Welcome, ladies and gentlemen to the Third Quarter of Fiscal Year 2022 Earnings Conference Call for Tactile Medical. [Operator Instructions] 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. And I would now like to turn the call over to Mr. Dan Reuvers, Tactile Medical’s President and Chief Executive Officer. Thank you, sir. Please go ahead.

Thank you, operator and welcome everyone to our third quarter earnings call. I am joined on the line by Brent Moen, our Chief Financial Officer. I will begin our remarks today with a high level review of our third quarter financial performance, followed by a discussion of the factors that drove our third quarter results and an update on some of the recent operational progress we have made. Brent will then cover our quarterly financial results in greater detail and review our 2022 financial guidance, which we updated today in our earnings press release. And finally, I will provide some thoughts on our updated outlook and continued areas of focus for 2022 before we begin the Q&A session. So, let’s get started with a review of our financial performance. We reported total revenue of $65.3 million for the third quarter, representing growth of 24% year-over-year. These results came in well above our expectation for third quarter growth of 13% to 17% year-over-year, which we discussed on our Q2 earnings call. Sales of our airway clearance products were the largest contributor to our stronger than anticipated revenue, contributing approximately 19 percentage points to our total revenue growth year-over-year. We are also pleased to see revenue from our lymphedema products increase 5% year-over-year, which modestly exceeded the 1% to 3% growth range we had anticipated. In addition to our strong sales performance, we delivered significant year-over-year improvements in our profitability, increasing our gross, operating and adjusted EBITDA margins compared to the prior year, while also maintaining our solid cash balance. Turning to a discussion of the primary drivers that contributed to our lymphedema and airway clearance sales performance our lymphedema business benefited from a combination of several factors. At a clinic level, we saw modest improvement in patient volumes compared to the…

Thanks, Dan. Total revenue in the third quarter increased 24% year-over-year to $65.3 million compared to $52.5 million in the third quarter of 2021. Looking at our total revenue by product line, sales of our airway clearance products, which includes the AffloVest product line we acquired on September 8 of 2021 increased $10.2 million year-over-year to $11 million. And sales and rentals of our lymphedema products, which includes our Flexitouch Plus and entree systems increased $2.6 million, or 5% year-over-year to $54.2 million. Total revenue by channel was comprised of $36.2 million from sales to commercial payers, $11.3 million from Medicare, $11 million from durable medical equipment distributors, and $6.8 million from the VA. As a reminder, durable medical equipment distributors, is comprised of revenue from our acquisition of the Airway Clearance Therapy business. These figures compared to our total revenue by channel in the third quarter of 2021, in which commercial, Medicare, DME distributors and the VA represented approximately $36 million, $8.9 million, $861,000, and $6.7 million, respectively. Continuing down the P&L, unless noted, all references to third quarter results are on a year-over-year basis. Gross margin was 71.7% of revenue compared to 70.4% last year. Non-GAAP gross margin increased nearly 40 basis points year-over-year to 72.2% compared to 71.8% in the prior year. The increase in non-GAAP gross margin was attributable to both product and payer mix. Non-GAAP gross margin excludes non-cash intangible amortization in both periods. Non-GAAP gross margin in the third quarter of 2021 also excludes inventory write-offs and non-cash purchase price adjustments related to the acquisition of the AffloVest in this period. As a reminder, we have provided reconciliations of certain GAAP to non-GAAP measures in our earnings press release. Third quarter operating expenses, were $48.4 million, an increase of $10.1 million or 26%. The…

Thanks, Brent. As Brent mentioned, we are raising our total revenue guidance for the second time this year to account for our outperformance in the third quarter. We are proud of the financial performance that we have achieved so far this year, along with the enhancements made to our product portfolio and our sales force and company leadership. Looking ahead to the fourth quarter, in our airway clearance business, we expect the solid demand that we have seen to-date will continue paced somewhat by our current supply constraints. As I mentioned earlier, our team is working diligently to secure additional production capacity to support future demand. And I want to underscore how well our operations team has done in supporting growth beyond our expectations, especially in one of the most challenging supply chain environments we’ve seen. Their efforts should ensure we are well positioned in 2023 to continue penetrating the greater than $5 billion market opportunity that lies ahead of us in airway clearance as more of the estimated 4,000 plus respiratory DME reps begin identifying qualified patients that stand to benefit from our airway clearance therapy at home. In our lymphedema business, we remain cautiously optimistic about our expectations regarding the pace of recovery given the dynamics that I outlined in our second quarter earnings call in August. Specifically, our team continues their work to reestablish ourselves in those accounts that went unrepresented a couple of quarters back when sales vacancies were more prevalent. Overcome patient volumes at clinics that remained below pre-COVID levels and navigate the headwinds created by payer dynamics, where we have seen some commercial payers favoring the use of a basic compression device as a precondition to becoming eligible for an advanced device. With that said, in the fourth quarter, we continue to expect strong…

Thank you, sir. [Operator Instructions] And our first question comes from the line of Ryan Zimmerman with BTIG. Please proceed with your question.

Good evening. Thanks for taking the question, Dan and Brent and congrats on the progress. It sounds like you guys are turning the corner on a lot of macro factors this year. So, maybe just the first question for me, I know we are not going to get ‘23 guidance. But I’d love to understand kind of your underlying assumptions both within the lymphedema segments and also the AffloVest or the respiratory segments, how to think about the growth of that AffloVest products into next year and kind of what you are expecting in terms of just maybe the normalization of patient volumes in the lymphedema clinics? And then I have a follow-up on the balance sheet.

Hi, Ryan. It’s Brent. Good afternoon. So I will talk to you a little bit about that. Certainly, I think we have always talked about the second half of the year being where we are going to start to demonstrate a return to growth. And I think our results today at 24% revenue growth was a strong indicator that we are going to deliver on that promise. I think what we are starting to see is, we finished the quarter with a lymphedema sales team that is at where we expect them to be at the end of the year. So they will contribute strongly in our fourth quarter. We continue to see very strong demand from AffloVest. And we expect that certainly to continue as we move into 2023. So, a lot of the headwinds that we had talked about earlier in terms of staffing and access seem to be subsiding a bit and providing us the benefits that we recognized in Q3 and expect to realize in Q4 as well.

Okay, that’s very helpful, Brent. And then I want to turn to the balance sheet for a second. This question comes up from investors from time-to-time, but the cash balance has kind of stagnated. You are not really burning cash, not really gaining cash, help us think through just your ability to sustainably generate positive cash flow next year kind of the durability of profitability on the company and kind of what we can expect the thing to see on the balance sheet over the coming quarters?

Yes, it’s a good question, Ryan. And you are right we do get that question often. And I think the indicators are again turning favorably as we push through Q3 and then into Q4. I think with our announcement today that we were going to increase revenue guidance and then also correspondingly, our adjusted EBITDA guidance gives us some comfort that we are going to start to see improved profitability. As you said, I know you are not asking for ‘23 guidance, but I’ll let you know that we are actively working on our 2023 annual operating plan and it takes the village. So, all of the senior leadership here are actively looking at profitable growth opportunities that will benefit 2023 and our multiyear outlook. So as we push into 2023, we certainly believe that we will be able to expand our adjusted EBITDA margin. And as we know that’s a bit of a proxy for cash as we go forward. And let me just touch on the balance sheet, specifically that’s to your question, we finished Q3 with $23.4 million of cash, roughly the same number that we ended 2000 – or Q2 with. But keep in mind, during the course of the 9-month period year-to-date we paid down $6 million of principal on our debt, on top of having to fight some lawsuits that certainly are expensive when it comes to legal fees. But aside from those two items, we did generate cash in the nine month period for year-to-date. But that said, we do also expect Q4 to be profitable, that will be a generator to help offset the earn-out payment that will get made here in the fourth quarter as well. So, I guess in summary, we remain really confident about our balance sheet and the financial condition of the company.

Thanks Brent.

And our next question comes from the line of Adam Maeder with Piper Sandler. Please proceed with your question.

Hi, Dan. Hi, Brent. This is Simran on for Adams. Thank you, guys for taking the questions. I guess I will start off with the guidance. So, just doing quick math here, the guide does imply low teen sequential growth in the lymphedema business in Q4, but a pretty big step down on a sequential basis for AffloVest. Maybe walk us through some of the key assumptions there. And specifically, why we should expect to see that dynamic for AffloVest?

Yes. You are talking about the $11 million and then the step down a little bit in Q4 is the expectation, that’s a good question, Simran. The reason is really led to supply chain issues. So, we were fortunate to have been able to get out ahead of ourselves in Q3 on some of the demand that was there. But a spot by we were able to acquire some additional batteries, and equipped the second source supplier, such that they were able to deliver their first tranche of product to us. We are still sort of in a hand to mouth stance on that one. So, the backdrop for our guidance on Q4 as it relates to AffloVest is largely driven by the supply capacity we think we can generate. I think to the credit of our ops team, they have certainly outperformed given where we expected at the beginning of the year, as we continue to see the momentum build. I think they have responded well in a very difficult environment. And we are also at the point now where I think we are getting good enough line of sight into 2023, where we think we are going to be entering with a much better position on sustainable supply chain, which is going to be important as we continue to try and build demand and support for our DME partners.

Got it. Okay. That makes sense. And maybe just a quick follow-up on that same topic, can we get a sense of how many DME accounts you are selling AffloVest. And the kind of growth in new versus existing DME accounts. And then maybe just, since 2023, is kind of top of mind, where do you expect that mix to go in 2023?

Yes. Let me just take a step back and say, we are just really pleased with the business that we found in the AffloVest. I think that the DME channel was one that we had to explain a little bit at the beginning. But I continue to be convinced that this is precisely the right channel, because they have access to all of these complex respiratory patients, and all of the other solutions that they need short of the airway clearance product, and affordable one at that. So, we think there is ample runway of growth here. We have not added a lot of DMEs per se. But what we have been doing is adding more branches and more participating reps within those DME channels that we have had. It’s as you can imagine, it’s an 80-20. There is a handful of bigger DMEs. And then there is a lot of smaller ones that, we work with as well. But it’s been less about adding DMEs at this point, as I said more about ongoing working and educating the sales channel, supporting them. And we are seeing the growth as a result of more branches participating and more reps participating. And I think the last one to add is this continues to be a very solid reimbursement area. CMS reimbursement is over $13,000 for the category. So, it’s a good business for our DME partners. So, that’s kind of a recipe success – for success when it’s a good business for both sides.

Got it. That’s it for me. Thank you, guys.

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

Hey, guys. Good afternoon. Thanks for taking the question. I was hoping to first start on lymphedema and focus on guidance a little bit. So, I will give Ryan’s question a second shot here. Given you are suggesting kind of mid-single digit growth, I guess in the second half of this year for lymphedema, what does that imply for 23? And if you don’t answer that, then maybe, how do you get back to that double-digit growth rate? And when can that happen? Thanks.

Yes. I think it’s a good question, Margaret. I think first of all, on the lymphedema side, we have seen some recovery in the patient volume. So, we have talked a little bit about that. We are not at pre-COVID levels, but we are seeing some good improvement there. I think the opportunity for us to demonstrate improved productivity will be an important part of the ‘23 recipe. I think that probably the most foretelling piece is the fact that we were negative in growth in the first half. It’s been a tale of two cities. The second half, we just grew 5% in the third quarter, our guidance would imply something in the upper-single digits in the fourth quarter. And all I can say is we certainly think that that puts us in a much better on ramp to 2023. I think we are in a better position right now than we have been all year long as it relates to both sides of the business. But I think that the upper-single digit growth that we will be exiting in Q4 certainly is – it’s a good way for us to enter 2023.

Okay. Perfect. And then I wanted to switch over to AffloVest. I know everyone knows you as the lymphedema company. But on the same token, AffloVest has just been surprising quarter-after-quarter-after-quarter. So, I guess the question I have is, do you have any sense of what the underlying demand is, as supply improves? Especially as we look into ‘23, I can have to bring that up again, but how much more demand I guess could you see, could that 11 and actually be 15 based on what you guys are saying are much above that, I guess? Thanks.

Yes. I think that we would probably have certainly had a little bit of a tug of war between supply and demand over the course of the year. And I think that as we start to look forward, there is certainly plenty of runway left, if that’s kind of the question. I think if we look at the size of the market, it’s significant. And what we also know is that the majority of reps, we still are not at the inflection point with the reps at the larger DMEs. The ones that have gravitated to it have done well. But I think there is a big opportunity for us to continue to get better coverage. Keep in mind, we are still in the early days. I mean this is kind of the first full year it’s been under our ownership. It took us a while to get acquainted with all of the DME partners that we have got. This is the first year where a couple of them. And this is one of the reasons that I think the growth has been so impressive is they have started to make it a more focused product. And when you have aligned incentives all the way down to the sales channel, at the rep level, typically it gets the kind of attention it deserves. We have talked in the past, I think too, about the fact that a placement of an AffloVest is really almost on par with placement of a non-invasive ventilator. And there is very little left in the respiratory bag of solutions that’s at the same kind of economic threshold. So, we know it’s a really big market, not ready to do ‘23 yet, but I can certainly suggest that we are still very enthusiastic for what ‘23 has got in store for us. And there is still an opportunity for us to add some additional DME partners as well, not everybody is on our dance card yet. But it seems a little premature for us to pursue some of those others, if we didn’t think that we had the capacity to support it. So, we want to make sure that we are in a good position when we bring a partner on that we can support them. But I think if we can finish up this year in this $35 million, $36 million range with AffloVest, we think that we are going to have a lot better foundation and participating DMEs and reps and should be in good shape for next year.

Great. Thank you very much.

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

Good afternoon Dan and Brent, can you hear me, alright?

Yes. Good afternoon Suraj.

Perfect. Hope everyone is safe and healthy. So, Dan, one of your comments caught my attention, which was on the commercial requirement change, presumably similar to the Medicare requirement of going with active touch first before going to – before Flexitouch? I was wondering if you could expand on that. What has been the specific change? What is the extent of this change that you are seeing and how do you plan for it moving forward?

Yes. Good question. And this is one that we actually raised. As you probably recall, even last quarter Suraj. One of the things that we had mentioned, last quarter we had seen was some Medicare Advantage plans operated by commercial companies starting to apply the Medicare criteria, as opposed to their commercial criteria, which may have been a bit more lenient. And as a consequence, with a couple of Medicare Advantage plans, it shifted mix, meaning we know that Medicare typically requires 651, which would be our entree before they would become eligible for our Flexitouch. If they can be treated successfully with a 651 or an entree, then that’s the end of it. If they don’t or can’t be treated effectively with an entree, then they become eligible for a Flexitouch. So, that was the mix issue that we had described. We had seen a little bit of a phenomenon of in Q2, I think we saw a bit of that in Q3 as well. On the – so, I think the good news is with our performance in some of the Medicare Advantage plans, we saw more entrees going out than we had in the past and still delivered a solid mid-single digit beat. And it meant that we actually captured more patients on that front. On the Medicare side, we saw really good growth in the vascular, particularly with Flexitouch. And I think that that points to a couple of things. One ComfortEase has been well received, because ComfortEase is really targeted to those patients with bilateral disease and those that have truncal swelling and need therapeutic support in the trunk area as well as in their legs. So that really kind of points to the ComfortEase traction that we saw. But I think the other point there is that, as we continue to see a larger universe of patients on Medicare that have gotten an entree over time, we are seeing that there is a segment of them that needs and we expect will benefit from Flexitouch, and that that segment of the business actually did quite well in Q3 as well.

Fair enough. And Dan, my final question. You talked about ComfortEase, the new garments, patient comfort, so on and so forth. And then this keeps coming up, obviously new entrants to the marketplace. Compliance is an issue. Compliance with Flexitouch is an issue that is usually brought up by some of the new entrants into the marketplace. I am wondering if you could phrase the use of ComfortEase, specifically from a perspective of who was the compliance before? And who does the compliance afterwards and help us to make some correlations to what – core lymphedema growth could eventually track to? Gentlemen, thank you for taking my questions.

Yes. Thank you, Suraj. I think the compliance component, certainly we expect ComfortEase will add to the benefits for those patients, because they are going to find it easier to apply, easier to use, and subsequently, more likely to complete their therapy. I think if you are commenting on perhaps there was a [indiscernible] out there talked a little bit about the compliance. I think at a recent conference. Their experience, I think was documented on 20 odd patients. So, I am not sure that I would quite align with the stance that, compliance has been an issue. But we do know that the easier the patient experiences, human nature is, the more likely they are going to complete their therapy. So, that’s one of the reasons – one of the key reasons that we introduced ComfortEase. And it’s also the backdrop for what our new product pipeline has in store, a number of attributes, namely, including making sure that we have got the right therapeutics available, that we can continue to make this a ubiquitous kind of easy patient therapy experience.

Thank you. We are currently seeing no remaining questions at this time. That does conclude our conference for today. Thank you all for your participation and have a great day. End of Q&A:

Thank you, operator and thanks for everyone – to everyone for participating on our call. We look forward to sharing the results of our full fiscal year in February.