Greetings, and welcome to Electromed's Third Quarter Fiscal 2019 Financial Results Conference Call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kalle Ahl of The Equity Group. Please go ahead.

Thank you, Donna, and good morning, everyone. Electromed's third quarter fiscal 2019 financial results were released yesterday after the market closed, a copy of the earnings release can be found in the Investor Relations section of the Company's website at www.smartvest.com. As a matter of formality, I need to remind participants that remarks made by management during the course of this call may contain forward-looking statements about the Company's results and plans. Such statements are subject to risks and uncertainties that could cause actual performance or achievements to be materially different from those projected. The words believe, expect, plan, intend, estimate, anticipate, should or could and similar expressions are words that are used to identify forward-looking statements, but their absence does not mean a statement is not forward-looking. In addition, any projections as to the Company's future performance represent management's estimates as of today, May 8, 2019. You should not place undue reliance on these forward-looking statements. We expressly do not undertake any duty to update forward-looking statements, whether as a result of new information, future events or otherwise. We ask that you please refer to the Company's SEC filings for further guidance on this matter. Joining us from Electromed this morning are Ms. Kathleen Skarvan, President and Chief Executive Officer; and Mr. Jeremy Brock, Chief Financial Officer. Kathleen will begin with some opening remarks, after which Jeremy will present a summary of the Company's third quarter fiscal 2019 financial results, and then we will open the call for questions. Now it's my pleasure to turn the call over to Kathleen.

Thank you, Kalle. Good morning, everyone, and thank you for joining us. Today, I will review our third quarter fiscal 2019 financial results, discuss the sales force restructuring we implemented in March of 2019, touch on the impressive leadership experience of Bud Reeves, our new Vice President of Sales, and recap our strategy to address the large and growing bronchiectasis market. Electromed's third quarter net revenue increased by 3.4% to $7.4 million reflecting 4.6% growth in home care revenue. These year-over-year comparisons were negatively impacted by lower average revenue per approval based on payor mix and below par sales performance in 2 of our 5 sales regions. We had an unusually high average selling price in the third quarter of fiscal 2018, so while our average selling prices this quarter was lower than prior period, it was in line with normal historical ranges. This is an example of the quarter-to-quarter variability inherent in our business and in our view, not a indication of a longer-term trend. The underlying cadence of our home care business remains solid. With approvals and shipments both increasing at double-digit rates in the third quarter. Referrals continue to increase, and we are achieving greater referral-to-approval percentages due to our sales team success educating physicians on reimbursement requirements. This quarter, we witnessed ongoing excellence in our reimbursement operations and good execution by our sales force across most of our territories. Briefly touching on the institutional side of our business, net revenue decline compared to the prior year period, but we are making progress developing relationships with the integrated delivery networks. The sales cycles are just taking longer than we anticipated, while today, our institutional segment represents a small percentage of our overall business, it is a very important focus of ours, because the high frequency chest wall…

Thank you, Kathleen, and good morning, everyone. Our net revenue in the third quarter of fiscal 2019 increased 3.4% to $7.4 million from $7.2 million in the third quarter of fiscal 2018, driven by growth in home care revenue. Home care revenue increased 4.6% to $6.9 million, primarily due to an increase in referrals and approvals, driven by greater productivity from our field sales staff and improved reimbursement processes. As Kathleen noted, during the third quarter of fiscal 2019, home care revenue was negatively impacted by lower average revenue per approval based on the payor mix. Institutional revenue decreased from 400 -- decreased to $414,000 from $496,000 in the prior year quarter. And international revenue, which is not a strategic growth area for Electromed, totaled approximately $142,000 compared to $119,000 in the prior year period. With the restructuring of our sales force behind us, we are well positioned for double-digit revenue growth in fiscal 2020 as we execute our organic growth strategy, although quarter-to-quarter sales variability can be expected due to the nature of our business. Gross profit increased 1.2% to $5.6 million or 75.2% of net revenue in the third quarter of fiscal 2019 from $5.5 million or 76.9% of net revenue in the third quarter of fiscal 2018. The increase in gross profit resulted primarily from an increase in home care revenue. And the decrease in gross profit as a percentage of net revenue was driven primarily by the lower average revenue per approval based on payor mix. Operating expenses, which include SG&A as well as R&D expenses, totaled $5.1 million or 66.7% of revenue in the third quarter of fiscal 2019 compared to $4.9 million or 68.2% of revenue in the same period of the prior year. SG&A expenses increased by 1.1% to slightly above $4.9 million…

[Operator Instructions] Our first question is coming from Kyle Bauser of Dougherty & Company. Please go ahead.

Kathleen and Jeremy, can you hear me okay?

Yes. We can.

Great. So the home setting is a nice opportunity here as you said and it's key to get into the hospitals first to really drive referrals into the home channel. As part of the new strategy, do you feel like you have the relationships with enough hospitals at this point and are more focused on driving referrals within these accounts? Or is there still runway to develop new relationships with other high-volume hospitals?

Yes. Thank you for the question, Kyle. It's first of all, when we think about the home care discharge referral, again, just to be clear, we have a high amount we have a higher number of hospitals where SmartVest already is being used in patient, in their intensive care unit primarily. And so, as I said in my comments, that's where we're going to target first for that growth in the home care referral discharge patients. And yes, we have a strong presence in a high volume of hospitals across the United States and those are, interestingly enough, a combination of it being used in adult hospitals and also pediatric intensive care units. So we're excited about building on that foundation. The other area -- and within those hospitals, there still is institutional business that can grow. So that is where we look first for the ability to grow the institutional business, either within additional generator, which can be a capital sale and also increasing their use of the single-patient used wraps, which is the recurring revenue that we look for in that institutional sales area. So those are all great opportunities for growth and then there still are greenfield hospitals that are looking for opportunities for productivity improvement from their respiratory therapist or they have not used HFCWO in the past and they see it as an opportunity to help send their patients home with clear lungs, so that they won't be coming -- and part of their COPD navigator programs, so that they aren't being readmitted within 30 days, and then also, of course, then to work on should that patient be discharged with HFCWO or SmartVest. So I know that's a bit of a long winded answer, but there are of course, 3 or 4 opportunities here for increasing revenue.

Got it. And you touched on this in your remarks, Kathleen, after reducing the sales force and realigning the regions from 5 to 4., does the now 36 reps kind of sustain the business for, say, another 12 to 24 months? In other words, from what you're seeing in the field, is there enough bandwidth amongst these 36 reps to stay at this number for a while?

You're going to see that number fluctuate a bit by 2 to 3, and that's because right now we would include a couple of territories that are open, that we are currently looking to fill. So -- but, again, the trigger point will be when we reach that productivity or sales per direct TAM or sales rep. And you'll be seeing that as well, when we're reporting every quarter and as that ticks up, and we get in that range then we'll start talking about expanding.

Okay. And you've spoken about this previously, but I'm just curious, can you provide an update on the service-related product enhancement that you've been working on and what sort of metrics it will track to inform adherence outcomes?

So our current wireless patient monitoring feature is cellular-based and it is already tracking their frequency that they're using with their device, the pressures, the amount of time that they use it for each session and also the number of sessions each day. So that will remain intact. The enhancement is really adding features for that patient so that they're more likely to use the device or the application and potentially can even bring it in and show their physician. Not all physicians are tapping into the wireless monitoring, but we believe that through the patient's interaction, they can pull the physician in and the patient can be more proud of the therapy adherence that they have and hopefully it'll improve their therapy adherence because of the interactive nature of the enhancement.

All right. Okay. And just lastly, Jeremy, can you remind me again what's in the tax expense line, it's come down considerably from last quarter, so I think there was a deferred tax expense before, is that still in there? And how should we think about this line item going forward?

Yes. I think the way we're looking at on a go-forward basis is we will be hovering more around the federal rate plus the state rate, which is then between the 20% and 30% on a go-forward basis.

[Operator Instructions] Thank you. Our next question is coming from Tim Chatard of Quantum Capital. Please go ahead.

Just a question on the sales issues. The difficulty reaching the sales rep productivity, I guess I'm trying to get a sense for what that revolves around. Is it the type of sale that the reps are trying to make is nontraditional? Or what they had been doing before, I know there are different types of never having been one, I can't speak personally, but capital equipment versus more consumable-type items lend themselves towards different types of sales professionals or sales processes. Anything along those lines that you can give me some color on?

Tim, thank you for the question. And so when we talk about sales productivity, we are referring only to our home care revenue as a ratio of the number of reps that we have. And the challenge in the home care revenue sale is twofold. One is the challenge of access to a physician and then being able to talk to them about their patient population, and identifying patients that would qualify for reimbursement and need high frequency chest wall oscillation or airway clearance as an ongoing therapy for their chronic condition. And so, in these territories that we vacated for a period of time now or temporarily I believe, we're not seeing the home care revenue that we would have expected. And so it was in my view the best approach to vacate those regions at this or those territories at this time and focus on the territories where we were seeing higher productivity and strength in our opportunity to grow. And that focus then will give us a foundation to build on, that will then be something to rebuild on as we expand then further once we see that productivity per sales person strengthen. So hopefully, that gives you a little more color on what we're focused on and why.

Yes. It sounds like access to the pulmonologist sort of on a very basic level, they need to be talking about what is your patient population, looked like very much a -- you need to be in partnership with local pulmonologist or pulmonologists or just trying to get a sense for how that work sometimes and how that doesn't work...

Well, in that -- yes, and sorry to interrupt, but that's a good -- that's a very helpful comment. Once you are able to establish access and you establish access by bringing value. And so, how are we bringing value, we bring value 2 ways. One, we're helping that physician help their patient with an airway clearance product that keeps them out of the hospital and helps them feel better. And then we also help them by making the prescription or the prescribing of our device and managing the medical records. So, we can receive reimbursement for the patient as easy as possible for that provider and for that office. Those are really the 2 ways we add value for the physician and the provider. And -- so our reps are, as I said, in my comments, they're adding value by being an extension of that office for the patient and for reimbursement and we handle all the reimbursement. So typically, what the provider needs to help us with is, of course, writing a prescription and then helping us collect the medical records on behalf of that patient, so then we can receive the authorization and the approval from the payor.

Yes. Is there a revenue opportunity for the pulmonologist that needs to be changed? Or maybe there's an opportunity to change or tinker with the current model. I'm just thinking about behavior on the ground with the physician.

Well, in the pulmonologist office, there is little economic benefit for the physician to prescribe this device. What we want to be doing is sharing with that pulmonologist that this is an airway clearance that can help their patient, again, feel better and stay out of the hospital, have higher quality of life. And we believe that the majority of pulmonologists, or physicians in general, want to help their patients feel better and improve their quality of life. And so, again, our job is to make it as easy as possible to prescribe this device and for them to believe that we are helping their patient long term. In the hospital environment, there is an economic reason to use HFCWO for their patients, in the hospital setting as an inpatient, this device, our therapy, is going to help that patient clear their lungs, hopefully faster and more effectively. And then when they are sent home with HFCWO or SmartVest that's going to help keep them out of the hospital and help them feel better as well. So that's economic value to the hospital, especially when it comes to COPD or pneumonia readmission penalties, which can occur if that particular patient is readmitted within 30 days after their discharge.

Okay. Do you anticipate any change to the operating expense structure going forward with -- from looking at your percentage of revenue on G&A related to the sales force reduction? Or is that probably not wise to model in a reduction given that you might make changes?

Actually, no, thank you for that question, Tim. We have modeled in about $500,000 savings from the restructuring annually and that could change, of course, as our strategies change for expansion. But, again, we'll be speaking to that each quarter.

At this time, I'd like to turn the floor back over to Kathleen Skarvan for closing comments.

Thank you all for participating on our call this morning. We look forward to reporting back to you in September, when we will release our fourth quarter fiscal 2019 financial results. Have a good day.

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time, and have a wonderful day.