Tactile Systems Technology, Inc.

Please stand by. Welcome, ladies and gentlemen, to the first quarter of fiscal year 2023 earnings conference call for Tactical 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 statement 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 this most comparable measures calculated and presented in accordance with the 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, Tactical Medical's President and Chief Executive Officer.

Please go ahead, sir. Thanks, operator. And welcome, everyone, to our first quarter of 2023 earnings call. I'm joined on the line today by Elaine Berkemeyer, our Chief Financial Officer. Let me provide you with a quick agenda for today's call. I'll begin with a high-level overview of our quarterly financial performance in the first quarter, followed by a discussion of the key drivers of our sales performance. I'll cover our first quarter operational progress, highlighting some of the most notable accomplishments made by our teams. Elena walked through our quarterly financial results in greater detail, as well as our financial guidance for 2023, which we updated in today's press release. And I'll conclude by discussing our outlook and strategic priorities for the rest of 2023 before opening the call for questions. With that, let's get started with a review of our financial performance. In the first quarter, we grew our total revenue by 23% year over year. to $58.8 million, exceeding our expectations. We were especially pleased to demonstrate that such strong performance in both of our key product lines. We posted another strong performance within our lymphedema products, growing 22 percent year over year to $48.9 million. We also saw strong contributions from sales of our airway clearance products, increasing 24 percent year over year to $9.1 million. We were pleased to deliver notable improvements in our operating results, with year-over-year reductions in our operating loss and net loss on both a GAAP and non-GAAP basis, and positive adjusted EBITDA results. This is the first time we've generated positive adjusted EBITDA in the first quarter since 2019. With that as a backdrop, I'll share some of the primary factors that contributed to our revenue performance, beginning with our lymphedema product line. In the first quarter, we were pleased to see another strong quarter of retention and engagement within our sales team. Our headcount remained consistent throughout the first quarter with 250 sales representatives at quarter end, unchanged since the beginning of 23, and up approximately 5% in comparison to the 238 reps that we had at the end of the first quarter of 2022. We also saw improving contributions from our newer sales reps that have joined since late 2021 as they got another quarter under their belt. The productivity of our sales team was aided by our recently introduced new products, most notably our Comfort Ease lower extremity garments. Comfort Ease, which we launched last summer, continues to resonate with prescribers and patients and provide our reps with an opportunity to reengage with key accounts. As a result, we saw our strongest growth among patients suffering from lymphedema related to vascular disease who often require our therapy for bilateral and truncal use in the lower extremities. Experience is made easier with Comfort Ease. Our sales performance also continued to benefit from a recent policy change made by CMS as of the first of the year when they discontinued the requirement for certificates of medical necessity. removing yet another administrative requirement for prescribers. As I mentioned on our last earnings call, our sales team focused on engaging with clinicians and educating them about this policy shift in the months before it became effective. This change in policy, along with the simpler internal submission process that we introduced, was welcomed by clinicians as it helps reduce the administrative burden associated with prescribing our therapies for patients covered under Medicare. And lastly, from a macro perspective, we continue to see evidence of improvement in patient throughput at many of the clinics that we serve, as staffing and patient velocity both continue to regain stability. Moving to our airway clearance product line, after working through some supply-related challenges in 2022, we were pleased to enter this year with a more secure supply chain and a second supplier up and running to provide us with expanded production capacity to support customer demand. This reassurance on the supply side has further empowered our team of respiratory specialists to engage our existing DME channel partners and work with them to confidently expand the availability of AfloVest to new prescribers, branches, and reps within their networks. During the first quarter, we saw solid demand from these DME distributors as the reps continued to identify patients among existing customers that they already served who qualify for AfloVest airway clearance therapy and stand to benefit from its use. As we've shared in the past, we believe that the majority of these patients may have otherwise gone either undiagnosed or untreated. And with this in mind, we're excited to play a role in helping expand the overall market by making good on our mission to both reveal and treat underserved patients with the chronic conditions like bronchiectasis. providing them with the only truly portable at-home solution that's clinically proven to reduce recurring pulmonary infections and pneumonia. Turning to an update on our operational performance, during the first quarter, we made strong progress on multiple fronts, educating clinicians and their patients, advancing the evidence to support the diagnosis and treatment of lymphedema, expanding our portfolio of new products, bolstering our balance sheet, and enhancing our leadership team and board of directors. I'll address each of these in a bit more detail, starting with our initiatives to educate clinicians and patients in the lymphedema market. Our team continued to develop and implement new educational programming to raise awareness of lymphedema and its comorbidities within the medical community. We hosted a total of 39 educational programs during the first quarter, which were attended by approximately 1,700 clinician participants. We are also pleased to see important new additions to the overall body of clinical research focused on advancing the medical community's understanding of lymphedema, including the importance of its effective diagnosis and treatment. At the American Venous Forum's annual meeting in February, Dr. Alexandra Tedesco presented the results of a study whereby researchers analyzed claims data from nearly 86,000 patients to determine the incidence and costs associated with various forms of lymphedema. They found that among three common ideologies of lymphedema, breast cancer-related lymphedema, chronic venous insufficiency-related lymphedema, known as flebolymphedema, and lymphedema related to gynecological cancer, the incidence and costs related to episodes of cellulitis in these patients, a deep and painful bacterial infection of the skin can present serious consequences. The researchers found that patients with a history of cellulitis were four and a half times more likely to develop subsequent cellulitis infections. Fleeble lymphedema patients in particular were three to five times more likely to develop cellulitis in comparison to patients with other forms of lymphedema. Fleeble lymphedema patients also had the highest healthcare utilization for cellulitis episodes ranging from $6,000 to $9,000 per episode This work further underscores the importance of effective management of lymphedema to reduce the incidence of cellulitis. Our FlexiTouch Plus system has been clinically shown to reduce the incidence of cellulitis in patients by more than 70%. And in March, we were pleased to see a new clinical article published in the medical journal Supportive Care in Cancers. The article titled, Under Recognition in Treatment of Lymphedema in Head and Neck Cancer Survivors, a Database Study, featured the results of a study that evaluated commercial and Medicare claims data from nearly 17,000 head and neck cancer survivors. While the head and neck lymphedema is estimated to be prevalent in approximately 90% of head and neck cancer survivors, the researchers found that only 6.5% of those nearly 17,000 patients that they evaluated had been diagnosed with head and neck lymphedema. Among these patients that were evaluated for lymphedema treatment, 80% received manual lymphatic drainage therapy but completed only 1.5 courses of treatment on average, and less than 9% of patients received an advanced pneumatic compression device. This publication adds to the evidence, highlighting the fact that head and neck lymphedema remains a woefully underdiagnosed and undertreated condition among cancer survivors. Our FlexiTouch Plus system remains the first and only pneumatic compression device cleared and commercially available to treat this region, and we remain committed to further expanding the clinical evidence demonstrating its effectiveness as we progress through the enrollment of our 250 patient randomized controlled clinical trial, the largest trial ever conducted for the treatment of head and neck cancer-related lymphedema. We're convinced that our resolve on behalf of this patient segment will lead to improved access in the future. Shifting to an update of our new product efforts, we're seeing strong adoption and utilization of our Kiley mobile application following its launch last summer. In February, we introduced a new version of our Kiley application, which provides Bluetooth connectivity-related features to our patients for the first time. Our latest FlexiTouch Plus systems now include Bluetooth compatibility, enabling users to automatically track and log their treatment activity with Kiley and generate summaries to share with their healthcare practitioner, an important first step towards providing patients and prescribers with a new resource to better inform and personalize their treatment process. I'm also proud to announce that we commenced the full market release of our next generation Entrez system at the end of the quarter. Our new basic pump system, Entrez Plus, has been redesigned to enhance the patient's experience during daily therapy without compromising therapeutic coverage. Its features include a new LCD screen with an enhanced user interface, as well as multiple ports to enable patients requiring bilateral therapy to treat both limbs simultaneously. Entrez Plus also features garments that actively deflate following the treatment, making them easier to take off and store. It's important to remember that the market for basic pneumatic compression devices, like Entrez Plus, is significantly larger today than that of advanced pumps like our FlexiTouch Plus. The introduction of our next-generation Entrez system is part of our commitment to enhance the experience for patients, whether they qualify for a basic pump or demonstrate the need for advanced pump therapy, and establishing Tactile Medical as the provider of choice for all at-home lymphedema therapy options. With this goal in mind, Entrez Plus has been redesigned to be part of the consistent product family with our more advanced FlexiTouch Plus system, which we believe will also make it easier for patients that may graduate to FlexiTouch Plus with a reduced learning curve if their condition warrants it. With respect to AfloVest, we introduced an additional size in March, adding to our ability to treat an even larger patient population. And with these enhancements across our product portfolio, we're continuing to maintain the pace of product innovation that we began with the introduction of Kiley and ComfortEase last year. another way in which we're enhancing and establishing our leadership positions in the markets we serve. And with respect to our balance sheet, on February 27th, we raised $35 million in net proceeds through an underwritten public offering of common stock, the first equity raise since the company's IPO in 2016. This offering provided us with additional capital to strengthen our balance sheet and support our initiatives as we progress towards achieving our stated longer-term revenue, profitability, and free cash flow goals. I'd like to thank our new and existing shareholders for their participation and support. And lastly, during the first quarter, we enhanced both our leadership team and board of directors with the addition of key personnel. In January, we announced the appointment of Carmen Volker, who joins our board of directors with over 40 years of financial and managerial experience. Majority of Carmen's career has been within the medical device industry, where she served as the chief financial officer for Nextera, Tournier, SpineWave, and American Medical Systems. More recently, in March, we were pleased to announce the appointment of Elaine Berkemeyer as our chief financial officer. Elaine joined our executive leadership team following a more than 25-year career in healthcare, consumer, and retail industries. with senior leadership experience at leading companies, including UnitedHealth Group, Best Buy, Sleep Number, and Target. In the course of her nearly nine-year tenure at UnitedHealth Group prior to joining Tactile Medical, Elaine served as Chief Financial Officer of Rally Health, a UnitedHealth portfolio company focused on digital health, and most recently as Chief Financial Officer of Optum's Care Solutions Portfolio. And I'm proud of the level of talent we've been able to attract with our recent appointments. And I'd like to take this opportunity on today's call to welcome both Carmen and Elaine to our team. And Elaine will now review our first quarter financial results in more detail, along with our financial guidance for 2023, which we updated in this afternoon's release. Elaine?

Thanks, Dan. I'm excited to have joined the TocTel medical team during a pivotal time in the company's history. and especially pleased to have such strong operating performance to outline on my first quarterly earnings call. Turning to review of our financial results. Unless noted otherwise, all references to first quarter financial results are on a gap and a year-over-year basis. Total revenue in the first quarter increased 10.9 million, or 23%, to $58.8 million. By product line, sales and rentals of Lymphedema products which includes our FlexiTouch and Entrez systems, increased $9.1 million, or 22%, to $49.8 million. And sales of our airway clearance products, which includes our AfloVest system, increased $1.8 million, or 24%, to $9.1 million. Continuing down the P&L, gross margin was 70.5% of revenue compared to 70.6%. Non-GAAP gross margin, which excludes non-cash intangible amortization in both periods, was 71% compared to 71.2%. GAAP and non-GAAP gross margins in the first quarter of 2023 were impacted by higher labor rates and material costs, as well as higher costs related to new product launches relative to the first quarter of 2022. First quarter operating expenses decreased $3.5 million, or 7%, to $45.3 million. The decrease in GAAP operating expenses was driven by a $5.8 million decrease in non-cash intangible asset amortization and earn-out expense and a $783,000 decrease in reimbursement general and administrative expenses. These items were offset partially by a $2.4 million increase in sales and marketing expenses and a $713,000 increase in research and development expenses. Operating loss decreased $11.1 million, or 74%, to $3.8 million. Non-GAAP operating loss decreased $3.2 million, or 59%, to $2.2 million. The decrease in non-GAAP operating loss was driven by a 22% increase in non-GAAP gross profit offset partially by a 10% increase in sales and marketing expenses, a 9% increase in reimbursement general and administrative expenses, and a 47% increase in research and development expense. By way of reminder, our non-GAAP operating loss excludes non-cash intangible amortization and around expenses, as well as certain non-reoccurring operating expenses in prior year period. We provided a detailed gap to non-GAAP reconciliation in our earnings press release. Importantly, our non-GAAP operating loss in Q1 reflects our continued focus on prudent investments in the business to support our longer-term strategic and financial goals. We were pleased to deliver strong operating leverage in the first quarter as our non-GAAP operating margin improved by approximately 750 basis points year over year. Other expense net increased by $0.5 million or 118% to $1 million, primarily due to an increase in interest expense. Income tax benefit was $2.9 million compared to an expense of $211,000 in the first quarter of 2022. Net loss was $1.9 million, or 7 cents per diluted share, compared to a net loss of $15.6 million, or 78 cents per diluted share. Non-GAAP net loss was $0.7 million, compared to $8.4 million. Adjusted EBITDA was $0.5 million, compared to adjusted EBITDA loss of $2.6 million. Turning to the balance sheet and our recent financing activities. As Dan mentioned in February, we closed an underwritten public offering which consisted of 2,875,000 shares of common stock at a public offering price of $13 per share. We raised $34.6 million of net proceeds from this offering after deducting underwriting discounts, commissions, and offering expenses. As of quarter end, we have $55 million in cash and $48.3 million of outstanding borrowings. This compares to $21.9 million in cash and $49 million of outstanding borrowings as of December 31, 2022. Shifting to a review of our 2023 outlook, which we updated in today's press release, we now expect full-year 2023 total revenue of approximately $271 to $275 million, representing year-over-year growth of approximately 10% to 11.5%. compared to our prior guidance of approximately 9% to 11%. Our 2023 total revenue guidance range now assumes sales and rentals of our lymphedema product increase approximately 9% to 10% compared to our prior guidance of 8% to 9%. And sales of our airway clearance products increase approximately 18% to 21%, largely unchanged versus our prior guidance range. For modeling purposes for the full year 2023, we expect our GAAP gross margins to be in the low 70% range, our GAAP operating expenses to increase in the low single digits year over year, interest expense of approximately $4 million, a GAAP tax rate of 61% compared to our prior guidance of 25%, and a fully diluted weighted average share count of approximately 23.5 million shares. Based on the stronger than expected profitability performance in Q1, we now expect to generate adjusted EBITDA of approximately $23.5 to $25.5 million in 2023, an increase of approximately $0.5 million versus our prior guidance range. Our adjusted EBITDA expectation assumes certain non-cash items, including stock compensation expense of approximately $11 million compared to $12 million previously, intangible amortization and changes in fair value of contingent consideration of approximately $5.8 million, and depreciation expense of approximately $2.5 million, both unchanged versus prior guidance. With that, I'll turn the call back to Dan for closing remarks.