Good afternoon, ladies and gentlemen, and welcome to the Second Quarter of 2018 Earnings Conference Call for Tactile Medical. At this time, all participants have been placed on the 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 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 our 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 as 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 release 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, operator. Good afternoon, and welcome everyone to our second quarter 2018 earnings call. I'm joined on the call today by our Chief Financial Officer, Lynn Blake. Let's begin with a quick overview of the topics we intend to discuss on today's call. I'll start off by reviewing some of the key highlights of our financial performance during the first six months and second quarter of 2018, with a brief analysis of the primary drivers of our revenue performance in each period. I'll also update you on the commercialization of our new products, Flexitouch Plus and Flexitouch head and neck and discuss some other key operational accomplishments during the second quarter. Following this discussion, Lynn will walk through our financial results in greater detail, and review our financial guidance for 2018, which we updated in our earnings press release this afternoon. I'll conclude today's prepared remarks by providing a few thoughts on our outlook for the second half of 2018 before we open the call for questions. We reported impressive sales performance over the first six months of 2018, generating total revenue of $61 million, representing 32% growth year-over-year. Sales of our Flexitouch Systems were the primary driver to our growth in the period, increasing 34% year-over-year to $55.9 million. We also saw modest contributions from sales of our Entre and ACTitouch Systems, which increased 16% year-over-year to $5.1 million. Our Flexitouch growth over the first half of 2018 continued to benefit from the impact of three important dynamics that we've outlined on our previous earnings calls as primary growth drivers in 2018. These three primary growth drivers include; first, the expansion of our field sales team in recent years, which includes over 170 sales representatives at the end of June 2018 compared to approximately 90 at the end…

Thank you, Gerry. Before I go into a discussion of our second quarter results, I just want to say that the past two years at Tactile Medical have been extremely rewarding for me both personally and professionally having had the opportunity to help the company go through its IPO and our subsequent growth and shareholder base expansion. As part of that, I'd like to thank everyone on the Tactile Medical team for helping drive our successful execution as a public company. And I very much look forward to supporting a smooth transition to Brent as he assumes the CFO role. Now moving to the second quarter financial performance, total revenue for the second quarter increased $7.9 million or 30% year-over-year to $34.1 million. Our revenue performance in the quarter was driven by Flexitouch system sales, which increased $7.1 million or 30% year-over-year to $31.4 million. The increase in Flexitouch system sales was due to the continued expansion of our sales force, growth in the VA channel, increased physician and patient awareness of the treatment options for lymphedema and our expanded contractual coverage with national and regional insurance payers. Flexitouch sales accounted for 92% of our total revenue in the second quarters of both 2018 and 2017. Entre and ACTitouch System sales increased $721,000 or 35% year-over-year to $2.8 million in the quarter. Gross profit increased $5.3 million or 28% year-over-year to $24.5 million in the second quarter of 2018. Our gross margin decreased approximately 140 basis points year-over-year to 71.8% compared to 73.2% in the prior year period. The gross margin rate in the second quarter was impacted by the launch of the Flexitouch Plus as expected. Operating expenses increased by $4.7 million or 25% year-over-year to $23.2 million. This increase was driven by increased sales and marketing expenses compared…

Thank you, Lynn. In summary, we are increasing our revenue guidance based on our strong financial and operating progress over the first half of 2018. And we continue to expect to leverage our revenue performance into improved profitability. As we enter the second half for the year, we anticipate strong Flexitouch sales performance, fueled by our primary growth drivers. Specifically we'll continue to expand and ramp the productivity of our field sales organization by improving our account coverage and penetration of the highest diagnosing lymphedema clinicians in the United States. We will also benefit from our broad in network coverage with commercial insurers the result of the solid efforts of our reimbursement and payer relations teams over the prior years. Likewise, we remain equally focused on driving growth by ensuring the commercial success of our Flexitouch Plus system. We'll follow our strong commercial traction in the second quarter by continuing to build momentum with both new and existing clinician customers throughout the remainder of 2018. In conclusion, with our enhanced Flexitouch Plus system on the market, compelling new clinical and economic evidence in support of our therapy, and our recently expanded IP portfolio, we are now better positioned to continue our leadership of the U.S. lymphedema market and grow our share of this $4 billion plus opportunity. Thank you for your participation in today's call. Operator, we will now open the call for questions.

Thank you. [Operator Instructions] And our first question will come from the line of JP McKim with Piper Jaffray. Your line is open.

Hi, good afternoon. Congrats on the quarter, and thanks for taking the question. I just wanted to first just touch upon guidance, just when I plugged the back half into my model, it gets - it implies somewhere around call it 17% growth for the back half. So, just trying to understand if there is anything we should be - if there was any reason for that slowdown or is this just kind of standard cadence of how you view guidance throughout the year, more just conservatism than anything?

Hey, hello JP. Thanks for the question. Let me just take a second to ground us from where we have come from. Our initial guidance coming into the year was for the company to grow revenue 20% to 22%. We are now with this new guidance advising 23% to 24% growth, reflective of the good performance we've had in the first half. You will appreciate as you look back over our quarterly performance over the past few years that this seasonality in our business really hasn't changed. Every year we have very strong growth in the first half and little slower growth in the second half. So, we're very comfortable with the guidance that we've given out today. We believe we're in about the same place we were a year ago and that the expectations for the second half of the year really have not changed from our point of view. So, we're very comfortable with where we're at on guidance.

Got it, that's helpful. And then I wanted to ask one on just the sales reps number you hired in the quarter. Are you comfortable with the pace that you're at today, comfortable you can still kind of grow the sales force you call it 20%? And then just on the sales force productivity, I know there was a lot of training done in Q2 especially around Flexitouch Plus. So, have you trained all the docs and all the kind of moonlight workers you've needed to train at this point and it's kind of all the “distractions” are behind you guys in terms of having to train people?

So, first of all yes, in fact, we are very happy with the launch of the Flexitouch Plus. In terms of the pace of hiring, we are now up about 17% compared to where we were this quarter a year ago, but still not to the 20% level we had suggested we'd be at. So, we are comfortable that we'll get to that 20% level of additions in our field organization this year. Your second question around the Flexitouch Plus launch, we certainly have been able to get that product in front of number of our trainers and our customers. But we still have some work to do yet in the second half of the year in getting all of our trainers up to speed and all of our customers ordering the product. So, that will be a dynamic in the third quarter yet. Some disruption from reaching the remaining 20% of the contract trainers that we haven't yet reached or trained. And we've received orders for the Flexitouch Plus from a little over half of our accounts. So, we still have work to do there as well.

Okay, that's very helpful. Thank you.

Your next question comes from the line of Margaret Kaczor with William Blair. Your line is open.

Hey, good afternoon folks. Lynn, first of all congrats on all your accomplishments, so yes, you will be missed. So just a follow-up first on the Flexitouch Plus, can you guys give us any suggestion as to what percentage of the mix it made up and what's the demand improvement that you are estimating for the Plus in the second half of the year? And part of this is, I think, when you launch the upper limb garments couple of years ago, it did actually resulted in pretty substantial increase in demand for the product. So why shouldn't it be as strong this time around if not stronger given the features?

Yes, hey Margaret, nice to hear from you. We certainly did have a strong start to our launch in the second quarter. I would say that we came into the quarter, expecting that the field team would focus on training and certifying the in-home trainers and engaging with some of our existing accounts. We're still getting really positive feedback on product itself, patients around the fit and comfort and ease of use in-home trainers on the more intuitive nature, easier to train and clinicians on both the ability that they control the pressure, but probably most importantly the bilateral therapy. While we have certainly seen some clinicians - new clinicians I should say, order from us I would say that our sales reps probably focus more on their existing accounts in Q2, than they did in - than I expect they will in Q3. So the early signs are very positive, but we're still pretty early in the launch of that product, in terms of trying to quantify how much impact that'll have in the latter half of the year. Having said that, the mix question is more a function of how quickly we can get in front of our customers and how soon we can get on the federal supply schedule. Keep in mind, this is a replacement product, it's not an incremental or additional product. So, at this time next year, we won't be talking about the Flexitouch Classic at all, because we'll have transitioned everyone to the Flexitouch Plus. So we're still on the pathway that suggest we're going to gain federal supply schedule inclusion by the end of the year and be able to sell to the VA patient by the end of the year, but no other change in that regard as of yet.

Got it. And then in terms of some of the rep hiring, just to follow-up on that as well. It sounds like you trained maybe 80% of the folks out there. So how much does that negatively impact the quarter, as best as you can guess, ensuring that pressure than ease if you're only doing the next 20% in Q3?

I think we set up the expectation coming into Q2, that the launch of Plus is going to be somewhat disruptive to our regular call pattern, it's prove to be that. So in spite of the fact that our reps were taken out of their usual call pattern, they were able to deliver some pretty phenomenal results in the second quarter. We expect that dynamic if you will of taking them a little bit outside their call pattern to continue in Q3. But to your point, we've got 80% of the trainers trained, were now gone to the remaining 20%, that should take less time, much less time, we would suggest and allow them to get more focused on exposing it, so the customers they have yet to get in front of, which still keeps them out of their regular call pattern, frankly. So we think this is just the Q3 dynamic that will affect the second half, but so far the response has been really positive around the product.

Great. And then just one more for me, if you look at some of the comps in the second half of the year, I think you guys were impacted by some of the hurricanes last year. So maybe walk us through, while you are assuming a similar progression, as you saw last year, why shouldn't it be - maybe a little bit better as we're going through given the easier comps? Thanks so much.

Yes, I certainly believe that we have got a larger field sales team now. Who are certainly improving productivity related to the targeting that we're doing. And our VA sales remain strong. So, assuming no hurricanes end up on our shores and disrupt our business, we should in fact have a positive second half and that's exactly what we're projecting. I talked a little bit about the Q3 dynamic on the disruption from taking the reps out of their regular call patterns. One additional item that could be a bit of a headwind to our growth in the second half is the fact that we signed a contract with a large payer on the 1st of July. And expect that that - and know that that will have an impact on our average selling price in the second half of the year. So the good news is we now have a direct contract, where we accessed this payer before through a buying group they were member of, but we now have a direct contract with them in place and expect that volumes will pick up dramatically overtime with this payer. Unfortunately the ASP drop picks up immediately, while the volume picks up later. So that another a little bit of a headwind for the second half expectations.

Got it, thanks.

Your next question comes from the line of Chris Pasquale with Guggenheim. Your line is open.

Thanks. Jerry, you touched on the idea that some of the IP you picked up could help you as you look to add features to Flexitouch in the future. Can you talk a little bit about where you see this technology going overtime?

Yes, Chris, hello and thanks for joining the call. I do believe the IP that we acquired brought us a number of benefits not the least of which is access to some interesting technology, where frankly right was a little bit ahead of the field in terms of developing. So the benefits as we see them in the IP are - they had a pretty strong set of patents around just how to apply pneumatic compression to patients. The two areas that we think have the most value for future product development are in the area of connectivity. So being able to connect to the device and in the area of patient monitoring. They actually had some pretty unique ways of feeding back physiologic information that might be used by clinicians to adjust treatment patterns or potentially treat their patients differently. Those are the two most positive areas that we see in the IP that we picked up, but know that there is a vast area that others who might want to enter this field will have to navigate around to be able to participate in this market.

Thanks. And then could you just spend a minute on what spark the resurgence in the non-Flexitouch portion of the portfolio? I know it's small relative to Flexitouch, but that's a line that we've been used to seeing go the other way and it seem to perk up a bit?

Good question. We'd actually set the expectation that that particular line was going to be flattish this year in our guidance and we did see it pick up. We actually took the responsibility of dealing with those 651 products from our field sales organization and brought them to an internal team of folks who are really expert at the reimbursement process. That resulted in a very nice uptick of our business, because frankly we've been focusing the field organization on Flexitouch almost exclusively so that they were I don't want to say neglecting, but at least not paying as much attention to the 651 business. And by bringing it inside we were able to address, kind of bolus, if you will, of patients that weren't served very well in the way we conducted business before. So we did see a pickup in Q2. It's increased our expectations, we're now suggesting that that other category ought to count on it for about 5% kind of mid-single-digit growth this year where we weren't expecting that previously.

Great, congrats on the quarter.

Thank you.

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

And Jerry and Lynn, this is actually Cecilia, on for Jason. And I just wanted to ask about the VA, another strong quarter, should this be viewed kind of as a run rate going forward? And then just what you think looking ahead, just the impact of access to rights customers, as well as the impact of getting on the federal supply schedule and the bilateral opportunity in the VA? And then just how growth in the VA business compares to your overall business going forward?

Sure. Lynn, do you want to take the first bite at that?

Sure. I can talk a bit to the strength in the quarter and growth rate expectation. So, VA was 20% of our Q2 revenues. You're right again another strong quarter, not as higher percentage as Q1 when we have more pronounced seasonal impact of the VA not having the co-pay. For the balance of the year, we expect it to continue to be a growth driver and grow a bit faster, stronger than the rest of the commercial business, but probably at a slightly lower rate than as in the first half, in part driven by the fact that the Flexitouch Plus as you know is not yet on the federal supply schedule. We anticipate gaining federal supply schedule inclusion by the end of the year, but not knowing exactly the timing of that. The VA channel is not the focus currently for the Flexitouch Plus sales effort.

Okay, great. And also just following up on that, just the impact targeting Wright customers can have going forward in 2019 and how big of an opportunity that is?

Yes, Cecilia, I think the list of customers that we've been working on with the Wright sales team has yielded some positive results. I would say overall, we are expecting it to be a positive in introducing us to clinicians within the VA system that are not familiar with Tactile. And it's up to us to earn that business once we have that introduction in place. So, I think it bodes well as a tailwind if you will going into 2019 and should position us for a really strong first quarter with the VA channel in Q1.

Great, thank you. And just as a quick follow-up, just in terms of the bilateral contribution that you're seeing in the commercial side, just what you're seeing so far. I know you touched on it, but how much opportunity is left in this as you continue to bring Plus into those centers? Thanks for taking our questions.

You bet, Cecilia. So, again, the VA - the Flexitouch Plus capability of treating bilateral limbs simultaneously for patients with lower extremity lymphedema has done two things for us. One, it's over - certainly overcome an objection that some clinicians had about prescribing our device for their bilateral patients. And we've seen clinicians start to do that in the second quarter. So, started to prescribe our products where before they were hesitant to do so. It's also given us the opportunity to become the single source vendor for a number of clinicians. And by becoming that single source vendor, we're able to move a competitor out of our - out of that customer. So, the Plus is again a little early in terms of our launch of the product, but with all the positive response we've seen so far, we're very comfortable that this is going to be a big impact later in 2018 and into 2019.

Great, thank you both very much.

Your next question comes from the line of JP McKim with Piper Jaffray. Your line is open.

Hi, thanks for the follow-up question. I wanted to - I've had several incoming questions on the topic such that we just addressed on the call. But you got the credit facility now with Wells Fargo and then everyone remembers Brent from Entellus and he was a part of the Spirox deal there. So has anything changed on your thought theory on M&A? I know originally you do have - you're building a platform company that could bring another product to sell under the channel. So, has your interest there perked up or this happen - the timing happen to be coincidence?

Hi, JP. This is Lynn. Let me just give a little backdrop on the credit facility work. We historically had had a very small working capital line with a local bank, here in the Twin Cities that really wasn't right sized for the company size Tactile was today or for our growth objective. So I have actually been working for quite some time looking at alternative to get something larger and more meaningful in place for the company both to just as a good governance item and to provide additional future flexibility and obviously support the company's longer term growth objective. So the fact that we were able to close on that in conjunction with our second quarter release was positive for us it was certainly on my list to complete. I'll let Jerry maybe speak to kind of the forward view as it relates to that.

Yes, thank you, Lynn. JP, good question. So we have always looked at this as a platform to build from and have been over the last two years looking at a number of opportunities that have presented themselves or that we have been able to uncover. As you can appreciate, those are difficult to close on and now that we have additional access to capital, I think it makes us a more attractive partner for some of these potential strategic relationships. We will find something that fits the company well at some point in our evolution, I wouldn't say Brent's arrival has a speeding that process up at all, but because we have been on that path already. So, we're opportunistically looking to add other products to the basket ideally those that also that leverage not only our field sales organization, but also our back office. So, stay tuned you know those take time and can't get ahead of yourself in terms of getting them announced, but we'll certainly be the first to let you know, when that's available.

Okay that's helpful. And then just one more on international, do you still expect to see CE mark sometime in 2018 and then potentially start moving internationally in 2019?

I certainly believe that there opportunities outside the United States are significant. We are on a path to get our CE mark on the products that we manufacture. I think the current timeline has us in Q1 of 2019 to get the CE mark, not in 2018 as of yet. But that'll be a discussion for our 2019 guidance.

Very helpful, thank you.

Welcome.

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