Good afternoon, ladies and gentlemen, and welcome to the First Quarter of 2017 Earnings Conference Call for Tactile Medical. [Operator Instructions] Please note that this conference call is being recorded and that the recording 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 that could cause actual results to differ materially from those indicated, including those identified in the Risk Factors section of our most recent annual report on Form 10-K filed with the Securities and Exchange Commission as well as our most recent 10-Q filing.

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 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. Jerry Mattys, Tactile Medical's Chief Executive Officer. Please go ahead, sir. .

Thank you, operator. Good evening, everyone, and welcome to our first quarter 2017 earnings call. I am joined on the call this evening by our Chief Financial Officer, Lynn Blake. .

Let me begin with a brief agenda for today's call. I'll begin my prepared remarks with a high-level summary of our financial results for the first quarter of 2017, along with a review of the multiple drivers that contributed to our performance during the quarter.

I'll then provide you with an update on the limited market release of our Flexitouch head and neck system, then I'll turn the call over to Lynn, who will discuss our quarterly financial results in detail and review our financial guidance for 2017, which we updated in this evening's earnings release.

Following this review of our 2017 guidance, I'll share some closing remarks before we open the call up for your questions. .

Let's get started with an overview of our financial performance. During the first quarter, we achieved total revenue of $19.9 million, which represented 45% growth year-over-year. Our revenue results were largely due to record growth in sales of our Flexitouch System, which increased 50% year-over-year to $17.5 million in the first quarter of 2017.

We also saw contributions from sales of our Entré and ACTitouch systems during the period, which collectively grew 17% year-over-year to $2.3 million. .

Overall, our revenue performance in the first quarter exceeded our expectations, and our growth during the period was well above the full year growth expectations that we have assumed in our 2017 guidance. The first quarter revenue has benefited from a number of important tailwinds.

Many of these will be familiar as they represent a continuation of the growth trends that we experienced in our business in 2016 and were highlighted on our last earnings call as the key drivers for our growth in 2017 as well.

For example, during the first quarter, we continued to see strong contributions from the investments we've made in our sales and reimbursement teams in recent years. Over the course of 2015 and 2016, we invested in expanding our field sales and reimbursement operations personnel and have seen strong contributions from these additions. .

As a reminder, we typically expect our newly hired sales reps to ramp to full productivity over the course of 12 to 18 months.

In addition to the overall expansion of our sales and reimbursement organizations, we saw improving productivity from our sales reps, as they increased their focus on the highest diagnosing physicians in the lymphedema market.

Our reps have been armed with better account targeting data over the last 12 months as a result of the reimbursement of claims data we obtained early in 2016. With these data, which represented prescriber level information for the 820,000 patients diagnosed with lymphedema in 2015, we've been able to target clinicians across the U.S.

that collectively represent the highest diagnosis of lymphedema. .

At the beginning of 2017, we have penetrated less than 20% of these target accounts. And during the first quarter, our reps continued to gain success in adding new high-diagnosing clinicians to our customer base by educating them on the clinical benefits of our innovative at-home solutions for the treatment of lymphedema.

We were also able to leverage the success that we saw last year and added new relationships with private payers, providing us with contracted in-network benefits for our products. We began the first quarter of 2017 with a significant number of contracts that were not in place during the first quarter of last year.

As a result of these additional contracts, our sales reps and the reimbursement teams supporting them capitalized on the fact that more patients had in-network access to our systems during the quarter than in any point in our company's past. .

Lastly, our first quarter growth also benefited from strong sales into the Veterans Administration. Late last year, we expanded our commercial presence in VA by adding dedicated resources to focus on this channel and gain new approvals from a number of VA hospitals.

We believe that this expanded commercial presence is partly responsible for our strong results in VA during the quarter. It is also important to note that our customers within the VA have no coping obligations, so their purchasing patterns do not share the same seasonal trends that we see from patients covered under private insurance plans. .

Along with these drivers of growth, our performance in the first quarter of 2017 benefited from 2 additional contributors that we believe are unique to the period.

As part of our national sales meeting in January, we announced plans to change the compensation structure of our sales force to align rep commissions with declining of shipments as opposed to our prior structure of aligning commissions with the timing of orders.

This change in our sales force compensation structure became effective at the beginning of the second quarter, but we believe that its announcement though in Q1 incentivized our sales force to pull forward some of their orders that may otherwise have been placed in Q2 if not for our change in commission plans. .

The second unique contributor to our performance during the quarter relates to our focus on the highest diagnosing clinicians in the lymphedema market. Our performance in the first quarter of 2017 benefited from the targeting data, which the sales team did not have in the first quarter of 2016.

Recall that we obtained this data in the first quarter of last year, and our sales force did not begin implementing it until the second quarter of last year. This fact would've amounted to easy year-over-year comparison. .

Together, we believe that these 2 unique contributors to our Q1 revenue growth accounted for a significant portion of our outperformance relative to expectations during the first quarter of 2017. .

Finally, in addition to the strong revenue performance in Q1, we also posted 72% gross margins and better cash flow from operations performance as compared to the first quarter of last year. .

Before turning the call over to Lynn for a complete review of our quarterly financial performance, I'd also like to share an update on the limited market release of our Flexitouch head and neck system.

Recall that in September of last year, we received FDA 510(k) clearance for our latest Flexitouch System, which is designed to treat patients suffering from lymphedema of the head and neck.

What this 510(k) clearance, our Flexitouch system became the first and only pneumatic compression device cleared for the treatment of lymphedema in this region of the body.

Importantly, it is estimated that more than 75% of head and neck cancer patients experienced lymphedema symptoms, a statistic that we believe illustrates the unmet clinical need within the marketplace for therapy that target this region. .

Following the receipt of our FDA 510(k) clearance, we began our limited market release of the product. And I'm happy to report that the feedback we've received from our initial base of patients and clinicians continues to validate our expectations.

In terms of the clinicians' perspective, we continue to hear that Flexitouch head and neck represents a new and effective therapy for a condition where the range of treatment options is previously very limited.

Likewise, the overwhelming response that these clinicians have received from their patients in the form of phone calls and before-and-after pictures has shown that our product is already changing lives in the marketplace.

Impressively, many of the patients that we've interviewed as part of the limited market release claims to see immediate reduction in their lymphedema swelling after only one Flexitouch treatment. .

This important positive feedback continues to support our belief that we are addressing an unmet clinical need in the market.

As part of our limited market release, we're continuing to refine our targeting strategy for the new Flexitouch head and neck system, given that the majority of head and neck cancer patients are cared for outside of the traditional focus of our organization mainly by oncologists and ear, nose and throat specialists.

With this dynamic in mind, we are focused on balancing the incremental addressable market opportunity in head and neck lymphedema patients against the potential for sales force disruption, as our sales reps access these patients in unique call points.

That being said, we remain on track to begin the full commercial launch of Flexitouch head and neck during the second quarter of 2017, consistent with the expectations we've shared with the investment community in the past. .

Now let me turn the call over to Lynn Blake, who will review our first quarter financial results in greater detail.

Lynn?.

Thanks, Jerry. Revenue for the first quarter increased $6.2 million or 45% year-over-year to $19.9 million. Our revenue performance in the first quarter was primarily driven by sales of our Flexitouch products, which increased $5.8 million or 50% year-over-year to $17.5 million in the quarter.

The increase in Flexitouch sales was primarily due to the expansion of our sales force as well as increased physician and patient awareness of the lymphedema condition and its treatment option. .

Flexitouch sales accounted for 88% of our revenue in the first quarter of 2017 compared to 85% of revenue in the first quarter of 2016. Revenue in the quarter also benefited from contributions from our Entré and ACTitouch system sales, which together increased by $333,000 or 17% year-over-year to $2.3 million. .

Continuing down the P&L, our gross profit increased $4.3 million or 44% year-over-year to $14.2 million compared to $9.9 million last year. Our first quarter gross margin rate was approximately flat with the prior year at 71.7% of revenue compared to 72.2% of revenue in the first quarter 2016.

Operating expenses increased $5.5 million or 47% year-over-year to $17.2 million. The increase in operating expense was primarily driven by increased sales and marketing expenses and reimbursement and G&A expense.

Our sales and marketing expenses increased by $2.9 million or 40% year-over-year due to continued investments in the expansion of our field sales team as well as increased marketing investments.

Reimbursement, general and administrative expenses increased $2.5 million or 72% year-over-year, driven by the combination of incremental stock-based compensation expense of approximately $900,000 as well as $800,000 of public company costs that were incremental to our operating expense structure compared to Q1 of 2016. .

Additionally, increased headcount in the reimbursement operations and corporate function contributed to the remainder of the increase. Our operating loss increased approximately $1.1 million or 64% year-over-year to a loss of $2.9 million in the first quarter compared to an operating loss of $1.8 million last year.

Adjusted EBITDA decreased by $184,000 or 12% year-over-year to an EBITDA loss of $1.7 million compared to an adjusted EBITDA loss of $1.5 million in Q1 last year. As a reminder, we have provided a reconciliation of GAAP net loss to our adjusted EBITDA in today's earnings press release.

Net loss for the first quarter was $1.5 million or $0.09 per share compared to a net loss of $1 million or $0.30 per share last year. Net loss attributable to common shareholders was $1.5 million or $0.09 per share compared to a net loss of $1.5 million or $0.45 per share last year.

Net loss attributable to common stockholders in the prior-year period included the accrual of convertible preferred dividend of $514,000. There was no accrual of convertible dividends in the first quarter of 2017, as we no longer have preferred stock subsequent to our IPO. .

Weighted average shares used to compute earnings per share were $16.9 million and $3.3 million for the first quarter in 2017 and 2016, respectively. As a reminder, the prior-year share count reflects our private company capital structure and, therefore, is not comparable to our current share count. .

Let me now turn to a review of our 2017 revenue guidance, which we updated in our earnings release this afternoon. For the fiscal year ending December 31, 2017, we now expect total revenue in the range of $103 million to $105 million, which represents growth of 22% to 24% year-over-year compared to revenue of $84.5 million for 2016.

This device range represents an increase of $2 million compared to our prior revenue guidance range of $101 million to $103 million. .

Also, for full year 2017, we continue to expect total company revenue to be driven primarily by continued growth in Flexitouch System sales, which we expect to increase by approximately 25% to 28% year-over-year in 2017.

Gross margin rate will remain in the low 70s, and adjusted EBITDA margin we expect to be in the high single digits, which includes noncash stock compensation of approximately $4 million for the year. We anticipate a GAAP tax rate ending at the high 30s.

And consistent with our performance in recent years, we expect to deliver a positive GAAP net income again in 2017. For purposes of calculating earnings per share, we expect our weighted average share count for the full year 2017 to approximate 19 million shares. .

With that, I'll now turn the call back to Jerry for some closing remarks.

Jerry?.

Thank you, Lynn. In summary, we are pleased to have multiple tailwinds that contributed to our exceptional performance during the first quarter, and continue to drive long-term growth in our business.

We're raising our fiscal year revenue guidance accordingly to account for the stronger-than-expected contributions that we saw during the quarter from these long-term growth drivers. .

Our revised guidance range incorporates 2 dynamics we believe have the potential to impact our results over the balance of the year. First, we began our new contract for in-network benefits with a large private payer in late March with updated terms and pricing.

While this new contract allows us to continue our status as an in-network provider for the large number of patients covered under this payer's plans, it will also result in a higher mix of sales to patients under rental agreements as opposed to traditional purchases.

We believe this factor will impact our revenue from sales to patients covered under this payer network beginning in the second quarter. .

Second, we expect temporary impacts to the productivity of our sales and reimbursement teams related to our new product launches over the balance of the year, specifically the full commercial launch of our Flexitouch head and neck system in the second quarter of 2017 and the introduction of our next-generation Flexitouch controller and upper and lower garment sets in the second half this year.

While these new product launches are crucial to our long-term success, in the short term, these launches represent a temporary hit to our productivity. .

increasing the coverage of our field sales organization by bringing on new resources, leveraging the investments we've made to our sales and reimbursement teams in recent years, continuing to focus our sales force on penetrating high-diagnosing accounts, raising awareness of our at-home therapies within the VA Hospital system and leveraging the many contracts with payers signed last year..

In terms of our new product pipeline, with very positive feedback in response to our limited market release, we remain on track to launch our new Flexitouch head and neck system in the second quarter of 2017.

We also continue to anticipate 510(k) clearance for new enhancements to our Flexitouch controller and upper and lower garments in the second half of this year.

Ultimately, we believe that our continued commercial success and raising the awareness of our new and existing products over the balance of 2017 will have profound benefits for our patient customers, while generating positive returns for our business and our shareholders. .

Thank you for your participation in today's call and for your continued interest in Tactile Medical. That concludes our prepared remarks for this afternoon. Operator, we will now open the call for questions. .

[Operator Instructions] And our first question will come from Matthew O'Brien with Piper Jaffray. .

First, for starters, just a number that I don't think you provided or I may have missed, but just the sales rep number in the quarter?.

Matt, this Lynn. We ended the quarter with a little over 140 in the field, which includes sales management. That number is in our 10-Q. .

Got it, okay.

So then just heading back to the pull-forward commentary, the better data that you have, I think that's going to continue throughout the course of the year as far as your sales force having access to higher volume reps or, excuse me, surgeons, but I'm curious as far as if you could quantify the impact from the change in the sales commission structure, if you have any sense for what that could be.

.

Yes. Matt, this is Jerry. Thanks for the question. We had a hard time looking back, understanding the total impact that -- announcing that we were having a change in our comp plan we had on the quarter.

We did want to align the compensation plan with shipments because that's ultimately what benefits the company, is to have a product shipped to a patient rather than an order from a patient. So we know in the long term it's the right thing to do.

But in terms of actually pulling forward, we were surprised to see how many of the orders came in after that announcement at the National Sales Meeting.

And we think those who understood their compensation plans, and most reps do understand their plans, we're able to move pretty quickly and put in extra effort to try to get those orders in under the old plan. We launched a new comp plan every year at the start of Q2, so that's a natural cadence for us.

We were just surprised by its impact, but I can't really comment on how large that impact might be. .

Yes. I would add, while we can't precisely quantify that, Matt, we're not anticipating that as an impact on our full year outlook, but more as it relates to the quarterly profile of revenue, as Jerry described. .

Sure. So you're beat by $3 million as far as where The Street was modeling. You raised guidance by $2 million.

Is it fair to say about $1 million of that might have been this pull forward?.

I think that and the fact that we had this new targeting data in the first quarter of this year that was not available to the reps last year. And I believe that really helped drive more reps, better data and more productivity against a pretty easy comparison in Q1. .

Okay. And then for -- that's helpful.

For the follow-up question, then I'll let some others jump in, but the high-volume impact that you're seeing at this point, I know it's fairly early days that you've been working with that group of surgeons, but can you talk about their reorder rates and progression as far as going deeper within those accounts that maybe you've been with for 6 to even 12 months, and then how we should think about that progression going forward? Will some of these new 510(k) approvals later this year open up a lot more of those high-volume clinicians to you?.

So first, on penetration of the high-decile accounts, we've mentioned that we came into 2017 having penetrated about 20% of the top 3 deciles of high-diagnosing clinicians. So we feel we've got a long way to go before we have saturated that network and those clinicians.

We've proven that once we get one of those high-diagnosing clinicians on board, they order between 2 and 3x the number on average of mainly our Flexitouch System, as Flexitouch made up the lion's share of our growth this quarter. So we've got, we believe, a target that's worth pursuing and sales organizations that is focused on pursuing that target.

It is, however, a bit of a headwind later in the year when we think about new product introductions, where those new product introductions are a bit of a headwind. Think of it this way.

To launch a new product like a head-and-neck solution, that may not go through these high-diagnosing clinicians because they're seeing the typical lymphedema patient with either upper or lower extremity lymphedema rather than specializing in the swelling of the head and the neck.

So we actually think it's going to pull our sales force away from calling on the high-diagnosing clinician to be able to launch effectively the new head-and-neck solution.

That's the balance that we talked about in the prepared remarks, trying to make sure we don't abandon, if you will, our focus and continued success with high-diagnosing accounts to pursue head-and-neck business. We know that that's an unmet need.

We know we're the only ones with a product that goes into that particular category of patient, but we also know that we're having tremendous success with these high-diagnosing clinicians. And that's the -- so the new product launch is actually a bit of a headwind as we think about penetrating that group going forward. .

And our next question comes from the line of Jason Mills from Canaccord Genuity. .

This is actually Cecilia Furlong on for Jason.

And I was just wondering, could you just walk us through some of your updated guidance assumptions? You raised the top line, but can you provide some more color on how you're thinking about both gross margins and EBITDA metrics relative to your thoughts when you first issued guidance? And how should we be thinking about gross margin and OpEx trends through the balance of the year?.

Cecelia, this is Lynn.

I would say with the update to the guidance and the revenue outlook, really, as we look at the full year on a margin basis, we're, at this time, forecasting the same profile we have communicated previously, which is a gross margin rate in the low 70s and, for the year, an adjusted EBITDA margin in the high-single digits that's a margin rate.

So with a higher revenue, we'll see incremental dollars flowing through to both lines, but as well, we'll continue to look for opportunities to invest in additional growth opportunities and these investments we've described to you in the past. So that's as much color as we give at this point for full year outlook on the bottom line. .

Okay, great.

And then just looking at how you're thinking about sales rep hiring to the balance of the year, how should we view the cadence of rep hiring? And do you really expect to see any material changes in the ramp to full productivity going forward? Or is it -- remain in that 12 to 18 months kind of timeframe?.

So we have come into the year with a plan to increase the sales organization by about 20%. We're off to a very good start in terms of hiring and feel very good about being able to achieve that.

In fact, we've -- tend to try to fund and load that hiring in the first couple of quarters, so that we can see some productivity happening by the end of the year. Just to kind of frame this, that's probably one of the biggest drivers to our growth.

And over the last 2 years, we've almost doubled the size of the sales organization since the first quarter of 2015 compared to where we ended the first quarter of 2017. So it's a big driver for our revenue growth and one of the reasons we're so focused on doing that.

In terms of the ramp to productivity, we do still see that taking a product specialist, 12 to 18 months; for the associates, anywhere from 6 to 12 months, until they reach full productivity. That's very true for us throughout 2016. And while we expect to get some improvement in that, it's not something that we have built into our plan. .

And our next question comes from the line of Margaret Kaczor with William Blair. .

First question for me, Jerry, I'm not sure if you guys have an updated number for the number of patients in the market. I think you guys have referenced 820,000 in the past.

So any color around that kind of market growth from '17 and '18 and maybe what's driving that?.

So the 820,000 patients that were diagnosed in 2015 is still our most current number. We are, in fact, looking at another data pool to try to update that, but don't have it available for this call, Margaret. So we'll answer that question on our next visit with you on our next quarterly update with investors.

And what's the second part of that?.

The market growth. .

Yes, our outlook on market growth, again, I don't really have any update beyond what we've already presented, which suggested that from the year 2014 midyear to 2015 end of year, the growth in the market was about 1% a month. So almost 17% growth in that 18-month period in terms of number of patients.

Anecdotally, the field organization is telling us that their clinicians are seeing many patients and don't see any end to the number of patients seeking help now. So we're anticipating that those numbers will have gone up when we finish this next data pool. .

Great.

And then in terms of the color on the penetration into the high-diagnosing accounts, I heard your answer to Matt's question, which is great, but do you have any idea of what your share is within a high-diagnosing clinician? So meaning, do they end up putting most or all of their patients on Tactile? Or does that continue to grow deeper? And then in terms of you guys looking at the ROI of adding a new high-volume account versus going deeper within accounts, does it still favor one or the other?.

So the kind of the status of our share at the account, there's kind of 2 elements to that. The first is, are we sharing the account with any other suppliers or any other vendors? And we believe the answer to that is no.

Once we get into an account and actually get them to think about Tactile, we don't believe we're sharing that account with any other vendor. So we're getting all of the business that they're -- we're bidding all the patients they're putting on pneumatic compression devices. That's what we believe. And so that's the first element of share.

The second element though in terms of what percent of the patients that they see do we get on pneumatic compression devices, I'm not sure we know the answer to that one yet. So we'll continue to try to understand that better and hopefully be able to report on that going forward. .

Okay.

And then on the head-and-neck physician side, do you have any sense of the account potential here beyond just patients, but more on the physician level? Then do you have any idea in terms of the physicians, how many patients they're treating relative to the traditional lymphedema account?.

the lymphedema clinics and the Veterans Administration hospitals. What we're finding is those 2 accounts or those 2 categories of accounts for us often see these patients.

When we talk to them about where their referrals are coming from, specifically in the Veterans Administration hospitals, we end up getting taken to various departments in VA that we hadn't anticipated would be a call point for us, for example, speech therapy.

So because swelling can affect swallowing, breathing and even speech, these patients end up in different departments within the VA and don't always make it to the ones providing lymphedema care.

And I think that's both the opportunity and the caution that we have about this market opportunity is we don't call on speech therapists, and I'm not sure we want our reps doing that. We want them calling on the lymphedema community and the vascular physician market. So that's what we're finding.

There are other clinicians that care for these patients, oncologists, for example, because many of these patients have a genesis of their lymphedema in head and neck cancer, and also your nose and throat docs, which we were surprised by as well. So that's -- we're being cautious in terms of how we roll this out.

We're thinking mentally, this is a pretty sizable opportunity. It's certainly an unmet need in the marketplace. And again, we're the only company with an approved product to go after or with a cleared product to go after this opportunity. .

Got it. And then if I'm going to sneak one more in here, but total revenue growth assumes a pretty meaningful deceleration in the back half of the year.

So I understand the productivity hit potentially with head and neck the way that you walked through it, but what are you guys assuming in terms of the inputs of that? Meaning, what are you assuming for sales rep productivity? What are you assuming for the head and neck product throughout this year in your guidance? And what would cause you to go on the low end of the guidance range?.

So I think, first off, I'm not sure I would agree with the deceleration comment because we think about the business as -- our other products this year are going to be pretty flat. But our Flexitouch System, we're talking about that growing between 25% and 28%.

So that's a big driver that gets us to the $103 million to $105 million new range that we've just given as guidance. So Flexitouch is going to make up the lion's share of our growth this year, and the other products are going to come in relatively flat. .

Got it.

In terms of kind of the inputs of that, so again, what does that imply for sales rep productivity and the head and neck indication?.

So Margaret, from an overall full year guidance perspective, at this point, the head and neck contribution, whilst very exciting and at hand, it wasn't a meaningful contributor to the top line in Q1. And to the extent, it contributes in the balance of the year.

That was offset against other Flexitouch sales, which is consistent with the outlook we had given you earlier. In terms of the -- rolling through $2 million into the guidance, I guess, first, I'd say is it's only Q1, so we have a lot of revenue left in the balance of the year.

As it relates to sales force productivity, the better account targeting has certainly -- is an upside or a tailwind on the productivity, but that balance with the disruption that we're doing that's paid in the channel some new product introduction with both the head and neck as well as the next-generation Flexitouch, which is hard to forecast, frankly.

And then additionally, Jerry mentioned in his prepared remarks the new contract with a large payer that -- both at a lower price, as we had anticipated. However, it is -- a function of that is also a conversion of that payer to rental purchases, which will defer some revenue from '17 into '18, all else being equal.

But that said, we are very optimistic about the balance of the year. I'm really happy with what our scores targeted early in the year as you, I'm sure, understand to take the guidance up, too, significantly. .

[Operator Instructions] And our next question comes from Matthew O'Brien with Piper Jaffray. .

Just a couple more follow-ups. And I think I may have missed the commentary on this directly, but I think, Jerry, you mentioned some rental-type agreements that you're going to be doing going forward. Can you just talk a little bit more about that? And then I have one final follow-up. .

Sure. So we signed a contract directly with a large payer at the end of Q1. The new contract terms kind of kicked in at the beginning of Q2. This particular payer prefers rental to outright purchase of the product.

So we're going to see those payments come in, spread out rather than the usual way, which is a single purchase, an outright purchase of the product. This is a payer that we absolutely had to have, and we think is a terrific long-term opportunity. They just have this proclivity toward rental rather than outright purchase.

So that's been if we sign up their patients in the fourth quarter of this year, we'll get 1/4 of the revenue we usually get from that patient population. So that's the large payer that -- or that's the rental piece that we were referencing in the prepared remarks. .

So you recognize the revenue over just the course of a year then, like 4 equal installments over the course of the year? Or is it longer than that?.

No, it's no longer than that, Matt, it's actually shorter than that. So this particular payer likes to spread their rental payments out over 10 months. And we recognize revenue on the monthly basis rather than the full purchase price at the beginning of the rental. .

Got it, okay. And then last question. Just on the new product introductions kind of in the second half of the year, I would love to just hear a little bit more about the gen 3 controller and the garments, the features and benefits that you're going to get from those products compared to previous iterations.

And then intellectual property, I know that was something that folks were concerned about, but as you roll these new products out, what kind of patent protection may you have in the future as a result?.

Yes, you bet. So Flexitouch next generation, we're expecting to get 510(k) clearance in the second half of next year. We will embark then on our usual cadence, which is a limited market release, get some experience with the product in the field, and then do a full outright launch probably at our National Sales Meeting in January.

Back to features and benefits and kind of what's protectable there, well, certainly, we have enjoyed a first-market advantage in terms of getting into the market. The new products, specifically the new garments, we are very excited about. Garment fit is a big part of why Flexitouch is the preferred product in the marketplace today.

And over the last 18 months, we filed another 10 patent applications around the garment and garment use, both for the new head-and-neck garments as well as the new -- next-generation Flexitouch garments. So we feel we'll be in a very good position on garment fit function, form and function for our Flexitouch System going forward.

In terms of the controller, an updated look, some additional features, which I'd rather not kind of get into on the phone here until we have the patent launched. But we feel very good about the new product increasingly appeal of Flexitouch to this patient population. .

Okay.

And then just on top of that, can current users upgraded to gen 3? Or how does that -- how might that rollout look?.

Yes. Most payers will expect that both the medical equipment, like our Flexitouch system, lasts for 5 years. So they expect that type of longevity to their durable medical equipment.

So for us to get a new product for a patient who received a current Flexitouch system before that 5-year mark, we have the result of them paying for the device out-of-pocket rather than through their insurance company. So we don't see a lot of that happening. Frankly, we don't see a lot of out-of-pocket sales for our product today.

Certainly, it's a potential, but it's not something we're banking on and certainly have not built into our guidance for the rest of this year. .

That does conclude our conference call. Thank you for your participation..