Good afternoon, ladies and gentlemen, and welcome to the Second Quarter 2017 Earnings Conference Call for Tactile Medical. At this time, all participants have been placed in a listen-only mode. At the end of Company’s prepared remarks we will conduct a question-and-answer session. Please note that this conference call is being recorded and that the recording will be available on the Company's website for replay shortly. Before we begin, I would like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements that are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including those identified in the Risk Factors Section of our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission as well as our most recent 10-Q filing. 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 generally accepted accounting principles or GAAP. We generally refer to these non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press conference on the Investor Relations portion of our website. I would now like to turn the call over to Mr. Jerry Mattys, Tactile Medical’s Chief Executive Officer. Please go ahead, sir.

Thank you, Emily. Good evening, everyone, and welcome to our earnings call for the second quarter of 2017. I'm joined on the call this evening by our Chief Financial Officer Lynn Blake. We begin with a brief agenda for today's call. I'll start off with the high-level overview of our financial performance during the first six months as well as the second quarter of 2017, along with a discussion of multiple tailwinds that contributed to our strong revenue performance in the first half of the year. Then I will outline some of the exciting progress that we've made during the second quarter in the development and commercialization of our new Flexitouch Systems. I'll then turn the call over to Lynn, who will provide you with a detailed review of our quarterly financial results as well as financial guidance for 2017, which we updated in our earnings press release this evening. Following Lynn's review, I'll offer some closing remarks before opening the call for your questions. With that, let's begin with a review of our most recent financial performance. For the first six months of 2017, we reported revenue of $46.1 million, representing growth of 38% over the first six months of 2016. Strong sales of our Flexitouch System drove our total revenue growth during the period, offset partially by lower sales of our Entre and ACTitouch products. Sales of Flexitouch systems increased 46% year-over-year to $41.7 million, while sales of our Entre and ACTitouch system declined by 9% to $4.4 million. The growth in sales of our Flexitouch Systems during the first six months of the year was driven by a continuation of the longer-term growth tailwinds in our business. As we have shared with you in prior earnings calls these tailwinds have and will continue to represent the primary…

Thanks Jerry. As Jerry said, our revenue growth continued strong in the second quarter. Revenue for second quarter increased $6.5 million or 33% year-over-year to $26.3 million. This revenue performance was driven by sales of our Flexitouch products, which increased $7.3 million or 43% year-over-year to $24.2 million. The increase in Flexitouch sales was primarily due to the expansion of our sales force as well as to increase physician and patient awareness of the lymphedema condition and of treatment options. Flexitouch sales accounted for 92% of our revenue in the second quarter of 2017, compared to 86% of revenue in the second quarter of 2016. The Flexitouch revenue performance in the quarter was slightly offset by a decrease of $781,000 in sales of our Entre and ACTitouch Systems, which decreased by 28% year-over-year to $2.1 million. Continuing down the P&L our gross profit increased by $4.8 million or 33% year-over-year to $19.2 million compared to $14.4 million last year. Our second quarter gross margin rate was approximately flat and comparison with the prior year at 73.2% of revenues compared to 73.0% of revenue in the second quarter of 2016. Second quarter gross margin performance was driven by favorable mix both product and payer as compared to the second quarter of 2016. Operating expenses increased by $5.9 million or 47% year-over-year to $18.5 million. The increase in operating expenses was primarily driven by increased sales and marketing expense as well as increased reimbursement general and administrative expenses. Our sales and marketing expense increased by $3 million or 40% year-over-year due to continued investment in the expansion of our field sales team as well as increased marketing expense. Reimbursement, general and administrative expenses increased $2.4 million or 61% year-over-year primarily due to expenses associated with increased personnel as well as approximately $750,000…

Thank you, Lynn. Stepping back, our revenue performance in the second quarter and first six months of 2017 demonstrates that we are pursuing the correct strategy to deliver strong and sustainable revenue growth and our updated full-year revenue guidance reflects our continued confidence in our outlook for 2017. As we enter the second half of 2017, we remain focused on driving increased productivity in our sales force by continuing to target high diagnosing accounts and by capitalizing on the broad opportunity created by our expanded in-network payer coverage. We will also continue to build the foundation for future growth by adding new resources to our sales and reimbursement teams and by working across our organization to ensure the successful commercialization of our new products. From a market standpoint, our confidence in the growing awareness of lymphedema continues to be supported by a recent analysis of claims data that we commissioned, which showed that more than 1 million patients in the U.S. were diagnosed with lymphedema during the 12 months ending June 30. This represents a greater than 23% increase in the number of lymphedema patients diagnosed over the 12 months ending in December of 2015. This growing awareness gives us confidence about the long-term opportunities for our Flexitouch systems. In conclusion, with expanding and productive selling and reimbursement organizations, and newly commercialized and cleared Flexitouch systems, Tactile Medical remains committed to raising awareness of the lymphedema condition within the medical community, maintaining our U.S. leadership position, and delivering advanced and effective therapies to benefit our payers, providers and patients. Thank you for your participation in today's call. And for your continued interest in Tactile Medical. That concludes our prepared remarks for this evening. Operator, we'll now open the call for questions.

Thank you. [Operator Instructions] And our first question will come from Matthew O'Brien from Piper Jaffray. Your line is open.

Good afternoon and congrats on a great quarter. Just for starters, I think Jerry or Lynn, you talked about the VA contribution, you talked a little bit about these new contracted lives. So if you were to kind of strip out the contribution from those two news sources, how's the core business growing and then how sustainable are those contributions from the new contracted lives and VA?

Yes. Matt, thanks very much for the question and thanks for the complements on the quarter. The primary drivers for growth in Q2 were the same drivers that we've been experiencing since we've gone public. So increasing our field headcount, maximizing productivity of that sales organization, targeting those high diagnosing clinicians, and seeing more contracted lives get benefits with us as an in-network provider as opposed to being out of network. The VA was particularly strong in the first two quarters of this year, I think primarily from some of the investments we took on last year by brining on some additional skilled resources that know how to navigate that system very well and we expect the VA to be a continuing contributor as we go into the second half of the year. On the commercial payer side improved approval rate with that – with those payers is a result of us being in-network with them, and that makes us more efficient when talking to clinicians and their patients that we can get in-network instead of out of network benefits. So we actually look at both of those to be continuing to drive our performance throughout the rest of this year and well into 2018.

That's very helpful. And then as the follow-up, it’s kind of two in one here. But just I know you rolled out the head and neck product, did we see any contribution here in Q2 from that product, I guess how is it going and then historically you've done about 40% of your revenue in the first half of the year were 60% in the back half, your guidance assumes 43% in the first half and 57% in the back. So is there anything specifically that you're seeing within the business that's leading you to that type of range, is there anything you're signaling here specifically that gives you a little bit of caution?

No, I think we have to step back and remember that we started the year and have been trying to guide folks to us being thinking of us as a 20% plus grower on the topline and our initial guidance for the year was 20% to 22% growth. We've now up to that guidance overall 24% to 27% growth year-over-year with Flexitouch being almost 30% growth year-over-year. So I think it's a strong – the guidance reflects a very strong Flexitouch growth and we've basically passed along $2 million beat in the second quarter and really haven't changed our growth expectations for the second half of the year. So we're feeling very confident about being able to deliver on this new guidance and I think we're in a great place to be able to do that.

And on the head and neck side?

On the head and neck side, we’re really early in that launch. You may remember that mid-May was when we actually turned it over to the general field organizations, so halfway through the quarter. We've certainly continued to receive very positive feedback about the impact that the new Flexitouch system has for these patients. But from a financial impact perspective, we don't expect it to be a significant contributor in 2017 to our results.

Got it, very helpful. Thank you so much.

Thanks Matt.

And our second question comes from Margaret Kaczor from William Blair. Your line is open.

Good afternoon, guys. Thanks for taking the question. So first off I guess you had strong results to start there, that’s clear. But can you give us any additional color into your existing Flexitouch accounts. Is that new high prescribing physician accounts are going deeper into the existing high prescribing physician accounts or you maybe saying better stickiness in the new position accounts than you have in the past.

Hi, Margaret, appreciate the question. I would say that overall we are seeing improved performance in all of those segments. So not only from our existing customer base, but high distal diagnosing clinicians are coming on board and we're seeing very positive results from them as well. You probably appreciate the fact that we repeated that data pool and we’re able to access more claims data showing a 23% increase in the number of patients diagnosed with lymphedema in the one-year period that just ended compared to the one that ended at the end of 2015. So even accelerating, the level of awareness that we're seeing in the marketplace, it’s causing additional demand for the Flexitouch System. So the increased awareness of lymphedema, the increased awareness of our sales organization talking to these clinicians and helping them understand the clinical and economic benefits around Flexitouch are really contributing to the overall Flexitouch growth.

Now I definitely appreciate the additional color on the over 1 million patients and definitely and process there. In terms of a follow-up question you guys also talked about having a pair approvals higher than normal I know some of that you answered Matt that it was due to being network, but I assume that should be a pretty substantial from here and then was that also something that you had assumed in your guidance is that in your guidance for the back of the year and just to add one more because I like asking five questions and one question, but that as you go out longer- term and you improved those pair approval rates that should be a pretty good thing I would think for your profitability profile.

So yes, there is a number of thing in there that I'll try to answer on the better approval rates. We do certainly see some seasonality in that approval rate and what I mean by that is our VA business drives up the approval rate because when we get a prescription from the VA 100% of the time it gets paid for. So the approval rate is very high. So product and payer mix will have an impact on the overall approval rate throughout the year we tend to see VA being more concentrated in the early part of the year rather than the laster part of the year because there the fact they have no co-payment or deductible obligations for the veterans to meet. So yes, we it does bode well for our future and yes we did build it into the guidance that we’ve just updated in our press release earlier this afternoon.

Fantastic. And then if I can squeeze one more in. In terms of your success with VA, can you give us any numbers added from that $1 million target that you gave us or otherwise. So what's your penetration into the VA and how should we look at that penetration whether on year-over-year comps or so on over the next few quarters? Thanks.

Yes. So VA penetration has two elements to it, penetration within each of VA and orders from all of the Vas. Well we can't really answer the penetration within each VA because we really are working to try to find all the sources of where these patients get care within each VA hospital. We can’t comment that – we believe we are in about 140 of the 180 VA hospitals now. So we've done a good job of reaching out to those VAs and at least getting our foot in the door, we think there's a lot more potential to go deeper in each of those 140 yet alone find the final 40 as customers for Tactile Medical.

Thanks a lot.

[Operator Instructions] Your next question comes from Jason Mills from Canaccord Genuity. Your line is open.

Hi. This is actually Cecilia Furlong on for Jason. And I was just wondering, can you provide a bit more color just around the impact today from the large payer; you called out shifting to rental? And should we think of Q2 as a proxy for future quarters and do you expect additional providers could ultimately pursue with similar strategy?

Hello, Cecilia. Good to hear your question. We did in fact report at our last conference call that one of the major payers had just signed a contract with us late in March as well as moved to more of a rental model than a purchase model. And that actually has happened. It has opened up that payer, and actually, it has opened up their patients, patients that are insured by that payer. Such that we've seen a pretty significant increase in the number of patients that we were able to serve and are able to serve from that particular payer. As you may remember because we're providing this as a rental, we're not recognizing the full sale amount in the first time we bill that patient, rather we divided into the rental period. So that can have an impact on our revenue recognition over time. But so far that payers business has actually increased not decreased for us in the second quarter and we’re optimistic we can continue to grow that business going forward. To your question on, do we expect other payers to go to this model? The answer is, no we don't. We've certainly had other payers who have done rentals in our past or have Lynn comment a little bit on the percent of our revenue that comes from rental of our product. But we haven't seen a shift toward rental of our Flexitouch Systems other than the one player we signed a contract with. So Lynn?

Sure, Jerry to that point, currently our rental business is approximately a mid-teens percentage of our total business, and historically it’s been in the 10 to low-teens percent a year-ago. So well those particular contract did move that percentage of total volume up more towards rental, if not a sea change in that trend for us.

Okay, great. And then if I could just have one follow-up. Just wondering, could you provide a little more or just an update on your plans for sales force additions to the back half of the year? And what type of increase you’re anticipating over 2016 levels?

Yes, I’d be happy to do that. So we set out this year to add 20% to our field organization. And coming through the first half of this year, we are right on our plan to do that. So we do expect to continue to hire throughout the year, in fact we just brought on an additional recruiting resource to help us actually attract and get candidates to interview, but we are on our plan to increase the sales organization by 20% of share.

Great. Thank you for answering the questions.

Welcome. End of Q&A

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