Quipt Home Medical Corp.

Thank you for standing by. This is the conference operator. Welcome to the third quarter fiscal 2021 financial results conference call and webcast for Quipt Home Medical Corp. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity for analysts to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. We remind you that the remarks today will include forward-looking statements that are subject to important risks and uncertainties. For more information on these risks and uncertainties, please see the reader advisory at the bottom of the company's results news release, as well as the company's MD&A, which you can find on the website, CDAR, and as may be included on EDGAR. the company's actual performance could differ materially from these statements. At this point, I'd like to turn the call over to Chairman and Chief Executive Officer Greg Crawford.

Thank you, Operator, and thank you all for joining us today on the call. My name is Greg Crawford, and I'm the Chairman and Chief Executive Officer of Quiptome Medical. Joining me today is Hardik Mehta, our Chief Financial Officer. I would like to begin by applauding our over 600 Quipt employees for their continued commitment to providing superior patient care to improve the quality of life for all our patients served. The quick motto is, exceeding expectations, enriching lives, as providing exceptional service isn't just something we do, it's who we are, and it's who we will always be. It is the clinical services we provide that have allowed us to grow our market share and set our sights on growing into a national home care provider in the United States. The continued compassion care coupled with the secular tailwinds of healthcare being delivered and monitored in the home has fostered continued robust growth, including impressive organic growth of 11% year-to-date. As a reminder, QIP specializes in end-to-end respiratory care, utilizing our interconnected healthcare platform, which leverages a sophisticated technology infrastructure and strong regional distribution footprint to streamline all phases of the delivery process. Known for our service-intensive model, ongoing patient education, and in-home respiratory therapy services, we are able to operate a successful patient-centric ecosystem throughout the organization. At present, QIPT operates out of 60 locations in 15 states across the United States, concentrated in the Midwest, Southeast, and East Coast regions, completing hundreds of thousands of deliveries each year to more than 145,000 active patients with over 18,000 referring physicians. We continue to execute on our three-pronged growth strategy through continued technology implementation, driving organic growth, and closing accretive acquisitions. We are able to leverage technology and workflow processes to improve our operations, which continue to yield consistent performance across the business. We have the financial resources, operational fortitude, and strongest regulatory environment we have had in a decade behind us to allow for the expansion of our geographical footprint and addition of additional talent across the organization. All aspects are a part of the strategy as we become a national leader in respiratory care across the United States. On this call, I will provide an update on the Phillips Recall, the continued bullish regulatory landscape, and update our core business, which continues to be very strong, with a focus on our record-breaking third quarter fiscal 2021 results. As many of you are aware, in June, Phillips Respironic announced a voluntary recall of certain respiratory devices related to polyurethane foam used in those devices. Philips Respironics has been a fantastic partner to us over the years, and we are committed to working through these challenges united together. Our ongoing dialogue with Philips concludes that the entire cost structure will be pushed onto them as it relates to trade-outs. As it relates directly to our business, I am pleased to note that we have additional strong supplier relationships with Philips representing only a minority percentage of the impacted category. Additionally, we are very proactive in getting ahead of the recall, including strong inventory management, device recovery, and as mentioned, working with an alternative supplier. Despite the recall, we have not experienced significant amounts of patients stopping the therapy, either CPAP, BiPAP, or ventilation. We have not experienced the financial impact to our Q3 financials and are yet to see a material impact into Q4. We have the ability and are striving to drive new setups and other product categories to mitigate the future impact due to the recall. Our clinical team has done an excellent job working with patients and physicians to manage this complex process, and we will continue to work diligently to minimize any future impact. On the regulatory front, we continue to operate in an extremely bullish environment. One of those major tailwinds propelling our industry comes from the decision made last October by CMS to cancel the 2021 competitive bidding program for 13 product categories. The cancellation of this program has provided us a clear margin outlook across our product mix and ensured our patient stability for the foreseeable future. Turning to the underlying business, we delivered solid year over year results and reached the high end of our run rate revenue guidance range, nearing $105 million. Our strong performance was driven through higher volumes, higher cash collections, and continuing to support the business with lower operating costs. Revenue of $26.2 million, adjusted EBITDA of $5.3 million, was driven by our heavily weighted respiratory product mix highlighted by sleep ventilation therapy and continued strength and oxygen therapy we are pleased for the nine months ending june 2021 that our bad debt expense has fallen to eight percent compared to ten percent for the same period in 2020 an improvement of two percent this exemplifies our progress on scaling the business and ensuring optimal billing processes. The first rate infrastructure we have in place today allows us to position ourselves as a market leader and gives us the flexibility to add locations organically to the platform as well as efficiently integrate acquired assets. Our recurring revenue base continues to be extremely solid during the first nine months of 2021. With recurring revenue representing approximately 75% of our overall revenue, our recurring revenue base provides us further stability and consistency as we look at our growth outlook, business model, and financial reporting. Quip is at such a pivotal time in the company's life cycles. On the heels of breaching $100 million run rate revenue and entering four new states since mid-July, reaching 60 locations, nearing 150,000 active patients, and concluding a NASDAQ listing at the end of May, we are set to execute on the exciting path forward for us to build shareholder value. With that background, I'd like to hand the call over to Hardik to discuss our third quarter 2021 financial results.

Thanks, Greg. Yesterday evening, we announced our third quarter financial results for fiscal 2021 representing the three months and nine months ended June 30, 2021. In reviewing the third quarter fiscal 2021 numbers, please note that all financial values are in US dollars and the full results are available on CDAR and EDGAR. Here are some key highlights. In the third quarter fiscal 2021, QIP completed 95,192 setups or deliveries compared to 57,551 in the corresponding period last year, an increase of 65%. In the third quarter fiscal 2021, QIP completed 40,580 respiratory resupply setups or deliveries compared to 14,436 in the corresponding period last year, an increase of 181%. The company's customer base increased 74% year-over-year to 64,578 unique patients served in Q3 2021 from 37,128 unique patients served in Q3 2020. The company generated revenue of $26.2 million in the third quarter fiscal 2021, up 41% from third quarter fiscal 2020. Not factoring acquisitions, the organic growth year-over-year was approximately 7%. The company's recurring revenue continues to be strong, and it is above 75%. Operating expenses for the third quarter of fiscal 2021 was 50% compared to third quarter of fiscal 2020 of 51%. For the nine months ending June 2021, bed debt expense was 8% compared to 10%, for the same period in 2020, an improvement of about 2%. This exemplifies our capability to scale and add more revenue through add-on acquisitions without compromising our billing capabilities. Adjusted EBITDA for third quarter of fiscal 2021 was 5.3 million compared to 4.4 million for the third quarter of fiscal 2020, representing a 21% increase year-over-year. Adjusted EBITDA margin for the third quarter of fiscal 2021 continues to be strong and was at 20% for the quarter. Adjusted EBITDA margin was impacted by one-time costs related to the company's NASDAQ listing from May 2021. Cash flow from operations for the nine months ending June 2021 was $11.9 million compared to $9.8 million in the corresponding period ending June 2022. Current assets totaled more than $61.7 million compared to $32.5 million in net short-term liabilities, demonstrating continuing strength in our liquidity. At the end of third quarter fiscal 2021, cash balance was $30.6 million compared to $27.2 million on March 31, 2021. At the end of third quarter fiscal 2021, the company has an undrawn revolving credit facility of $20 million USD. We are proud with the continued execution displayed through the strength of our third quarter results, once again seeing the consistency of our model in full display. We saw revenue breaching $26 million, reflecting the high end of our revenue range target and EBITDA margins remaining above 20%, whilst having a number of one-time expenses related to NASDAQ listing. We continue to experience sustained growth across all product mix, highlighted by heightened demand for ventilators, sleep, and oxygen equipment. We also continue to see very strong cash collections through the third quarter resulting from a continuous effort to better our revenue cycle management processes. Moreover, we have seen our business in Q4 2021 remain elevated and continue to be in a position to accelerate our growth trajectory over the near and medium term as we look forward to further our long-term acquisition strategy. Furthermore, we remain extremely pleased with our operating performance through the third quarter and are pleased with the increasing organic growth rate, which has been a top priority for us. Overall, market conditions continue to be sound, and we believe the tailwinds will continue to life the entire industry. Our infrastructure allows us to scale quickly, and the robust financial position we have provides us the ability to target meaningful acquisition candidates that work significantly to move the needle for our coverage peer in the United States. We expect to have a very busy remainder of the year as it relates to our M&A program and our organic growth initiatives. We are pleased to announce the addition of David Chester to lead our M&A and integration team. David is a healthcare executive with 21 years of experience with a specific focus on the home medical equipment and services industry. David comes as a director of acquisition from one of the largest home medical equipment companies in the industry. We are thrilled to make this significant hire for our company and look forward to David being an instrument in the future growth of the company. In closing, we continue to have an active pipeline and we expect to see more strategic M&A opportunities throughout the remainder of the year. With approximately $33 million in cash on hand and an untapped $20 million credit facility, we strongly believe in our ability to add substantial revenue at a very fast pace. We will continue our disciplined capital allocation strategy furthering our strategic goals and are more confident than ever in our market position and ability to quickly increase our scale. Thank you, and with that update, I'll turn the call back to Greg.

Thanks, Hardik. QIPP is undertaking an ongoing national expansion effort with the goal of economically growing our operating footprint to serve as a leader in respiratory home care across the United States. We have built out a significant infrastructure platform, which is highly scalable and allows the ability to efficiently integrate acquired businesses, resulting in meaningful cost synergies and revenue growth opportunities. The first nine months of Fiscal 2021 has been extremely successful for the QIP team. We saw solid organic growth of 11% through the first three quarters of Fiscal 2021, entered five new states, added 35,000 active patients, important insurance contracts, and over $15 million in revenue. We also rebranded the organization to provide us significant opportunity in our local markets, as well as continuing to provide superior patient care. Year to date, QIPT has entered Florida, California, Missouri, Arkansas, and Mississippi and will utilize a combination of the Quip brand name post-integration as well as leaving an acquired brand in place where it makes sense. This marks the start of a longer-term plan to transition certain local market brands to Quip as it strengthens its brand equity and recognition. We strongly believe this will be a driver of future organic growth Combining these newly acquired entities provides QIPT a pathway to grow into these new states with each business having a proven track record in the markets they serve and diversified product mixes. Across the industry, substantial tailwinds continue to be prevalent in 2021 when it comes to the importance of home care. Whether it be patients, referral sources, payers, or lawmakers, it is clear The structural shift is well underway to ensure a patient is treated in a home care setting whenever possible. We are supporters and continue to work with payers on potential opportunities for a shift from fee for service towards one that incorporates the service we provide for patients after the delivery of the equipment. Our team has been focused on finding the optimal ways to grow relationships with referral sources. and we are seeing the benefits of this across the organization. Turning to our operational execution earlier this year, we are pleased to continue overachieving as it relates to our growth objectives. We also continue to execute on operating efficiencies, generating strengthening organic growth, and continuing to leverage our cost structure. Our efforts of communicating to physicians and patients through our technology platforms have certainly paid off in large part due to our investments over the past few years in cloud-based technology across the back office and patient-facing functions. We continue to invest in technology in order to improve our operating efficiencies, whether through the ongoing use of our telehealth platform, revenue cycle management, or through our automated subscription-based resupply program. These actions drive sustained value to the company and allows us to continue to increase our productivity. Now, I want to take a moment to explain in a little more depth what we are doing differently and why we have been able to achieve the results we have and why we continue to be so excited about the future. We continue to successfully deploy a highly scalable connected healthcare platform focused on organic sales generation, accretive acquisitions with efficient capital deployment, targeted margin expansion, and cash generation. This model also encourages compliance, improves outcomes, and drives engagement with patients. Moreover, we can drive early interventions, reduce hospitalizations, and monitor treatment plan effectiveness, which all serves as a benefit to the payers. I would now like to review with you the three components of our growth strategy. First, we are laser focused on capturing market share economically and profitably. Our industry growth rate is about 5% to 6% a year. However, we believe we can continue to significantly outpace the industry growth rate by focusing on significantly increasing our market share in key target regions within the markets we serve, as well as opening up new markets. Secondly, we continue to lead the industry in technology deployment and our use of data mining tools to drive efficiencies and profitability. An example would be our robust subscription-based model for resupply, which provides meaningful revenue synergies for us on the acquisition front. The third component of our growth strategy is acquisitions. We are looking for turnkey respiratory operations that can be seamlessly integrated into our highly scalable platform. As we look at M&A, we have three facets to our acquisition approach. The first being a focus on scale and hence targeting companies in the revenue range of $5 to $20 million with consistent annual EBITDA margins between 10% and 20% plus and large distribution volume, which can be leveraged by our platform. The second facet being focused on our ambition of becoming a national provider This segment focuses on acquiring sub $5 million revenue targets with a strategic goal of expanding our payer mix and expanding our geographical footprint across new states. The third facet being a focus towards larger opportunities that would be more meaningful from a revenue, EBITDA, patient-based, and geographical reach standpoint. On the capital markets front, We have had a very exciting year, completing our most significant milestone to date with the commencement of trading on the NASDAQ in late May. Since that time, we have been steadily marketing the company with U.S.-based institutional investors through roadshows and conferences, and we will continue to be active on this front. We are pleased to have 8Capital initiate research coverage and look forward to their support. We remain focused on ensuring the Quip name, vision, continued strong performance is echoed to the investment community. As I look at the evolution of our company, I am so proud of the entire team for their hard work and dedication to going above and beyond, and this is a culmination of those efforts. We continue to strategically position the company for continued robust growth And given the current landscape of the industry, we must remain active in capturing the many opportunities that exist in front of us, and we have all the tools to do so. We could not be more excited for what the future holds for QIP and our more than 145,000 patients we care for. Once again, I would like to take a moment to thank the entire QIP team for its tireless efforts and its stakeholders for all their continued support.

We will now begin the analyst question and answer session. To join the question queue, you may press star, then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then 2. The first question comes from Doug Cooper of Beacon Securities. Please go ahead.

Greg, congratulations on the quarter. A couple quick ones to start off. The 5.3 million VivaDai reported, I just want to confirm that that does not include, or that includes, excuse me, that includes the transaction costs for NASDAQ. Can you, or the listing costs, can you indicate how much those were as a one-time item?

Sure. I'll let Hardik take that one. Sure. In Q3 approximate, value was around $400,000. The total NASDAQ spend so far is not of half a million dollars. Okay.

So is it fair to say that the adjusted earnings X that one time around is closer to $5.7 million?

Yeah.

Okay. Yeah, absolutely. Okay. Just on the organic growth question, My calculation for quarter-over-quarter growth, Q3 versus Q2, you didn't get a full contribution from Mayhew Medical in Q2, but my quarter-over-quarter growth estimate would be somewhere in the neighborhood of 5% or so. Is that fair? So 26.2% versus roughly 25% on a pro forma last quarter?

Yeah. I mean, it's about in that 4% to 5% range, yes.

So that would be close to 20% annualized. Was that a seasonal thing or what? It's much higher than sort of 11% that you've indicated for the nine-month period.

Yeah, that is correct. I mean, as I said, we always say that the industry growth is around 5% and we've been consistently delivering more than the industry average for the last three years in a row. And I think we'll just stick to that, that we continue to expect to do that.

Okay. Revenue per patient.

I'm not going to say whether we can do a 20% year over year. Yeah.

Revenue per patient, you know, the 26.2 million divided by 64,500 patients. I get $406, which is, you know, a little lower than it was in Q1 and Q2. Is that, Do you expect that to sort of rebound back up or maybe just some thoughts on that?

So, you know, as we've said in the past about this particular topic, we really don't see revenue per patient as a reliable metrics. A lot of variables go underneath that. It's just not a great comparison. I see what you're saying, but I couldn't say whether it will continue that way or it will change one way or another. It's just too many variables underneath that.

Okay. And my final one, and then I'll jump back in the queue. The revenue, or excuse me, cash was up $3.5 million versus Q2. Was that all predominantly from cash flow from operations, or was there other things that we should note in there?

Yeah, it's a combination of cash flow from operations, some warrant exercising, and also keep in mind we did have some acquisitions that were closed in June, so it's net of the outflow from those acquisitions as well.

Okay. Okay, great. Thanks very much, guys. Thank you. Thank you.

The next question comes from Doug Lowe with Lead Jones Gable. Please go ahead.

Thanks, Operator, and good morning, gentlemen. Thanks very much for the overview on the quarter. A couple things for me. I guess, first of all, I'm encouraged about your feedback about continuing to bolt on new acquisitions in the home respiratory care space. You now have pretty solid interstate diversification, you know, advancing to Florida and Missouri and Georgia, as you indicated. As you know, in M&A strategies, diversification is a positive until it isn't, and geographic clustering is a positive until it isn't. So I was just sort of wondering how you're conceptualizing how you might configure your geographic footprint going forward. Would the idea be to acquire regional firms that allow you to take advantage of existing hubs, or do you expect to expand into other states not previously contemplated? And then I have a follow-up.

Yeah, sure. So our plan is to expand in that into new states when opportunities present. We feel right now with the regulatory environment that there's a window here and that for us to expand. As far as looking at these new states, we've really been looking at states that have a high acuity of COPD patients and that would be a good fit for our clinical programs that we could potentially expand in that around the state. So that's definitely a big part for us.

I love good feedback. Thanks, Greg.

And then the other is, you know, just with regard to, you know, functioning as a healthcare services firm in a pandemic environment, I mean, your focus indications are exclusively pulmonary and, you know, COVID-19 is an RNA respiratory pathogen. So I'm just wondering, any insights as to how your patient symptom configuration is being influenced in a In a contemporary COVID universe, are you seeing a lot of COVID pathologies that are sort of reconfiguring your service base or any... Yeah, so we haven't really treated a large number of active patients.

COVID patients. But we have seen, you know, an uptick in certain product categories, especially home oxygen and a lot of our disposable replacement supplies. So we tend to think in that that we're picking patients up earlier in the onset of their disease state, you know, such as COPD or another cardio or pulmonary disease state. Considering those referrals and that have kind of shifted in that throughout COVID from coming, instead of coming out of hospitals more frequently, and that we're seeing more orders come out of physicians' offices.

Okay, fair enough. Thanks, Dave. That's good to know. Thank you.

The next question comes from Sefer Manocheri with Eight Capital. Please go ahead.

Good morning, and congrats on the continued operational excellence Just a question regarding the M&A pipeline. Could you possibly characterize in terms of number of deals you're looking at, whether it's a ballpark estimate in terms of the number or the cumulative revenue opportunity that you're trying to capture, let's say, within the next six months or 12 months?

Sure. I guess the number of opportunities we are looking at and the revenue size is just definitely very, very large. Not all of that is going to translate into a deal, but as we mentioned on the call earlier, we do want to continue our methodical approach and be good stewards of the capital as far as The depth of the pipeline, I would say the depth of the pipeline is enough if we wanted to deploy everything we could, if we just wanted to close on every single one that we have. It's pretty large. The depth is not a problem for us. We just want to make sure we are deploying it into the type of companies and the opportunities that are consistent with the three-pronged strategy that we've been advocating for a while.

Understood. And I guess, would you say the mix is pretty even in terms of the targets you're looking at, or are you focusing currently more on the sub-5 million to enter these new jurisdictions as a part of this national expansion plan?

I would say, of course, you can do the percentage allocation in terms of revenue because it would be skewed. But if you look at it in terms of number of deals, I think we have equal proportion of deals in sub 5 million to 5 to 10 million, and then about 10 million. I think at this point, the about 10 million pipeline is also getting larger. I mean, some of these deals are extremely large in size that we are looking at, but as far as the quantity or the number of deals in each of those three buckets, I think they are, I would say, very similar in terms of number of deals that we're looking at in each of those buckets.

Okay. would you put kind of a total kind of current opportunity at a ballpark number? Would that be 10 or above or below 10 or is that too rough of an estimate?

Way more than 10 in terms of number of opportunities. I think the last time we said it was about 100 million plus revenue size. 100 million in cumulative value of revenue size still holds true to that. Just Some deals are just large that we are currently working on.

And is there any changes in funding, whether it's government payers or hospitals specifically that you're seeing out there with regards to kind of the shift towards home health? Is there any opportunities that you see in the near midterm or are there potential changes?

changes coming that you're aware of in any of the industries you have exposure to for home health yeah as we've uh i've been talking about for several months is that we believe we're in the best regulatory environment and reimbursement environment that we've been in in well over a decade with the competitive bid and that the 13 product categories being removed that uh here for 2021 we also seen some slight increases in oxygen rates that had uh begun in April. There's also some changes coming for the LCD for oxygen and that, which would open up some additional coverage in that for potential new patients. But nothing negative in that that we see coming. We just feel right now in that, once again, that we're really in the best reimbursement environment that we've been in in well over a decade. We still feel there's a lot of opportunity for Quip to to start looking at national contracts and that with payers, whether it be fee for service or captation, as we continue to expand in that into new states and cover more of a geographical area.

Understood. And just off of that, my last question would be, is there a threshold that you're looking to meet in terms of being eligible for pursuing some of those broader national contracts? Do you need to be in a majority of states, let's say, or how do you, is there a benchmark you have to meet in terms of patients served or.

Yeah, we can put a benchmark on it and that, cause I think each payer is separate, uh, you know, from what they believe in that we do have one, uh, the national contract in that, that we believe, uh, will take effect in calendar Q4. So we're pretty excited about that. And that'll really help on the MNA front. When we acquire a company, we'll be able to immediately add them to the national contract, uh, So we're pretty pleased about that, and that particular payer was happy with the 15 states after ongoing talks.

Understood, understood. Presumably that's going to continue once there's the initial, we're probably looking at a pipeline ahead.

Yeah, I'll say on that, that's really kind of something that's untapped in that four quips at this point, in that it has not been a big focus up until recently. So we feel there's a lot of opportunity And that's for us on the payer side and ways of adding additional payers.

Understood. Thanks, Greg. Thanks, Hardik, for the details. Appreciate it.

Thank you.

The next question comes from Justin Keywood with Stiefel. Please go ahead.

Hi. Good morning. Thanks for taking my call. Just on the Philips recall, are you able to give some additional context on the potential affected patients and how that could possibly impact organic growth, if at all?

Yeah, so as far as the number of patients, that's something that we haven't released. I will say that it's been very minimal considering the amount of sleep devices that have been set up by the company over the period of the recall. At this point in that, there is a major shortage in that in supply chain issues in that for sleep devices. It's something that we're continuously working through. We are on allocation in that with one of our large vendors. But at this point in time, we've also got a very large back order in that from our sleep lab referrals and our patients in that because every company has basically the same issue in that with supply chain. So to date in that we have not seen any drop in our revenue or anything that would be material, but we're also building at the same time. We believe there's going to be a big pent-up demand at some point once the supply chain does come back on. We don't have a timeline or anything that we could really put on top of that. So I will say that things are better than they were in July, August. So if that trend continues, things should get better. But I think the timing of that will really determine what the impact will really be. And we just don't have a clear outlook in that from the manufacturers yet.

Understood. That's helpful. And given that this is an industry-wide disruption, I assume some of your smaller competitors may be in a worse-off position. Would this accelerate any of the deal processes and potentially lead to some a lower valuation in the targets that you're looking to acquire?

Yes and no. It could lead into some desperate measures by some smaller sellers, but then on our end, we also want to make sure we are not buying a company which is just because it's a little bit cheaper when we would have some of the supply chain issues as well. I mean, it's not a slam-dunk answer to that question. We evaluate those on a case-by-case. We like to look at their mixes in terms of Philips versus the others and whether we can acquire them and keep the continuity. While there could be an opportunity, it could also mean that you could be buying something and you might not be able to service them at its historical level soon after. So it's definitely a balance.

Okay, that's helpful. And then just on the organic growth for the first three fiscal quarters, it was mentioned at 11%. Are you able to bucketize that on the different segments, being the home ventilators, oxygen, and sleep therapy, on what contributes to that 11%?

No, we do not. We have never done that, and we just do not like to project or break down our revenue on a segment basis, I think. With the way revenue recognition works, especially with reserves and everything else, it's just a very complicated way of doing it in the details. So that's the reason why we have not been doing this in the past, and we still can at this point.

Okay.

And if I could just flip in on the concept called respiratory lines have definitely been a key contributor.

Understood. And just one more question. On the bad debt expense, I believe it was mentioned at 8% in the opening remarks. Is that a sustainable level that you see going forward?

We've always said 8% to 10%. As long as we keep it under 10%, we feel it's a good metric. So having said that, I would say 8% to 10% is still our range of comfort. As long as it stays in that range, we feel good.

I think one thing you have to take into account on the bad debt expense is on acquired assets. It does take quite some time to get them onto our billing platform, which could, depending on the activity within M&A, and that could lead to higher bad debt, maybe closer to that 10%, versus if the business was just operating in a normal, ordinary state without acquisitions. that's one of the most difficult things to integrate and takes the longest time being at two quarters or so before we really start to see those collection rates increase.

Right. Makes sense. And thank you for taking my questions.

Thank you.

The next question comes from Bill Sutherland with the Benchmark Company. Please go ahead.

Thank you. Hey, Greg. Hey, Hardik. I had a quick question on the Delta surge and whether you've seen any impact in terms of discharges from whatever sources and any impact on your own labor force.

Yeah, so as far as the Delta variant and that, it is very prevalent in service areas and that that we service in the southeast. We typically will see a lull in our oxygen setups through the summer months, and I'll say that that number has stayed strong in that as if it were December, January, February timeframe when we would typically see a lot of COPD exacerbations. And yes, we have had employees out in that, but to date in that it hasn't caused any material disruptions around the organizations.

So, Greg, you mean the discharges home from, you know, whatever facilities, that hasn't been impacted in a negative way from your perspective as far as, you know, accessing new patient referrals?

No, we've primarily seen an increase in our home oxygen in that for the Delta variant.

Okay, good. And then the other one I had was interested in kind of how much expansion of the Salesforce you've implemented year-to-date and maybe your objectives there. I know you get some of that just by the acquisition process, but maybe some color there would be great. Thanks.

Yeah, sure. So on the sales side in that area, Over the past, say, three to four months in that, we've probably added around 12 to 14 additional sales representatives. We've identified over 50-plus markets in that that we are currently targeting in that, most as continuum areas in that, that we would add additional sales reps. I will say that is one thing that's kind of slowed again in that due to COVID, in that as more and more facilities have and that have started locking down and not letting sales reps in and vendors and things. So we've had to be very cautious with that. But we're still, you know, pretty excited, you know, about the future and that from a sales perspective and the additional areas that we've identified that we believe that our services and that would resonate.

Got it. So you'll – you'll maybe take a little bit of a wait and see as the surge winds, you know, takes its course before you step up that sales expansion again, or are you going to just wait for, I mean, you know, obviously for the productivity to kick in as well.

No, I'll just say we have to be a little more cautious in that than we were before. We really have to understand the market and what our targets are. Are they closed? Those are things that we traditionally would not have to do in the past is to figure out whether or not a doctor's office is letting vendors in, and that's before we make a hire, considering these are new areas. That's just part of the process, and we have just found that it's all over the board, that some areas in that are just not letting anyone in, and some areas in that just have a set of rules, but vendors are allowed in. So it's really all over the board. There's no consistency.

Gotcha.

Great. Well, thanks again for taking the questions. Thank you.

The next question comes from Rahul Sargassar with Raymond James. Please go ahead.

Morning, Greg. Morning, Artic. Thanks so much for taking my questions. Most of my questions have actually been answered through mostly Q&A. And forgive me if this has already been answered. Just looking at cost of goods, who is this, the increase in cost of goods? Is that as a result of prior recalls? Can you give us a little more color then? How should we be thinking about that really going forward, particularly as a percentage of revenue as you continue to escalate?

Sure. So the reason it is a little higher this year is, of course, it's proportional to how high the sales revenue is as proportion to the rental and total revenue. sales revenue are the key drivers on the inventory sold. So, you know, for increment in the sales revenue, you are going to see dollar-for-dollar increase, a proportional dollar-for-dollar increase on the inventory side. As far as giving guidance on how we see about it, we would say use the year-to-date number, and that's probably a good reflection of what you will see on a sustainable basis.

Okay, thanks for that. So, but just to push a little bit further there, you know, as a proportion of revenue, it's closer to, you know, sort of 29 and a half, pushing 30, whereas historically we've been looking at sort of 25 to 27. So, on a dollar-for-dollar basis, it has sort of increased marginally. So, that's why I wanted to make sure that for our modeling purposes, you know, we are being accurate going forward using maybe more historical data numbers versus the slight potential outlier that this quarter might have been.

Yes, and that's exactly why I said for guidance purposes, we would encourage you guys, the analyst community, to use the year-to-date numbers. The anomalies are already a factor in the year-to-date numbers, right? So we feel very strongly and comfortable with suggesting that the year-to-date percentages can be used for modeling.

Perfect. Thanks very much. And I should start by saying congratulations on the strong .

Thank you. Thank you.

The next question comes from Chelsea Stelic with IA Capital Markets. Please go ahead.

Hello, good morning. I just have a couple of questions in particular on the latest acquisition. First off, I just kind of want to understand how much respiratory you can cross-sell through this new acquisition.

Sure. So the new acquisition opens up a new market for us. But at the same time, we have other companies also in the state of Missouri that we could use to expand on the respiratory program. The current, the company that we just acquired in Missouri, they do not have much of a respiratory presence at all, but as far as the opportunity in the St. Louis as a market is great. Whether we would do that, we don't anticipate doing it under the new acquisition, but but under a previously completed acquisition from June, which has the contracts in the state, we do plan to enter into the St. Louis market with a previously acquired company.

Okay, and I guess just... Sorry.

Do they have the contract that we need to enter into the respiratory market?

Okay. Sorry, I think I missed that. I don't know if there was another person talking over the top.

Sure. I was just saying that, you know, one of the companies that we acquired in June also has payer contracts in Missouri that we plan to leverage and use for the whole state, including St. Louis.

Okay. And I guess just to follow up on that, I know earlier you mentioned, you know, your key focal points for growth, one being, you know, looking at turnkey respiratory operations as sort of your acquisition target. The last acquisition that was a little bit more traditional DME, is that not going to be as much of a focus on traditional DME-type acquisitions going forward, or is that – how should I look at that?

So we don't – I mean – We look at each opportunity on an individual basis, right? So as you can just see from the most recent acquisition, it has a different product profile than the typical respiratory companies that we have in our portfolio. So as long as it makes sense and as long as it falls with our strategy of, you know, expansion, the payer contract, geography, and cross-selling abilities, we would continue to execute on those deals. Of course, we do prefer turnkey respiratory programs, but that doesn't mean that all acquisitions we do will fit the exact same guidelines. Of course.

And I guess just one last question from me. Hoping just to get a little bit more color on the insurance contracts that you mentioned. How long are these contracts? How material are they to operations?

They could be transformational over the longer run on the payer contracts. As you grow the footprint and you get more lives under your coverage, you can go back to your payers and AX for national contracts that helps our overall M&A program substantially and post-close perspective. And B, you can ask for some price increases as and when that is justified. So I think having more footprint, having more life center coverage is definitely critical if you are going to be in the healthcare space.

All right. Thank you. That's all for me.

Thank you. Thank you.

The next question comes from Doug Cooper with Beacon Securities. Please go ahead.

Just a couple of follow-ups. The new hire, David Chester, it doesn't take long to see where he's from. How long will it take him to get up and be productive? When did he start? Is he up to speed on your business? Just how long will it take him?

Sure. Dave is already up and running full speed. We've just had him up for a couple weeks now. Actually, just about a week now. As you know, I was primarily doing the M&A portion on our end, and he's going to be a great asset and a great help to expedite on some of the pipeline that we have. He I mean, he's a very seasoned guy. He understands M&A. He understands process. We are extremely aligned on the philosophy and how, you know, what we call the quip way. He is ready to roll. There is no downtime. It's going to pick up everything that we currently have.

Right. The company he came from was just focused primarily on larger opportunities, so they certainly did a number of large deals. So he Does he bring that Rolodex with him? I'm assuming that his prior company has run into some trouble, for sure, at least judging by the stock price and some of the news around them. Is there any possibility to get more people from this type of situation?

Yeah, I would say we have our own full pipeline and have no expectations of hiring someone and bringing over a you know, something that may belong to someone else, and that our focus is closing on the deals that we have in our pipeline, and that's what we fully expect, and that to happen in the, you know, the near term and the medium term here, deals potentially of all sizes. As far as new hires, I think you will definitely see us continue to add talent in that, especially in leadership roles, and that throughout the organization, that's been a big focus of ours. and we'll continue down that path here as we close out 2021 and going into 2022 as we do feel we have opportunities in that to fill.

And my final question, guys, you obviously hit that goal or benchmark or milestone of $100 million of revenue. You surpassed that. Where do you think you rank in the sphere of companies in this space, Lindcare, AFRI, Adopt Health, obviously bigger, but where do you think you'd rank? now that you're at that level. Yeah.

I mean, from our market research, I mean, if you take out the big four and that, I mean, we think we're definitely in the top 10, if not the top five, um, you know, hitting that a hundred plus million dollar run rate revenue. We just don't see companies out there. We've, we've also been told in that by some other, you know, bankers and, and things like that out there that are very familiar with the industry and that, that they do believe in that, that we're likely in the top five, top 10. So we think we sit in a very unique spot. I think for us to hit that $105 million that we've kind of guided was the higher end in that we hit that a full quarter earlier than expected. We had that as far as calendar 2021. You know, we're growing really good. We feel there's a great opportunity for us. We sit in a really nice spot here to really kind of grow from here. We hit a real inflection point.

And I'll just add to that, you know, when you ask that question, it kind of fits a little bit of a subjective as well, right? I mean, to look at the footprint that we have, there might be a few more, maybe two or three more players that are 100 plus, but they do not have, they're very local and very focused on maybe one or two states. But the kind of footprint we have, it really comes after the top four that Craig mentioned. I don't think there's anybody out there which has the footprint that we do along with the revenue size after you take out the first four.

Okay, that's great. Thank you very much.

The next question comes from Dick Ryan with Collier Securities. Please go ahead.

Thank you. So, Greg, you mentioned hitting your 105 a bit early. What's your current thoughts on the timing of getting to the next milestone? I think that's been in that 135 million range.

Yeah, so we've kind of talked about that being calendar 2022. You know, we're growing really nice at that 10% rate plus. So if you just kind of factor 10% organic growth in that, you know, we have to definitely pick up some M&A. We think with our hire, you know, that's going to accelerate. And also an important piece of that is the integration of that. That's a big thing for us in that we stay laser focused on the integration of those acquired assets. So, you know, it could happen sooner rather than later, two years in a row, and that we have exceeded our goals one quarter earlier than expected, going from 100 to 135, and that is a bigger leap, but we also have the balance sheet to support that.

Are you seeing any vendor pricing benefits coming your way?

Yeah, so we have great relationships with all of our vendors. We're always working with our vendors in that to look at ways in that that can allow us to serve our patients better and also being more profitable, whether that's through technology platforms or potential lower pricing. We look at our vendors in that for all sorts of partnerships that will allow us to grow our business profitably.

Okay, great. Thank you. Congratulations.

Thank you.

This concludes the question and answer session. I would like to turn the conference back over to Craig Crawford for any closing remarks.

Thank you, operator, and thank you all for your participation today. As always, you can find us on the web at quipthomemedical.com, where we will be posting a transcript of this call and also our updated investor deck. On the site, you can also view some of the exciting products and developments discussed on this call. Thank you, and have a great day.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.