Welcome, ladies and gentlemen, to the Second Quarter 2024 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. I would now like to turn the call over to Sam Bentzinger Investor Relations at Gilmartin & Group for a few introductory comments. Please go ahead.

Good afternoon, and thank you for joining the call today. With me from Tactile's management team are Sheri Dodd, Chief Executive Officer; and Elaine Birkemeyer, Chief Financial Officer. 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 those 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. With that, I'll now turn the call over to Sheri Dodd.

Thanks, Sam. Good afternoon, everyone, and welcome to our second quarter 2024 earnings call. Here with me is Elaine Birkemeyer, our Chief Financial Officer. I'm pleased to report strong Q2 performance across both our top and bottom lines as well as improvements in our operating cash flow. Specifically, Tactile achieved total revenue of $73.2 million in the second quarter, representing 7% growth year-over-year. By product line, lymphedema revenues increased 8% year-over-year to $64.7 million, and Airway Clearance revenues increased 2% year-over-year to $8.5 million. We delivered strong adjusted EBITDA with over 49% year-over-year increase, reflecting our focus on profitably scaling for our business and operating leverage. From a cash perspective, we increased cash and cash equivalents by $12.9 million in Q2, tipping our cash balance to $73.6 million as of June 30, 2024. Finally, each of our key commercial initiatives for 2024 remain on track. These include: number one, technology and workflow related investments in sales and order operations focused on simplifying and accelerating time to revenue. Number two, development and launch readiness of our next-generation lymphedema platform; and number three, generation of clinical evidence to support patient expansion. I'll expand on each of these shortly, but I'd like to begin with a few high-level remarks. This marks my first earnings call as CEO of Tactile Medical. But before I dive in, I'd first like to congratulate Dan Reuvers on his well-earned retirement and thank him for his measurable impact and meaningful contributions to the company and the patients we've served over the last 4 years. I've had a chance to work closely with Dan as a member of Tactile's Board of Directors since 2021 and his stewardship of the business during the pandemic and through the post pandemic recovery period has been admirable. I'm excited to be in this…

Thanks, Sheri. Unless noted otherwise, all references to second quarter financial results are on a GAAP and year-over-year basis. Total revenue in the second quarter increased $4.9 million or 7% to $73.2 million. By product line, sales and rentals of lymphedema products, which includes our Flexitouch and Entre Systems, increased $4.7 million or 8% to $64.7 million, and sales of our Airway Clearance products, which includes our AffloVest System, increased $0.2 million or 2% to $8.5 million. Continuing down the P&L. Gross margin was 73.9% of revenue compared to 70.7% in the second quarter of 2023. Non-GAAP gross margin, which excludes noncash intangible amortization of both periods was 74.3% compared to 71.1% in the prior year. The increase in non-GAAP gross margin was attributable to -- primarily to lower manufacturing and warranty costs and improving collections reflected in our revenue. Second quarter operating expenses increased $2 million or 4% to $48.3 million. The change in GAAP operating expenses reflected a $0.4 million increase in sales and marketing expenses, a $0.4 million increase in research and development expenses and a $1.8 million increase in reimbursement, general and administrative expenses. Strategic technology investments accounted for approximately $1 million of the increase. These items were partly offset by a $0.6 million decrease in noncash intangible asset amortization and around expense, operating income increased $3.8 million or 184% to $5.8 million. Non-GAAP operating income increased $2.9 million or 80% to $6.5 million. As a reminder, our non-GAAP operating income excludes noncash intangible amortization and earn-out expense as well as certain nonrecurring operating expenses. We've provided a detailed GAAP to non-GAAP reconciliation in our earnings press release. Other income net increased $1.1 million or 127% to $0.2 million. The increase was due to higher interest income on our increased cash position and lower interest expense,…

Thanks, Elaine. To close, we are pleased with our Q2 performance, but even more excited about what the future holds for Tactile. We are fortunate to have well-defined strategies already in place and actionable initiatives underway to achieve them. Over the next several weeks and months, I'll be having deeper conversations with our leadership team, spending time in the field with our sales people and connecting with our physician and patient communities with the goal of refining key elements of our existing strategies and identifying new opportunities to continue driving sustainable and profitable growth. Importantly, I also plan to share greater detail on our approach to capital allocation in the coming quarters. As Elaine mentioned, we are increasingly benefiting from a generation of free cash flow, a trend we expect to continue. This not only reflects the maturity of our business and our prudent cash management, but also an opportunity to allocate capital in various ways to increase shareholder value. In the coming months, we will be focusing on evaluating several options to leveraging our strong balance sheet, and I look forward to providing updates on our strategy. With that, operator, we'll now open the call for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Margaret Kaczor with William Blair. Please proceed with your question.

Hey, good afternoon everyone. Thanks for taking the question. I maybe wanted to touch on guidance first. The range decreased $7 million on the high and low end, and it sounds like, correct me if I'm wrong, that all of that was kind of on the Medicare side, more likely Flexitouch. But how should we think about that impacting maybe Q4 versus Q3 seasonality? And you were clearly able to offset some of those headwinds this quarter as well as the first. So maybe you can give us a sense of is it getting worse? Are you seeing these trends expand? And then -- sorry, it's a loaded question. But how do we - and when do we expect this to be more normalized? Is it 2025 as some of these documentation elements start to have an impact? Thank you.

Thanks, Margaret, and definitely anticipated this question. So let me break it down into three components. So you know, just facts. There's been a really distinct change in the documentation requirements for PCD coverage. So Medicare is just demonstrating this increasingly onerous approach to documentation, which is requiring more time to assemble the requisite documentation which elongates the time from Rx to order completion. And this impacts all PCD manufacturers, not just us. This change is really surprising given the fact, as I mentioned before, the 2015 LCD has not increased its documentation requirements. So this is a new approach. Speaking of approaches. So that's facts. Our approach has looked the following. First is we're addressing this interpretation change both strategically and operationally. So strategically, with policy engagement with professional societies, MAC, CMS level, et cetera, and then operationally with technology investments such as this e-prescribing tool that I shared. We can go into more detail about that, too. With the e-prescribing tool, we're well into our pilot of that technology, and we plan to expand that implementation later in the back half of this year to go more nationally. So that's the second component that I want to share. On a third, and I'll turn it over to Elaine for more concrete examples of the requested documentation change with CMS. But I really want to emphasize that we see this as turbulence versus an unmitigable [ph] headwind. So our non-Medicare business grew 20%, and our business fundamentals are really solid. It's comforting to me and hopefully all of you that I've had over 20 years of experience in both pharm [ph] and med device and U.S. reimbursement. So I'm really confident we have the appropriate strategies and action plans in place, and we can readily adapt to this dynamic reimbursement environment. You asked about new normal. And is this what we can expect. Medicare policies are always going to be dynamic. And while it's difficult to anticipate sudden changes in interpretation for a long-standing policy like this LCD, we're really prepared. Our investments in modernizing technology are designed to be adaptive to whatever requirements are out there, and our strategic approach will be to work with MACs and CMS to position therapy -- PCD therapy, sorry, for Medicare patients that meet the clinical criteria. It takes time to strategically adjust some things and operationally to get everything in place. But the good news is we started this pilot earlier in the year and we'll anticipate seeing more and more benefit come through. And Elaine can talk more about the timing of that. But let me first start by asking her to give some examples. So the context of what these documentation change looks like are appreciated.

Yes. I think probably a long-standing requirement has always been the need to do conservative [ph] therapy. And in the past, documenting that conservative therapy has occurred was sufficient. And what we're learning through both our claims adjudication as well as regular routine audits is that now we need to document start and end dates, we need to have measurements on those dates. And in fact, also if the conservative therapy trial extends longer than four weeks or documentation as to why. So that specificity as you can imagine, doesn't always make it into the medical records, which then can cause a lot of rework, both on our part, the physicians and really delayed treatment to these patients. And so that's why this e-prescribing platform, which we're able to then facilitate the appropriate capture that first time is very important. And then in addition to the work that we will be doing from a payer policy perspective, we also believe that these are just onerous requirements that really are a detriment to Medicare patients getting speedy access to treatment.

One thing, just so Margaret, you mentioned Flexitouch only, and I just want to correct you that this is for all PCD pumps, whether they're basic or advanced.

Okay. Thank you. I appreciate that. And then just to touch on the guidance question as well. The $7 million on the high and low end, how should we think about that for Q3, Q4? And then your margins obviously were great. Your cash increase is great. I know you referenced you'd give us an update on that later. But as we think about the LRP in 2025, as we think about kind of margin expansion, is this story and the cash generation, can you give us any sneak peek of those future plans? Thank you.

So Margaret, I'll address the kind of back half and quarter question and then I'll -- Sheri touch on kind of how we're thinking about 2025. So I think you asked a question as to does the cadence change. And I would say, no, I think we would continue to see sort of our normal sequential growth that we would see in a typical year or Q3 is always a little bit bigger than Q2 and Q4 being kind of the bigger quarter. Again, this dynamic really driven by the fact that co-pays become less and less as people progress along their plan here. So we wouldn't expect anything different in that regard.

As it relates to the LRP, the -- given the guidance reduction, so not going to reiterate or provide any updates today regarding the LRP in 2025 and one month plus five days, I guess, to be specific, into this new CEO role. And I really need more time to give an informed perspective. I have been and we'll continue to collect information, be out in the field, talk to both internal and stakeholder constituents and just having more discussions to understand where are we and then where we can go. And that's just going to require a little bit more time for reflection and analysis. I am really encouraged that our profitability and free cash flow profile do mirror the targets that were set out in 2022. But as we've shared, the revenue is pacing below due to the increased MAC documentation. So with more time in this chair, I'll be in a better position to comment more specifically on 2025 expectations in the next months and quarter ahead. I also think, Margaret, maybe you asked a little bit about the approach and you didn't use the words, but let me just kind of address is this conservative or aggressive. The guidance that we're putting out is really based on our current view and understanding of the Medicare landscape, which again surprised us because of the documentation requirements really just don't fit with the current LCD guidance. So this is an updated range that we feel comfortable with. And I appreciate it's a 2% cut in revenue, but it's also on the foundation of really strong business fundamentals, growing market, high unmet need, under penetration. And we're going to address this Medicare issue, both strategically and operationally, and I feel that we've got a good chance to get ourselves in a better position, but we need more time to really provide any guidance on the LRP or 2025.

Sounds good. Appreciate it.

Yeah. Thank you.

Thank you. Our next question is from Adam Maeder with Piper Sandler. Please proceed with your question.

Hi, Sheri, Elaine, congrats on the Q2 results. And thanks for taking the questions. And Sheri, welcome, and congrats on the new role. I wanted to follow up on the Medicare documentation requirements. Just a couple of kind of clarifying points there. So first -- and sorry if I missed this in the prepared remarks, when did this go into effect or when did you kind of really start to see the change? And then I'd be curious in terms of the script to kind of order completion or the elongation of the patient funnel. Can you put more specifics around there? I mean, what does that change in terms of patient funnel, how many days this would be helpful to get a little bit more granular there? And then I have a follow-up. Thanks.

Sure. I'll let Elaine first kind of speak to when this all started to go from a one-off to a trend.

So I think, as you know, we have been closely monitoring all of our adjudication results. And in fact, that's been a lot of what's attributed to our great success in working down AR, growing cash and improving free cash flow. And we started to see earlier this year, denials related to some of this what was increased documentation requirements as well as kind of, like I said, routine kind of audit practices. And really the evidence has continued to accumulate and this quarter in Q2, we realized that we needed to change our criteria and what we require for orders to be processed to reflect what has been growing and mounting evidence of stricter and more documentation there. So it was really sort of, I would say, a build across the two quarters with that change happening in Q2 and when we implemented it.

What I will say, Adam, is also we talked a little bit about the e-prescribing tool. And again, quite forward thinking in terms of getting that in place, just wanting to automate and simplify the process, both for our team as well as for our providers. But very insightful as it relates to what is a realistic expectations that policy environments are going to change. And so now we have this tool in pilot that's going to help us adjust and adapt to whatever the policy requirements are. The -- what we do know from the pilot are a couple of things is one is we've got the right tool that can get to the specificity of the documents that we need. And so we're actually the first partner of this e-prescribing vendor to apply the tool to a PCD. And again, so we're laying the groundwork for the appropriate documentation of how that tool works. And we do know that on the pilot that those who use the pilots, we actually saw product shipping faster when patient orders went through the pilot versus on our overall average. So we are confident that when we can get that tool in place that we will see faster shipping times. So this is our future using this tool and the early feedback has been positive, both on shipping times as well as on the overall experience.

That's very helpful color. Thank you both for that. And for the follow-up, I wanted to ask about Nimbl. Congratulations on the approval. I would love just to hear a little bit more about the commercial strategy. I think I heard early fall for limited market release. But maybe just any more specifics you can give us around Nimbl, which customers are going to target? Do you have any restrictions or capacity constraints to launch that product? And I guess, just bigger picture, how do you think about the impact on the lymphedema business with this new product in the bag? Thank you so much.

Yes. Thanks, Adam. I'm glad you asked because another great time to be joining as CEO is on the heels of a 510(k) approval of this new platform. So you are correct. We're going to be doing a limited launch this fall and are excited to bring this new platform to patients. I got to demo Nimbl and the Kylee app, and I'm really confident that patients are going to appreciate this lifestyle friendliness attributes, smaller, it's portable. The connectivity on digital with Kylee allows the patient to share data on their progress with their lymphedema directly with their provider. And it's a great product introduction altogether. We started this Nimbl platform with the basic pump, and that's very strategic. Owning this entry-level space is part of our sustainable growth plan, and we're always going to be focused on innovation and technology that meets the patient where they are in the lymphedema care continuum. So that's our starting place. We'll be with Entre patients, the basic pump patients, and then we'll have an innovation road map that will continue to expand that across our other offerings. Right now, the limited launch is going to be targeted in specific geographies and then we'll go to full launch. We've built, I think, over 900 demo units now. I don't see any constraints at all in our manufacturing or operations side of it. We're ready to go there. And also really looking forward to this coming on board as a portfolio and adding it to our P&L, we're confident that it's going to be providing exactly what patients need, and it's going to be accretive to our P&L. So we're in a good place and looking forward to sharing more details on the launch in Q3.

Thank you.

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

Hi, thanks for taking the questions. This is Izzy on for Ryan. So Sheri, just to start with you, given your appointment about a month ago, can you walk us through some of your near-term goals that you have for this new position?

Certainly. You didn't sound like Ryan, so yeah, no. Thanks for joining the call and thanks for question. Yes, just one month in, and so a very intentional and deliberate plan to spend time both internally and externally. Last week, I was with customers have been meeting with not just the executive leadership team, but the senior management team, engagement with the Board, product demos, deep into financial operations. So I've really been taking a very intentional approach to learn the business. And go in where we have both the biggest opportunities in some of our pain points, as we described with this Medicare issue and fortunate that this is a background. So the language and the strategies are not foreign to me. And we'll continue -- I'll continue to dive in and continue to expand with the goal on looking to see what is the refinement of our strategy and what are those new opportunities we can put forward. But it's been a really very energizing first 30 days.

Great. Thank you. And just given the strength of the balance sheet today and the cash generation you guys have been able to deliver, why isn't a share repurchase at these levels, the right strategy?

Yes. Thank you for noticing. We also are really excited about where we sit, again, another great time to join CEO when this nice increasing generation of free cash flow is not only on the balance sheet, but we expect it to continue. The nice thing is cash is cash and you can't take it and it really demonstrates this improved financial profile that we have reflects the maturity of the business, we can efficiently scale prudent cash management, we can prioritize, tighten where we can and invest in tech road maps and initiatives. And then we can invest in growth while prioritizing shareholder value. So we have a lot of options in front of us. And in the coming months, I'm really going to be laser-focused on evaluating the choices of which share buyback is definitely one of those, and I'll be able to update you. But also need a little bit more time in the chair before we start pulling on all of those levers, but it's a really nice position to be in with the balance sheet as it is, affords us a lot of options.

Great. Thanks for taking the questions.

Yes. Thank you.

Thank you. Our next question is from Suraj Kalia with Oppenheimer & Company. Please proceed with your question.

Sheri, can you hear me all right?

Yes, I can, Suraj. Hi. Good afternoon.

Good afternoon to you, too. So Sheri, a couple of questions. First, this e-prescribing too. I just wanted to make sure I understand the workflow for these tools, your initial point of contact still is the lymphologist or vascular surgeon or someone. Then thee -- it basically comes back to you guys in terms of prescribing it or entering the information, and that is controlled by Tactile. I just wanted to make sure I understand who controls the e-prescribing tool, the authenticity and then basically, how do you determine the ROI from this e-prescribing tool?

Good questions. I'm glad I'll have a chance to add some clarity here, and I'll tag team with Elaine on this. So first, we don't prescribe. So the prescription comes from either the vascular surgeon or it's going to come from the oncologist. And that's where the prescription is going to generate. And then when that prescription comes over to us, then we look to do the inpatient demo and then look to make sure that all the documentation is in place so that we can move it through as an actual order. What the e-prescribing tool does is it's actually an interface with the physician. So it's the physician who's using the tool for the prescription and then documenting these specific requirements that are required, if you will, for reimbursement and coverage. So that's the -- that's the process. We don't prescribe this is merely a tool that allows the physician not only to write the prescription but to put all the documentation that allows it to go through as an order, so we can get that first-time claims approval. I'll have Elaine turn over -- or I'll move it to Elaine to talk about kind of the ROI and how we saw it as a business investment.

Yes. And just to clarify, so the e-prescribing tool, I think is -- could be a little confusing because the word prescribing. So it's a prescription, but it also collects all the appropriate medical record information. So today, we rely on our physicians to remember everything that has to get documented. And again, remember, this is not a condition that they treat day in and day out, so to commit that to memory is difficult. And as it gets more and more - requirements get higher and higher, the likelihood one would forget an element becomes quite high. And so we get the information, review it, and we realize something is missing. We've got to send it back and you can see how this could really delay having to go back and forth. The e-prescribing tool. Again, we control the fields that we can put in there. So again, we can make sure it's always reflective of what Medicare and other commercial payers are looking for. So we capture the appropriate information the first time. But from a security perspective, all of that is independent and third party. So it ensures everything has the right level of integrity throughout that entire process, both from a confidentiality as well as ensuring the right information along the process. As far as ROI, we looked at it traditionally as far as investment in the platform. And really, what we saw in terms of our ability to accelerate revenue. We know that -- we've talked a lot about we make it easier for prescribers. We are able to treat more patients. So we expect that we will be able to look at the top line, both also from a back office perspective, as you can mention, if we have to touch this order less because it comes in with everything the first time. And then third, from a collections perspective, if you have everything that you need, your likelihood of getting you paid and reimbursed it comes [ph] higher. So it really has a couple of different places where the ROI is generated from this investment.

Got it. And my follow-up question. So Sheri, during COVID, and a little after COVID, a lot of the training was handed out externally. And one of the arguments was training by in-house salespeople or even virtually was yielding dividends. It seems like now reverse, i.e., being handled by external consultants again. So the 50% bogey, can you help us understand how you'll reach that? What is the rationale in terms of outsourcing half of the training versus presumably all the trading? Thank you for taking my questions.

Yes. Thanks, Suraj. So I think this might be helpful. So first, it's not outsourced. So the training that is done in an old model, if you will, prior -- it was our sales reps that did both the selling type of work as well as they did the in-home demos for patients. And so if you think about that on -- it's a patient engagement plus they were dealing with physicians and these other things. And so the development of a new workforce called PEC or patient education consultants was developed, but these are our employees. And so the patient education consultants are going out and their skill set is in education with patients. And so they're going out and doing the in-home patient demos directly with the patient, which alleviates the sales reps from doing, if you will, kind of non-selling activities. So I want to be really clear. These are our employees. They are trained. They are Tactile employees. And so we had a goal in our sales rep productivity to change the mix of activities that the sales reps were doing and take those non-selling activities off their plate and have these trained patient education consultants be the ones that we're engaging with the patient. And so our goal by the end of this year is to have 50% of those in-home -- patient in-home demos done by our patient, our patient education consultants. And so we're seeing that happen. We went from 30% last year to 35% in Q1. And then this quarter, we had 45%. So our goal at the end of the year is to get to this 50%. Again, our employees, patient education consultants doing the in-home patient demos, which can help the reps have more productivity in selling activities. I hope that's been helpful.

Thank you.

Thank you. There are no further questions at this time. This does conclude our conference for today. Thank you for your participation. You may now disconnect your lines.