Tactile Systems Technology, Inc.

Welcome, ladies and gentlemen, to the first quarter of fiscal year 2022 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 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 risk factor section of our annual report on Form 10-K, as well as our most recent 10-Q filing 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 the generally accepted accounting principles or GAP. We generally refer to these as non-GAAP financial measures. Reconciliation of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available on 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 Medicals President and Chief Executive Officer. Please go ahead, sir.

Thank you, Operator. And welcome, everyone, to our first quarter earnings call. I'm joined on the line by Brent Moen, our Chief Financial Officer. I'm going to begin our prepared remarks today with an overview of our quarterly sales performance and some of the highlights that we saw during the first quarter. Brent will cover our first quarter financial results in greater detail and review our 2022 financial guidance, which we reaffirmed in our earnings release today. And I'll conclude with some additional thoughts on our outlook and key areas of focus in 2022 before we open the line for questions. So let me start by saying I was pleased with our team's ability to deliver a strong quarter amid a host of headwinds that we believe peaked in the first quarter. In the quarter, we reported total revenue growth of 12% year over year to $48 million, exceeding our expectations for growth in the mid single digits. which we communicated on our earnings call in February. Our total revenue growth was primarily driven by sales of our airway clearance products, which includes our recently acquired AfloVest product line. Airway clearance product sales contributed approximately 17 percentage points to our revenue growth in the first quarter. The stronger than anticipated sales of our airway clearance products offset a 5 percent decrease in sales and rentals of our lymphedema products. Let me provide you with a brief update on the puts and takes that we saw in our lymphedema and airway clearance categories. Beginning in our lymphedema products, as we outlined in our earnings call in February, our first quarter sales performance remained paced by the surge in COVID cases related to the Omicron variant, as well as the expected effects of the Salesforce staffing gaps we experienced during the second half of 2021. As we anticipated on our last call, the headwinds related to the Omicron variant continued through much of the first quarter. Similar to prior periods with high COVID case volumes, we saw higher rates of absenteeism at the patient, provider and staff, and even within our own Salesforce levels, along with reduced patient throughput and limitations on rep access at some of the facilities that we serve. While these headwinds ultimately limited our team's ability to engage with new accounts, we were pleased with their efforts to support our existing clinician and patient customers, despite the disruption created by this recent case surge. In terms of Salesforce staffing, remember that we navigated several challenges during the second half of 2021, which impacted our recruiting and retention efforts, including the challenging labor market and some reluctance related to vaccination and testing. During the first quarter, we continued to make progress in getting back to our target headcount, and ended the quarter with 226 field sales representatives. Given the bolus of our new field sales reps that joined since late 2021, we remain focused on getting them onboarded and trained during the second quarter, with the expectation of improving productivity as we enter the second half of 2022. We're also targeting continued expansion of our field sales headcount during the remaining months of this year to approximately 240 before the end of 2022. With respect to our airway clearance products, we were pleased to see strong initial performance in the DME channel during the first quarter, culminating in pro forma growth of 108% year over year. As a reminder, our AfloVest product line is sold through respiratory DME providers throughout the United States, supported by a small team of tactile sales specialists. The AfloVest acquisition was predicated on the belief that respiratory DME reps are uniquely positioned in the market due to their existing relationships with pulmonologists and primary care providers that treat chronic respiratory conditions, like bronchiectasis, as well as other chronic disorders that lead to retained secretions and breathing problems. The initial traction these DME reps are seeing is evidence that the aflovest airway clearance therapy is a natural complement to other therapies that they provide to complex respiratory patients, including oxygen, nebulizers, and non-invasive ventilation. Our integration efforts also progressed as we expected during the quarter, and our specialized airway clearance sales force continued to make progress in raising awareness, educating, and training within our DME channel. Turning to a review of some important operational highlights. During the first quarter, we continued to host virtual education events, as well as serve as sponsors at the American Venus Forum, and power lymphatics conferences. Specifically, we hosted 54 educational programs that were attended by nearly 1,600 clinician participants. And we increased our podium presence at the key society meetings, including the American Venous Foundation Congress in February, where our chief medical officer, Dr. Tom O'Donnell, and several other key opinion leaders delivered five presentations on a variety of topics related to identification, diagnosis, and management of lymphedema. In addition to these efforts, we were pleased to see an expert opinion consensus on lymphedema diagnosis and treatment published in Phlebology, the journal for venous disease, in March. It reflected a consolidated stance on the diagnosis and treatment of lymphedema among three independent professional societies, the Society of Vascular Medicine, the American Venous Forum, and the American vein in lymphatic society. Experts from these societies used the Delphi methodology and arrived at a consensus on a number of factors related to lymphedema, including two particularly notable items. First, all patients with chronic venous insufficiency, stages C3 through C6, should be considered lymphedema patients. And second, pneumatic compression should be recommended for lymphedema patients. We believe this will prove to be another persuasive tool as we engage with prescribers as well as payers, particularly in demonstrating the need for access to pneumatic compression devices for patients suffering from CVI-related lymphedema. We also made progress in our development of new solutions for our lymphedema customers. We remain on track for a limited market release later in the second quarter and a full market release in the third quarter of a new series of FlexiTouch garments intended to further enhance the patient experience. Among the improved features, our redesign favors increased patient comfort and ease of use, all focused on a better patient experience. And our work continues towards introducing a mobile app later this year. This app will enable Tactile to engage and inform patients earlier in their diagnosis and treatment journey, help them learn more about their condition and treatment options, and allow them to document their symptoms and progress ahead of their visit with a specialist, helping them arrive better informed and potentially better qualified for our therapies. We believe that both of these new solutions will provide the added benefit of helping our team to educate and train patients more effectively, as well as begin to engage with them earlier in their journey toward a definitive diagnosis and path to relief. In January, we bolstered our board of directors with the appointment of two new highly experienced members, Valerie Asbury and Brent Schaefer. Valerie is the president and CEO of LifeScan, a former Johnson & Johnson company and global leader in blood glucose monitoring for people with diabetes. She previously spent 20 years with J&J, including five years as global president of its diabetes solutions business. Brent is the former chairman and CEO of Cerner Corporation, which was acquired by Oracle in 2021. He formerly served as the chief executive officer of Philips North America as well. Their addition to our board further strengthens Tactile Medical's depth of experience in accessing and treating patients that suffer from chronic conditions, including the use of digital health tools and supporting our continued development as a company. And lastly, in February, we were pleased to announce that the Ketam lawsuit filed by a competitor had been dropped and dismissed with prejudice by a federal judge, with the plaintiff agreeing to waive the right to appeal. After defending our organization and its partners against the allegations in this case, which we always believed were meritless, we're proud to resolve this matter in its entirety without paying anything to the plaintiff, his counsel, or the government. We're proud to have rightfully defended our reputation and glad to close this chapter with it fully intact. Now let me turn it over to Brent to discuss our financial results in more detail, along with our guidance for 2022. Brent?

Thanks, Dan. Total revenue in the first quarter increased 12% year-over-year to $48 million, compared to $42.8 million in the first quarter of 2021. Looking at our total revenue by disease state, sales of our Airway clearance products, which includes our recently acquired AfloVest product line, contributed $7.3 million for the quarter. And sales and rentals of our Lymphedema products, which includes our FlexiTouch and Entrez systems, decreased 5% year-over-year to $40.7 million. Total revenue by channel was 55% commercial, 18% Medicare, 15% durable medical equipment distributors, and 12% VA. As a reminder, durable medical equipment distributors is a new channel comprised of revenue from our acquisition of the airway clearance therapy business, which closed on September 8, 2021. These figures compare to our total revenue by channel in the first quarter of 2021, in which the commercial, Medicare, and VA channels represented 66 percent, 20 percent, and 14 percent of total revenue, respectively. Continuing down the P&L, unless noted, all references to first quarter results are on a year-over-year basis. Gross margin was 70.6 percent of sales compared to 70.7 percent last year. Non-GAAP gross margin was 71.2 percent of sales compared to 70.7 percent in the prior year. Non-GAAP gross margin excludes non-cash intangible amortization in both periods. As a reminder, we have provided reconciliations of certain GAAP to non-GAAP measures in our earnings press release. First quarter operating expenses were $48.8 million, an increase of $14.4 million, or 42 percent. The largest driver of the increase in operating expenses year over year was a $7 million increase in non-cash earn-out expense related to the acquisition of the airway clearance therapy business and non-cash intangible asset amortization. Our prior year GAAP operating expenses were not impacted by these non-cash items. The increase in operating expenses was also driven by a $5.1 million increase in sales and marketing expenses, largely due to increases in personnel-related compensation expense, including the addition of the AfloVest-related commercial expenses and travel-related expenses as we return to normalized business activities. A $2 million increase in reimbursement, general, and administrative expenses and a $300,000 increase in research and development expenses. Excluding the aforementioned non-cash expenses and litigation defense costs in both periods, our non-GAAP operating expenses increased 19 percent year-over-year in the first quarter. Operating loss was $14.9 million compared to an operating loss of $4.1 million last year. Non-GAAP operating loss was $5.4 million compared to a loss of $3.1 million last year. Income tax expense was $200,000 compared to an income tax benefit of $1.8 million last year. The difference relates to a full valuation allowance being recorded against all deferred tax assets in the current period. Net loss was $15.6 million, or 78 cents per diluted share, compared to a net loss of $2.3 million, or 12 cents per diluted share last year. Non-GAAP net loss was $8.4 million, compared to a net loss of $1.5 million last year. Weighted average shares used to compute GAAP diluted net loss per share were $19.9 million, and $19.5 million in the first quarter of 2022 and 2021, respectively. Adjusted EBITDA loss was $2.6 million compared to an adjusted EBITDA loss of $7,000 last year. As of March 31, 2022, we had $21.2 million in cash and cash equivalents and $51.3 million of outstanding borrowings compared to $28.2 million in cash and cash equivalents and $55 million of outstanding borrowings as of December 31st, 2021. Turning to a review of our 2022 outlook, which we reaffirmed in our earnings press release today, our guidance for full year 2022 total revenue remains unchanged in the range of $235 to $240 million representing growth of approximately 13% to 15% year-over-year. Our 2022 total revenue guidance reflects sales of our lymphedema products increasing approximately 6% to 8% year-over-year and sales of our airway clearance products in the range of 19.5 million to 20.5 million. For modeling purposes, We expect to generate adjusted EBITDA of approximately $14 million to $16 million in 2022. This range is based on the following assumptions for the full year. Gross margins in the low 70% range, an increase in GAAP operating expenses in the low 20% range year over year, driven primarily by a $2 to $3 million of legal expenses and certain non-cash items, including stock compensation expense of approximately $12 million, intangible amortization and estimated changes, and contingent consideration of approximately $11.5 million, and depreciation expense of approximately $2.4 million. Lastly, in the interest of transparency, we would like to provide some additional color on our revenue expectations for the second quarter, specifically we expect total revenue growth of approximately 10% to 15% year-over-year, driven by flat to 3% growth in our sales of our lymphedema products and $5 to $6 million of sales of our airway clearance products, which, as a reminder, did not impact our sales results in the second quarter of 2021. With that, I'll turn the call back to Dan for some closing remarks.