVest airway clearance products, acquired in September 2021, accounted for 14%[394][395] - The company's commercial infrastructure includes a direct sales force, training, reimbursement capabilities, and clinical expertise, with a field staff of 287 employees as of December 31, 2022[396] - Revenue for 2022 was $246.8 million with a net loss of $17.9 million, compared to $208.1 million revenue and $11.8 million net loss in 2021[401] Components of our Results of Operations This section details the various components contributing to the company's financial results, including revenue, cost of revenue, and operating expenses - Revenue is derived from sales and rentals of Flexitouch and Entre systems (direct-to-patient/VA) and sales of AffloVest (to DME providers), with fluctuations expected due to seasonality and payer/product mix[405][406][407][408] - Cost of revenue includes component costs, labor, overhead, warranties, and amortization, expected to increase with revenue growth but decrease as a percentage of revenue[410][411] - Sales and marketing expenses, primarily personnel-related, are expected to increase in absolute dollars but decrease as a percentage of revenue over time[414] - R&D expenses, focused on product enhancement and clinical trials, are expected to increase for the foreseeable future[415] - Intangible asset amortization and earn-out expenses include amortization of definite-lived intangibles and fair value adjustments of the AffloVest earn-out liability[416][417] - Reimbursement, general and administrative expenses cover compensation for patient services, billing, finance, HR, and professional services[418][419] - Other income (expense), net, primarily consists of interest income and expense from debt obligations[420] - Income tax expense (benefit) is driven by permanent differences from share-based compensation and deferred income taxes from temporary differences[421] Critical Accounting Estimates This section highlights key accounting estimates, such as revenue recognition and stock-based compensation, that require significant management judgment - Revenue recognition involves estimating expected consideration for Flexitouch and Entre systems based on historical pricing adjustments and collections, updated quarterly[424] - Stock-based compensation fair value is estimated using Black-Scholes or Monte Carlo Simulation models, requiring subjective assumptions like expected term, volatility, risk-free interest rate, and dividend yield[427][428] Results of Operations This section presents a detailed analysis of the company's financial performance, including revenue, expenses, and net loss, for 2022 compared to 2021 Consolidated Statements of Operations Data (2022 vs. 2021) | (In thousands) | 2022 | % of revenue | 2021 | % of revenue | Change ($) | Change (%) | | :------------------------------------------ | :----- | :----------- | :----- | :----------- | :--------- | :--------- | | Revenue | $246,785 | 100% | $208,057 | 100% | $38,728 | 19% | | Cost of revenue | $70,809 | 29% | $59,844 | 29% | $10,965 | 18% | | Gross profit | $175,976 | 71% | $148,213 | 71% | $27,763 | 19% | | Sales and marketing | $106,418 | 43% | $86,775 | 42% | $19,643 | 23% | | Research and development | $7,088 | 3% | $5,659 | 3% | $1,429 | 25% | | Reimbursement, general and administrative | $60,796 | 25% | $56,802 | 27% | $3,994 | 7% | | Intangible asset amortization and earn-out | $14,432 | 5% | $739 | —% | $13,693 | N.M. | | Total operating expenses | $188,734 | 76% | $149,975 | 72% | $38,759 | 26% | | Loss from operations | $(12,758) | (5)% | $(1,762) | (1)% | $(10,996) | N.M. | | Other expense | $(2,715) | (1)% | $(531) | —% | $(2,184) | N.M. | | Loss before income taxes | $(15,473) | (6)% | $(2,293) | (1)% | $(13,180) | N.M. | | Income tax expense | $2,393 | 1% | $9,518 | 5% | $(7,125) | (75)% | | Net loss | $(17,866) | (7)% | $(11,811) | (5)% | $(6,055) | 51% | Revenue by Product (2022 vs. 2021) | (In thousands) | 2022 | % of total revenue | 2021 | % of total revenue | Change ($) | Change (%) | | :---------------------- | :----- | :----------------- | :----- | :----------------- | :--------- | :--------- | | Lymphedema products | $212,266 | 86% | $202,913 | 98% | $9,353 | 5% | | Airway clearance products | $34,519 | 14% | $5,144 | 2% | $29,375 | N.M. | | Total | $246,785 | 100% | $208,057 | 100% | $38,728 | 19% | - Sales and marketing expenses increased by $19.6 million (23%) in 2022, primarily due to increased personnel-related compensation ($15.8 million), travel and entertainment ($2.6 million), and national sales training meeting costs ($1.2 million)[438] - R&D expenses increased by $1.4 million (25%) in 2022, mainly due to higher personnel-related expenses and R&D supplies[439] - Reimbursement, general and administrative expenses increased by $4.0 million (7%) in 2022, driven by increased personnel-related compensation ($4.0 million) and occupancy costs ($0.7 million)[441] - Intangible asset amortization and earn-out expenses significantly increased by $13.7 million in 2022, primarily due to an increase in the estimated fair value of the AffloVest earn-out liability[442] - Income tax expense decreased by $7.1 million (75%) in 2022, primarily due to a change in deferred tax assets and a corresponding increase in the full valuation allowance[444] Seasonality This section explains the seasonal patterns affecting the company's business, particularly related to insurance deductibles and patient spending - The business experiences seasonality, with reduced demand in Q1 due to new insurance deductibles and higher revenue in Q3 and Q4 as patients meet deductibles or exhaust flexible spending accounts[446] Liquidity and Capital Resources This section discusses the company's cash position, accounts receivable, cash flow activities, debt obligations, and future cash requirements Cash and Cash Equivalents and Net Accounts Receivable | Metric | December 31, 2022 (Millions) | December 31, 2021 (Millions) | | :------------------------ | :--------------------------- | :--------------------------- | | Cash and cash equivalents | $21.9 | $28.2 | | Net accounts receivable | $77.9 | $62.3 | Net Cash Provided by (Used in) Activities (2022 vs. 2021) | Activity | 2022 (Millions) | 2021 (Millions) | | :-------------------------------- | :-------------- | :-------------- | | Operating activities | $5.2 | $2.6 | | Investing activities | $(1.9) | $(82.2) | | Financing activities | $(9.6) | $59.9 | | Net (decrease) increase in cash | $(6.3) | $(19.6) | - Net cash used in investing activities in 2021 was significantly higher due to $79.8 million in acquisition-related payments for the AffloVest business[453] - Net cash used in financing activities in 2022 was $9.6 million, primarily due to $6.0 million in note payable payments and a $5.0 million AffloVest earn-out payment[455] - As of December 31, 2022, the company had $49.0 million in outstanding borrowings under its Credit Agreement ($24.0 million term loan, $25.0 million revolving credit facility) and was in compliance with all financial covenants[462] Future Cash Requirements (as of Dec 31, 2022) | (In thousands) | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | | :--------------------- | :------ | :--------------- | :-------- | :-------- | :---------------- | | Purchase commitments | $33,478 | $33,478 | — | — | — | | Operating lease obligations | $27,227 | $3,427 | $6,936 | $6,782 | $10,082 | | Note payable payments | $24,000 | $3,000 | $21,000 | — | — | | Revolving line of credit payments | $25,000 | — | $25,000 | — | — | | Interest payments | $5,778 | $3,539 | $2,239 | — | — | | Earn-out obligation | $13,050 | $13,050 | — | — | — | | Total | $128,533 | $56,494 | $55,175 | $6,782 | $10,082 | Item 7A. Quantitative and Qualitative Disclosures About Market Risk This section discloses market risks, including interest rate, inflation, credit, and foreign currency risks, affecting the company's financial position - The company is exposed to interest rate risk from variable-rate borrowings under its credit facility, with increases in LIBOR or replacement rates potentially increasing interest expense[476] - Inflationary factors could adversely affect operating results if product prices do not increase sufficiently to offset rising costs[477] - Credit risk primarily relates to accounts receivable from commercial and government payers, with two insurers representing approximately 45% and 21% of accounts receivable as of December 31, 2022[479] - Foreign currency risk is currently nominal but may increase with future international commercialization efforts[480] Item 8. Financial Statements and Supplementary Data This section contains the audited consolidated financial statements, including balance sheets, statements of operations, cash flows, and comprehensive notes - The financial statements were audited by Grant Thornton LLP, who expressed an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting as of December 31, 2022[486][487] Consolidated Balance Sheets (as of Dec 31, 2022 and 2021) | (In thousands) | 2022 | 2021 | | :------------------------------------ | :----- | :----- | | Total current assets | $119,763 | $113,547 | | Total non-current assets | $135,233 | $130,723 | | Total assets | $254,996 | $244,270 | | Total current liabilities | $64,330 | $34,461 | | Total non-current liabilities | $69,266 | $81,582 | | Total liabilities | $133,596 | $116,043 | | Total stockholders' equity | $121,400 | $128,227 | | Total liabilities and stockholders' equity | $254,996 | $244,270 | Consolidated Statements of Operations (Years Ended Dec 31, 2022, 2021, 2020) | (In thousands) | 2022 | 2021 | 2020 | | :------------------------------------------ | :----- | :----- | :----- | | Total revenue | $246,785 | $208,057 | $187,130 | | Gross profit | $175,976 | $148,213 | $132,810 | | Total operating expenses | $188,734 | $149,975 | $136,438 | | Loss from operations | $(12,758) | $(1,762) | $(3,628) | | Net loss | $(17,866) | $(11,811) | $(620) | | Net loss per common share - Basic | $(0.89) | $(0.60) | $(0.03) | Consolidated Statements of Cash Flows (Years Ended Dec 31, 2022, 2021, 2020) | (In thousands) | 2022 | 2021 | 2020 | | :------------------------------------ | :----- | :----- | :----- | | Net cash provided by operating activities | $5,209 | $2,631 | $2,794 | | Net cash (used in) provided by investing activities | $(1,909) | $(82,184) | $20,179 | | Net cash (used in) provided by financing activities | $(9,600) | $59,927 | $2,112 | | Net (decrease) increase in cash and cash equivalents | $(6,300) | $(19,626) | $25,085 | | Cash and cash equivalents – end of period | $21,929 | $28,229 | $47,855 | Report of Independent Registered Public Accounting Firm This section presents the independent auditor's report on the consolidated financial statements and internal control over financial reporting - Grant Thornton LLP audited the consolidated financial statements and internal control over financial reporting, expressing an unqualified opinion on both as of December 31, 2022[486][487] - The critical audit matter identified was the transaction price adjustment related to uncollected Lymphedema product sales with commercial payers and Medicare, due to significant judgment in estimating expected consideration and payment uncertainty from the appeals process[491][493] Consolidated Balance Sheets This section provides a snapshot of the company's assets, liabilities, and equity at specific points in time Consolidated Balance Sheets (as of Dec 31, 2022 and 2021) | (In thousands) | 2022 | 2021 | | :------------------------------------ | :----- | :----- | | Cash and cash equivalents | $21,929 | $28,229 | | Accounts receivable | $54,826 | $49,478 | | Net investment in leases | $16,130 | $12,482 | | Inventories | $23,124 | $19,217 | | Total current assets | $119,763 | $113,547 | | Property and equipment, net | $6,077 | $6,750 | | Intangible assets, net | $50,375 | $54,081 | | Goodwill | $31,063 | $31,063 | | Accounts receivable, non-current | $23,061 | $12,847 | | Total assets | $254,996 | $244,270 | | Accounts payable | $9,984 | $5,023 | | Note payable (current) | $2,968 | $2,960 | | Earn-out, current | $13,050 | $3,250 | | Total current liabilities | $64,330 | $34,461 | | Revolving line of credit, non-current | $24,916 | $24,857 | | Note payable, non-current | $20,979 | $26,933 | | Total liabilities | $133,596 | $116,043 | | Total stockholders' equity | $121,400 | $128,227 | | Total liabilities and stockholders' equity | $254,996 | $244,270 | Consolidated Statements of Operations This section details the company's revenues, expenses, and net loss over specified periods Consolidated Statements of Operations (Years Ended Dec 31, 2022, 2021, 2020) | (In thousands, except share and per share data) | 2022 | 2021 | 2020 | | :------------------------------------------ | :----- | :----- | :----- | | Sales revenue | $211,345 | $177,914 | $161,497 | | Rental revenue | $35,440 | $30,143 | $25,633 | | Total revenue | $246,785 | $208,057 | $187,130 | | Total cost of revenue | $70,809 | $59,844 | $54,320 | | Gross profit | $175,976 | $148,213 | $132,810 | | Sales and marketing | $106,418 | $86,775 | $79,634 | | Research and development | $7,088 | $5,659 | $5,264 | | Reimbursement, general and administrative | $60,796 | $56,802 | $51,343 | | Intangible asset amortization and earn-out | $14,432 | $739 | $197 | | Total operating expenses | $188,734 | $149,975 | $136,438 | | Loss from operations | $(12,758) | $(1,762) | $(3,628) | | Other (expense) income | $(2,715) | $(531) | $1,367 | | Loss before income taxes | $(15,473) | $(2,293) | $(2,261) | | Income tax expense (benefit) | $2,393 | $9,518 | $(1,641) | | Net loss | $(17,866) | $(11,811) | $(620) | | Net loss per common share - Basic | $(0.89) | $(0.60) | $(0.03) | | Net loss per common share - Diluted | $(0.89) | $(0.60) | $(0.03) | Consolidated Statements of Comprehensive Loss This section presents the company's comprehensive loss, including net loss and other comprehensive income or loss items Consolidated Statements of Comprehensive Loss (Years Ended Dec 31, 2022, 2021, 2020) | (In thousands) | 2022 | 2021 | 2020 | | :------------- | :----- | :----- | :----- | | Net loss | $(17,866) | $(11,811) | $(620) | | Other comprehensive loss | — | — | $(26) | | Comprehensive loss | $(17,866) | $(11,811) | $(646) | Consolidated Statements of Stockholders' Equity This section outlines changes in the company's equity accounts, including common stock, additional paid-in capital, and retained earnings Consolidated Statements of Stockholders' Equity (Years Ended Dec 31, 2022, 2021, 2020) | (In thousands, except share data) | Common Stock (Shares) | Common Stock (Par Value) | Additional Paid-In Capital | (Accumulated Deficit) Retained Earnings | Accumulated Other Comprehensive Loss | Total | | :-------------------------------- | :-------------------- | :----------------------- | :------------------------- | :-------------------------------------- | :----------------------------------- | :------ | | Balances, December 31, 2021 | 19,877,786 | $20 | $119,962 | $8,245 | — | $128,227 | | Stock-based compensation | — | — | $9,600 | — | — | $9,600 | | Exercise of common stock options and vesting of performance and restricted stock units | 225,282 | — | $153 | — | — | $153 | | Common shares issued for employee stock purchase plan | 149,609 | — | $1,286 | — | — | $1,286 | | Comprehensive loss for the period | — | — | — | $(17,866) | — | $(17,866) | | Balances, December 31, 2022 | 20,252,677 | $20 | $131,001 | $(9,621) | — | $121,400 | Consolidated Statements of Cash Flows This section reports the cash generated and used by the company's operating, investing, and financing activities Consolidated Statements of Cash Flows (Years Ended Dec 31, 2022, 2021, 2020) | (In thousands) | 2022 | 2021 | 2020 | | :------------------------------------ | :----- | :----- | :----- | | Net cash provided by operating activities | $5,209 | $2,631 | $2,794 | | Net cash (used in) provided by investing activities | $(1,909) | $(82,184) | $20,179 | | Net cash (used in) provided by financing activities | $(9,600) | $59,927 | $2,112 | | Net (decrease) increase in cash and cash equivalents | $(6,300) | $(19,626) | $25,085 | | Cash and cash equivalents – beginning of period | $28,229 | $47,855 | $22,770 | | Cash and cash equivalents – end of period | $21,929 | $28,229 | $47,855 | | Cash paid for interest | $2,186 | $130 | — | | Cash paid for taxes | $44 | $1,593 | $543 | Notes to the Consolidated Financial Statements This section provides detailed explanations and additional information supporting the consolidated financial statements Note 1. Nature of Business and Operations This note describes Tactile Medical's core business, product offerings, and the seasonal nature of its operations - Tactile Systems Technology, Inc. (Tactile Medical) manufactures and distributes medical devices for at-home treatment of chronic diseases, including Flexitouch and Entre systems for lymphedema, and AffloVest for chronic respiratory conditions[512][513] - The company acquired the AffloVest airway clearance business on September 8, 2021, to expand its leadership in treating underserved chronic conditions at home[513] - The business is affected by seasonality, with reduced demand in Q1 and higher revenue in Q3 and Q4, influenced by patient insurance deductibles[515] Note 2. Basis of Presentation This note explains the accounting principles and consolidation methods used in preparing the financial statements - Consolidated financial statements are prepared in accordance with GAAP and SEC rules, including accounts of Tactile Systems Technology, Inc. and its wholly-owned subsidiary, Swelling Solutions, Inc[516][517] - The COVID-19 pandemic negatively impacted the business, causing reduced patient visits and staffing challenges, with long-term impacts remaining uncertain[518] Note 3. Summary of Significant Accounting Policies This note outlines the key accounting policies applied, including revenue recognition, inventory valuation, and stock-based compensation - Cash and cash equivalents are held in checking accounts, exceeding federally insured limits at times, but the company believes there is little credit risk[522] - Accounts receivable are primarily from commercial and government payers, with collectability estimated based on historical payment and collection experience, updated quarterly[525][526] - Revenue from Flexitouch and Entre systems is recognized upon shipment, with transaction price estimated using a portfolio approach based on payer payment history and patient collections[532][534][535][536] - AffloVest revenue is recognized upon shipment to distributors, with volume-based incentives (rebates) accounted for as reductions in transaction price[542][543] - Research and development costs are expensed as incurred, and product warranties are recorded as a liability at the time of sale[547][549] - Stock options are valued using Black-Scholes or Monte Carlo Simulation models, with compensation expense recognized straight-line over the vesting period[552] Note 4. Acquisitions This note details the acquisition of the AffloVest business, including purchase price allocation and earn-out terms - On September 8, 2021, the company acquired the AffloVest therapy business from IBC for up to $100.0 million, with $80.0 million paid at closing[557] - An amendment to the AffloVest APA in November 2022 modified earn-out terms, setting the initial earn-out payment at $10.0 million ($5.0 million paid in 2022, $5.0 million plus interest due by May 26, 2023) and changing the multiplier for the second earn-out[558] AffloVest Purchase Price Allocation (In millions) | Asset Type | Allocated Fair Value | | :------------------ | :------------------- | | Inventories | $1.6 | | Property and equipment | — | | Intangible assets | $53.5 | | Goodwill | $31.1 | | Purchase price | $86.2 | Acquired Intangible Assets and Useful Lives (In millions) | Intangible Asset | Allocated Fair Value | Estimated Useful Life | | :------------------ | :------------------- | :-------------------- | | Customer relationships | $31.0 | 13 years | | Developed technology | $13.0 | 11 years | | Tradenames | $9.5 | Indefinite | | Total | $53.5 | | Note 5. Accounts Receivable This note provides details on the composition of accounts receivable, including significant concentrations with specific insurers - Two insurers accounted for approximately 45% and 21% of accounts receivable as of December 31, 2022, and 19% and 10% of total revenue for the year[565] Note 6. Inventories This note breaks down the company's inventory into finished goods, component parts, and work-in-process Inventories (In thousands) | Category | At December 31, 2022 | At December 31, 2021 | | :---------------------------- | :------------------- | :------------------- | | Finished goods | $5,100 | $8,242 | | Component parts and work-in-process | $18,024 | $10,975 | | Total inventories | $23,124 | $19,217 | Note 7. Property and Equipment This note details the categories of property and equipment, their net values, and associated depreciation expenses Property and Equipment, Net (In thousands) | Category | At December 31, 2022 | At December 31, 2021 | | :------------------------ | :------------------- | :------------------- | | Equipment | $8,274 | $8,051 | | Tooling | $3,390 | $2,545 | | Furniture and fixtures | $2,087 | $2,104 | | Leasehold improvements | $1,493 | $1,458 | | Demonstration equipment | $1,012 | $632 | | Construction in progress | $606 | $1,003 | | Subtotal | $16,862 | $15,793 | | Less: accumulated depreciation | $(10,785) | $(9,043) | | Property and equipment, net | $6,077 | $6,750 | - Depreciation expense was $2.5 million in 2022, $2.3 million in 2021, and $2.4 million in 2020[567] Note 8. Goodwill and Intangible Assets This note provides information on goodwill from acquisitions and the company's intangible assets, including amortization schedules - Goodwill of $31.1 million was recognized from the AffloVest Acquisition in Q3 2021, reflecting expected synergies and is deductible for tax purposes over 15 years[568] Intangible Assets, Net (In thousands) | Category | At December 31, 2022 | At December 31, 2021 | | :---------------------------- | :------------------- | :------------------- | | Definite-lived intangible assets | $40,420 | $44,016 | | Unamortized intangible assets | $9,955 | $10,065 | | Total intangible assets | $50,375 | $54,081 | - Amortization expense was $3.8 million in 2022, $1.4 million in 2021, and $0.4 million in 2020[569] Future Amortization Expenses (In thousands) | Year | Amount | | :-------- | :----- | | 2023 | $3,808 | | 2024 | $3,787 | | 2025 | $3,697 | | 2026 | $3,633 | | 2027 | $3,623 | | Thereafter | $21,872 | | Total | $40,420 | Note 9. Accrued Expenses This note itemizes the company's accrued expenses, including in-transit inventory, warranty, travel, and legal costs Accrued Expenses (In thousands) | Category | At December 31, 2022 | At December 31, 2021 | | :------------------ | :------------------- | :------------------- | | In-transit inventory | $3,228 | $416 | | Warranty | $2,005 | $1,851 | | Travel | $1,121 | $661 | | Legal and consulting | $730 | $1,371 | | Clinical studies | $276 | $113 | | Sales and use tax | $147 | $106 | | Other | $1,733 | $744 | | Total | $9,240 | $5,262 | Note 10. Warranty Reserves This note details the activity and balances of the company's warranty reserves over the past three years Warranty Reserve Activity (In thousands) | (In thousands) | 2022 | 2021 | 2020 | | :------------- | :----- | :----- | :----- | | Beginning balance | $4,959 | $4,841 | $3,759 | | Warranty provision | $2,047 | $2,606 | $2,957 | | Processed warranty claims | $(2,794) | $(2,488) | $(1,875) | | Ending balance | $4,212 | $4,959 | $4,841 | | Accrued warranty reserve, current | $2,005 | $1,851 | $1,606 | | Accrued warranty reserve, non-current | $2,207 | $3,108 | $3,235 | | Total accrued warranty reserve | $4,212 | $4,959 | $4,841 | Note 11. Credit Agreement This note describes the company's credit facility, including term loans, revolving credit, interest rates, and compliance with covenants - The company entered into an Amended and Restated Credit Agreement on April 30, 2021, and a First Amendment on September 8, 2021, adding a $30.0 million incremental term loan to a $25.0 million revolving credit facility, both maturing on September 8, 2024[572][573] - On September 8, 2021, $30.0 million term loan and $25.0 million from the revolving credit facility were used to fund the AffloVest acquisition[574] - A Second Amendment on February 22, 2022, modified covenants and increased the applicable margin for LIBOR rate loans to 3.50% until June 30, 2023, and included a mandatory $3.0 million principal prepayment[575][576] - As of December 31, 2022, outstanding borrowings totaled $49.0 million ($24.0 million term loan, $25.0 million revolving credit facility) at an interest rate of 7.41%, and the company was in compliance with all financial covenants[576][577] Note 12. Commitments and Contingencies This note outlines the company's operating lease obligations, purchase commitments, 401(k) plan, and significant legal proceedings - The company leases office, warehouse, vehicles, and computer equipment under operating leases, with ROU assets and liabilities recorded for terms greater than one year[578][579][580][581][583][584] Operating Lease Liabilities (In thousands) | Category | At December 31, 2022 | At December 31, 2021 | | :------------------ | :------------------- | :------------------- | | Right of use operating lease assets | $21,322 | $23,984 | | Operating lease liabilities: Current | $2,500 | $2,506 | | Operating lease liabilities: Non-current | $20,866 | $23,354 | | Total | $23,366 | $25,860 | - Operating lease costs were $3.8 million in 2022, $3.6 million in 2021, and $3.0 million in 2020[586] - The company had purchase commitments of $33.5 million in 2022 for goods expected in 2023[588] - A 401(k) retirement plan is maintained for employees, with discretionary contributions of $1.5 million in 2022[589] - The company is involved in a securities class action lawsuit (Mart Lawsuit) and a stockholder derivative lawsuit (Weaver v. Moen, et al.), with the Mart Lawsuit having a Memorandum of Understanding to settle for $5 million[591][592] Note 13. Stockholders' Equity This note details the company's equity incentive plans, stock-based compensation expense, and share-based awards - The 2016 Equity Incentive Plan authorizes grants of stock options, restricted stock, and other awards, with 5,957,683 shares available for future grant as of December 31, 2022[595] - Total stock-based compensation expense was $9.6 million in 2022, $10.2 million in 2021, and $10.7 million in 2020[598] - Stock options typically vest over three or four years with a seven or ten-year contractual term, valued using Black-Scholes or Monte Carlo Simulation models[599][601] - Time-based restricted stock units vest over one to three years, with $7.8 million of unrecognized compensation expense as of December 31, 2022[607] - Performance-based restricted stock units (PSUs) have performance and time-based vesting