Good evening, ladies and gentlemen, and welcome to the Second Quarter of 2021 Earnings Conference Call for Tactile Medical. 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 second quarter of 2021 earnings call. I'm joined on the line by Brent Moen, our Chief Financial Officer. In terms of what we intend to cover this afternoon.

I'll begin with an overview of our second quarter sales performance, along with the discussion of the drivers, trends, and operational highlights we saw during the quarter. Then, Brent will discuss our financial results in greater detail and review our financial guidance for 2021, which we updated in our earnings release this afternoon.

I'll conclude by sharing some additional thoughts on our outlook and key focus areas for the second half of 2021 before we open up the line for questions. Now let's get started with a review of our sales performance.

In the second quarter of 2021, we were excited to achieve sales results that reflected easing of some of the pandemic related headwinds, and thus exceeded our expectations.

Total revenue for the second quarter increased 45% year-over-year to $51.1 million, exceeding the 40% to 43% year-over-year increase that we expected and shared on our first quarter earnings call.

Our total revenue growth was largely driven by sales and rentals of our Flexitouch systems, which increased 45% year-over-year, and contributions from sales and rentals of our Entre systems, which increased 49% year-over-year.

Given that the second quarter of 2020 was notably impacted by the disruption caused by the COVID-19, we were particularly pleased to see that our total revenue in the second quarter of 2021 increased 13% on a reported basis, and 17% on an operational basis compared to the pre pandemic sales in Q2 of 2019.

Our sales performance in the second quarter was driven by a combination of strong execution by our team and progressive improvements in the broader healthcare environment.

Looking at our second quarter trends a bit more closely, during the first half of the quarter; our business remains substantially impacted by the COVID related health and safety protocols adopted by many of the clinics that we serve. These protocols continue to impact our business in two primary ways.

First, they restricted clinics treatment capacity, as clinics continued to operate with fewer exam rooms, and dedicated additional time to turning over these rooms, reducing their patient throughput.

Some of the surveys of our top accounts in April found that two thirds were still operating at less than 80% of normal levels consistent with our surveys earlier in the year. Second, clinics continued to restrict in- clinic access to patients, limiting the ability of our sales reps to conduct patient demos in person.

While we continue to face these COVID related headwinds throughout Q2, we were pleased to see both clinic throughput and in clinic patient access improve in the second half of the quarter, ass a larger portion of the population received vaccinations and government restrictions were relaxed. .

Thanks Dan. Total Revenue in the second quarter increased 45% year-over-year to $51.1 million compared to $35.1 million in the second quarter of 2020.

Our revenue in the second quarter benefited from the initial stages of recovery from the COVID-19 pandemic with a portion of healthcare facilities and clinics, relaxing restrictions and increasing patient throughput.

Additionally, the year-over-year increase in second quarter revenue was driven by improvements and the productivity of our sales force, as well as the expansion of our prescriber base, due in part to our effective virtual clinician education activities.

By product, sales and rentals of our Flexitouch systems increased 45% year-over-year to $45.1 million in the quarter, and sales and rentals of our Entre systems increased 49% year-over-year to $6 million. Flexitouch revenue accounted for 88% of our total revenue in the second quarter of 2021 compared to 89% in the prior year period.

By payer, second quarter revenue was approximately 70% commercial, 16% Medicare and 14% VA compared to 73% commercial, 15% Medicare and 12% VA respectively, in the second quarter of 2020. Continuing down the P&L, gross margin was 71% of sales in the second quarter of 2021, unchanged compared to the same period last year.

Second quarter operating expenses came in at $36.3 million, an increase of $3.4 million, or 10%. The increase in operating expenses was driven by higher sales and marketing expenses, which increased $3.5 million to $20.9 million and to a lesser extent, by higher research and development expense, which increased $100,000 to $1.2 million.

Second quarter reimbursement, general and administrative expenses decreased by approximately $200,000 to $14.1 million and included approximately $900,000 of litigation defense costs in the period.

Excluding litigation expenses in the second quarter of 2021, and the impairment charge in the second quarter of 2020, our reimbursement and G&A expenses increased approximately 25% year-over-year..

Thanks Brent. The performance and trends that we observed to date are largely consistent with our expectations and it gives us incremental confidence in our full year outlook. We expect to see continued relief from the primary COVID related headwinds outlined earlier during the remaining months of 2021.

Although the Delta variant is served as a bit of a caution flag, we anticipate these headwinds will continue to subside as widespread vaccine inoculation drives a progressive return to normalcy in the healthcare environment.

As conditions continue to improve, we remain committed to delivering strong performance as we increase the size and productivity of our commercial field team.

Expand our base of prescribing clinicians by continuing our targeting, outreach and education events and leverage our leadership position in the lymphedema space with clinically proven products that enjoy broad in network reimbursement coverage.

By focusing on these objectives, we remain confident in our ability to expand our share of the $5 billion US market for lymphedema and related chronic conditions and deliver growth approaching 20% in the second half of 2021, continuing along the path to resume our long-term revenue and margin trajectory.

I'd like to close by thanking the entire Tactile Medical team for their efforts in continuing to navigate this challenging environment, which has enabled us to continue serving our customers and patients safely and return to growth.

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 will now open the call for questions..

And our first question will come from Chris Pasquale with Guggenheim..

Thanks, Dan, I like to start by just getting an updated baseline on where you guys are in terms of the COVID impact on the business.

So starting outside of the VA, what limitations, if any, are you still facing there today? And then for the VA segment, do you have any visibility on what the trigger would be to bring those patients back from the outpatient clinics or if that's even likely to occur? It sounded like guidance is not really assuming any progress there..

Yes, thanks for the questions, Chris. Let me start with kind of what we're seeing on the COVID front. I think one of the things that led to a really strong quarter for us was the continued normalization trends that we're seeing back when we were serving our customers top prescribers.

Back in early April, we were still hearing that they were well below 80% of normal throughput. We've seen that continue to approach the 80% value as we got later into the quarter, and that certainly helped. We don't expect that we'll get back to 100% or rather that the clinics will get back to 100% throughput by the end of the year.

Some of the sanitation procedures they're doing to continue to turnover rooms, some of the new office policies about limiting the number of patients, either in exam rooms or in the waiting rooms, we continue to expect those to persist, however, not at the same levels.

So we've kind of had the expectation that we will continue to see progressive improvements, I don't know that we'll get back to what was truly the old normal by the end of the year. .

That's helpful. Thanks. I'm curious whether maybe the vascular clinics are a good leading indicator of this. But lymphedema is a chronic condition is not going to go away.

If these patients are not treated, many of them maybe have not been getting the kind of treatment that they would have otherwise now for 18 months, in the settings where things have normalized fastest, have you seen a bolus of pent-up demand as access returns in those sites? Or is that not something you expect to materialize in your business?.

I don't know that I'd say I'd seen a bolus of pent-up demand simply because of govern around the amount of patients that are being seen in these clinics. But I would say that there's certainly been no shortage of a steady diet of patients wanting to fill those rooms. It's been more; I think the control or the capacity rather of the clinics themselves.

They're seeing what they can with this new normal and some of the precautionary models that they put in place. But I think the good news for patients is that access to these clinics has started to recover. They're allowing more patients in the throughput environment.

I've heard there were clinics that were back in early Q1, it was you had to wait down on your cars, you'd be summoned one at a time when an exam room was ready. Now, instead of having as many patients as can sit in the waiting room, they may have a limit on four.

But there is a queue of patients in the waiting room now, that has helped with some of the throughput and I think those are the things that are the difference between sub 70 and starting to get closer to 80% or better on the throughput especially for our bigger prescribers..

Our next question comes from Matt O'Brien with Piper Sandler..

Hey, guys, it's Adam on for Matt, thanks for taking the questions and congrats on a positive trend. To start wanted to ask about the guidance. The guide implies a nice ramp in the back half of the year. Maybe just talk about your level of confidence in achieving the updated guide that you've laid out and kind of how you built up the guidance range.

And why not take up the upper end as well. And then the second part of the question is just around quarterly cadence. I think the street shows Q3 revenue of about $58 million. Are you comfortable with that figure? Just any thoughts on quarterly progression would be great. Thank you so much..

Yes, thanks for the question, Adam. Let me give you a little bit of the kind of high level on the guidance and then I'll let Brent kind of back clean up on this one. We really don't think anything's changed, I guess in how we saw the market, how we saw the recovery even a few months ago, so our outlook at this point really hasn't changed.

Hence, our reaffirming and the guidance for the most part, some of the assumptions that are built into that are as I mentioned some ongoing improvements in the COVID environment or progressive improvements as the year continues to unfold. We don't think that the throughput of patients will get back to 100%.

But we do expect that we'll get certainly north of 80% and approaching 90%, by the time we exit the year, we do expect new prescribers to continue to contribute to our results as they have in the last couple of quarters. We don't expect any material change in the VA postures I mentioned a moment ago.

And we've modeled in a modest increase in sales headcount increase in the back half. So that's kind of how we've thought about it. But frankly, those are the same assumptions that we really had a few months ago, as far as kind of the guidance change.

Because we still see the outlook very much the same, I think things are playing out very much like we expected. But we had the good fortune of having a really solid Q2. And I think that gave us the confidence to bring up the lower end, as a result of what we had achieved in the first half.

There was still a fair amount of wood to chop in the second half, there's still some uncertainty in the marketplace, we like to think that we've tried to account for those. And I think it's provided us with a pretty good balance in how we've tried to lay out the back half of the year..

Yes, now, I would, Adam, it's Brent. I would just echo everything that Dan said too, just the raising the low end of our guidance range just to reflect the better than expected Q2 results. But as we progress to the second half of the year, all those things were kind of built into our expectations.

In terms of the sequencing for Q3 and Q4, I feel confident that we'll be able to hit that approaching 20% mark, as we act exit 2021 and quarterly sequencing looks pretty consistent..

Got it, guys. Thanks so much. And if I can just sneak in one more, would be curious if there's any update just on the top prescriber cohort, as it relates to their performance in Q2, I think you talked about this group being down roughly 20% in Q1.

So just curious if you saw some recovery there and just trying to get a sense for what that trajectory could look like going forward. Thanks again..

Yes, Adam, it's Brent again. And I'd tell you that we saw a progressive improvement in terms of just access throughput. And then patient from a prescriber perspective, kind of met expectations for the second quarter, I think what we've always, we've talked about, at least for the past two quarters, just having a limited access relative to pre COVID.

But I think where we're seeing a bit of the offset is in the new prescribers. And we don't quantify what those new prescribers are. But certainly, we're seeing an add to clinicians out there that are interested and are the byproduct of the Virtual Education events that we've done. So continuing to see progress as we expected..

Our next question comes from Ryan Zimmerman with BTIG..

Hi, this Carolyn on for Ryan thanks for taking my questions. On the commercial organization, can you share where you're at in terms of adding in the 45 field support specialists over the course of the year? Is 45 still a goal? You mentioned expectation for a modest increase to the balance of the year here.

And then you noted over 300 on that team, or over the entire commercial team exiting the quarter versus over 295 last quarter. So is that five not added through the quarter? So again, just where are you in terms of that 45 fields for specialists additions for the year? Thank you. And then I have one follow up..

Okay, thanks for the question, Carolyn. First, as we put in the press release I think one of the important things on the sales team also is that we brought in this new leader in Eric Pauls, our new Senior Vice President with a long storey experience from Philips, and I think he's done a really nice job of engaging with this team.

He's kind of gotten his arms around it, probably quicker than I expected. We've got, we finished the quarter just over 300 to your point, there's -- while we had about 45 targeted for new heads in the field, we're about a third of the way there at the end of Q2, and we got about two thirds of the way to go in the back half.

And that's still the plan is that we would continue to add those heads in the back half. And then ultimately we continue to hear good things about those field support reps that we've positioned so far, we hosted some sales meetings in July.

And just the feedback that we got from some of our Senior Product specialists, who had the good fortune of being paired with a field support specialists had reiterated the fact that it did liberate them from a lot of the patient demos, that is an important part of the selling process, but not necessarily.

We want our product specialists and it's allowing them to spend more time not only with their higher quartile prescribers but also to spend more time with the new prescribers, these new physicians that either participate or attended one of our education events, where some of the information that we've been able to equip them has resonated and now we're working to continue to develop them as more active prescribers as they recognize the right patients.

So I'd say overall good progress being made in the continued expansion of the field team, and in good progress between the harmonizing between these support reps and our product sales specialists..

Great, thank you. And then just one more on the Qui Tam trial. So, previously we had thought the case might go to trial sometime in the early fall. We saw the case is recently delayed until December.

So, just appreciating there's only so much you can share? Can you provide any color around the reasoning for the new timeline? Thank you so much for taking my questions..

Hi Carolyn, it's Brent. I'd be happy to share a little bit of color on the Qui Tam lawsuit. Just in terms of overall updates, things are progressing. We are essentially through discovery and the deposition process. So those are virtually complete. But we're working through the exchange of briefs and motions between now and later this fall.

You're absolutely correct. The trial date has been pushed back until the beginning of December. A lot of that has to do with preparation on the relater side more so than it is on our side.

And so continuing to navigate their request to push the trial out and our quest to actually finalize the trial and put this behind us, but as you might expect, Caroline, we continue to believe that the case is without merit and we'll continue to vigorously defend ourselves on these claims, but that's generally the story line as of now..

Our next question comes from Margaret Kaczor with William Blair. Please state your question..

Hey, good afternoon and thanks for taking the questions. I'll be number three or four with guidance here, but I'll kind of be more specific to what I can get.

If we back into the guidance for Flexitouch and I know the total guidance gets you close to 20%, but it seems like Flexitouch as may be in the mid-teens for the second half? It seems a bit conservative, I guess, versus what we typically see sequentially more likely in Q4.

So I know there is uncertainty in the numbers, but I guess, anything that would suggest that traditional seasonality isn't applicable here, especially since Q4 is probably more commercial versus VA and should see that uplift..

Hi, Margaret, it's Brent. Thanks for the question. I would say your analysis is pretty typical and I think it's pacing with the recovery that we've seen in the first half of 2021. So, just kind of lay down the expectations with the VA recovering the slowest. You have to remember that the VA is almost exclusively Flexitouch.

So that's one component that's contributing to this and if they don't recover like they historically have in terms of Q3 and Q4 performance that puts a little bit of pressure on the Flexitouch line of business. The other piece that we've talked about in Q1 and Q2 is vascular.

We expect that that continues to recover at a faster pace than some of the other categories that are out there. And then just as the third payer, Medicare, they're predominantly Entre as well and follow quite closely the pace of the vascular business.

So, it's -- the expectation is really predicated on where we're starting to see the opportunity as we progress through the year..

Okay, fair enough.

And I guess ultimately the question is, what does that imply for '22 growth and so is that mid-teens to start improving from there or can we kind of get back to that 20% if you don't touch, I guess, the bigger question is from a broad strategic perspective, what's that catalyst, what's that growth driver outside of just COVID recovery that you guys are prepping toward when you look at '22 and beyond? Thanks..

Yes, I would tell you, nothing has changed in our overall expectations for this marketplace. So, once we get through the COVID environment, we do expect that we'll return to a 20% plus top line revenue grower.

We haven't worked out our '22 expectations or guidance, but certainly there is nothing in our line of sight that would give us pause relative to the opportunity that's in front of us. So I would tell you that once we kind of traverse through that gate, things should look a bit more normal..

Yes, I would just add, Margaret. There are a lot of things for us to be enthusiastic about, I guess, as we look down a little further down the line. I mean, we're really anxious like the rest of the world is to get back to kind of pre-COVID normalcy.

And I think it has stretched out a little longer than some of us might have expected, if you asked us a year ago. But I still am of the mind that we'll get back to a more normal environment next year. I think some of the new prescribers that we continue to add haven't been prescribing yet at the full pace of recognition.

As we've kind of described I think in the past, new prescribers typically start with a few -- with one or two patients or a small group. They want to see how they do in spite of the fact they may have written their first prescription based on a much broader body of evidence, they still kind of want to see it with their own patients.

We think about the VA, I think back to Chris' question about when they are going to recover. It's hard for us to predict. So we haven't modeled it into 2021, but I expect at some point the VA's posture will return to normal.

And then when you think about the expanded organization, we continue to invest in and I think some of the other investments that we'll be making into 2002 and beyond, we're certainly enthusiastic about what happens as we get past 2021.

We haven't -- we won't be providing specific guidance for 2022 at this point, but it will come, but I think there are certainly a number of things that we're enthusiastic about as we start to contemplate it..

Our next question comes from Suraj Kalia with Oppenheimer..

Hello, oh, sorry, Dan. My phone was behaving goofy.

So, Dan, couple of questions, on the lower end of the guidance, how have you all factored in any potential impact from the delta variant? And I'm particularly curious about Florida and Missouri, how those specific geographic regions contribute to the overall performance and the outlook for the remainder of '21?.

Well, I think it's a good question and certainly paying attention to what's going on in Florida and some of the other states get people's attention, but I think you've hit it exactly, Suraj. That's what would point to the lower end of the range.

There's -- talked a little bit about the assumptions, I think, there's certainly an opportunity to find our way on the higher end of the range if we can see faster recovery, if we can get closer to the 90% plus throughput from our big prescribers, unfettered access to patients for demos, things like that and perhaps even a pivot in the VA's posture before the end of the year.

I think on the low end, the other end of the spectrum is, if we see some resurgence where the delta variant causes a bit more pause in certain markets, that's what would probably guide us there. And that's why we've got a bigger range than normal for the back half than I think we historically would have provided.

We're trying to account for the kind of that cone of variables. But those would certainly be the things that would kind of pull us down toward the lower end. But we feel like we've tried to balance the handicap. We certainly haven't modeled in perfection in our expectations. So we're certainly hopeful that we don't get a bigger surprise there..

Fair enough. And, Dan, I'll just throw in a couple of quickly, what was the independent contractor usage in the quarter? And if I could piggyback, I believe one of the other guys asked this question, I'll ask it slightly differently.

When we look at average prescriptions per clinic, right, does the Pareto rule still apply in terms of what you all are seeing? Or is it more normally -- I shouldn't say normally, but it's getting back to what historical patterns were? Any color would be greatly appreciated. Thank you for taking my questions..

Sure. So, let me touch on the patient training first. On the patient training front, let me just put it in perspective for the broader group is, there has been pretty even balance in the second quarter between patients that were trained in the home by one of our representatives or done virtually or out of the box.

It's been pretty evenly balanced between those two in the second quarter. Of patients that were trained in the home, the majority were done by an employee of Tactile. We've continued to expand our field trainers, who -- our full timer's for the most part in those markets where we've got a good steady diet of prescriptions.

Contractors represented actually a small portion.

I think something less than a quarter of all in-home training in the second quarter, certainly by June, was done by a contractor and I wouldn't say that we won't use contractors, Suraj, but I think contractors are best suited for us in those markets where there is either a big geographic ranges to be covered or simply less developed markets where we don't have enough of a steady diet to fulfill a full-time employee.

So that's what gives you a little bit on kind of what the training piece look like. I think what portion will be in-home and virtual over time, I think that pendulum is still swinging a bit, but in Q2, it was pretty even between in-home and virtual.

And then as far as kind of prescribers per clinic, we've certainly seen in the second quarter solid increases in our more active prescribers and the amount of volume that we saw in prescriptions from those prescribers and it's not a big surprise to us, I guess, for a couple of reasons.

As their throughput has continued to recover that in essence has led to an increase in recovery of prescriptions that we've seen from those clinics.

So we've seen some complement certainly from new prescribers, but as the throughput, which is why it's a variable that we have tracked quite closely because we're convinced to take close perimeter to the kind of activity we're going to see from our existing customers as throughput has continue to improve, we saw that in our existing clinic prescribers as well..

Thank you. We are currently seeing no remaining questions at this time. I'll turn it back to Mr. Reuvers for closing remarks..

Thanks, operator, and thanks to everyone for your interest in Tactile Medical's journey. We remain focused on revealing and treating the underserved lymphedema segment and we look forward to sharing updates of our progress in the second half. Hope everybody has a great summer in the meantime and thanks again for joining our call..

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