Greetings, and welcome to the Electromed, Inc., Second 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 Equity Group. Thank you. You may begin.

Thank you, Sherry, and good morning everyone. Electromed's second 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, intent, 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 February 13, 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 second quarter fiscal 2019 financial results, and then we'll 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 to discuss Electromed's second quarter fiscal 2019 financial results. This quarter, our net revenue grew by approximately 15% year-over-year, reflecting 13% growth in home care revenue and the 31% increase in institutional revenue. Home care growth was driven by an increase in referrals generated by our expanded field sales team and greater referral to approval percentage due to our sales team success educating physicians on reimbursement requirements, resulting in more quality referrals as well as ongoing operational excellence in our best in class reimbursement teams. Our institutional revenue grew by continuing to focus on integrated delivery networks. By expanding our institutional market share, it will also support our home care growth strategies. Our focus on the institutional market on hospitals where patients are being treated, gives Electromed direct access to the healthcare professionals who manage the discharge patients. Often the high frequency chest wall oscillation brand used in the hospital is the default brand prescribed when discharging a patient. At Electromed, our strategies are focused on perfect synergy, building our brand in the hospital setting and making SmartVest the preferred HFCWO product used by patients at home. Shifting to expense management, we were pleased that this quarter's SG&A expenses grew at a slower rate than our revenues compared to the second quarter of the prior year. Our operating income was lower than the prior year period, primarily due to an increased investment in the sales team over the past few months and R&D expenses this past quarter. R&D investment is for the development of an innovative service related product enhancement that will improve our patient’s ability to access their SmartVest therapy adherence data. We are excited about this project because physicians are interested in knowing if their patients…

Thank you, Kathleen. Good morning, everyone. Our net revenue in the second quarter of fiscal 2019 increased 15.1% to $8 million from $7 million in the second quarter of fiscal 2018, driven by growth in home care revenue. Home care revenue increased 13% to $7.3 million, primarily due to an increase in referrals and approvals driven by a higher number of field sales employees and improved reimbursement processes. Institutional revenue increased 30.9% to $402,000 from $307,000 in the prior year quarter. International revenue which is not a strategic growth area for Electromed totaled $279,000 compared to $166,000 in the prior year period, although quarter-to-quarter sales variability can be expected due to the nature of our business. We anticipate double digit revenue growth in fiscal 2019 as we execute our organic growth strategy. Gross profit increased 12.2% to $6.1 million or 75.7% of net revenue in the second quarter of fiscal 2019 from $5.4 million or 77.6% of net revenue in the second quarter of fiscal 2018. The increase in gross profit resulted primarily from an increase in home care revenue. The decrease in gross profit as a percentage of net revenue was driven by a lower selling price per device in our institutional market. Operating expenses, which include SG&A as well as R&D expenses totaled $5.4 million or 67.3% of revenue in the second quarter of fiscal 2019 compared with $4.6 million or 66.5% of revenue in the same period of the prior year. SG&A expenses increased 12.6% to $5.2 million from $4.6 million in the second quarter of fiscal 2018, primarily due to higher payroll and compensation related expense, travel, meals and entertainment expenses, both related to the expansion of our sales team. Research and development expenses increased to $238,000 in the second quarter of fiscal 2019 from $57,000…

Yes thank you. [Operator Instructions] There are no questions at this time. I would like to turn the conference back over to Kathleen Skarvan for closing remarks. Actually, I'm sorry, we just got a question. And that is from Josh Peters from Sterling [ph] Advisors. Please proceed, Josh.

Good morning, Kathleen and Jeremy. Good to speak with you this morning. Congratulations on the sales growth.

Thank you, Josh. Good to hear from you.

Yes. I just wanted to ask a quick question about seasonality in the business certainly a very nice uptick, from last quarter. I know we talked about this in the past that it can be kind of hard to get a sense of what the real seasonal trends are there. But do you have any other insights that might help to evaluate what sales could look like over the next couple of quarters without explicitly giving guidance?

Thank you, Josh, for that question. You're absolutely correct in that, we have spoken about seasonality quite a bit regarding this business. And it is difficult to get true understanding of that based on other variables that we have in this business. Certainly, we know that the summertime seems to provide us fewer prescriptions due to many doctors taking time off vacations and less people potentially visiting for exacerbations. But of course, the challenge then is tracing that referral to when we actually have an approval or book revenue. And we know that that booking of the approval or revenue can range anywhere from two to six to eight weeks. Then if you throw appeals in there that can happen with commercial or Medicare, it does find us to be in a bit of a lumpy situation. I think though, if you look at revenue traditionally, you would see that our third and fourth quarter or second half of the year has had some traditional increases. And so that's a long winded answer, which I apologize for, but it is a bit of a complex story.

Okay, well, that that does help any context that helps as we along the journey here. And one other question and then I'll let you go, on the expansion there in New Prague, what type of expansion are you contemplating? Are you adding manufacturing space or office space? What are you considering there?

Hi, Josh. Thanks for the question. Regarding the building addition, as we stated, we've carefully mapped out what the infrastructure that we need and believe that this project is actually going to have very favorable financial terms for us and support our future growth objectives. A little more color on the topic, the building addition that we're talking about, will allow us to eliminate the need for lease of office space that is the current home of our reimbursement team. We'll move from a space of proximity 20,000 square feet of which 8,000 square feet is occupied by the reimbursement team to a square foot layout of under 15,000 square feet. And the least that will be eliminated currently requires about $130,000 in base rent. So the Minneapolis, New Prague area, which has a strong economy and a very favorable payback period that we're seeing from this project as compared to the rent expense will also give us a quick residual value to the building as well. So I think the financial terms of this is very good and again it'll be mostly office space and combine common areas for the entire company for that building. Again, we haven't finalized the deal the deal and we will give you a further update on the next conference call.

Okay, thank you very much.

[Operator Instructions] Our next question is from Andy Summers with Summers Value Partners. Please proceed with your question.

Good morning, Kathleen and Jeremy.

Hi, Andy. How are you today?

I'm well, thank you. A couple quick questions if I may. Firstly, since you have a new Head of Sales in your institutional business, the performance there has really improved. Can you talk about where that business could go over the next three to five years?

Yes, I'd be happy to talk a little bit more about that. As I mentioned too in our comments the institutional opportunity we think is a great one for us as all bronchiectasis patients funnel through the hospital and we are able to -- the hospitals are recognizing the value of a therapy like high frequency chest wall like SmartVest in their in patients critical care units as well. So they can send people home with clear lungs, which hopefully helps them to stay healthy and not see those readmission penalties. But the idea that they can identify the COPD phenotype -- COPD bronchiectasis phenotype is really catching on as well as hospitals are putting in these readmission penalty programs to continue to keep people with pneumonia and COPD the respiratory care out of the hospital or from being readmitted of course. But as far as hospital revenue overall, this is for now more of a market share gain for us. Do we think that we can -- we will have double digit growth here as well. Could it be on the higher end of the home care. I think that's potential.

So am I thinking about it correctly that the institutional revenue growth is somewhat of a leading indicator for your home care revenue growth, or is that not the right way to think about it?

I think that could -- could be actually for sure be the right way to think about it, Andy. The more opportunity we have in that hospital the more growth we see there, the more as we said that perfect synergy where then our brand is being used in the hospitals so the physicians are using it, they have more exposure and that gives us also that access to talk to those physicians about the value and then help them work on how do we make this more of a standard of care then for discharging. Well first, diagnosing bronchiectasis and then discharging those patients with SmartVest. So we're as I said in my comments very excited about the opportunity.

Okay great. And then last question for me, I appreciate the additional color you provided on the sales productivity initiatives. But if we look out over the next three to five years and assume that those initiatives do bear fruit. What do you see as the potential for the EBIT margin of this business over that time period. You have been sort of mid-teens historically, but where do you see this going over the next three to five years if your initiatives pay-off?

Hi Andy, it's Jeremy. And I think when we look at getting the leverage and the increase in the revenue without having to add the expenses I think it is our belief that we can get back to the mid-teens and depending on the current growth opportunities that we have at that time, at any given time in the future and they invest other investments that we're making ex. any of those other investments we can meet those same mid-teen numbers.

Okay, thank you very much.

Thank you, Andy.

[Operator instructions] Our next question is from Salim Najim [ph], Private Investor. Please proceed with your question.

Good morning. So I just have a quick question on the home medical equipment distributor opportunity that has been identified in the past and it's also in the 10-K, just wanted to get an update I guess having continuing conversations and exploring that channel as an opportunity for increased sales.

Thank you, Salim [ph] for asking that question. We are actively involved in conversations with a handful of home medical equipment distributors and when we do have something more material to speak about that and how it might be beneficial for our longer term growth we will definitely share that with you. It's certainly something that we think has been worth exploring in regard to being able to expand our brand and particularly in those parts of the country or regions or territories where our brand may not be as strong from a market share standpoint. So thank you for the question and that’s where we are at this point.

Maybe a follow on to that, if I may, is the opportunity with those distributors for the home care end market or is it for the institutional market?

Right now we would be targeting exclusively the home care market, those home medical equipment distributors do have relationships with hospitals as well and those relationships are often for serving a discharge patient with portable oxygen or non-invasive ventilation. And so those relationships could be beneficial, but again would be for the home care market.

Thank you.

Thank you.

[Operator Instructions] There are no more questions at this time, I would like to turn the call back over to Kathleen Skarvan for closing remarks.

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

Thank you this concludes today’s conference. You may disconnect your lines at this time and thank you for your participation.