Good evening, ladies and gentlemen, and welcome to the First Quarter of 2021 Earnings Conference Call for Tactile Medical. At this time, all participants have been placed in a listen-only mode. At the end of the Company's prepared remarks, we will conduct a question-and-answer session.

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

Before we begin, I would like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements that are based on the current expectations of management and involve inherent risks and uncertainties 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..

Thank you, operator, and welcome everyone to our first quarter of 2021 earnings call. Joining me on this evening's call is Brent Moen, our Chief Financial Officer. Let me provide you with a brief outline of what we intend to cover this evening.

I'll start by discussing our first quarter sales performance and business trends followed by a discussion of our recent operational highlights. Brent will review our financial results in detail as well as our 2021 financial guidance, which we reaffirmed in our earnings release this afternoon.

I'll close with some additional thoughts on our assumptions, outlook and key areas of focus for 2021 before we open the call for questions. With that, let's get started. We were pleased to deliver sales performance that modestly exceeded our expectations for the first quarter of 2021.

Specifically, we saw first quarter total revenue decreased by 2% year-over-year to $42.8 million compared to the mid single-digit year-over-year decline we had anticipated at the time of our earnings call in February.

The 2% decrease in total revenue was driven by sales and rentals of our Flexitouch systems, which decreased 3% year-over-year, partially offset by sales and rentals of our Entre systems, which grew 5% year-over-year. Turning to a more detailed discussion of the first quarter.

We continued to face a series of COVID-related headwinds throughout the quarter. These headwinds and their impact were consistent with our expectations and largely represented a continuation of the dynamics we saw in Q4.

In early January, we conducted a survey of our top accounts, which found that only a quarter were operating without restrictions, which was consistent with the results of our survey in October.

A follow-up survey in early April of this year found that this ratio had slightly improved to just under 30% of surveyed accounts operating without restrictions. These health and safety protocols continued to impact our performance in two primary ways..

Thanks, Dan. Total revenue in the first quarter decreased 2% year-over-year to $42.8 million compared to $43.7 million in the first quarter of 2020. Sales and rentals of our Flexitouch systems accounted for 88% of our total revenue in the first quarter of 2021 consistent with the prior year period.

First quarter 2021 revenue by payer was approximately 66% commercial, 20% Medicare and 14% VA compared to approximately 69% commercial, 15% Medicare and 16% VA, respectively, in the first quarter of 2020. Continuing down the P&L. First quarter gross profit decreased $843,000 or 3% to $30.2 million.

Gross margin was 71% of sales in the first quarter of 2021 consistent with the same period last year. First quarter operating expenses decreased $1.2 million or 3% to $34.3 million.

The reduction in operating expenses was driven by lower sales and marketing expenses, which decreased $4.2 million or 18% to $18.8 million and to a lesser extent by lower research and development expense, which decreased $400,000 to $1.3 million.

The decrease in sales and marketing expenses was driven by virtual sales meetings along with lower patient training costs and reduced T&E.

The year-over-year decrease in sales and marketing and R&D expenses more than offset higher reimbursement, general and administrative expenses, which increased $3.4 million or 31% to $14.3 million driven primarily by increased occupancy costs, depreciation, legal fees and personnel-related expenses.

Operating loss in the first quarter of 2021 decreased $367,000 or 8% to $4.1 million compared to a loss of $4.5 million in the first quarter of 2020. Income tax benefit in the first quarter of 2021 was $1.8 million compared to $2.9 million in the first quarter of 2020.

The year-over-year decrease in income tax benefit was primarily due to the net operating loss carryback claim recognized in the first quarter of last year, which did not impact the tax benefit in the first quarter of 2021.

Net loss was $2.3 million or $0.12 per diluted share for the first quarter of 2021 compared to a net loss of $1.3 million or $0.07 per diluted share for the first quarter of 2020. Weighted average shares used to compute diluted net income per share were 19.5 million and 19.2 million for the first quarters of 2021 and 2020, respectively.

Adjusted EBITDA loss for the first quarter was compared to the loss of $470,000 in the first quarter of 2020. As a reminder, we have provided a reconciliation of certain GAAP measures to non-GAAP measures in our earnings press release.

As of March 31, 2021, we had cash and cash equivalents of $46.9 million compared to $47.9 million at December 31, 2020. We had no outstanding borrowings on our $10 million revolving credit facility at quarter end..

Thanks, Brent. Given our performance in the first quarter and the trends we've seen to date this year, our assumptions and expectations for 2021 remain unchanged. We remain confident in our ability to deliver strong performance in 2021 as the recovery continues to progress.

We expect that the primary COVID-related headwinds to persist through the first half of 2021 followed by progressive improvements in the second half of the year as vaccine inoculation becomes more widespread and its effects on the overall healthcare landscape continue to gain traction.

We continue to anticipate growth in the high-teens, approaching 20% in the second half of the year as we focus on expanding our position in the U.S.

lymphedema market by increasing the size of our commercial field team and driving improved productivity, primarily through strategic investment in our field support specialist initiative, expanding our base of prescribing clinicians through targeting and education and continuing to leverage our unique position in the market with products that are clinically proven to improve outcomes and reduce costs.

Longer term, we look forward to returning to our multiyear track record of 20%-plus annual revenue growth by continuing to develop the greater than $5 billion market for lymphedema and related chronic conditions.

I'd like to close by thanking our team for the commitment they've demonstrated to our success in the first quarter despite a challenging environment as well as their continued dedication to serving the needs of our customers while ensuring their own safety as well as that of our patients.

I'd also like to thank our investors and those on today's call for their interest and support in Tactile Medical and our mission. Operator, we'll now open the call for questions..

Thank you. Our first question will come from Matt O'Brien with Piper Sandler. Please proceed with your question..

Hi, guys. Good afternoon. This is Drew on for Matt, and thank you for taking the questions. I do want to start-off on the guidance.

Obviously, good to hear that you guys are comfortable with the previous range set out there, but I did want to see if maybe you could speak to some of the factors that have kind of given you that confidence, obviously with a pretty big second half ramp implied.

So maybe if you could comment, what type of growth rate did you see in March and then into April? And then in your press release, you had mentioned that you expect to return to growth approaching 20% in the second half. You've historically talked about yourselves at 20%-plus growers.

So maybe you could kind of help us understand what you're assuming from a COVID perspective in the back half of the year?.

Sure, thanks. Hey, Drew, it's Brent. Thanks for the question. I'll just give you a little bit of a color relative to guidance and then I'll turn it over to Dan for a couple of closing remarks. But just in terms of what we saw during the course of the first quarter, we were certainly pleased with March results.

They were actually modestly better than what we had expected following a very challenging first half of Q1. We reaffirmed guidance today certainly at 15% to 20% growth year-over-year which equates to about $215 million to $225 million.

And we continue to expect mid-teens – mid to high-teens over the first half of 2021, which implies growth of 40% to 43% year-over-year for Q2. And then certainly are starting to rebound nicely in the second half of 2020 in the high-teens in approaching 20%..

Yes. I think just to add, Drew, we were pleased to see some of the momentum we were able to start to develop in March, certainly a different view than we saw in January and February. We saw some of that same progress continuing into April. So that's certainly felt good.

I think the fact that we hosted again so many clinicians and some of our physician education events continues to help us bring more new prescribers onboard, which I think is going to be an important part of our ongoing recipe.

And the sales support roles that we've been sponsoring, we are seeing early indications that that also can help some of our productivity.

So in spite of the fact that clinics are still not at their pre-COVID levels, as far as the number of patients that they're seeing, we feel like a number of the other things that we're doing around that is both offsetting it and then as we continue to see some of the – what I would call emergence from the COVID environment continue to progress over the course of the year, we think that will move in tandem with that..

Okay. That's very helpful. And then second question. People are obviously taking a look at some of the claims data for 2020 which I believe you referenced on your previous call and then comparing the growth of Tactile to the growth of overall lymphedema diagnosis.

So just wondering if you could comment on that and then any changes from a competitive perspective that you're seeing out there right now? Whether that's from simple pumps or some of the more advanced competitors you have out there. Thank you..

Sure, Drew. I'll give you a little perspective on overall size of the market. Certainly, COVID has challenged everything in terms of comparability out there, but certainly over the course of 2020, even in a COVID year, we saw the total number of diagnosed patients grow up to 1.4 million patients in 2020.

So I think that's certainly indicative of the growing awareness and market development that we've had – that we've been able to influence both in terms of the educational events that we've hosted on top of the fact that we've continued to invest in our commercial organization, both of those things are starting to pay dividends.

We expect that as we progress through 2021, we'll be able to take advantage of that growing diagnosed population and certainly convert that back into our overall expectation of long-term 20% growth in terms of the revenue line..

Yes. And then maybe just a comment on the competition, Drew, I don't know that we've seen anything dramatically new in the last couple of months. Certainly there is – we're aware of a few that are expressing interest in our space.

I think on the surface, it sort of validates the TAM suggesting that this is a market that's drawing some additional interest. As we said in the past, I think the body of evidence that we've built up that so heavily reads on our devices, our direct distribution as opposed to DME, and then all the payer contracts that have to be put in place.

We feel like we've got a pretty good protected position for the time being, but we certainly don't look to take that for granted. It's one of the things I've said several times that we want to continue to invest and make sure that we've got a good vibrant portfolio going forward and we certainly intend to do that as well..

Thank you..

Thank you. Our next question comes from Margaret Kaczor with William Blair. Please proceed with your question..

Hey, guys. Thanks for taking the question. I'd love to follow-up on guidance a little bit. And so to sum up 40% to 43% number that you gave – and I know you didn't really give a ton of detail between Flexi and Entre, so maybe that's part of it.

But to us sequentially, as you look back between Q1 and Q2 Flexitouch should probably be up 20%-plus and that's despite what seemed like a pretty good Q1, you kind of kept guidance unchanged.

So as things get better sequentially, I know things are still shutdown, but things are getting better sequentially, we're not assuming that in guidance at least have something similar to what we've seen in the past. And then if you can give us some input to what gets you to the high and low-end of the range that would be helpful..

Sure. Yes. Hi, Margaret, it’s Brent. Thanks for the question. I think as we progress through the first quarter, certainly we're encouraged by momentum that we're starting to see coming out of March. It's obviously early though in terms of being able to kind of really forecast full recovery.

Certainly within our guidance range, we have a few things in terms of recovery built in specifically in the second half where it's starting to return to normal. Vaccination traction has taken place and we're focused on being able to kind of get back to business in terms of normal.

On your question relative to Flexitouch and Entre, certainly both of those will be contributors to our overall growth. Right now, you're seeing Entre just on a lower base, deliver a slightly higher growth number, but certainly Flexitouch is expected to continue to provide its fair share of growth as we move forward to.

And then just in terms of expectations and what's giving us a little bit of confidence as we head into the back half, provided there is no resurgence or change in variants expectations in terms of the vaccinations, we expect that with our expanding sales force, the ever large TAM that we've got in front of us that we should be able to certainly hit our guidance expectations for 2021..

Okay. So let's kind of maybe walk through the tailwinds more specifically because it sounds like you've got reps, you've got new strategy, you've got a new team, all of which is getting – you've got new accounts that you guys are adding very, very quickly. So how do we think about that? And maybe the question is better for 2022.

I mean this seems like it's really developing together to be a really nice business.

So what are the key inputs to those three or four things? Why shouldn't they happen faster I guess?.

Yes. I think there is – just the one thing that we all have cautioned for I think is just this still transient kind of COVID year.

So we're coming off a quarter where we were below prior year and we see Q2 is kind of the transition quarter and then we get into the back half of the year, we think we'll start to see the kind of growth that we've been more indicative of and kind of will put us on good footing as we enter 2022.

Little early for us to give 2022 guidance at this point, but to your question about tailwinds, there are a host of them. And we're going to depend on those to move from kind of a cold start after February and still deliver that 15% to 20% for the year. But you alluded to it, it's certainly new prescribers.

We've continued to spend a good amount of energy educating our sales force as well. We've got a number of them that have achieved vascular certification, which is an internal program that we've developed and it takes number of hours of study and they basically have to pass a series of tests and other barriers to make sure that they achieve that.

So we're really trying to continue to raise the competency level of the team. I think as they continue to engage with new customers, being able to have good solid clinical discussions is bearing fruit. And as we continue to see some of the recovery and the throughput that's been the biggest barrier I think for us to recover.

And we certainly expect, we will continue to see improvements on that as vaccine traction continues to take root. And then on the oncology side, that's also an area of focus. We've deployed a small handful of key account managers.

These are historically previous clinicians, that really understand how to navigate the oncology market and because there is so many different stakeholders treating patients with cancer, it's important to help navigate that process and I think these key account managers are certainly helping to raise the competency level of our sales force when they're calling on that audience as well.

So lots of good things going on. And then a number of things on the evidence generation side still on the horizon. So I think a number of good reasons for us to have the confidence that we're going to be able to deliver the year that we've got in mind. But just to remind again the growth is going to have to come in nine months not 12 months..

Okay.

And then just last question for me, I wanted to talk a little bit about these privately owned practices that are recovering faster and then the hospital based practices, because there seems to be a little bit of a disconnect there, which makes sense, but can you give us a little bit of color in terms of what those two categories grew at? And then does your guidance as you get toward the end of the year, do you assume that hospital comes back to normal or do you think it will take a little longer than that? Thanks guys..

Margaret, just in terms of the breakout between the private-owned practices and the hospital systems, which I think also would be also indicative of where the VA was, although they are the most conservative.

Those private-owned practices are primarily the vascular businesses that we call on and certainly there is a parallel going on between growth in the vascular and then also growth in our Medicare business. So you're starting to see Medicare business grow pretty dramatically, which as you might expect.

A lot of the patients that end up in the vascular space come in with lower extremity that kind of moves directly into our product offering, our Entre product offering. So a little bit of growth there, and so it just happens to be those private-owned practices are a little more progressive and how they're willing to move patients through their system.

First is the more institutionalized hospital systems out there that have a much higher standard kind of protocol that they need to follow getting patients through their systems too.

So it goes to expect as you're dealing with a larger institutions, that some of those administrative requirements to gain access to clinicians, gain access to patients, fall a little bit slower than what the privately owned practices are..

Yes. I would just agree. And I would just add Margaret that, we do expect an ongoing normalization to occur in the back half even in the institutional side.

The VA is a little less certain, we're a little more cautious on what our expectations are there, but I think as we think about bigger health systems, university based systems, we do expect more normalizing of that environment as we progress through the second half..

Thanks guys..

Thanks, Margaret..

Thank you. Our next question comes from Ryan Zimmerman with BTIG. Please proceed with your question..

All right. Good afternoon, and thanks for taking the questions. Maybe I could follow-up on a couple questions that Margaret was asking.

The Medicare business was up about 35% this quarter, and I just want to get your impression of with patients coming back into the clinics, whether there's a bolus, whether there's some backlog dynamics there? And then the second part of that question is just with the VA, with patients kind of being kept out of the hospitals, what are your expectation is for when those VA dynamics improve, if you have a line of sight on that? And I have a follow-up..

Yes. I'll take a shot and see if Brent wants to add anything. I think on the Medicare side, one of the things that we do see and I think is that a lot of the patients coming through the vascular path tend to have a higher Medicare mix. We also see as a result of higher Entre mix.

And we think that as we continue to expand our prescriber base, even those patients that come through the gate as an Entre patient if that's their entry level, it allows us to kind of get our arms around a bigger pool of patients.

And while some will certainly be treated effectively with the entry level pump, some may have more advanced disease progression and ultimately may lead to a Flexitouch, which is – I think we've covered is kind of the more advanced treatment option that's available from us.

So one, it's an increase in the basic – in the total number of patients that we're seeing that have Medicare and then there is also an opportunity where some of those patients will continue to progress so, as the universe of Entre patients gets bigger inevitably, we will continue to see growth in Flexitouch we expect as well.

On the VA side, we're a little more cautious there as I mentioned a moment ago.

But if we can see the VA vaccination efforts, which they've put their energies behind for both their clinicians as well as patients continue to advance, we're hopeful that they'll start to invite those patients back more regularly to the VA centers, where they are much easier for us to access.

But we've been a little bit cautious just because without any certainty of that we haven't been able to pinpoint when that might occur in 2021..

Okay. Maybe just a follow-up from me. I mean, you did make a number of changes to the field sales force in terms of tweaking the roles as of the last quarter.

Dan, from your perspective, what have you seen from a productivity standpoint for your more quota-carrying reps, if you want to call them that? And if not now in the first quarter, when do you expect the impact of those changes to be seen in the productivity metrics for the field force? Thank you..

Yes. I think it's a good question. So just to remind folks, we said we're going to look to add somewhere in the neighborhood of 15% more heads in the field in calendar 2021 or roughly 45 plus more people.

What we've been doing is promoting some of our associate product specialists into full product specialists territories and things like vascular certification are the kinds of things that continue to equip them to be a full-fledged rep. We see that shift continuing to mix – mix continue to shift.

So we're seeing an increase in product specialists as they mature from the associates. So we have actually added some territories.

But I think to your other point, our field support specialists that we've been continuing to expand are intended to backfill the associate product specialists and continue to give new product specialists the support that they need for some of the administrative effort.

What we've seen so far Ryan is that, where we have deployed FSSs, it's certainly liberated the reps from a number of the administrative tasks that they were otherwise having to put energy into and some of those territories we are starting to see some productivity gains, we continue to believe as the FSSs get fully oriented, introduced have developed relationships with some of the high prescribing clinics that will continue to expand.

So we feel good about the progress that we're seeing there, we're up about 10 heads so far at the end of the first quarter. So this plus 45 or so for the year, we're pretty well on track about a quarter of the way in, but ultimately I think we're seeing encouraging signs that this can bear fruit.

We certainly, will continue to look at the productivity and make sure that it's a good return on investment but right now we feel good about that..

All right. Thank you for taking the questions..

Our next question comes from Chris Pasquale with Guggenheim. Please proceed with your question..

Thanks. I had one on this path back to normal and then one on the VA.

On the recovery question, what do you see is the most important trigger for a normalization as it relates to your business? Is it primarily a patient demand issue and so vaccines are the key or state restrictions really keeping these clinics, below capacity and those need to be lifted? Just trying to get a better sense for what needs to happen to get from here to there?.

Yes. Good question, Chris. I think the primary one is, there is a component of behavior that will start to emerge as people's vaccinations continue to gain numbers across the broader population.

As we said, the key point that continues I think to be a governor for our growth has been this sub 100% throughput, clinics and hospitals that are saying they're seeing 80% or less of the same amount of patients they'd seen a given day or week.

Clearly with growth goals that we've declared even in Q2, we've got to continue to find ways to grow faster, simply because the existing accounts that we were calling on are running at lower volumes.

We think that the handful of things that have impacted those reduced throughputs, social distancing may not change as rapidly throughout the year, but certainly patient cancellations as they get their vaccines, I think those things go down, clinic throughput just because of having people not calling out sick because they've either been exposed or they're sick, et cetera.

A lot of the different variable headwinds associated with COVID should continue to lift as we start to see ourselves emerge over the back half of the year.

Frankly, if we had clinics back up at 100% along with the ongoing expansion prescriber base, we feel really bullish about what the future looks like and that's probably the biggest governor for us, but we've seen the – just the comparison of March and April to January and February has kind of given us the indication that change is coming.

So we've got Q2 expectations that this is kind of the pivot point we start to see growth emerge again. And with this continued momentum, we certainly expect that we will be more closer to hitting stride in the back half..

Thanks. And then on the VA, so it sounds like you're sort of waiting for these patients to come back to the hospitals. But what happens if they decide that shifting these patients to an outpatient setting is actually the way that things should be even post-COVID. We certainly see a push to alternative sites of care in other areas of healthcare.

So do you have a plan in place to address that population if in six months, nine months, 12 months, those are still the sites where you have to go to access them?.

Well, to some extent, we've kind of been running that play. We've been swimming upstream, we've started to have virtual education events for primary care physicians.

We've tried to enroll or enlist docs from some of the community-based outpatient centers to participate, raising the awareness and education about lymphedema among the primary-care doctors. As a result, clearly our VA business hasn't gone to zero, we were at 14% of our total revenue this quarter versus 16% a year ago.

So admittedly not where we want to be and not where we've been, but I think that we can continue to incrementally get better even if the environment and the point-of-care doesn't change because we're already moving in that direction.

I simply think it gets easier and these patients become much more concentrated when we're able to see them with a vascular specialist at the VA Center, than when we're trying to sift through all of the different patients seen in a primary care environment..

Thanks..

Thank you. Our last question will come from Suraj Kalia with Oppenheimer. Please proceed with your question..

Hi, Dan, Brent.

Can you hear me all right?.

Coming through great..

Perfect. So Dan, give us an update on the structural dynamics on the commercial side? And I'm especially interested in the new contract signed, I believe in late 2018 with United.

Any update to be shared on that front?.

Suraj, hi, it's Brent. I can give you a little bit of context on that. We haven't named that large payer we refer to them as a large payer contracts. That large payer – I think if you recollect, one of the things that they did is we traded some ASP for broader expansion to their prescriber base and it continues to perform very well for us.

So continues to grow as we expect it would..

Okay. So Dan, I know a lot has been asked about 80% capacity of pre-COVID levels. Maybe I can ask it a little differently. Dan, would you mind providing any specific utilization metrics? And I'm – I was more curious in terms of number of accounts, average prescriptions per account per quarter.

Just trying to get a sense so for example, how things are moving on the VA side versus commercial, more so in terms of the specifics..

Yes. I don't know that we've broken it down to that level, Suraj. But one of the things that we've alluded to here is that new prescribers have certainly filled some of the gap among the existing top prescribers, whose volumes are simply down. So we continue to maintain relationships with what have been our high prescribers.

But the majority of them have just not met the same volumes that we were accustomed to with them as recent as 18 months ago.

So we continue to focus on those, but the one thing that we've determined is we can control our destiny more by continuing to expand the prescriber base and that's one of the reasons we've been so focused on a number of these medical education events.

They've been really effective ways for us to reach out, develop relationships with new clinicians and continue the education process. So I think that's basically, what we've seen. And we say less than 80%, the spread is surprisingly large.

Less than 80% is the number we use, but we've had some that have told us that they are still is at 60% of their capacity. So it's still a little surprising even to me that the throughput has not recovered faster in some of these practices.

But the other thing that we continue to ask is what do you expect and our confidence in there, what I would call continued improvements in throughput comes from their expectations as well..

Got it. Last question Dan from my side, and forgive me if I got these numbers wrong. I thought I heard you guys say 40% of your patients were trained virtually, please correct me if I got it or….

Yes. It was just under 40% that were trained in-person in Q2..

In-person..

Correct..

So how should I think about the independent contractor used for the quarter, Dan? Thank you for taking my questions..

Yes. So it's still a small portion that were trained via independent contractors and we still frankly had even some of our sales reps doing training in some markets in the first quarter.

The addition of FSSs and also hiring some employee trainers, we think will not only continue to make sure that we've got the right kind of patient experience and consistency, but also make sure that we don't draw our sales people into any of the trainings either. So that mix of it was just under 40% that were done in-person.

I think we're going to continue to monitor that, we want to make sure that wherever it lands it leads to a good patient experience.

Fortunately so far, for all those that have been virtually trained and we surveyed those patients equally, we're getting the same kinds of satisfaction scores, as among those that have been trained in the home, but there is a number of variables that I think continue to dictate whether a virtual or home training is suitable and we try to match it up with each patient..

Thank you..

This concludes our conference for today. Thank you for your participation and have a wonderful evening..

Thank you, everyone..

Thank you. We look forward to speaking with everyone again once we have the conclusion of our second quarter..