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?

Thanks, Brent. Broadly speaking, our updated guidance today reflects a revised outlook for the operating environment during the second half of 2021. Our updated guidance also reflects the changes within the composition of our commercial team, specifically a smaller number of product specialists through the fourth quarter. Our revised outlook for the operating environment and for the composition of our field commercial team are expected to be partially offset by the contributions from the AFLA-VEST. Let me share a bit more on our assumptions driving our revised guidance for FlexiTouch and Entrez sales in more detail. With respect to our expectations for business disruption related to the impact of the Delta variant, our prior guidance had assumed progressive improvements in COVID-related headwinds throughout the second half of 2021. We now expect the primary COVID-related headwinds that we experienced in the third quarter to persist into the fourth quarter postponing our pace of recovery. The second half impacts of the Delta variant coupled with our lower selling headcount are the key contributors to the revision in our FlexiTouch and Entrez revenue guidance. Specifically, we expected to end 2021 with approximately 225 direct sales reps with a roughly 60-40 split in favor of product specialists. Given the higher than expected attrition of product specialists that we saw during the third quarter, we have 24 fewer product specialists than our guidance for 2021 had contemplated. As we've said in the past, our fully tenured sales reps contribute well above a million dollars per year on average and significantly higher when supported with an FSS. So the impact of this attrition, offset partially by the improved productivity from our expanded team of field support specialists, is responsible for the balance of our FlexiTouch and Entrez revenue guidance change. Finally, The low end of our FlexiTouch and Entrez revenue guidance contemplates the potential for some additional Salesforce attrition related to our internal vaccine efforts during the fourth quarter. We've seen increased access issues from both clinicians and patients. We're also mindful of our obligations within the recent executive orders. As a result, we've conveyed expectations of full vaccination by year end. in an attempt to restore optimized customer access, address our executive order obligations, and ensure the safety of our patients, customers, and employees. While we believe this is in the long-term interest of all of our stakeholders, it introduces some uncertainty in the short term, as some employees have voiced reluctance to get vaccinated. To address these challenges, we're focused on investing to enhance our sales rep retention efforts bolster our internal recruiting resources, and increasing our hiring incentives, especially for territories that have been more difficult to staff. To be clear, we see the headwinds affecting our business in the second half of 2021 as impactful, but transitory, and continue to believe that we're incrementally better positioned for long-term success and value creation. given the increasing awareness and consensus within the medical community of the prevalence of lymphedema and the importance of effective treatment, along with our product development initiatives, advancing and positioning our portfolio with improved patient solutions, and the addition of AfloVest to our portfolio, which expands our addressable U.S. market opportunity to over $10 billion per year. With our expanded portfolio of clinically proven products, a robust product pipeline, we remain excited about our longer term prospects and look forward to expanding the awareness and treatment options for patients with lymphedema, bronchiectasis, and other chronic conditions as we continue our mission to reveal and treat patients with underserved chronic conditions in the home. I'm appreciative to our employees for enduring a challenging environment and sharing a commitment to making a difference in thousands of patients' lives. I'd also like to thank our investors and those on today's call for their interest and support in Tactile Medical and our mission. Operator, we'll now open the call for questions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We do ask that you limit yourself to one question and one follow-up. If you would like to ask additional questions, we invite you to add yourself to the queue again by pressing star 1. And our first question comes from the line of Adam Mader with Piper Sandler. Please proceed.

Hi guys, this is, uh, Duran for Adam. Thanks for taking the questions. Um, there's an awful lot to unpack here, but maybe you could just help us understand the breakdown of some of the things impacting the business. So if you had to split out, um, each of the headwinds, whether that be the access issues at your customers, the Salesforce attrition, the vaccine challenges, all that kind of stuff, you know, how meaningful reach of those headwinds on their own, as far as contributing to the Q3 shortfall. And then I think, you know, when you did the Apple best deal, it seemed to be messaged as being incremental to the existing guidance you had out there. So, you know, maybe you could just help us understand, you know, what, if anything, a change in the business between now and then and just confidence in that improving.

Sure. Let me take a shot at addressing a little bit of the context. commentary side, and then I'll turn it over to Brent. He can probably walk you through a bit more of a breakdown on the guidance change with some specifics. But in short, the two things that really contributed, as you alluded to in our prepared remarks, was the COVID headwinds and sales staffing. And I'll just offer a little bit of texture on both. As it related to the COVID headwinds, we had modeled and expected progressive improvements in continuing in what we saw in Q2. So recall Q2, we saw improving conditions. At the time, we were expecting to see continued improved conditions throughout the balance of the year. Not back to normal, but certainly improving in some of the underlying headwinds that we'd faced as a result of COVID. With the Delta resurgence, we saw a combination of three things that it affected. One was patient throughput. which has continued to be a consequence of COVID since it was introduced. The second was some patient cancellations increased, and staffing vacancies were reported to us as well. All of those led to pressures on the underlying business. One of the interesting sidebars is we were at the AVF, the American Venus Foundation Congress, in October, and one of the things that was shared there was the results of a survey within their membership that resulted through May had still said that 60% of respondents saw their volumes down 25% or more compared to pre-COVID windows. And that was through May. So that was when we were seeing improvements. So I suspect that the delta influence of the fall would probably have demonstrated a continuation or even an acceleration of that. So those are some of the consequences we saw with COVID. On the staffing side, two things. One, we've continued to see some increasing access issues as especially the larger university systems, the places where we typically find patients that are affected by cancer, those have been the places that have been more restrictive. And we've had a fair amount of our sales staff that has still been unvaccinated as of October 1st going into the fourth quarter. So we've introduced a vaccine expectation of our teams by the end of this year. Some of them, I think, are grappling with that. You know, it's certainly a minority, but there's a segment of our population that I think is still reconciling with that. So that, along with just some of the general conditions we've seen in the hiring marketplace, are just something like I've never seen in my career. Being able to find good talent, the quality and number of candidates available, much more limited, and I think those are certainly the key contributors that have led to the change. But let me actually turn it over to Brent, and I think he can probably walk you through kind of the bridge from our previous guidance to that which we've shared today.

Hi, Drew. So let me just give you a little bit of perspective on guidance. So just as a reminder, our 2021 total revenue guidance is 203.5 to 206, and that includes 5 to 5.5 million from the acquisition of AfloVest. Our organic revenue range is 198.5 to 200.5. representing a reduction of $18 million on the low end and $24 million on the high end. So just let me take a little bit of time to walk you through some of the drivers of the change in the organic revenue range. So let's start with the low end. So at the $18 million reduction versus our prior guidance, driven by First, as we detailed out in our prepared remarks, we're down approximately 24 product specialists. Dan had done a little math in his commentary there, but on average a product specialist does about a million dollars or more on an annualized basis. So having been down 24 product specialists versus our prior guidance, that certainly has a sizable impact on the second half results representing approximately one half of the change in the low end of our organic guidance range, or approximately $9 million of that $18 million that I had mentioned earlier. Second, we've accounted for the potential for additional sales repetition in the fourth quarter related to the mandatory VACs policies. That impact represents approximately $2.5 to $3 million in Q4. Third, And again, as detailed in the prepared marks, our prior guidance had assumed progressive improvements in the operating environments in the second half of 2021. We now expect continued headwinds. That impacts roughly about one third of the change in the low end of our organic guidance range, or approximately $6 million. As you move to the midpoint and the high ends of the range, You'll note that our guidance reflects a larger impact from COVID headwinds, given our prior guidance assumes stronger growth as a result of the improving environment in the second half of 21. So hopefully that gives you a little bit of perspective on the three primary drivers impacting our modification to guidance.

Yeah, very helpful. Thank you. And just, you know, just to put a finer point on it, I think what people are struggling to really understand is, you know, when you strip out COVID, you strip out the staffing shortage noise, you know, do you think your core lymphedema business can still grow in that, you know, call it 15 to 20 percent range? And given the current state of the COVID environment, how long do you think it will be until it can get back to those levels? Thank you.

Yeah, I think it's a fair question. I don't mean to be curt, but I think that our ability to predict when COVID will subside has clearly been tested. So I'm not sure that that's an easy one to answer, but we certainly at this point expect that this continues to be transitory. I think when you contemplate the two changes in our guidance, one is very much driven by the COVID circumstance and the other one by staffing. Both of these should be transitional kinds of things. I think it certainly points in my mind that recovery gets pushed out a bit into 22. That said, to your broader question, what does it say about the underlying market, I still don't believe it says anything. When you think about the durable market conditions, the TAM on both the lymphedema and the respiratory space that we're now participating in are immense, and the level of penetration is still very small. So there's nothing that's changed in the underlying market. I think when you couple that with the growing awareness that we're continuing to see, the recognition of the importance of treatment, I think payer relation opportunities for us to continue to improve market access. We've got a robust product development pipeline underway right now that's richer, I think, than perhaps any time in the company's history. and some of the evidence in the market development tailwinds, I think all of those speak to an enduring opportunity for us. So we don't think that this is necessarily a referendum on the space that we're in, but admittedly a disappointment for us in where we sit at this point in the year.

Thank you. Our next question is from Margaret Kaser with William Blair. Please proceed.

Good afternoon, guys. Thanks for taking the questions. I'm hoping to dive in a little bit deeper based on the prior comments that you made. So, you know, maybe on the sales repetition side, just to start there, you know, this theoretically, you know, while short-term will have some sort of an impact for probably at least a couple quarters. So, I guess to kind of put a finer point on it, is there a time period at which point that does recover, whether it's mid-22 or beyond, and does that kind of pressure the underlying business, let's say, for the first half of 22 before you kind of get to that more normalized double-digit-plus growth rate as we move on throughout the year?

Yeah, Margaret, hi, it's Brent. I can provide a little bit of perspective on that. Certainly, sales reps have a big impact on our overall growth rates for sure. Being 24 down at the end of the third quarter and as we progress through our fourth quarter certainly has an impact in 2021, but also in 2022. We believe that we can, by the end of Q1, should be back in hopefully the same zone that we expected to be at the end of the third quarter. So it will be a fairly sizable effort between now and the end of the first quarter to make sure that we can find appropriate talent to fill the seats. But nonetheless, our expectations is that as we exit Q1, we'll be back in good stead with our product specialists.

Okay, so does that then imply that you'll be closer to that 140 that you had mentioned at the beginning of the call? And will it take a couple quarters from there for those folks to ramp up? Or how should we think about that, I guess? And when can kind of the underlying business, I guess, return to growth?

Yeah, I mean, as you recall some of the commentary that we've made in the past, product specialists, because they are the senior reps, do take a degree of time to get to maturity over the course of, and recall, most of those product specialists. although we're finding them outside of the organization now, come from ranks at the associate product specialist level, but they do take some time to get to maturity. And so if we can get back to the 140 at the end of first quarter, then you're looking for a degree of time for them to mature and get ready and present themselves at the same expected levels that... A mature rep is you're looking towards the middle of 2022 before we see kind of a return to normal.

Okay. Just making one more question. Sorry about that, guys. But as we think about kind of the underlying improvements, and you guys spoke to it a bit, we're hearing from others that as Delta case volumes have declined, some of the restrictions maybe have loosened. Are you assuming maybe that things might get worse again as we get into the winter months? And then, you know, again, as we think about 22, should we think about that 6 million plus or minus some seasonality start to come back like you referenced maybe in the second quarter or something? Thanks.

I think we're continuing to assume that conditions are probably changing. So they don't necessarily deteriorate, but also don't improve from what we saw exiting Q3. I think the other issue that we're trying to reconcile is the access issue. So we continued to see, I mean, we've all seen the number of healthcare facilities, institutions, both large and small, that have imposed vaccination requirements. Most of the doctors, nurses, and therapists that we call on today have been vaccinated. they've started to extend that expectation of those that interact with them as well as those that interact with patients. And I think that's a reasonable expectation as we work alongside those folks. So that's the same expectation that we've shared with our teams. You know, between now and the end of the year, which is when we said we expect everyone to be vaccinated, ongoing access issues are probably going to continue to be a bit uneven until we get our teams on the other side of the vaccination topic. So that's kind of another one that, you know, we're doing our best to try and handicap.

Okay. Thanks, guys. Thanks, Margaret.

Our next question is from Ryan Zimmerman with BTIG. Please proceed.

All right. Good afternoon. I want to follow up on some of the other line of questioning, if I could, and just dig in a little bit here. So I just want to understand, I mean, the reps that left in the third quarter or that are no longer with the organization, can you characterize how many were kind of high-performing reps over that kind of million-dollar period? average productivity level, and I appreciate that these vaccine mandates can be challenging for employers, but it does seem like a large bolus, and so you did have some changes in leadership and sales, and so is there some component there beyond, say, the vaccine mandate that is kind of hamstringing you guys on some of these dynamics?

Yeah, I think that I don't necessarily think that's the case as far as leadership change, but just I'll be able to share a couple of things that might be helpful. First of all, historically, we have seen product specialist turnover in the teens. And associate product specialists, those newer reps, the junior folks, those tend to have a higher turnover rate. Those were in the 20s. Year to date, we're closer to the low 30s. Overall on a blend so we're seeing a higher turnover rate than we have in the past and then I think just from the math piece There's a hierarchy of productivity to your point So tenured reps if you've been here over a year and you're supported by an FSS Those are clearly the highest producers and then kind of the the hierarchy continues to go notching down to tenured reps without a support person to a newer rep less than a year with an FSS and to a newer rep without, and then finally to a vacant territory. So these vacant territories have a pretty material consequence. When they're vacant, we recognize that productivity certainly is impaired. The dependence, I think, on presence and support, interaction with patients is quite clear. I think when we look at what the turnover has been like, we have seen a higher turnover in some of our product specialists than we historically had. But I think it's also a function of it's just an incredibly dynamic and competitive market. And I certainly speak to a number of executives at a number of other companies, not a unique challenge. But as we get tenured reps who have been with us and been good producers in this market, they can be a great target for poachers. and they have proved to have been. We've seen some folks that have departed either for hospital sales, sometimes non-medical, sometimes they've gone somewhere where they didn't require a vaccination. And while that has actually been a fairly material one for us, there's about 30% of our sales force remained unvaccinated as of October 1st. That's a pretty significant number. And that's why we're a little bit broad in our range as far as what we think the remaining consequence might be. But I also believe, Ryan, that it's the right thing to do. And I also believe that in time, especially as we get closer to the end of the year, those that are contemplating their destiny on this decision may also conclude that there's very few safe havens. There are not many others that, like us, or just like us, that are not hiring unvaccinated to be out in patient and customer-facing roles. So we're hopeful that our group will come to that conclusion and continue to serve patients. But, you know, there's a variable I think that still remains open.

Okay. And just looking forward, just following up on Margaret's question, I mean, you're going to need to hire pretty rapidly, obviously, to get back to these levels by the first quarter. What impact, Brent, is that going to have on the P&L? I mean, will we see labor rates start to tick up? And can we see that on the P&L as we think about it going forward? And then I just have another follow-up.

Yeah, I think you're right, Ryan. There's, you know, it's going to be difficult to predict the pace of hiring, but certainly our plan is for sales rep hiring to hit the target of 140 product specialists by the end of the first quarter. Obviously, it's dependent on the labor market, but we feel good about... where we're at and what we're seeing. And then I think COVID certainly will have an interesting impact as we progress through fourth quarter and into first quarter. You know, it'll depend on where market rates are taking, you know, direct sales rep compensation levels to have an impact on the P&L, but certainly we're mindful of that as we progress through Q4 and into Q1. With commissions and such, some of it's fairly variable as we progress through. The other thing that you have to also keep in mind, Ryan, is that the AfloVest acquisition is expected to contribute about $5 to $5.5 million in 2021. And on a full year basis, the revenue is expected to be somewhere around $17 million on a pro forma basis. So we expect that to be a nice contributor as we progress through the fourth quarter and into the first quarter. And as I think Dan mentioned in his call, you know, the profitability of the AfloBest businesses is even better than what our core business is. So we expect that, you know, adjusted EBITDA margins at roughly about a 30% rate for AfloBest will certainly be beneficial as we progress through Q4 and Q1 as well.

Okay. And then just another one for me, and then I'll hop back in queue, but, you know, the blended growth rate in a normalized state, uh, you know, you guys talk about kind of, you know, being in that mid teens, maybe 20% growth rate. And I think about the, the, the split between all the product categories now between flexi touch and entree and, and Aflo, you used to talk about kind of what your expectations are, you know, for flexi touch in a normalized environment, um, where you think that can grow. relative to some of your other higher growing assets?

Well, I think FlexiTouch is still capable of being a high growth asset for sure. You know, one of the things that we've seen, the two most difficult environments that we faced in Q3, as we called out, were both most directly impacted in the FlexiTouch category. So the VA tends to be a FlexiTouch source for us And with the VA business flat, that certainly affected FlexiTouch more than any other product in the portfolio. The other place is in the oncology space where access has been a lot harder for us, especially when we've got an unvaccinated portion of our sales force. And the oncology patients typically end up getting a FlexiTouch as well. So both the two segments that we saw impact from COVID headwinds kind of squarely hit FlexiTouch more than anything else in the portfolio. That's why we still believe that as COVID conditions start to improve and our access is restored more universally, I think FlexiTouch certainly benefits. Okay.

I'll hop back in queue. Thank you for taking the questions. Thanks, Ryan.

Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question is from Suraj Kalia with Oppenheimer. Please proceed.

Good afternoon, Dan and Brent.

Can you hear me all right?

Coming through, Ken. Thanks, Suraj.

Perfect. Hey, Dan. So a lot of commentary provided on the product specialist being down by 24 impact on the reporter. Let me ask the same question with a slightly different flavor. Has, in your view, has Tactile adopted a tougher stance vis-a-vis vaccination rates as compared to the broader MedTech universe? Because we haven't heard similarly in terms of this issue popping up. That would be one thing. The second is on Aflowest, right? The implied guidance for Q4 still seems intact, at least from the time that you all acquired the company. And I'm curious, Are you all seeing the same dynamics there in terms of staffing shortages? The reason partly I ask is just bronchostasis. You need to go in quite a bit just from a diagnostics, pulmonary function perspective. And just kind of walk us through the dynamics you're seeing on the Aflovesc side vis-a-vis organic flexitat side.

Sure. Yeah, good questions. Let me start with the Aflovesc, and then I'll come back on the vaccination policy, Suraj. Sure. First of all, we're still getting acquainted with this business. And keep in mind, we're also once removed from those that are calling directly on the prescriber. So this is a respiratory DME channel. We ended up with 11 salespeople that were dedicated to the AfloVest from IBC. They joined us and we were delighted to bring them on board. All 11 came over and all 11 are squarely in the seat and continuing to support this business. I think a couple things I can, I'll attempt to speculate a little bit why I think the AfloVest has been a little less impacted than our lymphedema business. One is there's a public health emergency CMS waiver where there's a little bit more relaxed conditions as it relates to some of the respiratory products. This would be one of them. I think the other one is respiratory perhaps has benefited a bit more from COVID. Some of the consequences of severe COVID have respiratory consequences, as we know, so some of those products have actually benefited. So I think those are a few of the variables, and as I said, we've had no staffing issue on the direct group that we acquired that supports the channel. It's still in the early days of more active promotion within some of the respiratory DME partners as well. So I think that we're going to continue to see the benefit of that as they're finding ways to more actively co-market it across some of the other products that are kind of fit well, oxygen and nebulizers, et cetera. I think as it relates to our vaccination stance, I can tell you we've done an awful lot of straw polls within the industry among friends, old colleagues, and also different professional associations. You know, one of the differences for us versus some companies is we're definitely, we believe that we definitely fit the executive order as it relates to a government organization. contractor we directly bill CMS along with the VA and you know we're also fall into the category of over a 100 employees I think while the executive order for the federal contractors came out on September 9th it suggested that all contractors had to be vaccinated by the 8th of December and then about a week ago the administration I think decided they were gonna relax that a little bit based on some feedback and then they pushed it back to January 4th. At some point, my opinion is it's difficult to continue to adapt our policy every time the Fed changes. I think there's a little bit of a fickle position here. And ultimately, we've gotten to the point where we've said, you know what, it's now or later. Let's do it. Let's determine where we stand from a staffing position by the time we get to the end of the year. And also, let's take this access issue, which we continue to grapple with in more and more places off the table. Let's make sure that our staffs are vaccinated and have the optimal opportunity to interact both with patients safely as well as with the caregivers that have actually been vaccinated already. So that's our stance. And while this is a very difficult one, I must admit, you can poll lots of different folks. Nobody polls the same way, as I'm sure you know. There's a variety of different factions. It's impossible to land on a stance that I think is going to appeal to everyone. But as a healthcare company, we've kind of landed where we think we should be. We think it's largely consistent with what the federal government is encouraging, and we also think it aligns well as a healthcare player.

Again, I do appreciate the in-depth answer and actually helped us connect some of the dots. And I commend you for taking a good public health stance versus short-term results. Hey, quickly, if I could, Dan, to the extent that you can, I'd love to get your thoughts on the interim results of a private competitor.

In the space and I'm I'm curious especially in the compliance rate any preliminary thoughts you could offer Gentlemen, thank you for taking my questions Oh, yeah, so I think you're referring to there is a private company that's got a non pneumatic compression device Yeah, they've they've actually gotten a fair amount of attention in the social media circuit here of late however unless I'm mistaken, I think the revenue that they've seen is largely close to zero. It's a self-pay product at this point without reimbursement in place. So it's really difficult to imagine either a sales channel or a prescriber base wanting to prescribe this actively if they can't get it for their patients. So I believe the company you're speaking of actually, they appealed to CMS in an attempt to get the pneumatic definition out of the EO652 category, which is where our FlexiTouch fits. They failed and got a K code, which is a temporary code. The difference between a code and a coverage policy can be a very large canyon. So there's no national or local coverage policy in place. And recently, we'd heard that Some of the commercial payers have already labeled this experimental investigation. So there were a handful of the Blue Cross programs, Humana, and perhaps some others. So I think there's a bit of a tough path ahead there. But I also think it's worth just regrounding folks that our product development roadmap is also not static. And while I think there's probably a long road to establishing a new payer code and a coverage policy for a new category, I'm convinced that our roadmap will have demonstrated that we, too, are a bit of a moving target. And I'm looking forward to some of the things that we'll be introducing here over the course of the next year or two.

Thank you.

We are currently seeing no remaining questions at this time. That does conclude our conference for today. Thank you for your participation.