Tactile Systems Technology, Inc.

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

Thanks, Operator, and welcome everyone to our third 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 evening, I'll begin with an overview of our third quarter sales performance, along with a discussion of the drivers, trends, and operational highlights we saw during the quarter. Brent will discuss our third quarter financial results in greater detail and review our financial guidance, which we updated in our earnings release this afternoon. I'll then conclude with some additional thoughts on our outlook before we open the line for questions. With that, let's begin with the review of our sales performance. Total revenue for the third quarter increased 7% year-over-year to $52.5 million. Our total revenue growth was largely driven by sales and rentals of our lymphedema products, which increased 5% year-over-year, with sales of our recently acquired AfloVest product contributing approximately two percentage points to our total revenue growth in the third quarter. Sales and rentals of our FlexiTouch and Entrez systems increased 3% and 23% year over year respectively. Our FlexiTouch and Entrez system sales performance in the third quarter of 21 was softer than we'd anticipated for several reasons. Let me take a moment to walk through the primary factors that impacted our third quarter performance. FlexiTouch and Entrez sales were impacted by the extended recovery from COVID-19. Heading into the second half of 2021, we'd expected progressive improvements in COVID-related headwinds, continuing the trends we saw in late May and into June. With these expectations as a backdrop, during the third quarter, the resurgence of the Delta variant led the renewed headwinds, similar to those that we'd seen earlier in the pandemic. Most notably, at many of the healthcare facilities we serve, we saw increased patient absenteeism, constraints on treatment capacity and patient throughput, and the renewal of restrictions on access to patients and clinicians, limiting our team's ability to conduct in-clinic product demonstrations and challenging our efforts to engage with new clinician customers. While the resurgence of these COVID-related headwinds was seen across our customer base, vascular clinics, and other outpatient-based or privately owned practices continued to demonstrate the most resilience, while practices based in hospitals and larger health systems remained more restrictive. The VA continued to be among our most challenging sites of care. As anticipated, many of the VA hospital systems continued to redirect lymphedema patients to their network of outpatient clinics, away from the more concentrated specialist settings. As a result, our VA sales in the third quarter were flat year over year and declined 8% compared to the second quarter of 21. We've revised our full year revenue outlook to account for the softer than expected third quarter sales results, our current expectation that the operating environment doesn't materially improve over the balance of the year, as well as the impact of fewer product specialists at quarter end than our prior guidance assumed. Recall that our commercial field team is comprised of product specialists or full quota-carrying sales reps, along with associate product specialists and field support specialists, whose priority is to support patient demos and the administrative task of records collection, thus enabling improved productivity within the sales ranks. We entered 2021 with a team of approximately 225 product specialists and associate product specialists. with roughly a 50-50 split between the two roles. Consistent with our stated goals for 2021, we promoted approximately 30 of our existing associate product specialists to product specialists to expand the number of sales territories, aiming to end 2021 with a roughly 60-40 split, of which our product specialist headcount would be roughly 140. We've, however, experienced higher-than-expected product specialist attrition to date. The challenging labor market, compounded by some candidates' vaccination reluctance, has impacted our ability to recruit, hire, and retain qualified candidates. Specifically, we are down roughly 24 product specialists versus what our guidance for 21 had assumed. It's worth noting that we grew our lymphedema segment 5% with a smaller selling crew than last year, reinforcing the productivity gains we're seeing from when our model is fully staffed. I'll discuss some of the initiatives we've put in place to mitigate these staffing-related challenges and enhance our hiring efforts, along with assumptions for Q4 later in my remarks. While our commercial team continued to face COVID-related access issues in the third quarter, they were able to partially mitigate them by using virtual solutions to train patients, raise awareness and expand prescriber adoption. Our team also continued to engage new and existing prescribers that participated in our clinician education events. We hosted 40 medical education programs in the third quarter, reaching more than 1,400 clinician attendees. We've engaged with more than 4,000 clinicians over the first nine months of 21. And the success of our clinician education efforts, despite the challenges presented by COVID, continues to serve as an important source of expanded awareness and adoption. Three other highlights of note in the third quarter. First, in late September, we announced the enrollment of the first patient in a randomized controlled clinical trial evaluating the effectiveness of our FlexiTouch Plus system for the treatment of head and neck lymphedema. This is the largest randomized controlled trial ever conducted for the treatment of lymphedema related to cancer of the head and neck. This trial will compare the effectiveness of FlexiTouch to usual care on head and neck cancer survivors. Enrollment was initiated by Dr. Ridner and the team at Vanderbilt University Medical Center. and the study is targeting a total of approximately 250 subjects to be enrolled across six clinical sites. We expect this trial to provide us with the statistical evidence necessary to secure broad reimbursement coverage for our FlexiTouch head and neck system, which is the only pneumatic compression device cleared to treat this condition. It's also the kind of evidence generation we expect will continue to differentiate the FlexiTouch from other treatment options. We were also pleased to see continued evidence within the medical community of the increasing awareness and recognition of both the prevalence of lymphedema and the need for its effective management. In August, the National Comprehensive Cancer Network, a nonprofit alliance of 31 leading cancer centers, published their updated survivorship guidelines. The updated guidelines added pneumatic compression devices to the list of patient education topics for self-care of lymphedema and encourages therapists to regularly consider pneumatic compression devices for ongoing management of lymphedema at home. This is another important step in addressing the comprehensive needs within the post-cancer care. Finally, on September 8th, we announced the acquisition of the AfloVest respiratory therapy product. This market entry squarely fits our mission. to reveal and treat patients suffering from underserved chronic conditions in their home. It's also consistent with our existing portfolio of clinically proven wearable therapeutic garments with established reimbursement, enabling patients with effective self-care solutions. AfloVest is a wearable vest that treats patients with chronic respiratory conditions, including bronchiectasis, a derivative of COPD, as well as conditions resulting from cystic fibrosis and neuromuscular disorders. AfloVest is the first truly portable high-frequency chest wall oscillation vest, providing patients with increased mobility. Treatment with the AfloVest has been demonstrated to reduce antibiotic use, emergency room visits, and hospitalizations. Similar to our existing products, Aflavest targets a large and under-penetrated patient population. Bronchiectasis is one of the most common respiratory diseases. Of the more than 16 million U.S. patients living with COPD, it's estimated that over 4 million may be affected by bronchiectasis. Each year, 500,000 adults are diagnosed with bronchiectasis, and this figure is expected to grow in the high single digits annually. Based on these estimates, We believe the annual addressable market opportunity for the AfloVest to be as high as $5 billion in the U.S. alone. The AfloVest sales team has achieved impressive market share gains by partnering with respiratory DME companies that are uniquely positioned to leverage their access to providers and patients by featuring AfloVest within their portfolio of complementary products and services for chronic respiratory conditions. In fact, Patients that require airway clearance therapy are commonly also in need of oxygen, nebulizers, and non-invasive ventilation, underscoring the merit of being a part of the comprehensive solutions that the respiratory DME channel represents. We also believe that our market development methods of investing in evidence generation and clinical education will be well served in this space. With a universe of approximately 4,000 respiratory DME reps to partner with in the U.S., we aim to continue this strategy leading to continued growth in the years to come. Lastly, the acquisition of AfloVest is aligned with our margin expansion goals with the gross margin profile in excess of 70% and adjusted EBITDA margins of more than 30%. Following the acquisition, we onboarded the 11-member internal AfloVest sales team to ensure an uninterrupted level of support to our respiratory DME partners. And I'm pleased to report that that integration of AfloVest is progressing very well. 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 third quarter increased 7% year over year, to $52.5 million compared to $49.1 million in the third quarter of 2020. By product category, sales and rentals of our FlexiTouch systems increased 3% year-over-year to $44 million in the quarter. Sales and rentals of our Entrez systems increased 23% year-over-year to $7.6 million. And sales of our recently acquired AfloVest system contributed approximately $860,000 for the period following the acquisition closing date on September 8, 2021. Total revenue by channel was 68% commercial, 17% Medicare, 13% VA, and 2% durable medical equipment distributors. The latter is a new channel comprised of revenue from our recent acquisition of AfloVest. These figures compare to our total revenue by channel in the third quarter of 2020, in which the commercial, Medicare, and VA channels represented 70%, 16%, and 14% of total revenue. Continuing down the P&L, unless noted, all references to third quarter results are on a year-over-year basis. Gross margin was 70.4% of sales compared to 71.2% last year. Non-GAAP gross margin was 71.8% of sales compared to 71.3% in the prior year. Non-GAAP gross margin excludes non-cash intangible amortization, inventory write-offs, and non-cash purchase price adjustments related to our acquisition of AfloVest in the current year period. As a reminder, we have provided reconciliations of certain GAAP to non-GAAP measures in our earnings press release. The third quarter operating expenses were $38.3 million, an increase of $5.2 million, or 16%. The year-over-year increase in operating expenses was driven primarily by a $2.7 million, or 14%, increase in sales and marketing expenses primarily due to increases in personnel-related compensation expense and travel-related expenses as we return to hosting in-person regional sales meetings. A $2 million or 16% increase in reimbursement general and administrative expenses. The increase primarily includes higher occupancy costs, legal fees, and $800,000 of non-recurring transaction-related costs associated with the acquisition of AfloVest. Operating loss was $1.4 million compared to operating income of $1.8 million last year. Non-GAAP operating income was $1 million compared to $2.6 million last year. Income tax expense was $1.9 million compared to an income tax benefit of $800,000 last year. The change was primarily due to changes in our effective tax rate which were attributable to a change in projected taxable income compared to last year. Net loss was $3.4 million or 17 cents per diluted share compared to net income of $2.4 million or 12 cents per diluted share last year. Non-GAAP net loss was $1.6 million compared to non-GAAP net income of $3 million last year. Weighted average shares used to compute GAAP diluted net income and loss per share were 19.8 million and 19.7 million shares for the third quarters of 2021 and 2020 respectively. Adjusted EBITDA was $4.1 million compared to $6.2 million last year. On September 8, 2021, we amended our restated credit agreement, adding an incremental $30 million term loan to the $25 million revolving credit facility provided by the restated credit agreement. We borrowed the $30 million term loan on September 8, and utilize that borrowing along with the $25 million under our revolving credit facility and cash on hand to fund the AfloVest acquisition. As of September 30th, 2021, we had $22.4 million in cash and cash equivalents and $52.5 million of outstanding borrowings on our revolving credit facility compared to $47.9 million in cash and cash equivalents and no outstanding borrowings as of December 31, 2020. The change in cash quarter-to-quarter, excluding the acquisition of AfloVest and related financing, was approximately $2 million. Turning to a review of our 2021 outlook, which we updated in our earnings press release this afternoon, we now expect full-year 2021 total revenue in the range of $203.5 million to $206 million, representing growth of approximately 9% to 10% year-over-year, compared to total revenue of $187.1 million in 2020. Our updated total revenue guidance range includes contributions from sales of AfloVest in the range of approximately $5 to $5.5 million from the closing date of September 8th to December 31st, 2021. This revised outlook compares to our prior revenue guidance range of 216.3 to $224.5 million, or 16% to 20% year-over-year growth. Note, our prior guidance range was updated as part of our second quarter financial results report in August and did not include the contributions from our acquisition of AfloVest from the closing date of September 8 to December 31, 2021. Byproduct, our updated 2021 total revenue guidance range assumes sales of our FlexiTouch systems increased approximately 5% to 6% year-over-year. Sales of our Entrez systems increased approximately 14% to 19%. and contributions from sales of AfloVest to be in the $5 to $5.5 million range. 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 6% to 8%. Note, this adjusted EBITDA range assumes DNA of approximately $3.5 million, including non-cash intangible amortization of approximately $1.1 million, stock-based compensation expense of approximately $10.8 million, interest expense of approximately $400,000, litigation-related defense costs and other non-recurring expenses of approximately $4 million, transaction costs and expenses of approximately $1.1 million, including purchase price adjustments to inventory of approximately $200,000. And finally, inventory write-offs and executive transition costs of approximately $800,000. We expect our fully diluted weighted average share count in 2021 to be approximately 20 million shares. With that, I'll turn the call back to Dan for some closing remarks. Dan?