Please standby. Good evening, ladies and gentlemen, and welcome to the Fourth Quarter and Fiscal Year 2021 Earnings Conference call for Tactile Medical. At this time, all participants have been placed in a listen-only mode. At the end of the company's prepared remarks, we will conduct a question-and-answer session. Please note that this conference call is being recorded and will be available on the company's website for replay shortly. Before we begin, I would like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements that are based on the current expectations of management and involve inherent risks and uncertainties 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 to be filed with the Securities and Exchange Commission. Such factors may be updated from time-to-time in our filings with the SEC, which are available on our website. We undertake no obligation to publicly update our -- 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 website. I would now like to turn the call over to Mr. Dan Reuvers, Tactile Medical's President and Chief Executive Officer. Please go ahead, sir.

Thanks, Operator, and welcome everyone to our fourth quarter and fiscal year 2021 earnings call. I'm joined on the line by Brent Moen, our Chief Financial Officer. I'll begin today's remarks with an overview of our fourth quarter sales performance, along with a discussion of the drivers, trends, and operational highlights we saw during the quarter. Brent will discuss our financial results for the fourth quarter and full-year in greater detail, and review our 2022 financial guidance, which we introduced in our earnings release this afternoon. Then I will share some additional thoughts on our outlook in key areas of focus heading into 2022 before we open the line for questions. So with that, let's get started. In the fourth quarter of 2021, we reported Total revenue growth of 4% year-over-year to $61.7 million. Our total revenue growth was driven by sales of our recently acquired AffloVest product line, which contributed approximately seven percentage points to our revenue in the fourth quarter. This more than offset a 3% decrease in sales of rentals. And rentals of our lymphedema products with our revenue from Flexitouch and Entre systems decreasing 3% in 2% year-over-year, respectively. Our fourth-quarter sales performance enabled us to achieve total revenue growth of 11% for the full year of 2021, exceeding our latest revenue guidance range, which called for total revenue growth of nine to 10% year-over-year, the higher-than-anticipated results, relative to our expectations, was driven by slightly better sales of our Flexitouch systems during the fourth quarter. Broadly speaking, our Flexitouch and Entre system sales performance continue to be moderated by two primary factors that we outline don our last earnings call in November. The headwinds related to the extended recovery from COVID, and the sales force, staffing gaps that emerged during the second half of 2021.…

Thanks, Dan. Total revenue in the fourth quarter increased 4% year-over-year to $61.7 million compared to $59.2 million in the fourth quarter of 2020. By product category, sales of our recently acquired AffloVest system, contributed $4.3 million for the quarter. Sales and rentals of our Flexitouch systems decreased 3% year-over-year to $49.7 million in the quarter. And sales and rentals of our Entre systems decreased 2% year-over-year to $7.8 million. Total revenue by channel was 68% commercial, 16% Medicare, 9% VA, and 7% durable medical equipment distributors. The latter is a new channel comprised of revenue from our recent acquisition of AffloVest, which closed on September 8th 2021. These figures compared to our total revenue channel in the fourth quarter of 2020, in which the commercial Medicare and VA channels represented 71%, 18% and 11% of Total revenue, revenue respectively. Continuing down the P&L. Unless noted, all references to fourth-quarter results are on a year-over-year basis. Gross margin was 72.6% of sales compared to 70.6% last year. An increase of 200 basis points year-over-year. non-GAAP gross margin was 73.3% of sales compared to 70.7% in the prior year. Non-GAAP gross margin excludes non-cash intangible amortization in both periods, and non-cash purchase price adjustments related to our acquisition of AffloVest in the current year period The increase in gross margin resulted from sales and rental mix by payer. As a reminder, we have provided reconciliations of certain GAAP to non-GAAP measures in our earnings press release. Fourth-quarter operating expenses were $41 million, an increase of 6.2 million or 18%. The increase in operating expenses was driven primarily by a $5 million or 26% increase in sales and marketing expenses, largely due to increases in personnel related compensation expense, including the addition of the AffloVest sales team and travel-related expenses as we…

Thanks, Brent. Let me share a bit more color on some of the primary assumptions underpinning our 2022 revenue guidance. First, our guidance assumes that the primary COVID headwinds related to the own Omicron variant, will persist throughout the first quarter and then begin to subside thereafter. These headwinds have been similar to those experienced during recent periods of high COVID case volumes with reduced patient throughput at the facilities we serve, limitations on rep access, and higher rates of absenteeism at the patient, provider and sales force levels. second, with respect to sales force hiring, we made progress in the fourth quarter and remain committed to the goal expressed on our third quarter earnings call of achieving our target for Field Sales Representatives. By the end of the first quarter of 2022. Our guidance therefore assumes increasing contributions from our new and recently promoted associates in the second half of 2022 after they're onboarded, trained, and ramp productivity during the first half of the year. Third, our adjusted EBITDA guidance reflects our proactive investments to support our future growth, including a step-up in R&D spend in 2022 fueled by a few important areas I'll share more color on in just a moment. In summary, we expect relatively flat results in our lymphedema business for the first half giving way to more normalized conditions and a return to double-digit growth in the back half of the year. Our primary objective is to position Tactile Medical to return to double-digit revenue growth on an organic basis during the second half of 2022 with the contributions from AffloVest enhancing our total revenue growth in the second half to mid to high teens. Longer-term, we expect to return to delivering strong, sustained organic revenue growth and expanding adjusted EBITDA margins in 2023 and…

Thank you. If you'd like to ask a question . We do ask that you limit yourself to 1 question and 1 follow-up. If you'd like to ask additional questions, we invite you to add yourself to the queue again . And our first question will come from Adam Maeder with Piper Sandler, please proceed with your question.

Hi, everyone. This is Emmerine Ann (Ph) on for Adam. Thank you for taking the questions. I guess I wanted to start with guidance, so 15% to 20% growth for 2022. And obviously it's a very fluid environment right now, but any additional color that you can provide on what you're seeing in the procedure landscape far into Q1 and is there anything meaningful outside of COVID that has been contemplated in the guide? And then I guess to round it out, when can we expect growth to return to that normalized 20% base and the core lymphedema business.

Yes. So -- good questions. Let me take a shot at a couple of those and then Brent may have some things he wants to weigh in on as well. Let me start a little bit with the first quarter and how we're seeing things unfolding. First of all, we were really delighted that our progress in December was slightly better than we'd expected. We saw a little bit of COVID subsiding frankly in early December where it allowed us to over perform against our latest guidance. But as we got into January, we certainly saw a much more severe spike from the Omicron variant, and that was particularly strong in January and into early February. We saw much higher absenteeism from our clinics, the healthcare practitioners, along with patients and frankly our own team. We had over 50 salespeople tested positive in the month of January for COVID due to the Omicron variant. So that's what underscored some of the way that our guidance unfolded for the full year, starting off at a little slower start. But the backdrop of expectations is that the Omicron variant, while it ramped quickly, we're still expecting it to continue to ramp back down rather rapidly as well, and more normalized conditions starting to set in. We expect that as we get into the back half of the year, the conditions start to look much more normalize, that we've grown much healthier as it relates to staffing our targeted sales headcount in the field throughout Q1. Q2 is going to be a function of continued to make sure that we get folks, especially the newest members, trained and productive. Then as we get to the back half, the expectation is we will not only have improving productivity within the sales force, some improving backdrop of general market conditions as it relates to COVID. Also, the introduction of some new products that I think can both reinvigorate at both our sales force, as well as our customer base. So those are the some of the macro assumptions that went into this. And then as far as the ongoing growth, yeah we still believe that the growth profile for this business is really unchanged. As you contemplate the size of this market and the opportunity that's in front of us, 2022 is clearly going to be a year where we demonstrate recovery somewhat back -- certainly back half-weighted but I think we have an opportunity to exit the year looking a lot more like ourselves.

Hi Amarin, it's Brent. Let me just provide a little bit of context about the year as well. The way I look at it, it's really the tale of two halves. If you heard my commentary, we're looking for first quarter to be a little bit softer than what we historically have seen with all of the things that Dan just mentioned and I'll lay it out in terms of what we expect, but a total revenue increase in the mid-single digit’s year-over-year. And then our lymphedema business is probably going to be down in the low single-digits for the first quarter, offset by contributions from AffloVest. You'll see AffloVest because it doesn't have a comparable to the prior year drive increase in Q1, but what we've experienced, and what Dan was talking about, will be a challenge in Q1. And then as we progress through the year, expecting continual improvement throughout the quarter, Q2 being a productivity focus, and then Q3 and Q4, getting back to our double-digit revenue growth on an organic basis.

Got it. Perfect. Thank you. That was very helpful. A quick follow-up on the sales force update. How quickly do you think you can get back to full strength sales organization? And to put a finer point on it, how long does it take these reps to get fully productive? And is there an average run rate revenue per rep that we should be looking out for to be considered productive rep?

Yeah, Amarin, it's Brent again, I'll give you a little bit of perspective on Salesforce. So I think it's important to appreciate where we were at the end of the third quarter and then what we've disclosed in the transcript headed out -- coming out of Q4 and what we expect as we look forward. So if you recall, when we exited Q3, we were down 20 selling heads, give or take. And where we finished at the end of December, we broke it into 3 broad categories. 1 is our field sales reps, and we had 220 field sales reps. We have 30 field managers and 94 field support specialists. If you recall, our fourth quarter goal was 225 field sales rep, so we made nice progress in the fourth quarter but we didn't get all the way back to what our goal was as we exited Q4. As we look forward to Q1 of 2022, our objective is to -- on the field sales reps get closer to 230 coming out of Q1 and then progressing from that point with the focus at year-end of growing up to about 240 by the end of the third quarter.

From a productivity perspective, the history would tell us because we were always in a build mode versus a buy mode. So building up our sales reps from an associate product specialist all the way up to a product specialist, we expected a -- APS to ramp to maturity between 6 and 12 months and then a product specialist taking somewhere in that 12-month period. Given some of the focus that we've put on our sales team over the course of the last 4 or 5 months. We feel that we can ramp that productivity faster such that our objective by being healthy at the end of the first quarter, will translate into double-digit organic growth in the second half of the year.

Got it. Thank you both.

Our next question is from Ryan Zimmerman with BTIG. Please proceed with your question.

Hey, this is Phil on for Ryan. Can you guys hear me okay?

Come in through, Phil.

Great, great. Thanks for taking the question. In terms of the lawsuit, getting that behind you, what do you expect from a revenue perspective in the Texas region where you were impacted?

It's a little early to say, but we will certainly have a fresh opportunity to go back and revisit those accounts that demonstrated pause just based on the reputational overhang that this created for us. We're certainly looking forward to getting back and more engaged with the number those accounts, particularly within the VA system, don't know that we've put a finer point on it beyond that, but we think it's a ready place for us to certainly go lean back into.

Sure. Sounds great and thanks for answering that. In terms of the VA, what you just mentioned. I understand that, your earlier comments about FY 22 being a tale of two halves, but in terms of that recovery in the VA as it relates to lymphedema patients, how do you see that playing out, as we move through the year here? Are there still regulations that your sales force is encountering? Or how do you see that going?

Yes. One of the things about the VA, is they -- they seem to be growing increasingly entrenched in their posture. I think when COVID surfaced, it seemed a little uncertain about whether or not they're pivot was temporary or if it was a precursor to something more permanent. Recall that we used to find most of our patients at the VA centers, of which there were about a 170. When COVID surfaced, most of those patients were redirected out to the community based outpatient centers. As it is -- as we've continued to monitor this one, I think that the CBOC or the outpatient centers and even virtual patient encounters seemed like it's here to stay. So I think that there's a good chance that this is the new model that we've seen. But I think we've also demonstrated that we've been able to pivot along with it. The outpatient centers have become a regular call point for us, so we're certainly engaging there. I think longer term I've suggested that I expect that low double-digits is more likely percentage is a function of mix for us on a projected basis with the VA, if you look at just the size of the market relative to the overall market. So we think that the VA posture is probably going to be enduring at least for the foreseeable future, and I think we've adapted to be able to engage with patients in that model.

Awesome, thanks so much.

Thanks Phil.

Our next question is from Margaret Kaczor with William and Blair, please proceed with your question.

Hey, guys, this is Maggie on for Margaret today. I just wanted to ask within the 2022 guide what are you assuming in rep, productivity growth from your existing reps and then the new reps that you would plan on hiring throughout the year.

Yes, maybe I can give you a little perspective on that. Recall that our general expectation for product specialists, and this is on average, is a product specialist generates roughly about $1 million of revenue in a given year. And depending on the size of the territory and how much demand there's in the territory, they might actually be granted and associate product specialists. And if that territory can support both the product specialists and associate product specialists, you can think about that territory, generating roughly about $1.5 million with the out of that APS. Then of course, we've talked about the field support specialists, if we can have a field support specialists in that territory, we start to see nice productivity gains on a comparable basis. So fully staffed territory with a product specialists, EPS and an FSS. Think about that FSS adding roughly somewhere between 20% and 30% relative to that territory. So that just gives you an idea of how the build works from a productivity perspective by the reps.

I think one thing to add too is that we have -- and Brent alluded to it earlier about build versus buy. We've historically had one path to staffing product specialists and that was to hire in and associate, develop that person, and typically the germination process takes a fair amount of time. What we're also doing now in an attempt to make sure that we staff all of the field territories that we have in mind, but to also accelerate our productivity curve, is we're introducing a blend. Some associate product specialists continuing to promote up when they're ready. But we're also competing now externally within the med-tech marketplace. And we're adding a blend of both promoted from within, as well as experienced med-tech salespeople externally. And I think that as we do that, there maybe an opportunity for us to condense some of the productivity curve for incoming product specialists.

Okay, great. Thank you. You guys talked about having a heavier podium presence this year. So what type of data are you aiming for? And then what, if any, benefits are included within the guide, whether that'd be assistance with utilization or new accounts or just growing market access. Thank you.

Great question. We had certainly shared last year that we had started sponsoring random clinic, randomized clinical trial on head and neck cancer survivors. And that one will continue to proceed. So that's one of the places that we're certainly investing in ongoing evidence. We're convinced that while that's a multiyear study, that it will have the girth and level of evidence that will actually influence payer policy. So that's an important one, it won't bear fruit in 2022, but a really good example of some of the evidence we're doing. Coming up later on this week is the American Venous Foundation Congress down in Orlando. We'll have a couple of opportunities with various speakers and presenters presenting some updated information as it relates to identifying patients, further exposing the market opportunity and how to identify suitable candidates for treatment. There is also in June, the society for interventional vascular radiology, we expect to be represented on the podium there. I think there's going to be a really nice opportunity for us within -- with another new constituent to further the opportunity to talk about the scope of lymphedema and how to better identify suitable candidates. And then, we've got some earlier stage work starting, as it relates to AffloVest that we'll be able to demonstrate. We believe some of the efficacy that the therapy that we've got, can produce. So evidence continues to be a really important part of our journey about revealing more of these under served and under-recognized patients and helping clinicians identify the right markers so they can both diagnose and ultimately prescribes the right therapies to bring relief to these patients.

Great. Thank you.

As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. We ask that you limit to one question and one follow-up . Our next question is from Suraj Kalia with Oppenheimer, please proceed with your question.

Hey, Dan Brent. Hope everyone is safe and healthy. Dan, first two-part question. In Q4, what percent of your organic revs were contributed by the 30% unvaccinated reps? And the second part of that question is in one, the 50 reps that contracted COVID on average, how long were they decommissioned and how recoverable is this business?

Suraj, I just want to make sure I answered the first one. There were a couple of percentages mixed in there. Your question was related to the 30% that we're unvaccinated. I just want to make sure the nature of the part of that.

Yeah. Just trying to understand what percent of the organic business is contributed by these 30% of the unvaccinated reps?

Yeah, I don't know that we have the detail on that. And just to remind you, we said we had about 30% of our sales force remained unvaccinated going into the fourth quarter. Over the course of the quarter, number of them either got vaccinated or -- we had -- our policy was going into effect. Basically, the first of the year. And anyone that remained unvaccinated would've gotten a waiver in agreement that they were going to be tested a couple of times a week. The entire sales force is either vaccinated by the end of the quarter or meeting that testing requirement. So we wanted to make sure that we could be bringing people into patients, homes, and interfacing with them in clinics in a safe environment. That 30% certainly continued to go down, as far as how many were unvaccinated. But ultimately, all of them followed our policy as it related to vaccination. And then I think the second question, how many -- oh yes. How many days? It's probably a reasonable assumption to say, not less than five. If you test positive, most protocols would certainly suggest that you're out for a week, and some of them could've been more. So I think it was -- that's a pretty typical rule of thumb.

But is this business recoverable, Dan?

When you say is it recoverable, --the sales rep wouldn't have been available to engage with patients in clinic. That's more about the ability to support new prescriptions. If we had prescribers that were prescribing for patients, we were still of course, able to support them. We were able to have trainers meet with them. So I think that that business continued, but you can imagine if you've got absent. it's the same as having an open territory. So if you pull a handful of salespeople out that are not productive in clinic, either growing the business or continuing to support their customer. There's certainly an impact and that's what led us to kind of some of the guidance, general direction that we were voicing as far as Q1.

Got it. And final question, Dan, what was the percent use of virtual training in the quarter? Thank you for taking my questions.

I don't have the percentage at my fingertips, Suraj, but it was relatively modest. It's a place where I think we can continue to grow, particularly as we introduced this mobile app in the back half of the year. I think engaging with patients with a digital footprint, increased training content via video in the palm of their hand on their phone, certainly will continue to help us move in that direction. But at this point, I think it was relatively modest in Q4.

Thank you.

We are currently seeing no remaining questions at this time. That does conclude our conference for today. Thank you for your participation.

Thanks, Carl.

Thanks, Carl.

You're welcome.