Tactile Systems Technology, Inc.

Please stand by. Good evening, ladies and gentlemen, and welcome to the fourth quarter and fiscal year 2021 earnings conference call for Tectile 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 to be filed 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, TechDial Medical's president and chief executive officer. Please go ahead, sir.

Thanks, operator, and welcome everyone to our fourth quarter and fiscal year 2021 earnings call. I'm joined on the line by Brent Moen, our chief financial officer. I'll begin today's remarks with an overview of our fourth quarter sales performance, along with a discussion of the drivers, trends, and operational highlights we saw during the quarter. Brent will discuss our financial results for the fourth quarter and full year in greater detail and review our 2022 financial guidance, which we introduced in our earnings release this afternoon. Then I'll share some additional thoughts on our outlook and key areas of focus heading into 2022 before we open the line for questions. So with that, let's get started. In the fourth quarter of 2021, we reported total revenue growth of 4% year over year to $61.7 million. Our total revenue growth was driven by sales of our recently acquired AfloVest product line, which contributed approximately seven percentage points to our revenue in the fourth quarter. This more than offset a 3% decrease in sales of rentals, and rentals of our lymphedema products, with our revenue from FlexiTouch and Entrez systems decreasing 3% and 2% year-over-year, respectively. Our fourth quarter sales performance enabled us to achieve total revenue growth of 11% for the full year of 2021, exceeding our latest revenue guidance range, which called for total revenue growth of 9% to 10% year-over-year. the higher than anticipated results relative to our expectations was driven by slightly better sales of our FlexiTouch systems during the fourth quarter. Broadly speaking, our FlexiTouch and Entrez system sales performance continued to be moderated by two primary factors that we outlined on our last earnings call in November. The headwinds related to the extended recovery from COVID and the Salesforce staffing gaps that emerged during the second half of 2021. Let me take a moment to cover each of those aspects in a bit more detail. Beginning with the impact of COVID, the spike in cases driven by the Delta variant during the second half of 2021 led to the re-emergence of many of the headwinds that we'd seen during similar periods in the pandemic, namely increased patient absenteeism, constraints on patient throughput, and restrictions on rep access to both patients and clinicians at the healthcare facilities that we serve. These headwinds ultimately limited our team's ability to engage with new clinicians and patient customers. The persistence of these headwinds throughout the fourth quarter was largely consistent with our expectations. With respect to the Salesforce staffing, our performance in the fourth quarter was impacted by the challenging labor market which in combination with some reluctance around our vaccination policy among both existing representatives and potential new hires impacted recruiting and retention. Keep in mind, our field teams regularly engage with patients directly, both in the clinic and in their home, thus our cautious stance. In addition, with nearly 30% of our sales team unvaccinated as we entered the fourth quarter, we sought to reconcile our vaccination testing requirements to balance retention with patient safety. During the fourth quarter, we focused on enhancing our sales rep retention efforts, bolstering our internal recruiting resources, and increasing our hiring incentives, especially for territories that have been more difficult to staff. We also instituted a vaccine policy aimed at restoring access to clinicians and patients, addressing our obligations as both a federal contractor as well as ensuring the safety of both our employees and the customers that we serve. I'm pleased to share that we navigated the implementation of this vaccine policy during the fourth quarter while minimizing additional departures. As of December 31st, our field commercial team, which is focused on increasing clinician awareness of our lymphedema solutions, consists of approximately 220 field sales representatives, 30 field managers, and 94 field support specialists. The AfloVest device is sold through our DME providers throughout the United States and is supported by a team of 11 tactile sales representatives. To help mitigate the effects of COVID-related headwinds on our business, our team's been focused in recent quarters on leveraging virtual solutions to interact with patients and customers. And these efforts continued during the fourth quarter as well. Most notably, we continued to educate the medical community through our clinician education events. We hosted a total of 65 education programs during the quarter, which saw participation from approximately 1600 clinician attendees. In total, more than 5500 clinician attendees participated in our educational programming throughout the course of 2021. This was more than double pre-COVID attendance. Given this enhanced engagement with the medical community, we've continued to see expansion in the awareness and effective treatment of lymphedema, as evidenced by our growing base of clinician prescribers. And lastly, we continued to make steady progress with the integration of our AfloVest product during the fourth quarter. From a sales perspective, we were pleased to see solid engagement among our channel partners. We're seeing affirmation. that our DME partners are finding well-qualified patients among their oxygen, nebulizer, and noninvasive ventilation customers. As a reminder, we believe that this partnership with DME representatives focused on respiratory products in the home care setting is an advantageous sales and distribution strategy. These reps are well-positioned to offer a complementary portfolio of respiratory solutions and benefit from the evolving needs of their existing customers. From a margin perspective, AfloVest helped contribute to our strong overall gross margin performance during the quarter, resulting in nearly 73% for the fourth quarter. Stepping back, while the second half of 2021 proved to be more challenging than we'd anticipated when the year began, we made solid operational progress that was consistent with our expectations during the fourth quarter. By continuing to successfully navigate these issues, we remain on track for a recovery and subsequent inflection as we work our way through 2022. Now, let me turn it over to Brent, who will share a more detailed discussion of our quarterly financial results, along with our guidance for 2022.

Brent? Thanks, Dan. Total revenue in the fourth quarter increased 4% year-over-year to $61.7 million compared to $59.2 million in the fourth quarter of 2020. By product category, Sales of our recently acquired AfloVest system contributed $4.3 million for the quarter. Sales and rentals of our FlexiTouch systems decreased 3% year-over-year to $49.7 million in the quarter. And sales and rentals of our Entrez systems decreased 2% year-over-year to $7.8 million. Total revenue by channel was 68% commercial 16% Medicare, 9% VA, and 7% durable medical equipment distributors. The latter is a new channel comprised of revenue from our recent acquisition of AfloVest, which closed on September 8, 2021. These figures compare to our total revenue channel in the fourth quarter of 2020, in which the commercial Medicare and VA channels represented 71%, 18% and 11% of total revenue respectively. Continuing down the P&L, unless noted, all references to fourth quarter results are on a year-over-year basis. Gross margin was 72.6% of sales compared to 70.6% last year, an increase of 200 basis points year-over-year. Non-GAAP gross margin was 73.3% of sales compared to 70.7% in the prior year. Non-GAAP gross margin excludes non-cash intangible amortization in both periods and non-cash purchase price adjustments related to our acquisition of AfloVest in the current year period. The increase in gross margin resulted from sales and rental mix by payer. As a reminder, we have provided reconciliations of certain gap to non-gap measures in our earnings press release. Fourth quarter operating expenses were $41 million, an increase of $6.2 million, or 18 percent. The increase in operating expenses was driven primarily by a $5 million, or 26 percent, increase in sales and marketing expenses, largely due to increases in personnel-related compensation expense, including the addition of the AfloVest sales team, and travel-related expenses as we return to hosting in-person regional sales meetings. The increase in operating expenses was also driven by a $340,000 increase in reimbursement general and administrative expenses, a $400,000 increase in research and development expenses, and a $400,000 increase in cash or non-cash intangible amortization and non-cash earn-out expense. The increase in intangible amortization and non-cash earn-out expense was primarily attributable to the increase in intangible assets associated with the AfloVest acquisition, offset by a $200,000 decrease in the estimated fair value of our earn-out liability related to the acquisition of AfloVest. which represented a reduction in our GAAP operating expenses in the fourth quarter of 2021. Operating income was $3.8 million compared to $7 million last year. Non-GAAP operating income was $6.4 million compared to $7.8 million last year. Income tax expense was $10.9 million compared to income tax benefit of $3.9 million last year. The current year tax expense was driven by the recording of a full valuation allowance against our deferred tax assets. Net loss was $7.5 million, or 38 cents per diluted share, compared to net income of $12.1 million, or 61 cents per diluted share last year. Non-GAAP net loss was $5.5 million, compared to non-GAAP net income of $11.8 million last year. Weighted average shares used to compute GAAP diluted net income and loss per share were 19.8 million shares for the fourth quarters of both 2021 and 2020. Adjusted EBITDA was $9.5 million compared to $10.8 million last year. Turning to a brief review of our results for the full year of 2021, total revenue increased $20.9 million, or 11%, to $208.1 million. The increase in total revenue was driven by an increase of $12.3 million, or 8%, in sales of FlexiTouch, $5.1 million in sales related to the AfloVest, and an increase of $3.5 million, or 15%, in sales of Entrez. 2021 revenue by payer was 68% commercial, 17% Medicare, 12% VA, and 3% DME, compared to 71%, 16%, 13%, and 0% respectively last year. Gap net loss for 2021 was $11.8 million or $0.60 per diluted share compared to a loss of $620,000 or $0.03 per diluted share for the full year 2020. Non-gap net loss for 2021 was $6.5 million compared to non-gap net income of $3.3 million for the full year of 2020. Adjusted EBITDA for 2021 was $17.7 million, or 9% of sales, compared to $16 million, or 9% of sales for the full year 2020. As of December 31st, 2021, we had $28.2 million of cash and cash equivalents and $55 million of outstanding borrowings, compared to $47.9 million in cash and cash equivalents and no outstanding borrowings as of December 31, 2020. This also compares to $22.4 million in cash and cash equivalents at the end of the third quarter of 2021. Turning to a review of our 2022 outlook, which we introduced in our earnings press release this afternoon, we expect full year 2022 total revenue in the range of $235 to $240 million, representing growth of approximately 13% to 15% year over year. Our 2022 total revenue guidance range assumes sales of our products that serve patients suffering from lymphedema and CVI, specifically our FlexiTouch and Entrez systems, increased approximately 6% to 8% year over year. And sales of products that serve patients suffering from bronchiectasis and chronic respiratory conditions, specifically our AfloVest product line, in the range of $19.5 million to $20.5 million for the full year of 2022. This compares to the $5.1 million of AfloVest sales following our acquisition on September 8, 2021. On a pro forma basis, assuming the asset had been acquired on January 1, 2021, sales of our AFLO vests are expected to increase in the range of approximately 18% to 24% year over year for the 12 months ending December 31, 2022. For modeling purposes, for the full year of 2022, we expect our GAAP gross margin to be in the low 70% range. our gap operating expenses to increase 18% to 20% year-over-year, with roughly one-fifth of the expected year-over-year increase coming from non-cash, intangible amortization, and non-cash changes in contingent consideration. The remaining increase in our gap operating expenses is driven primarily by incremental expenses from the acquisition of AfloVest, for the 12-month period in fiscal 2022 as compared to the partial period for fiscal 2021, and our continued investment in research and development, including new product introductions we expect to introduce in 2022, which is expected to increase by $4 million. Interest expense of approximately $2 million, a tax rate of 25 percent and fully diluted weighted average share count of approximately 19.8 million shares. We also expect to generate adjusted EBITDA of approximately $14 million to $16 million in 2022. Our adjusted EBITDA expectation assumes approximately $2 million of legal expenses and certain non-cash items, including stock compensation expense of approximately $12 million, intangible amortization and changes in contingent consideration of approximately $8.5 million, and depreciation expense of approximately $2.4 million. Lastly, given the continued COVID-related headwinds we are seeing in the first quarter of 2022, we expect our total revenue for the first quarter to increase in the mid-single digits year over year. This will be driven by a decline in sales of our lymphedema products in the low single digits year over year, offset by contributions from sales of AfloVest, which, by way of reminder, did not impact our sales results in the first quarter of 2021. With that, I'll turn the call back to Dan for some closing remarks. Dan?