Tactile Systems Technology, Inc.

Welcome ladies and gentlemen to the fourth quarter and 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 involved 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 to be filed with the Securities and Exchange Commission. Such factors may be updated from time to time and 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, TACPAN Medical's President and Chief Executive Officer. Please go ahead, sir.

Thank you, Operator, and welcome everyone to our fourth quarter and full year 2022 earnings call. I'm joined online by our Chief Financial Officer, Brent Moen. I'll start off today's remarks with a high-level overview of our financial performance in the fourth quarter and the factors that drove our better-than-expected performance. Then I'll share an update on some of the important operational highlights during the quarter and in recent months. Brent will review our financial results in greater detail, along with financial guidance for 2023, which we introduced in our earnings press release today. And then I'll conclude by sharing some additional thoughts on our strategic priorities for 2023 and our outlook for this year and the years to come before we begin the Q&A session. With that, let's begin with a review of our Q4 financial performance. In the fourth quarter, we grew our total revenue by 20% year over year to $73.9 million. Our total revenue performance was well above our expectations for the quarter. enabling us to exceed the high end of the updated fiscal year guidance range that we shared in our third quarter earnings press release. Looking at the composition of our total revenue growth for the quarter, we were especially pleased to see significant contributions from sales of both our lymphedema and airway clearance products. Revenue from our lymphedema products increased 14% year-over-year to $65.8 million, and sales of our airway clearance products increased 90 percent year-over-year to $8.1 million. We complemented our revenue performance in the fourth quarter with strong year-over-year improvements in our profitability, with several hundred basis points of GAAP and non-GAAP operating margin expansion, generating $5 and $6 million of net income on a GAAP and non-GAAP basis, respectively, compared to net losses in their prior year periods. and delivering 100 basis points of adjusted EBITDA expansion year over year. From a cash perspective, we generated $3.8 million of free cash flow, which helped fund our $5 million milestone payment in the period related to the AfloVest acquisition. In terms of the factors that contributed to our fourth quarter revenue performance, with respect to our lymphedema product line, we ended 2022 with 250 sales representatives, consistent with our headcount at the beginning of the fourth quarter, which speaks to the improved level of retention and engagement we've seen in comparison to some of the challenging quarters we experienced in the second half of 2021. Our fourth quarter lymphedema revenue performance reflects the productivity of our sales team during the quarters as the bolus of reps that we hired and trained since late 2021 continue to contribute more meaningfully. From a macro level, clinic throughput continued to stabilize, and we saw pockets of VA centers resume seeing patients. At the same time, our reps made notable progress during the quarter in engaging with accounts, including those accounts that were previously unrepresented in 2021. Our ComfortEase lower extremity garments and Kiley digital application, which were both launched in July, continued to serve our sales team well in these efforts, providing them with new solutions to discuss, when revisiting accounts. We saw strong sales of our lymphedema systems for use on the lower extremities throughout the quarter, reflecting the success of our team and the positive market response to our ComfortEase garments. Additionally, we were pleased to see that CMS discontinued their policy that required suppliers to include certificates of medical necessity for all pneumatic compression device claims beginning January 1st, 2023. The upcoming change provided our reps with another reason to engage with and educate prescribers during the fourth quarter. Turning to our airway clearance product line, our team of respiratory specialists continued to work with our existing base of DME channel partners, helping to educate and support their reps. We continued to experience solid demand for our AfloVest airway clearance therapy from the DME distributors. The DME distributors continued to expand the availability of AfloVest to additional branches, and their reps have been successful in identifying patients eligible for airway clearance therapy among their existing customers that they serve. We believe that the demand we're seeing continues to reflect the increasing awareness and adoption by previously underserved patients who would have otherwise been left unidentified and untreated. For these patients, Our AfloVest airway clearance therapy provides them with an at-home solution that's clinically proven to reduce the risk of recurring pulmonary infections and pneumonias. While we were pleased to see nearly double our airway clearance revenue on a year-over-year basis in the first full quarter following the anniversary of our AfloVest acquisition, our sales performance continued to be paced by the supply constraints that we've discussed on our recent earnings calls. With that said, our operations team has made notable progress in working to expand AfloVest production capacity by establishing our second supplier and securing our supply chain. Our sales performance in 2022 has us excited about the future prospects for this product line. And as we enter 2023, we are now squarely focused on developing and supporting demand. Shifting to a review of our operational progress in the fourth quarter, From a new product standpoint, we continue to be pleased with the response we've seen from prescribers, trainers, and patients following the full market release of our ComfortEase lower extremity garments and our Kiley mobile application. The feedback we've received on ComfortEase garments from trainers and patients continues to underscore that the product's design features, improving ease of use, comfort, and fit have substantially enhanced the patient experience. especially for the large portion of our patients with bilateral lymphedema in the lower extremities with limited mobility. Feedback from our patients highlights an appreciation for the flexible and breathable materials used in the ComfortEase garments, which are designed to make the garment more comfortable to wear and easier to apply while continuing to deliver best-in-class treatment. These features are indicative of the improving patient experience our product development priorities will continue to focus on. Our team also made steady progress in expanding the adoption of our first generation Kiley mobile application, which is available on both the iOS and Android platforms, by educating clinician prescribers and making the app available to patients in their doctor's offices through our in-clinic patient product demos and via social media platforms. As a reminder, our Kiley mobile app represents a new resource for patients with tools to engage with them earlier in their disease progression, educate them about lymphedema and their treatment options, and help them assemble the requisite data to obtain a definitive diagnosis and qualify for treatment. Once a patient qualifies to receive our FlexiTouch or Entrez systems, they can use the app to track their order and review our training tutorials, helping to further enhance our industry-leading customer support and training efforts. During the fourth quarter, our team also worked to expand the app's capabilities beyond these initial features. Most notably, we began incorporating Bluetooth functionality into our FlexiTouch Plus systems shipped late last year. FlexiTouch Plus with Bluetooth allows patients with the latest version of Kiley, which we recently rolled out in February, to synchronize their FlexiTouch with the app, enabling them to automatically track and log their treatments. The latest version of our Kiley app also allows users to easily summarize their recent treatment activity in an auto-generated activity report, which they can share with their doctor. While we're still in the initial days of this rollout, we believe the addition of Bluetooth connectivity between FlexiTouch Plus and Kiley represents a significant milestone in bringing more personalized care to the treatment of lymphedema. In short, we're pleased with the initial success of both our ComfortEase lower extremity garments and Kiley mobile application. As I'll discuss later in my remarks, they represent the beginning of a more consistent cadence of product innovation from Tactile Medical in 2023 and the years to come. Turning our efforts to raise awareness for lymphedema and educate the medical community on its effective treatment, on November 16th, A new clinical publication was featured in the European Journal of Vascular and Endovascular Surgery discussing the role of obesity in lymphedema. The publication was authored by five researchers, including our chief medical officer, Dr. Tom O'Donnell, and described the results of an observational cohort study that included de-identified patient data from over 60,000 lymphedema patients. The researchers separated these patients into two groups, depending on whether they were also diagnosed with severe obesity. The researchers then compared the demographics, health-related characteristics, treatment plans, and outcomes of the two respective groups. The study demonstrated that patients with both lymphedema and severe obesity were more than two and a half times as likely to suffer from cellulitis, a deep and painful bacterial infection of the skin with potentially serious consequences. These patients had higher medical costs as a result. Importantly, the researchers also found that these patients with lymphedema and severe obesity received fewer targeted treatments for their lymphedema, including treatments that are proven to reduce the incidence of cellulitis. This underscores the importance of recognizing often overlooked lymphedema among those with obesity and the importance of early and accurate diagnosis. as well as effective treatment to reduce both the health and economic burden for these patients. With this in mind, during the fourth quarter, our clinical services and medical education team continued their efforts to raise awareness of lymphedema and its effective treatment through educational events, including programming that featured the results of this study. In December, our team launched the first continuing education unit course for obesity-related lymphedema, which drew participation from 266 attendees. During the fourth quarter as a whole, we hosted 43 educational programs that were attended by approximately 1,300 clinician participants. Our in-person and virtual programming for the full year trained nearly 6,500 participants, demonstrating the significant role we continue to play in expanding awareness. Stepping back, We were pleased with our conclusion to 2022 from both a financial and operational standpoint. And looking back over the year as a whole, we recovered from the turnover in our sales force that we experienced in late 2021, and our Lymphedema product line returned to double-digit revenue growth on a year-over-year basis in the fourth quarter. We achieved exceptionally strong growth throughout 2022 in sales of our airway clearance product line following the acquisition of the AfloVest. On a standalone basis, this product line achieved annual growth of 109% in 2022. As a result of the performance in each of these product lines, we were able to raise our annual total revenue guidance in the second and third quarter earnings press releases, which we ultimately exceeded in the fourth quarter. And lastly, we successfully introduced the first new products Tactile Medical has released for lymphedema patients in over three years, reflecting our renewed multi-year commitment. to new product innovation. But before I turn the call over to Brent, I'd like to discuss an important announcement we made via press release earlier this morning. Today, we announced that Brent's communicated his intention to retire as Chief Financial Officer in 2023. Since joining Tactile Medical in September of 2018, Brent's been an important contributor to our growth as an organization, helping develop a strong financial and accounting team improve our analytical and reporting processes, and achieve multiple milestones, including our largest acquisition as a public company. And as we announced in today's press release, we've initiated a process to identify a successor. In the interim, we appreciate Brent's commitment to continued leadership in his role through the end of the first quarter or until such time as a successor is named. Brent's been a close and trusted colleague over the last three years since I joined Tactile. On behalf of the broader team, I'd like to take the opportunity on today's call to thank him for the important contributions he's made while at Tactile, and I look forward to his continued support amid a smooth transition. Brent will now review our fourth quarter financial results in more detail, along with our financial guidance for 2023. Brent? Thanks, Dan.

It has been a privilege to serve as a member of Tactile's executive leadership team and work with an excellent group of colleagues to develop and grow the organization as we bring life-changing therapies to patients. Given the strength and the depth of our team and the financial and operational progress made over the course of the last year, I believe this is the right time for me to begin my transition to retiring from CFO role at Tactile. I'd like to thank everyone on our team for their support over the last five years, and I look forward to supporting a smooth transition. Turning to a review of our financial performance, total revenue in the fourth quarter increased 20% year-over-year to $73.9 million compared to $61.7 million in the fourth quarter of 2021. Looking at our total revenue by product line, sales and rentals of our Lymphedema products, which includes our FlexiTouch Plus and Entrez systems, increased $8.3 million, or 14% year over year, to $65.8 million. And sales of our airway clearance products, which includes our AfloVest product line, increased $3.9 million, or 90% year over year, to $8.1 million. Total revenue by channel was comprised of $41.4 million from sales to commercial payers, $18 million from Medicare, $8.1 million from durable medical equipment distributors, and $6.4 million from the VA. As a reminder, durable medical equipment distributors is comprised of revenue from our acquisition of the airway clearance therapy business. These figures compare to our total revenue by channel in the fourth quarter of 2021 in which commercial, Medicare, DME distributors, and the VA represented approximately $41.7 million, $10 million, $4.3 million, and $5.7 million, respectively. Continuing down the P&L, unless noted, all references to fourth quarter results are on a gap and year-over-year basis. Gross margin was 70.5% of revenue compared to 72.6%. Non-gap gross margin was 71.2%, compared to 73.3 percent. The decrease in non-GAAP gross margin was attributable to higher direct labor and freight expense, as well as spot buys on select components. Non-GAAP gross margin excludes non-cash intangible amortization in both periods. Non-GAAP gross margin also excludes inventory write-offs in the fourth quarter of 2022 and non-cash purchase price adjustments related to the acquisition of AfloVest in the fourth quarter of 2021. As a reminder, we have provided reconciliations of certain GAAP to non-GAAP measures in our earnings press release. Fourth quarter operating expenses were $44.2 million, an increase of $3.2 million, or 8 percent. The increase in operating expenses year over year was primarily driven by a $2.3 million increase in sales and marketing expenses due to new hires added to our Lymphedema sales team, along with increased travel-related expenses as we return to normalized business activities. The year-over-year increase in operating expenses was also driven by a $1.2 million increase in non-cash intangible asset amortization and non-cash earn-out expense related to the acquisition of the airway clearance therapy business. And a $365,000 increase in research and development expenses offset partially by a $567,000 decrease in reimbursement, general and administrative expenses. Operating income in the fourth quarter was $7.9 million compared to $3.8 million in the prior year. Non-GAAP operating income was $9.5 million, or 13% of sales, compared to $6.4 million, or 10% of sales. Other expense was $950,000 compared to $377,000 due to a year-over-year increase in interest expense driven by higher interest rates on outstanding borrowings compared to the prior year. Income tax expense was $2.3 million compared to $10.9 million. Income tax expense in the fourth quarter of 2022 relates to a valuation allowance being recorded against our current year deferred tax assets, while income tax expense in the prior year period was a result of establishing a full valuation allowance against our deferred tax assets. Net income was $4.6 million, or 23 cents per diluted share, compared to a net loss of $7.5 million, or 38 cents per diluted share. Non-GAAP net income was $5.9 million, compared to non-GAAP net loss of $5.5 million. Adjusted EBITDA increased 27 percent year-over-year to $12.1 million, or 16 percent of sales, compared to $9.5 million, or 15 percent of sales. As of December 31, 2022, we had $21.9 million in cash and $49 million of outstanding borrowings. This compares to $28.2 million in cash and $55 million of outstanding borrowings as of December 31, 2021. In addition, during the fourth quarter of 2022, we made the $5 million earn-out payment to the former owner of AfloVest. Turning to a review of our 2023 outlook, which we introduced in our earnings press release this morning, we expect full year 2023 total revenue in the range of $269 million to $273 million, representing growth of 9% to 11% year over year. Our 2023 total revenue guidance range assumes Sales and rentals of our lymphedema products increased approximately 8% to 9% year-over-year. And sales of our airway clearance products increased approximately 18% to 22% year-over-year. For modeling purposes, for the full year 2023, we expect our gap gross margins to be in the low 70% range. our gap operating expenses to increase in the low single digits year over year, interest expense of approximately $4.2 million, a tax rate of 25 percent, and a fully diluted weighted average share count of approximately 20 million shares. We also expect to generate adjusted EBITDA of approximately $23 million to $25 million in 2023. Our JUSTIBIDA expectation assumes certain non-cash items, including stock compensation expense of approximately $12 million, intangible amortization, and changes in fair value of contingent consideration of approximately $5.8 million, and depreciation expense of approximately $2.5 million. Lastly, in the first quarter of 2023, we expect our total revenue to increase in the range of 10% to 15% year-over-year. With that, I'll turn the call back to Dan for some closing remarks. Dan?