Greetings, and welcome to the Electromed, Inc.'s Second Quarter Fiscal 2020 Fiscal Results Conference Call. [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, Kevin, and good morning, everyone. Electromed's second quarter fiscal 2020 financial results were released yesterday after the market close. 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 you that some of the statements that management will make on this call are considered forward-looking statements, including statements about the company’s future operating and financial 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. Any such statements represent management’s expectations as of today’s date. You should not place undue reliance on these forward-looking statements and the company does not undertake any obligation to update or revise forward-looking statements whether as a result of new information, future events or otherwise. 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 second quarter fiscal 2020 financial results, and then we'll open the call for questions. Now it's my pleasure to turn it over to Kathleen.

Thank you, Kalle. Good morning everyone and thank you for joining us to discuss Electromed’s second quarter financial results. We delivered another strong bottom-line performance in the second quarter as our net income for the period nearly tripled to $1.2 million compared to $381,000 in the same period last year, driven by 7% – driven by 6.7% revenue growth and substantial operating margin improvement. Starting with our home care business, net revenue increased 4.6% year-over-year despite some open sales territories which we are in the process of filling and despite having approximately 10 fewer direct sales employees in the field compared to the prior year period contributing to the flat referral growth. At quarter end, our field sales employees totaled 40 of which 34 were direct sales compared to 52 at the end of the second quarter of fiscal 2019 of which 44 were direct sales. Our plan remains to peak at approximately 38 direct sales reps in fiscal 2020. Our home care revenue growth in this quarter was moderated some pockets of weakness in our central territory in November, but we were pleased to see referrals in this region and throughout the country steadily rebound in December and January. In the quarter, we benefited from a higher average selling price per device due to payer mix and importantly from improved sales force productivity driven by strong performance from our longer tenured sales reps. We produced approximately $938,000 of annualized home care revenue per direct field sales employee, well ahead of the comparable figure of $687,000 for the second quarter of fiscal 2019 and above our target range of between $750,000 and $850,000. We remain confident about meeting or exceeding our target productivity levels for the full fiscal year. Our growth strategies are focused on increasing referrals in adult pulmonology…

Thank you, Kathleen. Good morning, everyone. As Kathleen shared, our net revenue in the second quarter of fiscal 2020 increased 6.7% to $8.5 million from $8 million in the second quarter of fiscal 2019, driven by growth in our home care revenue. Home care revenue increased 4.6% to $7.7 million, primarily due to higher average allowable based on payer mix as compared to the prior year and improved productivity of our direct sales force. Institutional revenue increased 22.8% from – to $494,000 from $492,000 in the prior year period. And international revenue, which isn't a strategic growth area for Electromed, totaled approximately $253,000 compared to $280,000 in the prior year period. Although quarter-to-quarter sales variability can be expected due to the nature of our business, we anticipate long-term, low double-digit revenue growth as we execute our organic growth strategy. Gross profit increased 10.1% to $6.7 million or 78.1% of net revenue in the second quarter of fiscal 2020 from $6.1 million or 75.7% of net revenue in the second quarter of fiscal 2019. The increase in gross profit resulted primarily from the increase in home care revenue, and the increase in gross profit as a percentage of net revenue was driven by a higher average allowable based on payer mix as compared to the prior year. The average selling price per device was at the high end of our historical range this quarter and could moderate depending on mix. We expect our long-term gross margins will continue to range in the mid- to high 70s. Operating expenses, which include SG&A as well as R&D expenses, totaled $5.1 million or 59.8% of revenue in the second quarter of fiscal 2020 compared to $5.4 million or 67.2% of revenue in the same period of the prior year. SG&A expenses decreased 3.6% to…

Thank you. [Operator Instructions] Our first question today is coming from Kyle Bauser from Dougherty & Company. Your line is now live.

Hi. Good morning, Kathleen and Jeremy.

Good morning.

Good morning, Kyle.

So you mentioned the larger prospective study, which began enrolling, which is great. How big is this trial? And based on the previous UAB study, when do you think you could finish enrolling for this?

Thanks for the question, Kyle. So this is going to be a multisite study. We're expecting upward of 100 patients to enroll. And then once those patients are enrolled, we'll be following them for a 12-month time period. So depending on the length of the enrollment, once we reach that 100 patients, then following them for 12 months. So I think we're thinking long-term here, this could be two to three years before we may see those results. Although it could be sooner, I just can't predict it precisely due to the time frame that it may take to enroll these patients.

Sure, okay. Got it. And the press release implies investment in multiple studies. So I guess beyond this prospective study, can you outline anything else that's in the works?

Well, I think one of the key studies that we're going to be thinking through and evaluating will be one on economics. And the prospective study that is underway currently would be a great springboard for an economic study on health care utilization. So how do we share with health care organizations, payers. How using SmartVest for people with bronchiectasis can benefit them as well from an economic standpoint, in addition to benefiting patient. There are also other databases that we can access for some of that economic data as well. So that would be, in general, one of the areas we're thinking about.

Okay. That's helpful. And you added two reps in the quarter and will – have plans to peak at another four after that at 38. I know you want to layer on the reps at a pace that allows you to hit that productivity goal, but when do you expect you can hit that peak number and have a full sales force with all the territories filled? And how are you approaching this addition differently than in the past?

So our plans for reaching the 38 would be in the second half of the year, but I think that, realistically, that should be this quarter. That's our plan. And then we'll, of course, start planning for our next year. As Jeremy mentioned, we're in our – we'll be kicking off our operations and strategic planning process, and that'll start planning for the next year in what that expansion might look like. But certainly, the peak should be here in this quarter. And by the way, just to add a little color, we've been very pleased with the quality of our hires. And I think with Bud's leadership and the experience that our sales recruiter has with understanding our culture, understanding our market, understanding the profile of the sales rep that can be most successful with this product and in this market, that we've been quite pleased.

Okay. And it looks like the Medicare bucket was really strong again in the quarter. Can you talk about some of the dynamics here? I mean was this a function of faster reimbursement turnaround? Or just a bolus of patients coming in from that 65-plus age population?

Good morning, Kyle. So what we're seeing as we continue to grow and focus on bronchiectasis is a larger number are in that 65-plus bucket. So we're seeing a lot of those patients end up with having Medicare and supplements to cover their co-pays and the allowable. So we are seeing a benefit from that. To the extent that continues, we do expect to see the benefit from that from a ASP standpoint as well as that then also helps the gross margin as well. But there is variability quarter-to-quarter and we may see that in future quarters, but we will also benefit from that.

Okay. And then just two quick ones. So your cash position continues to grow here, and I know you've been talking about wanting to allocate that for growth opportunities. But at $9 million or $1 per share, just wondering how you're thinking about cash allocation in the future here?

As Jeremy commented in his opening remarks, Kyle, we want to ensure that our cash allocation is linked very carefully to our strategy. And right now, our strategy is focused on growth. So that's why we continue to share that we want that to be used for long-term growth strategies. That said, we are entering our strategic planning process that we enter into every time at this time of the year. And so that's when we're going to dig in a little deeper here and take a look at what are the other opportunities for use of cash to improve our opportunity for growth but also to provide the best shareholder value. So I can assure our shareholders that we will take a look at that very carefully here in this cycle. And as we reach conclusions on that opportunity for our cash, we will share that with the financial community and our shareholders.

Okay, great. And just lastly, so obviously you saw some really nice operating margin expansion, 18% plus. And you note that you anticipate additional margin improvement over the long term. Just to get a sense, I mean, what is your idea of a long-term goal for operating margin? Thanks so much.

Yes. Thanks, Kyle. As we hit different points through our different projects that we're hitting, our long-term goal is to be in the mid- to upper teens from an operating margin standpoint as we continue through our growth period.

Okay. Got it. Thanks for talking the questions.

Thanks, Kyle.

Thanks, Kyle.

Thank you. Our next question today is coming from Stephen Globus[ph] from Globus Generation Group[ph]. Your line is now live.

Good morning, Kathleen and Jeremy, and congratulations. One question and one comment. Question is, your study that you're currently on, can the results be used by your competition?

Hello, Stephen. Thank you for the question. Absolutely. Any clinical study in the marketplace can be used by competition. Although I will say that this will be a clinical study only using our device. And so I think that, that speaks volumes for us and for the patients that are using SmartVest and the results that they're receiving from our therapy as an algorithm of that care.

Okay. Well, thank you for that comment. Is it possible for you to have these conference calls in the evening after releasing your results? It's more of the state-of-the-art where companies talk about this in the evening at 5:00 PM. A lot of the financial industry is very busy in the morning, programs positioning and getting to work. And I think it's a little bit more convenient. And as you reach out to investors or potential investors, I think an afternoon call is appropriate.

Well, thank you for your input on that, Stephen. We have looked at…

You’re early this morning.

Yes. We have looked at the number of companies that, of course, do evening calls and morning calls. And it's not unusual to do a morning call as well, but we'll definitely take your comments into evaluation.

Okay. But you're – I guess, it's 7:30, it's early there, right? Anyway, congratulations and keep up the good work.

Thank you so much.

Thank you. Our next question is coming from Howard Rue, a Private Investor. Your line is alive.

Good morning, Kathleen and Jeremy. Congratulations on not just this quarter but really the last three quarters in a row, where you've had really excellent results.

Hello, Howard.

Hi, Kathleen. I have two questions. One is in the area of guidance, and I know we've talked about this before. More in terms of both short term, which you've talked about before, but the long term. With the way that you set out this opportunity, $1 billion opportunity, you're in third place with maybe still around a 20% share of a $200 million market and you're forecasting double-digit growth. But as you look at it, what's – can you lay out for us, this should be a $100 million revenue company at some point in time. I'm not saying next year. But what's the inflection point? Where do you see that it goes from a 10% growth, where it jumps much higher in order to get you into a second place in this market, or as this market continues to grow, not only gaining share but using the advantage of these studies to really change the growth trajectory of Electromed? Can you talk a little bit about that?

I will happy to talk about that Howard, thank you for a great question. Inflection point, I think that is a key term, and a term and an opportunity that we think about and talk about here on an ongoing basis. So I don't know if you had a chance to listen in on Dr. Solomon’s conference call with Dougherty here this week. But Dr. Solomon talked about an inflection point as well. And he talked about that this is really still a development market in that we're still in the early stages of pulmonologists and even primary care physicians, their awareness of bronchiectasis and looking for bronchiectasis in patients that have those symptoms of a chronic cough, chronic exacerbation and then ordering the high-resolution CT scan to diagnose it appropriately. So I think that we aren't sure when that inflection point will come, but what we are looking for and what we talk to pulmonologists about, and in particular, those pulmonologists that are part of the bronchiectasis registry sites throughout the United States, which they're about 13, soon to go to about 17, is that they're talking about gathering enough clinical evidence and information so that they could be confident about creating a standard of care for bronchiectasis patients. And that standard of care is what we believe would be very important. And part of that would be that you always start with airway clearance as that part of that standard of care. And once we reach some momentum where those pulmonologists and physician groups are comfortable setting that up through associations like the American Thoracic Society or the American Association of Respiratory Care therapies, in my belief, that's when we're going to start seeing that inflection. But the momentum is growing. When you think about Dr. Solomon's patients that he's seeing, he's prescribing anywhere from 50% of his patients, high frequency chest wall oscillation. He's seeing the sickest of the sick. So I think that momentum is growing. So unfortunately, we don't have an exact time frame, but I think it's coming for sure.

Yes. I think I'd just encourage you to put numbers around that to show where it is and also on the share that you have of the existing market, because with your new sales team or newly focused sales team, you should be able to grow your share. And that would – a 10% growth is only $4 million a year. You ought to be able to do much better than that. And if you can sell that story, if you can explain how that works, which it should, you'll get great benefit from it. The second question I've got is on capital allocation, just following up on what Kyle asked. And Jeremy, what you said about you're kind of looking at future strategy. I mean with now, probably today, over $10 million in the bank, and I wouldn't call it a clean balance sheet, I would call a pristine balance sheet, what you have. I mean, unfortunately, the opportunity that we had for the share repurchase that we advocated for at the $5 to $7 range, where you could have bought that 5% of the stocks for less than $3 million, is gone, hopefully forever. But the dividend is still there. And when you're looking at that, I would encourage you. Because you can talk about growth, but as you've mentioned many times, the growth comes from your operating cash flow. You're not looking at doing acquisitions because you have a great market opportunity. You don't need to invest more of operating capital into it because you're making more with great gross margins. So shareholders should be comfortable that you're not going to have to spend what you have. And as a result, a small dividend to start that process would be something I'd strongly encourage. Any comments on that?

I appreciate your comments. And all options are going to be on the table, Howard, so that will be part of our consideration.

Okay, thanks and congrats on a great quarter.

Thank you, Howard.

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

All right. Thank you all for participating on our call this morning, and we look forward to reporting back to you in May when we release our third quarter fiscal 2020 results. Have a good day.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.