Good afternoon, ladies and gentlemen, and welcome to the Second Quarter 2017 Earnings Conference Call for Tactile Medical. At this time, all participants have been placed in a listen-only mode. At the end of Company’s prepared remarks we will conduct a question-and-answer session.

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 these non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press conference 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, Emily. Good evening, everyone, and welcome to our earnings call for the second quarter of 2017. I'm joined on the call this evening by our Chief Financial Officer Lynn Blake. We begin with a brief agenda for today's call.

I'll start off with the high-level overview of our financial performance during the first six months as well as the second quarter of 2017, along with a discussion of multiple tailwinds that contributed to our strong revenue performance in the first half of the year.

Then I will outline some of the exciting progress that we've made during the second quarter in the development and commercialization of our new Flexitouch Systems.

I'll then turn the call over to Lynn, who will provide you with a detailed review of our quarterly financial results as well as financial guidance for 2017, which we updated in our earnings press release this evening. Following Lynn's review, I'll offer some closing remarks before opening the call for your questions.

With that, let's begin with a review of our most recent financial performance. For the first six months of 2017, we reported revenue of $46.1 million, representing growth of 38% over the first six months of 2016.

Strong sales of our Flexitouch System drove our total revenue growth during the period, offset partially by lower sales of our Entre and ACTitouch products. Sales of Flexitouch systems increased 46% year-over-year to $41.7 million, while sales of our Entre and ACTitouch system declined by 9% to $4.4 million.

The growth in sales of our Flexitouch Systems during the first six months of the year was driven by a continuation of the longer-term growth tailwinds in our business. As we have shared with you in prior earnings calls these tailwinds have and will continue to represent the primary drivers of our growth of 2017.

Let me now take a minute to briefly review these long-term drivers of our growth. First, we've made considerable investments to expand our sales and reimbursement teams by bringing on a number of new resources.

Specifically over the last two years our selling organization has expanded to more than 145 representatives as of June 30, from 66 representatives at the beginning of 2015. Second, we've been focused on maximizing the productivity of our selling representatives by providing them with the resources that they need to be successful.

As part of our efforts to drive a sales force productivity we continue to focus our reps on targeting clinicians diagnosing the highest number of lymphedema patients.

We began this targeting strategy in 2016 after obtaining reimbursement claims data that enabled us to identify those representing the top 30% of clinicians diagnosing lymphedema in the United States. Our sales productivity has also been helped by our increased contract coverage with commercial payers as well in-network provider.

We began in 2017 with contracts as an in-network provider covering over 270 million lives in the U.S. and our sales and reimbursement teams have worked diligently this year to leverage our expanded access to patients who are covered by these insurers. Moving to a review of our second quarter performance.

For the second quarter of 2017, we reported revenue of $26.3 million representing 33% growth year-over-year. Our revenue performance was due to strong sales of our Flexitouch systems, which increased by 43% year-over-year to $24.2 million. Sales of our Entre and ACTitouch systems decreased by 28% year-over-year to $2.1 million during the period.

In addition to the longer-term growth tailwinds, that I outlined earlier in my remarks, our revenue results for the second quarter benefited from notably stronger sales performance in both the VA and Commercial Insurance segments of our market.

First, in the VA, our performance during the second quarter benefited from our decision in late 2016 to enhance our commercial presence in this portion of the market by hiring several dedicated resources to help our sales representatives penetrate and market more efficiently within the VA hospitals.

Second, within the portion of the market covered by commercial insurers, our success in creating a skilled and tenured reimbursement team and establishing productive relationships with private payers has been evidence in a steady multiyear improvement in our commercial payer approval rate.

At the end of 2016, our long-run commercial approval rate was in excess of 85%. In the second quarter specifically, we were able to achieve a commercial payer approval rates for our products that exceeded our historical average, increasing the efficiency of our sales and reimbursement teams during the quarter.

Lastly, we had a sales compensation plan change that became effective at the beginning of the second quarter. While we were confident in our long-term benefits of the new plan, we were uncertain about the potential near-term impacts as the plant rolled out.

We are very pleased to report that the new comp plan had minimal disruption in the business in the second quarter, and more importantly, our sales force is very focused on driving continued growth in our Flexitouch products under the new plan.

The increased focus that we saw within our sales force contributed to the sales performance of our ACTitouch and Entre products in the second quarter and we would expect this trend to continue to impact sales for this product over the balance of the year.

Beyond our strong revenue growth performance in the second quarter, we also delivered 73% gross margins for both the second quarter and year-to-date as well as a 9% increase in adjusted EBITDA year-over-year to $2.3 million.

From an operational standpoint, during the second quarter, we continue to deliver on our stated expectations for the development and commercialization of our pipeline of new product innovation. On May 17, we announced the commercial launch of our Flexitouch systems to treat head and neck lymphedema.

This is one of the most significant product launches in our company history for two reasons. One, Flexitouch is now the first and only pneumatic compression system on the U.S. market that is clear for the treatment of people with lymphedema of head and neck, in patient population sorely lacking in treatment options.

Two, the available data suggest that lymphedema of the head and neck flex a significant patient population. A study conducted by [indiscernible] and published in the Lymphatic Research and Biology, estimates that more than 75% of head and neck cancer patients developed lymphedema.

The American Cancer Society estimates that there are approximately 400,000 patients in the U.S. with head and neck cancer.

Head and neck lymphedema patients have historically suffered from a lack of available treatment options and we are proud to now offer an at-home therapy that has demonstrated its effectiveness at believing in variety of lymphedema symptoms.

Following our FDA 510(k) clearance of the Flexitouch head and neck system last September, we completed a limited market release involving 80 patients.

After a single 32 minute treatment, 88% of these patients saw a reduction in head and neck swelling, and 89% reported improvement in other symptoms including an improved ability to swallow, improved a range of motion, a reduction in fibrotic tissue and less discomfort.

While we are excited about the incremental opportunity to treat head and neck lymphedema patients, it's important to note that many of these patients are cared for in areas of the health care system outside of our traditional focus.

We are mindful of the potential for this new product to distract our sales force from their primary call points, given the large opportunity that these targeted areas represent. In the early month of our commercial launch, however, we've been pleased with the ability of our sales force to remain focus on lymphedema clinics and the VA hospitals.

With this initial progress in mind, we expect that our Flexitouch System for the treatment of head and neck lymphedema will become a more meaningful contributor to our growth in 2018. On June 1, we announced the FDA 510(k) clearance of the third generation of our Flexitouch system, the Flexitouch Plus.

Flexitouch Plus has been designed to deliver the same clinically proven benefit of our current Flexitouch therapy while improving the overall patient experience. To this end, the system feature features several important enhancements.

The Flexitouch Plus controller will feature an easy to navigate 7-inch color display, patients will be able to use the display to create and save preset therapy programs, which can then be initiated at the press of a button.

Most importantly, the controller rollout patients treat two limbs simultaneously and enabling them to complete bilateral therapy in approximately half the time. And lastly, we have also redesigned the Flexitouch Plus garments to make them easier for patient to on and off.

Feedback from our existing patients’ community was the primary source of inspiration for the development of Flexitouch Plus and we're excited to get the product into the hands of our patient customers as part of our limited market release in late 2017 and preparation for a full commercial launch in early 2018.

Lastly, before I conclude my opening remarks, I would like to highlight last month's announcement of our newly appointed Chief Medical Officer Dr. Thomas F. O'Donnell, Jr. Dr. O'Donnell has led an impressive carrier in vascular surgery.

He is the senior vascular surgeon at Tufts Medical Center and the Benjamin Andrews America's professor and Chair of Surgery at Tufts University School of Medicine. Among his many notable accomplishments, Dr.

O'Donnell has served as the President of the Society for Vascular Surgery, the American Venous Forum, The New England Society for Vascular Surgery, the Eastern Vascular Society and the Boston Surgical Society.

He is a current member of the Editorial Boards for The Journal of Vascular Surgery, Phlebology and WOUNDS and has personally produced over a 180 articles in peer-reviewed journals. Dr.

O'Donnell also joins Tactile Medical with significant experience as a Medical Executive, having served for nearly a decade as a President and CEO of Tuft's New England Medical Center Hospitals. Prior to joining Tactile Medical’s Senior Leadership team in July, Dr.

O'Donnell was an interval contributor to our efforts as the Chair of our Scientific Advisory Board for the last four years. And we look forward to his continued guidance under the expanded leadership as well as our Chief Medical Officer.

Let me now turn the call over to Lynn Blake, who will review our second quarter financial results in greater detail.

Lynn?.

Thanks Jerry. As Jerry said, our revenue growth continued strong in the second quarter. Revenue for second quarter increased $6.5 million or 33% year-over-year to $26.3 million. This revenue performance was driven by sales of our Flexitouch products, which increased $7.3 million or 43% year-over-year to $24.2 million.

The increase in Flexitouch sales was primarily due to the expansion of our sales force as well as to increase physician and patient awareness of the lymphedema condition and of treatment options. Flexitouch sales accounted for 92% of our revenue in the second quarter of 2017, compared to 86% of revenue in the second quarter of 2016.

The Flexitouch revenue performance in the quarter was slightly offset by a decrease of $781,000 in sales of our Entre and ACTitouch Systems, which decreased by 28% year-over-year to $2.1 million. Continuing down the P&L our gross profit increased by $4.8 million or 33% year-over-year to $19.2 million compared to $14.4 million last year.

Our second quarter gross margin rate was approximately flat and comparison with the prior year at 73.2% of revenues compared to 73.0% of revenue in the second quarter of 2016. Second quarter gross margin performance was driven by favorable mix both product and payer as compared to the second quarter of 2016.

Operating expenses increased by $5.9 million or 47% year-over-year to $18.5 million. The increase in operating expenses was primarily driven by increased sales and marketing expense as well as increased reimbursement general and administrative expenses.

Our sales and marketing expense increased by $3 million or 40% year-over-year due to continued investment in the expansion of our field sales team as well as increased marketing expense.

Reimbursement, general and administrative expenses increased $2.4 million or 61% year-over-year primarily due to expenses associated with increased personnel as well as approximately $750,000 of incremental stock-based compensation and $500,000 of public company cost that were not included in operating expense in the second quarter of 2016.

Operating income decreased approximately $1.1 million or 59% year-over-year to $730,000 for the second quarter of 2017 compared to operating income of $1.8 million last year. We recorded an income tax benefit of approximately $3 million in the second quarter compared to income tax expense of approximately $800,000 in the prior year period.

The large tax benefit in the current quarter reflects the impact of discrete items associated with a significant level of tax deductible stock-based compensation expense generated from equity award related activity in the quarter.

Adjusted EBITDA increased by $183,000 or 9% year-over-year to $2.3 million compared to adjusted EBITDA of $2.1 million in the second quarter of last year. As a reminder, we’ve provided a reconciliation of GAAP net income to our adjusted EBITDA in today’s earnings press release.

Net income for the second quarter was $3.8 million compared to net income of $1 million last year. Net income attributable to common shareholders was $3.8 million or $0.20 per diluted share compared to net income of $177,000 or $0.04 per diluted share last year.

Net income attributable to common stockholders in the prior year period included the accrual of convertible preferred dividends of $509,000 as well as the allocation of undistributed earnings to preferred stockholders of $302,000.

Both of these items were function of our private company capital structure in the prior year quarter and thus neither of these items impacted net income for the second quarter of 2017. Weighted average shares used to complete diluted earnings per share were $18.8 million and $4.8 million for the second quarter of 2017 and 2016 respectively.

As a reminder, the prior year share reflects our private company capital structure and therefore is not comparable to our current share count. Let me now turn to a discussion 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 revenue in the range of $105 million to $107 million which represents growth of 24% to 27% year-over-year compared to revenue of $84.5 million in 2016. This revised outlook represent an increase of $2 million compared to our prior revenue guidance range of $103 million to $105 million.

As a reminder, our guidance continues to contemplate the impact of two notable dynamics. First, the impact of a new contract with a large commercial payer initiated in late March which included updated terms and pricing as well as shift and the mix of sales to patient under rental pricing terms as opposed to upfront purchases.

And secondly, we've received a continued potential versus sales force distraction in the second half of 2017 in connection with the commercialization of our Flexitouch head and neck product as well as the limited market release of the Flexitouch Plus.

For full-year 2017, we continue to expect total company revenue growth to be driven primarily by continued growth in sales of our Flexitouch products. We expect Flexitouch growth for the year to be approximately 29% to 32% year-over-year. We expect gross margin rate to remain in the low 70s and adjusted EBITDA margin in the high single-digit.

This includes non-cash stock compensation of approximately $4 million for the year. Consistent with our performance in recent years, we expect to deliver positive GAAP net income again in 2017. For the purpose of calculating earnings per share, we also 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. Stepping back, our revenue performance in the second quarter and first six months of 2017 demonstrates that we are pursuing the correct strategy to deliver strong and sustainable revenue growth and our updated full-year revenue guidance reflects our continued confidence in our outlook for 2017.

As we enter the second half of 2017, we remain focused on driving increased productivity in our sales force by continuing to target high diagnosing accounts and by capitalizing on the broad opportunity created by our expanded in-network payer coverage.

We will also continue to build the foundation for future growth by adding new resources to our sales and reimbursement teams and by working across our organization to ensure the successful commercialization of our new products.

From a market standpoint, our confidence in the growing awareness of lymphedema continues to be supported by a recent analysis of claims data that we commissioned, which showed that more than 1 million patients in the U.S. were diagnosed with lymphedema during the 12 months ending June 30.

This represents a greater than 23% increase in the number of lymphedema patients diagnosed over the 12 months ending in December of 2015. This growing awareness gives us confidence about the long-term opportunities for our Flexitouch systems.

In conclusion, with expanding and productive selling and reimbursement organizations, and newly commercialized and cleared Flexitouch systems, Tactile Medical remains committed to raising awareness of the lymphedema condition within the medical community, maintaining our U.S.

leadership position, and delivering advanced and effective therapies to benefit our payers, providers and patients. Thank you for your participation in today's call. And for your continued interest in Tactile Medical. That concludes our prepared remarks for this evening. Operator, we'll now open the call for questions..

Thank you. [Operator Instructions] And our first question will come from Matthew O'Brien from Piper Jaffray. Your line is open..

Good afternoon and congrats on a great quarter. Just for starters, I think Jerry or Lynn, you talked about the VA contribution, you talked a little bit about these new contracted lives.

So if you were to kind of strip out the contribution from those two news sources, how's the core business growing and then how sustainable are those contributions from the new contracted lives and VA?.

Yes. Matt, thanks very much for the question and thanks for the complements on the quarter. The primary drivers for growth in Q2 were the same drivers that we've been experiencing since we've gone public.

So increasing our field headcount, maximizing productivity of that sales organization, targeting those high diagnosing clinicians, and seeing more contracted lives get benefits with us as an in-network provider as opposed to being out of network.

The VA was particularly strong in the first two quarters of this year, I think primarily from some of the investments we took on last year by brining on some additional skilled resources that know how to navigate that system very well and we expect the VA to be a continuing contributor as we go into the second half of the year.

On the commercial payer side improved approval rate with that – with those payers is a result of us being in-network with them, and that makes us more efficient when talking to clinicians and their patients that we can get in-network instead of out of network benefits.

So we actually look at both of those to be continuing to drive our performance throughout the rest of this year and well into 2018..

That's very helpful. And then as the follow-up, it’s kind of two in one here.

But just I know you rolled out the head and neck product, did we see any contribution here in Q2 from that product, I guess how is it going and then historically you've done about 40% of your revenue in the first half of the year were 60% in the back half, your guidance assumes 43% in the first half and 57% in the back.

So is there anything specifically that you're seeing within the business that's leading you to that type of range, is there anything you're signaling here specifically that gives you a little bit of caution?.

No, I think we have to step back and remember that we started the year and have been trying to guide folks to us being thinking of us as a 20% plus grower on the topline and our initial guidance for the year was 20% to 22% growth.

We've now up to that guidance overall 24% to 27% growth year-over-year with Flexitouch being almost 30% growth year-over-year.

So I think it's a strong – the guidance reflects a very strong Flexitouch growth and we've basically passed along $2 million beat in the second quarter and really haven't changed our growth expectations for the second half of the year.

So we're feeling very confident about being able to deliver on this new guidance and I think we're in a great place to be able to do that..

And on the head and neck side?.

On the head and neck side, we’re really early in that launch. You may remember that mid-May was when we actually turned it over to the general field organizations, so halfway through the quarter. We've certainly continued to receive very positive feedback about the impact that the new Flexitouch system has for these patients.

But from a financial impact perspective, we don't expect it to be a significant contributor in 2017 to our results..

Got it, very helpful. Thank you so much..

Thanks Matt..

And our second question comes from Margaret Kaczor from William Blair. Your line is open..

Good afternoon, guys. Thanks for taking the question. So first off I guess you had strong results to start there, that’s clear. But can you give us any additional color into your existing Flexitouch accounts.

Is that new high prescribing physician accounts are going deeper into the existing high prescribing physician accounts or you maybe saying better stickiness in the new position accounts than you have in the past..

Hi, Margaret, appreciate the question. I would say that overall we are seeing improved performance in all of those segments. So not only from our existing customer base, but high distal diagnosing clinicians are coming on board and we're seeing very positive results from them as well.

You probably appreciate the fact that we repeated that data pool and we’re able to access more claims data showing a 23% increase in the number of patients diagnosed with lymphedema in the one-year period that just ended compared to the one that ended at the end of 2015.

So even accelerating, the level of awareness that we're seeing in the marketplace, it’s causing additional demand for the Flexitouch System.

So the increased awareness of lymphedema, the increased awareness of our sales organization talking to these clinicians and helping them understand the clinical and economic benefits around Flexitouch are really contributing to the overall Flexitouch growth..

Now I definitely appreciate the additional color on the over 1 million patients and definitely and process there.

In terms of a follow-up question you guys also talked about having a pair approvals higher than normal I know some of that you answered Matt that it was due to being network, but I assume that should be a pretty substantial from here and then was that also something that you had assumed in your guidance is that in your guidance for the back of the year and just to add one more because I like asking five questions and one question, but that as you go out longer- term and you improved those pair approval rates that should be a pretty good thing I would think for your profitability profile..

So yes, there is a number of thing in there that I'll try to answer on the better approval rates. We do certainly see some seasonality in that approval rate and what I mean by that is our VA business drives up the approval rate because when we get a prescription from the VA 100% of the time it gets paid for. So the approval rate is very high.

So product and payer mix will have an impact on the overall approval rate throughout the year we tend to see VA being more concentrated in the early part of the year rather than the laster part of the year because there the fact they have no co-payment or deductible obligations for the veterans to meet.

So yes, we it does bode well for our future and yes we did build it into the guidance that we’ve just updated in our press release earlier this afternoon..

Fantastic. And then if I can squeeze one more in. In terms of your success with VA, can you give us any numbers added from that $1 million target that you gave us or otherwise. So what's your penetration into the VA and how should we look at that penetration whether on year-over-year comps or so on over the next few quarters? Thanks..

Yes. So VA penetration has two elements to it, penetration within each of VA and orders from all of the Vas. Well we can't really answer the penetration within each VA because we really are working to try to find all the sources of where these patients get care within each VA hospital.

We can’t comment that – we believe we are in about 140 of the 180 VA hospitals now. So we've done a good job of reaching out to those VAs and at least getting our foot in the door, we think there's a lot more potential to go deeper in each of those 140 yet alone find the final 40 as customers for Tactile Medical..

Thanks a lot..

[Operator Instructions] Your next question comes from Jason Mills from Canaccord Genuity. Your line is open..

Hi. This is actually Cecilia Furlong on for Jason.

And I was just wondering, can you provide a bit more color just around the impact today from the large payer; you called out shifting to rental? And should we think of Q2 as a proxy for future quarters and do you expect additional providers could ultimately pursue with similar strategy?.

Hello, Cecilia. Good to hear your question. We did in fact report at our last conference call that one of the major payers had just signed a contract with us late in March as well as moved to more of a rental model than a purchase model. And that actually has happened.

It has opened up that payer, and actually, it has opened up their patients, patients that are insured by that payer. Such that we've seen a pretty significant increase in the number of patients that we were able to serve and are able to serve from that particular payer.

As you may remember because we're providing this as a rental, we're not recognizing the full sale amount in the first time we bill that patient, rather we divided into the rental period. So that can have an impact on our revenue recognition over time.

But so far that payers business has actually increased not decreased for us in the second quarter and we’re optimistic we can continue to grow that business going forward. To your question on, do we expect other payers to go to this model? The answer is, no we don't.

We've certainly had other payers who have done rentals in our past or have Lynn comment a little bit on the percent of our revenue that comes from rental of our product. But we haven't seen a shift toward rental of our Flexitouch Systems other than the one player we signed a contract with.

So Lynn?.

Sure, Jerry to that point, currently our rental business is approximately a mid-teens percentage of our total business, and historically it’s been in the 10 to low-teens percent a year-ago. So well those particular contract did move that percentage of total volume up more towards rental, if not a sea change in that trend for us..

Okay, great. And then if I could just have one follow-up.

Just wondering, could you provide a little more or just an update on your plans for sales force additions to the back half of the year? And what type of increase you’re anticipating over 2016 levels?.

Yes, I’d be happy to do that. So we set out this year to add 20% to our field organization. And coming through the first half of this year, we are right on our plan to do that.

So we do expect to continue to hire throughout the year, in fact we just brought on an additional recruiting resource to help us actually attract and get candidates to interview, but we are on our plan to increase the sales organization by 20% of share..

Great. Thank you for answering the questions..

Welcome. End of Q&A.

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