Earnings Call Transcript - TCMD Q3 2024

Operator, Operator

Please standby. Welcome, ladies and gentlemen, to the Third 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.

Sam Bentzinger, Investor Relations

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’d like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements that are based on the current expectations of management and involve inherent risks and uncertainties, 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 Sherri.

Sheri Dodd, CEO

Thanks, Sam. Good afternoon, everyone, and welcome to our third quarter 2024 earnings call. Here with me is Elaine Birkemeyer, our Chief Financial Officer. Today, we will review our financial results for the third quarter, discuss evolving market dynamics across our business and provide progress updates on each of our three key ongoing commercial initiatives. As a reminder, these initiatives cover technology and workflow related investments in sales and order operations, the development and launch readiness of our next-generation lymphedema platform and the generation of clinical evidence to support further patient access to our platform. We will also provide an update on our full year 2024 revenue guidance and capital allocation strategy. Total revenue in the third quarter grew 5% year-over-year to $73.1 million. In our lymphedema business, revenue increased 4.4% year-over-year to $65.3 million, and Airway Clearance revenue increased 10.3% year-over-year to $7.8 million. Our gross margin increased 410 basis points year-over-year. Margin expansion was primarily a result of lower material costs and warranty expenses, resulting from improvements in the design of our products over the past several years. Adjusted EBITDA grew 39.3% year-over-year in Q3, representing the 10th consecutive quarter of year-over-year improvement and reflecting our commitment to delivering continued improvements in operating leverage. From a cash perspective, cash and cash equivalents increased sequentially by $8.5 million, increasing our cash balance to $82.1 million as of September 30, 2024. The sequential growth in both adjusted EBITDA and cash balance are indicative of our operational maturity and continued focus on balancing profitability and cash generation with investments in our business. While pleased with our third quarter performance across key multiple metrics, our revenue results were below our expectations due to a confluence of two main factors: on our Q2 call, I spoke to the impact of increased documentation requirements on our lymphedema sales rep productivity due to the Medicare administrator's approach to administering the pneumatic compression pump LCD. During the third quarter, we saw strong execution in our mitigation activities. However, growth in the lymphedema business was impacted to a slightly greater extent than originally expected. In our Airway Clearance business, we continue to see year-over-year growth, but DME buying patterns led to uneven results. From a business fundamentals perspective, we continue to see strong patient and clinician demand for our products. We are taking a concerted approach to fortifying our sales channels, simplifying our front and back-office work through technology modernization and amplifying the voice of our patients and providers through product and service innovation. Driving further revenue growth and shareholder value remain top priorities, and I'm confident in our ability to do so while sustaining our track record of strong bottom line performance. With that backdrop, let's review the respective business line performances, beginning with lymphedema. Today, I'll focus our lymphedema discussion on two main topics. First, a review of our Q3 performance, particularly relative to Medicare channel dynamics; and second, an encouraging update on the recent major policy announcement from CMS regarding changes to the coverage policy for pneumatic compression devices. As a reminder, on our Q2 earnings call, we discussed revised expectations for the full year 2024 to account for the unexpected change in the Medicare administrator's interpretation of the 2015 LCD for pneumatic compression devices or PCDs, and the associated increase in documentation collection required for complete claims. For Tactile, the sourcing responsibility for this added documentation falls on our sales reps, who work with the prescribing clinicians to collect the required details. As a reminder, our sales reps have call points across vascular practices, vein centers, oncology and lymphatic therapists who treat patients across government and commercial payers. Because our sales reps support all patients, regardless of insurance type, the increased burden on this Medicare documentation gathering impacts our reps' productivity as a whole. While this disproportionately impacts claims for Medicare patients, it also impacts sales activities across all channels. To be clear, while the additional documentation collection tends to extend the timeline from order completion to product shipment and claim submission, it has not resulted in a higher rate of claims denials. We have also not seen an increased number of post-payment Medicare audits. Our collection across channels remained strong as evidenced by our sequential cash generation. Despite this increased documentation requirement for Medicare patients, lymphedema sales grew 4.4% year-over-year in the quarter and were roughly flat on a sequential basis. With a full quarter of experience now dealing with the changes in LCD interpretation, we've gained much greater insight into how exactly these dynamics are playing out in our revenue cycle management results and have seen our strategies working to mitigate the full impact of this policy turbulence. Specifically, we've modernized and expanded customer-facing and internal-facing workflow-related tools. For example, we have migrated to a more efficient electronic method of verifying patient insurance and launched our previously piloted e-prescribing tool nationally to help streamline the prescriber experience with required data collection. We've received positive feedback on the e-prescribing tool, and we are seeing strong adoption through these early days of national launch. Importantly, we will continue to update this tool to remain current with coverage policies, further mitigating the administrative burden on providers and our sales reps. Further indicative of our strategy to leverage new technologies to drive efficiency, we also accelerated the implementation of select tools from our new CRM, which we plan to fully deploy in early 2025. These tools have better equipped our sales reps to best organize and prioritize their work so they can be as efficient as possible. From an internal people and process perspective, we've redesigned and streamlined various internal business processes to enhance speed and efficiency in order operations. With respect to our human capital, in Q3, we redeployed portions of our back office resources to work directly with the sales reps and patients to support timely documentation gathering and patient engagement. We also added incremental contractor resourcing to assist with documentation efforts. Finally, we continue to make progress with increasing the percentage of in-home patient demos that are performed by our patient education consultants, also known as PECs. This quarter, 48% of in-home demos were performed by PECs versus 45% in Q2 and up from 30% at the end of 2023. We are pleased with this continued growth and continue to expect our PEC staff to complete at least 50% of in-home demos by the end of 2024. Regarding sales headcount, we ended the third quarter with 270 reps, up from 264 at the end of the second quarter and within our target range for the full year. Our lymphedema channel mix was also a positive story in the third quarter. Despite the aforementioned impact on the overall sales rep productivity, our VA and commercial sales demonstrated strong growth in the quarter, reflecting solid underlying fundamentals in both channels. Both grew double digits year-over-year, with commercial up over 20%. Strength in the VA channel was particularly impressive with 16% year-over-year growth driven exclusively by Flexitouch and aided by the recent publication of positive clinical trial results for veterans using Flexitouch versus standard-of-care. Collectively, these tools and process enhancements, combined with human capital investments and strong underlying demand for our products leave us confident in our ability to build momentum through Q4 and into 2025. With that context on the third quarter performance, I want to pivot to an encouraging upcoming change in the Medicare coverage policy for PCD. Last month, CMS announced that the current LCD policy will be retired as of November 14, 2024, and that the existing National Coverage Determination, or NCD, will instead be the sole coverage policy in effect. We view this as a win for lymphedema patients and a positive for our business. As a brief context, the NCD policy for PCDs was established in 2002, and Tactile followed that policy until 2015 when MAX established their own LCD and began adjudicating claims under a more stringent policy, which, for example, defined specific reimbursement eligibility requirements for basic versus advanced PCDs. Since the creation of the LCD, the NCD and the LCD policies have coexisted with some similar sets of requirements, but also some areas of conflict, particularly in terms of coverage eligibility for Flexitouch. The LCD requires the patient to try a basic pump before receiving an advanced pump, even if the basic pump did not meet the advanced clinical needs of the patient. Tactile adjusted our internal claims processes and related documentation requirements to the LCD, and we've continued to refine and adapt our approach based on the MACs' evolving adjudication patterns. With the retirement of the LCD in mid-November, the MACs will adjudicate claims moving forward based only on the NCD. This provides for greater flexibility to consider case-by-case patient needs, including initiating PCD therapy for Flexitouch when clinically supported. In short, this is a positive for Tactile and for patients. Coverage policy changes can create disruption. But in the case of this change, we are optimistic. We have over a decade of experience submitting claims under the NCD, including extensive adjudication history, audits, and knowledge of where there is ambiguity in the NCD policy language. As needed, we can quickly adapt the e-prescribing tool, mobilize training and education for our sales force and clinician partners, and implement claims processing adjustments while monitoring success rates. As I stated earlier, the NCD policy does have some language ambiguity. If they choose, the MACs can continue to apply their own interpretation of the NCD policy, which may be similar to their current LCD position. Ultimately, we believe the change to the NCD will be good for patient therapy access and we'll be monitoring adjudication behavior and advocating for patients as clinically appropriate. In summary, we expect the recent turbulence associated with the lymphedema LCD coverage policy interpretation to ease in the near and medium terms. With the change to a sole NCD policy, we believe the dynamics that negatively impacted Medicare channel sales directly and commercial channel sales indirectly in Q2 and Q3 will improve moving forward. While the total retirement of the LCD was unexpected, we are pleased with the MACs' decision and believe the elimination of the conflicting policies represents a patient-friendly change that will make it easier for Medicare patients to gain access to life-changing treatment options for their lymphedema. As the market leader, we have worked closely with the MACs, CMS, and professional societies for years to lead societal advocacy initiatives and industry coalitions, which have pushed for policy changes. We feel this is our responsibility as the leader in this space, and I'm proud of the work our entire team has done every step of the way to help influence this policy change. Turning now to a review of Airway Clearance. Sales of AffloVest were up on a year-over-year basis, but down sequentially as expected due to seasonal dynamics. While bronchiectasis itself is not strictly seasonal, it is influenced by seasonal changes and the associated increase in respiratory illnesses like allergies, the cold, and flu, which are most prevalent in November through May. Beyond these seasonal dynamics, our performance was also affected by uneven buying patterns across a handful of our DME customers. We remain encouraged that there is a large number of bronchiectasis patients that are undiagnosed and undertreated. Our Airway Clearance sales organizations are the experts in educating and training our DME sales partners and providers in bronchiectasis and the role of AffloVest in their care. We continue to believe that AffloVest is a compelling, differentiated offering for these patients. As mentioned earlier, we had several bright spots in the quarter, both operationally and financially that demonstrate continued momentum with respect to profitability, leverage, cash generation, and growth in our VA and commercial channels. That said, the cumulative effect of Q3's challenges within the Medicare channel and Airway Clearance business have led us to further revise our revenue guidance for 2024. We now expect total revenue in the range of $292 million to $295 million. On the profitability side, as mentioned, we continued to deliver year-over-year increases in adjusted EBITDA and expect that strength to continue. As a result, we are raising our guidance for adjusted EBITDA to a new range of $35 million to $37 million. We have several reasons to be optimistic in our ability to close out the year strong from a revenue perspective. Q4 is typically the strongest quarter for our lymphedema business due to patient co-pays being at the lowest at any point during the year. As shared, we are still in strong execution mode of our current commercial initiatives. We are investing and deploying technology and workflow-related improvements, including the national rollout of e-prescribing and increasing PAC and back-office support to perform non-selling administrative activities. We published strong clinical results, which support the value of Flexitouch versus standard-of-care and our launch of Nimbl is generating enthusiasm among clinicians and patients. As many of you are aware, Nimbl is the next generation of our basic PCD and an important addition to our leading portfolio of patient-focused clinically-proven lymphedema therapy solutions. The first phase of Nimbl's introduction to the market is targeted specifically for upper extremity treatment, a patient group dominated by breast cancer survivors. In fact, up to 40% of breast cancer survivors are affected by lymphedema, and they are often surprised and unprepared to learn that after going through the ordeal of breast cancer treatment, they now have been diagnosed with a new lifelong chronic progressive disease with no cure. For these patients, the constant swelling and discomfort of the breast, trunk, and arms limits mobility, activity, and travel. It is difficult and time consuming to treat and patients seek a more convenient option that reduces the physical and physiological burden of treatment while still providing the best therapy possible. They now have that with Nimbl. From a design and feature perspective, Nimbl is 68% lighter, 40% smaller and uses 33% less housing than our previous generation device. Nimbl's compact design is the smallest PCD of its kind, making it an ideal therapy for daily use at home or on the go. In addition to these patient-centric design features, Nimbl also offers connectivity to our free Kylee digital application, providing patients a simpler way to track their usage and changes in symptoms and to share results with their care team. Early feedback from patients and clinicians has been positive as both groups appreciate this compelling treatment option designed to increase adherence and improve clinical outcomes. Patients specifically value the connectivity to Kylee and its role in aiding increased therapy engagement. We are excited about this new platform and will be expanding Nimbl to include patients with lower extremity conditions in the first half of 2025. From a clinical evidence perspective, in September, we announced the publication of positive clinical trial results among VA patients that assess the use of Flexitouch for the treatment of their lower extremity lymphedema over the course of one year. This was the largest prospective clinical trial investigating PCDs and lymphedema ever published in the U.S., and the results demonstrated significant improvements across primary and secondary study endpoints, including increases in lymphedema and quality of life scores, reductions in lymph girth, cellulitis events, skin hyperpigmentation, and high compliance with therapy. Further, mild lymphedema was the most common disease stage among the study group, presenting in 68% of patients. This is important as it shows the value and clinical efficacy of Flexitouch earlier in the care pathway. Our ongoing RPT assessing Flexitouch for head and neck lymphedema is also progressing well and remains on track for an initial data readout in early 2025. This is the largest study ever conducted among this patient group, and we look forward to communicating the results as soon as we are able. Delivering speed and efficiency in the sales and order management process, launching and supporting innovative therapies and solutions, and generating peer-reviewed evidence and patient advocacy support are foundational elements for improving access to care. Having served over 1 million patients since Tactile's inception, improving access to care continues to be a focus of our work today and will become an even more important cornerstone of our strategy in the future. We look forward to sharing specifics of this refreshed access to care strategy next quarter. In the meantime, we're encouraged by our demonstrated momentum in this area to date and pleased to have a strong balance sheet to support appropriate future investments. Before turning the call over to Elaine, I want to share a brief update on our capital allocation strategy. As communicated during the previous earnings call and mentioned earlier in my prepared remarks, we are increasingly benefiting from generating free cash flow, a trend we expect to continue. This provides us the luxury of continuing to evaluate various investment opportunities to drive growth and increase shareholder value while also initiating a share repurchase program of up to $30 million of outstanding stock. We believe the strategic action and near-term use of cash align with our conviction in the trajectory of our business as well as our ability to execute our financial and operational initiatives. To be clear, our strong balance sheet affords us a multitude of options in terms of meaningful capital deployment, and we will continue to evaluate ways to leverage our market leadership and strong commercial and operational footprint to invest in and drive incremental growth. With that, I'll now have Elaine review our third quarter financial results and provide an update on our outlook for the remainder of 2024.

Elaine Birkemeyer, CFO

Thanks, Sheri. Unless noted otherwise, all references to third quarter financial results are on a GAAP and year-over-year basis. Total revenue in the third quarter increased $3.5 million or 5% to $73.1 million. By product line, sales and rentals of lymphedema products, which includes our Flexitouch and Entre Systems, increased $2.8 million or 4% to $65.3 million, and sales of our airway clearance products which includes our AffloVest System, increased $0.7 million or 10% to $7.8 million. Continuing down the P&L. Gross margin was 75% of revenue compared to 70.9% in the third quarter of 2023. Non-GAAP gross margin, which excludes non-cash intangible amortization in both periods, was 75.4% compared to 71.4% in the prior year. The increase in non-GAAP gross margin was attributable primarily to lower manufacturing and warranty costs and improving collections reflected in our revenue. Third quarter operating expenses increased $6.6 million or 16% to $48 million. The change in GAAP operating expenses reflected a $0.8 million increase in sales and marketing expenses, a $0.5 million increase in research and development expenses and a $1.7 million increase in reimbursement, general and administrative expenses, including and primarily driven by strategic technology investments, and a $3.7 million one-time earn-out benefit that occurred in the prior year related to the final true-up of our earn-out liability related to the AffloVest acquisition. Operating income decreased $1.2 million or 15% to $6.8 million. Non-GAAP operating income increased $2.7 million or 50% to $7.9 million. As a reminder, our non-GAAP operating income excludes non-cash intangible amortization and earn-out expense, as well as certain non-recurring operating expenses. We provided a detailed GAAP to non-GAAP reconciliation in our earnings press release. Other income net increased $0.9 million, or 225% to $0.5 million. The increase was primarily driven by higher interest income on our increased cash position and lower interest expense primarily driven by the retirement of a revolving line of credit at the end of 2023. Income tax expense increased $16.8 million or 116% year-over-year to $2.1 million. The year-over-year change in income tax was driven primarily by a one-time adjustment in the prior year releasing of our valuation allowance. This non-cash impact reflected our return to more consistent profitability. The current year expense is driven by our taxable income. Net income decreased $17.1 million to $5.2 million, or $0.21 per diluted share, compared to $22.3 million, or $0.94 per diluted share. Non-GAAP net income decreased $14.2 million, or 70% to $6 million compared to $20.2 million. As mentioned, this decrease is driven by the impact the prior year valuation allowance relief had on prior year income tax. Adjusted EBITDA increased $10.7 million or 14.6% of sales compared to $7.7 million or 11.1% of sales. With respect to our balance sheet, we had $82.1 million in cash and cash equivalents and $27 million of outstanding borrowings at quarter end. This compares to $61 million in cash and $29.3 million of outstanding borrowings as of December 31, 2023. Our cash growth was driven by a combination of operating income and an increase in net working capital. Turning to a review of our 2024 outlook. For the full year 2024, we now expect total revenue in the range of $292 million to $295 million, representing growth of approximately 6% to 8% year-over-year. This compares to previous 2024 total revenue guidance in the range of $293 million to $298 million, representing growth of approximately 7% to 9% year-over-year. Our updated guidance reflects the impacts we are seeing from Medicare's increased documentation requirements and the DME buying patterns within Airway Clearance that Sheri discussed earlier. For 2024 total revenue guidance range, it seems that the growth in both our lymphedema and Airway Clearance products will be in a similar range. For modeling purposes for the full year 2024, we now expect our GAAP gross margins to be approximately 74%, our GAAP operating expenses to increase low double digits as we advance our tech-related investments throughout the year. Net interest income of approximately $1 million, a tax rate of 30%, and a fully diluted weighted average share count of approximately 24 million shares. As a result of our continued progress with improved profitability, we now expect to generate adjusted EBITDA of approximately $35 million to $37 million in 2024. This compares to previous adjusted EBITDA guidance of $34 million to $36 million. Our adjusted EBITDA expectations assume certain non-cash items, including stock compensation expense of approximately $8.4 million, intangible amortization of approximately $3.8 million, and a depreciation expense of approximately $3 million. With that, I'll turn the call back to Sheri for some closing remarks.

Sheri Dodd, CEO

Thanks, Elaine. In closing, my confidence in our team and our business remains high. Our market opportunity is large, growing and underpenetrated, and Tactile brings the largest breadth of clinically proven solutions for our patient population from head to toe. Meanwhile, we are fortifying our business operations for scale, simplifying the patient, provider, clinician, and employee experience and are amplifying the voice of the patient in our policy and payer advocacy as well as seeing improving CMS coverage conditions in the near horizon. These efforts will continue to bear fruit in the coming quarters and years and leave us optimistic about our ability to continuously adapt, grow, and profitably scale. With that, operator, we'll now open the call for questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Margaret Kaczor Andrew with William Blair. Please proceed.

Unidentified Analyst, Analyst

Hey guys. It's Jimmy on for Margaret. Thanks for taking the question. Two for me. Obviously, the Medicare documentation impact didn't play out as expected this quarter. So maybe just touch on why that was a surprise relative to your expectations. And I understand you have the LCD reverting back to the NCD. But maybe just give us some more color on the level of visibility you have on Medicare sales improving going forward.

Sheri Dodd, CEO

Thank you for joining us. I can address this in two parts. Firstly, the good news is that the Medicare MACs did not become stricter as we transitioned from Q2 to Q3, meaning the situation did not worsen. Over the course of the quarter, we gained a clearer understanding of what it would take to gather the necessary documentation. This involved recognizing the requirements for our sales representatives and determining how we could support them with additional resources, including both human capital and various tools such as technology, processes, and personnel. With this experience, we have a much clearer picture, which is reflected in our guidance. While we had some insights going into Q3, it was indeed challenging for our business to collect all the required documentation. This issue extended beyond our Medicare operations, affecting our representatives who support patients across different specialties and various insurance types. As a result, while this challenge impacted our Medicare business and contributed to its decline, we still experienced double-digit growth in our VA and commercial sectors. This shows that the market dynamics and fundamentals remain strong, and while it took longer than we expected to gather the necessary documentation to advance our orders, the demand and patients are present.

Unidentified Analyst, Analyst

Okay. That's helpful. And then maybe just the second one on guidance here. You lowered guidance by less than the miss, $2 million roughly at the midpoint. So I guess maybe what are you assuming in Q4 that's giving you confidence that you can lower by less than the miss? And then are you baking in any contribution from Nimbl or maybe you just touched on it, but is most of that improvement stemming from the Medicare documentation impact lessening in Q4, stepping down and then potentially exiting the year?

Sheri Dodd, CEO

Yes. So thanks for the question. It's a good one. So I'll kind of go with the last first. So we still expect to see very minimal impact from Nimbl. We only just launched that product. It is in our upper extremity only. We're really excited about the impact it's had thus far. We were able to launch it on time with the breast cancer awareness month, but we don't expect that to have a material impact on Q4. We also know that the change from the LCD to the NCD is only going to go effective on November 14. And any orders that are in the queue right now are going to be adjudicated under the LCD, not the NCD. So we also don't expect the change to the NCD itself to have any impact on Q4. And again, there's still a lot of ambiguity about that. What we are confident in is now having had this full quarter under our belt and having accelerated tools from our CRM out into the sales force. The way that we have deployed and redeployed headcounts for order operations. The way the successes of taking our e-prescribing pilot into a national launch, all of these factors from technology and people and process, we now have a lot of experience, so what it looks like to operationalize under the Medicare stricter requirements. And we've seen the impact in progress of those initiatives. With that already seeing momentum in Q3, we're going to see more of that full momentum in Q4. And quite honestly, on into 2025, many of the initiatives that we put in place are now going to be our standard practice. And so that's what gives us confidence for a Q4, at least stabilizing Medicare seeing return to growth and continuing to take advantage of our strong market presence in both commercial and VA businesses.

Unidentified Analyst, Analyst

That's very helpful. Thanks for taking the question.

Sheri Dodd, CEO

You bet. Thank you very much. Send our best to Margaret.

Operator, Operator

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

Unidentified Analyst, Analyst

Hi, everyone. This is Izzy...

Sheri Dodd, CEO

Hi, Ryan.

Unidentified Analyst, Analyst

This is Izzy on for Ryan tonight, and I appreciate the opportunity to ask questions. We're nearly a year since the lymphedema treatment Act was implemented back in January. I wanted to know if you are beginning to observe any benefits from that or if there has been an increase in patients entering the funnel?

Sheri Dodd, CEO

It's a great question. The policy went into effect in January, and since it's new, it takes some time for education and understanding to fully unfold. We have heard from our providers and industry partners that they are beginning to see patients come through and utilize the LTA. To clarify, for patients to obtain a garment through the LTA, they need to be diagnosed with lymphedema, which can take time as it requires a physician visit for measurements, documentation of medical necessity, and a prescription. There is still a process that patients must navigate to fully utilize the LTA for reimbursement, but we are starting to see progress. Although we haven't seen a significant impact on the pumps yet, we anticipate that awareness of the LTA policy will grow among patients and physicians, leading to proper documentation, approved claims, and the opportunity for patients to transition from conservative treatment to pump therapy if needed. We understand that there is momentum building, and while it's not yet material to our business, we are excited about the potential. We believe this is beneficial for patients, and we are ready to support them as they make this transition.

Unidentified Analyst, Analyst

Got it. That's really helpful. Thank you. And then, I know there's a lot of moving pieces with all of the documentation requirements and kind of the headwinds that we're facing right now. But as we start to think about 2025, do you see the opportunity for these headwinds to kind of start to subside and get to a more normalized rate once the e-prescribing tool is more broadly rolled out at a national level? Or do you think we'll still face some challenges as we move into next year?

Sheri Dodd, CEO

Yes. It's such a good question, because policy changes do create a degree of turbulence. As I said in Q2, I mentioned a little bit in the prepared remarks, where we're optimistic is that with the change from LCD to NCD, there will now just be one policy. Previously, there have been these two policies. They were sometimes in conflict with each other. We've had experience operating under both of those policies. So we believe that this change to one sole policy is the right thing for patients, and we think it's going to be good for our business as well. We also have experience working under this policy. So we're aware of where there's ambiguity in the language, and we have experiences through previous audits, et cetera, to see where sometimes that ambiguity can create challenges on different types of documentation, et cetera. So, having been there and kind of seen how this plays out, we're also feeling that this change in policy is actually going to be less of turbulence, less headwind for us, and it creates more of a like a new normal, hopefully, for us as we move forward. So there's a lot of advantage of the one policy. The other thing is, that I would say and ask Elaine to weigh in as well is the mitigations that we put in place, whether it's e-prescribing and moving that from pilot to national launch or E-Verify or the CRM tool that helps our reps be more efficient, our back-office streamlining and simplifying, all of these things are just good for business. And so, if the policy environment changes again, which it could, and you have to be prepared at any time. I think we're ready. We are fortifying truly and simplifying the way we're doing our business. So I anticipate that we're going to be in a good position with the NCD coming forward. And then as policy evolves, and we see how the MACs are going to adjudicate under that NCD, we’ll be ready.

Unidentified Analyst, Analyst

Very helpful. Thanks for taking the question.

Sheri Dodd, CEO

Thanks, Izzy.

Operator, Operator

Thank you. Our next question comes from Kyle Bauser with B. Riley. Please proceed.

Sheri Dodd, CEO

Hi, Kyle.

Kyle Bauser, Analyst

Hi. Good evening. Thanks.

Sheri Dodd, CEO

Welcome, and thanks to be in spirit picking up coverage.

Kyle Bauser, Analyst

Thank you. Our pleasure. And thank you for all the updates and taking my questions here. So maybe I'll start with guidance. The top-line came down a little bit as you talked about, but bumping up the EBITDA expectations is great. We also saw a 50% growth in non-GAAP operating income in the quarter. So despite the mix, the bump up in EBITDA for the full year it just kind of curious, how would you rank kind of the factors that are contributing to the expanding margins and kind of outpacing top-line growth here?

Sheri Dodd, CEO

Yes. Thank you. We believe that the performance of our business is sometimes overlooked, and it's not just a one-time occurrence. We have shown continuous improvement in our bottom line, and our cash balance is in a strong position. Several factors are significantly contributing to this, particularly on the gross margin side. Product enhancements have helped reduce our warranty costs, benefiting both patients and gross margins. Manufacturing efficiencies are also having a positive impact. Overall, we are seeing solid fundamentals from a business perspective, which is good for our patients. Regarding our other expenses, I'll discuss that with Elaine, as she can provide more details on the main drivers in that area.

Elaine Birkemeyer, CFO

Yes. I think as Sherri mentioned, the biggest impact has been due to our gross margin. And if you saw, we increased outlook for the year to 74%. We were previously at 73%, and we had taken it up all year. And so really just great work on our manufacturing team. We're gaining scale in some of our new products so the costs are coming down, the warranty expense. So all good, durable improvements that we expect to continue. And I think that's allowed us to continue to make the OpEx investments that we've needed to in order to continue to modernize our technology and also has been helpful in us launching some of the initiatives that Sheri talked about that allowed us to mitigate some of the turbulence that we've been seeing with the recent Medicare administrative changes.

Kyle Bauser, Analyst

I understand, thank you. I have a follow-up question. How has the shift to having patient education consultants handle training instead of sales representatives affected the situation? I assume there’s been a positive impact on margin expansion. That’s the first part of my question. Once you exceed the 50% mark, what prevents you from fully transitioning to using PECs for training?

Sheri Dodd, CEO

Yes. I think you noticed our sales and marketing expenses, where we achieved some leverage. This is not solely due to the trainers I mentioned, but we also continued to optimize our back office. We've provided the sales reps with additional tools, including the improved CRM toolkit we plan to implement more effectively next year. All of these factors have contributed to our efforts regarding the use of trainers. We set a goal of 50%, which we believe is reasonable, considering where the demos are taking place, the geographic distribution, and the partnership with the PEC during the transition. We continuously assess that goal each quarter, and we are very pleased with the progress we've made this year, particularly in enhancing the capacity of our sales reps.

Elaine Birkemeyer, CFO

The other thing that I would say about that is some of our clinicians prefer that the demos are done in their office, and they have the relationship, most deeply with the sales reps.

Kyle Bauser, Analyst

Yes.

Elaine Birkemeyer, CFO

So in that case, that's the preference of the provider. So we also go with that as being kind of the primary that's where the provider is comfortable and then very opportunistic in the other ones where it makes sense that the PECs are able to be in the home with the patients for those demos.

Kyle Bauser, Analyst

Okay. Got it. And then just one quick one, if I may, it sounds like there's no change in the success rate of the Medicare claims on the edema side of the business, despite the more stringent documentation requirements, which is great. Does that mean that there could be a buildup or kind of a backlog out there as we kind of move through this issue going forward? Thank you.

Sheri Dodd, CEO

You know what we actually feel that we've really got ourselves caught up. And so while there was a bit of a backlog the way we redeploy tools and process and people, we feel generally caught up. One of the challenges, though, is you get some leakage, right? So if patients aren't able to get access to the product, that process takes too long, they drop out, not different from when there's back order on elective surgery and a patient may decide to drop out and go to a different vendor or drop out of having the surgery altogether. So we feel like we're in a good place for stemming that patient leakage, feel very caught up on the claims. And so now it's just a matter of the referrals to keep coming in. Medicare referrals keep coming in. We know there's a patient there. We know our providers see us as a leader in this space. So none of those market pieces are problematic for us, and we have streamlined our internal process. And we'll just continue to do this. But do it in a way that's efficient and best for patients. The other thing just on the claims approval, there's been a history where we had had exposure and understanding audits and documentation that was missing. And so for a number of quarters, the process has been getting better for that first pass claims approval. So we're not looking for that to improve at all. In fact, it's very good right now. It's going to continue and sustain to be very good. So not a backlog and not an issue with now suddenly having a bolus of claims that we think are going to get approved, you can see our balance sheet, our revenue recognition is super healthy. So it's just now about continuing to operationalize the tools, process, and people that we have and continue to serve patients in the best and most effective way we can.

Kyle Bauser, Analyst

Excellent. That makes sense. And I really appreciate all the detail here. I'll jump back in queue.

Sheri Dodd, CEO

Thank you. Yeah. Thanks.

Operator, Operator

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