Good evening, ladies and gentlemen, and welcome to the Second Quarter 2010 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'd 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 annual report on Form 10-K 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 website. We undertake no obligation to publicly update or revise our forward-looking statements as a result of new information, further 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 in the Investor Relations portion of our website. I would now like to turn the conference call over to Mr. Dan Reuvers, Tactile Medical’s President and Chief Executive Officer. Please go ahead, sir.

Thanks, operator, and good evening, and welcome, everyone, to our second quarter 2020 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. As the recently appointed President and Chief Executive Officer of Tactile Medical, I'll begin my remarks with an introduction and share with you what I've been focusing on since joining the team in early June. I'll then briefly review our second quarter revenue results, before shifting to a more detailed discussion of how the COVID-19 pandemic has impacted our business and revenue performance throughout the quarter, as well as the initiatives that our team has been focused on to help mitigate these impacts and continue to serve clinicians and patients. Brent will then provide you with a detailed review of our second quarter financial results and discuss our balance sheet condition. Following his remarks, I'll share some color on the business trends during July and some of our near and long-term strategic priorities as we enter the second half of 2020. We'll then open the call up for questions. Before delving into the update for the quarter, I'd like to take a moment to introduce myself and provide a few summary points on my background and where I focused my time since joining the team. I joined Tactile Medical on June 8, with over 30 years of experience in the medical device industry. The last 12 years of my career were with Integra Lifesciences. I most recently led Integra's largest business, as the Executive Vice President and President of Codman Specialty Surgical, which generated about $1 billion in revenue during 2019. In that role, I led the division's organic growth through new products as well as several deals, including Integra's acquisition…

Thanks, Dan. Total revenue in the second quarter decreased 22% on a reported basis and 20% on an operational basis to $35.1 million, compared to $45.2 million in the second quarter of 2019. As a reminder, our operational revenue growth excludes the impact of our adoption of the ASC 842 accounting standard, which favorably impacted our revenue in the second quarter of 2019. The decrease in our total revenue in the quarter was driven by a decrease of $9.8 million or 24% year-over-year in sales and rentals of our Flexitouch systems and a decrease of approximately $250,000 or 6% year-over-year in sales and rentals of our Entre systems. Sales and rentals of our Flexitouch systems accounted for 89% of our total revenue in the second quarter of 2020, compared to 91% in the prior year period. Second quarter 2020 revenue by payer was 73% commercial, 15% Medicare and 12% VA, compared to 71%, 11% and 18%, respectively, in the second quarter of 2019. Turning to the rest of the P&L. Second quarter gross profit decreased $6.6 million or 21% to $24.9 million compared to $31.5 million last year. Gross margin was 71% of sales in the second quarter of 2020, compared to 70% of sales in the second quarter of 2019. The increase in gross margin was primarily attributable to sales and rental revenue mix by payer, compared to last year. Gross margin in the second quarter of 2020 was impacted by $430,000 noncash write-off of our Airwear inventory. Excluding the impact of the noncash inventory write-off in the period, non-GAAP adjusted gross margin was 72% of revenue. Second quarter operating expenses increased $4.4 million or 16% to $32.9 million compared to $28.5 million last year. The increase in operating expenses was primarily driven by higher reimbursement general and administrative…

Thanks, Brent. While we're not providing formal financial guidance, we thought it would be helpful to share some additional color on recent business trends in July to help investors better understand the current operating environment. As I mentioned earlier, despite the challenging operating environment, we were pleased by the improvements that we saw as we progressed through the second quarter. Our sales force's ability to access accounts has recovered significantly. With many health care facilities easing formal restrictions on rep access, which helped our efforts to continue to add new Flexitouch accounts in second quarter. As discussed, our sales force also continued to make progress in engaging with existing accounts virtually. We are particularly encouraged with how the year-over-year changes in sales for June was materially stronger than in April and May, albeit still down, mid single-digits year-over-year. While the business trends have improved significantly, as we progressed through the second quarter, the trends through July support our belief that we remain in the early stages of recovery. In late July, we conducted a survey of nearly 1,900 of our top accounts, which showed that approximately 92% were open in some capacity. While this represents a roughly 40% increase in the number of open accounts compared to the survey we conducted in April, this represents only a modest improvement compared to the results from our survey in late June. It's equally important to note that the vast majority of accounts survey have indicated that their patient throughput remains well below normal. Specifically, only about 22% of the accounts that were open in late July survey reported that they were operating without any constraints. This appears to be largely related to the impact of health and safety protocols adopted by clinics in response to COVID. Some accounts, for example, have reported…

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Ryan Zimmerman from BTIG. Your line is now live.

Thank you. Thank you, Dan and Brent, for the commentary and the color on your trends. I guess, two questions for me. The first, in terms of the surveys you've conducted, did you get any indication around when those clinics – specifically the 22% you referred to, when they would expect normalized operations? Is that fourth quarter this year? Is that something out into 2021? Just any color around the expectation for more normalized operations, I think, would be helpful. And then I'll just ask my second follow-up question now. As you think about the investment in Airwear that you're stepping back on, where do you intend to redeploy those resources? Is there something specifically that you're honing in on, Dan, as you've surveyed and kind of landscaped the company since joining. Thanks for taking the questions.

Sure. Thanks for the questions, Ryan. So first, just as far as normalized operations, I think, it's still a little difficult to predict. I think until we see the impacts of the COVID pandemic, many of the constraints will probably continue. We've seen probably the most, as I've kind of alluded to in the comments, the most resourcefulness, probably led by private vascular clinics. And keep in mind, that's grown to be a pretty meaningful part of our business. So that's probably led the charge back. We're seeing continued improvements in the throughput of some of the lymphedema clinics, where, I think, they probably had the most severe initial reaction just because of the intimate interaction with a therapist. And overall, those improvements have continued. But I think that they probably will have to struggle with those over the course of the balance of the year. The most ambitious practices continue to, I think, find better ways to be resource with throughput. So there being some of the things we mentioned about extending office hours, extending days in clinic, working Saturdays, limiting vacations, I think, those are the things that we would expect to continue to occur to try and see better throughput happening. But some of the things about calling a patient up from the parking lot, those behaviors, I think, will probably continue for some period of time. The VA has probably been the most significant as far as some of their changes redirecting patients out of the hospital centers and into the regional outpatient centers. So those are the moves. And I think over time, we continue to find those sites as well. Keep in mind, 700 VA call points as opposed to 170 hospitals has required more work for our sales force. This is 1,000 points…

Thank you.

Thank you. Next question today is coming from Matthew O'Brien from Piper Sandler. Your line is now live.

Good afternoon, thanks for taking my questions. Just a follow-up on Ryan's question. I guess I'm a little bit surprised, there hasn't been a bit more recovery in July. And I don't know if there's more outbreaks that you're encountering, but why haven't things improved more in July if these centers are opening up more and working more hours, et cetera? And then as far as the VA goes, when do you think – are they going to get back to those 170 centers later this year? Or is that going to be more established into these community hospitals for the remainder of the year and is likely going to be a revenue headwind? And then I do have one more follow-up. Thanks.

Sure. Thanks for the questions, Matt. Yes. So first of all, just as it relates to July, I think, we're pretty encouraged, frankly, that we've seen June and now July back within single digits of prior year. When you think about the majority of these largest prescribers that we've been serving have continued to say that they are seeing restrictions or limits in their throughput, that's really the – I think that's primarily the key for us. So frankly, I think, as we look at where we were in late March, April and even May, we're actually pretty encouraged by the fact that we've seen ourselves close the gap this much. And I think as far as the VA is concerned, we can still find these patients. It's just a lot more places. How long it will be before the VA invites some of these patients back to the main VA centers as their primary source to meet with their clinicians, it's a little hard to predict. And not always does the VA behave nationally. Many times they'll adopt different practices. Thus far, it's been pretty sweeping that they've kind of redirected folks to these outpatient community clinics. I think on the good front, as we've seen patients that maybe haven't been going to some of their natural sites and they're going even into primary care, we continue to invest in the education that we talked about. And by expanding the prescriber base, even though, volumes are down because of throughput, our goal is to continue to be in a good position. So when recovery is complete, we've made the prescriber base larger.

Okay. That’s helpful, thank you. And then as far as these patients go, I mean their lymphedema is going to continue to progress. Do you have a sense of the building backlog, where that stands? How you can service that group? And then specifically, in the back half of the year, the consensus is looking for flat performance in Q3 and then actual growth in – some pretty meaningful growth in Q4. Are those targets attainable? Or are we a little bit too aggressive as we think about things heading through the back half? Thank you.

Yes. I think that, first of all, when you think about where we've been in April and May, down as much as 30%, we feel good about the trends so far. But as we said, I think, we're still in the early stages, we're not prepared to give guidance. But I think that as we finished up July, we saw ourselves down mid-single digits. So I think as you continue to kind of run that out, we're hoping to see some progressive improvements over the course of this quarter and then throughout the balance of the year.

Okay. And just real quick, has your prescriber base grown or not?

We have added new prescribers in the second quarter. But those larger prescribers that we had developed obviously were prescribing fewer patients just because of the throughput and the patients that they're seeing on a regular basis. So they clearly have offset each other. But we'd like to think that our universe of prescribers has certainly gotten larger as a result of some of our ongoing education.

Got it. Thank you so much.

Thank you. Our next question today is coming from Margaret Kaczor from William Blair. Your line is now live.

Good afternoon, guys. Thanks for taking the questions. Yes. So no surprises, I'm going to keep pushing on June, July and beyond. But as you think of June and July, is there any kind of a risk that this is a catch-up of patients that maybe weren't treated in April and May? And then is there basically a push to treat these patients in the home that's helping and maybe – and as lymphedema clinics maybe do reopen that creates another headwind? Or do you think that this is more sustainable? And some of these vascular surgeons are finally seeing the light and saying, you know what, I should just push most of my patients into a lymphedema clinic.

Yes. So I think – thanks for the question, Margaret. I think good questions about, are we seeing ourselves developing a backlog? Ultimately, these patients are going to need care and the issues that they're struggling with, they're not going to go away. Lymphedema is a lifelong consequence. So we do believe that the pool of patients has certainly not dwindled over the last couple of months, and fewer of those patients have been able to see their primary care or specialist to get a prescription. We've also seen that there has been a lot more disruption in access to lymphedema clinics, where they would historically go for lymphedema massage therapy. So ultimately, I think there's an opportunity for us to see certainly healthy growth once we can get beyond some of the limitations right now. The patient throughput continues to be a very real issue, I think, that we're going to have to continue to get through. But I think the large patient base still is – remains really appealing. The one thing that we've also have heard from – anecdotally from some lymphedema clinics is some during this have actually looked to Flexitouch sooner than they normally would have, simply because of the reluctance to invite patients in for physical therapy, rather electing to look to Flexitouch sooner. If that's a trend we could continue, that would certainly be good for us, and I think good for our patients.

Hey, Margaret, it's Brent. I would just add one thing, Margaret, and I think it goes back to some of the surveying results that we had seen, right? So if you remember back in late April, roughly about one-third of the facilities that we were surveying were closed. Now into June and into July, that number has decreased pretty dramatically. So the – despite the fact that the patient throughput is being impacted, I think, you're seeing some of the trends in June and July really starting to favor the open facilities during those periods. So that's just an added kind of comment to what Dan was already talking about.

Yes. And frankly, a lot of the companies we're talking to are saying June maybe down 10% relative to pre-COVID levels. You guys are kind of in this mid-single-digit year-over-year decline. So on the margin, you are doing better in a sense. And I guess what I'm trying to figure out is how much of that is kind of market-related? And how sustainable is that? So maybe just as a follow-up, you guys talked about the 3,300 folks that you've engaged virtually in the second quarter. It seems to me that I think that's more than all of 2019. So can you talk to what impact that could have had on your scripts and account openings and why that shouldn't have a bigger impact in the second half?

Yes. I think that certainly, the virtual attempts to engage with customers has been, I think, a really resourceful move internally. And you're right, the 3,300 is well above what the company did all of last year in a single quarter. So we really do think this could be among the keys to continue to drive the business. I think that overall, we continue to come back to the size of the market. And it's less about a pent-up demand and more about continuing to educate. So it's going to be an important part for us. We did invite in more prescribers, as I mentioned. So we saw a bigger pool of prescribing accounts, sort of, ironically in the second quarter in spite of the fact that we are off 20%. So those that were prescribing, as I said, the bigger ones, just their number of patients prescribed in a given month were down. But, yes, that's part of what we would certainly expect is as throughput improves and a bigger universe of prescribers, that's all part of the recipe.

Okay. Thanks, guys.

Thank you. Our next question today is coming from Chris Pasquale from Guggenheim. Your line is now live.

Thanks. A couple of questions. First one, Dan, I'm just curious, overall strategy for how you access more of those 1.3 million patients in the thought process with Airwear was at establishing a presence earlier in the funnel might be helpful. So if that's not part of the solution, then what is? Do you need more evidence? Do you need a different sales strategy changes to the technology itself? I'd love to get your thoughts on sort of high level, what you do to penetrate that more?

Sure, Chris. It's a really good question. The companies that we compete with, for the most part, go through DME. So we're in kind of a unique position. We're a leader, but we can't depend on other folks doing the heavy lifting for us. And I think, very much, we're still in a market development stage with the population is big and the penetration is small. So Airwear, I think, was a really interesting one. The concept of let's intervene early and capture the patient so they can – we can progress together if their disease progresses with more involved interventions like Flexitouch. I think what we're finding is, our sales force, when they find those patients, are typically already at a specialist level, and they've gone through a sequence of tried and failed less involved compression therapy. So many of them have already been introduced to something else. In the meantime, we could certainly pursue that. But as I said, I think it's a good amount of resources that I'd rather us invest elsewhere. And the answer of elsewhere is, in my opinion, it's really about evidence and education. And we need to – so if you look back at the company, our R&D spend has been under 3%, I think, last year, clinical evidence comes out of that bucket as well. So for us, the precious dollars to invest, I want to see them go into clinical evidence to support Flexitouch and its efficacy along with some of the emerging applications. So Head and Neck, we believe, is a really material opportunity. We're the only player in that space with a solution that looks like ours. So the fact that we just published or got published an RCT on a segment of those patients, we think, is an important part of that market development. Getting payer policy to continue to be favorable for these patients that need these treatments typically depends on good evidence and good education. So those are the two places that I would say it'd be fair to expect us to continue to invest.

That’s helpful. Thanks. And then, when I hear you say that you want to leverage the sales force and the back office capabilities the company has built up, it sounds to me like you'd like to fill out the bag with other products that would be sell-through those same channels. Is that a priority for you?

So I'm still in the midst of, I would say, kind of getting my sea legs as it relates to our strategy going forward. But certainly, a good amount of work in the second half of 2020, my first two full quarters, that's a focus, is to take a look at what our strategic plan looks like. And kind of what our portfolio might look like as we go forward. So more to come on that in time. But, yes, I think, if we were so fortunate, the things that leverage the places where we've already made big bets, those would certainly be good fits.

Thanks.

Thank you. Our next question today is from Cecilia Furlong from Canaccord Genuity. Your line is now live.

Hey, thank you for taking our questions. I guess I wanted to start off just touching back on Head and Neck opportunity. With the data in hand now, I'd just like your take on kind of what you're thinking about near-term in terms of just really driving further awareness really around the solution, but adoption ahead of reimbursement over the next several quarters.

Yes. Thanks for the question, Cecilia. The Head and Neck opportunity, as I said, I think, is a really provocative one for us because we're a unique player in that slot. It was really important for us in June to see this randomized RCT that was completed by Vanderbilt and Southern Illinois University, published in Supportive Care in Cancer. The game plan is to continue to develop the evidence necessary to position ourselves so we can go make a, I think, a compelling case to the payer community. And this was an important piece of that puzzle. So it's not the only component. We have other evidence that we've been able to assemble, not the least of which was in March we had 205 patients in a retrospective analysis. That was published in Head and Neck, and it spoke to improvements in swallowing and less pain, better breathing. So I think we're building the body of evidence that's going to be important for us to be able to convince payers that this is a wise investment, and it's a good efficacious solution for these patients. In the balance of this year, we'll continue to kind of build out that arsenal and into 2021. And next year will certainly be one of the important things for us on our to-do list is to get more favorable coverage policies. So we can really fulfill the opportunity in that space.

Great. Thank you. And I guess, if I could just return also to the VA opportunity. And just your ability to reach some of those outpatient clinics today, but really how that impacts your view on kind of what the VA as a percent of your overall business can really represent longer-term?

Yes. So I think the VA represents a good opportunity because there's a lot of patients with comorbidities that happen to fit into that – to that coverage area. So it will continue to be an important place for us. I think that the likelihood it will become a bigger than it has been in the high-teens percentage of revenue, probably, unlikely. I think it's – we get back to normal times and our ability to interact with our patients and customers at the VA. That's probably a healthy penetration level for us. So I think we would like to continue to see ourselves get back there. But percentage-wise, that's probably a good target for us.

Great. Thank you.

Thank you. [Operator Instructions] Our next question today is coming from Suraj Kalia from Oppenheimer. Your line is now live.

Good afternoon, Dan; good afternoon, Brent. Can you hear me all right?

Yes. Hi, Suraj.

Hi, Suraj.

So Dan, appreciate your commentary. And I guess, let me start out. And Brent, please correct me if I'm wrong. You mentioned 30% of the accounts were closed in April and that went to 9% in June. How should we look upon these numbers within the context of your three business categories: commercial; Medicare; and VA, obviously, looking within the context of Q2? But also your commentary seems somewhat cautious. Maybe you can parse through this within the context of your three business segments, help us from a housekeeping and a modeling perspective, moving forward.

Yes. I think just to give you a little bit of color, Suraj. So there were 1,900 accounts we talked about, not necessarily specifically by group. I think if you kind of listen to the commentary as it relates to the different categories, probably fair to assume that we've seen more of those that were closed initially in lymphedema clinics than in vascular. And I think a lot of that had to do with just the physical interaction between them. So that was probably the biggest one. And then as we come back to, it's a pretty small number now that's no longer open. So to your point, that's a very encouraging sign of recovery. I think the throughput continues to be the issue. So when you still have so many of the open accounts that are telling us they're just not able to see as many patients in a day with some of the COVID-imposed restrictions and protocols that they've adopted. That's the one that we're watching closely because I think it will probably be the biggest reflection of full recovery.

Got it. And Dan, forgive me if I didn't connect the dots on, how should we think about same-store sales versus new stores, moving forward? I believe your commentary about – it's not to one of the earlier questions, about – it's not about pent-up demand. Maybe you can thread the needle here and help us understand, moving forward, how should we look upon new store versus same-store? Thank you for taking my questions, gentlemen.

Sure. Yes. I think when we talk about new store, the biggest driver we have is clinical education. We have got a large sales force, as you know. But clinical education is the best way for us to invite more clinicians into the level of awareness. And just to take the broader group back, remember that most of the physicians that are prescribing for us were not trained on lymphedema when they went through medical school. This is at best a passing comment. They don't spend a bunch of time identifying this. So the clinical education piece is paramount for us at this stage in a market development. And ultimately, I think that this is where – if it's a much more recognized treatment, the backlog continues to build. This is one where we have the opportunity to continue to help physicians unearth the patients that have lymphedema, and many of them benefit from some of the education events that we host because they know what they're looking for. So I think that, that will continue to be an important part.

Thank you. That does conclude today's question-and-answer session. And that does conclude our conference call for today. We thank you for your participation.