Tactile Systems Technology, Inc.

Good evening, ladies and gentlemen, and welcome to the first quarter of 2021 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 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, as well as our most recent 10-Q filing, 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 Revers, Tactile Medical's President and Chief Executive Officer. Please go ahead, sir.

Dan Revers Thank you, operator, and welcome everyone to our first quarter of 2021 earnings call. Joining me on this evening's call is Brent Moen, our Chief Financial Officer. Let me provide you with a brief outline of what we intend to cover this evening. I'll start by discussing our first quarter sales performance and business trends, followed by a discussion of our recent operational highlights. Brent will review our financial results in detail, as well as our 2021 financial guidance, which we reaffirmed in our earnings release this afternoon. I'll close with some additional thoughts on our assumptions, outlook, and key areas of focus for 21 before we open the call for questions. With that, let's get started. We were pleased to deliver sales performance that modestly exceeded our expectations for the first quarter of 2021. Specifically, we saw first quarter total revenue decrease by 2% year-over-year to $42.8 million compared to the mid-single-digit year-over-year decline we had anticipated at the time of our earnings call in February. The 2% decrease in total revenue was driven by sales and rentals of our FlexiTouch systems, which decreased 3% year over year, partially offset by sales and rentals of our Entrez systems, which grew 5% year over year. Turning to a more detailed discussion of the first quarter, we continued to face a series of COVID-related headwinds throughout the quarter. These headwinds and their impact were consistent with our expectations and largely represented a continuation of the dynamics we saw in Q4. In early January, we conducted a survey of our top accounts, which found that only a quarter were operating without restrictions, which was consistent with the results of our survey in October. A follow-up survey in early April of this year found that this ratio had slightly improved to just under 30 percent of surveyed accounts operating without restrictions. These health and safety protocols continued to impact our performance in two primary ways. First, the treatment capacity of many of the clinics that we serve remained constrained due to lower patient throughput as clinics continued to operate with fewer exam rooms, dedicate more time to cleaning, and room turnover, leading to longer gaps between patient consultations. Specifically, our surveys in January and April found that two-thirds of our top accounts reported they were still operating at less than 80% of normal levels. And second, many clinics continued to restrict sales rep access to their patients, which limited our ability to conduct in-person patient demos at the clinic, an important part of the patient engagement. During the first half of the quarter, we also continued to see impacts from the spike in COVID cases around the winter holidays and its effect on facilities, clinicians, patients, and our own field teams. Specifically, our accounts continued to experience an uptick in COVID-related patient cancellations and employee absenteeism in the first two months of the year. We also saw absenteeism in our own sales force due to quarantining in compliance with our corporate safety policies. As COVID cases declined from the highs of December and January, We were pleased to see conditions begin to moderate, and we ultimately achieved sales performance in March that showed evidence of recovery. In terms of the trends across our customer base, throughout the first quarter, privately owned practices based in the outpatient settings continued to demonstrate higher resiliency and faster recovery trends. Vascular clinics specifically remained a key contributor to our performance. Our focus on targeting vascular clinics has been an important contributor to the strong growth in Entrez system sales. With our expanding universe of Entrez patients, we're also well-positioned to serve those that may ultimately require an advanced therapeutic device like our FlexiTouch Plus. Meanwhile, sales to practices based within hospitals and health systems continued to lag, as these practices remained more constrained by COVID-related restrictions. The VA in particular remained especially challenged by these restrictions, and during the first quarter, we continued to see lymphedema patients redirected from the 170 VA hospital centers to the more than 700 community-based outpatient clinics. VA sales tend to be an important contributor to our total revenue in the first quarter of each year. due to the typical seasonality we experience related to the resetting of annual deductibles for patients covered under commercial insurance plans. With these challenges as a backdrop, our VA revenue declined 17% year over year to $5.8 million, adding a particular drag on the quarter, yielding just 14% of our total revenue compared to 16% in the first quarter of last year. Given this performance in the VA, and the continued challenges related to COVID, the fact that we only saw a 2% year-over-year decrease in our total revenue for the quarter speaks to the dedicated efforts of our team and the tailwinds from our expanded base of prescribers, which helped to offset some of the most notable impacts of the pandemic. In terms of our patient-focused activities, our sales reps continue to conduct a portion of patient demos virtually where appropriate due to clinic restrictions. we also continue to enhance our virtual out-of-the-box alternatives to in-person patient training. These expanded options are earning high patient satisfaction scores, with patients equally likely to recommend our system regardless of which training option they utilize. Approximately 40% of our new patients were trained in-person during the first quarter, and while it remains to be seen where the mix of in-person trainings will shake out longer term, we're poised to provide a menu of well-structured options. In terms of our medical education efforts, our teams continue to organize events virtually, which were developed to engage and inform a variety of target audiences. We hosted 31 events during the first quarter in collaboration with many KOLs in the treatment of lymphedema and related conditions. And these events were attended by approximately 1,200 clinicians and staff. Most notably, we co-sponsored and presented at the Power Lymphatic Symposium, which was held virtually and attended by over 650 therapists. We also participated in the virtually hosted American Venus Forum's annual congress. In addition to their primary purpose of helping us raise awareness and educate the market on the diagnosis and treatment of lymphedema, these events continued to serve as a valuable resource for our sales reps to build relationships with potential new prescribers. As a result, given the strong interest that we've seen in our virtual events over the last 12 months, we continue to see success in our efforts to expand our prescriber base during the quarter. In summary, while the COVID-related headwinds remained largely consistent with our expectations, we were pleased by the resourcefulness of our team and their efforts to lay the foundation for our future growth by expanding our prescriber base. As Brent will discuss further, I'm also pleased we were able to maintain our 70-plus percent gross margins, along with the modest year-over-year improvements in our operating income and adjusted EBITDA, despite experiencing a slight decline in total revenue. And lastly, we complemented our financial performance with some important operational highlights, which I'd like to briefly recap. First, we continued to invest or to expand the productivity of our commercial team. Consistent with our stated strategy, we expanded sales territories by promoting a portion of our existing associate product specialists. We also grew our commercial field team of both sales and support personnel to over 295 members, including field support specialists, to help our product specialists dedicate more of their time to engaging new physicians. And second, we continued to strengthen our leadership, by adding top talent to help lead our continued market development efforts as we scale into the future. In addition to expanding our board of directors with the appointment of Sherry Dodd and Deepti Jain, whom we discussed on our fourth quarter call, we added three important new members to our senior leadership team. In January, we appointed Mickey Brown as our new vice president of payer relations and market access, following the retirement of Maggie Thompson. In March, we appointed Christy Burns as our new Senior Vice President of Marketing and Clinical Affairs following the promotion of Darren Wenin. And earlier this month, we appointed Eric Pauls as our new Senior Vice President of Sales following the retirement of Brian Reich. Mickey, Christy, and Eric each bring over 20 years of experience in the healthcare industry. Mickey was previously the Vice President of Reimbursement at Wright Medical, And his career highlights include five years at Cochlear, where he served as vice president of health economics, nine years at Medtronic, where he was the director of health policy and reimbursement for their spinal and biologics business, and experience from the payer side, including Blue Cross Blue Shield. Christy and Eric's backgrounds both include significant experience commercializing wearable medical technologies for the treatment of chronic conditions at home Christy joins us from a prior career at Cala Health, where she led the U.S. commercial introduction of its lead product, a wearable neuromodulation device for the treatment of essential tremor. She also spent 13 years at ResMed, where she helped develop the market within the obstructive sleep apnea space. And Eric spent the past 19 years at Philips, where he most recently led a 500-person commercial team within their sleep and respiratory segments. While there, Eric also managed the integration and operations of Respitech, a Philips acquisition with a similar business model to our own that markets a wearable garment to treat chronic respiratory conditions in the home. Mickey, Christy, and Eric possess the leadership skills and vision to help us develop the lymphedema market, scale our business, and ultimately deliver healthy long-term growth, and I'm excited to have them on our team. With that, let me turn it over to Brent to discuss our quarterly financial results in greater detail and review our guidance for 2021. Brent?

Thanks, Dan. Total revenue in the first quarter decreased 2% year-over-year to $42.8 million compared to $43.7 million in the first quarter of 2020. Sales and rentals of our FlexiTouch systems accounted for 88% of our total revenue in the first quarter of 2021 consistent with the prior year period. First quarter 2021 revenue by payer was approximately 66% commercial, 20% Medicare, and 14% VA compared to approximately 69% commercial, 15% Medicare, and 16% VA respectively in the first quarter of 2020. Continuing down the P&L, first quarter gross profit decreased $843,000, or 3%, to $30.2 million. Gross margin was 71% of sales in the first quarter of 2021, consistent with the same period last year. First quarter operating expenses decreased $1.2 million, or 3%, to $34.3 million. The reduction in operating expenses was driven by lower sales and marketing expenses, which decreased $4.2 million, or 18%, to $18.8 million, and to a lesser extent by lower research and development expense, which decreased $400,000 to $1.3 million. The decrease in sales and marketing expenses was driven by virtual sales meetings, along with lower patient training costs, and reduced T&E. The year-over-year decrease in sales and marketing and R&D expenses more than offset higher reimbursement general and administrative expenses, which increased $3.4 million, or 31 percent, to $14.3 million, driven primarily by increased occupancy costs, depreciation, legal fees, and personnel-related expenses. Operating loss in the first quarter of 2021 decreased $367,000 or 8% to $4.1 million compared to a loss of $4.5 million in the first quarter of 2020. Income tax benefit in the first quarter of 2021 was $1.8 million compared to $2.9 million in the first quarter of 2020. The year-over-year decrease in income tax benefit was primarily due to the net operating loss carryback claim recognized in the first quarter of last year, which did not impact the tax benefit in the first quarter of 2021. Net loss was $2.3 million, or 12 cents per diluted share, for the first quarter of 2021, compared to a net loss of $1.3 million, or 7 cents per diluted share, for the first quarter of 2020. Weighted average shares used to compute diluted net income per share were $19.5 million and $19.2 million for the first quarters of 2021 and 2020 respectively. Adjusted EBITDA loss for the first quarter was $7,000 compared to the loss of $470,000 in the first quarter of 2020. As a reminder, we have provided a reconciliation of certain gap measures to non-gap measures in our earnings press release. As of March 31st, 2021, we had cash and cash equivalents of $46.9 million compared to $47.9 million at December 31st, 2020. We had no outstanding borrowings on our $10 million revolving credit facility at quarter end. On April 30th, We'd entered into a restated credit agreement with Wells Fargo Bank to expand the size of our revolving credit facility, providing us with increased financial flexibility to pursue our growth strategies. The restated credit agreement provides for a $25 million revolving credit facility and a three-year maturity that includes a $30 million accordion feature, which could allow the company to expand the total aggregate principal up to $55 million. Turning to a review of our 2021 outlook, which we have reaffirmed 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 percent to 20 percent year over year. compared to revenue of $187.1 million in 2020. Byproduct, our 2021 total revenue guidance range assumes sales of our FlexiTouch systems increase approximately 13.5 percent to 18 percent year-over-year, and sales of our Entrez systems increase approximately 26 percent to 33.5 percent year-over-year. 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%. Please note that this adjusted EBITDA range assumes depreciation and amortization expense of approximately $3 million, stock-based compensation expense of approximately $12 million, and legal expenses 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 million shares. Lastly, we continue to expect total revenue growth in the mid to high teens over the first half of 2021, which for the avoidance of doubt implies year-over-year growth in the second quarter of approximately 40 percent to 43%. With that, I'll turn the call back to Dan for some closing remarks. Dan?