Good evening, ladies and gentlemen, and welcome to the Second Quarter 2010 Earnings Conference Call for Tactile Medical. At this time, all participants have been placed in a listen-only mode. At the end of the company’s prepared remarks, we will conduct a question-and-answer session.

Please note that this conference call is being recorded and will be available on the company's website for replay shortly.

Before we begin, I'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 the Securities and Exchange Commission.

Such factors may be updated from time to time in our filings with the SEC, which are available on our website. We undertake no obligation to publicly update or revise our forward-looking statements as a result of new information, further 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 in the Investor Relations portion of our website. I would now like to turn the conference call over to Mr.

Dan Reuvers, Tactile Medical’s President and Chief Executive Officer. Please go ahead, sir..

Thanks, operator, and good evening, and welcome, everyone, to our second quarter 2020 earnings call. I'm joined on the call today by our Chief Financial Officer, Brent Moen. Let me provide you with a brief outline of today's call.

As the recently appointed President and Chief Executive Officer of Tactile Medical, I'll begin my remarks with an introduction and share with you what I've been focusing on since joining the team in early June.

I'll then briefly review our second quarter revenue results, before shifting to a more detailed discussion of how the COVID-19 pandemic has impacted our business and revenue performance throughout the quarter, as well as the initiatives that our team has been focused on to help mitigate these impacts and continue to serve clinicians and patients.

Brent will then provide you with a detailed review of our second quarter financial results and discuss our balance sheet condition. Following his remarks, I'll share some color on the business trends during July and some of our near and long-term strategic priorities as we enter the second half of 2020. We'll then open the call up for questions.

Before delving into the update for the quarter, I'd like to take a moment to introduce myself and provide a few summary points on my background and where I focused my time since joining the team. I joined Tactile Medical on June 8, with over 30 years of experience in the medical device industry.

The last 12 years of my career were with Integra Lifesciences. I most recently led Integra's largest business, as the Executive Vice President and President of Codman Specialty Surgical, which generated about $1 billion in revenue during 2019.

In that role, I led the division's organic growth through new products as well as several deals, including Integra's acquisition of the Codman Neurosurgery business from Johnson & Johnson.

I joined Integra in 2008 and held a variety of roles at the company during my tenure, including serving as President of Integra's $200 million international business and president of its surgical instrument business.

While my 12 years with Integra provided me with experience in managing a large global business, I've also enjoyed success in my career at smaller, high growth, medical device companies, including working with companies in the home health care space.

I was president of a private medical device company named Advanced Respiratory, which sold a home-based therapy device and was ultimately acquired by Hill-Rom.

Similarly, I served 10 years on the Board of RespirTech, a privately held medical device company, focused on selling respiratory therapy equipment for in-home use, which was acquired by Philips. In addition to their focus on the treatment of patients at home, both companies employed business models very similar to Tactile Medicals.

In fact, a handful of the individuals I was fortunate enough to work with at Advanced Respiratory, joined Tactile Medical when it was an early-stage company. So I've been an observer of the company's progress for many years now.

And I've admired the consistent track record of strong top line growth and profitability improvements that the employees and executive team here have achieved.

Since joining the Tactile team nearly two months ago, I've focused a considerable portion of my time on engaging and developing relationships with our employees and customers, while evaluating all of the primary aspects of our market and growth strategy in order to better understand our potential business opportunities and challenges.

I've been impressed by the culture at Tactile Medical, the passion our employees have for making a difference in the lives of our customers and the patients that we serve, and the ability for our organization to react and respond so quickly to changing circumstances, especially as it relates to the COVID pandemic.

From a market growth strategy perspective, I believe that Tactile remains in the early innings of pursuing a very attractive opportunity in chronic swelling conditions, having just scratched the surface of the over $5 billion market opportunity for lymphedema in the United States.

One of the primary takeaways from my many discussions with the leadership team, employees and customers, in recent weeks, is that we indeed are largely on track but with incremental opportunities to further focus our efforts on the most important aspect of our strategy.

I'll share some thoughts on our near and longer-term priorities later in my remarks, but first, let me review our second quarter revenue performance.

Like many companies in the medical device sector, our second quarter financial and operating results were significantly impacted by the COVID-19 pandemic, and by the restrictions and policies adopted to slow its spread.

For the second quarter of 2020, we reported total revenue of $35.1 million, representing a decrease of 22% year-over-year on a reported basis and 20% on an operational basis. Sales and rentals of our Flexitouch Plus system decreased 24% year-over-year, while sales and rentals of our Entre system decreased 6% year-over-year.

As discussed on our first quarter earnings call, our growth trends slowed materially in the last two weeks of March as health care facilities and clinics restricted access to their clinicians, reduced patient consultations and treatments or announced temporary closings as a result of the COVID pandemic.

In order to better understand the impact of these factors, we began to survey our top accounts across the United States, beginning in the last week of March.

Our surveys in both late March and late April, which included 1,500 and 1,800 accounts, respectively, showed that roughly a third of top accounts were temporarily closed as a result of COVID-related restrictions.

In addition, while the remaining top accounts were open, they indicated that they were seeing far fewer patients largely as a result of COVID-related constraints. These surveys also revealed that many of the top accounts that were open were adopting some degree of telehealth practices in response to this pandemic.

With this in mind, our organization reacted quickly during this period to develop and implement modifications to our own practices to engage with clinicians and customers via virtual means. Our growth continued to be challenged in April and May, as we saw a combined sales decline 32% year-over-year.

Despite this challenging start to the quarter, we were pleased to see improving trends in the latter half of May and throughout June, as many health care facilities began to reopen, lessen restrictions on access to their facilities, and resume patient consultations and treatments.

We continue to survey our top accounts in May and June, and we're pleased to see a steady decline in the percentage of surveyed top accounts reporting that they were closed, specifically just 9% of top accounts surveyed in late June were still closed, about one-third as many as reported in late April.

While we're encouraged to see our top accounts reopening in May and June, the challenge has remained that among those open, many are still operating at significantly lower rates of productivity. We've also seen variation in the pace of recovery depending on site of care.

As a reminder, with the exception of the VA, the majority of our customers are based outside of the hospital setting.

At a high level, we saw patient throughput and activity recover more quickly for our customers in vascular clinics, while our customers that operate in lymphedema clinics have been particularly disrupted by the social distancing policies and shelter-in-place restrictions.

Simply stated, this was a challenging quarter, yet the organization performed admirably, and our efforts to leverage virtual education, sales and service opportunities helped us navigate the environment. June's performance showed marked improvement over April and May. However, our sales in June were still down mid-single digits year-over-year.

We believe this is the strongest indication that we remain in the early days of recovery. Turning to a discussion of our Q2 operational highlights.

As I mentioned earlier, our sales and marketing teams have been quick to shift their processes and dedicate their efforts to engaging with customers virtually, to help mitigate the disruption caused by the COVID-19 pandemic.

Following proactive outreach to our top accounts in late March, our sales reps began communicating with our clinician customers using virtual means to provide support and assist them in serving their patients.

Throughout the second quarter, our sales reps continue to conduct product demonstrations using virtual meeting software, and we also modified and improved our process for providing virtual training and support for our new patient customers, which historically had been conducted in person.

This quick pivot by our team allowed us to respect the social distancing requests of our customers.

In addition to our efforts to support existing customers during this period of disruption, we were highly effective in engaging with potential new customers by hosting virtual events to educate the clinical community on lymphedema and the benefits of our at-home therapies.

Our shift to conducting medical education programs virtually began in earnest in April when we hosted multiple education seminars focused on a variety of relevant topics that drew more than 1,300 attendees.

To put this in perspective, with these concentrated efforts in one month, we're able to engage more than half of the total number of attendees that we're able to reach through our medical education programs in all of 2019.

Based on this impressive response, our team continued to develop and organized virtual events in May and June, some of which were hosted by Tactile Medical and some in partnership with key opinion leaders. In total, the events hosted in the second quarter saw participation from over 3,300 attendees.

In short, our virtual programs are proving to be a highly valuable method for extending our reach and educating clinicians in the future. Shifting to a brief update on our recent progress with respect to new clinical publications.

Recall that our team has been focused in recent years on expanding the portfolio of clinical evidence for our Flexitouch Head and Neck product to support our pursuit of expanded reimbursement coverage and ultimately, more widespread adoption.

I'm pleased to share that the results of a randomized clinical trial was published in Supportive Care in Cancer last month.

The study conducted by Vanderbilt and Southern Illinois universities compared advanced pneumatic compression to standard of care and the statistically significant results included reductions in swelling and pain and improvements in the ability to swallow among head and neck cancer survivors.

This represents the kind of evidence that we've continued to assemble to shape clinician prescribing practice and payer policy. Lastly, I'd like to take a minute to discuss the recent decision we've made with respect to our Airwear product.

As I mentioned earlier, I spent considerable time during my initial weeks on the job with team members throughout the organization. My deep dive into the business has included strategic meetings with our leadership team to review the company short and longer-term opportunities.

These discussions included a reevaluation of all existing plans for strategic growth investment, including the plans for the Airwear product line. While we received positive initial feedback, the commercial launch was pointing to a bigger investment in direct-to-consumer channels.

After careful consideration, we decided that the Airwear commercial initiative was not aligned with our focus on a more advanced product solution, specifically our market-leading franchises in both Flexitouch and Entre.

While Airwear had the promise to access patients earlier in their disease progression, it was apparent that our commercial plan required a level of investment, both in terms of capital and time that was unlikely to generate a compelling return over the next few years.

Given the significant commercial growth that we have with Flexitouch and Entre, we've elected to focus our investment in the areas that offer the highest potential return. By way of reminder, the analysis of the U.S.

medical claims data that we conducted in December 2019 showed 1.3 million patients diagnosed with lymphedema in the trailing 12 months that ended in June of that same year.

When compared to the 40,000 Flexitouch Systems that we shipped last year, it's clear we have a tremendous opportunity remaining in helping patients suffering from the symptoms of lymphedema with our more advanced treatment solutions. This is where I want our organization to be focused.

Stepping back, given the unique challenges that we faced in adapting to COVID-19, I'm incredibly proud of the continued progress that our team's made, both financially and operationally throughout the second quarter.

Before I share some thoughts on our near-term priorities and long-term outlook, let me first turn the call over to Brent to discuss our second quarter financial results in greater detail and review the comments we shared in our press release this afternoon.

Brent?.

Thanks, Dan. Total revenue in the second quarter decreased 22% on a reported basis and 20% on an operational basis to $35.1 million, compared to $45.2 million in the second 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 second quarter of 2019.

The decrease in our total revenue in the quarter was driven by a decrease of $9.8 million or 24% year-over-year in sales and rentals of our Flexitouch systems and a decrease of approximately $250,000 or 6% year-over-year in sales and rentals of our Entre systems.

Sales and rentals of our Flexitouch systems accounted for 89% of our total revenue in the second quarter of 2020, compared to 91% in the prior year period. Second quarter 2020 revenue by payer was 73% commercial, 15% Medicare and 12% VA, compared to 71%, 11% and 18%, respectively, in the second quarter of 2019. Turning to the rest of the P&L.

Second quarter gross profit decreased $6.6 million or 21% to $24.9 million compared to $31.5 million last year. Gross margin was 71% of sales in the second quarter of 2020, compared to 70% of sales in the second quarter of 2019. The increase in gross margin was primarily attributable to sales and rental revenue mix by payer, compared to last year.

Gross margin in the second quarter of 2020 was impacted by $430,000 noncash write-off of our Airwear inventory. Excluding the impact of the noncash inventory write-off in the period, non-GAAP adjusted gross margin was 72% of revenue. Second quarter operating expenses increased $4.4 million or 16% to $32.9 million compared to $28.5 million last year.

The increase in operating expenses was primarily driven by higher reimbursement general and administrative expenses, which increased $5.6 million or 63% to $14.4 million compared to $8.8 million last year.

This increase was driven by a $3.6 million noncash impairment charge related to our Airwear long-lived assets and by a $2 million increase in occupancy costs, depreciation expense, legal and professional fees and compensation expense in our reimbursement and corporate functions.

The increase in operating expenses was partially offset by a decrease of $1 million or 6% in sales and marketing expenses and to a lesser extent, a decrease of $130,000 or 10% in the research and development expenses. Loss from operations in the second quarter of 2020 was $8 million, compared to income from operations of $3 million last year.

Excluding the $4 million noncash Airwear inventory write-off and impairment charge in the second quarter of 2020, our non-GAAP adjusted loss from operations was $4 million. Income tax expense in the quarter of – in the second quarter of 2020 was $5.9 million compared to $400,000 in the second quarter of 2019.

The increase in income tax expense was primarily due to changes in our effective tax rate, which were attributable to a change in the projected taxable income, including proportionately lower benefits for stock-based compensation, as compared to the same period last year.

Net loss for the second quarter of 2020 was $13.9 million or a negative $0.72 per diluted share, compared to net income of $2.8 million or $0.14 per diluted share for the second quarter of 2019.

Weighted average shares used to compute diluted net loss and net income per share were $19.3 million and $19.6 million for the second quarters of 2020 and 2019 respectively. Second quarter adjusted EBITDA loss was approximately $750,000 compared to adjusted EBITDA income of $6.3 million in the second 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 June 30, 2020, cash, cash equivalents and marketable securities were $37.4 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. We continue to believe that our balance sheet and financial condition leaves us well positioned to fund our operating strategy and meet our working capital and capital expenditure requirements during the COVID-19 pandemic.

With this in mind, we expect to continue investing in our commercial organization to enhance our future growth profile. Lastly, as a reminder, on April 6, we withdrew our financial outlook for the full year 2020 due to the rapidly evolving environment and the continued uncertainties associated with the COVID-19 pandemic.

As we mentioned in our earnings release this afternoon, given the considerable uncertainty surrounding the magnitude and duration of the continuing impacts of COVID-19, we are not in a position to reliably estimate its future impact on our operations and financial results and have not provided an updated full year 2020 financial outlook at this time.

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

Dan?.

Thanks, Brent. While we're not providing formal financial guidance, we thought it would be helpful to share some additional color on recent business trends in July to help investors better understand the current operating environment.

As I mentioned earlier, despite the challenging operating environment, we were pleased by the improvements that we saw as we progressed through the second quarter. Our sales force's ability to access accounts has recovered significantly.

With many health care facilities easing formal restrictions on rep access, which helped our efforts to continue to add new Flexitouch accounts in second quarter. As discussed, our sales force also continued to make progress in engaging with existing accounts virtually.

We are particularly encouraged with how the year-over-year changes in sales for June was materially stronger than in April and May, albeit still down, mid single-digits year-over-year.

While the business trends have improved significantly, as we progressed through the second quarter, the trends through July support our belief that we remain in the early stages of recovery. In late July, we conducted a survey of nearly 1,900 of our top accounts, which showed that approximately 92% were open in some capacity.

While this represents a roughly 40% increase in the number of open accounts compared to the survey we conducted in April, this represents only a modest improvement compared to the results from our survey in late June.

It's equally important to note that the vast majority of accounts survey have indicated that their patient throughput remains well below normal. Specifically, only about 22% of the accounts that were open in late July survey reported that they were operating without any constraints.

This appears to be largely related to the impact of health and safety protocols adopted by clinics in response to COVID. Some accounts, for example, have reported that they're using fewer exam rooms due to social distancing and requiring extra time to clean and turn over these rooms.

Accounts have also frequently mentioned extended periods between patient consultations, citing the time it takes for the patient to get from a parked car to the exam room versus the waiting room where they were typically staged. Our clinic customers are in various stages of the recovery process, depending on their geographic region and site of care.

We continue to see that privately owned practices based in the outpatient setting, specialty vascular clinics are the furthest along in this recovery process.

We've heard that many of these clinics are committing to longer hours or additional days, limiting vacation time and continuing to be more resourceful in terms of their approach to seeing patients.

On the other hand, hospitals and health systems tend to be at relatively earlier stages in the recovery process and typically have more COVID-related restrictions governing their approach to interacting with patients and sales reps.

This has been particularly impactful in the VA, where our patients have largely been redirected from the 170 VA hospital centers to their more than 700 community-based outpatient clinics. The feedback from surveys of accounts in July reflected a still uneven impact across regions.

The order trends in July provide further support that we're in the early days of recovery. Orders for July represent declines of roughly mid-single digits year-over-year, consistent with the year-over-year decline we saw in June.

In summary, we're encouraged by the notable improvements in business trends we've seen since April, however, we remain cautiously optimistic about our prospects for recovery during the second half of the year.

Although we expect COVID will continue to impact our financial and operating results, we're fortunate to be well positioned as an organization with a focus on enabling clinicians to provide treatment for patients at home, a customer base that operates largely in the outpatient setting, a back-office that's demonstrated the ability to remotely and efficiently support our customers and a strong balance sheet to help us weather this pandemic.

As I think about my key priorities for the organization, the near-term focus is clearly to ensure that Tactile Medical is positioned to return to our prior track record of growth as quickly as possible, as the impacts of the pandemic subside.

This means continuing to lean into virtual engagement and train, so that we can continue to develop the market and grow our prescriber base as we move into the second half of the year. It also means continuing to leverage our balance sheet to retain and attract key talent to our organization.

Most notably, we remain committed to our annual goal of expanding our sales force by approximately 20 reps to more than 260 reps by the end of the year compared to more than 240 at the end of 2019.

Longer-term, we remain uniquely positioned to drive strong, sustainable and profitable growth as we continue our market leadership and penetration of the $5 billion-plus market opportunity for lymphedema in the United States.

With this in mind, we'll continue to invest in areas, including clinical evidence and clinical education, key components to developing this market.

As a proud member of the Tactile Medical team, I'd like to close today by thanking all of our employees for their exceptional efforts and dedication in the second quarter of 2020 and the resourcefulness in helping us navigate challenging circumstances presented by the COVID-19 pandemic.

Our team remains energized knowing we're making a difference in so many lives. And I'd also like to thank our customers and shareholders for their support and those on the call this evening for their interest in Tactile Medical. Operator, we'll now open the call for questions..

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Ryan Zimmerman from BTIG. Your line is now live..

Thank you. Thank you, Dan and Brent, for the commentary and the color on your trends. I guess, two questions for me.

The first, in terms of the surveys you've conducted, did you get any indication around when those clinics – specifically the 22% you referred to, when they would expect normalized operations? Is that fourth quarter this year? Is that something out into 2021? Just any color around the expectation for more normalized operations, I think, would be helpful.

And then I'll just ask my second follow-up question now. As you think about the investment in Airwear that you're stepping back on, where do you intend to redeploy those resources? Is there something specifically that you're honing in on, Dan, as you've surveyed and kind of landscaped the company since joining. Thanks for taking the questions..

Sure. Thanks for the questions, Ryan. So first, just as far as normalized operations, I think, it's still a little difficult to predict. I think until we see the impacts of the COVID pandemic, many of the constraints will probably continue.

We've seen probably the most, as I've kind of alluded to in the comments, the most resourcefulness, probably led by private vascular clinics. And keep in mind, that's grown to be a pretty meaningful part of our business. So that's probably led the charge back.

We're seeing continued improvements in the throughput of some of the lymphedema clinics, where, I think, they probably had the most severe initial reaction just because of the intimate interaction with a therapist. And overall, those improvements have continued.

But I think that they probably will have to struggle with those over the course of the balance of the year. The most ambitious practices continue to, I think, find better ways to be resource with throughput.

So there being some of the things we mentioned about extending office hours, extending days in clinic, working Saturdays, limiting vacations, I think, those are the things that we would expect to continue to occur to try and see better throughput happening.

But some of the things about calling a patient up from the parking lot, those behaviors, I think, will probably continue for some period of time. The VA has probably been the most significant as far as some of their changes redirecting patients out of the hospital centers and into the regional outpatient centers. So those are the moves.

And I think over time, we continue to find those sites as well. Keep in mind, 700 VA call points as opposed to 170 hospitals has required more work for our sales force. This is 1,000 points of light instead of a couple of satellites. So the good news is we're finding where they are, but it's taken a little bit of adapting.

I think as far as the Airwear question is concerned, Airwear has the opportunity to be, I think, a very useful product for patients in the early stages of their disease. It's truly a consumer product, however. And when we think about where we want to continue to invest, it really continues to be in the place where we put so much of our bets.

So we have a very large sales force, as you know, and we also have a back-office that we've invested in, which is a unique part of our direct to the prescriber kind of market. I want to make sure we're leveraging those big investments we've made as opposed to start to dilute our energies into building a different kind of competency.

So consumer products, good one. I'm not sure it's the fit for us, nor do I think that it leverages where we've built our competencies in some of our differentiating value. So where will we continue to put our investment, it's going to continue to be in that space to try and grow that out.

And I think because the market opportunity still has so much runway ahead of us, we didn't want to be distracted..

Thank you..

Thank you. Next question today is coming from Matthew O'Brien from Piper Sandler. Your line is now live..

Good afternoon, thanks for taking my questions. Just a follow-up on Ryan's question. I guess I'm a little bit surprised, there hasn't been a bit more recovery in July.

And I don't know if there's more outbreaks that you're encountering, but why haven't things improved more in July if these centers are opening up more and working more hours, et cetera? And then as far as the VA goes, when do you think – are they going to get back to those 170 centers later this year? Or is that going to be more established into these community hospitals for the remainder of the year and is likely going to be a revenue headwind? And then I do have one more follow-up.

Thanks..

Sure. Thanks for the questions, Matt. Yes. So first of all, just as it relates to July, I think, we're pretty encouraged, frankly, that we've seen June and now July back within single digits of prior year.

When you think about the majority of these largest prescribers that we've been serving have continued to say that they are seeing restrictions or limits in their throughput, that's really the – I think that's primarily the key for us.

So frankly, I think, as we look at where we were in late March, April and even May, we're actually pretty encouraged by the fact that we've seen ourselves close the gap this much. And I think as far as the VA is concerned, we can still find these patients. It's just a lot more places.

How long it will be before the VA invites some of these patients back to the main VA centers as their primary source to meet with their clinicians, it's a little hard to predict. And not always does the VA behave nationally. Many times they'll adopt different practices.

Thus far, it's been pretty sweeping that they've kind of redirected folks to these outpatient community clinics. I think on the good front, as we've seen patients that maybe haven't been going to some of their natural sites and they're going even into primary care, we continue to invest in the education that we talked about.

And by expanding the prescriber base, even though, volumes are down because of throughput, our goal is to continue to be in a good position. So when recovery is complete, we've made the prescriber base larger..

Okay. That’s helpful, thank you. And then as far as these patients go, I mean their lymphedema is going to continue to progress.

Do you have a sense of the building backlog, where that stands? How you can service that group? And then specifically, in the back half of the year, the consensus is looking for flat performance in Q3 and then actual growth in – some pretty meaningful growth in Q4.

Are those targets attainable? Or are we a little bit too aggressive as we think about things heading through the back half? Thank you..

Yes. I think that, first of all, when you think about where we've been in April and May, down as much as 30%, we feel good about the trends so far. But as we said, I think, we're still in the early stages, we're not prepared to give guidance. But I think that as we finished up July, we saw ourselves down mid-single digits.

So I think as you continue to kind of run that out, we're hoping to see some progressive improvements over the course of this quarter and then throughout the balance of the year..

Okay.

And just real quick, has your prescriber base grown or not?.

We have added new prescribers in the second quarter. But those larger prescribers that we had developed obviously were prescribing fewer patients just because of the throughput and the patients that they're seeing on a regular basis. So they clearly have offset each other.

But we'd like to think that our universe of prescribers has certainly gotten larger as a result of some of our ongoing education..

Got it. Thank you so much..

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

Good afternoon, guys. Thanks for taking the questions. Yes. So no surprises, I'm going to keep pushing on June, July and beyond.

But as you think of June and July, is there any kind of a risk that this is a catch-up of patients that maybe weren't treated in April and May? And then is there basically a push to treat these patients in the home that's helping and maybe – and as lymphedema clinics maybe do reopen that creates another headwind? Or do you think that this is more sustainable? And some of these vascular surgeons are finally seeing the light and saying, you know what, I should just push most of my patients into a lymphedema clinic..

Yes. So I think – thanks for the question, Margaret. I think good questions about, are we seeing ourselves developing a backlog? Ultimately, these patients are going to need care and the issues that they're struggling with, they're not going to go away. Lymphedema is a lifelong consequence.

So we do believe that the pool of patients has certainly not dwindled over the last couple of months, and fewer of those patients have been able to see their primary care or specialist to get a prescription.

We've also seen that there has been a lot more disruption in access to lymphedema clinics, where they would historically go for lymphedema massage therapy. So ultimately, I think there's an opportunity for us to see certainly healthy growth once we can get beyond some of the limitations right now.

The patient throughput continues to be a very real issue, I think, that we're going to have to continue to get through. But I think the large patient base still is – remains really appealing.

The one thing that we've also have heard from – anecdotally from some lymphedema clinics is some during this have actually looked to Flexitouch sooner than they normally would have, simply because of the reluctance to invite patients in for physical therapy, rather electing to look to Flexitouch sooner.

If that's a trend we could continue, that would certainly be good for us, and I think good for our patients..

Hey, Margaret, it's Brent. I would just add one thing, Margaret, and I think it goes back to some of the surveying results that we had seen, right? So if you remember back in late April, roughly about one-third of the facilities that we were surveying were closed. Now into June and into July, that number has decreased pretty dramatically.

So the – despite the fact that the patient throughput is being impacted, I think, you're seeing some of the trends in June and July really starting to favor the open facilities during those periods. So that's just an added kind of comment to what Dan was already talking about..

Yes. And frankly, a lot of the companies we're talking to are saying June maybe down 10% relative to pre-COVID levels. You guys are kind of in this mid-single-digit year-over-year decline. So on the margin, you are doing better in a sense.

And I guess what I'm trying to figure out is how much of that is kind of market-related? And how sustainable is that? So maybe just as a follow-up, you guys talked about the 3,300 folks that you've engaged virtually in the second quarter. It seems to me that I think that's more than all of 2019.

So can you talk to what impact that could have had on your scripts and account openings and why that shouldn't have a bigger impact in the second half?.

Yes. I think that certainly, the virtual attempts to engage with customers has been, I think, a really resourceful move internally. And you're right, the 3,300 is well above what the company did all of last year in a single quarter. So we really do think this could be among the keys to continue to drive the business.

I think that overall, we continue to come back to the size of the market. And it's less about a pent-up demand and more about continuing to educate. So it's going to be an important part for us. We did invite in more prescribers, as I mentioned.

So we saw a bigger pool of prescribing accounts, sort of, ironically in the second quarter in spite of the fact that we are off 20%. So those that were prescribing, as I said, the bigger ones, just their number of patients prescribed in a given month were down.

But, yes, that's part of what we would certainly expect is as throughput improves and a bigger universe of prescribers, that's all part of the recipe..

Okay. Thanks, guys..

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

Thanks. A couple of questions. First one, Dan, I'm just curious, overall strategy for how you access more of those 1.3 million patients in the thought process with Airwear was at establishing a presence earlier in the funnel might be helpful.

So if that's not part of the solution, then what is? Do you need more evidence? Do you need a different sales strategy changes to the technology itself? I'd love to get your thoughts on sort of high level, what you do to penetrate that more?.

Sure, Chris. It's a really good question. The companies that we compete with, for the most part, go through DME. So we're in kind of a unique position. We're a leader, but we can't depend on other folks doing the heavy lifting for us.

And I think, very much, we're still in a market development stage with the population is big and the penetration is small. So Airwear, I think, was a really interesting one. The concept of let's intervene early and capture the patient so they can – we can progress together if their disease progresses with more involved interventions like Flexitouch.

I think what we're finding is, our sales force, when they find those patients, are typically already at a specialist level, and they've gone through a sequence of tried and failed less involved compression therapy. So many of them have already been introduced to something else. In the meantime, we could certainly pursue that.

But as I said, I think it's a good amount of resources that I'd rather us invest elsewhere. And the answer of elsewhere is, in my opinion, it's really about evidence and education. And we need to – so if you look back at the company, our R&D spend has been under 3%, I think, last year, clinical evidence comes out of that bucket as well.

So for us, the precious dollars to invest, I want to see them go into clinical evidence to support Flexitouch and its efficacy along with some of the emerging applications. So Head and Neck, we believe, is a really material opportunity. We're the only player in that space with a solution that looks like ours.

So the fact that we just published or got published an RCT on a segment of those patients, we think, is an important part of that market development. Getting payer policy to continue to be favorable for these patients that need these treatments typically depends on good evidence and good education.

So those are the two places that I would say it'd be fair to expect us to continue to invest..

That’s helpful. Thanks. And then, when I hear you say that you want to leverage the sales force and the back office capabilities the company has built up, it sounds to me like you'd like to fill out the bag with other products that would be sell-through those same channels.

Is that a priority for you?.

So I'm still in the midst of, I would say, kind of getting my sea legs as it relates to our strategy going forward. But certainly, a good amount of work in the second half of 2020, my first two full quarters, that's a focus, is to take a look at what our strategic plan looks like. And kind of what our portfolio might look like as we go forward.

So more to come on that in time. But, yes, I think, if we were so fortunate, the things that leverage the places where we've already made big bets, those would certainly be good fits..

Thanks..

Thank you. Our next question today is from Cecilia Furlong from Canaccord Genuity. Your line is now live..

Hey, thank you for taking our questions. I guess I wanted to start off just touching back on Head and Neck opportunity.

With the data in hand now, I'd just like your take on kind of what you're thinking about near-term in terms of just really driving further awareness really around the solution, but adoption ahead of reimbursement over the next several quarters..

Yes. Thanks for the question, Cecilia. The Head and Neck opportunity, as I said, I think, is a really provocative one for us because we're a unique player in that slot. It was really important for us in June to see this randomized RCT that was completed by Vanderbilt and Southern Illinois University, published in Supportive Care in Cancer.

The game plan is to continue to develop the evidence necessary to position ourselves so we can go make a, I think, a compelling case to the payer community. And this was an important piece of that puzzle. So it's not the only component.

We have other evidence that we've been able to assemble, not the least of which was in March we had 205 patients in a retrospective analysis. That was published in Head and Neck, and it spoke to improvements in swallowing and less pain, better breathing.

So I think we're building the body of evidence that's going to be important for us to be able to convince payers that this is a wise investment, and it's a good efficacious solution for these patients. In the balance of this year, we'll continue to kind of build out that arsenal and into 2021.

And next year will certainly be one of the important things for us on our to-do list is to get more favorable coverage policies. So we can really fulfill the opportunity in that space..

Great. Thank you. And I guess, if I could just return also to the VA opportunity.

And just your ability to reach some of those outpatient clinics today, but really how that impacts your view on kind of what the VA as a percent of your overall business can really represent longer-term?.

Yes. So I think the VA represents a good opportunity because there's a lot of patients with comorbidities that happen to fit into that – to that coverage area. So it will continue to be an important place for us. I think that the likelihood it will become a bigger than it has been in the high-teens percentage of revenue, probably, unlikely.

I think it's – we get back to normal times and our ability to interact with our patients and customers at the VA. That's probably a healthy penetration level for us. So I think we would like to continue to see ourselves get back there. But percentage-wise, that's probably a good target for us..

Great. Thank you..

Thank you. [Operator Instructions] Our next question today is coming from Suraj Kalia from Oppenheimer. Your line is now live..

Good afternoon, Dan; good afternoon, Brent.

Can you hear me all right?.

Yes. Hi, Suraj..

Hi, Suraj..

commercial; Medicare; and VA, obviously, looking within the context of Q2? But also your commentary seems somewhat cautious. Maybe you can parse through this within the context of your three business segments, help us from a housekeeping and a modeling perspective, moving forward..

Yes. I think just to give you a little bit of color, Suraj. So there were 1,900 accounts we talked about, not necessarily specifically by group.

I think if you kind of listen to the commentary as it relates to the different categories, probably fair to assume that we've seen more of those that were closed initially in lymphedema clinics than in vascular. And I think a lot of that had to do with just the physical interaction between them. So that was probably the biggest one.

And then as we come back to, it's a pretty small number now that's no longer open. So to your point, that's a very encouraging sign of recovery. I think the throughput continues to be the issue.

So when you still have so many of the open accounts that are telling us they're just not able to see as many patients in a day with some of the COVID-imposed restrictions and protocols that they've adopted. That's the one that we're watching closely because I think it will probably be the biggest reflection of full recovery..

Got it. And Dan, forgive me if I didn't connect the dots on, how should we think about same-store sales versus new stores, moving forward? I believe your commentary about – it's not to one of the earlier questions, about – it's not about pent-up demand.

Maybe you can thread the needle here and help us understand, moving forward, how should we look upon new store versus same-store? Thank you for taking my questions, gentlemen..

Sure. Yes. I think when we talk about new store, the biggest driver we have is clinical education. We have got a large sales force, as you know. But clinical education is the best way for us to invite more clinicians into the level of awareness.

And just to take the broader group back, remember that most of the physicians that are prescribing for us were not trained on lymphedema when they went through medical school. This is at best a passing comment. They don't spend a bunch of time identifying this. So the clinical education piece is paramount for us at this stage in a market development.

And ultimately, I think that this is where – if it's a much more recognized treatment, the backlog continues to build. This is one where we have the opportunity to continue to help physicians unearth the patients that have lymphedema, and many of them benefit from some of the education events that we host because they know what they're looking for.

So I think that, that will continue to be an important part..

Thank you. That does conclude today's question-and-answer session. And that does conclude our conference call for today. We thank you for your participation..