Welcome, ladies and gentlemen, to the First Quarter of Fiscal Year 2023 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 which 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 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 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 first quarter of 2023 earnings call. I’m joined on the line today by Elaine Birkemeyer, our Chief Financial Officer. Let me provide you with a quick agenda for today’s call. I’ll begin with a high level overview of our quarterly financial performance in the first quarter, followed by a discussion of the key drivers of our sales performance. I’ll cover our first quarter operational progress, highlighting some of the most notable accomplishments made by our team. Elaine will walk through our quarterly financial results in greater detail, as well as our financial guidance for 2023, which we updated in today’s press release. And I’ll conclude by discussing our outlook and strategic priorities for the rest of 2023 before opening the call for questions. With that, let’s get started with a review of our financial performance. In the first quarter, we grew our total revenue by 23% year-over-year to $58.8 million, exceeding our expectations. We were especially pleased to demonstrate that such strong performance in both of our key product lines. We posted another strong performance within our lymphedema products, growing 22% year-over-year to $48.9 million. We also saw strong contributions from sales of our airway clearance products increasing 24% year-over-year to $9.1 million. We were pleased to deliver notable improvements in our operating results with year-over-year reductions in our operating loss and net loss on both a GAAP and non-GAAP basis, and positive adjusted EBITDA results. This is the first time we’ve generated positive adjusted EBITDA in the first quarter since 2019. With that as a backdrop, I’ll share some of the primary factors that contributed to our revenue performance, beginning with our lymphedema product line. In the first quarter, we were pleased to see another strong quarter of retention and engagement within…

Thanks, Dan. I’m excited to have joined the Tactile Medical team during a pivotal time in the company’s history, and especially pleased to have such strong operating performance to outline on my first quarterly earnings call. Turning to review of our financial results, unless noted otherwise, all references to first quarter financial results are on a GAAP and a year-over-year basis. Total revenue in the first quarter increased $10.9 million, or 23%, to $58.8 million. By product line, sales and rentals of lymphedema products, which includes our Flexitouch and Entre systems, increased $9.1 million, or 22%, to $49.8 million, and sales of our airway clearance products, which includes our AffloVest system, increased $1.8 million, or 24%, to $9.1 million. Continuing down the P&L, gross margin was 70.5% of revenue, compared to 70.6%. Non-GAAP gross margin, which excludes non-cash intangible amortization in both periods, was 71%, compared to 71.2%. GAAP and non-GAAP gross margins in the first quarter of 2023 were impacted by higher labor rates and material costs, as well as higher costs related to new product launches relative to the first quarter of 2022. First quarter operating expenses decreased $3.5 million, or 7%, to $45.3 million. The decrease in GAAP operating expenses was driven by a $5.8 million decrease in non-cash intangible asset amortization and earn-out expense, and a $783,000 decrease in reimbursement, general and administrative expenses. These items were offset partially by a $2.4 million increase in sales and marketing expenses and a $73,000 increase in research and development expenses. Operating loss decreased $11.1 million, or 74%, to $3.8 million. Non-GAAP operating loss decreased $3.2 million, or 59% to $2.2 million. The decrease in non-GAAP operating loss was driven by a 22% increase in non-GAAP gross profit, offset partially by a 10% increase in sales and marketing expenses,…

Thanks, Elaine. In summary, we’re proud of the financial performance and the operational progress we achieved in the first quarter, which exceeded our expectations. We’re raising our full year guidance based on the strong start to the year, while keeping an eye on the emerging macroeconomic backdrop as 2023 unfolds. And we remain committed to achieving double-digit organic revenue growth on an annual basis, along with year-over-year improvements in our profitability. As we progress through 2023, we intend to continue our recent pace of progress as we execute against the following 4 strategic priorities that I outlined at the beginning of the year: first, to improve the productivity of our lymphedema field sales team; next, to expand and deepen relationships with DME providers and their reps for our airway clearance product line to develop and introduce new products and innovations focused on addressing the lifestyle needs of our patients and improving digital functionality and therapy optimization; and finally, enhancing our operational efficiency to continue to reduce our overall cost to serve. In light of our recent performance and progress, we believe our continued execution with respect to these strategic priorities will position Tactile Medical to deliver strong sustainable growth in 2023 and the years ahead, as we progress towards achieving our longer term strategic and financial goals. Thanks to everyone on the Tactile Medical team for your efforts this past quarter and to our customers, suppliers, shareholders, as well as those on today’s call for your support. Operator we’ll now open the call for questions.

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Adam Maeder with Piper Sandler. Please proceed with your question.

Hey, Dan. Hey, Elaine. This is Simran on for Adam. Thank you for taking the question.

Hi, Simarin.

Hi. I want to start out with the guidance for a moment here. You raised your revenue outlook by about $2 million, despite about a $5 million beat at the midpoint of your prior Q1 guide. So maybe just walk us through what you’re seeing in the procedure environment throughout the quarter and exiting Q1, and then also from a macro perspective to help inform that decision. And then I also didn’t hear Q2 guidance. So what are your expectations for this quarter?

Yeah, so let me try and unpack that one if I can, Simran. I’ll start a little bit with what are we seeing in Q2 so far. I think nothing terribly surprising we’ve seen some ongoing stability resuming in the clinic volumes. I think we saw that through Q1, and I think that’s continued largely into Q2 as well. We’ve said several times that I don’t know that we see velocity of volumes getting back to 100% of pre-COVID levels, but we don’t need to get back to that level either. I think that we have seen good recovery on a macro basis, and I think that’s been consistent with our expectations. We’re hearing staffing issues are getting progressively better in the clinics and the therapy clinics that we serve. And, I think, so far we’ve had a good reception to the recent introduction of our Entre Plus. And ultimately, all those are kind of considered in the guidance. We are not updating quarterly guidance at this point, but rather we just opted to update annual guidance. And I think to your question, that where you started relative to how we got there. So, first of all, we knew Q1 was going to be our strongest quarter. Our original guidance suggested that it would grow faster than our overall full year. But if you take a look at where we finished up, we beat our high end by about $3.6 million. We raised it by two on the high end. So it’s about a little over a $1.5 million dealt in. And frankly, I’m not sure, we’re good enough to have that much precision at this point. We got 9 months of wood left to chop, and I think that with a more balanced comparison of sales headcount as we progressed through the year, we got the biggest benefit in Q1, where we were still trying to get role staffed. Ultimately, those are some of the things that contribute to that. We have not seen any of the macroeconomic backdrop that would take us to the lower end. And I think we talked about that we initially posted guidance in February, but that’s certainly something that we’ll keep an eye on. And in the meantime, we were just really, really pleased to be able to raise guidance and feel confident about the latest guidance, which puts us in the double-digit kind of 10% to 11.5% range.

Awesome. Thank you for that response. And I guess for my follow-up, I’ll ask about AffloVest, another nice quarter here in Q1. Did you see any impact from those prior supply chain headwinds in Q1 and was there any pull through from potential backlog that being from those headwinds? I guess what I’m trying to get out is, are you in a position now to take full advantage and supply the market?

Well, I think the answer to the last question is we are in a full position to supply the market and we didn’t really carry anything in the line of a backorder into Q1 or into Q2 for that matter. But I think now that we’ve been able to communicate our expectation that we have ample supply capacity, I think, it’s an opportunity for us to make sure that the sales channels are fully reengaged. There were some, I would say admittedly at points throughout the last handful of quarters that would express some reluctance to put their shoulder behind it with the uncertainty about whether or not we’d be able to supply them at the higher end. So, I think that we’ve certainly communicated the fact that we feel like we’re in a good spot from a supply chain standpoint going forward. And we’re hopeful that that will lead to ongoing demand that will continue to increase and those are things that we factored in as well.

Perfect. Thank you.

Our next question comes from the line of Margaret Kaczor with William Blair. Please proceed with your question.

Hey, good afternoon, everyone. Thanks for taking the questions. I’m going to try my hand one more time on the guidance side just to follow-up. So I’m just kind of going through the math and the multiples, especially on the line side of the business, you guys had this tremendous 22% growth. I know the comps get a little bit tougher as we go on throughout the year. But if all I do is just try to average to that 9% or 10% for the full year guidance number, I get to this kind of mid- to high-single-digit line growth for the next three quarters. So, one, tell me if I’m right or wrong about that that’s below the long-term guidance that you’ve given for lymphedema. So I appreciate the conservatism on the thoughts around macro, but it seems like maybe there’s a little bit of room to that number, and why or why not?

Yeah. I’m not sure the answer is a lot different, Margaret. I think that we certainly tried to express our confidence by raising our full year guidance. That said, I think it’s a little early for us to declare victory, but we felt really good about the fact that we saw some solid productivity from our sales force. I think the administrative process that we’ve tried to streamline has been certainly good for the business in the first quarter, and ComfortEase has continued, I think, to resonate well. So I’d say we feel confident about the double-digit growth guidance that we’ve updated to, and I think we’ll have a lot clearer vision of this once we get through Q2 and into the later part of the summer. So I think that’s still pretty consistent.

Okay. I appreciate it. I had to try. So just as to follow-up on some other things, you had talked about some of the CMS changes eliminating certificate of medical necessity at the beginning of the year that seems like it’s maybe potentially more meaningful change. So how does that help accelerate getting the product to the patient maybe therein sales rep productivity, if at all? And then could it even increase the closed rate for patients?

Yeah, I think it remains to be seen, but it’s a really good question. So there’s a couple of things going on in that space with the Medicare patients. First of all, I think there have been a fair amount of those patients that would have been overlooked, partly because the administrative effort was frankly pretty burdensome to the clinic. So the elimination of a CMN and then maybe just as importantly, but some new processes that we introduced as far as how we can collect that information, what information is going to be necessary, some forms that are more user friendly. And I think all of those, we’re hopeful, will continue to help make sure that patients that can benefit from our therapies get recognized, not overlooked, and that we don’t make the work harder than it’s going to need to be for the HCPs. As a result, we hope to reveal more of those patients that we can treat. On the flip side, the PHE waiver is ending in mid-Q2, actually it’s in a few days, if my calendar memory is right. So there’s a little bit of an offset there that, there were some things that were a little bit easier that will go back to the olden days. But we think that the offset. On the good side is that the processes that we’ve introduced, we’re hopeful to continue to demonstrate that it shouldn’t be a burden on the HCP to do the right thing. And help these patients that haven’t gotten therapy to date.

Okay. Great. Thank you, guys.

Our next question comes from the line of Ryan Zimmerman with BTIG. Please proceed with your question.

Hey, good afternoon. Congrats on the quarter. I want to ask I know you’re not guiding quarterly here, Dan, that’s pretty evident as we’ve all tried. But remind us about seasonality and kind of how you expect the seasonality to progress, particularly in the second and third quarters? You’ve historically had this nice linear improvement recently, but as we come out of COVID kind of help us think about the pace for the next three quarters.

Yeah, I mean, I think you can look at history and see that typically our revenue ramps throughout the year and kind of resets. So we would certainly expect to continue to see incremental growth sequentially throughout the year with Q4, of course, continuing to be our biggest one as co-pays come down, and typically the device gets effectively less expensive for the patient. Probably even more true with the AffloVest, just because of the average sell price is higher than some of our lymphedema therapy products. But sequential growth would certainly continue to be an expectation that I would say is fair. Okay.

And Elaine, it’s nice to have you on the call, and especially on a strong quarter, start your time here at Tactile. Just remind us kind of your near-term goals that you have in the position as you take hold there?

Yeah, maybe I’ll take the time to just share a little bit of what my observations and kind of how that leads me into my goals here. So, coming from a large organization, I’ve been really impressed by the talent, the alignment around our strategy and really how mission driven the organization is. In fact, I was just at our national sales meeting last week and it was clear that our mission permits everything that we do. And we’re really making a difference in people’s lives and I think be a key to our success and what I was looking for when I joined the organization. I also had a chance to dive into our long range financials and took a look at the guidance that we put out for 2025. And just as a reminder there, we said we would deliver over $350 million in revenue, over $50 million in adjusted EBITDA and $75 million of cumulative free cash flow. I feel confident we can deliver that, and I see a team here who’s focused on driving top-line growth while expanding profitability. And that too is going to be one of my objectives and things that I focus on this year. And then lastly, another focus area for me – oh, sorry, would be to leverage – I’m sorry, go ahead.

No, I was saying, please go ahead, Elaine. Sorry for interrupting.

Okay. Yeah, no problem. And I just say lastly, another opportunity I see is really to be able to leverage my healthcare experience to drive improvements in our revenue cycle management. I think this represents a significant opportunity for Tactile and should result in improvements in our net working capital as we’re able to lower accounts receivable. So I see that too as a focus area and a way for us to achieve those 2025 goals that I mentioned.

Very helpful. And the mention of cash flow actually promised me to sneak in one more question, which is Medicare, as a percentage of sales this quarter was up pretty significantly relative to last year. And just given the payment terms on those Medicare cases you get, how do you think about that dynamic coming through in terms of your cash balance and just the overall shifting dynamics of the payer mix of the business?

Yeah. So, I think, one thing I’ve been excited to see is that the team, as I moved in here, has been spending a lot of time with our Medicare administrative contractors to increase our first pass approval. I’m really encouraged by the latest engagements that we have with them. We’ve gotten greater alignment on our submissions, and we’re seeing improvement in our first pass adjudication. So that really points to a really good momentum, especially as you mentioned, that we see strong growth in the Medicare space.

Yeah. I would just add to Elaine’s comments that, I think, this team is doing a really good job working with the Max. We’ve made some pretty good progress and I think we’re going to demonstrate that it’s not the curse to support the Medicare business than it was a few years ago as we go forward, as we continue to get better at working at the first past adjudication, which her team and think is making really good progress on.

Okay. Thanks for taking the questions.

[Operator Instructions] Our next question comes from the line of Suraj Kalia with Oppenheimer. Please proceed with your question.

Good afternoon, Dan, Elaine, can you hear me all right?

We can.

Perfect. Apologies, I’m under the weather a little bit.

Okay.

So, Dan, in terms of Kylee, can you remind us what percent of patients currently have Kylee? And more specifically, what kind of a tool deal envision Kylee to be? Would it help improve patient compliance? Or is this more as a data gathering tool for payers, so to speak?

Yeah, I think good question, Suraj. And frankly, Kylee has got a variety of different complexions to it. We originally talked about Kylee as a learning tool that we can make available to patients so they can better understand their condition and, frankly, advocate for themselves. We know that so many lymphedema diagnoses are missed or misdiagnosed, so equipping the patients with more information via this Kylee app was the first goal of the application. And then the next one is we think that it can have an impact on our training. We have training vignettes and that’s a cost to serve component. We can meet patients where they want to be met. If they want to be trained in the home, we can support that. If they’re adept with a smartphone, we may be able to provide them the assistance that they need more efficiently. Like so many of us depend on our smartphones. There’s another piece which then becomes the ability to communicate with their physician their progress. While Kylee was introduced back in the summertime last year, we’ve continued to have incremental drops with new features. The most recent addition was we started adding bluetooth chips to Flexitouch in December. We’ve already had over 35,000 patient sessions that have been captured and downloaded through Kylee. These are opportunities for patients to bring the results to their physician, share with them when and how they’re using it and how they’re benefiting or responding from it. So I think that those are some of the ways that we see Kylee currently. They’re also able to track their orders. So from a contacting customer service, it offloads some of the human burden and can even more immediately give them that feedback. And then as we get into the back half of this year, Suraj, we’re going to continue to have some advances on how patients can record and track their measurements. We’ll have prompts, just like my iWatch does about, hey, it’s probably time to do your therapy or celebrate the fact that you did, and a number of other things, I think, on the cost to serve side as far as order processing engagement. So I’d say, in summary, it’s an opportunity to educate. It’s an opportunity to engage with patients and reduce our cost to serve and also an opportunity for them to share more useful information with their providers.

Got it. And Dan, if I could ask a higher level question. Dan, what do you think would be the next iteration of product development, more specifically to reduce the minutes spent per day by the patient? Thank you for taking my questions.

Yeah, really a good question. There’s a lot of ways that we want to continue to improve the utility and the efficiency of patients therapy sessions. I think the introduction of Entre Plus is a great example, where it’s easier for patients with bilateral lymphatic disease to treat both legs at the same time, and we’ve already got the ability to do that with the Flexitouch as well. So I think that being able to treat multiple parts of the body in one treatment session is already a way to optimize that. There’s certain limit about, I think that we can’t shortchange it, because there’s a component that’s necessary to make sure that therapeutic outcome is good. But again, being able to do multiple parts of the body simultaneously certainly helps rather than having to treat those parts of the body sequentially. So I think that’s one that is certainly more visible in the latest iteration of our Entre system. And then, Suraj, we continue to invest in product development. There are additional solutions that we continue to work on, and ultimately we expect those to produce a better therapeutic experience that’s always optimizing efficacy, but starting to continue to appreciate some of the consumer features that we know patients want.

Thank you.

It appears there are no further questions in the queue. This does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.