Q3 2021 Tactile Systems Technology Inc Earnings Call

[music].

Please standby.

Good evening, ladies and gentlemen, and welcome to the third 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.

<unk> 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 future events or otherwise. This call will also include references to certain financial measures that are not calculated in accordance.

Lawrence with generally accepted accounting principles or GAAP, we generally refer to these as non-GAAP financial measures reconciliations of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release on the Investor Relations portion of our website.

I would now like to turn the call over to Mr. Dan Rivers.

Medical's, President and Chief Executive Officer. Please go ahead Sir.

Thanks, Operator, and welcome everyone to our third 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 evening I'll begin with an overview of our third quarter sales performance along with a discussion of the drivers trends and operational highlights we saw.

During the quarter.

<unk> will discuss our third quarter financial results in greater detail and review, our financial guidance, which we updated in our earnings release. This afternoon.

I'll, then conclude with some additional thoughts on our outlook before we open the line for questions.

With that let's begin with a review of our sales performance total.

Total revenue for the third quarter increased 7% year over year to $52 $5 million or total revenue growth was largely driven by sales and rentals of our lymphedema products, which increased 5% year over year with sales of our recently acquired Hasler best product contributing approximately two percentage points.

Two our total revenue growth in the third quarter.

Sales and rentals of our flexi touch an entre systems increased 3% and 23% year over year, respectively.

Our flexi touch an entre system sales performance in the third quarter of 'twenty, one was softer than we'd anticipated for several reasons.

Let me take a moment to walk through the primary factors that impacted our third quarter performance.

Flexi touch an entre sales were impacted by the extended recovery from COVID-19, heading into the second half of 2021 we'd expected progressive improvements in COVID-19 related headwinds continuing the trends we saw in late may and into June with.

With these expectations as a backdrop during the third quarter the resurgence of the Delta variance led to renewed headwinds similar to those that we'd seen earlier in the pandemic.

Most notably at many of the health care facilities, we serve we saw increased patient absenteeism.

Strengths on treatment capacity and patient throughput.

And the renewal of restrictions on access to patients and clinicians limiting our team's ability to conduct in clinic product demonstrations and challenging our efforts to engage with new clinician customers.

While the resurgence of these COVID-19 related headwinds was seen across our customer base vascular clinics and other outpatient based or privately owned practices continued to demonstrate the most resilient well practices based in hospitals and larger health systems remained more restrictive the V. A.

<unk> to be among our most challenging sites of care.

As anticipated many of the VA Hospital systems continued to redirect lymphedema patients to their network of outpatient clinics away from the more concentrated specialist settings.

As a result, our VA sales in the third quarter were flat year over year and declined 8% compared to the second quarter of 'twenty one.

We've revised our full year revenue outlook to account for the softer than expected third quarter sales results. Our current expectation that the operating environment doesn't materially improve over the balance of the year as well as the impact of fewer product specialists at quarter end than our prior guidance assumed.

Recall that our commercial field team is comprised of product specialists or full quota carrying sales reps.

Along with associated product specialists and field support specialists, whose priority is to support patient demos and the administrative task of records collection, thus, enabling improved productivity within the sales ranks.

We entered 2021 with the team of approximately 225 product specialists and associate product specialists with roughly a 50 50 split between the two roles.

Consistent with our stated goals for 2021, we promoted approximately 30 of our existing associate product specialists to product specialists to expand the number of sales territories.

Aiming to end 2021, with a roughly 60 40 split of which our product specialist head count would be roughly a 140.

We have however experienced higher than expected product specialist attrition to date.

The challenging labor market compounded by some candidates vaccination reluctance is impacted our ability to recruit hire and retain qualified candidates.

Specifically, we are down roughly 24 product specialists versus what our guidance for 'twenty one had assumed.

It's worth noting that we grew our lymphedema segment, 5% with a smaller selling crude than last year reinforcing the productivity gains we're seeing from what our model is fully staffed.

I'll discuss some of the initiatives we've put in place to mitigate the staffing related challenges and enhance our hiring efforts along with assumptions for Q4 later in my remarks.

While our commercial team continued to face COVID-19 related access issues in the third quarter. They were able to partially mitigate them by using virtual solutions to train patients raise awareness and expand prescriber adoption.

Our team also continued to engage new and existing prescribers that participated in our clinician education events.

We hosted 40 medical education programs in the third quarter, reaching more than 1400 clinician attendees.

We've engaged with more than 4000 clinicians over the first nine months of 'twenty one and.

And the success of our clinician education efforts. Despite the challenges presented by Covid continues to serve as an important source of expanded awareness and adoption.

Three other highlights of note in the third quarter.

First in late September we announced the enrollment of the first patient in a randomized controlled clinical trial evaluating the effectiveness of our flexi touch plus system for the treatment of head and neck lymphedema.

This is the largest randomized controlled trial ever conducted for the treatment of lymphedema related to cancer of the head and neck.

This trial will compare the effectiveness of flexi touch to usual care on head and neck cancer survivors.

Enrollment was initiated by Dr. Ridner and the team at Vanderbilt University Medical Center and the study is targeting a total of approximately 250 subjects to be enrolled across six clinical sites.

We expect this trial to provide us with the statistical evidence necessary to secure broad reimbursement coverage for our flexi touch head and neck system, which is the only pneumatic compression device cleared to treat this condition.

It's also the kind of evidence generation, we expect will continue to differentiate the flexi touch from other treatment options.

We were also pleased to see continued evidence within the medical community of the increasing awareness and recognition of both the prevalence of lymphedema and the need for its effective management in.

In August the National comprehensive cancer network, a nonprofit alliance of 31, leading cancer centers published their updated survivorship guidelines.

The updated guidelines added pneumatic compression devices to the list of patient education topics for self care of lymphedema and encourages therapists to regularly consider pneumatic compression devices for ongoing management of lymphedema at home.

This is another important step in addressing the comprehensive needs within the post cancer care.

Finally on September eight we announced the acquisition of the Aflow best respiratory therapy product. This.

This market entry squarely fits our mission to reveal and treat patients suffering from underserved chronic conditions in their home.

It's also consistent with our existing portfolio of clinically proven wearable therapeutic garments with established reimbursement, enabling patients with self with effective self care solutions.

<unk> is a wearable vest that treat patients with chronic respiratory conditions, including bronchiectasis, a derivative of COPD as well as conditions, resulting from cystic fibrosis and neuromuscular disorders.

<unk> is the first truly portable high frequency chest wall oscillation best providing patients with increased mobility.

Treatment with the <unk> has been demonstrated to reduce antibiotic use emergency room visits and hospitalizations.

Similar to our existing products after the best targets are large and underpenetrated patient population.

Bronchiectasis is one of the most common respiratory diseases.

Of the more than 16 million U S patients living with COPD, It's estimated that over 4 million may be affected by bronchiectasis.

Each year 500000 adults are diagnosed with bronchiectasis and this figure is expected to grow in the high single digits annually.

Based on these estimates we believe the annual addressable market opportunity for the <unk> to be as high as $5 billion in the U S alone.

The <unk> sales team has achieved impressive market share gains by partnering with respiratory <unk> companies that are uniquely positioned to leverage their access to providers and patients by featuring Aflow vest within their portfolio of complementary products and services for chronic respiratory conditions.

In fact patients that require airway clearance therapy are commonly also in need of oxygen nebulizer and noninvasive ventilation underscoring the merit of being a part of the comprehensive solutions that the respiratory DMA channel represents.

We also believe that our market development methods of investing and evidence generation and clinical education will be well served in this space.

With a universe of approximately 4000 respiratory <unk> reps to partner with in the U S. We aim to continue this strategy leading to continued growth in the years to come.

Lastly, the acquisition of <unk> is aligned with our margin expansion goals with the gross margin profile in excess of 70% and adjusted EBITDA margins of more than 30%.

Following the acquisition, we on boarded the 11 member internal Aflow about sales team to ensure an uninterrupted level of support to our respiratory <unk> partners and I am pleased to report that that integration of <unk> is progressing very well.

With that let me turn it over to Brent to provide you with a more detailed review of our quarterly financial results along with our updated guidance for 2021.

Thanks, Dan.

Total revenue in the third quarter increased 7% year over year to $52 $5 million compared to $49 $1 million in the third quarter of 2020 <unk>.

Byproduct category sales and rentals.

Of our flexi touch systems increased 3% year over year to $44 million in the quarter.

Sales and rentals of our entre systems increased 23% year over year to $7 $6 million and sales of our recently acquired Apolo vest system contributed approximately $860000 for the period. Following the acquisition closing date on September eight 2021.

Total revenue by channel was 68% commercial 17%, Medicare, 13%, VA and 2% durable medical equipment distributors.

The latter is a new channel comprised of revenue from our recent acquisition of <unk>.

These figures compare to our total revenue by channel in the third quarter of 2020 in which the commercial Medicare and VA channels represented 70, 16, and 14% of total revenue.

Continuing down the P&L unless noted all references to third quarter results are on a year over year basis.

Gross margin was 74% of sales compared to 71, 2% last year.

Non-GAAP gross margin was 71, 8% of sales compared to 71, 3% in the prior year.

Non-GAAP gross margin excludes noncash intangible amortization and inventory write offs.

Noncash purchase price adjustments related to our acquisition of <unk> in the current year period. As a reminder, we have provided reconciliations of certain GAAP to non-GAAP measures in our earnings press release.

The third quarter operating expenses were $38 $3 million, an increase of $5 2 million or 16%.

The year over year increase in operating expenses was driven primarily by a $2 7 million or 14% increase in sales and marketing expenses.

Primarily due to increases in personnel related compensation expense and travel related expenses as we returned to hosting in person regional sales meetings.

A to a $2 million or 16% increase in reimbursement general and administrative expenses.

The increase primarily includes higher occupancy cost legal fees and $800000 of nonrecurring transaction related costs associated with the acquisition of Aflow vest.

Operating loss was $1 $4 million compared to operating income of $1 $8 million last year.

Non-GAAP operating income was $1 million compared to $2 $6 million last year.

Income tax expense was $1 $9 million compared to an income tax benefit of $800000 last year the.

The change was primarily due to changes in our effective tax rate, which were attributable to a change in projected taxable income compared to last year.

Net loss was $3 $4 million or <unk> 17 per diluted share compared to net income of $2 $4 million or <unk> 12 per diluted share last year.

Non-GAAP net loss was $1 $6 million compared to non-GAAP net income of $3 million last year.

Weighted average shares used to compute GAAP diluted net income and loss per share or $19 8 million and $19 7 million shares for the third quarters of 2021 and 2020, respectively.

Adjusted EBITDA was $4 $1 million compared to $6 $2 million last year.

On September eight 2021, we amended our restated credit agreement, adding an incremental $30 million term loan to the $25 million revolving credit facility provided by the restated credit agreement.

We borrowed $30 million term loan on September eight and utilize that borrowing along with the $25 million under our revolving credit facility and cash on hand to fund the <unk> acquisition.

As of September 32021, we had $22 $4 million in cash and cash equivalents and $52 $5 million of outstanding borrowings on our revolving credit facility compared to $47 $9 million in cash and cash equivalents and no <unk>.

Outstanding borrowings as of December 31, 2020.

The change in cash quarter to quarter, excluding the acquisition of <unk> and related financing was approximately $2 million.

Turning to a review of our 2021 outlook, which we updated in our earnings press release. This afternoon. We now expect full year 2021 total revenue in the range of $203 5 million to $206 million representing growth of approximately nine.

10% to 10% year over year compared to total revenue of $187 1 million in 2020.

Our updated total revenue guidance range includes contributions from sales of <unk> in the range of approximately five to $5 $5 million from the closing date of September eight to December 31 2021.

This revised outlook compares to our prior revenue guidance range of $216 three to $224 5 million or 16% to 20% year over year growth note. Our prior guidance range was updated as part of our second quarter financial results.

Report in August and did not include the contributions from our acquisition of <unk> from the closing date of September eight to December 31 2021.

Byproduct, our updated 2021 total revenue guidance range assumes sales of our flexi touch systems increased approximately 5% to 6% year over year sales of our entre systems increased approximately 14% to 19% and contributions from sales of.

<unk> to be in the five to $5 $5 million range.

For modeling purposes for the full year, we expect our gross margin to be in the low 70% range.

Our adjusted EBITDA margin to be in the range of 6% to 8%.

This adjusted EBITDA range assumes DNA of approximately $3 $5 million, including noncash intangible amortization of approximately $1 $1 million.

Stock based compensation expense of approximately $10 8 million.

Interest expense of approximately $400000.

Litigation related defense costs, and other nonrecurring expenses of approximately $4 million.

Transaction cost and expenses of approximately $1 $1 million, including purchase price adjustments to inventory of approximately $200000 and finally inventory write offs and executive transition cost of approximately $800000.

We expect our fully diluted weighted average share count in 2021 to be approximately 20 million shares.

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

Dan Thanks, Brent.

Broadly speaking our updated guidance today reflects a revised outlook for the operating environment during the second half of 2021.

Our updated guidance also reflects the changes within the composition of our commercial team specifically, a smaller number of product specialists through the fourth quarter.

Our revised outlook for the operating environment and for the composition of our field commercial team are expected to be partially offset by the contributions from the <unk>.

Let me share a bit more on our assumptions driving our revised guidance for flexi touch an entre sales in more detail.

With respect to our expectations for business disruption related to the impact of the Delta variant. Our prior guidance had assumed progressive improvements in COVID-19 related headwinds throughout the second half of 2021.

We now expect the primary COVID-19 related headwinds that we experienced in the third quarter to persist into the fourth quarter postponing our pace of recovery.

The second half impact of the Delta variant, coupled with our lower selling head count are the key contributors to the revision in our flexi touch an entre revenue guidance specifically.

Specifically, we expected to end 2021 with approximately 225 direct sales reps with a roughly 60 40 split in favor of product specialists.

Given the higher than expected attrition of product specialists that we saw during the third quarter, we have 24 fewer product specialists than our guidance for 2021 had contemplated.

As we've said in the past are fully tenured sales reps contribute well above a $1 million per year on average and significantly higher when supported with an FSS. So.

So the impact of this attrition offset partially by the improved productivity from our expanded team of field support specialist is responsible for the balance of our flexi touch an entre revenue guidance change.

Finally, the low end of our flexi touch an entre revenue guidance contemplates the potential for some additional sales force attrition related to our internal vaccine efforts during the fourth quarter.

We've seen increased access issues from both clinicians and patients.

We're also mindful of our obligations within the recent executive orders.

As a result, we've conveyed expectations of vaccination by year end and an attempt to restore optimized customer access.

Address our executive order obligations and ensure the safety of our patients customers and employees.

While we believe this is in the long term interest of all of our stakeholders. It introduces some uncertainty in the short term as some employees have voiced reluctance to get vaccinated.

To address these challenges we're focused on investing to enhance our sales rep retention efforts bolster our internal recruiting resources and increasing our hiring incentives, especially for territories that had been more difficult to staff.

To be clear, we see the headwinds affecting our business in the second half of 2021 is impactful but transitory.

And continue to believe that we're incrementally better positioned for long term success and value creation given.

Given the increasing awareness and consensus within the medical community of the prevalence of lymphedema and the importance of effective treatment.

Along with our product development initiatives, advancing and positioning our portfolio with improved patient solutions.

And the addition of <unk> to our portfolio, which expands our addressable U S market opportunity to over $10 billion per year.

With our expanded portfolio of clinically proven products, a robust robust product pipeline.

We remain excited about our longer term prospects and look forward to expanding the awareness and treatment options for patients with lymphedema bronchiectasis and other chronic conditions as we continue our mission to reveal and treat patients with underserved chronic conditions in the home.

I'm appreciative to our employees for enduring a challenging environment, ensuring a commitment to making a difference and thousands of patients' lives I'd also like to thank our investors and those on today's call for their interest and support and tactile medical and our mission.

Operator, we will now open the call for questions.

Thank you.

Like to ask a question. Please signal by pressing star one on your cellphone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

We do ask that you limit yourself to one question and one follow up if you will.

I'd like to ask additional questions. We invite you to add yourself into the queue again by pressing star one.

And our first question comes from the line of Adam Maeder with Piper Sandler. Please proceed.

Hi, guys. This is drew on for Adam Thanks for taking the question.

There is an awful lot to unpack here, but maybe you could just help us understand the breakdown of some of the things that back in the business. So if you had to split out each of the headwinds whether that'd be the asset issues at your customers and sales force attrition.

Vaccine challenges all of that kind of stuff.

Meaningful each of those headwinds on their own as far as contributing to the Q3 shortfall.

And then I think when you did the Apple deal was it seemed to be messaged as being incremental to the existing guidance you had out there. So maybe you could just help us understand what if anything has changed in the business between now and then just confidence in that improvement.

Sure, let me take a shot at addressing a little bit of the.

Commentary side, and then I'll turn it over to Brent He can probably walk you through a bit more of a breakdown on the guidance change with some specifics but in short the two things that really contributed as you alluded to in our prepared remarks was the COVID-19 headwinds and sales staffing and I'll just offer a little bit of.

Texture on both as it related to the Covid headwinds, we had modeled and expected progressive improvements continuing and what we saw in Q2. So recalls Q2, we saw improving conditions at the time, we were expecting to see continued improved conditions through.

The balance of the year not back to normal, but certainly improving and some of the underlying headwinds that we faced as a result of COVID-19 with the Delta resurgence. We saw a combination of three things that it affected one was patient throughput.

Which has continued to be a consequence of COVID-19. Since it was introduced the second was some patient cancellations increased in staffing vacancies were reported to us as well all of those lead to pressures on the underlying business one of the interesting sidebars as we were at the.

ABF for the American Venous Foundation Congress in October and one of the things that was shared there was the results of a survey within their membership that was <unk>.

The resulted through May had still said that 60% of respondents saw their volumes down 25% or more compared to pre COVID-19 windows and that was through may. So that was when we were seeing improvements.

So I suspect that the delta influence of the fall would probably have demonstrated a continuation or even an acceleration of that so those are some of the consequences. We saw with COVID-19 on the staffing side.

Two things one we've continued to see some increasing access issues.

As especially the larger University systems to places, where we typically find patients that are affected by cancer.

Those have been the places that have been more restrictive and we've had a fair amount of our sales staff that has still been unvaccinated as of October 1st going into the fourth quarter.

So we've introduced a vaccine expectation of our teams.

By the end of this year some of them I think are grappling with that.

It's certainly a minority, but but theres a segment of our population.

That I think is still reconciling with that.

So that along with just some of the general conditions, we've seen in the hiring.

Marketplace or just something like I've never seen in my career.

Being able to find good talent.

The quality and number of candidates available much more limited.

And I think those are certainly the key contributors that have led to the change.

But let me, let me actually turn it over to Brent and I think he can probably walk you through.

Kind of the bridge from our previous guidance to that which we've shared today.

Hi, drew so let me just give you a little bit of perspective on guidance. So just as a reminder, our 2021 total revenue guidance is $203 five to two O six and that includes five to $5 5 million from the acquisition of <unk>, our organic revenue.

The range is $198 five to 205, representing a reduction of $18 million on the low end and $24 million on the high end. So just let me take a little bit of time to walk you through some of the drivers of the change in the organic revenue rate.

<unk>.

So let's start with the low end, so at the $18 million reduction versus our prior guidance.

Driven by.

First as we detailed out in our prepared remarks, we're down approximately 24 product specialists.

Dan has done a little math and the.

And in his commentary there, but on average are product specialists does about $1 million.

Or more on an annualized basis, so having been down 24 product specialists versus our prior guidance that certainly has a sizable impact on our second half results.

Representing.

Approximately one half of the change and the low end of our organic guidance range or approximately $9 million of that $18 million that I had mentioned earlier second we've accounted for the potential for additional sales rep attrition in the fourth quarter related to the mandatory.

<unk> policies.

That impact represents approximately two and a half to $3 million in Q4.

Third and again as detailed in the prepared remarks, our prior guidance had assumed progressive improvements in the operating environment in the second half of 2021.

We now expect continued headwinds that impacts roughly about one third of the change and the low end of our organic guide guidance range or approximately $6 million.

As you moved the midpoint in the high ends of the range. You'll note that our guidance reflects the larger impact from Covid headwinds given our prior guidance assumes stronger growth as a result of the improving environment in the second half of 'twenty one.

So hopefully that gives you a little bit of perspective on the three primary drivers impacting our modification to the guidance.

Yes very helpful. Thank you and just.

Just to put a finer point on it I think what people are struggling to really understand is when you.

Strip out Covid, you strip out the staffing shortage.

Now do you think your Korolev FEMA business can still grow in that call it 15% to 20% range and given the current state of the Covid environment. How long do you think it will be until I can get back to those levels.

Yes.

Yes, I think it's I think it's a fair question.

I don't mean to be hurt, but I think that.

Our ability to predict when Covid will subside has clearly been tested.

So I'm not sure that that's an easy one to answer but we certainly at this point expect that.

This continues to be transitory I think when you when you contemplate the two changes in our guidance.

One is very much driven by the Covid circumstance and the other one by staffing.

Of these should be.

Transitional kinds of things I think it certainly points in my mind that recovery gets pushed out a bit into 'twenty. Two that said to your broader question. What does it say about the underlying market I still don't believe it says anything.

When you think about the durable market conditions, the Tam on both the lymphedema in the respiratory space that we're now participating in are immense and the level of penetration is still very small so theres nothing thats changed in the underlying market I think when you couple that with.

The growing awareness that we're continuing to see the recognition of the importance of treatment I think payer relation opportunities for us to continue to improve market access we've got a robust product development pipeline underway right now that's richer I think than perhaps any time in the company's history.

And some of the evidence in the market development.

<unk> I think all of those speak to an enduring opportunity for us. So we don't think that this is necessarily a referendum on the space that we're in but admittedly a disappointment for us and where we sit at this point in the year.

Okay.

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

Hey, good afternoon, guys. Thanks for taking my questions.

I was hoping to delve in a little bit deeper.

Based on the prior comments that you made so maybe on the sales rep attrition side just to start there.

Theoretically while short term, we will have some sort of an impact for probably at least a couple of quarters. So I guess.

Kind of put a finer point on it is there a time period at which point that does recover whether it's mid 22 or beyond and add does that kind of pressure the underlying business looks like.

First half of.

'twenty two before you kind of get to that more normalized.

Double digit plus growth rate as we move on throughout the year.

Yes, Margaret highest sprint I can provide a little bit of perspective on that.

Certainly, yes sales reps have a big impact on our overall growth rates for sure being 24 down at the end of the third quarter and as we progress through our fourth quarter certainly has an impact.

And 2021, but also in 2022.

We believe that.

We can by the end of Q1 should be back in hopefully.

The same zone that we expected to be at the end of the third quarter. So it'll be a fairly sizeable effort between now and the end of the first quarter to make sure that we can find appropriate talent to fill the seats, but nonetheless, our expectations is that as we exit Q1, we'll be back in.

And good stead with our product specialists.

Okay. So does that then imply that you'll be closer to that 140 that you had.

I had mentioned at the beginning of the call.

Will it take a couple of quarters from there for those folks to ramp up or.

How should we think about that I guess.

And one can kind of the underlying business I guess return to growth.

Sure.

Yeah, I mean as you recall some of the commentary that we've made in the past.

Specialists because they are the senior a senior reps do take a degree of time to get to maturity.

Over the course of and recall most of those product specialists, although we're finding them outside of the organization now come from ranks at the associate product specialists, but level, but they do take some time to get to maturity and so.

If we if we can get back to the 140 at the end of <unk>.

First quarter than your yes, youre looking for a degree of time for them to mature and get ready.

And present themselves at the same expect that expected levels that are mature rep as youre looking towards the middle of 2022 before we.

We see.

Kind of a return to normal.

Okay, and just to add.

Sneaking in one more question sorry about that guys.

But as we as we think about kind of the underlying improvement in you guys spoke to it that we're hearing from others that Delta case volumes have declined from a restriction maybe at Lucent. So are you assuming maybe that things might get worse again as we get into the winter months and then.

Again, as we think about 'twenty two should we think about that 6 million plus or minus something.

Seasonality start to come back like you referenced maybe in the second quarters. Thanks.

I think I think we're continuing to assume that conditions are probably stable. So they don't necessarily deteriorate, but also don't improve from what we saw exiting Q3 I think the other issue that we're trying to reconcile is the access issue. So we continued to see when we've all seen.

The number of health care facilities.

Institutions, both large and small that are imposed vaccination requirements most of the doctors nurses and therapists that we call on today have been vaccinated they are.

Started to extend that expectation of those that interact with them as well as those that are interact with patients and I think that's a reasonable expectation as we work alongside those folks.

So that's the same expectation that we've shared with our teams.

Between now and the end of the year, which is when we said we expect everyone to be vaccinated.

Ongoing access issues are probably going to continue to be a bit uneven until we get our teams.

On the other side of the vaccination topic, so thats kind of another one that we.

We're doing our best to try and handicap.

Okay. Thanks, Scott.

Hum.

Thanks Margaret.

Our next question is from Ryan Zimmerman with BTG. Please proceed.

Hi, Good afternoon, I wanted to follow up on some of the other line of question, if I could and just digging a little bit here. So I just wanted to say I mean, the reps that left in the third quarter or that are no longer with the organization.

Can you characterize how many were kind of high performing reps over that kind of a million dollars.

Average productivity level.

I appreciate that these vaccine mandates can be challenging for employers, but it does seem like a large bolus and so.

You did have some China changes in leadership in sales and so.

Is there some component there beyond say the vaccine mandate that is kind of having hamstrung in you guys on some of these some of these dynamics.

Yes, I think that.

I don't necessarily think Thats the case as.

As far as leadership change, but just be able to share a couple of things that might be helpful. First of all historically, we have seen product specialists turnover in the teens.

And associate product specialist those newer reps.

The junior folks those tend to have a higher turnover rate those were in the twenties.

Year to date.

We're closer to the low thirties overall on a blend so we're seeing a higher turnover rate than we have in the past and then I think just from the math piece.

There is a hierarchy of productivity to your point, so tenured reps if you've been here over a year and you're supported by an FSS. Those are clearly the highest producers and then kind of the hierarchy continues to go notching down to tenured reps without a support person to a newer rep less than a year with an FSS to a newer rep with.

And then finally to a vacant territory. So these vacant territories have pretty material consequence, when they're vacant we recognize that productivity certainly has impaired the dependent I think on present.

Presence and support interact with patients.

It is quite clear.

I think when we look at what the turnover has been like.

We have seen a higher turnover in some of our product specialists than we historically had but I think it's also a function of it is just an incredibly dynamic and competitive market and I certainly speak to a number of executives at a number of other companies.

Not a not a unique challenge.

But as we get tenured reps who have.

Been with us and been good producers in this market they can be a great target for poachers.

And they have proved to have been we've seen some folks that have departed either for hospital sales, sometimes nonmedical, sometimes they've gone somewhere where they didn't require a vaccination.

And while that has actually been a fairly material one for us.

There is about 30% of our sales force remained on vaccinated as of October one.

That's a pretty significant number and that's why we're a little bit broadened our range as far as what we think the remaining consequence might be but I also believe Ryan that it's the right thing to do.

And I also believe that in time, especially as we get closer to the end of the year.

Those that are contemplating their destiny on this decision May also conclude that there's very few safe havens. There are not many others that like us or just like us that are not hiring.

Unvaccinated to be out in patient and customer facing roles. So we're hopeful that that our group will come to that conclusion.

And continue to serve patients.

But there is a variable I think that's still remains open.

Okay.

And then just looking forward just following up on Margaret's question I mean.

Youre going to need to hire pretty rapidly obviously to get back to these levels by the first quarter what impact Brent is that going to have on the P&L I mean, what we saw.

See labor rates start to tick up and.

And so we see that down the P&L as we think about it going forward and then seven another follow up.

Yes, I think you're right Ryan.

It's going to be difficult.

The pace of hiring but certainly.

Our plan is for our sales rep hiring to hit the target of 148 product specialists by the end of the first quarter.

Obviously, it's dependent on the labor market, but we feel good about.

Where we're at and what we're what we're seeing.

And then I think Covid certainly will have an interesting impact as we progress through fourth quarter and in the end of first quarter.

It'll depend on where market rates are taking.

Direct sales rep compensation levels to have an impact on the P&L, but certainly we're mindful of that as we as we progress through Q4 and into Q1.

With commissions and such some of it fairly.

Variable.

As we as we progress through the other thing that you have to also keep in mind Ryan is that the <unk> acquisition.

As expected to contribute about $5 to $5 5 million in 2021 and on a full year basis. The revenue is expected to be somewhere around $17 million on a pro forma basis. So we expect that to be a nice contributor as we progress through the fourth quarter and into the first quarter and.

I think Dan mentioned in his call.

The profitability of the outflow best businesses.

As.

Even better than what our core businesses. So we expect that.

Adjusted EBITDA margin.

At a roughly about a 30%.

Rate for <unk> will certainly be beneficial as we progress through Q4 and Q1 as well.

Okay and then just another one for me and then I'll hop back in queue, but.

The blended growth rate in a normalized state.

Talk about kind of being in that mid teens, maybe 20% growth rate.

Think about that.

It's split between all of the product categories now between Flexi touch an entre and an aflow.

Can you just talk about kind of what your expectations are for flexi touch in a normalized environment.

Where do you think that can grow.

Relative to some of your other higher growing assets.

Well I think flexi touch is still capable of being a high growth asset for sure one of the things that we've seen the two most difficult environments that we faced in Q3 as we called out were both most directly impacted in the flexi touch category. So the VA tends to be.

A flexi touch.

Source for us and with the VA business flat, that's certainly affected flexi touch more than any other product in the portfolio. The other places in the oncology space, where access has been a lot harder for us, especially we've got an unvaccinated.

Portion of our sales force and.

The oncology patients typically end up getting a flexi touch as well so both the two segments.

That that we saw impact from Covid headwinds kind of squarely hit flexi touch more than anything else in the portfolio. That's why we still believe that as COVID-19 conditions start to improve and our access is restored more universally I think I think flexi touch certainly benefits.

Okay I'll hop back in queue. Thank you for taking the questions.

Hmm.

Thanks Ryan.

Yes.

Thank you as a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.

Our next question is from Suraj Kalia with Oppenheimer. Please proceed.

Good afternoon, Dan and Brent can you hear me all right.

Coming through Ken Thanks perfect.

And then so.

A lot of commentary provided on the on the product specialists being down 20 by 'twenty four.

Impact on the quarter.

Let me ask.

The same question a slightly different flavor.

In your view.

Tactile adopted that tougher stance vis vis vaccination rates as compared to the broader med Tech universe.

We haven't heard similarly in terms of this issue popping up that would be one thing.

After the worst right.

The implied guidance for Q4, it still seems intact.

From the time that you acquired the company and I'm curious are.

Are you seeing the same dynamics there in terms of staffing shortages. The reason park assets, just bronchus case or you need to go in quite a bit just from a diagnostics pulmonary function perspective, and I'm just kind of walk us through the dynamics, you're seeing on the applebee's side vis vis organic flex at that site.

Sure.

Yes, good questions, let me start with the <unk> and then I'll come back on the vaccination policy Suraj.

First of all we're still getting acquainted with this business and keep in mind. We're also once removed from those that are calling directly on the prescribers. So this is a respiratory DM E channel.

We but we ended up with 11 salespeople that were dedicated to the outflow vest from IDC. They joined US and we were delighted to bring them onboard all 11 came over.

And all 11 are squarely in the seat and continuing to support this business.

I think a couple of things I can.

Attempt to speculate a little bit why I think the <unk> has been a little less impacted than our lymphedema business one is.

There is public.

Public health emergency CMS waiver, where theres, a little bit more relaxed.

Conditions as it relates to some of the respiratory products. This would be one of them I think the other one is.

Respiratory perhaps has benefited a bit more from COVID-19.

Some of the consequences of severe COVID-19 have respiratory consequences as we know some of those products are actually benefited.

So I think those those are a few of the variables and as I said, we've had no staffing issue on the direct group that we acquired that supports the channel.

Still in the early days of more active promotion within some of the respiratory <unk> partners as well so.

I think that we're going to continue to see the benefit of that as theyre finding ways to more actively co marketed across some of the other products that.

Our kind of fit well oxygen and nebulizer is et cetera, I think as it relates to our vaccination stance.

I can tell you we've done an awful lot of straw polls.

Within the industry.

Among friends old colleagues.

And also different professional associations.

One of the differences for us versus <unk>.

Some companies as we're definitely we believe that we definitely fit.

The executive order as it relates to our government.

Contractor, we directly built CMS.

Along with the VA and we're also fall into the category of over 100 employees I think while the executive order for the federal contractors came out on September nine.

It suggested that all contractors had to be vaccinated by the 18th of December and then about a week ago.

The administration I think.

Decided they were going to relax that a little bit based on some feedback and then they pushed it back to January 4th at some point.

My opinion is it's difficult to continue to.

Adapt our policy every time, the fed changes I think theres, a little bit of a fickle position.

Position here and ultimately we've gotten to the point, we said you know what it's now or later, let's do it let's determine where we stand from a staffing position by the time, we get to the end of the year and also let's take this access issue, which we continue to grapple with and more and more.

<unk> off the table, let's make sure that our staffs are vaccinated and have the optimal opportunity to interact both with patients safely as well as with the caregivers.

That have actually been vaccinated already so that's our stance and while this is a very difficult when I must admit.

You can pull lots of different folks nobody pulls the same way as I'm sure. You know there is a variety of different factions, it's impossible to land on a stance that I think is going to appeal to everyone, but as a health care company, we've kind of landed where we think we should be we think it's largely.

System with what the federal government is encouraging and we also think it aligns wells as a health care player.

Again.

Do appreciate.

Uh huh.

In depth answer and actually.

Help us connect some of the dots and I commend you for taking.

Good public health stands versus short term results.

If I could Dan to the extent that you can love to get your thoughts on the interim results of our private competitor.

In the space and I'm, I'm curious, especially given the compliance rates.

Any preliminary thoughts you could offer gentlemen, thank you for taking my questions.

Yeah.

Oh, yes, so I think youre, referring to there is a private company that's got a non pneumatic.

Compression device.

Yes.

They've actually gotten a fair amount of attention in the social media circuit here of late.

However.

Unless I'm mistaken I think the revenue that <unk> seen is largely close to zero.

It is a self pay product at this point without reimbursement in place. So it's really difficult to imagine either a sales channel or a prescriber base wanting to prescribed this actively if they can't get it for their patients. So I believe the company Youre speaking of actually.

They appealed to CMS and in an attempt to get the pneumatic definition out of the 652 categories, which is where our flexi touch fits.

Failed and got a K code, which is a temporary code the.

The difference between a code and a coverage policy can be a very large canyon, so theres no national or local coverage policy in place.

And recently, we heard that.

Some of the commercial payers have already labeled this experimental investigation. So there were a handful of blue cross programs Humana and perhaps some others. So.

I think it's.

There's a bit of a tough path ahead there.

But I also think it's worth just re grounding folks that our product development roadmap is also not static and while I think there's probably a long road to establishing a new payer code and a coverage policy for a new category.

I am convinced that our roadmap will have demonstrated that we took a bit of a moving target.

Im looking forward to some of the things that we'll be introducing here over the course of the next year or two.

Thank you.

Okay.

Yeah.

Okay.

Okay.

We are currently seeing no remaining questions at this time that does conclude our conference for today. Thank you for your participation.

Thank you. Thank you Arthur.

[music].

[music].

Good evening, ladies and gentlemen, and welcome to the third quarter of 2021 earnings conference call for tactile medical at this time, all participants have been placed in a listen only mode.

And 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.

<unk> 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 future events or otherwise. This call will also include references to certain financial measures that are not calculated in accordance.

Ordinance with generally accepted accounting principles or GAAP, we generally refer to these as non-GAAP financial measures reconciliations of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release on the Investor Relations portion of our website.

I would now like to turn the call over to Mr. Dan Rivers.

Carl Medical's, President and Chief Executive Officer. Please go ahead Sir.

Thanks, Operator, and welcome everyone to our third 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 evening I'll begin with an overview of our third quarter sales performance along with a discussion of the drivers trends and operational highlights we saw.

During the quarter.

<unk> will discuss our third quarter financial results in greater detail and review, our financial guidance, which we updated in our earnings release. This afternoon.

I'll, then conclude with some additional thoughts on our outlook before we open the line for questions with that let's begin with the review of our sales performance.

Total revenue for the third quarter increased 7% year over year to $52 5 million.

Our total revenue growth was largely driven by sales and rentals of our lymphedema products, which increased 5% year over year with sales of our recently acquired have low best product contributing approximately two percentage points to our total revenue growth in the third quarter.

Sales and rentals of our flexi touch an entre systems increased 3% and 23% year over year, respectively.

Our flexi touch an entre system sales performance in the third quarter of 'twenty, one was softer than we'd anticipated for several reasons let.

Let me take a moment to walk through the primary factors that impacted our third quarter performance.

Flexi touch an entre sales were impacted by the extended recovery from COVID-19 heading into the second half of 2021, we'd expected progressive improvements in Covid related headwinds continuing the trends we saw in late may and into June with.

With these expectations as a backdrop during the third quarter. The resurgence of the Delta variant led to renewed headwinds similar to those that we'd seen earlier in the pandemic.

Most notably at many of the health care facilities. We serve we saw increased patient absenteeism constraints on treatment capacity and patient throughput and the renewal of restrictions on access to patients and clinicians limiting our team's ability to conduct in clinic product demonstrations and challenging our efforts to <unk>.

<unk> with new clinician customers.

While the resurgence of these COVID-19 related headwinds was seen across our customer base.

<unk> clinics and other outpatient based or privately owned practices continued to demonstrate the most resilience while practices based in hospitals and larger health systems remained more restrictive the VA continued to be among our most challenging sites of care.

As anticipated many of the VA Hospital systems continued to redirect lymphedema patients to their network of outpatient clinics away from the more concentrated specialist settings.

As a result, our VA sales in the third quarter were flat year over year and declined 8% compared to the second quarter of 'twenty one.

We've revised our full year revenue outlook to account for the softer than expected third quarter sales results. Our current expectation that the operating environment doesn't materially improve over the balance of the year as well as the impact of fewer product specialists at quarter end than our prior guidance assumed.

Recall that our commercial field team is comprised of product specialists or full quota carrying sales reps.

Along with associated product specialists and field support specialists, whose priority is to support patient demos and the administrative task of records collection, thus, enabling improved productivity within the sales ranks.

We entered 2021 with a team of approximately 225 product specialists and associated product specialist with roughly a 50 50 split between the two roles.

Consistent with our stated goals for 2021, we promoted approximately 30 of our existing associated product specialists to product specialists to expand the number of sales territories aiming.

Gaming to end 2021, with a roughly 60 40 split of which our product specialist head count would be roughly 140.

We have however experienced higher than expected product specialist attrition to date.

The challenging labor market compounded by some candidates vaccination reluctance has impacted our ability to recruit hire and retain qualified candidates.

Specifically, we are down roughly 24 product specialists versus what our guidance for 'twenty one had assumed.

It's worth noting that we grew our lymphedema segment, 5% with a smaller selling crude than last year reinforcing the productivity gains we're seeing from what our model is fully staffed.

I'll discuss some of the initiatives we've put in place to mitigate the staffing related challenges and enhance our hiring efforts along with assumptions for Q4 later in my remarks.

While our commercial team continued to face COVID-19 related access issues in the third quarter. They were able to partially mitigate them by using virtual solutions to train patients raise awareness and expand prescriber adoption.

Our team also continued to engage new and existing prescribers that participated in our clinician education events.

We hosted 40 medical education programs in the third quarter, reaching more than 1400 clinician attendees.

We've engaged with more than 4000 clinicians over the first nine months of 'twenty one and.

And the success of our clinician education efforts. Despite the challenges presented by Covid continues to serve as an important source of expanded awareness and adoption.

Three other highlights of note in the third quarter.

First in late September we announced the enrollment of the first patient in a randomized controlled clinical trial evaluating the effectiveness of our flexi touch plus system for the treatment of head and neck lymphedema.

This is the largest randomized controlled trial ever conducted for the treatment of lymphedema related to cancer of the head and neck.

This trial will compare the effectiveness of flexi touch to usual care on head and neck cancer survivors.

Enrollment was initiated by Dr. Ridner and the team at Vanderbilt University Medical Center and the study is targeting a total of approximately 250 subjects to be enrolled across six clinical sites.

We expect this trial to provide us with the statistical evidence necessary to secure broad reimbursement coverage for our flexi touch head neck system, which is the only pneumatic compression device cleared to treat this condition.

It's also the kind of evidence generation, we expect we will continue to differentiate the flexi touch from other treatment options.

We were also pleased to see continued evidence within the medical community of the increasing awareness and recognition of both the prevalence of lymphedema and the need for its effective management.

In August the National comprehensive cancer network, a nonprofit alliance of 31, leading cancer centers published their updated survivorship guidelines.

The updated guidelines added pneumatic compression devices to the list of patient education topics for self care of lymphedema and encourage therapists to regularly consider pneumatic compression devices for ongoing management of lymphedema at home.

This is another important step in addressing the comprehensive needs within the post cancer care.

Finally on September eight we announced the acquisition of the Aflow best respiratory therapy product.

This market entry squarely fits our mission to reveal and treat patients suffering from underserved chronic conditions in their home.

It's also consistent with our existing portfolio of clinically proven wearable therapeutic garments with established reimbursement, enabling patients with self with effective self care solutions.

<unk> is a wearable vest that treat patients with chronic respiratory conditions, including bronchiectasis, a derivative of COPD as well as conditions, resulting from cystic fibrosis and neuromuscular disorders.

<unk> is the first truly portable high frequency chest wall oscillation best providing patients with increased mobility.

Treatment with the <unk> has been demonstrated to reduce antibiotic use emergency room visits and hospitalizations.

Similar to our existing products <unk> targets are large and underpenetrated patient population.

<unk> is one of the most common respiratory diseases.

Of the more than 16 million U S patients living with COPD, it's estimated that over $4 million may be affected by bronchiectasis.

Each year 500000 adults are diagnosed with bronchiectasis and this figure is expected to grow in the high single digits annually.

Based on these estimates we believe the annual addressable market opportunity for the <unk> to be as high as $5 billion in the U S alone.

The <unk> sales team has achieved impressive market share gains by partnering with respiratory DMA companies that are uniquely positioned to leverage their access to providers and patients by featuring Aflow best within their portfolio of complementary products and services for chronic respiratory conditions.

In fact patients that require airway clearance therapy are commonly also in need of oxygen nebulizer and noninvasive ventilation underscoring the merit of being a part of the comprehensive solutions that the respiratory DMA channel represents.

We also believe that our market development methods of investing and evidence generation and clinical education will be well served in this space.

The universe of approximately 4000, respiratory DMA reps to partner with in the U S.

We aim to continue this strategy leading to continued growth in the years to come.

Lastly, the acquisition of <unk> is aligned with our margin expansion goals with the gross margin profile in excess of 70% and adjusted EBITDA margins of more than 30%.

Following the acquisition, we on boarded the 11 member internal <unk> sales team to ensure an uninterrupted level of support to our respiratory DMA partners.

And I'm pleased to report that that integration of <unk> is progressing very well.

With that let me turn it over to Brent to provide you with a more detailed review of our quarterly financial results along with our updated guidance for 2021, Brent Thanks, Dan.

Total revenue in the third quarter increased 7% year over year to $52 5 million compared to $49 1 million in the third quarter of 2020.

Byproduct category sales and rentals.

Of our flexi touch systems increased 3% year over year to $44 million in the quarter.

Sales and rentals of our entre systems increased 23% year over year to $7 $6 million and sales of our recently acquired Apolo vest system contributed approximately $860000 for the period. Following the acquisition closing date on September eight 2021.

Total revenue by channel was 68% commercial 17%, Medicare, 13%, VA and 2% durable medical equipment distributors the ladder as a new channel comprised of revenue from our recent acquisition of <unk>.

These figures compare to our total revenue by channel in the third quarter of 2020 in which the commercial Medicare and VA channels represented 70, 16, and 14% of total revenue.

Continuing down the P&L unless noted all references to third quarter results are on a year over year basis.

Gross margin was 74% of sales compared to 71, 2% last year.

Non-GAAP gross margin was 71, 8% of sales compared to 71, 3% in the prior year.

Non-GAAP gross margin excludes noncash intangible amortization and inventory write offs.

Noncash purchase price adjustments.

<unk> to our acquisition of <unk> in the current year period. As a reminder, we have provided reconciliations of certain GAAP to non-GAAP measures in our earnings press release.

Yeah.

The third quarter operating expenses were $38 3 million, an increase of $5 2 million or 16%.

Year over year increase in operating expenses was driven primarily by a $2 7 million or 14% increase in sales and marketing expenses, primarily due to increases in personnel related compensation expense and travel related expenses as we return to hosting in person.

Regional sales meetings.

A 2% a $2 million or 16% increase in reimbursement general and administrative expenses.

The increase primarily includes higher occupancy cost legal fees and $800000 of nonrecurring transaction related costs associated with the acquisition of <unk>.

Operating loss was $1 $4 million compared to operating income of $1 $8 million last year.

Non-GAAP operating income was $1 million compared to $2 $6 million last year.

Income tax expense was $1 $9 million compared to an income tax benefit of $800000 last year.

The change was primarily due to changes in our effective tax rate, which were attributable to a change in projected taxable income compared to last year.

Net loss was $3 4 million or <unk> 17 per diluted share compared to net income of $2 4 million or <unk> 12 per diluted share last year.

Non-GAAP net loss was $1 $6 million compared to non-GAAP net income of $3 million last year.

Weighted average shares used to compute GAAP diluted net income and loss per share were $19 8 million and $19 7 million shares for the third quarters of 2021 and 2020, respectively.

Adjusted EBITDA was $4 1 million compared to $6 $2 million last year.

On September eight 2021, we amended our restated credit agreement, adding an incremental $30 million term loan to the $25 million revolving credit facility provided by the restated credit agreement.

We borrowed the $30 million term loan on September eight and utilize that borrowing along with the $25 million under our revolving credit facility and cash on hand to fund the <unk> acquisition.

As of September 32021, we had $22 $4 million in cash and cash equivalents and $52 $5 million of outstanding borrowings on our revolving credit facility compared to $47 9 million in cash and cash equivalents and no outstanding.

Borrowings as of December 31, 2020.

The change in cash quarter to quarter, excluding the acquisition of <unk> and related financing was approximately $2 million.

Turning to a review of our 2021 outlook, which we updated in our earnings press release. This afternoon. We now expect full year 2021 total revenue in the range of $203 5 million to $206 million representing growth of approximately 9%.

<unk> to 10% year over year compared to total revenue of $187 $1 million in 2020.

Our updated total revenue guidance range includes contributions from sales of <unk> in the range of approximately five to $5 $5 million from the closing date of September eight to December 31 2021.

This revised outlook compares to our prior revenue guidance range of $216 three to $224 5 million or 16% to 20% year over year growth note. Our prior guidance range was updated as part of our second quarter financial results.

Report in August and did not include the contributions from our acquisition of Aflow vest from the closing date of September eight to December 31 2021.

Byproduct, our updated 2021 total revenue guidance range assumes sales of our flexi touch systems increased approximately 5% to 6% year over year sales of our entre systems increased approximately 14% to 19% and contributions from sales of.

<unk> to be in the five to $5 $5 million range.

For modeling purposes for the full year, we expect our gross margin to be in the low 70% range.

Our adjusted EBITDA margin to be in the range of 6% to 8% now this adjusted EBITDA range assumes DNA of approximately $3 5 million, including noncash intangible amortization of approximately $1 1 million.

Stock based compensation expense of approximately $10 $8 million.

Interest expense of approximately $400000.

Litigation related defense costs, and other nonrecurring expenses of approximately $4 million.

Transaction costs and expenses of approximately $1 $1 million, including purchase price adjustments to inventory of approximately $200000 and finally inventory write offs and executive transition cost of approximately $800000.

We expect our fully diluted weighted average share count in 2021 to be approximately 20 million shares.

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

Dan Thanks, Brent.

Broadly speaking our updated guidance today reflects a revised outlook for the operating environment. During the second half of 2021, our updated guidance also reflects the changes within the composition of our commercial team specifically, a smaller number of product specialists through the fourth quarter.

Our revised outlook for the operating environment and for the composition of our field commercial team are expected to be partially offset by the contributions from the <unk>.

Let me share a bit more on our assumptions driving our revised guidance for flexi touch an entre sales in more detail.

With respect to our expectations for business disruption related to the impact of the Delta variant. Our prior guidance had assumed progressive improvements in COVID-19 related headwinds throughout the second half of 2021, we now expect the primary COVID-19 related headwinds that we experienced in the third quarter to persist into the fourth.

Quarter, postponing our pace of recovery.

The second half impact of the Delta variant, coupled with our lower selling head count are the key contributors to the revision in our flexi touch an entre revenue guidance.

Specifically, we expected to end 2021 with approximately 225 direct sales reps with a roughly 60 40 split in favor of product specialists.

Given the higher than expected attrition of product specialists that we saw during the third quarter, we have 24 fewer product specialists and our guidance for 2021 head contemplated.

As we've said in the past are fully tenured sales reps contribute well above a $1 million per year on average and significantly higher when supported with an FSS. So.

So the impact of this attrition offset partially by the improved productivity from our expanded team of field support specialist is responsible for the balance of our flexi touch an entre revenue guidance change.

Finally, the low end of our flexi touch an entre revenue guidance contemplates the potential for some additional sales force attrition related to our internal vaccine efforts during the fourth quarter.

We've seen increased access issues from both clinicians and patients.

We're also mindful of our obligations within the recent executive orders.

As a result, we've conveyed expectations of both vaccination by year end and an attempt to restore optimized customer access.

Address our executive order obligations and ensure the safety of our patients customers and employees.

While we believe this is in the long term interest of all of our stakeholders.

It introduces some uncertainty in the short term as some employees have voiced reluctance to get vaccinated.

To address these challenges we're focused on investing to enhance our sales rep retention efforts bolster our internal recruiting resources and.

And increasing our hiring incentives, especially for territories that have been more difficult to staff.

To be clear, we see the headwinds affecting our business in the second half of 2021 is impactful but transitory.

And continue to believe that were incrementally better positioned for long term success and value creation.

Given the increasing awareness and consensus within the medical community of the prevalence of lymphedema and the importance of effective treatment.

Along with our product development initiatives, advancing and positioning our portfolio with improved patient solutions.

And the addition of <unk> to our portfolio, which expands our addressable U S market opportunity to over $10 billion per year.

With our expanded portfolio of clinically proven products, a robust robust product pipeline.

We remain excited about our longer term prospects and look forward to expanding the awareness and treatment options for patients with lymphedema bronchiectasis and other chronic conditions as we continue our mission to reveal and treat patients with underserved chronic conditions in the home.

I'm appreciative to our employees for enduring a challenging environment, ensuring a commitment to making a difference and thousands of patients' lives I'd also like to thank our investors and those on today's call for their interest and support and tactile medical and our mission.

Operator, we'll now open the call for questions.

Thank you.

Like to ask a question. Please signal by pressing star one on telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment. We do ask that you limit yourself to one question and one follow up.

If you would like to ask additional questions. We invite you to add yourself to the queue again by pressing star one.

And our first question comes from the line of Adam Maeder with Piper Sandler. Please proceed.

Hi, guys. This is drew on for Adam Thanks for taking the question.

There is an awful lot to unpack here, but maybe you could just help us understand the breakdown of some of the things that back in the business. So if you had to split out each of the headwinds whether that'd be the access issues at your customers and sales force attrition.

<unk> seen challenges all of that kind of stuff how meaningful are each of those headwinds on their own as far as contributing to the Q3 shortfall.

And then I think when you did the Apple that deal was it seemed to be messaged as being incremental to the existing guidance you had out there so.

If you could just help us understand what if anything has changed in the business between now and then just confidence in that improvement.

Sure.

Take a shot at addressing a little bit of the.

Commentary side, and then I'll turn it over to Brent He can probably walk you through a bit more of a breakdown on the guidance change with some specifics but.

In short the two things that really contribute as you alluded to in our prepared remarks was the COVID-19 headwinds and sales staffing and I'll just offer a little bit of.

Texture on both as it related to the Covid headwinds, we had modeled and expected progressive improvements continuing and what we saw in Q2. So recall Q2, we saw improving conditions at the time, we were expecting to see continued improved conditions.

The balance of the year not back to normal, but certainly improving and some of the underlying headwinds that we faced as a result of COVID-19 with the Delta resurgence. We saw a combination of three things that it affected one was patient throughput.

Which has continued to be a consequence of COVID-19. Since it was introduced the second was some patient cancellations increased in staffing vacancies were reported to us as well all of those lead to pressures on the underlying business one of the interesting sidebars as we were at the.

ABF for the American Venous Foundation Congress in October and one of the things that was shared there was the results of a survey within their membership that was <unk>.

Resulted through May had still said that 60% of respondents saw their volumes down 25% or more compared to pre COVID-19 windows and that was through may. So that was when we were seeing improvements.

So I suspect that the delta influence of the fall would probably have demonstrated a continuation or even an acceleration of that so those are some of the consequences. We saw with COVID-19 on the staffing side.

Two things one we've continued to see some increasing access issues.

Especially the larger University systems, the places, where we typically find patients that are affected by cancer.

Those have been the places that have been more restrictive and we've had a fair amount of our sales staff that has still been unvaccinated as of October 1st going into the fourth quarter.

So we've we've introduced a vaccine expectation of our teams.

By the end of this year some of them I think are grappling with that.

It's certainly a minority but but.

There's a segment of our population.

That I think is still reconciling with that.

So that along with just some of the general conditions, we've seen in the hiring.

Marketplace or just something like I've never seen in my career.

Being able to find good talent.

The quality and number of candidates available much more limited.

And I think those are certainly the key contributors that have led to the change.

But let me, let me actually turn it over to Brent and I think he can probably walk you through.

Kind of the bridge from our previous guidance to that which we've shared today.

Hi, Joe So let me just give you a little bit of perspective on.

Guidance. So just as a reminder, our 2021 total revenue guidance is $203 five to two <unk> and that includes five to $5 5 million from the acquisition of <unk>, Our organic revenue range is 198 five.

Five to 205, representing a reduction of $18 million on the low end and $24 million on the high end. So just let me take a little bit of time to walk you through some of the drivers of the change in the organic revenue range.

So let's start with the low end, so at the $18 million reduction versus our prior guidance.

Driven by.

First as we detailed out in our prepared remarks, we're down approximately 24 product specialists.

Dan had done a little math and the.

And in his commentary there, but on average are product specialists does about $1 million.

Or more on an annualized basis, so having been down 24 product specialists versus our prior guidance that certainly has a sizable impact on the second half results.

Representing.

Approximately one half of the change and the low end of our organic guidance range or approximately $9 million of that $18 million that I had mentioned earlier second we've accounted for the potential for additional sales rep attrition in the fourth quarter related to the mandatory.

<unk> policies.

That impact represents approximately two 5% to $3 million in Q4.

Third and again as detailed in the prepared remarks, our prior guidance had assumed progressive improvements in the operating environment in the second half of 2021.

We now expect continued headwinds that impacts roughly about one third of the change and the low end of our organic guide guidance range or approximately $6 million.

As you moved the midpoint in the high ends of the range.

Note that our guidance reflects the larger impact from Covid headwinds given our prior guidance assumes stronger growth as a result of the improving environment in the second half of 'twenty. One. So hopefully that gives you a little bit of perspective on the three primary drivers impacting our modification to guide.

<unk>.

Yes very helpful. Thank you and just.

Just to put a finer point on it I think what people are struggling to really understand is when you strip out Covid you strip out the staffing shortage noise.

Thank you or Korolev FEMA business can still grow in that call it 15% to 20% range and given the current state of the Covid environment. How long do you think it will be until you can get back to those levels.

Sure.

Yes, I think it's I think it's a fair question.

I don't mean to be Kurt I think that.

Our ability to predict when Covid will subside has clearly been tested.

So I'm not sure that that's an easy one to answer but we certainly at this point expect that.

This continues to be transitory I think when you when you contemplate the two changes in our guidance.

One is very much driven by the Covid circumstance and the other one by staffing.

Of these should be.

Transitional kinds of things I think it certainly points in my mind that recovery gets pushed out a bit into 'twenty. Two that said to your broader question. What does it say about the underlying market I still don't believe it says anything.

When you think about the durable market conditions, the Tam on both the lymphedema in the respiratory space that we're now participating in are immense and the level of penetration is still very small so theres nothing thats changed in the underlying market I think when you couple that with.

The growing awareness that we're continuing to see the recognition of the importance of treatment I think payer relation opportunities for us to continue to improve market access we've got a robust product development pipeline underway right now that's richer I think than perhaps any time in the company's history.

And some of the evidence in the market development.

<unk> I think all of those speak to an enduring opportunity for us. So we don't think that this is necessarily a referendum on the space that we're in but admittedly a disappointment for us and where we sit at this point in the year.

Yes.

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

Hey, good afternoon, guys. Thanks for taking my questions.

I was hoping to delve in a little bit deeper.

Based on the prior comments that you made so maybe on the sales of our petition side just to start there.

This theoretically while short term, we will have some sort of an impact for probably at least a couple of quarters. So I guess the.

You kind of put a finer point on it is there a time period at which point that does recover whether it's mid 22 or beyond and add those that kind of pressure the underlying business looks like for the first half.

'twenty two before you kind of get to that more normalized.

Double digit plus growth rate as we move on throughout the year.

Well, yes, Margaret highest sprint I can provide a little bit of perspective on that.

Certainly yes.

Sales reps have a big impact on our overall growth rates for sure being.

24 down at the end of the third quarter and as we progress through our fourth quarter certainly has an impact.

And 2021, but also in 2022.

We believe that.

We can by the end of Q1 should be back in hopefully.

The same zone that we expected to be at the end of the third quarter. So.

It'll be a fairly sizeable effort between now and the end of the first quarter to make sure that we can find appropriate talent to fill the seats, but nonetheless, our expectations is that as we exit Q1, we'll be back in.

In good stead with our product specialists.

Okay. So does that then imply that you'll be closer to that 140 that you.

I had mentioned at the beginning of the call.

Will it take a couple of quarters from there for those folks to ramp up or.

How should we think about that I guess.

One can kind of the underlying business I guess return to growth.

Yes.

As you recall some of the commentary that we've made in the past.

Product specialists, because they are the senior <unk>.

Senior reps do take a degree of time to get to maturity.

Over the course of and recall most of those product specialists, although we're finding them outside of the organization now come from ranks at the associate product specialists, but level, but they do take some time to get to maturity and so.

If we if we can get back to the 140 at the end of.

First quarter than your yes, youre looking for a degree of time for them to mature and get ready.

Present themselves at the same expect that expected levels that are mature rep as youre looking towards the middle of 2022 before we see.

Kind of a return to normal.

Okay, and just to add.

Ed.

And then one more question sorry about that guys.

But as we as we think about kind of the underlying improvement and you guys spoke to it that we're hearing from others that.

Delta case volumes have declined some of the restrictions at Lucent. So are you assuming maybe that things might get worse again as we get into the winter months and then.

Again, as we think about 'twenty two should we think about that 6 million plus or minus.

Seasonality start to come back like you referenced maybe in the second quarters. Thanks.

I think I think we're continuing to assume that conditions are probably stable. So they don't necessarily deteriorate, but also don't improve from what we saw exiting Q3.

The other issue that we're trying to reconcile is the access issue. So we continued to see.

We've all seen the number of health care facilities.

Institutions, both large and small that are imposed vaccination requirements most of the doctors nurses and therapists that we call on today have been vaccinated they.

<unk> started to extend that expectation of those that interact with them as well as those that are interact with patients and I think that's a reasonable expectation as we work alongside those folks. So that's the same expectation that we've shared with our teams.

Between now and the end of the year, which is when we said we expect everyone to be vaccinated.

Ongoing access issues are probably going to continue to be a bit uneven until we get our teams.

On the other side of the vaccination topic, so thats kind of another one that we're doing our best to try and handicap.

Okay. Thanks, guys.

Thanks Margaret.

Our next question is from Ryan Zimmerman with <unk>. Please proceed.

Alright, good afternoon, I wanted to follow up on some of the other line of question if I could just dig in a little bit here. So I just want understand I mean, the reps that left in the third quarter or that.

No longer with the organization.

Can you characterize how many were kind of high performing reps over that kind of a million dollars.

Average productivity level.

I appreciate that this vaccine mandates can be challenging for employers, but it does seem like a large bolus and so.

You did have some China changes in leadership in sales and so.

Is there some component there beyond say the vaccine mandate that is kind of having hamstrung in you guys on some of these some of these dynamics.

Yes, I think that.

I don't necessarily think Thats the case as.

As far as leadership change, but just be able to share a couple of things that might be helpful. First of all historically, we have seen product specialists turnover in the teens.

And associate product specialists those newer reps.

The junior folks those tend to have a higher turnover rate those were in the twenties.

Year to date.

We're closer to the low thirty's overall on a blend so we're seeing a higher turnover rate than we have in the past and then I think just from the math piece.

There is a hierarchy of productivity to your point, so tenured reps if you've been here over a year and you're supported by an FSS. Those are clearly the highest producers and then kind of the hierarchy continues to go notching down to tenured reps without a support person to our newer reps less than a year with an FSS to a newer rep with.

And then finally to a vacant territory. So these vacant territories have pretty material consequence, when they're vacant we recognize that productivity certainly is impaired.

It dependent I think on Prem.

Presence and support interact with patients as is quite clear.

I think when we look at what the turnover has been like.

We have seen a higher turnover in some of our product specialists than we historically had but I think it's also a function of it's just an incredibly dynamic and competitive market and I certainly speak to a number of executives at a number of other companies.

Not a not a unique challenge, but as we get tenured reps who have.

Been with us and been good producers in this market they can be a great target for poachers.

And they have proved to have been we've seen some folks that are part of it either for hospital sales, sometimes nonmedical, sometimes they've gone somewhere where they didn't require a vaccination.

And while that has actually been a further material one for us.

There is about 30% of our sales force remained on vaccinated as of October one.

That's a pretty significant number and that's why we're a little bit broadened our range as far as what we think the remaining consequence might be but I also believe Ryan that it's the right thing to do.

And I also believe that in time, especially as we get closer to the end of the year.

Those that are contemplating their destiny on this decision May also conclude that there's very few safe havens. There are not many others that like us or just like us that are not hiring.

Vaccinated to be out in patient and customer facing roles. So we're hopeful that that our group will come to that conclusion.

And continue to serve patients.

But there is a variable I think that's still remains open.

Okay.

And then just looking forward just following up on Margaret's question.

Youre going to need to hire pretty rapidly obviously to get back to those levels by the first quarter what impact Brent is that going to have on the P&L I mean, what we saw.

See labor rates start to tick up until.

Until we see that on the P&L as we think about it going forward and then I just have another follow up.

Yes, I think Youre right Ryan.

It's going to be difficult.

The pace of hiring but certainly.

Our plan is for our sales rep hiring to hit the target of 140 product specialists by the end of the first quarter.

Obviously, it's dependent on the labor market, but we feel good about.

Where we're at and what we are.

What we're seeing.

And then I think Covid certainly will have an interesting impact as we progress through fourth quarter and in the first quarter.

It will depend on where market rates are taking.

Sure.

Direct sales rep compensation levels to.

Have an impact on the P&L, but.

Certainly we're mindful of that as we as we progress through Q4 and into Q1.

<unk>.

With commissions and such.

Of it fairly.

Fairly variable.

As we as we progress through the other thing that you have to also keep in mind Ryan.

Is that the <unk> acquisition.

It is expected to contribute about five to $5 5 million in 2021 and on a full year basis. The revenue is expected to be somewhere around $17 million on a pro forma basis. So we expect that to be a nice contributor as we progress through the fourth quarter and into the first quarter and.

So I think Dan mentioned in his call.

The profitability of the outflow best businesses.

Yes.

Even better than what our core businesses. So we expect that.

Adjusted EBITDA margin.

At a roughly about a 30%.

Rate for <unk> will certainly be beneficial as we progress through Q4 and Q1 as well.

Okay, and then just another one for me and I'll hop back in queue, but.

The blended growth rate in a normalized state.

You guys talk about kind of being in that mid teens, maybe 20% growth rate.

As I think about that.

Split between all of the product categories now between Flexi touch an entre and an aflow.

Can you just talk about kind of what your expectations are for <unk> touch in a normalized environment.

Where do you think that can grow.

Relative to some of your other higher growing assets.

Well I think flexi touch is still capable of being a high growth asset for sure.

One of the things that we've seen the two most difficult environment that we faced in Q3 as we called out were both most directly impacted in the flexi touch category. So the VA tends to be a flexi touch.

Source for us and with the VA business flat, that's certainly affected flexi touch more than any other product in our portfolio. The other places in the oncology space, where access has been a lot harder for us, especially when we've got an unvaccinated.

A portion of our sales force and the oncology patients typically end up getting a flexi touch as well so both the two segments.

Net debt, we saw impact from Covid headwinds.

And are squarely hit flexi touch more than anything else in the portfolio. That's why we still believe that as COVID-19 conditions start to improve and our access is restored more universally I think I think flexi touch certainly benefits.

Okay I'll hop back in queue. Thank you for taking the questions.

Thanks Ryan.

Thank you.

A reminder, if you'd like to ask a question. Please press star one on your telephone keypad.

Our next question is from Suraj Kalia with Oppenheimer. Please proceed.

Good afternoon, Dan and Brent can you hear me all right.

Coming through Ken Thanks perfect.

So.

A lot of commentary provided on on the product specialists being down 20 by 'twenty four.

The impact on the quarter.

Let me ask.

The same question a slightly different flavor.

In your view.

Hess tactile adopted that tougher stance vis vis vaccination rates as compared to the broader med Tech universe.

Because we haven't heard similarly in terms of this issue popping up that would be one thing.

Thickness affluence right.

The implied guidance for Q4, it still seems intact at least from the time that you acquired the company and I am curious.

Are you seeing the same dynamics there in terms of staffing shortages. The reasons, partly I ask is just bronchus days. So you need to go in quite a bit just from a diagnostics pulmonary function perspective, and I'm, just kind of walk us through the dynamics youre seeing on the applebee's side vis vis organic flex at that site.

Sure Yes, good questions, let me start with the <unk> and then I'll come back on the vaccination policy Suraj.

First of all we're still getting acquainted with this business and keep in mind. We're also once removed from those that are calling directly on the prescribers. So this is a respiratory DM E channel.

We but we ended up with 11 salespeople that were dedicated to the outflow from IDC. They joined US and we were delighted to bring them onboard all 11 came.

Over and all 11 are squarely in the seat and continuing to support this business.

I think a couple of things I can.

Attempt to speculate a little bit why I think the outflow.

Has been a little less impacted than our lymphedema business one is theirs.

Public health emergency CMS waiver, where theres, a little bit more relaxed.

Conditions as it relates to some of the respiratory products. This would be one of them I think the other one is <unk>.

<unk>, perhaps has benefited a bit more from COVID-19.

Some of the consequences of severe COVID-19 have respiratory consequences as we know some of those products are actually benefited.

So I think those those are a few of the variables and as I said, we've had no staffing issue on the direct group that we acquired that supports the channel.

Still in the early days of more active promotion within some of the respiratory <unk> partners as well so.

I think that we're going to continue to see the benefit of that as they are finding ways to more actively co marketed across some of the other products that.

Our kind of fit well oxygen and nebulizer is et cetera, I think as it relates to our vaccination stance.

I can tell you we've done an awful lot of straw polls.

Within the industry.

Among friends old colleagues.

And also different professional associations.

One of the differences for us versus <unk>.

Some companies as we're definitely we believe that we definitely fit the executive order as it relates to our government.

Contractor, we directly built CMS.

Along with the VA and we're also fall into the category of over 100 employees.

While the executive order for the federal contractors came out on September nine.

It suggested that all contractors had to be vaccinated by the 8% of December and then about a week ago.

The administration I think.

Decided they were going to relax that a little bit based on some feedback and then they pushed it back to January 4th at some point.

My opinion is it's difficult to continue to.

Adapt our policy every time, the fed changes I think theres, a little bit of a fickle position.

Position here and ultimately we've gotten to the point. We've said you know what it's now or later, let's do it let's determine where do we stand from a staffing position by the time, we get to the end of the year and also let's take this access issue, which we continue to grapple with and more and more.

Laces off the table, let's make sure that our staffs are vaccinated and have the optimal opportunity to interact both with patients safely as well as with the caregivers.

<unk>.

<unk> actually been vaccinated already so that's our stance and while this is a very difficult one I must admit.

You can pull lots of different folks nobody pulls the same way as I'm sure. You know there is a variety of different factions, it's impossible to land on a stance that I think is going to appeal to everyone, but as a health care company, we've kind of landed where we think we should be we think it's largely.

Distant with what the federal government is encouraging and we also think it aligns wells as a health care player.

Again.

Do appreciate.

Uh huh.

In depth answer actually.

Disconnects some of the dots and I commend you for taking a.

Good public health stands versus short term results.

Quickly if I could Dan to the extent that you can love to get your thoughts on the interim results of our private competitor.

In the space and I am I'm curious, especially given the compliance rates any preliminary thoughts you could offer gentlemen, thank you for taking my questions.

Oh, yes, so I think youre, referring to there is a private company that's got a non pneumatic.

Compression device.

Yes, they are.

Actually gotten a fair amount of attention in the social media circuit here of late.

However.

Unless I'm mistaken I think the revenue that <unk> seen is largely close to zero.

Its a self pay product at this point without reimbursement in place. So it's really difficult to imagine either a sales channel or a prescriber base wanting to prescribe. This actively if they can't get it for their patients. So I believe the company Youre speaking of actually.

They appealed to CMS in an attempt to get the pneumatic definition out of the 652 category, which is where our flexi touch fits they failed and got a K code, which is a temporary code for.

The difference between a code and a coverage policy can be a very large canyon, so theres no national or local coverage policy in place and recently we've heard that.

Some of the commercial payers have already labeled this experimental investigation. So there were a handful of blue cross programs Humana and perhaps some others. So.

I think it is.

There is a bit of a tough path ahead there.

But I also think it's worth just re grounding folks that our product development roadmap is also not static and while I think there is probably a long road to establishing a new payer code and a coverage policy for a new category.

Convinced that our roadmap will have demonstrated that we took a bit of a moving target.

Im looking forward to some of the things that we'll be introducing here over the course of the next year or two.

Thank you.

Yes.

We are currently seeing no remaining questions at this time that does conclude our conference for today. Thank you for your participation.