What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-01 compared with 2022-05-02 · 110 added, 56 removed, 147 unchanged (53% of the section changed)

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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.

We have seen adverse impacts as it relates to the decline in the number of patients that healthcare facilities and clinics are able to treat due to enhanced safety protocols, particularly during most of 2021 and during the first quarter of 2022.

We have also seen staffing challenges, both in our organization and at the clinics we serve, as another consequence of the COVID-19 pandemic.

While we saw some level of recovery in the second quarter of 2022, 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.

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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.

Our current lymphedema products are the Flexitouch and Entre systems and our airway clearance product is the AffloVest.

A predecessor to our Flexitouch system received 510(k) clearance from the U.S.

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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.

Sales and rentals of our lymphedema products represented 86% and 100% of our revenue in the six months ended June 30, 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.

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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.

For the six months ended June 30, 2022, sales of AffloVest represented 14% our revenue.

To support the growth of our business, we continue to invest 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.

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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.

As of June 30, 2022, we employed a field staff of 286 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 234 as of June 30, 2021.

We invest 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.

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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.

While the U.S.

government’s declaration of a public health emergency (PHE) related to the COVID-19 pandemic has relaxed some Medicare criteria for respiratory patients, these circumstances are ever-changing, and 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.

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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.

We conduct final assembly of the garments used with our 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 .

On May 1, 2022, we began manufacturing and shipping the AffloVest device from our Minnesota-based facility.

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.

However, we cannot assure you that our supply chain will not be materially impacted in the future or that we will be able to meet any increased demand.

In July 2022, we launched Kylee™ a free mobile app that makes it easier for patients to manage their conditions by tracking treatments and symptoms, as well as having direct access to educational resources.

For the three months ended June 30, 2022, we generated revenue of $59.6 million and had a net loss of $4.6 million, compared to revenue of $51.1 million and a net income of $1.3 million for the three months ended June 30, 2021.

For the six months ended June 30, 2022, we generated revenue of $107.6 million and had a net loss of $20.2 million, compared to revenue of $93.8 million and a net loss of $1.0 million for the six months ended June 30, 2021.

Our primary sources of capital since our initial public offering in 2016 have been from operating income and bank financing.

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Results of Operations

Comparison of the Three Months Ended March 31, 20 22 and 20 21

Comparison of the Three and Six Months Ended June 30, 2022 and 2021

The following table presents our results of operations for the periods indicated:

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Loss before income taxes

Income tax (benefit)

Net (loss) income

“N.M.” Not Meaningful

Six Months Ended

(In thousands)

Consolidated Statement

of Operations Data:

Sales revenue

Rental revenue

Total revenue

Cost of revenue

Cost of sales revenue

Cost of rental revenue

Total cost of revenue

Gross profit - sales revenue

Gross profit - rental revenue

Operating expenses

Sales and marketing

Research and development

Reimbursement, general and administrative

Intangible asset amortization and earn-out

Total operating expenses

Loss from operations

Other expense

Loss before income taxes

Income tax expense (benefit)

“N.M.” Not Meaningful

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:

Revenue increased $8.6 million, or 17%, to $59.6 million in the three months ended June 30, 2022, compared to $51.1 million in the three months ended June 30, 2021.

The increase in total revenue was attributable to $8.0 million in sales of the airway clearance product line, which includes the AffloVest product acquired on September 8, 2021, and an increase of $0.6 million, or 1%, in sales and rentals of the lymphedema product line in the quarter ended June 30, 2022, compared to the 2021 second quarter.

Revenue increased $13.8 million, or 15%, to $107.6 million in the six months ended June 30, 2022, compared to $93.8 million in the six months ended June 30, 2021.

The increase in total revenue was attributable to $15.3 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 $1.5 million, or 2%, in sales and rentals of the lymphedema product line for the six months ended June 30, 2022.

The first six months of 2022 revenue from the lymphedema product line was adversely affected by the fact that 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, particularly during the first quarter of 2022.

Revenue from the Veterans Administration represented 11% and 14% of total revenue in the three months ended June 30, 2022 and 2021, respectively.

Revenue from the Veterans Administration represented 12% and 14% of total revenue in the six months ended June 30, 2022 and 2021, respectively.

Revenue from Medicare represented 17% and 16% of total revenue in the three months ended June 30, 2022 and 2021, respectively.

Revenue from Medicare represented 17% and 18% of total revenue in the six months ended June 30, 2022 and 2021, respectively.

The following table summarizes our revenue by product line for the three and six months ended June 30, 2022 and 2021, both in dollars and percentage of total revenue:

Three Months Ended

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“N.M.” Not Meaningful

Six Months Ended

(In thousands)

Lymphedema products

Airway clearance products

Percentage of total revenues

Lymphedema products

Airway clearance products

“N.M.” Not Meaningful

Our business is affected by seasonality.

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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.

Cost of revenue increased $1.6 million, or 11%, to $16.4 million in the three months ended June 30, 2022, compared to $14.8 million in the three months ended June 30, 2021.

Cost of revenue increased $3.1 million, or 11%, to $30.5 million in the six months ended June 30, 2022, compared to $27.4 million in the six months ended June 30, 2021.

The increase in cost of revenue in both periods was primarily attributable to the additional contribution of AffloVest sales and an increase in inbound freight costs.

The total gross margin was 73% and 71% of sales in the three months ended June 30, 2022 and 2021, respectively, and 72% and 71% of sales in the six months ended June 30, 2022 and 2021, respectively.

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.

Sales and marketing expenses increased $7.9 million, or 38%, to $28.8 million in the three months ended June 30, 2022, compared to $20.9 million in the three months ended June 30, 2021.

The increase was primarily attributable to a:

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● $1.3 million increase in travel and entertainment expense due to eased restrictions on travel;

● $1.2 million increase related to our annual national sales training meeting ;

● $0.6 million increase for new product introduction.

Sales and marketing expenses increased $13.0 million, or 33%, to $52.7 million in the six months ended June 30, 2022, compared to $39.7 million in the six months ended June 30, 2021.

The increase was primarily attributable to a:

● $8.3 million increase in personnel-related compensation expense as a result of the increased headcount in the collective field commercial team;

● $2.2 million increase in travel and entertainment expense due to eased restrictions on travel;

● $1.2 million increase related to our annual national sales training meeting;

● $0.9 million increase for new product introduction;

● $0.4 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.

Research and development (“R&D”) expenses increased $0.6 million, or 53%, to $1.8 million in the three months ended June 30, 2022, compared to $1.2 million in the three months ended June 30, 2021, which was primarily attributable to an increase in personnel-related compensation expense, R&D supplies and professional services.

R&D expenses increased $0.9 million, or 36%, to $3.4 million in the six months ended June 30, 2022, compared to $2.5 million in the six months ended June 30, 2021, which was primarily attributable to an increase in personnel-related compensation expense, R&D supplies and professional services.

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.

Reimbursement, general and administrative expenses increased $0.8 million, or 6%, to $14.9 million in the three months ended June 30, 2022, compared to $14.1 million in the three months ended June 30, 2021.

This increase was primarily attributable to a:

● $0.5 million increase in personnel-related compensation expense as a result of increased headcount in our reimbursement operations, payer relations and corporate functions;

● $0.3 million increase in occupancy costs, depreciation expense, and legal and professional fees.

Reimbursement, general and administrative expenses increased $2.8 million, or 10%, to $31.1 million in the six months ended June 30, 2022, compared to $28.3 million in the six months ended June 30, 2021.

This increase was primarily attributable to a:

● $1.5 million increase in occupancy costs, depreciation expense, and legal and professional fees;

● $1.3 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.

Intangible asset amortization and earn-out expense increased $1.7 million to $1.7 million in the three months ended June 30, 2022, compared to $48 thousand in the three months ended June 30, 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.

Intangible asset amortization and earn-out expense increased $8.7 million to $8.8 million in the six months ended June 30, 2022, compared to $0.1 million in the six months ended June 30, 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, net was $0.6 million and $24 thousand for the three months ended June 30, 2022 and 2021, respectively, and was $1.0 million and $34 thousand for the six months ended June 30, 2022 and 2021, respectively.

Other expense was primarily attributable to an increase in interest expense .

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.

We recorded an income tax benefit of $20 thousand and $1.4 million for the three months ended June 30, 2022 and 2021, respectively.

We recorded an income tax expense of $0.2 million and an income tax benefit of $3.2 million for the six months ended June 30, 2022 and 2021, respectively.

The difference relates to a full valuation allowance being recorded against all deferred tax assets in the current year periods and a tax benefit related to a research and development credit recognized in the second quarter of 2021.

Liquidity and Capital Resources

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.

At June 30, 2022, our principal sources of liquidity were cash and cash equivalents of $ 23.4 million and net accounts receivable of $ 64.5 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

Six Months Ended

(In thousands)

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Financing activities

Net decrease in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

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.

Net cash used in operating activities during the six months ended June 30, 2022, was $0.9 million, resulting from a net loss of $20.2 million, which was partially offset by a net increase in operating assets and liabilities of $3.5 million and non-cash net (loss) income adjustments of $15.8 million.

The non-cash net (loss) income adjustments consisted primarily of $7.6 million related to a change in fair value of earn-out liability, $5.1 million of stock-based compensation expense, $3.0 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 increases in accounts receivable of $2.2 million, net investment in leases of $0.9 million and inventories of $0.7 million, partially offset by decreases in prepaid expenses and other assets of $1.9 million.

The changes in operating liabilities consisted of increases in accounts payable of $4.1 million and accrued expenses and other liabilities of $1.2 million.

Net cash used in operating activities during the six months ended June 30, 2021, was $1.9 million, resulting from a net loss of $1.0 million and a net decrease in operating assets and liabilities of $3.7 million, which was partially offset by non-cash net income (loss) adjustments of $2.8 million.

The non-cash net income (loss) adjustments consisted primarily of $5.1 million of stock-based compensation expense, $3.6 million in deferred taxes and $1.3 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 .

The uses of cash related to changes in operating assets primarily consisted of increases in inventories of $2.6 million, accounts receivable of $1.2 million, net investment in leases of $1.0 million and income taxes of $0.8 million, partially offset by a decrease in prepaid expenses and other assets of $0.5 million.

The changes in operating liabilities consisted of increases in accrued expenses of $1.7 million and accounts payable of $0.9 million, partially offset by a decrease in accrued payroll and related taxes of $1.3 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.

Net cash used in investing activities during the six months ended June 30, 2022, was $0.4 million, consisting of purchases of property and equipment, and patent costs.

Net cash used in investing activities during the six months ended June 30, 2021, was $0.7 million, consisting of purchases of property and equipment, and patent costs.

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 .

Net cash used by financing activities during the six months ended June 30, 2022, was $3.6 million, primarily consisting of payments of $4.5 million made on our term loan, slightly offset by $1.0 million in proceeds from exercise of common stock options and the issuance of common stock under the ESPP.

Net cash provided by financing activities during the six months ended June 30, 2021, was $3.8 million, consisting of $4.9 million in proceeds from exercise of common stock options and the issuance of common stock under the ESPP, partially offset by $1.1 million in taxes paid for the net share settlement of performance and restricted stock units.

Credit Agreement

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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.

As of June 30, 2022, the outstanding balance of the term loan was $25.5 million and the outstanding balance under the revolving credit facility was $25.0 million.

As of June 30, 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.

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 June 30, 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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● labor shortages and wage inflation;

● component price inflation;

● costs to develop and implement new products;

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis