Good afternoon, ladies and gentlemen, and welcome to the First Quarter of 2019 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 Web site 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 as well as our most recent 10-Q filing filed today with the Securities and Exchange Commission. Such factors may be updated from time to time in our filings with the SEC, which are available on our Web site. 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 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 Web site. 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 first quarter 2019 earnings call. I’m joined on the call today by our Chief Financial Officer, Brent Moen. Let me provide you with a brief outline of today’s call. I’ll start with a review of our financial performance highlights for the first quarter of 2019 and commentary on the primary drivers of our revenue growth. Then, I’ll provide a brief update on our recent operational progress that we’ve made during the quarter. Brent will then discuss our financial results in detail and review our financial guidance for 2019 which we updated in our earnings press release this afternoon. I’ll then share some additional closing thoughts before we open the call for your questions. Our revenue performance in the first quarter represented a strong start to 2019. We achieved revenue of $37.6 million for the first quarter which represent 40% growth year-over-year. Our revenue growth in our first quarter was driven by sales and rentals of our Flexitouch systems, which increased 39% year-over-year to $34.1 million. Additionally, we saw contributions from sales and rentals of our Entre and Actitouch systems with revenue increasing 51% year-over-year to $3.5 million. Our reported revenue results during the quarter were favorably impacted by our adoption of ASC 842, a new accounting standard for leases. The adoption of ASC 842 increased 2019 first quarter total revenue by 10 percentage points compared to first quarter of 2018. Even without the impact of the accounting change, our top line grew 30% compared with the same quarter last year. This is a great start to 2019. Brent will discuss the accounting standard and its impact on our financial reporting and full year 2019 guidance in his prepared remarks. Revenue growth benefitted from four primary drivers during the first quarter.…

Thanks, Jerry. Total revenue for the first quarter increased 40% to $37.6 million compared to $26.8 million for the quarter ended March 31, 2018. Our total revenue performance in the quarter was driven by sales and rentals of our Flexitouch systems, which increased $9.6 million or 39% year-over-year to $34.1 million. The increase in Flexitouch system sales and rentals was largely driven by the expansion of our sales force, continued growth in the Medicare and VA channel, increasing physician and patient awareness of the treatment options for lymphedema and expanded contractual coverage with national and regional insurance payers. As Jerry mentioned, we experienced strong sales volume to a large commercial payer that exceeded our expectations and more than offset the expected pricing impact of the related new contract, which went into effect on July 1, 2018. Flexitouch sales accounted for 91% of our total revenue in the first quarter of both 2019 and 2018. Entre and Actitouch sales and rentals increased approximately $1.2 million or 51% year-over-year to $3.5 million in the quarter. Our performance in this product category continues to benefit from both our strategic decision in 2018 to manage these quarters in-house as well as the contributions from the higher than expected volume from the new large commercial payer contract. First quarter revenue by payer was 69% commercial, 20% VA and 11% Medicare compared to 69.5%, 23% and 7.5%, respectively, last year. It is important to note that our total revenue growth during the first quarter benefitted from the adoption of a new accounting standard which changed our revenue recognition practices for rental sales. As a reminder, a portion of our revenues are derived from patients that obtain our products under rental arrangements with rental periods of up to 10 months in length. The new lease accounting standard,…

Thank you, Brent. Our performance during the first quarter marks a promising start to the year and we are raising our full year revenue guidance in part to account for the stronger than expected revenue results that we were able to achieve. Looking ahead, we’re confident in our ability to deliver strong revenue growth in 2019 as we continue to expand our field sales team, drive increased productivity by focusing our reps on the highest diagnosing accounts in the lymphedema market and expanding their penetration in the VA and benefitting from the broad in-network coverage that we’ve obtained for our products from commercial insurance payers. Furthermore, we continue to see ample opportunity and important tailwinds that will enable us to achieve sustained growth over a multiyear period. As I mentioned earlier, we entered the year with 2,300 high diagnosing facilities in the U.S. that are not currently customers of Tactile Medical as of the end of 2018. Based on our latest analysis of claims data, we also estimated 11% annualized compounded growth in the number of patients diagnosed with lymphedema over the last five years. And more broadly, we continue to see mounting qualitative evidence of the increasing awareness of lymphedema and its treatment. In 2019, we look forward to demonstrating our commitment to leadership in the more than $4 billion U.S. lymphedema market as we continue to expand our share and deliver high quality products and service to our patient and clinician customers. Thanks to our employees for their hard work and dedication and to everyone on tonight’s call for their interest in Tactile Medical. Operator, we will now open the call for questions.

Thank you. [Operator Instructions]. Your first question comes from Chris Pasquale with Guggenheim. Your line is open.

Thanks and congrats on another great quarter, guys.

Thank you, Chris.

My first question is on the guidance update here. So 6 million of the 7 million increase is accounting related and you beat by about 1.5 million here in 1Q after backing out the accounting change. So it doesn’t seem like you’re really assuming that the extra strength that you saw here in the first quarter continues over the balance of the year giving yourselves credit for that continued momentum?

I would say your math is correct, Chris, that in fact 6 million of the 7 million is related to the accounting change and our estimates of that. We did see better than expected demand volume from a large payer. And as you may remember from our past calls, we’re unsure of how quickly that payer would come up to speed and give us that additional volume. So we’re taking about 1 million of that volume and adding it into our guidance for 2019.

Okay. And then, Jerry, can you provide any update on the legal action that was initiated back in the first quarter, the qui tam suit from one of your competitors? Anything you can say there about where that stands?

Sure, Chris. I’ll just reiterate what we’ve said previously and then I’d let you know where we are today. As we discussed in the 10-K, we were served with a sealed complaint in the U.S. district – southern district of Texas on February 13. The suit was brought by a competitor and the U.S. declined to intervene or join the suit. That suit was unsealed March 20 of this year. We continue to believe the allegations are without merit and we’ll vigorously defend ourselves. In fact, we filed a motion to dismiss the suit on April 5 of this year. But as for additional details, our policy is not to discuss details about standing litigation until we get a little further in the process.

Understood. There was one particular aspect to that complaint which related to your network of in-home trainers. Maybe it’s worth just spending a minute on that particular operating structure, your confidence in its legality and why it’s important to the business? Thank you.

Yes, Chris, we’re not going to discuss any of the single items that were brought up in the litigation. We don’t believe those allegations have any merit. And we’re certainly looking forward to the opportunity to present that case.

Your next question comes from J.P. McKim with Piper Jaffray. Your line is open.

Hi. Good afternoon. Thank you for taking my questions. I just want to start first with the change over to the rental, the accounting change. Firstly, why now and does it have anything to do with customers or payers I guess acquiring more and more rental period first before they give it to the customer? And does it affect the sales reps compensation plan in any way that would affect their behaviors at all?

Hi, J.P. It’s actually Brent. I’ll take the first part of that question and Jerry can add on. But as it related to why did we adopt the accounting change now, it was actually required for us effective January 1, 2019. So just to take you back a bit, in the middle of 2018 we became a large accelerated filer which accelerated a couple adopting items relative to new accounting standards out there. ASC 842 is one of those items that accelerated for us, so first quarter became the first quarter in which we were required to adopt it. And then the follow-on to that quite honestly it doesn’t change anything operationally within our organization at all. It doesn’t change how we fundamentally approach our business from a revenue and sales perspective nor does it change the compensation elements relative to our sales team.

I would just add, J.P., it did certainly have a very positive impact on revenue, so reported revenue up 40% for the quarter. But stripping the accounting change out, we were still up 30% on the base business. And as Brent said, the base business is unaffected by this accounting change.

Got you. That’s helpful. Then I wanted to ask on – you made an interesting comment around the large payer that flipped in the network but they also I assume they’ve got a whole Medicare advantage book of business, so you guys now can access those Medicare patients within that plan. Does that plan have the same restrictions as the Medicare LCD or does this now allow more Medicare patients through that large payer to get the Flexitouch, if that makes sense?

It certainly makes sense. I would say that each of the commercial payers has a choice as to whether they want to follow their own or Medicare’s requirements for putting a patient on one of our products. I will say that our Medicare business was up in the first quarter and up sizably, so we were very excited about having this new payer onboard. It did give us access to more of the Medicare Advantage patients that they have and I think you see that reflected in our Medicare business.

Got it. Thank you.

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

Hi. Good afternoon, everyone. Thanks for taking the questions. The first one for me is maybe a little bit of a focus on the VA which I think was roughly about 20% of total sales this quarter. It’s still showing some nice growth but down maybe from 23% in the year-ago period. Can you give us a little bit of color how much of that is because of the change in rev rec that maybe changed the mix, and then maybe some more detail around the sales within that channel, so the Flexitouch Plus having the first kind of full quarter impact within there may be gaining momentum and then some of the strategy around the tertiary VA centers that you guys referenced on the last call?

Yes. Hi, Margaret. Thanks for the question. Our Medicare business was up again this quarter which we expected and we’re excited to see it did represent 20% of sales instead of 23% last year. You may remember last year our first quarter revenue was up 73%, so we have a bit of tough comp here in the VA channel specifically last year being so successful. We did see higher than our growth rate for the channel in shipments and did see some ASP drop by signing the new Federal Supply Schedule contract that we did in the third quarter of last year. So volumes still ticking along pretty nicely. We did see a little price adjustment which we anticipated as part of our plan for this year and it’s I think reflective in our guidance for the 2019 total.

Okay. And then in regards to maybe some of the strategy looking at other tertiary VA centers outside of the VA hospitals that has moved forward there, any additional data that you guys can give us in terms of the size of the scale of those centers relative to kind of the more single VA departments, let’s say, within the hospitals or how they may compare to high diagnosing clinicians?

Yes, it’s good commentary. We still see the VA as a terrific growth opportunity for us. Strategically, the use of VA sales specialists are helping us to penetrate deeper into the hospitals that we’re already having relationships with and give us an opportunity to get onto those hospitals where we have yet to get an order and there still are some of those out there. And I’ll come back to that in a minute. Regarding the CBOCs or the Community-Based Outpatient Clinics, we didn’t see a big change in Q1 as to where those orders were coming from. So about the same proportion as we saw late in the year last year. I will say that in the VA itself we saw an uptick in our Head and Neck business which is something we did not see a year ago. So that I would attribute to our VA specialists helping our local reps target what I would call new call points within the VA. So whether they’re getting onto surgeons, head and neck surgeons at the VA, whether they’re getting to speech therapists in the VA, that’s where we’re having some success that we didn’t have a year ago.

Good. And then just maybe lastly for me, you referenced the sales team this quarter and seeing some good impacts from those folks that maybe are coming on. Can you give us any color in terms of how those new reps are ramping? When we should think about productivity? And then the hiring – you hired another 10 folks it sounds like in the first quarter. As you think about that, are you seeing more good candidates come forward and so maybe have additional flexibility above the 20% based on the typical folks that are coming and applying for Tactile? Thanks.

Yes. Thank you. On the sales team expansion, if you look back a year to the end of the first quarter of 2018, we were just over 160 people in the field. We are now over 210. So we’ve added 50 to that field organization and that 50 is coming up to speed at varying rates of productivity. Many of the hires were in the last two quarters of last year, so we really expect the biggest impact in the last two quarters of this year and the first two in 2020. As to the challenge or the opportunity for hiring more, I will say that because of where our economy is, hiring people is harder than it’s ever been, frankly. The good news is we’re able to identify 10 of what we think are really topnotch additions to the sales organization in the first quarter and we are actively looking for another 20 on top of that. So we continue to try to drive expansion of our field sales team as one of the key drivers of our growth and have a lot more resource behind frankly doing that hiring. Compared to a year ago, we are putting much more effort into this hiring process because of the competitive nature of employment in our country.

Your next question comes from Jason Mills with Canaccord Genuity. Your line is open.

Hi, Jerry and Brent. Thanks for taking the questions and congrats on a great start to the year. Can you hear me okay?

Yes, Jason. Thank you for that.

Super. So just a question about as we look forward and perhaps to help us all model, a couple of things I took note of. One is obviously the accounting change is going to be perpetual and you’ve added the revenues 6 million to 7 million or so for the balance of the year. You also said that it’s not changing the way your sales force, sales reps are incentivized or how they produce within your system. So I presume why you haven’t given 2020 guidance, I’m going to ask about it. As we think about our models for 2020 and beyond relative to 2019, it sounds like there shouldn’t be much change as it relates to this accounting change in terms of how we think about growing your business in our model. Is that a fair assumption?

So we’re not ready to give guidance on 2020 quite yet, Jason. I think our guidance that we talked about today was really around '19 driving revenue 25% to 27% year-over-year. A piece of that accounting change will continue onward into 2020 and some of that accounting change will fall off. In other words, we’ve got a little bit more that we need to share as you rebuild a model in midyear in terms of what the puts and takes are around that particular dynamic. So it hasn’t really changed our basic view of the future. We still see ourselves as a 20% plus grower on the top line with strong gross margins in the 70% range and improving profitability, which we’ve been harping on now for two and a half years we’ve been a public company.

Okay, so maybe we’ll take it offline but I think it’s fair that everyone listening to the call would want a sense for the year-over-year comps that are going to be faced and the optics of the growth that are going to be reported when we get to these quarters in 2020. And so I’ll ask my next question and maybe if you’d like to chime in on any other commentary around that, I’m sure everyone would appreciate that. But I guess just secondly, congratulations on the early success with the large payer that you added. Clearly they’re ramping a little better than what you’d guided to. As we think again about moving forward, it sounds – based on the tenor of your voice and your guidance that you expect to continue to penetrate this large payer and continue to reap the benefits of having them in that work. Would you face any difficult comps as we look into 2020 relative to that progress with that payer in particular in 2019 or do you think that the opportunity within that payer will extend for several years and we should again think of you as that 20% grower generally speaking as it relates to that payer’s impact as well? Thanks, Jerry.

Thanks, Jason.

So, Jason, hi, it’s Brent. So just let me add a little clarification to your initial question relative to what the impact of ASC 842 has on 2020. I think what the messaging was is that ASC 842 does put in place acceleration of recognizing revenue. So historically we spread the recognition of that revenue over the life of the contract. Under ASC 842, now we recognize it upfront. So that’s one aspect that will perpetuate itself as you point out. The piece that actually is going to be unique is the piece related to contracts that are in place as of December 31, 2018. Those contracts actually will continue to be recognized over the remaining life of their lease. And to your point I think the question you were asking is, does that put a pinch on 2020? And the answer to the question is yes. Because of the acceleration on how the accounting standard was adopted, roughly about $5.1 million of revenue will not be repeating itself in the 2020 period.

Got it. That’s helpful.

Now back to your second question, Jason, around do we expect the long runway with this payer? We do. And I think the good news about the contract we signed last year is they’ve come up and given us access to more of their plans faster than we previously experienced. It’s a little hard to predict how the volumes will flow from those plans, which is why I think we’re willing to pass on the extra from Q1 into our guidance for the rest of the year. But we’d certainly expect that we will continue to service that account and continue to expand our business with them over time.

Great. Thank you both.

You bet.

[Operator Instructions]. Your next question comes from Mitra Ramgopal with Sidoti. Your line is open.

Hi. Good afternoon. Jerry I’m just wondering in light to the sales force expansion you’re undertaking, I believe you mentioned early that you’re in about 50% of the high diagnosing facilities and I’m just wondering if you could give us a sense of what that number was maybe a year or two ago and how do you see that number increasing over the next few years?

So the high diagnosing facilities, Mitra, if I’m understanding your question correctly, those facilities vary depending upon when we pull the claims data. So in other words, when we did the data pull in the middle of 2016 there were fewer high diagnosing clinician groups than when we did the data pull in the end of 2018. So there’s not really an apples-to-apples comparison I can give you. We came into 2018 thinking we had penetrated about 40% of then existing high diagnosing accounts and we left 2018 thinking we were a little – we were right around 50%, so we picked up another 10%. The problem is the denominator increased as well. So the number of accounts increased. Now it’s 4,700 high diagnosing facilities in the U.S., almost half are doing business with us today which means that 2,300 aren’t. So we see this as a very frugal call point for us as we continue our expansion into this $4 billion market opportunity.

Okay, that’s very helpful. And then just on the payer mix, I know you have talked about the increased coverage with commercial payers and obviously you have a focus on the VA. I was just wondering how you – if we should expect any meaningful change in the payer mix relative to what we’re seeing today?

We don’t really see much change moving forward other than the little uptick we talked about with Medicare. That was up substantially in the first quarter, a couple million dollars year-over-year. But we think the mix is about correct. The reason mix keeps coming up is it’s hard to predict where it will be in any given quarter. So pricing is impacted by which channel that we’re in. As we mentioned in the past, the VA has most favored nation pricing. So when the VA business is up, our gross margin experiences some pressure. The flipside of that is Medicare is actually one of our better payers. So we get an opportunity for a little bit better gross margin tailwind rather than headwind. So that’s what – we think the mix is going to be roughly the same over the year. It can vary quarter-to-quarter.

Okay, that’s great. Thanks again for taking the questions.

You’re welcome.

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Thank you.