Tactile Systems Technology, Inc.

Welcome, ladies and gentlemen, to the second 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 the current expectations of management and involve inherent risks and uncertainties, which could cause actual results to differ materially from those indicated, including those identified in the 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 generally accepted accounting principles or GAAP. We generally refer to these non-GAAP financial measures. Reconciliations of these 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 to our second quarter earnings call. I'm joined on the line by our Chief Financial Officer, Brent Mullen. Today I'll begin with an overview of our sales performance and operational highlights during the second quarter. Brent will then cover off on our second quarter financial results in greater detail and review our 2022 financial guidance, which we updated in our earnings release earlier today. I'll conclude with some additional thoughts on our updated outlook and key areas of focus in 2022 before we open the line for questions. Starting off with our second quarter sales performance, we were pleased to report total revenue growth of 17% year-over-year to $59.6 million, which came in ahead of our 10% to 15% growth we'd anticipated at the time of our earnings call in May. Our outperformance in the second quarter was largely driven by sales of our airway clearance products, which, as a reminder, includes AfloVest. Airway clearance products contributed approximately 16 percentage points to our total revenue growth. Sales and rentals of our lymphedema products in the second quarter increased 1% year-over-year to $51.6 million, consistent with our expectation of flat to low single-digit growth. Looking at the performance in our lymphedema and airway clearance product categories more closely, we were pleased to see lymphedema product sales return to modest year-over-year growth as some of the more pronounced headwinds that we experienced during the first quarter began to subside. As a reminder, throughout the first quarter of 2022, performance in our lymphedema business was paced by headwinds related to COVID case surge, as well as the Salesforce staffing gaps we experienced in the second half of 2021. With this as a backdrop, during the second quarter, we saw lower rates of COVID-related absenteeism at the patient, provider, and Salesforce levels. Sales in our lymphedema business increased 27% sequentially compared to our first quarter's revenue From a Salesforce staffing and training perspective, we made good progress in recovering from the recruiting and retention challenges discussed on our recent earnings calls. I'm pleased to report that we achieved our hiring target for the year, ending the second quarter with 241 field sales reps in our lymphedema channel, an increase of 15 since the end of March. In addition to filling the remaining gaps in our sales team, we've focused on ensuring that the bolus of new reps we brought on board in recent quarters are well trained to facilitate their increasing productivity over the second half of 2022. In our airway clearance business, we were pleased to deliver another quarter of exceptionally strong sales performance in the DME channel. On a standalone basis, given AfloVest was a private company in the prior year period, airway clearance product sales grew 96% year over year. Feedback from our DME channel partners indicates that the respiratory DME reps that we partner with have been quick to appreciate the value and complementary nature of having our AfloVest within their existing portfolios. They're seeing success in finding qualified audiences across the complex respiratory patients they're already serving. These are patients who, for example, may be on oxygen, nebulizers, non-invasive ventilation, or using one of the other complementary products that respiratory DME reps sell. and do not yet have an effective at-home treatment for their airway clearance needs. Given the success their reps are seeing, our DME partners are continuing to introduce our AfloVest system to more of their branches, further expanding their coverage universe. In addition, our small team of respiratory specialists is making good progress supporting and educating reps among our existing DME partners, while also helping to develop new partnership opportunities. And lastly, From an operational standpoint, we completed the final stage of our integration of AfloVest on May 1st by assuming oversight of product manufacturing and shipping. We continue to work with our existing supplier to expand production capacity and remain on track to add a second supplier by the end of this year in order to support our growing demand. Our performance over the first half of this year, where sales of AfloVest increased 102% year over year, along with the positive feedback received from our DME channel partners, continues to validate the effectiveness of our strategy to leverage this channel to reach more complex respiratory patients. Turning to a review of our other operational highlights, as I mentioned earlier, our primary focus during the second quarter was onboarding and training our recently hired lymphedema sales reps. Most notably, we hosted our national sales meeting in April the first time in 27 months that we've been able to assemble our entire sales team in person due to COVID. Our primary goal for the event was to reinforce our new team members' technical knowledge and selling skills. With this goal in mind, our event included interactive panels which allowed our reps to learn from and engage with both our top performing sales team members and with key opinion leaders in the field of vascular medicine. We also held sessions dedicated to reviewing the latest clinical evidence, as well as interactive workshops focused on enhancing selling skills. Our national sales meeting was also a great opportunity to bring our team up to speed on our new product introductions ahead of their full market release. On the heels of our national sales meeting, we hosted regional in-person training sessions to support our newer reps as well. Feedback on these events has been positive, and along with our new products, has helped to re-energize our team as we enter the second half of 2022. In addition to our sales training efforts, we continued to educate clinicians. We hosted 69 educational programs attended by nearly 1,700 US clinician participants. As part of this programming, we continued to build awareness of the recently published expert consensus on lymphedema by hosting a webinar with the lead physician authors along with contributing panel experts. They discussed the publication, which represents an important collective stance among three disparate professional societies to payers and clinicians, concluding that all patients with chronic venous insufficiency should be considered lymphedema patients and that pneumatic compression devices should be recommended for the treatment of lymphedema patients. By continuing to raise awareness in the market about the identification and effective treatment of lymphedema, we're creating new opportunities for our team to identify, educate, and train new clinicians and their staff. And lastly, in keeping with our renewed focus on R&D and new product development, we completed the final prelaunch stages of two new solutions for our lymphedema patients. The first of these is the new series of lower extremity comfort-ease garments for our FlexiTouch system. The development of these garments, led by a designer who joined Tactile Medical with a background in athletic apparel, was informed by over 18,000 points of feedback obtained from patients and therapists. The goal of our new Comfort E series is to improve the user experience for our patients, making them easier to train and use, more comfortable, and better fitting. Our new garments are lighter than our prior generations and made from materials that are cooler and more malleable. Lymphedema is a condition which requires daily management, so our design team was focused on making the experience of putting on and taking off our garments more comparable to getting dressed versus wearing a medical device. During the second quarter, we conducted a limited market release of our lower extremity comfort ease garments across a targeted group of accounts, and I'm pleased to report that the feedback we received from our patients and trainers was excellent. Comparisons between comfort ease and our prior generation of garments has emphasized its intuitive nature and ease of use with less external assistance required. By improving comfort, fit, and ease of use, we believe ComfortEase garments will favor improved patient adherence and ultimately optimal treatment outcomes. Based on the success of our limited market release, we began our full market release of ComfortEase in July, which we announced via a press release last week. In addition to our ComfortEase garments, we were pleased to announce the launch of our new Kiley mobile application for the iOS and Android platforms. As we've discussed previously, lymphedema is an underserved condition, and patients often go undiagnosed and untreated for years. Based on an analysis conducted of 85,000 patients with lymphedema over a five-year period, we found that it took three years on average for a patient to obtain a definitive lymphedema diagnosis following the onset of their first symptoms. We also found that patients often engage with three or more healthcare providers along this multi-year journey. The launch of our Kiley mobile app represents our first digital step in providing support for patients with information and tools to assist them on their path to diagnosis and treatment. Our app is designed to help educate patients with chronic swelling about lymphedema and its effective treatments. It contains features that will enable them to track and document their disease progression with pictures and measurements ahead of their visit with their specialist, helping to arrive better informed and qualified for treatment. Patients that are prescribed one of our devices will then be able to stay informed via the app, which will help update them on their verification of benefits and insurance approval status, help them track when their FlexiTouch Plus or Entrez system will arrive, and assist them with their training, including product tutorial videos and FAQ help. Armed with our Kiley mobile application and easier-to-use ComfortEase garments, patients should be better positioned for easy and effective training, either through our self-training option or by working with one of our in-house trainers. Let me now turn it over to Brent to discuss our financial results in more detail along with our updated guidance for 2022. Brent?

Thanks, Dan. Total revenue in the second quarter increased 17 percent year-over-year to $59.6 million compared to $51.1 million in the second quarter of 2021. Looking at our total revenue by product line, sales of our airway clearance products, which includes the AfloVest product line we acquired in September of 2021, contributed $8 million for the corridor. Sales and rentals of our lymphedema products, which includes our FlexiTouch Plus and Entrez systems, increased 1% year-over-year to $51.6 million. Total revenue by source was 59% commercial, 17% Medicare, 13% durable medical equipment distributors, and 11% VA. As a reminder, Durable medical equipment distributors is a new source 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 source in the second quarter of 2021, in which commercial, Medicare, and VA represented approximately 70%, 16%, and 14% of total revenue, respectively. Continuing down the P&L, unless noted, all references to the second quarter are on a year-over-year basis. Gross margin was 72.5% of sales compared to 70.9% last year. Non-GAAP gross margin increased 210 basis points year-over-year to 73% of sales compared to 70.9% in the prior year. Non-GAAP gross margin excludes non-cash intangible amortization in both periods. The increase in gross margin was attributable to both product and payer mix. As a reminder, we have provided reconciliations of certain GAAP to non-GAAP measures in our earnings press release. Second quarter operating expenses were $47.3 million, an increase of $11 million or 30%. The increase in operating expenses year-over-year was primarily driven by a $7.9 million increase in sales and marketing expenses, largely due to the addition of our AfloVest sales team and new hires added to our Lymphedema sales team, along with increased travel-related expenses as we return to normalized business activities, expenses related to our in-person national sales meeting held in April, and costs associated with new product introductions. The year-over-year increase in operating expenses was also driven by a $1.7 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 gap operating expenses were not impacted by these non-cash items. An $800,000 increase in reimbursement general and administrative expenses and a $643,000 increase in research and development expenses. Including the aforementioned non-cash expenses and litigation defense costs in both periods, our non-GAAP operating expenses increased 28% year-over-year in the second quarter. Operating loss was $4.1 million compared to an operating loss of $76,000 last year. Non-GAAP operating loss was $1.8 million compared to income of $915,000 last year. Income tax benefit was $20,000 compared to a benefit of $1.4 million last year. The difference relates to a full valuation allowance being recorded against all deferred tax assets in the current period and a tax benefit related to a research and development credit recognized in the second quarter of 2021. Net loss was $4.6 million, or 23 cents per diluted share, compared to net income of $1.3 million, or 7 cents per diluted share last year. Non-GAAP net loss was $2.9 million, compared to net income of $2 million last year. Weighted average shares used to compute gap diluted net loss per share were $20 million and $19.7 million in the second quarters of 2022 and 2021, respectively. Adjusted EBITDA was $1.7 million compared to $4.1 million last year. As of June 30, 2022, we had $23.4 million in cash and cash equivalents and $50.5 million in outstanding borrowings. This compares to $21.2 million in cash and cash equivalents and $51 million of outstanding borrowings as of March 31, 2022, and $28.2 million of cash and $54.8 million at December 31, 2021. Turning to a review of our 2022 outlook, which we updated in our earnings press release today, We are raising the full year guidance range to account for our stronger than expected performance during the first six months of 2022, as well as our updated growth expectations for the balance of the year. For 2022, we now expect total revenue in the range of $238 to $242 million, which represents growth of approximately 14% to 16% year over year. This revised outlook compares to our prior revenue guidance range of $235 to $240 million, representing growth of approximately 13% to 15% year-over-year. Our updated 2022 total revenue guidance range assumes sales of our lymphedema products increased approximately 3% year-over-year, which reflects growth in the range of 6% to 8% year-over-year in the second half of 2022. Sales of our airway clearance products in the range of approximately $30 million to $32 million. For modeling purposes, for the full year 2022, we expect gross margins in the range of 71% to 72%. Our gap operating expenses to increase 23% to 24%. driven primarily by incremental operating expense from our acquisition of AfloVest for the 12-month period in fiscal year 2022 as compared to the partial period in fiscal year 2021. We also expect legal expenses of approximately $3 million, an interest expense of approximately $2 million, and a fully diluted weighted average share count of approximately 19.8 million shares. In 2022, we continue to expect to generate adjusted EBITDA of approximately $14 million to $16 million. And our adjusted EBITDA expectation continues to include certain non-cash items, including stock compensation expense of $12 million, intangible amortization and estimated changes in contingent consideration of $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 expectations for the third quarter. Specifically, we expect total revenue growth of approximately 13% to 17% year over year, driven by 1% to 3% growth in sales of our lymphedema products and $7 million to $8 million of sales in our airway clearance products. With that, I'll turn the call back to Dan for some closing remarks. Dan?