Please stand by. Good morning, ladies and gentlemen, and welcome to the First Quarter of 2020 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, this conference call is being recorded, will be available on the company’s website for replay shortly.Before we begin, I’d 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 Annual Report on Form 10-K, as well as our most recent 10-Q filing filed today with 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 statements as a result of new information, future events or otherwise.This call will also include references to certain financial measures that are not calculated in accordance with Generally Accepted Accounting Principles or GAAP.

We generally refer to these as non-GAAP financial measures. Reconciliations of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release on the Investor Relations portion of our website.I would now like to turn the conference call over to Mr.

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

Venous and Lymphatic Disorders, suggested that chronic venous insufficiency induced lymphedema afflicts as many as 16 million individuals in the United States.Our products enable patients to care for themselves at home, and are supported by strong clinical evidence demonstrating their ability to improve the health and quality of life for our patients, while reducing healthcare costs.

Our supply chain continues to function well, and we have multiple safeguards in place designed to satisfy future demand for our products, and with approximately $45 million of cash, cash equivalents and marketable securities at quarter end, and access to additional liquidity via our $10 million revolving credit facility, we remain very well capitalized.Given our strong balance sheet and financial condition, we are continuing to invest in our commercial organization.

We expanded our salesforce to include more than 250 reps at quarter end. And our salesforce hiring expectation of adding a total of 20 reps in 2020 remains unchanged.In conclusion, we’re pleased with the progress we’ve made this quarter under difficult circumstances.

The long-term outlook for our business remains very positive, and I believe we are poised to return to strong, sustained and profitable growth as the COVID-19 pandemic subsides.Let me now turn the call over to Brent to discuss our first quarter financial results in greater detail and review the comments we shared in our press release this morning.

Brent?.

Thanks, Jerry. Total revenue in the first quarter increased 16% on a reported basis and 26% on an operational basis to $43.7 million, compared to $37.6 million in the first quarter of 2019.

As a reminder, our operational revenue growth excludes the impact of our adoption of the ASC 842 accounting standard, which favorably impacted our revenue in the first quarter of 2019.

Our total revenue performance in the quarter was driven by an increase of $4.5 million or 13% year-over-year in sales and rentals of our Flexitouch systems, and an increase of $1.6 million or 45% year-over-year in sales and rentals of our Entre system.Sales and rentals of our Flexitouch systems accounted for 88% of our total revenue in the first quarter of 2020, compared to 91% in the prior year period.

First quarter 2020 revenue by payer was 69% commercial, 16% VA and 15% Medicare, compared to 69%, 20%, and 11%, respectively in the first quarter of last year.Turning to the rest of the P&L. First quarter gross profit increased $4.8 million or 18% to $31.1 million compared to $26.3 million last year.

Gross margin was 71% of sales in the first quarter of 2020 compared to 70% of sales in the first quarter of 2019. The increase in gross margin was primarily attributable to sales and rental revenue mix by payer compared to last year.First quarter operating expenses increased $7.5 million or 27% to $35.5 million, compared to $28.1 million last year.

The increase in operating expense was primarily driven by a year-over-year increase of $5.6 million or 32% in sales and marketing expenses, due to the continued investments in the field sales team, patient training and marketing initiatives to increase clinician awareness.The increase in operating expenses was also impacted by higher reimbursement, general administrative expenses, which increased $1.5 million, or 16%, to $10.9 million, compared to $9.4 million last year.

This increase was primarily due to higher occupancy costs, depreciation, and legal and professional fees, as well as increased personnel-related expenses resulting from additional headcount in our reimbursement operations, payer development and corporate functions.Operating loss for the first quarter of 2020 increased $2.6 million or 147% to $4.5 million compared to an operating loss of $1.8 million last year.

Income tax benefit decreased $200,000 or 8% to $2.9 million in the first quarter of 2020, compared to $3.1 million last year.

The decrease in the tax benefit in the first quarter of 2020 was primarily related to a reduced level of tax deductible share-based compensation activity compared to the first quarter of 2019.Net loss for the first quarter of 2020 was $1.3 million or $0.07 per diluted share, compared to net income of $1.5 million, or $0.08 per diluted share for the first quarter of 2019.

Weighted average shares used to compute diluted net loss and net income per share were 19.2 million and 19.6 million for the first quarters of 2020 and 2019, respectively.

First quarter adjusted EBITDA loss was approximately $500,000 compared to adjusted EBITDA of $2.1 million in the first quarter of 2019.As a reminder, we have provided a reconciliation of certain GAAP measures to non-GAAP measures in our earnings press release.

At March 31, 2020, cash, cash equivalents and marketable securities were $44.8 million, compared to $45.2 million at December 31, 2019.

We had no outstanding borrowings on our $10 million revolving credit facility at quarter end.As Jerry mentioned, we believe our balance sheet and financial condition leaves us well positioned to fund our operating strategy and to meet our working capital and capital expenditure requirements during the COVID-19 pandemic.

We expect to continue investing in our commercial organization to enhance our future growth profile.Let me now discuss our 2020 guidance. On April 6, we withdrew our financial outlook for the full year 2020, due to the rapidly evolving environment and continued uncertainties associated with the COVID-19 pandemic.

As we mentioned in our earnings release this morning, we are currently unable to reliably estimate the future impact of COVID-19 on our operations and financial results, and have not provided any updated full year 2020 financial outlook at this time.With that, I’ll turn the call back to Jerry for some closing remarks.

Jerry?.

Thank you, Brent.

I’d like to close by again thanking our employees, suppliers and clinician customers for their extraordinary efforts under difficult circumstances, which has enabled us to continue providing our products to patients who need them, fulfilling our mission to help those suffering from chronic diseases live better and care for themselves at home.Tactile Medical is grateful to the healthcare professionals that care for patients on the frontlines of the COVID-19 pandemic.

And our hearts go out to all those who have been impacted by this crisis. Lastly, I’d like to thank our shareholders for their continued support and everyone on today’s call for their interest in Tactile Medical.Operator, we will now open the call for questions..

Thank you. [Operator Instructions] Our first question today is coming from Matthew O’Brien from Piper Sandler. Your line is now live..

Morning, thanks for taking the questions. I guess just for starters, on the trending side of things here as we progress through April, I know you guys said back-half of March was down 50% versus the first-half of March.

Did you bottom kind of middle of April? Or are you still kind of finding a bottom right now?.

Hello, Matt. Thanks. Thank you for the question. We’re really not in a position to be giving in our quarter updates. But I did want to point to my quote in the press release, that the shift to virtual selling and service strategies has been positive.

And we’re certainly encouraged by the potential dampening of the impact on the crisis.We’ve seen improvement during the month of March. But keep in mind, with that big drop we saw in March, the run-rate trends did improve marginally each week, but it was off pretty low – pretty low number coming into the month.

So while those trends are encouraging, the order rates represent sales declines of roughly 30% year-over-year..

Okay.

And, Jerry, just to be clear, I think you said, you saw an important in March, but I think you meant to say an improvement in April, is that right?.

Yes, I’m sorry..

Okay, no worries, okay. And then, the other thing would be just on the co-pay side of things for this device. I think some people view the device as a nice to have, not a have to have. I’d love to hear your view on that first of all.

And then secondly, how flexible can you be with patients, to help them financially with a co-pay component of getting access to either Flexi or – Flexitouch or Entre? Thank you..

You bet. So regarding the patient obligation for payment on our Flexitouch system, let me break it out by call point or by group of patients.

First for those patients that are prescribed this device in any of the Veteran’s Administration hospitals or clinics, patient has no copayment obligation whatsoever.In the case of Medicare, patient is obligated for 20% copayment, but often has a supplemental plan to cover those costs.

Commercial patients average throughout the year about a 10% copayment obligation. That does fluctuate throughout the year. Early in the year, when insurance plans reset, that number is higher than 10.

At the end of the year, that number swings lower than 10.But overall, because we’ve demonstrated to clinicians and patients, that use of a Flexitouch actually reduces their healthcare costs while improving their outcomes. We don’t see a lot of hesitancy to purchase the product in a given year.

Having said that, there are some seasonal differences that I mentioned on the commercial side, but overall, that has not been a big obstacle..

Okay. Thank you..

Thank you. Our next question today is coming from Jason Mills from Canaccord Genuity. Your line is now live..

Hi, Jerry and Brent. It’s actually Cecilia on for Jason.

I was just wondering, could you talk a little bit about the trends you’re seeing and being able to reach the patient post-COVID, just being able to engage with new patients that may have not been in the funnel and really leverage kind of that virtual connectivity to reach them?.

Hey, thanks, Cecilia, and thanks for the question. I would say that most of our efforts on the virtual side initially have been around the clinician base.

So trying to and identify which accounts are open, which are using telehealth techniques to reach patients, both new and existing has been the focus of our – really the focus of our field-team initially.

So we serve – we’ve done a multitude of surveys over the past few weeks starting in late March.About a third of those accounts were temporarily closed. Of those that were open, 38% of those accounts were engaging with their patients virtually.

That number nicely has risen as the month of April has progressed to our last survey, where it was 50% of the open accounts that were actually engaging with patients virtually.We then pivoted to servicing patients of our own.

And what I mean by that is after getting a prescription from the physician or from the clinician, being able to engage with patients virtually. So, whether it’s face-time or through one of the other conferencing platforms, we’re able to engage and demonstrate the product to the patient.

We’ve even been able to implement patient training virtually by having one of our lymphedema therapy clinicians that are employees of the company, actually engage with that patient to teach them how to use the equipment. And overall, very early in the process, but that’s been a very promising trend for us..

Okay. Thank you. And if I could also ask just how you’re thinking about rep additions this year? I know you brought on about 10 in Q1. But how are you thinking about the cadence of bringing on those additional about 10 reps throughout the year just to position yourself for 2021? Thank you..

Yeah. Thanks, Cecilia. So as you mentioned, we were able to successfully bring on and onboard 10 new product specialists about half of our plan for the year by the end of Q1. As Brent mentioned in the script, we intend to continue our hiring and preparing ourselves for the back end of this pandemic.

As we’ve stated previously, we would prefer to hire those new reps earlier in the year rather than later in the year, when they can have a bigger impact. So we are still targeting another 10 to be added as they become available..

And Cecilia, I would just add. This is Brent, by the way. Good morning. I would just tell you that, when we look at where we stand, we’re very comfortable with our balance sheet. So as I had mentioned in my prepared remarks, we have nearly $45 million in cash on our balance sheet.

We have access to some incremental resources through our revolving line of credit. And so we feel like we’re in a good spot to continue to invest in our commercial strategy. So once the pandemic does subside, knock on wood, hopefully it’s soon, we can continue our growth trajectory.

So gives us a lot of confidence to continue to invest in our commercial strategy..

Great. Thank you both..

Thank you. Next question today is coming from Margaret Kaczor from William Blair. Your line is now live..

Hey, good morning, guys. Thanks for taking the question. First of all, I wanted to follow-up a little bit about your comments on telehealth. So I understand that 50% of accounts that are using it right now.

Can you give us a sense of how ordering patterns are coming out of those accounts? Are they driving all the growth, for example, in late March and the rest are 0? And then what would be a good bull case scenario for you? What would happen if that number goes to 70% to 80% or 100%? And is that even possible?.

first, those accounts that are open are where we’re getting the patient flow from. It’s coming to us either virtually or directly. There are many states in the country that are not locked down, and in those particular areas with – lockdown with stay in place restrictions. And in those areas, we’re engaging with the accounts directly.

In those areas that are locked down or somehow restricted by the COVID-19 pandemic.We are engaging with those clinics via telehealth or tele-engagement.

And we’ve seen a nice uptick just in the month of April from leaving March at about 38% of those open accounts, engaging with their patients virtually to 50%, that’s a 71% increase just in that short period of time.

I believe that, that will continue to be a driver for us coming out of the pandemic, because of the leverage that the account gets in engaging with their patients in this manner.

They’re able to service a lot more patients that way.So it’s early, but we’re encouraged by the – what I would call the dampening of the impact of the pandemic, by this virtual selling and service strategy we’ve implemented..

Okay, that’s helpful. And that kind of leads into one of the questions I had, which was walking through some of your main prescribers and any trends you’re seeing there. So not just from a payer perspective, but from a vascular surgeon perspective, lymphedema therapy clinics where maybe patients aren’t going in or the VA.

So as you’re seeing those centers open up or those states open up, are your reps increasingly allowed into those facilities? And can you share any other kind of big metrics that you guys are looking at as leading indicators for business outside of the ones that you’ve referenced so far on the call?.

Thanks, again. The impact that we have by call point is across the board. So what I mean by that is each call point has been significantly impacted by this and still are and there’s regional differences even within the various call points that we have. I gave the example of the New York area.

Those vascular physicians are not seeing a lot of their normal patients today. So we’re not getting a lot of referrals from a vascular audience in the New York City area. So there’s no national trend that I could speak to other than the fact that lymphedema therapists in general engage with their patients in a very hands-on manner.

They are the ones impacted most by the stay-in-place or shelter-at-home restrictions across the United States.They’re the ones who are now reaching out to patients through tele-means and trying to keep these patients or get them treated since they can’t.

I think the – most of our patients outside of the VA system, most of our patients come to us from clinicians that practice outside of the hospital, so in an outpatient or office-based setting. And I think that’s really important.

And one of the reasons that we’ve spent so much time and energy during this pandemic to try to increase the number of opportunities to raise awareness about our products and about this condition, the fact that it can be treated at-home, and that we are still as an essential business able to treat these patients.And we’ve really bulked up the number of clinicians that we’ve reached during this pandemic.

So, well over 1,200 patients, we’ve been able to reach just within the last couple of weeks. Compare that to last year, we spent the whole year trying to educate clinicians, both virtually and in regional or local educational symposia, and only reached about 2,300 of them.

So a big uptick in the number of clinicians that are getting exposed to lymphedema and getting exposed to how to manage this condition, specifically at-home..

Okay. That’s helpful. And if I can, I’m going to sneak one more in here, but just kind of big picture strategic questions.

So a lot of trends short-term, but I think ultimately, what everyone really wants to know is, as we look out at 2021 and beyond, how does this position Tactile in a bear case or a bull case, meaning that, how does this impact you from a market development perspective? Or does that not matter? Can it actually help you, frankly, as a home health provider and anything that from a competitive standpoint would be helpful? Thanks..

Yeah, I don’t think the long-term stories changed at all, Margaret. So we still are in a very underpenetrated market opportunity. I think the COVID-19 pandemic has pointed out a few things that this population of patients can benefit from. First, is that you don’t necessarily need to have as much face-to-face contact to get appropriate care.

And I think that’s a long-term benefit that’s going to actually drive more patients through the system.

And that’s one of the things that we look at kind of over the long-term is, there are ways to leverage this virtual experience that we’ve been having during the pandemic, including demonstrating for patients, training patients, engaging with patients, that has a potential to improve our productivity, our profitability.

But it’s early and we certainly need more data before we can move along that path and predict in a predictable way..

Thank you..

Thank you. The next question today is coming from Chris Pasquale from Guggenheim. Your line is now live..

Thanks. Jerry, I wanted to ask about the logistical sort of practical challenges of that shift to virtual medicine that you talked about. So we think about the – this being a home health business, the real issue is getting patients properly diagnosed, their condition properly documented.

So based on the requirements that insurers have put in place for patients to qualify for pneumatic compression, how easy is that to do in a remote setting? Is it as simple as taking pictures? Are there measurements the patients having to now make that the doctor would have been making? What’s the documentation process and how easy is it to be accomplished in this kind of new environment..

Hello, Chris, and thanks for the question. I would say that one of the things that happened, we think, very rapidly as the COVID pandemic was coming into focus was that payers started to respond by being more flexible with the documentation that they require. So we’ve seen an increasing flexibility and coverage criteria.

For example, Medicare was able to lift the requirements for face-to-face engagement with these patients. So we have the ability to engage them virtually.We can get measurements from them virtually. We can interact with physician staff virtually. And that increased flexibility has allowed us to continue to get new patients throughout the pandemic.

Keep in mind, we’ve got a sales funnel that we had patients in that funnel before the pandemic hit. In those instances, the records are already at the office, so to speak, of the clinician.And as long as we’re able to engage with them to access those records, we can pull the information that we need to submit claims and move forward.

But we’ve been very impressed with how quickly the payers have moved to allow us to continue serving their members and our patients..

That’s helpful. And it kind of leads me into my next question. I mean, the premise of pneumatic compression, is that it mimics the work lymphedema therapist does in the clinic.

But it obviously does in the patient’s home and without two people having to be in very close proximity to one another.So that seems like it could confer some added benefits in the current situation.

Is there an opportunity for you guys to push payers or physicians to embrace the technology more, because lymphedema clinic is, by definition, not someplace you can practice social distancing?.

I think that’s the – Chris, I think that’s the basis for these payer changes.

The fact that they realize that these patients can’t access their traditional way of being treated or can’t access their lymphedema therapist because of those restrictions, if you look at the announcement that CMS made, it really speaks specifically to the fact that – we’re basically not requiring this face-to-face or in-person encounter during this pandemic and during the public health emergency, because it’s not necessarily needed now.Now, whether that continues to play out or not, we can’t speculate.

Obviously, we will be making the case that in these face-to-face visits have been effectively replaced by virtual visits. But that’s going to be up to the payer. And that’s going to take some time. So I wouldn’t speculate on a big C change shift there yet, but it’s promising in the early days..

Thanks..

Thank you. [Operator Instructions] Our next question is coming from Ryan Zimmerman from BTIG. Your line is now live..

All right. Thank you. Thank you, Brent, Jerry, for taking the question. So just want to ask a little bit away from telehealth, but I certainly appreciate the importance of having it. I want to ask first on your shift in-house with Entre and Actitouch. Can you elaborate on that process a little bit?I mean, you started it last year.

And I think you were planning to take it companywide this year after a successful trial in 2019. So, can you talk about maybe the timing of all that? What are the necessary steps there? And any color there I think would be helpful. And then, I have a follow-up..

Yeah, Chris – Ryan, thank you. Hello and thank you and appreciate the question. As you saw in our Q1 results, the Entre business was up dramatically compared to the same period a year ago and it is due to what you brought up.

We are shift – our strategic shift to bring the ordering for that product inside, so we could free our field team up to focus more on Flexitouch.That process did start actually about 14 or 16 months ago. And I would say is implemented throughout our territories, one of the big drivers of our Q1 performance.

The benefit was – or the benefit is that it was already a more virtual process, because we were engaging with the offices that were giving us Entre orders directly.And that engagement allowed us to already have in place ways that we could access the records that we need. So I would say that were implemented.

It’s now common practice for Entre orders to be the primary responsibility of our inside team in terms of placing and managing that order.It does still involve some field involvement. We’re often in those accounts that give us both Entre and Flexitouch business.

So our field team isn’t removed completely from the process, but it is primarily being shepherded by the internal team now..

Okay. It’s helpful.

And then, Jerry, appreciate you are on these calls, but can you update us on your successor at this point? When can we have that potentially announced and has anything changed as a result of the pandemic and timing and all that?.

Yeah, Ryan, it’s nice to be loved. Thank you for that. I would say that there really – we don’t have anything new to talk about in terms of the CEO transition. We in fact have continued to run the process. We’ve got a really good process underway with our recruiting firm. We’ve seen some really strong candidates.

And that process is moving along, so I don’t have anything I can add at this point in time, other than we’re pleased with how it’s going to date..

Okay, understood. I’ll hop back in queue. Thanks for taking the question..

Thanks..

Thank you. Ladies and gentlemen, we’ve reached the end of our question-and-answer session. And that does conclude our conference for today. We thank you for your participation today..