Tactile Systems Technology, Inc.

Good evening, ladies and gentlemen, and welcome to the fourth quarter and fiscal year 2020 earnings conference call for Tactile Medical. At this time, all participants have been placed in a listen-only mode. At the end of the company's prepared remarks, we will conduct a question and answer session. Please note that this conference call is being recorded and will be available on the company's website for replay shortly. Before we begin, I would like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements that are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including those identified in the risk factors section of our annual report on Form 10-K, filed today with the Securities and Exchange Commission. Such factors may be updated from time to time in our filings with the SEC, which are available on our website. We undertake no obligation to publicly update or revise our forward-looking statements as a result of new information, future events, or otherwise. This call will also include references to certain financial measures that are not calculated in accordance with generally accepted accounting principles, or GAAP. We generally refer to these as non-GAAP financial measures. Reconciliations of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release on the investor relations portion of our website. I would now like to turn the call over to Mr. Dan Reavers, Tactile Medical's president and chief executive officer. Please go ahead, sir.

Thank you, operator. Good evening and welcome everyone to our fourth quarter and full year 2020 earnings call. I'm joined on the call today by our chief financial officer, Brent Moen. Let me provide you with a brief outline of today's call. I begin with a recap of our revenue results for the fourth quarter and a review of our recent operational performance, including an update on the impacts that we saw during the quarter from COVID. Brent will discuss our quarterly and annual financial results in detail and review our financial guidance for 2021, which we provided in our earnings release this afternoon. I'll then share a few closing thoughts on our outlook for 21 before we open the call for questions. And with that, let's get started with the review of the fourth quarter. In spite of the business disruption that we saw due to COVID, we were pleased to return to year-over-year growth this quarter, and ultimately exceed the high end of our annual revenue guidance range. For the fourth quarter of 2020, we grew total revenue by 4% year over year to 59.2 million, a new quarterly record. The increase in total revenue was driven by strong sales and rentals of our Entrez systems, which increased 44% year over year, while sales and rentals of our FlexiTouch Plus systems were essentially flat. Relative to the third quarter of 2020, we saw a 20% sequential improvement in total revenue, performance which we believe is especially notable given the incremental headwinds we experienced in Q4 as a result of COVID. Looking at our business trends more closely, throughout the fourth quarter, we continued to see the impact of COVID in the form of constraints related to health and safety protocols adopted by the healthcare facilities that we serve. A survey of our top accounts conducted in early January found that only a quarter of the approximately 1,400 accounts surveyed were operating without restrictions, consistent with the results of our October survey. The addition or the adoption of COVID-related health and safety protocols has continued to impact our business in two primary ways. First, clinic capacity to treat patients remained impaired, with practices operating with fewer exam rooms requiring additional time to clean in turnover rooms and experiencing extended periods between patient consultations due to imposed social distancing. And second, although prescribers have largely restored rep access to them, clinics continue to restrict sales reps' access to patients, limiting our ability to conduct in-person demonstrations with patients at their clinics. As I've mentioned on prior calls, providing patients with the ability to try on our system and experience a brief treatment session is an important part of engaging patient conviction, especially as they confront potential co-pays. In addition to these dynamics, during the fourth quarter we experienced incremental headwinds as a spike in cases around the holidays impacted facilities, clinicians, and patients during the months of December and into January. Most notably, feedback from surveys of our top clinic customers indicates that many saw notable COVID-related employee and patient absenteeism. with clinicians missing work due to COVID or COVID-related quarantining and high rates of appointment cancellations as patients attempted to minimize COVID exposure during the holidays. We also saw an increase in sales rep vacancies in the back half of Q4 due to mandated quarantine in our own compliance with our safety policies. With this in mind, we believe our sales performance in the fourth quarter was especially impressive given these incremental headwinds. In terms of the trends that we saw by site of care, outpatient-based, privately-owned practices continue to recover faster and have been among the most resilient during the second wave. We believe these customers are often the most resourceful in their approach to seeing patients while still continuing to adhere to COVID-related restrictions. These dynamics have been the most notable in the vascular clinics that we work with, and their continued recovery was an important driver of our growth in the quarters. Hospital and health system-based practices, on the other hand, continue to maintain more COVID-related restrictions. This has been especially the case in the VA, where we continued to see lymphedema patients redirected from the approximately 170 VA hospitals to more than 700 community-based outpatient clinics, requiring our sales force to expand their focus to primary care physicians throughout these additional sites. For the fourth quarter of 2020, VA revenue declined by 17% year-over-year to $6.3 million, representing 11% of our total fourth quarter revenue compared to 13% in the prior year. Against this backdrop, I was struck by the resourcefulness, dedication, and execution of our teams during the fourth quarter, which facilitated our continued recovery despite these challenging headwinds. Our sales team has done an excellent job of supporting both new and existing prescribers, and equipped with some new tools, engaging with patients virtually when required in order to navigate restrictions on in-clinic access. In addition, we've made progress in continuing to develop our expanded menu of patient training options as part of our commitment to providing the best possible patient experience. During the fourth quarter, we refined our out-of-box instructional materials, which provide patients with everything they need to begin treating themselves as quickly and easily as possible. Virtual patient trainings continue to receive positive reviews from our patients. Our most recent patient surveys this past quarter have confirmed that patient satisfaction scores are consistently high across both our in-home and virtually hosted trainings, and that patients are equally likely to recommend our products regardless of the training option they used. Most importantly, I'm pleased to report that we saw continued success in expanding our prescriber base by engaging with new clinicians. A key component of this initiative in recent quarters has been our shift to hosting more professional education events virtually. Working together with key opinion leaders in our field, we developed and organized a total of 34 virtual education events during the fourth quarter. These events ranged in scope and focus, depending on the target audience, within our universe of potential prescribers and healthcare providers. The fourth quarter saw event participation from nearly 1,100 attendees. In all of 2020, we hosted over 6,500 attendees at education events, nearly three times as many as we did in all of 2019. In addition to our account targeting efforts, these virtual education events have been an important resource for our sales force. They serve as a way to augment the more limited physical access our field teams have faced, as well as provide a great way for the reps to initiate new relationships with prescribers. And as a result, we've continued to see our prescriber base expand, which helped us to partially offset the COVID headwinds I previously described. Looking ahead, we're excited to be expanding our prescriber base, creating a broader pool of clinicians recognizing FlexiTouch and Entrez and the role they can play in their treatment arsenals. In summary, I'm proud of the achievements of our team this quarter, which enabled us to continue along the path to recovery in spite of the incremental headwinds we faced. We were ultimately able to bring the year to a strong close, returning to year-over-year growth for the first quarter since the onset of the pandemic and exceeding our revenue guidance. Reflecting on our performance in 2020, I'm incredibly proud of our team's ability to deliver year-over-year growth on an operational basis which excludes the impact of ASC 842 for the full year 2020 period, especially after the sobering 20% operational decline we faced in Q2. And before I turn the call over to Brent, I'd just like to call out a couple of other recent operational highlights. We received 510 clearance to market our solutions for both Lipedema and PhleboLymphedema. PhleboLymphedema is the combination of lymphedema and chronic venous insufficiency. Both indications we already had clearance for, but this more comfortably expands the dialogue boundaries and adds clarity as we educate and interact with our customers. Lipoedema is a chronic medical condition characterized by symmetric buildup of adipose tissue in the legs and arms. Lipoedema may cause swelling, pain, and easy bruising. We were also successful in removing the contraindications for active cancer. reducing the consideration to a caution. This helps add clarity to suitable patient selection within the oncology community and simply better aligns with the evidence. Also, in early January, we announced the addition of two new board members with the appointment of Sherry Dodd and Deepti Jain. Sherry and Deepti each join our board with over 20 years of healthcare experience. Sherry's currently vice president and general manager of Medtronic's care management services business And Deepti recently served as president of IngenioRx, an Anthem subsidiary that manages a $20 billion pharmacy business. I'm pleased to welcome them to our board and convinced they'll enrich our leadership team and look forward to leveraging their expertise and strategic insights as we continue to evolve as an organization. With that, Brent will now discuss our fourth quarter and full year financial results in greater detail and review our guidance for 2021. Brent?

Thanks, Dan. Total revenue in the fourth quarter increased 4% on both the reported and operational basis to $59.2 million compared to $57.1 million in the fourth quarter of 2019. Sales and rentals of our FlexiTouch systems accounted for 87% of our total revenue in the fourth quarter of 2020 compared to 90% in the prior year period. Fourth quarter 2020 revenue by payer was approximately 71% commercial, 18% Medicare, and 11% VA compared to 75%, 12%, and 13% respectively in the fourth quarter of 2019. Continuing down the P&L, fourth quarter gross profit increased $753,000 to $41.9 million compared to $41.1 million last year. Gross margin was 71% of sales in the fourth quarter of 2020 compared to 72% last year. The year-over-year change in gross margin in the fourth quarter of 2020 was primarily driven by product mix. There was proportionately higher fourth quarter revenue coming from our Entrez product line versus the prior year, which has a modestly lower gross margin compared to FlexiTouch. Fourth quarter operating expenses decreased $189,000 to $34.9 million compared to $35.1 million last year. The decrease in operating expenses was primarily driven by lower sales and marketing expenses which decreased $2.6 million, or 12%, to $19.8 million. The decrease was driven by lower patient training costs, sales commissions, and travel and entertainment expenses. The year-over-year decrease in sales and marketing expenses more than offset higher reimbursement, general and administrative expenses, and to a lesser extent, higher R&D expenses, which increased 19% and 15%, respectively, in the fourth quarter. Reimbursement and G&A expenses increased $2.2 million to $13.7 million, driven by litigation defense costs and other professional fees, as well as personnel-related expenses due to increased headcount in our reimbursement and corporate functions. Operating income in the fourth quarter of 2020 increased $948,000 to $7 million compared to $6 million in the fourth quarter of 2019. In the fourth quarter of 2020, we recognized $1.2 million of other income associated with the general allocation from the CARES Act to support healthcare-related expenses or lost revenue attributable to the COVID pandemic. Income tax benefit in the fourth quarter of 2020 was $3.9 million compared to income tax expense of $1.9 million in the fourth quarter of 2019. The change in income tax expense and benefit was primarily due to changes in our effective tax rate, which was attributable to a change in taxable income including proportionately higher tax benefits for stock-based compensation as compared to the same period last year. Net income increased $7.8 million to $12.1 million or 61 cents per diluted share for the fourth quarter of 2020 compared to $4.3 million or 22 cents per diluted share for the fourth quarter of 2019. Weighted average shares used to compute diluted net income per share were $19.8 million and $19.7 million for the fourth quarters of 2020 and 2019 respectively. Adjusted EBITDA for the fourth quarter was approximately $10.8 million compared to adjusted EBITDA of $10.4 million in the fourth quarter of 2019. As a reminder, we have provided a reconciliation of certain GAAP measures to non-GAAP measures in our earnings press release. Turning to a brief review of our results for the full year 2020, total GAAP revenue decreased $2.4 million, or 1%, to $187.1 million, compared to $189.5 million for the full year 2019. On an operational basis, total revenue increased 1% year over year. As a reminder, our operational revenue growth excludes the impact of ASC 842 accounting standard, which favorably impacted our revenue in the first three quarters of 2019. Decrease in total gap revenue was driven by a decrease of approximately $7.4 million, or 4%, year over year in sales and rentals of the FlexiTouch system, and an increase of $5 million, or 28%, in sales and rentals of the Entrez system. 2020 revenue by payer was 71% commercial, 16% Medicare, and 13% VA, compared to 72%, 11%, and 17%, respectively, last year. Net loss for 2020 was $620,000 or $0.03 per diluted share compared to net income of $11 million or $0.56 per diluted share for the full year 2019. Weighted average shares used to compute diluted net income per share were $19.3 million and $19.6 million for the full years 2020 and 2019 respectively. Adjusted EBITDA for 2020 was $16 million compared to $25.3 million for the full year 2019. Adjusted EBITDA margin was 9% for 2020 compared to 13% for 2019. As of December 31, 2020, we finished the year with a $2.7 million increase in cash, cash equivalents, and marketable securities totaling $47.9 million compared to $45.2 million at December 31, 2019, a satisfying measure that reflects the strong cash flow generation of our business despite an unprecedented year. We had no outstanding borrowings on our $10 million revolving credit facility at year end. Turning to a review of our 2021 outlook, which we provided in our earnings release this afternoon, for 2021, we expect total revenue in the range of $215.3 million to $224.5 million, which represents growth of 15% to 20% year over year, compared to the revenue of $187.1 million reported in 2020. By product, our 2021 total revenue guidance range assumes sales of our FlexiTouch systems increase approximately 13.5% to 18%. Sales of our Entrez systems increase approximately 26% to 33.5%. For the full year 2021, we also expect our gross margin to be in the low 70% range, our adjusted EBITDA margin to be in the range of 12% to 13%. This adjusted EBITDA range assumes the following, depreciation and amortization expense of approximately $3 million, stock-based compensation expense of approximately $12 million, and legal expense related to litigation defense costs of approximately $2.5 million. We expect our fully diluted weighted average share count in 2021 to be approximately 20.6 million shares. Lastly, given the continued COVID related headwinds we expect throughout the first quarter of 2021, we expect our total revenue to be down mid single digits year over year in the first quarter of 2021. With that, I'll turn the call back to Dan for some closing remarks. Dan?