Q1 2022 Tactile Systems Technology Inc Earnings Call

May 2, 2022

Welcome, ladies and gentlemen to the first quarter of fiscal year 2022 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 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 risk factors section of our annual report on Form 10-K, as well as our most recent 10.

Q filing to be filed 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.

That's your events or otherwise.

This call will also include references to certain financial measures that are not calculated in accordance with the generally accepted accounting principles.

Yep.

We generally referred to these as non-GAAP financial measures.

If you're an affiliation 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, and the Investor Relations portion of our website I would now like to turn the call over to Mr. Dan Rivers, Tactile Medical's, President and Chief Executive.

Sir Please go ahead Sir.

Thank you operator, and welcome everyone to our first quarter earnings call I'm joined on the line by Brent Moen, Our Chief Financial Officer, I'm going to begin by pairing.

I'll begin our prepared remarks today with an overview of our quarterly sales performance and some of the highlights that we saw during the first quarter.

Brent will cover our first quarter financial results in greater detail and review, our 2022 financial guidance, which we reaffirmed in our earnings release today and I'll conclude with some additional thoughts on our outlook and key areas of focus in 2022 before we open the line for questions.

So let me start by saying I was pleased with our team's ability to deliver a strong quarter amid a host of headwinds that we believe peaked in the first quarter.

In the quarter, we reported total revenue growth of 12% year over year to $48 million exceeding our expectations for growth in the mid single digits, which we communicated on our earnings call in February .

Our total revenue growth was primarily driven by sales of our airway clearance products, which includes our recently acquired <unk> product line.

Airway clearance product.

<unk> contributed approximately 17 percentage points to our revenue growth in the first quarter.

The stronger than anticipated sales of our airway clearance products offset a 5% decrease in sales and rentals of our lymphedema products.

Let me provide you with a brief update on the puts and takes that we saw in our lymphedema and airway clearance categories.

Beginning in our lymphedema products.

We outlined in our earnings call in February our first quarter sales perform performance remain paced by the surge in Covid cases related to the omicron variant as well as the expected effects of the sales force staffing gaps we experienced during the second half of 2021.

As we anticipated on our last call the headwinds related to the Omicron variant continued through much of the first quarter similar to prior periods with high Covid case volumes, we saw higher rates of absenteeism at the patient provider and staff and even within our own sales force levels, along with reduced patient.

Throughput and limitations on rep access with some of the facilities that we serve well.

While these headwinds ultimately limited our teams ability to engage with new accounts, we were pleased with their efforts to support our existing clinician and patient customers. Despite the disruption created by this recent case search.

In terms of Salesforce staffing remember that we navigated several challenges during the second half of 2021, which impacted our recruiting and retention efforts, including the challenging labor market and some reluctance related to vaccination and testing.

During the first quarter, we continued to make progress and getting back to our target head count and ended the quarter with 226 field sales Representatives give.

Given the bolus of our new field sales reps that joined since late 2021.

We remain focused on getting them on boarded and trained during the second quarter with the expectation of improving productivity as we entered the second half of 2022.

We're also targeting continued expansion of our field sales head count during the remaining months of this year to approximately 240 before the end of 2022.

With respect to our airway clearance products. We were pleased to see strong initial performance in the D. M E channel during the first quarter, culminating in pro forma growth of 108% year over year as.

As a reminder, our aflow vest product line is sold through respiratory DMA providers throughout the United States supported by a small team of tactile sales specialists.

<unk> acquisition was predicated on the belief that respiratory DMA reps are uniquely positioned in the market due to their existing relationships with pulmonologists and primary care providers that treat chronic respiratory conditions like bronchiectasis as well as other chronic disorders that lead to retains accretions and breathing.

Problems.

The initial traction. These <unk> reps are seeing is evidenced that the <unk> airway clearance therapy is a natural complement to other therapies that they provide to complex respiratory patients, including oxygen nebulizer and noninvasive ventilation.

Our integration efforts also progressed as we expected during the quarter and our specialized airway clearance sales force continued to make progress in raising awareness educating and training within our <unk> channel.

Turning to a review of some important operational highlights during the first quarter. We continued to host virtual education events as well as service sponsors at the American venous Forum and power Lymphatics conferences, specifically, we hosted 50 for educational programs that were attended.

By nearly 1600 clinician participants.

And we increased our podium presence at the key society meetings.

<unk> The American Venous Foundation Congress in February where our Chief Medical Officer, Dr. Tom O'donnell, and several other key opinion leaders delivered five presentations on a variety of topics related to identification.

The diagnosis and management of lymphedema.

In addition to these efforts we were pleased to see an expert opinion consensus on lymphedema diagnosis and treatment published in Phlebology. The journal venous disease in March it reflected a consolidated stance on the diagnosis and treatment of lymphedema among three independent professional societies.

The society of vascular medicine, the American venous Forum, and the American vein and Lymphatic Society.

Experts from the societies used the Delphi methodology and arrived at a consensus on a number of factors related to lymphedema, including two particularly notable items.

First all patients with chronic venous insufficiency stages see through C. Three through six six should be considered lymphedema patients and.

And second pneumatic compression should be recommended for lymphedema patients.

We believe this will prove to be another persuasive tool as we engage with prescribers as well as payers, particularly in demonstrating the need for access to pneumatic compression devices for patients suffering from CVI related lymphedema.

We also made progress in our development of new solutions for our lymphedema customers. We remain on track for a limited market release later in the second quarter and a full market release in the third quarter of a new series of Flexi touch garments intended to further enhance the patient experience.

Among the improved features are redesigned favors increase patient comfort and ease of use all focused on a better patient experience.

And our work continues towards introducing a mobile app later this year.

This app will enable tactile to engage and inform patients earlier in their diagnosis and treatment journey.

Them learn more about their condition and treatment options and allow them to document their symptoms and progress ahead of their visit with a specialist helping them arrive better informed and potentially better qualified for our therapies.

We believe that both of these new solutions will provide the added benefit of helping our team to educate and train patients more effectively.

As well as begin to engage with them earlier in their journey towards a definitive diagnosis and path to relief.

In January we bolstered our board of directors with the appointment of two new highly experienced members Valerie Asbury and Brent Shafer.

Valerie is the president and CEO of Lifescan, a former Johnson <unk> Johnson company and global leader in blood glucose monitoring for people with diabetes.

She previously spent 20 years with J&J, including five years as global President of its diabetes solutions business.

Brent is the former chairman and CEO of Cerner Corporation, which was acquired by Oracle in 2021.

He formally served as the Chief Executive Officer of Philips North America as well.

The addition to our board further strengthens tactile medical's depth of experience in accessing and treating patients that suffer from chronic conditions, including the use of digital health tools and supporting our continued development as a company.

And lastly in February we were pleased to announce that the qui Tam lawsuit filed by a competitor had been dropped and dismissed with prejudice by a federal judge with the plaintiff agreed to waive the right to appeal.

After defending our organization and its partners against the allegations in this case, which we always believed were meritless.

Proud to resolve this matter in its entirety without paying anything to the plaintiff is council for the government.

We're proud to have rightfully defended our reputation and glad to close this chapter was it fully intact.

Now, let me turn it over to Brent to discuss our financial results in more detail along with our guidance for 2022, Brent Thanks, Dan.

Total revenue in the first quarter increased 12% year over year to $48 million compared.

Compared to $42 8 million in the first quarter of 2021.

Looking at our total revenue by disease state.

Sales of our airway clearance products, which includes our recently acquired <unk> product line contributed $7 3 million for the quarter and.

In sales and rentals of our lymphedema products, which includes our flexi touch an entre systems decreased 5% year over year to $47 million.

Total revenue by channel was 55% commercial 18% Medicare.

<unk>, 15% durable medical equipment distributors and 12% VA.

As a reminder, durable medical equipment distributors is a new channel comprised of revenue from our acquisition of the airway clearance therapy business, which closed on September eight 2021.

These figures compare to our total revenue by channel in the first quarter of 2021 in which the commercial Medicare and VA channels represented 66%, 20% and 14% of total revenue respectively.

Yes.

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

Gross margin was 76% of sales compared to 77% last year.

non-GAAP gross margin was 71, 2% of sales compared to 77% in the prior year.

non-GAAP gross margin excludes noncash intangible amortization in both periods.

As a reminder, we have provided reconciliations of certain of certain GAAP to non-GAAP measures in our earnings press release.

First quarter operating expenses were $48 $8 million, an increase of $14 4 million or 42%.

The largest driver of the increase in operating expenses year over year was a $7 million increase in non cash earn out expense related to the acquisition of the airway clearance therapy business and noncash intangible asset amortization.

Our prior year GAAP operating expenses were not impacted by these noncash items.

The increase in operating expenses was also driven by a $5 $1 million increase in sales and marketing expenses largely due to increases in personnel related compensation expense, including the addition of the <unk> related commercial expenses and travel related expenses as we returned to normalized business.

Activities.

A $2 million increase in reimbursement general and administrative expenses.

And a $300000 increase in research and development expenses.

Excluding the aforementioned noncash expenses and litigation defense costs in both periods, our non-GAAP operating expenses increased 19% year over year in the first quarter.

Yeah.

Operating loss was $14 9 million compared to an operating loss of $4 $1 million last year.

non-GAAP operating loss was $5 4 million compared to a loss of $3 $1 million last year.

Income tax expense was $200000 compared to an income tax benefit of $1 $8 million last year.

The difference relates to a full valuation allowance being recorded against all deferred tax assets in the current period.

Net loss was $15 6 million or <unk> 78 per diluted share compared to a net loss of $2 3 million or <unk> 12 per diluted share last year.

non-GAAP net loss was $8 4 million.

Compared to a net loss of $1 $5 million last year.

Weighted average shares used to compute GAAP diluted net loss per share were $19 9 million and $19 5 million in the first quarter of 2022 and 2021, respectively.

Adjusted EBITDA loss was $2 6 million compared to an adjusted EBITDA loss of $7 last year.

As of March 31, 2022, we had $21 $2 million in cash and cash equivalents and $51 $3 million of outstanding borrowings.

Compared to $28 $2 million in cash and cash equivalents and $55 million of outstanding borrowings as of December 31, 2021.

Turning to a review of our 2022 outlook, which we reaffirmed in our earnings press release today.

Our guidance for full year 2022, total revenue remains unchanged in the range of $235 million to $240 million representing growth of approximately 13% to 15% year over year.

Our total our 2022 total revenue guidance reflects sales of our lymphedema products, increasing approximately 6% to 8% year over year and sales of our airway clearance products in the range of $19 5 million to $20 5 million.

For modeling purposes, we expect to generate adjusted EBITDA of approximately 14 million to $16 million in 2022.

This range is based on the following assumptions for the full year.

Gross margins in the low 70% range.

An increase in GAAP operating expenses in the low 20% range year over year, driven primarily by a $2 million to $3 million of legal expenses and certain noncash items, including stock compensation expense of approximately $12 million.

Intangible amortization and estimated changes.

And contingent consideration of approximately $11 5 million and depreciation expense of approximately $2 4 million lastly, and the entrance in the interest of transparency, we would like to provide some additional color on our revenue expectations for the second quarter.

Specifically, we expect total revenue growth of approximately 10% to 15% year over year, driven by flat to 3% growth in our sales of our lymphedema products.

And $5 million to $6 million of sales of our airway clearance products, which as a reminder, did not impact our sales results in the second quarter of 2021.

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

Thanks Brent.

And we're pleased to be in a position to reaffirm our full year guidance, we expect improving growth and profitability performance in the second quarter and the second half of this year driven by a combination of the increasing productivity of recently hired and promoted sales representatives.

The moderation of Covid related headwinds.

And the commercial launch of our new ease of use garments and digital app.

As a result, we expect to deliver mid to high teens total revenue growth in the second half of the year.

Looking ahead, we remain focused on driving operational progress in the following four areas first enhancing our sales force hiring retention and training to fill key roles and improved productivity of our new reps are recently hosted national sales meeting in April the first.

Time in 27 months, we've been able to assemble our entire team was a solid step forward towards improving retention and engagement.

Second increasing the base of our new clinician prescribers for our lymphedema products as well as deeper penetration by educating and training their clinical teams and providing efficient support for the referrals.

Third introducing new and improved solutions, including our new flexi touch garments and mobile app to improve patient engagement experience and outcomes as well as extend our competitive lead.

And finally, supporting our respiratory DMA channel partners to help them integrate the aflow best among their existing offerings of complementary solutions and raise awareness among their physician and patient customers.

By continuing to execute with respect to these key areas. We expect to set the stage for sustained organic revenue growth and EBITDA margin expansion in the coming years with significant runway ahead for us as we continue to penetrate the combined multibillion dollar annual addressable markets that we serve.

Before concluding my remarks today I'll just.

To thank our employees for their continued dedication to the advocacy and treatment of underserved patients living with lymphedema bronchiectasis and other related chronic conditions tactile medical success is the direct result of their dedication to bringing relief to thousands of patients.

I'd also like to thank our investors and those on today's call for their interest and support of tactile medical.

Later, we will now open the call for questions.

Thank you.

Like to ask a question please signal by pressing star one on your telephone keypad.

Using a speaker phone please make sure.

<unk>.

Sanction 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 question as it relates to ask additional questions. We invite you to add yourself to the queue again by pressing star one.

And our first question will come from Ryan Zimmerman with <unk>. Please proceed.

Hey, good evening, thanks for taking the questions Dan and Brent.

Alright, and with the guidance for a moment here.

And I appreciate that you're reaffirming if I think back to the last quarter I think.

The <unk> guidance was fairly similar to what youre, telling us today.

The lymphedema products guidance was expected to increase about 6% to 8% for the year as well.

Given where you're at with <unk>, and then kind of given where youre at with lymphedema products.

It would imply.

The big increase in lymphedema in the second half of the year and somewhat of a slowdown in <unk> for the second half of the year. So help me kind of reconcile that and kind of your thinking about the pacing of each of the product categories through the year.

Yes, So let me take a shot at that one and then maybe Brent will have some peaking back clean up on it a bit let me start with Aflow invest Ryan first of all we were really pleased with the fact that we had a solid first quarter of the year.

I think some of it had to do with the fact that we know how important it is to keep the team together and we preserve the specialist group that we inherited from the <unk> acquisition I think they have demonstrated the ability to continue to engage with our <unk> partners.

I think the other thing we saw in the first quarter just from a positive standpoint with the outflow vest was that this does indeed fit well within their portfolio and as they continue to service patients with a lot of chronic respiratory needs addressing the airway clearance gap is clearly one that we've recognized collectively there is an.

<unk> four now that said we.

We're just one quarter into the year and we are.

A little bit cautious that we want to make sure that this wasn't just low fruit but.

Sustainability there so.

That's why we've kind of continued to keep.

The pace of the Aflow invest expectation on par for the time being and I think as it relates to the lymphedema business.

What we really guided to was no change basically said, we're still going to be more of a second half story, but didn't really change any of our expectations. So I think we're at quarter end. We know we still have a good amount of wood to chop in.

In the back half you've got some new products to be introduced trying to get our teams up and running and well trained.

So no big change there and I think ultimately, we'll probably revisit expectations once we get to the halfway point, but those are some of the variables I think that helped shape. It I don't know if Brent if you have anything you want to add yes, I think thats a good summary of.

What we expect for the remainder of 2022.

Okay.

A couple of follow ups.

Two for me just.

Just briefly one what's kind of a state of the state on VA access at this point I know that was an issue for you guys before and then just the second question I'll ask it as well as the state of the new prescriber base in terms of their contribution relative to existing prescribers. It sounds like you had picked up a lot last year.

And we've seen any meaningful contribution from that group at this point thanks for taking the questions.

Sure, Yes, I think the VA access story is really not much of a change we continue to see.

An awful lot of these patients seen in those outposts the community based outpatient centers. So we've continued to include those as part of our call point.

We've certainly got a focus on some of the targeted VA centers to try and reestablish some additional growth as we progress through the year. We've got some specialists that focus on that as well as the rest of the rank and file a product specialist so we.

We still see that there's certainly opportunity for us to continue to grow there, but no no change I would say in the VA posture.

Over the last quarter from what we've been reporting as far as new prescriber base.

The good news, we've said as we've certainly added more prescribers I think the fact that we've had a little bit of a reset with the sales force from the back half of last year and into first quarter.

<unk> has certainly paced our ability to more deeply penetrate some of these new prescribers, but that's still the still the game plan and the priority as we progress through the year and.

We've continued to have I think some rather cautious approach to that in Q2, but I think when we get to the back half certainly Q3 and Q4, we do expect to continue to demonstrate additional penetration.

I think that there's also some opportunities for us to continue to hopefully improve some of the shape of payer relations and policy and I think all of those.

We will we will certainly be friendlier to us as we continue to progress through the year.

Thank you guys.

Thanks, Brian .

Our next question is from Adam <unk> with Piper Sandler. Please proceed.

Hi, Dan Hi, Brian Congrats on the progress and thanks for taking the questions.

Just wanted to start with broader procedure environment.

It's a dynamic environment and I think that's putting it.

Mildly so would just love some extra color or commentary around Q1, and kind of how it played out by months.

As well as kind of the exit momentum that you had into Q2 and what you saw over the course of April both on the lymphedema Annapolis side I mean, it I didn't hear you guys kind of talk about trends.

In that much detail. So just wanted to flesh that out a little bit in terms of progression and I had a follow up or two.

Yes, I think I'll start just with a little bit of Q1, and then maybe ask Brent to add something as it relates to Q1, we started off certainly with a soft bigger.

Beginning of the quarter with omicron.

Sure.

We continued to see what I would say some modest <unk>.

Positive progression through the quarter, but it was still a bit sluggish as we entered in March So I think thats, what probably got us a little on the lower side of where we expected on the lymphedema business.

So.

That's a little bit of I think what we what we saw on that side, Adam It's Brent just as we progress into Q2, certainly look for or look for an uptick in performance total revenue.

Expectations somewhere between 10, and 15% year over year.

It's split between our lymphedema products, which we expect to be flat to 3%. So.

As Dan pointed out improvement in the omicron, but looking for kantar.

Continued enhancements in productivity as we progress through Q2.

Obviously, not getting all the way there, but really really emphasizing second half of 2022 growth there and then.

5% to $6 million of sales of our airway clearance products, which as you know thats outflow vest.

So we have expectations that that will be that we'll continue to do.

Perform at that expectation and then.

As we improve growth certainly profitability will pick up as well in the second half of the.

The first of the year, but more particularly in the second quarter as well.

So just with the relief of some of the omicron impacts and then the.

The commercial launch of our new ease of use garments and digital app in the second half of the year.

That's helpful color guys I appreciate that and then maybe.

Wanted to just follow up on.

The sales force.

<unk> hired initiatives that you guys have I mean, it sounds like if I heard correctly you finished Q1 with 226.

Heads and I think that that was going to just shy of the $2 30 number that I think he pointed to you in the past.

Yeah.

How is the.

Hiring environment today is it getting any better.

Maybe just the level of confidence to continue to scale the <unk>.

Salesforce in a timely fashion and then I had one last follow up for you guys. Thanks.

So we did end up at $2 26, and keep in mind, that's a snapshot in time. So we are consistent we always report where we sit at the end of the quarter.

You asked US a week ahead or a week later it could be a different number as you can imagine it moves a little bit and it's dynamic I think the key point for US was when we exited just to recall.

Q3, the end of September we had 200 salespeople.

And we said that we had a good amount of work ahead of us to try and get that number back up we wanted to get upward near 230 towards the end of Q1, and we got within foreheads.

That is a net increase of 26 over the course of the last couple of quarters. So.

We feel good about the fact that we've been able to attract some really good talent I think some of the adds that we've made have been really particularly.

Good.

Good adds for us coming from good profiles some of that's been promotion, but as we alluded to I think before some of it is coming from the outside as well.

We were able to assemble all of our sales force just a couple of weeks ago in Las Vegas, where we had our national sales meeting the first one it used to be an annual event. This is the first one we've had in three years due to omicron or rather COVID-19. So it was a really encouraging and I think.

Engaging opportunity to get this group together, we feel like it was going to be a good investment that certainly going to bring some restored energy to our group and I think that the enthusiasm. They showed for some of the things that we covered in training as well as some of these new garments that will be introducing there was a lot of.

A lot of good energy as we left that we think will continue to see some of the benefits of that.

That's great to hear that and great color and maybe just one last one for me if it's a housekeeping question I'm not sure if I heard it on the in the prepared remarks, but just on.

Supply chain environment is there anything new.

Notable are worth calling out from a tactile standpoint.

Items that have been particularly challenging to procure.

Just anything to flag for for.

For the street, Thanks, again for taking the questions.

Yes.

It's Brent I'll start and then if Dan wants to clean up any of this certainly but.

I think it all centers around gross margin and we reaffirmed that we expect gross margins to be in the low 70% and we've reaffirmed our our topline revenue so.

I think thats suffice to say that.

We have.

Been pretty successful at specifically our operations team doing a great job to stay ahead of and mitigate any potential issues that are out there.

And so I think we feel like we're in a good spot relative to our supply chain.

I would just add a couple items on that one too Adam first let me just do a shout out to our ops team because I think they've done a fantastic job, we have certainly not been immune to some of the issues that you've alluded to that a lot of companies are talking about so we've seen plenty of.

Increase in things like freight and spot buys in labor and things like that but I think our team has done a really good job of finding offsets.

The other one I would just add as it relates to outflow vest and it's a little bit about what kind of tempered our.

Update as far as guidance, but.

We are in the final stages now of the integration of Aflow best we'd had before this past quarter, we basically brought virtually everything and with final exception of taking direct control of the supply chain upstream as well as final assembly and we're going to be completing that during the second quarter that.

Said, we have a really good supplier that we inherited but they've got some capacity constraints. They are fully capable of delivering product to our original forecast.

But as we see potential opportunity for growth.

Not only this year, but well into the future keep in mind. This is a this is a.

Big opportunity and one that.

We didn't enter into as a hobbyist, we're in the midst of working on trying to.

Stand up a secondary source I think right now we continue to believe that that's probably likely about the end of the year.

<unk>.

That's a work in progress as well.

Okay. Thanks for the extra color.

You bet.

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

Yes.

Hey, Suraj.

So three questions all of the lymphedema side, if I may.

Second half 'twenty, two upper and for that matter. The second half 'twenty two step up required in lymphedema to reach guidance.

Hi.

Segments within lymphedema.

Are you all expecting to contribute more and why.

E commercial Medicare.

How should we think about these three buckets within lymphedema.

Yes, I think maybe it's a little that's a little tough one to answer because we don't forecast by payer.

Focused on end user segments. So.

The primary call points, we expect to demonstrate growth or contribute to that suraj would be some combination of the oncology patients as well as the.

The lower extremity lymphedema patients through those <unk> lymphedema or CVI related that's clearly the biggest market continues to represent probably two thirds of the opportunity. So.

Expecting a mix thats, probably something that looks akin to that.

We'd probably be reasonable.

Got it.

Dan on the lymphedema side, how many reps.

The annual productivity.

Exiting Q1.

So suraj can you repeat the question.

What's the number of reps that we have.

<unk> reps.

Are we in terms of interest in terms of productivity trying to.

Ascertain how many.

How many of fleet in New York.

Full levels and versus how much capacity is remaining in the remaining.

On boarded reps.

Yes.

I'll take a shot at Suraj.

So.

As Dan pointed out earlier.

We've had net adds of 26 heads.

Since our Q3 period so.

Probably suffice to say that.

More than 26.

I've left the organization and so I would tell you that from a tenure perspective.

We're not as far along as we as we would like to be and I think that's what we've been talking about in terms of ramping up productivity in the second half or particularly in the second quarter, but.

Starting to see the benefits in the second half of.

Of 2022 and so.

The.

The new ads that we brought in I think we had talked also about in Q3 and Q4 that not all of them are historical kind of hiring methodology is to bring them in as associate product specialists.

We've expanded that now to bring in reps at not only associated product specialists, but also the product specialist in order to ramp productivity faster than it historically has and so we have expectations that.

What historically has taken roughly year to get to productivity is going to be something less than that.

As we as we pushed through 2022.

Got it.

One last one a subpart, Brent and Dan I'll, just and I'll hop back in the queue.

Are there any dynamics of the commercial segment that you would characterize as sort of onetime or unique.

To reflect the perceived drove three to the commercial side and then Brent if I may just push you on the last point you made maybe let me ask you a different a little.

Differently.

How many reps are let's see productivity levels between $1 billion or over $1 million gentlemen, Thank you for taking my questions.

Okay.

On the payer side I can talk a little bit about that suraj.

In terms of the commercial peso. This is no different than what we've experienced.

<unk> seasonally and two from a.

Covid perspective so.

As you might expect that with the highest co pays.

Early in the period that certainly has an impact on our ability to.

Really capitalize on the commercial opportunity on that and then further handicapped by the fact that.

We experienced a pretty sizeable.

Covid omicron flare up.

And then.

The other pieces when you experience that then you also have the.

The reactions that you get from the large institutional slash hospitals. So they really limit access when you have a flare ups like that in which and that's the piece that has historically.

Prescribed the majority of the flexi touch.

So.

I think as we as we pushed back into.

Q2, and in the later half of 2022.

Youll see that commercial business rebound a little bit more.

Both from seasonality and then also the relieving some of those COVID-19 symptoms.

I think as far as the productivity, it's hard to give you a useful number.

Simply because we've got you could have two reps one as a solo rep and one may have an associate that's helping support them. They could have an FSS rather than try and give you one number thats really.

Consolidated number that probably isn't as useful I think the one thing I would concede for sure is that our overall productivity suraj is not where we needed in the first quarter and that's what we've been talking about is as we've retooled. The sales group we filled out some of these roles in the back half last year. The first part of this year I do.

That.

It feels like we've turned a corner I think that.

We're feeling as if we've got our sales force more engaged at this point I think the focus will be for now on training and I think that's why the national sales meeting was came at such an opportune time, we not only had an opportunity to assemble and kind of get the group energized, but there was a lot of died.

Didactic content that was represented there as well and then we.

We've got a host of different ongoing follow up training events coming up so between the NSM General training and frankly, some additional seat time those are the things that point to our confidence on why we believe second half stronger and I think the last one I would just add is this is not a unique story for us right at the back half always.

Is much more heavily weighted in the first half of the device gets less expensive as the year progresses and co pays go down. So it is a phenomenon we are quite used to but.

Think that with the introduction of new products, which is yet another energizer and I think a really good thing for patients along with some additional seat time and I think.

Some emerging stability in the sales force.

Still feel real good about that.

Yes.

Thank you.

Okay.

As a reminder, this star one on your telephone keypad, if he would like to ask a question. Our next question is from Barbara <unk> with William Blair. Please proceed.

Hey, guys. This is Maggie Billy on for Margaret today.

Wanted to ask one on echelon.

Just a little bit differently. So it obviously came in stronger than expected. This quarter. So can you talk about what drove that dynamic.

And just kind of give us the breakdown of that and what youre seeing into April .

Yes, I mean ultimately what drove it is the same reason that we were founded as appealing asset for us in the first place Maggie is.

Remember there is thousands like 4000 respiratory DMA reps out there so.

When we explored the opportunity.

This was still what I'd call, an emerging product within the portfolio some of the respiratory <unk>.

Our diligence continued to point to the fact that.

If you think about our complex respiratory patient like a little bit like a puzzle, there's niv theres <unk> Theres nebulizer, Theres Pep devices and there was one glaring missing piece in the middle and it was the ability to provide effective airway clearance therapy. So.

I think what we're seeing is that these respiratory <unk> reps are recognizing that these same complex patients that they already are serving the same referral sources that they are serving this fits very well and by introducing more active dialogue about trying to call out and help docs.

Ignite which patients can benefit.

We're seeing an attach rate that we're pleased with so I think those are some of the characteristics. As we've said this is a really big market and with thousands of respiratory <unk> reps.

Still in the early days when you think about it.

What kind of penetration, we even had in Q1 so.

It was a good way for us to get off.

In Q1.

We still have some work to do.

Got it thanks, and then just one.

Wanted to ask.

For your core lymphedema business, you've got the.

New government, you're launching as well as the mobile app, so what type of momentum.

The core Athena business and then how can we see that translate into growth specifically in the back half of the year. Thanks for taking our questions.

Yes fair question Maggie.

So just to give you a little bit more precision on timing, we've got a limited market release for the new garments. This quarter back half of this quarter as our limited market release, and we expect a full market release in early Q3.

So like any new product typically it doesn't turn on like a light switch, but we're optimistic that by introducing this in early Q3 that it can have an impact as early as Q4, so and that's been built into some of our expectations. It's also what gives us a better feeling as we would.

We have developed hopefully some of that momentum that we can carry into the new year, but thats thats basically what that one looks like.

Lots of nice features in this one its a much lighter weight garment its easier for patients to put on it employees zippers and things like that the digital App will follow shortly thereafter, it's got limited market release in early Q3 and full market release, probably by the end of Q3.

That one we believe.

<unk> will pay more dividends when we get into 2023, but ultimately it's an opportunity for us to engage with patients earlier.

<unk> seen our iceberg slide that we point to a lot it kind of shows that the majority of the lymphedema patients remain under recognized and under diagnosed.

Having an app that they can better educate themselves about their condition that they can track symptoms for ultimately would hopefully allow them to when they see their specialists be better qualified they'll have already met some of the tribe.

Yes.

Lesser kinds of interventions already documented that they can take pictures of the progressions of their limb.

All of those things, we think can help engage patients earlier in their journey.

And then there's other features that we're optimistic will be able to to get some value from as well not the least of which is easy.

<unk> ways for the patient to do some self administered training lots of little video vignettes.

And a host of other features in there as well and that's kind of that's kind of step one there is a fairly extended digital roadmap journey that we've kind of laid out internally as well.

Great. Thank you.

Okay.

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

Thank you. Thank you everyone.

Okay.

Yes.

[music].

Welcome, ladies and gentlemen to the first quarter of fiscal year 2022 earnings conference call for tactile medical at this time, all participants have been placed in a listen only mode.

Payments that are based on 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 risk factors section of our annual report on Form 10-K, as well as our most recent 10-Q.

<unk> filing to be filed with the Securities and Exchange Commission such.

Such factors may be updated from time to time in our filings with the SEC, which are available on our website. We undertake no obligation to publicly update or revise our forward looking statements as a result of new information future events or otherwise.

This call will also include references to certain financial measures that are not calculated in accordance with the generally accepted accounting principles or GAAP.

We generally refer to these as non-GAAP financial measures.

If you're an affiliation of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available on 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, Tactile Medical's, President and Chief Executive.

Officer. Please go ahead Sir.

Thank you operator, and welcome everyone to our first quarter earnings call I'm joined on the line by Brent Moen, Our Chief Financial Officer, I'm going to begin by pairing.

Ill begin our prepared remarks today with an overview of our quarterly sales performance and some of the highlights that we saw during the first quarter.

So let me start by saying I was pleased with our team's ability to deliver a strong quarter amid a host of headwinds that we believe peaked in the first quarter.

In the quarter, we reported total revenue growth of 12% year over year to $48 million.

Cedar and our expectations for growth in the mid single digits, which we communicated on our earnings call in February .

Our total revenue growth was primarily driven by sales of our airway clearance products, which includes our recently acquired <unk> product line.

Airway clearance product sales contributed approximately 17 percentage points to our revenue growth in the first quarter.

The stronger than anticipated sales of our airway clearance products offset a 5% decrease in sales and rentals of our lymphedema products.

Let me provide you with a brief update on the puts and takes that we saw in our lymphedema and airway clearance categories.

Beginning in our lymphedema products as we outlined in our earnings call in February our first quarter sales perform performance remained paced by the surge in Covid cases related to the omicron variant as well as the expected effects of the sales force staffing gaps we experienced during the second half of 'twenty.

'twenty one.

Throughput and limitations on rep access with some of the facilities that we serve.

During the first quarter, we continued to make progress and getting back to our target head count and ended the quarter with 226 field sales representatives.

Given the bolus of our new field sales reps that joined since late 2021, we remain focused on getting them on boarded and trained during the second quarter.

With the expectation of improving productivity as we entered the second half of 2022.

We're also targeting continued expansion of our field sales head count during the remaining months of this year to approximately $240 before the end of 2022.

With respect to our airway clearance products, we were pleased to see strong initial performance in the DIY channel during the first quarter, culminating in pro forma growth of 108% year over year.

As a reminder, our <unk> product line is sold through respiratory Dms providers throughout the United States supported by a small team of tactile sales specialists.

<unk> acquisition was predicated on the belief that respiratory <unk> reps are uniquely positioned in the market due to their existing relationships with pulmonologists and primary care providers that treat chronic respiratory conditions like bronchiectasis as well as other chronic disorders that lead to retains accretions and breathing.

Problems.

By nearly 1600 clinician participants.

And we increased our podium presence at key society meetings.

The diagnosis and management of lymphedema.

The society of vascular medicine, the American venous Forum, and the American vein and Lymphatic Society.

Experts from the societies used the Delphi methodology and arrived at a consensus on a number of factors related to lymphedema, including two particularly notable items.

First all patients with chronic venous insufficiency stages see through C. Three through six six should be considered lymphedema patients and.

And second pneumatic compression should be recommended for lymphedema patients.

<unk> tended to further enhance the patient experience.

Among the improved features are redesigned favors increased patient comfort and ease of use all focused on a better patient experience.

And our work continues towards introducing a mobile app later this year.

This app will enable tactile to engage and inform patients earlier in their diagnosis and treatment journey.

We believe that both of these new solutions will provide the added benefit of helping our team to educate and train patients more effectively as well as begin to engage with them earlier in their journey towards a definitive diagnosis and path to relief.

In January we bolstered our board of directors with the appointment of two new highly experienced members Valerie Asbury and Brent Shafer.

He is the president and CEO of Lifescan, a former Johnson <unk> Johnson company and global leader in blood glucose monitoring for people with diabetes. She previously spent 20 years with J&J, including five years as global President of its diabetes solutions business.

Brent is the former chairman and CEO of Cerner Corporation, which was acquired by Oracle in 2021.

Formerly served as the Chief Executive Officer of Philips North America as well.

After defending our organization and its partners against the allegations in this case, which we always believed were meritless.

Proud to resolve this matter in its entirety without paying anything to the plaintiff is council for the government.

We're proud to have rightfully defended our reputation and glad to close this chapter was it fully intact.

Let me turn it over to Brent to discuss our financial results in more detail along with our guidance for 2022, Brent Thanks, Dan.

Total revenue in the first quarter increased 12% year over year to $48 million compared.

Compared to $42 8 million in the first quarter of 2021.

Looking at our total revenue by disease state.

Sales of our airway clearance products, which includes our recently acquired Aflow vest product line contributed $7 3 million for the quarter and.

In sales and rentals of our lymphedema products, which includes our flexi touch an entre systems decreased 5% year over year to $40 7 million.

Total revenue by channel was 55% commercial 18% Medicare.

<unk>, 15% durable medical equipment distributors and 12% VA.

As a reminder, durable medical equipment distributors is a new channel comprised of revenue from our acquisition of the airway clearance therapy business, which closed on September eight 2021.

These figures compare to our total revenue by channel in the first quarter of 2021 in which the commercial Medicare and VA channels represented 66%, 20% and 14% of total revenue respectively.

Yes.

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

Gross margin was 76% of sales compared to 77% last year.

non-GAAP gross margin was 71, 2% of sales compared to 77% in the prior year.

non-GAAP gross margin excludes noncash intangible amortization in both periods.

As a reminder, we have provided reconciliations of certain of certain GAAP to non-GAAP measures in our earnings press release.

First quarter operating expenses were $48 $8 million, an increase of $14 4 million or 42%.

Our prior year GAAP operating expenses were not impacted by these noncash items.

Business activities.