Tactile Systems Technology, Inc.

Good evening ladies and gentlemen and welcome to the second 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 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, 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.

Thank you, operator, and welcome everyone to our second quarter of 2021 earnings call. I'm joined on the line by Brent Moen, our Chief Financial Officer. In terms of what we intend to cover this afternoon, I'll begin with an overview of our second quarter sales performance, along with the discussion of the drivers, trends, and operational highlights we saw during the quarter. Then, Brent will discuss our financial results in greater detail and review our financial guidance for 2021, which we updated in our earnings release this afternoon. I'll conclude by sharing some additional thoughts on our outlook and key focus areas for the second half of 2021 before we open up the line for questions. Now let's get started with a review of our sales performance. In the second quarter of 2021, we were excited to achieve sales results that reflected easing of some of the pandemic-related headwinds and thus exceeded our expectations. Total revenue for the second quarter increased 45% year over year to $51.1 million, exceeding the 40% to 43% year-over-year increase that we expected and shared on our first quarter earnings call. Our total revenue growth was largely driven by sales and rentals of our FlexiTouch systems, which increased 45% year-over-year, and contributions from sales and rentals of our Entrez systems, which increased 49% year-over-year. Given that the second quarter of 2020 was notably impacted by the disruption caused by the COVID-19 pandemic, we were particularly pleased to see that our total revenue in the second quarter of 2021 increased 13% on a reported basis and 17% on an operational basis compared to the pre-pandemic sales in Q2 of 2019. Our sales performance in the second quarter was driven by a combination of strong execution by our team and progressive improvements in the broader healthcare environment. Looking at our second quarter trends a bit more closely, during the first half of the quarter, our business remained substantially impacted by the COVID-related health and safety protocols adopted by many of the clinics that we serve. These protocols continue to impact our business in two primary ways. First, they restricted clinics' treatment capacity as clinics continued to operate with fewer exam rooms and dedicated additional time to turning over these rooms, reducing their patient throughput. Some of the surveys of our top accounts in April found that two-thirds were still operating at less than 80% of normal levels, consistent with our surveys earlier in the year. Second, clinics continued to restrict in-clinic access to patients limiting the ability of our sales reps to conduct patient demos in person. While we continue to face these COVID-related headwinds throughout Q2, we were pleased to see both clinic throughput and in-clinic patient access improve in the second half of the quarter, as a larger portion of the population received vaccinations and government restrictions were relaxed. Looking at our recovery trends by site of care, outpatients based privately owned practices, most notably vascular clinics, continued to exhibit the fastest pace of recovery. With this trend as a backdrop, our team's focus on targeting and engaging with vascular specialists was again an important contributor to the strong growth that we saw during the quarter, especially the growth in the sales of our Entrez systems. While sales to practices based in hospitals and health systems remained slower, we were pleased to see incremental evidence of recovery in some of the facilities that we serve, with a portion enabling our sales reps to resume in-person patient demos. The VA hospital system, on the other hand, remained more challenging as restrictions persisted through the quarter, with many VA hospitals continuing to redirect lymphedema patients away from specialist settings to their network of approximately 700 community-based outpatient clinics. VA sales increased 69% year over year in the second quarter. However, given the slower pace of recovery in the VA and related persistent challenges, our VA revenue in the second quarter of 2021 was still 11% lower than what we reported in the second quarter of 2019. That said, we were pleased to see that the VA business improved modestly as the broader operating environment improved during the second quarter. In fact, our VA revenue increased 25% sequentially in comparison to the first quarter of 2021, which speaks to our team's progress in navigating the VA's shift in site of care. We look forward to a broader recovery within the VA, but we've also accounted for them maintaining their current posture in our second half of 2021 outlook. While we expect a continued recovery of our VA business into next year, it's worth noting that our non-VA revenue growth increased 23% in the second quarter of 2021 on an operational basis compared to the second quarter of 2019. From an execution standpoint, during the second quarter, our team did a nice job of using virtual solutions to train patients, raise awareness, and expand adoption among both new and existing prescribers. ultimately moderating the COVID related access issues that we faced. Specifically, we leveraged our expanded menu of patient training options to meet the needs and preferences of our customers, roughly half of whom were trained via our virtual or out of the box alternatives during the second quarter. From a medical education standpoint, our team kept up the momentum we saw over the last year and a half in using virtual programming to engage and educate a variety of potential new prescribers on the diagnosis, care, and management of lymphedema. We hosted a total of 39 medical education programs over the course of the quarter, 27 of which were held virtually and the rest conducted in person. These events were attended by nearly 1,600 clinicians bringing the total to approximately 2,800 in the first half of the year. And we've continued to see our overall base of prescribers expand as a consequence, which served as an important tailwind for our business during this challenging period. And lastly, we continued to lay the foundation for future improvements in the overall productivity of our field commercial team by bringing on field support specialists to help our sales reps focus on engaging with new physicians. We expanded the size of our team to slightly over 300 members by quarter end. Feedback from our sales meetings just last month continued to reaffirm our sales reps appreciation for the new field support specialist role. And we look forward to leveraging the potential of our recently hired FSS team members going forward. Our top-line results enabled us to deliver solid gross margins and a return to net income and adjusted EBITDA profitability. With that, let me turn it over to Brent to provide you with a more detailed review of our quarterly financial results, along with our updated guidance for 2021. Brent?

Thanks, Dan. Total revenue in the second quarter increased 45% year-over-year to $51.1 million this compared to $35.1 million in the second quarter of 2020. Our revenue in the second quarter benefited from the initial stages of recovery from the COVID-19 pandemic, with a portion of healthcare facilities and clinics relaxing restrictions and increasing patient throughput. Additionally, the year-over-year increase in second quarter revenue was driven by improvements in the productivity of our sales force, as well as the expansion of our prescriber base. due in part to our effective virtual clinician education activities. By product, sales and rentals of our FlexiTouch systems increased 45% year over year to $45.1 million in the quarter, and sales and rentals of our Entrez systems increased 49% year over year to $6 million. FlexiTouch revenue accounted for 88% of our total revenue in the second quarter of 2021. compared to 89% in the prior year period. By payer, second quarter revenue was approximately 70% commercial, 16% Medicare, and 14% VA, compared to 73% commercial, 15% Medicare, and 12% VA respectively in the second quarter of 2020. Continuing down the P&L, gross margin was 71% of sales in the second quarter of 2021, unchanged compared to the same period last year. Second quarter operating expenses came in at $36.3 million, an increase of $3.4 million, or 10%. The increase in operating expenses was driven by higher sales and marketing expenses, which increased $3.5 million to $20.9 million, and to a lesser extent, by higher research and development expense, which increased $100,000 to $1.2 million. Second quarter reimbursement general and administrative expenses decreased by approximately $200,000 to $14.1 million and included approximately $900,000 of litigation defense costs in the period. Excluding litigation expenses in the second quarter of 2021 and the impairment charge in the second quarter of 2020, our reimbursement and G&A expenses increased approximately 25% year over year. Second quarter operating loss was $76,000 compared to operating loss of $8 million in the second quarter of 2020. Income tax benefit in the second quarter of 2021 was $1.4 million compared to an income tax expense of $5.9 million in the second quarter of 2020. The year over year change was primarily due to a tax credit for a research and development study recognized in the second quarter of 2021. Net income was $1.3 million or seven cents per diluted share for the second quarter of 2021 compared to a net loss of $13.9 million or 72 cents per diluted share for the second quarter of 2020. Weighted average shares used to compute diluted net income per share were 20 million and 19.3 million shares for the second quarters of 2021 and 2020 respectively. Adjusted EBITDA for the second quarter was $4.1 million compared to adjusted EBITDA loss of approximately $700,000 in the second quarter of 2020. As a reminder, we have provided a reconciliation of certain gap to non-gap measures in our earnings press release. As of June 30th, 2021, we had cash and cash equivalents of $49 million, a high watermark for the company, compared to $47.9 million at the December 31st, 2020 period. We had no outstanding borrowings at quarter end. On April 30th, we entered into a restated credit agreement with Wells Fargo Bank, which increases our borrowing capacity up to $55 million. Turning in review of our 2021 outlook, we updated our earnings press release this afternoon. We are raising the full year guidance range to account for our stronger than expected performance in the second quarter. as our conviction in our ability to deliver strong sales performance during the second half of 2021. For 2021, we now expect total revenue in the range of 216.3 to $224.5 million, which represents growth of approximately 16% to 20% year over year, compared to revenue of $187.1 million in 2020. This revised outlook compares to our prior revenue guidance range of $215.3 to $224.5 million, or 15 to 20% year-over-year growth. By product, our updated 2021 total revenue guidance range assumes sales of our FlexiTouch systems increase approximately 14% to 18% year-over-year growth. and sales of our entrée systems increased 26% to 34%. For modeling purposes, for the full year, we expect our gross margin to be in the low 70% range, our adjusted EBITDA margin to be in the range of 12% to 13%. And please note, this adjusted EBITDA range assumes depreciation and amortization expense of approximately $3 million, stock-based compensation expense of approximately $11 million, and litigation-related defense costs and other non-recurring expenses of approximately $4 million to $4.5 million. We expect our fully diluted weighted average share count to be approximately 20 million shares. With that, I'll turn the call back to Dan for some closing remarks. Dan?