Tactile Systems Technology, Inc.

Please stand by. Welcome, ladies and gentlemen, to the second quarter of fiscal year 2023 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 factors 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 BioLinks for 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 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, Taxile Medical's President and Chief Executive Officer. Please go ahead, sir.

Thanks, Operator, and welcome everyone to our second quarter earnings call. I'm joined on today's call by Elaine Berkemeyer, our Chief Financial Officer. Let me provide a quick agenda for the call. I'll start with a high level overview of our financial results, along with the discussion of the key drivers of our sales performance in the second quarter. Then I'll share the progress we've made in recent months from an operational standpoint with a focus on some of our most notable accomplishments. Elaine will review our second quarter financial results in greater detail, as well as our latest 2023 financial guidance, which we increased in today's press release. And finally, I'll provide some concluding thoughts on our outlook and key areas of focus for the remainder of the year before we open the call for questions. Now let's begin with the review of our financial performance. I'm really pleased with our team's ability to deliver another quarter of performance that exceeded expectations, including double-digit revenue growth, operating leverage that led to improved profitability, strong cash flow generation, and enhancements to our balance sheet. In the second quarter, we achieved total revenue growth of 15% year-over-year to $68.3 million. Our total revenue performance exceeded our expectations, driven by stronger than anticipated contributions from our lymphedema products. Looking at our performance by product line, lymphedema revenues increased 16% year-over-year to $60 million, while our airway clearance revenues increased 4% year-over-year to $8.3 million. We complemented our sales performance with strong year-over-year improvements in our operating results during the second quarter, including a $6.1 million improvement in our GAAP operating income, year-over-year reductions in our GAAP and non-GAAP net loss of $4.5 million and $4 million, respectively, and a $4.4 million improvement in our adjusted EBITDA. This strong financial performance across the board enabled us to generate $13.9 million of cash flow from operations, a quarterly record in our seven-year history as a public company. Turning to a more detailed discussion of our sales performance in the second quarter, in our lymphedema product line, our stronger than anticipated performance was largely a reflection of the engagement, retention, and improving productivity that we saw across our sales team. From a retention perspective, we ended the second quarter with 249 field sales representatives compared to 250 at the end of the first quarter and the beginning of 2023. Our improved Salesforce productivity benefited from a combination of factors, including the increasing tenure of our team, the introduction of new products, and our continued efforts to improve our operational efficiency. Most notably, in March we began the full market release of Entrez Plus, our next-generation Entrez system, which we offer for patients who qualify for a basic pneumatic compression device. As a reminder, many payers require patients to begin with a basic pump as a prerequisite before considering whether their condition qualifies them for an advanced system like the FlexiTouch. With this in mind, the development and introduction of our Entrez Plus system reflects our increased focus on identifying, engaging with, in supporting this important segment of lymphedema patients. In connection with the full market release of Entrez Plus, our team engaged with existing and prospective prescribers to introduce the new system and its features, and then worked with them to identify qualified patients who could benefit from its use. The response to Entrez Plus by both prescribers and patients has been very favorable so far, and we've seen strong adoption and sales growth in this portion of the market during the initial months post-launch. As a reminder, both our Entrez Plus system and the FlexiTouch Comfort Ease Garments that we launched last year feature enhancements to facilitate the bilateral treatment of lymphedema in the lower extremities, a common therapeutic area of focus for patients suffering with lymphedema related to vascular disease. With these two enhanced treatment options in our portfolio, we continue to see strong growth in sales to patients treated at vascular clinics. In addition to the strong market response to our Entrez Plus system, the productivity of our sales team continued to benefit from our efforts to improve our operational efficiency by streamlining medical record exchanges and reducing the administrative burden on both our reps and prescribers. In recent quarters, We've begun to make progress in our efforts to reduce the time allocated by our sales reps to processes that limit their market development bandwidth, including obtaining documentation and conducting in-home patient demos. We've also continued to improve the efficiency of our interactions with prescribing clinicians with simplified forms and an enhanced process for exchanging documents. And as I discussed on our earnings call in May, we introduced a more streamlined internal process for the submission of claims data for patients covered under Medicare, which along with CMS's discontinuation of its requirement for a certificate of medical necessity at the beginning of this year, helped reduce the administrative burden for clinicians. With respect to our airway clearance product line, the more modest sales growth we saw in the second quarter was the result of one large DME partner experiencing slowed AFLO vest placements This was due to the eligibility criteria changes associated with the expiration of the COVID-19 public health emergency waiver on May 11th. The return to pre-public health emergency eligibility requirements slowed their processing and placements of AFLO vests. As a result, we now expect this DME partners volume to be lower, and we've adjusted our guidance accordingly. With that said, it's worth noting that the remainder of our DME partners continued to grow in the second quarter. turning to an update on our operational performance. In recent months, we've continued to execute across multiple aspects of our strategy to further enhance our positioning in the markets we serve. Among our accomplishments, we continue to advance our product portfolio with multiple patient-centric innovations, educate patients and clinicians, enrich our senior leadership team with the addition of key talent, and increase our available borrowing capacity to support our future growth initiatives and enhance the company's financial flexibility. But this is a backdrop. I'll walk through a few of these items in further detail, beginning with an update on our new product initiatives. As I touched on earlier, we've been very pleased by the reception of our Entrez Plus system. It's been well received from clinicians, patients, and our sales team since its full market release in March. Entrez Plus is the first generational update to our Entrez system since we introduced it eight years ago. It's been redesigned to include a variety of enhancements over the prior generation with the goal of improving the overall patient experience while delivering the same therapeutic benefits. Among its enhancements, Entrez Plus features an LCD-based user interface that provides patients with easier access to information about their treatment session. It also features active garment deflation so that the patient can more easily remove and store the system after they complete their treatment. For those patients that require bilateral treatment, the system's controller was designed to allow them to treat both of their limbs simultaneously, an important part of achieving efficient treatment. And importantly for those patients who may later require a more advanced pneumatic compression device for their therapy, Our Entrez Plus was designed with consistency across our product family, so patients' migration to FlexiTouch, if necessary, becomes more seamless. Based on the feedback we've received during the initial months following our launch, as well as our strong lymphedema sales performance in the second quarter, we believe these primary features and enhancements are resonating with customers. During the second quarter, we also continued to expand the capabilities of our Kiley mobile applications. The latest version of the Kiley app includes enhanced features that enable patients to easily record, track, and compare changes in their skin condition, limb measurements, and other lymphedema-related symptoms. We believe these additional enhancements continue to boost Kiley's utility as a resource for patients to monitor their disease progression and treatment progress, and then share this information with their physicians. Kiley also now includes improved treatment reminders, making it easier for patients to establish a routine of consistent self-treatment and facilitating adherence to therapy. Based on the feedback we obtained during the quarter, these new enhancements and the benefits they bring to patient reporting and adherence are both recognized and appreciated by the clinicians we serve. And from a patient perspective, we're continuing to see compelling adoption and utilization trends in the second quarter. with strong sequential growth in the number of downloads and user check-ins. There were approximately 4,500 unique customer downloads of Kiley in the second quarter, a 37% increase over the first quarter. And the number of patient check-ins on Kiley grew to nearly 63,000 in the second quarter. Overall, in the first year following the launch of the Kiley app, we've been very pleased with the progress made from our product development adoption and utilization standpoint. We look forward to enriching Kiley's utility and establishing it as an instrumental resource for the education, diagnosis, training, and effective treatment of lymphedema. In addition to this progress, we were pleased to complete the prelaunch stages for our ComfortEase upper extremity garments during the second quarter and initiate our full market release in July. Like our lower extremity comfort ease garments, which we launched last summer, the design of these upper extremity garments drawn our team's experience in the design of athletic apparel with the overreaching goal of improving the treatment experience for our patients. Our comfort ease garments are comprised of materials that are lighter, cooler, and more malleable than our prior garment offerings. And they were designed with extensive input from patients and therapists. to make them easier to put on and take off, facilitating the initial patient training and daily treatment process. Our new chest garments also provide improved therapy to the axillary region, an important part of achieving optimal therapy among breast cancer survivors. As our pace of progress this past quarter illustrates, we remain committed to a strong cadence of new product innovation with enhancements focused on addressing the lifestyle needs of our patients improving the digital functionality of our products, and optimizing the treatment process. Shifting to a discussion of our efforts to raise awareness and educate the market on the underserved conditions we address, in addition to the progress made in educating patients with our Kiley app, we hosted a total of 41 clinician-focused education programs during the second quarter, which saw participation from approximately 1,200 clinician attendees. These events covered a variety of important subjects, ranging from introductory programs on the causes, diagnosis, and treatment modalities of lymphedema broadly, as well as programs focused on specific manifestations, such as lymphedema related to breast cancer and lipedema. Many of our programs also enabled our clinician attendees to earn continuing education credits for their participation. With respect to our airway clearance product line, we sponsored an article published in the June edition of RT Magazine, an industry publication focused on respiratory care. The article summarized the results of a blinded, randomized patient preference study comparing four high-frequency chest wall oscillation devices on the market, including our AfloVest. The study was conducted by an independent market research firm and consisted of 30 symptomatic adults, all naive to vest therapy. Each participant in the study trialed all four devices at equivalent settings for 15 minutes each with the manufacturer's instructions for use to guide them and a respiratory therapist on hand to ensure proper fit. During each treatment, patients were assessed with a standardized questionnaire that evaluated patient preference across several key categories. Most notably, 93% of the participants stated they favored the AfloVest over the other devices they trialed and reported a greater likelihood of compliance to the therapy if it was the device they were prescribed. Specifically, 90% of participants stated they believed they would be compliant with the daily AfloVest therapy. In addition, the researchers found that 77% of the participants preferred AfloVest's controls and features, 70% preferred its overall fit, and 90% preferred the experience of removing the AfloVest in comparison to the other devices they trialed. The results of this study support the conclusion that AfloVest's features, including the fact that it's completely portable, comfortable to wear, and quiet while in operation, are likely to increase patient compliance. It also adds to the existing body of evidence that the DME reps we partner with can utilize in their discussions with potential prescribers and patients. While most of our growth has come from the expanding universe of eligible patients, we believe this paper can equip our DME channels to compete more vigorously for competitive share as well. And lastly, we added to our senior leadership team. In June, Dr. Tony Gasparis, as the company's chief medical officer, was appointed following the retirement of Dr. Thomas O'Donnell. Dr. Kasparis previously served as the chair of our scientific advisory board since 2020. He's a professor of surgery and director of the Center for Vein Care at Stony Brook University, as well as the past president of the American Venous Forum. Dr. Kasparis is an experienced healthcare leader and an enthusiastic educator dedicated to delivering innovative care and unique approaches to building awareness of lymphedema. And in July, we appointed Sherry Fursler as our Senior Vice President of Sales, succeeding Eric Pauls. Sherry joins Tactile Medical from Johnson & Johnson Vision, where she led a team of 325 sales-related personnel as VP of Sales for North America. In the course of her more than 25-year career in health care, she's also led national and regional sales teams at Bayer Diabetes Care, Endo Pharmaceuticals, and Mylan Pharmaceuticals. Sherry has a successful track record of developing sales teams and delivering growth in revenue and profitability. We're excited to have Sherry join Tactile Medical, adding additional depth to the richly talented team that we've assembled. Elaine will now review our second quarter financial results in more detail, along with our financial guidance for 2023, which we updated in today's earnings release. Elaine?

Thanks, Dan. Trying to review our financial results. Unless noted otherwise, all references to second quarter financial results are on a GAAP and year-over-year basis. Total revenue in the second quarter increased $8.7 million, or 14.6%, to $68.3 million. By product line, sales and rentals of lymphedema products, which includes our FlexiTouch and Entrez systems, increased $8.4 million, or 16.2%, to $60 million. And sales of our airway clearance products, which includes our AfloVet system, increased $329,000 or 4.1% to $8.3 million. Continuing down the P&O, growth margin was 70.7% of revenue compared to 72.5%. Non-GAAP growth margin, which excludes non-cash intangible amortization in both periods, was 71.1% compared to 73%. Gap and non-gap growth margins in the second quarter of 2023 were impacted by higher labor rates and material costs, as well as higher costs related to new product launches and changes in our mix related to strong growth in sales of our Entrez Plus system. Second quarter operating expenses decreased $1.1 million, or 2.3%, to $46.2 million. The decrease in gap operating expenses was driven primarily by a $600,000 decrease in sales and marketing expenses and a $500,000 decrease in non-cash intangible asset amortization and earn-out expense. Operating income was $2.1 million compared to an operating loss of $4.1 million. The $6.1 million improvement in our operating income was driven by a $5.1 million or 12% increase in our gross profit as well as the aforementioned $1.1 million or 2% decrease in our operating expenses. Non-GAAP operating income was $3.6 million compared to an operating loss of $1.8 million. As a reminder, our non-GAAP operating income excludes non-cash intangible amortization and around expenses, as well as certain non-recurring operating expenses in the prior year period. we've provided a detailed gap to non-gap reconciliation in our earnings press release. Other expense net was $800,000 compared to $600,000 last year, primarily due to an increase in interest expense driven by a higher average interest rate on outstanding borrowings compared to the prior year period. Income tax expense was $1.3 million compared to a benefit of 20,000 in the second quarter of 2022. Net loss declined $4.5 million year over year to $100,000 or zero cents per diluted share. Non-GAAP net income increased $4 million to $1 million compared to non-GAAP net loss of $2.9 million last year. Adjusted EBITDA increased $4.4 million to $6.1 million or 8.9% of sales compared to $1.7 million or 2.8% of sales last year. Turning to the balance sheet. As of quarter end, we had $63.2 million in cash and $47.5 million of outstanding borrowings. This compares to $21.9 million in cash and $49 million of outstanding borrowings as of December 31st, 2022. The increase in cash was driven by the reduction in net loss and improvements in working capital efficiency compared to prior year quarter and prior periods. Specifically, working capital was a source of nearly $10 million of cash in the second quarter of 2023 compared to $1.5 million last year and a use of $2.9 million in the prior quarter. This significant improvement in working capital efficiency to date has been driven primarily by better day sales outstanding performance, which has resulted in strong cash flow from operations. The $13.9 million of cash flow from operations we generated in Q2 is a quarterly record for the company, which is not only impressive, but also underscores our confidence in our ability to deliver a cumulative free cash flow target of more than $75 million for the three fiscal years ending 2025. In August, we made additional strides to further strengthen our balance sheet, adding to our financial flexibility. We entered into an agreement to our existing credit agreement that extends the maturity of our term loan and the revolving credit from September 8, 2024 to August 1, 2026. It also expands our available borrowing capacity to $55 million, which is an increase of $8.25 million. And lastly, our amendment agreement includes more favorable borrowing terms, including lower rates and less restrictive covenants. 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 $274 to $278 million representing year over year growth of 11% to 13% compared to our prior guidance of 10% to 11.5%. Our total 2023 revenue guidance range now assumes Sales and rentals of our lymphedema products increased approximately 13% to 14% compared to our prior guidance of 9% to 10%. And sales of our airway clearance products increased approximately 0% to 5% versus our prior guidance range of 18% to 21%. These updated growth assumptions reflect better than expected sales of our lymphedema products in the second quarter and higher growth expectations in the second half of 2023. It also assumes updated expectations for airway clearance products in 2023. For modeling purposes for the full year 2023, we expect our gap growth margins to be approximately 71%. Our gap operating expenses to be flat to down 1% year over year compared to our prior expectation of low single digit increase year over year. Interest expense of approximately $3.8 million a GAAP tax rate of 57% compared to our prior guidance of 61%, and a fully diluted weighted average share count of approximately 23.5 million shares. Based on the stronger than expected profitability performance in Q2 and our updated expectations for the second half of 2023, we now expect to generate adjusted EBITDA of approximately $25 to $27 million in 2023 versus our prior guidance range of approximately $23.5 to $25.5 million. Our adjusted EBITDA expectation assumes certain non-cash items including stock compensation expense of approximately $9.8 million compared to $11 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 of which are unchanged versus prior guidance assumptions. With that, I'll turn the call back to Dan for closing remarks.