Q3 2022 Tactile Systems Technology Inc Earnings Call

November 7, 2022

[music].

Please standby.

Welcome, ladies and gentlemen to the third 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 the current expectations of management and involve inherent risks and uncertainties, which could cause actual results to differ materially from those indicated including those identified in the risk factors section of our annual report on Form 10-K as well as.

Our most recent 10-Q filing 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 publicly update or revise our forward looking statements as a result of new information future events or otherwise.

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

And I would now like to turn the call over to Mr. Dan Rivers, Tactile Medical's, President and Chief Executive Officer. Thank you Sir Please go ahead.

Thank you operator, and welcome everyone to our third quarter earnings call I'm joined on the line by Brent Moen, Our Chief Financial Officer, I'll begin our remarks today with a high level review of our third quarter financial performance, followed by a discussion of the factors that drove our third quarter results and an update on some of the recent operational progress we've made.

Brent will then cover our quarterly financial results in greater detail and review, our 2022 financial guidance, which we updated today in our earnings press release and.

And finally I'll provide some thoughts on our updated outlook and continued areas of focus for 2022 before we begin the Q&A session.

So let's get started with a review of our financial performance. We reported total revenue of $65 $3 million for the third quarter, representing growth of 24% year over year.

These results came in well above our expectation for third quarter growth of 13% to 17% year over year, which we discussed on our Q2 earnings call.

Sales of our airway clearance products were the largest contributor to our stronger than anticipated revenue contributing approximately 19 percentage points to our total revenue growth year over year.

We were also pleased to see revenue from our lymphedema products increased 5% year over year, which modestly exceeded the 1% to 3% growth range, we had anticipated.

In addition to our strong sales performance, we delivered significant year over year improvements in our profitability, increasing our gross operating and adjusted EBITDA margins compared to the prior year, while also maintaining our solid cash balance.

Turning to a discussion of the primary drivers that contributed to our lymphedema and airway clearance sales performance are lymphedema business benefited from a combination of several factors.

At a clinical level, we saw a modest improvement in patient volumes compared to the second quarter, although pockets of clinics with staffing related challenges do remain.

At a company level, we saw a high level of engagement from our lymphedema sales reps following our training initiatives in the first half of the year and the launch of our two new products in July in.

In particular, the launch of our new comfort each garment has been a nice innovation for our reps to feature as they work as they work to reengage targeted clinics and referral sources.

Additionally, we're pleased to see stabilization emerging in our field sales team exiting the third quarter fully staffed a consequence of improving retention and engagement and.

And lastly at the clinician level. We were also pleased by the response, we saw from both new and existing customers and the lymphedema channel. Following the launch of our new products. This was most notable in the vascular space, where comfort east garments additive fresh message.

In addition to the strong sales of our lymphedema products, we enjoyed another very impressive quarter with our airway clearance products, namely the aflow vest generating slightly over $11 million in revenue.

As a reminder, we acquired the airway clearance business and its product the Aflow vest system on September 8th of last year, and only booked about three weeks of sales in the third quarter of 2021.

On a standalone basis, however, assuming it had remained a separate entity in both periods, our airway clearance product line achieved growth of 139% year over year in the third quarter of 2022.

This performance reflects the ongoing adoption among the respiratory DMA reps, we partnered with.

As I've described previously these respiratory <unk> portfolios of complementary products, coupled with the existing clinicians that they serve are leading them to both new and existing patients that are well qualified to benefit from airway clearance therapy via the Aflow vest.

The case for at home treatment with Aflow vest is a compelling one.

As these eligible patients are likely to require hospitalization if left untreated due to recurring pulmonary infections and pneumonia.

And from an economic standpoint, Aflow vest receives favorable reimbursement, making it a compelling product for our <unk> partners.

With this as a backdrop, we believe the strong demand. We're seeing is largely driven by identifying eligible patients that need at home airway clearance therapy within our channel partners existing customer base and referral networks.

Importantly, we also believe our growth is benefiting from identifying patients that would have otherwise been left unidentified or untreated if not for the efforts of these reps we.

We couldnt be more pleased to be bringing <unk> therapy to countless underserved patients, which is in keeping with tactile mission to both reveal and treat those suffering from underserved chronic diseases in their homes.

During the third quarter. We also continued to see our existing <unk> partners expand the availability of <unk> two additional branches within their networks aided in part by our team of respiratory specialists.

This represents another important driver of demand and one with significant runway as we continue to expand the number of reps branches and <unk>, bringing in <unk> relief to more patients.

Lastly from a supply side, we continue to make progress in expanding our <unk> production capacity we.

We continued to work closely with our existing supplier and we're also able to secure some initial inventory from our new second supplier to support demand, although their initial progress remain dependent on spot buys.

While we expect some lumpiness through the rest of the year, we remain on track to be fully up and running with our second supplier by year end, which should position us to keep pace with the strong demand we expect going forward.

Stepping back when we acquired our airway clearance business a year ago. It represented the largest acquisition within tactile to date.

It had generated just under $17 million in revenue over the prior 12 month period and remained in the initial phases of validating its strategy to leverage the <unk> channel.

Given the progress we've achieved over the last year and as indicated by our updated guidance. The fact that we now expect to generate upwards of $36 million in airway clearance revenue this year.

We're convinced we're pursuing the right strategy with the right asset to support our focus on delivering sustainable growth and improving profitability.

Shifting to a review of our third quarter operational highlights.

Most notably in July we began the full market release of our two latest solutions for our lymphedema patients our comfort ease garments in our Kylie mobile application.

It is important to note that these represent the first new product introductions from tactile medical in over three years and reflect our multiyear effort to enhance our focus on R&D and new product development.

Let me update you on our recent progress with respect to each of these solutions.

As a reminder, our comfort. These garments are designed to be used with our flexi touch system on the lower extremities.

Our primary goal in designing this latest generation of flexi touch garments was to enhance the overall user experience for our patients by improving ease of use comfort and fit while insisting on preserving and delivering our clinically proven results.

With this goal in mind, our company's garments were developed to be more intuitive to put on and take off much like any other article of clothing and were created out of lighter cooler and more malleable materials to improve patient comfort.

Many patients with lymphedema in the lower extremities have limited mobility. So our comfort ease garments are designed to help them overcome these issues within their daily management of their lymphedema at home.

These improvements were also intended to make it easier to train patients promote strong patient adherence and ultimately facilitate optimal treatment outcomes.

The following following the full market release, we've received excellent feedback from our sales reps trainers clinicians and most importantly, our patients.

Our reps are excited to have a new product to facilitate conversations with existing and potential new clinician prescribers and as I mentioned earlier, we're pleased with the level of customer engagement they are seeing.

And our patient trainers have broadly shared that patients are finding our company's garments more intuitive and easier to use importantly, they're seeing that patients with limited mobility are able to put on and take off companies garments more easily.

We've also been pleased with the feedback received following the launch of our Kylie mobile application for both the iOS and Android platforms.

This app is intended to expand our support for lymphedema patients that are earlier in their journey towards obtaining a definitive diagnosis and effective treatment.

Our analysis has shown that it takes an average of three years. The average lymphedema patients to obtain a definitive diagnosis. Following the onset of symptoms and engagement with three or more health care providers along their journey.

This underscores the lack of awareness and understanding that exists among health care practitioners when it comes to lymphedema, which is unsurprising given the little attention the lymphatic system receives and medical training, even among most specialty programs.

With Kylie patients can easily learned more about lymphedema and their treatment options and then use the app to document their disease progression and.

In doing so we believe there'll be able to arrive at the Doctor's office better informed ultimately shortening the eligibility time it takes to obtain one of our entre or flexi touch plus systems.

Once a patient receives an entre or flexi touch. They can also use the product tutorial videos and FAA skus available on our Kylie app to complete their training easily and effectively or use it as a source of support.

Following its launch we focused on introducing the Kylie app to our clinician prescribers and making it available to patients and their doctors offices through our in clinic patient demos and via social media platforms.

While still early we've seen some patients initiating therapy immediately upon receipt of their device finding the video vignettes easy to understand and responding with satisfaction scores equally high to those with an in home training experience.

In time, Kylie is expected to grow in the utility, including as a path to exchange documents and process orders more efficiently, but also in ways for us to continue to our ongoing patient engagement.

Keys to delivering high patient satisfaction scores, while reducing our overall cost to serve.

In addition to promoting the use of our Kylie mobile App, we are continuing to raise awareness for lymphedema and its effective treatment within the medical community through virtual and in person clinician education events.

In the third quarter, we hosted a total of 45 educational programs that were attended by approximately 1500 U S clinician participants.

Year to date, we've hosted over 160 educational programs and trained nearly 4900 participants both in person and virtually.

We plan to continue hosting educational events focused on cancer related lymphedema, including survivorship and proper management of cancer related lymphedema.

All in all we were excited to complement our stronger than expected financial performance with continued operational progress during the third quarter.

Brent will now review, our third quarter financial results in more detail along with our updated financial guidance Brent.

Thanks, Dan.

Total revenue in the third quarter increased 24% year over year to $65 3 million compared to $52 $5 million in the third quarter of 2021.

Looking at our total revenue by product line.

<unk> of our airway clearance products, which includes the <unk> product line. We acquired on September <unk> of 2021 increased $10 $2 million year over year to $11 million and sales and rentals of our lymphedema products, which includes our flexi touch plus an entre systems.

<unk>, $2 6 million or 5% year over year to $54 2 million.

Total revenue by channel was comprised of $36 2 million from sales to commercial payers.

$11 $3 million from Medicare <unk>.

$7 million from durable medical equipment distributors and $6 $8 million from the VA.

As a reminder, durable metal coal equipment distributors is comprised of revenue from our acquisition of the airway clearance therapy business.

These figures compared to our total revenue by channel in the third quarter of 2021, and which commercial Medicare DMA distributors and the VA represented approximately $36 million $8 $9 million $861000.

$6 $7 million respectively.

Continuing down the P&L.

Unless noted all references to third quarter results are on a year over year basis.

Gross margin was 71, 7% of revenue compared to 74% last year.

non-GAAP gross margin increased nearly 40 basis points year over year to 72, 2% compared to 71, 8% in the prior year.

The increase in non-GAAP gross margin was attributable both to both product and payer mix.

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

non-GAAP gross margin in the third quarter of 2021 also excludes inventory write offs and noncash purchase price adjustments related to the acquisition of the Aflow vest in this period.

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

Third quarter operating expenses were $48 4 million, an increase of $10 1 million or 26%.

The increase in operating expenses year over year was primarily driven by a $4 $4 million increase in sales and marketing expenses largely due to the addition of our <unk> sales team and new hires added to our lymphedema sales team along with increased travel and related expenses as we return to norm.

<unk> business activities.

The year over year increase in operating expenses was also driven by a $3 $8 million increase in non cash intangible asset amortization and a non cash earn out expense related to the acquisition of the airway clearance therapy business.

An increase of $1 $8 million in reimbursement general and administrative expenses and a $172000 increase in research and development expenses.

Excluding the aforementioned noncash expenses, along with litigation defense and executive transition costs in both periods, our non-GAAP operating expenses increased 18% year over year in the third quarter.

Operating loss was $1 $6 million compared to $1 $4 million last year.

non-GAAP operating income was $3 9 million or 6% of sales compared to $1.1 million or one 8% of sales last year.

Interest expense was $700000 compared to $100000 last year, driven by incremental borrowings related to our acquisition of the airway clearance business in the third quarter of 2021.

Income tax benefit was <unk> $77000 compared to an expense of $1 $9 million last year the.

The difference relates to a full valuation allowance being recorded against all net deferred tax assets in the current period, whereas no valuation allowance was recorded for 2021.

Net loss was $2 $3 million or <unk> 11 per diluted share compared to a net loss of $3 4 million or <unk> 17 per diluted share last year.

non-GAAP net income was $1 $9 million.

Compared to a non-GAAP net loss of $1 6 million last year.

Weighted average shares used to compute GAAP diluted net loss per share or $20 1 million and $19 8 million in the third quarters of 2022 and 2021, respectively.

Adjusted EBITDA increased 74% year over year to $7 2 million or 11% of sales compared to $4 1 million or seven 8% of sales last year.

As of September 32022, we had $23 4 million in cash and $49 8 million of outstanding borrowings. This compares to $23 4 million in cash and $55 million of outstanding borrowings as of June 32022, and two.

$28 2 million of cash and $55 million of outstanding borrowings at December 31, 2021.

Turning to a review of our 2022 outlook, which we updated in our earnings press release today, we are raising our full year guidance range to account for our stronger than expected performance during the third quarter of 2022.

Now expect total revenue in the range of $242 million to $245 million, which represents growth of approximately 16% to 18% year over year. This revised outlook compares to our prior revenue guidance range of $238 million to $242 million representing <unk>.

<unk> of approximately 14% to 16% year over year.

Our updated 2022 total revenue guidance range assumes sales of our lymphedema products in a range of $207 million to $209 million representing.

Representing growth of two 5% at the midpoint of the range consistent with the growth expectations in our prior guidance range, which also points to growth in the second half of 2022 in the mid single digits.

And sales of our airway clearance products in the range of approximately 35 million to $36 million. This compares to our prior guidance range of $30 million to $32 million.

For modeling purposes for the full year 2022, we expect gross margins in the 71% to 72% range.

Our GAAP operating expenses to increase 26% to 28% year over year compared to 23% to 24% previously the.

The higher expected growth in our GAAP operating expense for this year is driven primarily by noncash intangible amortization and earn out expense of $3 $3 million in Q3, and approximately $500000 of executive transition and legal expenses, neither of which were.

<unk> in our prior guidance ranges.

No our updated full year guidance now.

Now assumes legal expenses of approximately $3 5 million compared to $3 million previously exec.

Executive transition cost of approximately $300000 recognized in the third quarter and not contemplated in our prior guidance interest expense of approximately $2 8 million compared to $2 million previously and fully diluted weighted average share count of approximately 20 million shares.

In 2022, we now expect to generate adjusted EBITDA of approximately 15 million to $16 million compared to our prior guidance of $14 million to $16 million.

In addition, our adjusted EBITDA guidance range excludes certain noncash items, including intangible amortization and estimated changes in contingent consideration of approximately $14 8 million.

Compared to $11 5 million previously.

Stock compensation expense of $11 million compared to $12 million previously and depreciation expense of approximately $2 4 million.

We continue to expect to deliver improving cash flow from operations and profitability in the fourth quarter, specifically, we expect cash flow from operations in the fourth quarter to exceed the expected cash outflows, including operating capital needs.

Debt service and the earn out payment related to the acquisition of <unk> in Q4.

Note that we recently updated the terms of this earn out payment to $5 million due in Q4 with the remaining $5 million balance deferred until may of 2023.

In summary, we remain confident in our balance sheet and financial condition.

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

Thanks Brent.

As Brent mentioned, we're raising our total revenue guidance for the second time this year to account for our outperformance in the third quarter. We're proud of the financial performance that we've achieved so far this year along with the enhancements made to our product portfolio and our sales force and company leadership.

Looking ahead to the fourth quarter in our airway clearance business, we expect the solid demand that we've seen to date, we'll continue paced somewhat by our current supply constraints as.

As I mentioned earlier, our team is working diligently to secure additional production capacity to support future demand and I want to underscore how well our operations team has done in supporting growth beyond our expectations, especially in one of the most challenging supply chain environments, we've seen.

Their efforts should ensure we're well positioned in 2023 to continue penetrating the greater than $5 billion market opportunity that lies ahead of us in airway clearance as more of the estimated 4000, plus respiratory DMA reps begin identifying qualified patients that stand to benefit from our airway clearance therapy at home.

And our lymphedema business, we remain cautiously optimistic about our expectations regarding the pace of recovery given the dynamics that I outlined in our second quarter earnings call in August specifically, our team continues their work to reestablish ourselves in those accounts that went unrepresented a couple of quarters back when sales vacancies were more prevalent.

Overcome patient volumes at clinics that remain below pre COVID-19 levels and navigate the headwinds created by payer dynamics, where we've seen some commercial payers favoring the use of a basic compression device as a precondition to becoming eligible for an advanced device with that said in the fourth quarter, we continued to.

We expect strong sequential improvement and improving year over year performance in our lymphedema business.

In terms of our operational priorities, we remain focused on driving continued execution with respect to the following four objectives.

Proving the productivity of our sales reps that we've hired over the last 12 months as we enter the fourth quarter, which as a reminder, typically benefits from seasonal strength with more patients covered under commercial insurance plans meeting their annual deductibles.

Number two continuing to facilitate and leverage the successful introduction of our new comfort east garments and Kylie mobile App.

Three helping current and future respiratory Dnb channel partners to integrate and feature <unk> to their prescribing clinicians and patients while expanding our capacity to meet that demand.

And finally, improving profitability by continuing to advance operational efficiencies with a focus on reducing overall cost to serve.

We believe our continued execution on these objectives will help enable us to achieve fourth quarter total revenue in the mid teens generate GAAP net income profitability and finished the year with over $20 million in cash and equivalents.

We remain committed to bringing 2022 to a strong conclusion and returning to sustainable growth and improving profitability in the years to come as we continue to reveal and treat underserved patients in the lymphedema and bronchiectasis communities.

I'd like to thank and congratulate our employees for their dedicated efforts. This past quarter. We appreciate your commitment to the success of tactile medical into the well being of the patients that we serve.

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

Yes.

Thank you, Sir if you'd like to ask a question. Please signal by pressing star one on your telephone keypad, if youre using a speakerphone. 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 and if you would like to ask additional questions. We invite you to add yourself to the queue again by pressing star and then one.

One moment, while we poll for questions.

Yeah.

And our first question comes from the line of Ryan Zimmerman with BTG. Please proceed with your question.

Good evening, Thanks for taking the question Dan Brandon Congrats on the progress.

Sounds like you guys are turning the corner on a lot of macro factors.

Here. So maybe just the first question for me.

No, we're not going to get 23 guidance, but I'd love to understand kind of your underlying assumptions both within the lymphedema segment and also the aflow vast or the respiratory.

<unk>.

How to think about.

The growth of that <unk> product into next year and kind of what you're expecting.

In terms of just maybe the normalization of patient volumes in the lymphedema clinics, and then I have a follow up on the balance sheet.

Hey, Ryan it's Brent good afternoon.

I'll talk to you a little bit about that.

I think we've always talked about the second half of the year being.

Where we're going to start to demonstrate a return to growth and I think our results today at 24% revenue growth was a strong indicator of that.

We're going to deliver on that on that promise.

What we're starting to see is we finished the quarter with.

Lymphedema sales team that is.

Is that where we expect them to be at the end of the year. So they will contribute strongly in our fourth quarter. We continued to see very strong demand from <unk> and we expect that certainly to continue as we as we move into 2023 so.

A lot of the headwinds that we had talked about earlier in terms of staffing and access.

Seem to be subsiding, a bit and providing us the.

The benefits that we recognized in Q3 and expect to realize in Q4 as well.

Okay. That's very helpful. Brian and then I want to turn to the balance sheet for a second. This question comes up from investors from time to time, but the cash balance is kind of stagnated.

Not really burning cash not really gaining cash help.

Help us think through just your ability to sustainably generate positive cash flow next year kind of the durability of profitability on the account and the company in and kind of what we can expect to see on the balance sheet over the coming quarters.

Yes, it's a good question Brian .

You're right, we do get that question.

Often.

And I think the indicators are.

Again, turning favorably as we as we pushed through Q3 and then into Q4.

I think with our announcement today that we were going to increase revenue guidance and then also correspondingly our adjusted EBITDA guidance gives us some comfort that we're going to start to see improved profitability.

As you said I know youre, not asking for 'twenty three guidance, but I'll.

I'll, let you know that we are actively working on our 2023 annual operating plan.

And it takes a village so all of the sudden your senior leadership here are actively looking at profitable growth opportunities that will benefit 2023, and our multiyear outlook. So as we push into 2023, we certainly believe that we'll be able to expand our adjusted EBITDA margin and <unk>.

We know that's a bit of a proxy for cash as we go forward.

And let me just touch on the balance sheet, specifically to your question.

Finished Q3 with $23 $4 million of cash roughly the same number that we ended 2000 Q2 with but keep in mind.

During the course of the nine month period year to date, we paid down $6 million of principal on our debt on top of having to fight some lawsuits that certainly our expenses when it comes to legal fees, but.

Aside from those two items, we did generate cash in the nine month period for for for year to date, but.

That said, we do also expect Q4 to be.

<unk> that will be a generator to help offset.

The earn out payment that will get made here in the fourth quarter as well. So I guess in summary, we remain really confident about our balance sheet and the financial condition of the company.

Thanks, Brian .

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

Hi, Dan Hi, Brent This is Jim Ryan on for Adam. Thank you guys for taking the question.

I guess I'll start off with <unk>.

So just doing quick math here the guide does imply low teens sequential growth in the lymphedema business in Q4, but a pretty big step down on a sequential basis for all of that maybe.

Maybe walk us through some of the key assumptions there.

Specifically.

Why we should expect to see that dynamic for alphabet.

Yes, youre talking about the $11 million and then the step down a little bit in Q4 is the expectation.

Yes, it's a good question.

The reason is really led to supply chain issues. So we were fortunate to have been able to get out ahead of ourselves in Q3 on some of the demand that was there by a spot buy we were able to acquire some additional batteries and equip the second source supplier such that they were able to deliver their first tranche of.

Product to us, we're still sort of in a hand to mouth stance on that one so the.

The backdrop for our guidance on Q4 as it relates to <unk> largely driven by the supply capacity. We think we can generate I think to the credit of our ops team.

They've certainly outperformed given where we expected at the beginning of the year as we continued to see the momentum build I think they've responded well in a very difficult environment.

And we're also at the point now where I think we're getting good enough line of sight into 2023, where we think we're going to be entering with a much better position on sustainable supply chain, which is going to be important as we continue to try and build.

Demand and support for our <unk> partners.

Got it okay that makes sense and maybe just a quick follow up on that same topic.

Can we get a sense of how many D&B accounts, you're selling Aqua Aston.

The kind of growth and new versus existing <unk> accounts.

And then maybe just.

In 2023 is kind of top of mind, where you expect that mix to go in 2023.

Yes, let me just take a step back and say, we're just really pleased with the business that we found.

And the outflow vast I think that the <unk> channel was one that we.

We had to explain a little bit at the beginning but I continue to be convinced that this is precisely the right channel because they have access to all of these complex respiratory patients and all of the other solutions that they need short of the airway clearance product in a portable one at that so we think there's ample runway of growth here.

<unk>, we have not added a lot of <unk> per se, but what we've been doing is adding more branches and more participating reps within those <unk> channels that that we've had.

As you can imagine it's an 80 20 theres a handful of bigger <unk> and then there is a lot of smaller ones that.

We work with as well, but it's been less about adding <unk> at this point as I said more about ongoing working in educating the sales channel supporting them and we're seeing the growth as a result of more branches participating and more reps participating in.

I think the last one to add is.

This continues to be a very solid reimbursement area.

CMS reimbursement is over $13000 for the category.

So it's a good business for our <unk> partners. So that's kind of our recipe success for success when.

It's a good business for both sides.

Got it that's it for me Thank you guys.

Okay.

And our next question comes from the line of Margaret CAGR with William Blair. Please proceed with your question.

Hey, guys. Good afternoon. Thanks for taking the question I was hoping to first start with Athena and focus on guidance a little bit. So okay. Brian question, a second shot here.

Given you're suggesting kind of mid single digit growth I guess in the second half of this year for lymphedema.

That implied for 'twenty three if you want to answer that and maybe how do you get back to that double digit growth rate and when could that happen.

Yes.

Good question Margaret.

First of all on the lymphedema side we.

Have seen some recovery in the patient volume so we've talked a little bit about that we're not at pre COVID-19 levels, but we're seeing some good improvement there.

I think the opportunity for us to demonstrate improved productivity will be an important part of the 23 recipe.

I think that probably the most foretelling pieces.

Fact that we were negative in growth in the first half it's been a tale of two cities. The second half. We just grew 5% in the third quarter, our guidance would imply something in the upper single digits in the fourth quarter and all I can say is we certainly think that that puts us in a much better on ramp to 2023.

I think we're in a better position right now then.

And then we've been all year long as it relates to both sides of the business.

But I think that the upper single digit growth that we will be exiting in Q4 certainly is.

A good way for us to enter 2023.

Okay perfect.

And then I wanted to switch over to outflow that everyone knows.

The lymphedema company, but on the same token outflow vessel.

Surprising quarter after quarter after quarter. So I guess the question I have is do you have any sense of what the underlying demand is.

As supply improves, especially as you look into <unk>.

'twenty three I can't help to bring that up again, but how much more demand I guess could you see could that 11 actually the 15 based on what you guys are saying much about that I guess.

Yes, I think that we probably.

Robley.

<unk> certainly had a little bit of a tug of war between supply and demand over the course of the year.

And I think that as we start to look forward.

There is certainly plenty of runway left if that's kind of the question I think if we look at the size of the market. It's significant and what we also know is that the majority of reps. We still are not at the inflection point with the reps at the larger <unk> the ones that have gravitated to it have done well.

I think theres, a big opportunity for us to continue to get better coverage keep in mind, we're still in the early days I mean, this is kind of the first full year, it's been under our ownership it took us a while to get acquainted with all of the Dnb partners that we've got.

This is the first year, where a couple of them and this is one of the reasons that I think the growth has been so impressive is <unk>.

They've started to make it a more focused product.

And when you have aligned incentives all the way down to the sales channel at the Rep level typically it gets the kind of attention. It deserves we've talked in the past I think too about the fact that.

Placement of an outflow vest is really almost on par with placement of a noninvasive ventilator and there is very little left in the respiratory bag of solutions. That's at the same kind of economic threshold. So we know it's a really big market.

Not ready to do 23, yet, but I can certainly suggest that we're still very enthusiastic for what 23 has got in store for us.

And there is still an opportunity for us to add some additional <unk> partners as well not everybody's on our dance card yet.

It seemed a little premature for us to pursue some of those others. If we didn't think that we had the capacity to support it.

So we want to make sure that we're in a good position when we bring a partner on that we can support them but.

I think if we can finish up this year in the.

$35 $36 million range with Aflow vest.

We think that we're going to have a lot better.

Foundation, and participating Dms and reps and should be in good shape for next year.

Great. Thank you very much.

And as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.

Yeah.

Our next question comes from the line of Suraj Kalia with Oppenheimer. Please proceed with your question.

Good afternoon, Dan and Brent can you hear me alright.

Yes, good afternoon Suraj.

Perfect Hope.

Hope everyone is safe and healthy.

So Dan.

One of your comments.

My attention, which was on the commercial requirement change.

<unk> similar to the Medicare requirement of going with active touch first before going to.

Before.

Flex the touch I was wondering if you could expand on that what has been the specific change what is this.

Danny.

Of this change that you're seeing and how do you plan for it moving forward.

Yes. Good question and this is one that we actually raised.

As you probably recall, even last quarter suraj.

One of the things that we had mentioned last quarter. We had seen was some Medicare advantage plans.

Operated by commercial companies starting to apply the Medicare criteria as opposed to their commercial criteria, which may have been a bit more lenient and as a consequence.

With a couple of the Medicare advantage plans, it's shifted mix, meaning we know that Medicare typically requires six 501, which would be our entre.

Before they become eligible for flexi touch if they can be treated successfully with a 651 or an entree.

Then that's the end of it if they don't or can't be treated effectively with an entree then they become eligible for a flexi touch so that was the mix issue that we had described we'd seen a little bit of a phenomenon of in Q2, I think we saw a bit of that in Q3 as well.

On the so I think the good news is with our performance and some of the Medicare advantage plans.

More entrees going out than we had in the past and still delivered a solid mid single digit beat.

And it meant that we actually captured more patients on that front on the Medicare side.

We saw really good growth in the vascular, particularly with flexi touch.

And I think that points to a couple of things one comfort ease has been well received because comfort ease is really targeted to those patients with bilateral disease and those that have trunk of swelling and need therapeutic.

Support.

In the trunk area as well as in the in their legs, so that really kind of points to.

The comfort.

Traction that we saw and I think the other point there is that.

As we continue to see a larger universe of patients on Medicare that have gotten an entre overtime.

Seeing that there is a segment of them that needs and we expect will benefit from flexi touch and that segment of the business actually did quite well in Q3 as well.

Fair enough.

And then my final question.

You talked about comfort ease.

The new garments.

Patient comfort so on and so forth and then this keeps coming up obviously, new entrants to the marketplace.

Compliance is an issue compliance with flex the touch is an issue that is usually brought by by some of the new entrants into the marketplace I'm wondering if you could phrase.

The use of comfort ease specifically from a perspective of he was the compliance before and how does the.

Compliance afterwards, and help us make some correlations to what.

Core lymphedema growth could eventually tracked gentlemen, thank you for taking my questions.

Yes, Thanks, Suraj I think the compliance component certainly we expect comfort these will add to the benefits.

For those patients because theyre going to find it easier to apply easier to use and subsequently more likely to complete their therapy I think if youre commenting on perhaps the.

There was a clear out there talked a little bit about the compliance.

At a recent conference.

<unk> experienced I think was documented on 20 odd patients so im.

I'm not sure that I would quite aligned with the stance that compliance has been an issue, but we do know that the easier the patient experiences.

Nature has the more likely we are going to complete their therapy.

So thats one of the reasons one of the key reasons that we introduced companies and it's also the backdrop for what our new product pipeline.

Has in store, a number of attributes, namely, including making sure that we've got the right therapeutics available.

That we can continue to make this.

Our ubiquitous kind of easy patient.

Therapy experience.

Thank you. We are currently seeing no remaining questions. At this time that does conclude our conference for today. Thank you all for your participation and have a great day.

Thank you operator, and thanks for everyone to everyone for participating on our call. We look forward to sharing the results of our full fiscal year in February .

Okay.

[music].

Welcome, ladies and gentlemen to the third 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.

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 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 measures that are not calculated in accordance with generally accepted accounting principles or GAAP.

We generally 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.

And I would now like to turn the call over to Mr. Dan Rivers, Tactile Medical's, President and Chief Executive Officer. Thank you Sir Please go ahead.

Brent will then cover our quarterly financial results in greater detail and review, our 2022 financial guidance, which we updated today in our earnings press release.

And finally I'll provide some thoughts on our updated outlook and continued areas of focus for 2022 before we begin the Q&A session.

So let's get started with a review of our financial performance. We reported total revenue of $65 $3 million for the third quarter, representing growth of 24% year over year.

These results came in well above our expectation for third quarter growth of 13% to 17% year over year, which we discussed on our Q2 earnings call.

We're also pleased to see revenue from our lymphedema products increased 5% year over year, which modestly exceeded the 1% to 3% growth range, we had anticipated.

Turning to a discussion of the primary drivers that contributed to our lymphedema and airway clearance sales performance are lymphedema business benefited from a combination of several factors at a clinical level, we saw a modest improvement in patient volumes compared to the second quarter, although pockets of clinics the staffing related challenges do remain.

At a company level, we saw a high level of engagement from our lymphedema sales reps following our training initiatives in the first half of the year and the launch of our two new products in July .

In particular, the launch of our new comfort East garment has been a nice innovation for our reps to feature as they work as they work to reengage targeted clinics and referral sources.

Additionally, we're pleased to see stabilization emerging in our field sales team exiting the third quarter fully staffed a consequence of improving retention and engagement and.

As a reminder, we acquired the airway clearance business and its product the Aflow vest system on September <unk> of last year and only booked about three weeks of sales in the third quarter of 2021.

On a standalone basis, however, assuming it had remained a separate entity in both periods, our airway clearance product line achieved growth of 139% year over year in the third quarter of 2022.

This performance reflects the ongoing adoption among the respiratory DMA reps, we partnered with.

As I've described previously these respiratory dms portfolios of complementary products, coupled with the existing clinicians that they serve are leading them to both new and existing patients that are well qualified to benefit from airway clearance therapy via the Aflow vest.

The case for at home treatment with <unk> is a compelling one as these eligible patients are likely to require hospitalization if left untreated due to recurring pulmonary infections and pneumonia.

And from an economic standpoint, Aflow vest receives favorable reimbursement, making it a compelling product for our <unk> partners.

Importantly, we also believe our growth is benefiting from identifying patients that would have otherwise been left unidentified or untreated if not for the efforts of these reps.

We couldnt be more pleased to be bringing <unk> therapy to countless underserved patients, which is in keeping with tactile his mission to both reveal and treat those suffering from underserved chronic diseases in their homes.