00:01 Greetings. Welcome to the Electromed Fiscal Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. 00:20 I will now turn the conference over to your host, Mike Cavanaugh, ICR of Westwicke. You may begin.

00:25 Good afternoon, and thank you for joining us today. Earlier today Electromed, Inc. released financial results for the quarter ended December 31, 2021. The release is currently available on the company's website at www.smartvest.com. Kathleen Skarvan, President and Chief Executive Officer; and Mike MacCourt, Chief Financial Officer will host this afternoons call. 00:54 As a reminder, 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. 01:14 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. 01:39 I will now turn the call over to Kathleen Skarvan, President and CEO of Electromed.

01:45 Thanks, Mike and thank you to everyone joining the call today. As always, we appreciate your continued support of Electromed. The fiscal second quarter of 2022 was record-breaking for Electromed. We are incredibly proud of what we have achieved to enhance Electromed’s position as a leading provider of airway clearance devices. 02:09 We achieved a record revenue of $10.2 million in the quarter, our second sequential quarter of record revenues. We believe this indicates that our strategic growth initiatives are beginning to yield the high results we anticipated, and this displays our team's strong execution in the face of the continued pandemic and tight supply chain. The fact that we have significantly exceeded pre-pandemic revenues demonstrates the values patients placed on our SmartVest Airway Clearance therapy to help them manage their chronic lung diseases. 02:45 Our revenue growth in the second quarter of fiscal 2022 was driven by our core home care segment, which grew 5.6% year-over-year to a record $9.4 million. On a year-to-date basis through the first-six months of our fiscal year, our home care revenue is up 14.2% compared to the prior year. 03:09 Our home care revenue growth in fiscal 2022 has been driven by an increase in referrals from the ongoing expansion of our sales footprint and sales rep productivity exceeding our goal. We did experience some turnover having 39 direct home care sales rep at the end of the current quarter compared with 41 at the end of the prior quarter. 03:34 As I mentioned in our previous earnings call, our goal is to staff 43 sales territories directly. While, we work to hire top talent to fill these positions, we are leveraging our entire team including support staff to ensure we are selling in all 43 territories. Since our last call, we…

08:07 Thank you, Kathleen and good afternoon, everyone. Our net revenue in the second quarter of fiscal 2022 increased 7.9% to $10.2 million from $9.5 million in the second quarter of 2021, driven primarily by higher home care and distributor revenue. Home care revenue increased 5.6% to $9.4 million primarily due to an increase in referrals and approvals. 08:33 As Kathleen mentioned earlier, Electromed benefitted from an increase in direct sales representative and an increase in overall sales representative productivity compared to the prior year period. Institutional revenue increased 7.8% to $333,000 due to an increase in the volume of devices and garment sold, as hospitals returned to more normal purchasing activity compared to the prior-year period, which is heavily impacted by COVID 19. 09:03 Distributor revenue increased 159.7% to $387,000. The growth in our distributor revenue this quarter was driven by increased selling focus from one of our key distributors. International revenue which is not a key strategic priority for Electromed declined by 8.1% to $124,000 this quarter. 09:28 Gross profit in the second quarter of fiscal 2022 increased to $7.9 million or 76.9% of net revenue from $7.5 million or 79.2% of net revenue in the second quarter of fiscal 2021. The increase in gross profit dollars this quarter was primarily due to stronger home care in distributor revenue. The decrease in gross profit percentage this quarter was primarily due to increased raw material costs and increased shipping costs. 10:00 We had noted rising cost during our last earnings call and expect this trend to continue for the balance of fiscal year 2022. We expect our gross margin percentage to be in the mid-70% range for the remainder of fiscal year 2022, which is on the low end of our historical gross margin percent range. We do expect…

14:37 At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Kyle Bauser with Colliers. Please proceed with your question.

15:06 Hi. Good afternoon. Thanks for all the updates here. So, it sounds like margins will be pressured to some extent for a couple of quarters given that higher raw material and shipping costs and since reimbursement is of course fixed, presumably as immediate increased price so, but it sounds like the next-gen system it's cheaper to make, given its smaller form factor. Did I understand that correctly? Could that kind of offset some of these higher costs, any sort of thoughts here would be great? Thank you.

15:41 Hi, Kyle. It's Kathleen here. Good to hear from you. Thanks for the question. And yes, we mentioned that last quarter that the supply chain constraints are providing higher cost components and there is expediting fees occasionally and also shipping costs. So we will expect those margins to be in those mid-70s as we go forward. And your other question was about the lower cost structure on. Yeah. The lower cost structure on the build materials for our next generation. Absolutely, we are still anticipating that that will be a lower bill of materials than our current SQL SmartVest. And so that's where we would expect to regain some margins as we introduce that in the, the first half of fiscal 2023.

16:40 Got you. I mean, any sort of ballpark range of how much cheaper it will be to make the next-gen version?

16:52 Well, I think initially, it's going to offset those component costs that we're dealing with, because of the supply chain situation. And then we expect that it might improve beyond that as we gain more traction with a substantial amount of that being our volume that we'd be shipping.

17:12 Got you. Appreciate that. And then, any thoughts on, I mean there is certainly a massive opportunity ahead of you for bronchiectasis, a big prevalence pool and you've got a best-in-class device you can take share with. And so maybe that would keep you plenty busy. I'm just kind of curious, so any thoughts on layering in additional products that you can utilize at the same call point through pulmonologists, like, just kind of curious if that would make sense to be able to have multiple products in the bag and maybe more specifically in any way to monetize SmartVest through those new remote therapeutic monitoring reimbursement code that came out. Just kind of curious on that?

18:06 We're always of course open if some opportunity might come up around an additional product, Kyle. But you're absolutely right in mentioning that we do believe that this is an under-penetrated market. We are excited about the market share opportunities that we see in the immediate future. And then, of course, with our next generation product, the additional innovative features that we're going to be providing. We think that that's going to be very helpful for us as well to continue penetrating the market and tap into those patients that are still not benefiting from HFCWO therapy. So I think that near term that will continue to be our focus and our opportunity. But again, if an opportunity dropped in our lap we wouldn’t ignored of course. 18:56 As far as the remote monitoring codes, we're still doing some in-depth research on those codes to understand. Could there be benefit for us, as well as for physicians and for those that might be on the call that aren't aware that were new remote monitoring codes for physicians and for companies that have remote monitoring on some of their home care devices. And so there could be some opportunity to monetize that or better leverage our SmartVest Connect for the physicians, as a value-add. So we'll update you as new information comes about for that. At this time, we're still in the assessing what the opportunity maybe.

19:44 Got you. I appreciate that. And then just lastly, kind of circling back to the opportunity here. I mean it's a massive untapped opportunity for SmartVest, but presumably, there is a lot of patients seeing out there in the prevalence pool that have never been treated with HFCWO and maybe they're harder to acquire, if you look at the cost to acquire those patients is probably much higher than it is to prescribe of SmartVest to selling that's entering the market through initial diagnosis or the incident. I guess, I'm just kind of wondering, what's the associated costs with acquiring someone, it's been out there for a while in the prevalence pool or maybe asked a different way, what's kind of your mix of new patient add if we're looking at people who are just entering the market for the first time, just starting to have exacerbations versus those that have been dealing with this for a long time?

20:50 Thanks for that question, Kyle. There's two ways that I typically will look at that pool of patients. So for us, based on research that we've done there, the majority of patients that are prescribed HFCWO have been struggling with repeat exacerbations for a period of time and that could be two years, it could be five years, but they are often have experienced those lower respiratory infections have had a chronic cough and they've been visiting their physician -- primary care physician or pulmonologist for quite, quite a bit of time. And it -- and so that's the opportunity. We believe that that's part of our selling process. The opportunity is to be working with physicians that diagnose bronchiectasis and talking to them about these patients that have repeat exacerbations and asking why haven't prescribed HFCWO when it's been proven to reduce hospitalizations and improve outcomes for these patients. So that's part of our selling process absolutely. When -- and there is that large pool of bronchiectasis patients that have not been using HFCWO so that's who we're targeting, and it's the physicians that are seeing those patients. 22:14 The other opportunity, as I said is through our direct-to-patient marketing. So, as we're -- our marketing SmartVest to patients who are sick of being sick and they're are researching on the Internet, as well as their caregivers. Why has my mom, my dad, why am I continuing to have these lower respiratory infections have been hospitalized 2 times or 3 times, they keep putting me on antibiotics. What could help me? And that's where SmartVest comes in and pops up when you're searching, some of those key words, takes them to our website. We then, when they sign up. We send them information and then we follow up with them directly with a phone call or texts, and talk to them about their chronic condition. And through that conversation, we can direct them to a SmartVest friendly physician, who understands how to diagnose bronchiectasis and the benefit of HFCWO or we can help them on how to talk to their physician about their situation and what might be helpful. So I think that your question really is a great question and that's how we are continuing to help bring new patients to SmartVest.

23:32 Excellent. Thank you, Kathleen. Super helpful and congratulations on the record results.

23:37 Kyle, thank you so much. Great to hear from you.

23:41 We have reached the end of the question-and-answer session. And I will now turn the call over to management for closing remarks.

23:49 Thank you all for joining our call this afternoon. Please reach out to our Investor Relations firm ICR Westwicke, if you are interested in scheduling a follow-up call. We look forward to reporting back to you in May, when we will release our third quarter fiscal year 2022 results. In the meantime, thank you for your continued support of Electromed and have a great evening.

24:13 This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.