Hello, and welcome to the Electromed Fiscal First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mike Cavanaugh. Please go ahead.

Good afternoon, and thank you for joining the Electromed earnings call. Earlier today, Electromed Inc. released financial results for the first fiscal quarter of 2023. The quarter ended September 30, 2022. The release is currently available on the company's website at www.smartvest.com. Joining me on the call today is Kathleen Skarvan, President and Chief Executive Officer; and Michelle Wirtz, Interim Chief Financial Officer. Before we get started, I'd like to remind everyone that some of these 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 those 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 information. I will now turn the call over to Kathleen Skarvan, President and CEO of Electromed.

Thank you, Mike, and thank you to everyone joining the call today. Our fiscal first quarter strengthened our conviction that our strategic growth initiatives continue to bear fruit and will place us on an accelerated growth trajectory. We grew our top line year-over-year 7% and continued to generate operating profits through strong efforts by our team, but we are not immune to the evolving macroeconomic environment and inflationary pressures that many med tech companies are experiencing. We are focused on addressing the opportunities to mitigate these risks to continue to execute on our strategic growth initiatives. As a reminder, these key pillars to grow our market share are expand our sales force in targeted geographies with high potential to 48 direct reps, launch our next-generation SmartVest device with innovative features that will appeal to patients, expand SmartVest brand awareness through direct-to-consumer and physician marketing and further develop and promulgate the body of bronchiectasis clinical evidence to increase physician adoption of the SmartVest system. Our approvals and revenue were negatively impacted by the lingering impacts of the COVID-19 pandemic on the supply chain. We were though encouraged as the team achieved multiple key operational milestones during the quarter, and we continued to generate operating profits, while investing in the business to support tapping into the large underpenetrated HFCWO market. We historically experienced declines in referral and approvals in fiscal quarter one, although, I would note that referrals were higher compared to the first three quarters of fiscal 2022, higher year-over-year and we achieved an increase in referrals per sales rep demonstrating improved productivity. We expect overall productivity to improve during the fiscal year as newer sales reps ramp their activity. Despite the solid referral volume, a disruption with one of our electronic suppliers meant that we simply didn't have enough devices…

Thank you, Kathleen. Net revenues for the quarter were $10.7 million, a 7% increase over the same period in the prior year. Home care revenue for the quarter was $9.6 million, a year-over-year increase of 4% from the same period in the prior year, primarily due to increases in both referrals and approvals, and we also benefited from a Medicare allowable rate increase that took effect on January 1, 2022. The increase in referrals was primarily due to an increase in direct sales representatives. This was slightly offset by a temporary interruption in supply chain in September of 2022. Home care distributor revenue for the quarter was $554,000, a year-over-year increase of 255% from the same period in the prior year. The revenue increase was primarily due to demand from one of our key distribution partners. Gross profit for the quarter increased to $8.3 million or 78% of net revenues from $7.7 million, or 77% of net revenues in the same period in the prior year. The increase in gross profit dollars and percentage for the quarter was primarily due to increased revenue and operational efficiencies related to shipping. Historically, we have occasionally experienced variability in our sales and gross profit due to payer mix as well as changes in clinic access or patient flow due to COVID-19 related issues. Future sales and gross profit may experience similar quarter-to-quarter fluctuations in fiscal 2023. Selling, general and administrative, or SG&A expenses for the quarter were $8 million, representing an increase of $1.2 million, or 17.7% compared to the same period in the prior year. Approximately half of this increase included legal fees and annual sales meeting expenses that are not expected to occur in the remaining quarters. The remaining SG&A increase includes additional headcount in our sales and reimbursement department, representing…

Of course, we will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Kyle Bauser with Lake Street Capital Markets. Please go ahead.

Hey, guys. This is Jake (ph) on here for Kyle. Thanks for taking the questions. I just have a few questions for you guys to get started. Has there been any changes to the estimate of overall HFCWO market growth? I believe last quarter, it was estimated to be around 5% annually. Can you elaborate on that?

Absolutely. Hi, Jake. How are you doing today? Yes, we would continue to believe that, that is in our best estimate. The growth for the overall industry is approximately 5% on an annualized basis. So yeah, you think about our growth and even though it was stunted a bit by the supply chain issue. Our demand is strong and we were able to, even with that situation, exceed the growth of the industry.

Awesome. Thanks for elaborating. So do you guys anticipate needing to update the target range for home care revenue per rep once the next-gen SmartVest comes to market?

At this time, that range is based on the more related to that ratio of tenured versus new reps. And until we have a little more -- a few months of building on the new rep experience, we don't plan to change that. If we would see ourselves exceeding it over the next two, three quarters, we would review that. But at this time, I think we're in the right range at the $850,000 to $950,000.

Awesome. Thank you. And for your sales reps, has compensation changed at all? And have you revised the comp structure or anticipate changing it?

So annually, we do a review of our comp structure overall, particularly, looking at that incentive plan, assuring that the sales incentive lines up with our strategic growth expectations. And so that went into effect July 1. Would I say though that overall comp, we've seen inflationary pressures? Absolutely, I would say for our sales reps, that's primarily on their base pay. Typically, our base pay is around -- to incentive is around a 70%, 30% ratio. That ratio still is approximately in the ballpark of what we're expecting. But we would -- are continuing to watch it carefully. We, though, are concentrated first on hiring the highest caliber experience of employees. And with that often comes some of that salary inflation. But we review our salaries on an ongoing basis and believe that we're attracting the right quality candidate with the incentive plan and comp plan that we have at this time.

Yeah. That makes a lot of sense. I got one more question for you guys here. Can you talk about what steps need to occur for HFCWO therapy to get included into the society guidelines?

Yeah. That's a terrific question, Jake. In talking with a number of physicians, particularly those on our Advisory Board as well as those that are part of the bronchiectasis registry sites throughout the United States, we do believe that there is work that is going on right now to develop draft for U.S. guidelines for treating bronchiectasis. We are not privy to what those details are, but that's based on the growing evidence that is being published for HFCWO and those positive outcomes for bronchiectasis, that's why we're focused on continuing our clinical road map and continuing our studies so that we can add to that body of evidence, so that airway clearance is included as a guideline or a treatment protocol as well as, at some point, assuring that HFCWO is part of that airway clearance and treatment guidelines. So that's really what we know so far and we'll keep everyone updated if we learn new information around guidelines.

Awesome, that’s all from me. Thanks for answering the questions.

Thank you, Jake.

That is all the time we have for questions. And this concludes our question-and-answer session. I would like to turn the conference back over to Kathleen Skarvan for any closing remarks.

Thank you very much for joining us today and for your interest in Electromed. Our employees continue to execute at a high level and we look forward to updating you on our progress as our team continues to advance our strategic plans. If you would like to schedule a follow-up call, please reach out to our Investor Relations partners at ICR Westwicke. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.