Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this report.
Coronavirus (COVID-19)
The United States economy in general and our business specifically have been negatively affected by the COVID-19 pandemic. In the first quarter of 2022, the continued prolonged recovery from COVID-19 and increased Omicron variant cases resulted in restricted access to clinics and hospitals and disrupted the recovery in patient visits versus the pre-COVID environment. The adverse impacts in the first quarter of 2022 were similar to those we experienced during the first quarter of 2021. At this time, there are no reliable estimates of how long the pandemic will last, whether any recovery will be sustained or will reverse course, the severity of any resurgence of COVID-19 or variant strains of the virus, the effectiveness of vaccines and attitudes towards receiving them, or what ultimate effects the pandemic will have. For that reason, we are unable to reasonably estimate the long-term impact of the pandemic on our business at this time.
Since the onset of COVID-19, we have remained proactive to ensure we continue to adapt to the needs of our employees, clinicians and patients. However, we cannot assure you these changes to our processes and practices will be successful in mitigating the impact of COVID-19 on our business. We continue to evaluate and, if appropriate, will adopt other measures in the future related to the ongoing safety of our employees, clinicians and patients.
Overview
We are a medical technology company that develops and provides innovative medical devices for the treatment of underserved chronic diseases. Our mission is to help people suffering from chronic diseases live better and care for themselves at home. We focus our efforts on advancing the standard of care in treating underserved chronic diseases in the home setting to improve patient outcomes and quality of life and help control rising healthcare expenditures. Our areas of therapeutic focus are (1) vascular disease, with a goal of advancing the standard of care in treating lymphedema and chronic venous insufficiency, (2) oncology, where lymphedema is a common consequence among cancer survivors and (3) providing airway clearance therapy for those suffering from chronic respiratory conditions. We possess a unique, scalable platform to deliver at-home healthcare solutions throughout the United States. This evolving home care delivery model is recognized by policymakers and insurance payers as a key for controlling rising healthcare costs. Our solutions deliver cost-effective, clinically proven, long-term treatment for people with these chronic diseases.
Our current lymphedema products are the Flexitouch and Entre systems and our airway clearance product the AffloVest. A predecessor to our Flexitouch system received 510(k) clearance from the U.S. Food and Drug Administration (the “FDA”) in July 2002, and we introduced the system to address the many limitations of self-administered home-based manual lymphatic drainage therapy. We began selling our more advanced Flexitouch system after receiving 510(k) clearance from the FDA in October 2006. In September 2016, we received 510(k) clearance from the FDA for the Flexitouch system in treating lymphedema of the head and neck. In June 2017, we announced that we received 510(k) clearance from the FDA for the Flexitouch Plus, the third-generation version of our Flexitouch system. In December 2020, we received 510(k) clearance for two new indications for our Flexitouch Plus system: phlebolymphedema and lipedema. We introduced our Entre system in the United States in February 2013. The Entre system is sold or rented to patients who need a simple pump or who do not yet qualify for insurance reimbursement for an advanced compression device such as our Flexitouch system. We derive the vast majority of our revenue from our lymphedema product line. Sales and rentals of our lymphedema products represented 85% and 100% of our revenue in the three months ended March 31, 2022 and 2021, respectively.
On September 8, 2021, we acquired the assets of the AffloVest airway clearance product line from IBC, a privately-held company which developed and manufactures AffloVest. AffloVest is a portable, wearable vest that provides airway clearance to treat patients with chronic respiratory conditions such as bronchiectasis or
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conditions resulting from neuromuscular disorders. For the three months ended March 31, 2022, sales of AffloVest represented 15% our revenue.
To support the growth of our business, we invest heavily in our commercial infrastructure, consisting of our direct sales force, training resources, reimbursement capabilities and clinical expertise. We market our lymphedema products in the United States using a direct-to-patient and -provider model. The AffloVest device is sold through respiratory durable medical equipment providers throughout the United States that service patients and bill third-party payers for the product. We also employ a small group of respiratory specialists, who educate DME provider representatives, provide product demonstrations for targeted clinicians and support technical questions related to the AffloVest. As of March 31, 2022, we employed a field staff of 268 Tactile employees, made up of sales representatives, as well as managers, who provide support throughout the United States for our lymphedema and respiratory therapies. This compares to 244 as of March 31, 2021.
As it relates to the impact of COVID-19 on our commercial processes, in the first quarter of 2022, the continued prolonged recovery from COVID-19 and increased Omicron variant cases resulted in restricted access to clinics and hospitals and disrupted the recovery in patient visits versus the pre-COVID environment. The adverse impacts in the first quarter of 2022 were similar to those we experienced during the first quarter of 2021.
We invest substantial resources in our reimbursement function to improve operational efficiencies and enhance individual payer expertise, while continuing our strategic focus of payer development. Our payer relations function focuses on payer policy development, education, contract negotiations, and data analysis. Our reimbursement operations function is responsible for verifying patient insurance benefits, individual patient case development, prior authorization submissions, case follow-up, and appeals when necessary. Since the onset of COVID-19, our reimbursement function has been actively working with Medicare and a broad base of private payers to understand the ever-changing reimbursement criteria being introduced. We have seen increased flexibility in coverage criteria with select payers in which they now allow the use of virtual patient interactions in place of the previously required in-person interactions. However, as these circumstances are ever-changing, the extent to which these changes will remain in place and the impact on our business in the future are not determinable at this time.
We also have a clinical team, consisting of a scientific advisory board, in-house therapists and nurses, and a Chief Medical Officer, that serves as a resource to clinicians and patients and guides the development of clinical evidence in support of our products. Most clinical studies require observation and interaction with clinicians and patients to monitor results and progress. Given the impact of COVID-19, patient recruitment for our clinical studies involving our products and clinical outcomes had previously been suspended in 2020. In 2021, all of our clinical trials resumed research activities, including study visits and new patient enrollments, albeit more slowly than the targeted enrollment rates.
We rely on third party contract manufacturers for the sourcing of parts, the assembly of our controllers and the manufacturing of the garments used with our systems. We conduct final assembly of the garments used with our lymphedema products, perform quality assurance and ship our products from our facility in Minneapolis, Minnesota. The AffloVest device continued to be manufactured and shipped by IBC on our behalf pursuant to a Transition Services Agreement through April 30, 2022. We will be manufacturing and shipping the AffloVest device going forward .
To date, our supply chain has not been materially impacted by COVID-19. We continue to receive our product on time and believe that we have enough safety stock to meet our short and mid-term demand. However, we cannot assure you that our supply chain will not be materially impacted in the future.
For the three months ended March 31, 2022, we generated revenue of $48.0 million and had a net loss of $15.6 million, compared to revenue of $42.8 million and a net loss of $2.3 million for the three months ended March 31, 2021. Our primary sources of capital since our initial public offering in 2016 have been from operating income and bank financing.
We operate in one segment for financial reporting purposes.
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Results of Operations
Comparison of the Three Months Ended March 31, 20 22 and 20 21
The following table presents our results of operations for the periods indicated:
Three Months Ended
March 31,
Change
(In thousands)
2022
2021
$
%
Condensed Consolidated Statement
% of
% of
of Operations Data:
revenue
revenue
Revenue
Sales revenue
$
41,170
86
%
$
36,125
84
%
$
5,045
14
%
Rental revenue
6,808
14
%
6,647
16
%
161
2
%
Total revenue
47,978
100
%
42,772
100
%
5,206
12
%
Cost of revenue
Cost of sales revenue
12,080
25
%
10,691
25
%
1,389
13
%
Cost of rental revenue
2,036
4
%
1,851
4
%
185
10
%
Total cost of revenue
14,116
29
%
12,542
29
%
1,574
13
%
Gross profit
Gross profit - sales revenue
29,090
61
%
25,434
59
%
3,656
14
%
Gross profit - rental revenue
4,772
10
%
4,796
12
%
(24)
(1)
%
Gross profit
33,862
71
%
30,230
71
%
3,632
12
%
Operating expenses
Sales and marketing
23,930
50
%
18,785
44
%
5,145
27
%
Research and development
1,520
3
%
1,270
3
%
250
20
%
Reimbursement, general and administrative
16,217
34
%
14,209
33
%
2,008
14
%
Intangible asset amortization and earn-out
7,096
15
%
50
—
%
7,046
N.M.
%
Total operating expenses
48,763
102
%
34,314
80
%
14,449
42
%
Loss from operations
(14,901)
(31)
%
(4,084)
(9)
%
(10,817)
N.M.
%
Other expense
(456)
(1)
%
(10)
—
%
(446)
N.M.
%
Loss before income taxes
(15,357)
(32)
%
(4,094)
(9)
%
(11,263)
N.M.
%
Income tax expense (benefit)
211
—
%
(1,828)
(4)
%
2,039
(112)
%
Net loss
$
(15,568)
(32)
%
$
(2,266)
(5)
%
$
(13,302)
N.M.
%
“N.M.” Not Meaningful
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Revenue
Revenue increased $5.2 million, or 12%, to $48.0 million in the three months ended March 31, 2022 , compared to $42.8 million in the three months ended March 31, 2021 . The increase in total revenue was attributable to $7.3 million in sales of the airway clearance product line, which includes the AffloVest product acquired on September 8, 2021, partially offset by a decrease of $2.1 million, or 5%, in sales and rentals of the lymphedema product line in the quarter ended March 31, 2022, compared to the 2021 first quarter. First quarter 2022 revenue was negatively impacted by the prolonged recovery from COVID-19, including the resurgence due to the Omicron variant during the period, which resulted in restricted access to clinics and hospitals and disrupted the recovery in patient visits versus the pre-COVID environment. In addition, the challenging labor market continued to impact our ability to recruit and retain quality candidates for our direct sales force .
Revenue from the Veterans Administration represented 12% and 14% of total revenue in the three months ended March 31, 2022 and 2021, respectively. Revenue from Medicare represented 18% and 20% of total revenue in the three months ended March 31, 2022 and 2021, respectively.
The following table summarizes our revenue by product line for the three months ended March 31, 2022 and 2021, both in dollars and percentage of total revenue:
Three Months Ended
March 31,
Change
(In thousands)
2022
2021
$
%
Revenue
Lymphedema products
$
40,654
$
42,772
$
(2,118)
(5)%
Airway clearance products
7,324
—
7,324
N.M.
Total
$
47,978
$
42,772
$
5,206
12%
Percentage of total revenue
Lymphedema products
85%
100%
Airway clearance products
15%
— %
Total
100%
100%
“N.M.” Not Meaningful
Our business is affected by seasonality. In the first quarter of each year, when most patients have started a new insurance year and have not yet met their annual out-of-pocket payment obligations, we experience substantially reduced demand for our products. We typically experience higher revenue in the third and fourth quarters of the year when patients have met their annual insurance deductibles, thereby reducing their out-of-pocket costs for our products, and because patients desire to exhaust their flexible spending accounts at year end. This seasonality applies only to purchases and rentals of our products by patients covered by commercial insurance and is not relevant to Medicare, Medicaid or the Veterans Administration, as those payers either do not have plans that have declining deductibles over the course of the plan year and/or do not have plans that include patient deductibles for purchases or rentals of our products. Further, seasonality trends have been, and may continue to be, significantly different than historical trends as a result of the COVID-19 pandemic and related impacts.
Cost of Revenue and Gross Margin
Cost of revenue increased $1.6 million, or 13%, to $14.1 million in the three months ended March 31, 2022, compared to $12.5 million in the three months ended March 31, 2021. The increase in cost of revenue was primarily attributable to the additional contribution of AffloVest sales and an increase in inbound freight costs.
The total gross margin was 71% of sales in each of the three months ended March 31, 2022 and 2021.
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Sales and Marketing Expenses
Sales and marketing expenses increased $5.1 million, or 27%, to $23.9 million in the three months ended March 31, 2022, compared to $18.8 million in the three months ended March 31, 2021. The increase was primarily attributable to a:
● $4.6 million increase in personnel-related compensation expense as a result of the increased headcount in the collective field commercial team;
● $1.0 million increase in travel and entertainment expense due to eased restrictions on travel; and
● $0.3 million increase in sales meetings and tradeshows.
These increases were partially offset by a $0.8 million decrease in external patient training expense as a result of transitioning to employee trainers.
Research and Development Expenses
Research and development (“R&D”) expenses increased $0.3 million, or 20%, to $1.5 million in the three months ended March 31, 2022, compared to $1.3 million in the three months ended March 31, 2021, which was primarily attributable to an increase in personnel-related compensation expense and R&D supplies.
Reimbursement, General and Administrative Expenses
Reimbursement, general and administrative expenses increased $2.0 million, or 14%, to $16.2 million in the three months ended March 31, 2022, compared to $14.2 million in the three months ended March 31, 2021. This increase was primarily attributable to a:
● $1.2 million increase in occupancy costs, depreciation expense, and legal and professional fees; and
● $0.8 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer relations and corporate functions.
Intangible Asset Amortization and Earn-out Expense
Intangible asset amortization and earn-out expense increased $7.0 million to $7.1 million in the three months ended March 31, 2022, compared to $0.1 million in the three months ended March 31, 2021. The increase in intangible asset amortization and earn-out expense was primarily attributable to the increase in the estimated fair value of our earn-out liability.
Other Expense, Net
Other expense, net was $0.5 million and $10 thousand for the three months ended March 31, 2022 and 2021, respectively. Other expense was primarily attributable to an increase in interest expense .
Income Taxes
We recorded an income tax expense of $0.2 million and an income tax benefit of $1.8 million for the three months ended March 31, 2022 and 2021, respectively. The difference relates to a full valuation allowance being recorded against all deferred tax assets in the current year.
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Liquidity and Capital Resources
Cash Flows
At March 31, 2022 , our principal sources of liquidity were cash and cash equivalents of $ 21.2 million and net accounts receivable of $ 59.5 million. This compares to cash and cash equivalents of $28.2 million and net accounts receivable of $62.3 million at December 31, 2021.
The following table summarizes our cash flows for the periods indicated:
Three Months Ended
March 31,
(In thousands)
2022
2021
Net cash (used in) provided by:
Operating activities
$
(3,206)
$
(800)
Investing activities
(175)
(311)
Financing activities
(3,698)
181
Net decrease in cash and cash equivalents
$
(7,079)
$
(930)
Operating Activities
Net cash used in operating activities during the three months ended March 31, 2022, was $3.2 million, resulting from a net loss of $15.6 million and a net decrease in operating assets and liabilities of $2.1 million, which was partially offset by non-cash net income (loss) adjustments of $10.3 million. The non-cash net income (loss) adjustments consisted primarily of $6.5 million related to a change in fair value of earn-out liability, $2.2 million of stock-based compensation expense, $1.5 million of depreciation and amortization expense and $0.1 million of deferred income tax expense. The uses of cash related to changes in operating assets primarily consisted of decreases in accounts receivable of $2.8 million and in net investment in leases of $0.2 million, partially offset by increases in prepaid expenses and other assets of $0.6 million and in inventories of $0.3 million. The changes in operating liabilities consisted of a decrease in accrued payroll and related taxes of $2.7 million, partially offset by increases in accrued expenses and other liabilities of $1.4 million and accounts payable of $1.2 million.
Net cash used in operating activities during the three months ended March 31, 2021, was $0.8 million, resulting from a net loss of $2.3 million which was offset by non-cash net income (loss) adjustments of $1.4 million and a net decrease in operating assets and liabilities of $0.1 million. The non-cash net income (loss) adjustments consisted primarily of $2.5 million of stock-based compensation expense, $1.8 million in deferred taxes and $0.7 million of depreciation and amortization expense. The uses of cash related to changes in operating assets primarily consisted of increases in inventories of $3.5 million and net investment in leases of $0.5 million, partially offset by decreases in accounts receivable of $2.5 million and prepaid expenses and other assets of $0.4 million. The changes in operating liabilities consisted of an increase in accounts payable of $5.0 million, partially offset by decreases in accrued payroll and related taxes of $3.0 million and accrued expenses and other liabilities of $0.8 million .
Investing Activities
Net cash used in investing activities during the three months ended March 31, 2022, was $0.2 million, consisting of purchases of property and equipment, and patent costs.
Net cash used in investing activities during the three months ended March 31, 2021, was $0.3 million consisting of purchases of property and equipment, and patent costs.
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Financing Activities
Net cash used by financing activities during the three months ended March 31, 2022, was $3.7 million, primarily consisting of payments of $3.8 million made on our term loan, slightly offset by $0.1 million in proceeds from exercise of common stock options.
Net cash provided by financing activities during the three months ended March 31, 2021, was $0.2 million, consisting of $1.3 million in proceeds from exercise of common stock options, partially offset by $1.1 million in taxes paid for the net share settlement of performance and restricted stock units .
Credit Agreement
On April 30, 2021, we entered into an Amended and Restated Credit Agreement (the “Restated Credit Agreement”) with the lenders from time to time party thereto, and Wells Fargo Bank, National Association, as Administrative Agent. The Restated Credit Agreement amended and restated in its entirety our prior credit agreement.
On September 8, 2021, we entered into a First Amendment Agreement (the “Amendment”), which amends the Restated Credit Agreement (as amended by the Amendment, the “Credit Agreement”) with the lenders from time to time party thereto and Wells Fargo Bank, National Association, as administrative agent. The Amendment, among other things, adds a $30.0 million incremental term loan to the $25.0 million revolving credit facility provided by the Restated Credit Agreement. The term loan is reflected on our condensed consolidated financial statements as a note payable. The term loan and the revolving credit facility mature on September 8, 2024. The Credit Agreement provides that, subject to satisfaction of certain conditions, we may increase the amount of the revolving loans available under the Credit Agreement and/or add one or more term loan facilities in an amount not to exceed $25.0 million in the aggregate, such that the total aggregate principal amount of loans available under the Credit Agreement (including under the revolving credit facility) does not exceed $80.0 million.
On September 8, 2021, in connection with the closing of the AffloVest Acquisition, we borrowed the $30.0 million term loan and utilized that borrowing, together with a draw of $25.0 million under the revolving credit facility and cash on hand, to fund the purchase price.
On February 22, 2022, we entered into a Second Amendment Agreement (the “Second Amendment”), which further amends the Credit Agreement, including with respect to the financial covenants.
The principal of the term loan is required to be repaid in quarterly installments of $750,000 commencing January 7, 2022, through July 8, 2024, with the remaining outstanding balance due on September 8, 2024. Pursuant to the Second Amendment, we made a mandatory principal prepayment of the term loan of $3.0 million on February 22, 2022.
As of March 31, 2022, the outstanding balance of the term loan was $26.3 million and the outstanding balance under the revolving credit facility was $25.0 million. As of March 31, 2022, there was no availability under our Credit Agreement.
Our obligations under the Credit Agreement are secured by a security interest in substantially all of our and our subsidiaries’ assets and are also guaranteed by our subsidiaries. The Credit Agreement contains a number of restrictions and covenants, including that we maintain compliance with a maximum leverage ratio, a minimum fixed charge coverage ratio, a minimum consolidated EBITDA covenant and a minimum liquidity covenant. As of March 31, 2022, we were in compliance with all financial covenants under the Credit Agreement.
For additional information regarding the Credit Agreement, including interest rates, fees and maturities, see Note 9 – “Credit Agreement” of the condensed consolidated financial statements contained in this report.
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Future Cash Requirements
For a discussion of our material estimated future cash requirements under our contractual obligations and commercial commitments, in total and disaggregated into current and long-term , see “Future Cash Requirements” included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes since December 31, 2021.
Adequacy of Resources
Our future cash requirements may vary significantly from those now planned and will depend on many factors, including:
● the impact and duration of the COVID-19 pandemic on our business;
● sales and marketing resources needed to further penetrate our market;
● expansion of our operations domestically and/or internationally;
● response of competitors to our solutions and applications;
● costs associated with clinical research activities;
● increases in interest rates;
● labor shortages and wage inflation;
● costs to develop and implement new products; and
● use of capital for acquisitions or licenses, if any.
Historically, we have experienced increases in our expenditures consistent with the growth in our revenue, operations and personnel, and we anticipate that our expenditures will continue to increase as we expand our business.
Although the impact of the COVID-19 pandemic and other factors such as inflation and rising interest rates are difficult to predict, we believe our cash, cash equivalents and cash flows from operations will be sufficient to meet our working capital, capital expenditure, debt repayment and related interest, and other cash requirements for at least the next twelve months.
Recent Accounting Pronouncements
Refer to Note 3 – “Summary of Significant Accounting Policies” of the condensed consolidated financial statements contained in this report for a description of recently issued accounting pronouncements that are applicable to our business.
Critical Accounting Estimates
Critical accounting estimates are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations. For additional information, please see the discussion of our most critical accounting estimates under “Critical Accounting Estimates ” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2021.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
For a discussion on our market risks, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” included in our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes since December 31, 2021.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.