Electromed Inc

Previous wording

Our products are sold in both the home health care market and the hospital market for inpatient use, which we refer to as “hospital sales.” Since 2000, we have marketed the SmartVest System and its predecessor products to patients suffering from bronchiectasis, cystic fibrosis, and other chronic pulmonary conditions which require external chest manipulation to enhance mucus transport. Additionally, we offer our products to a patient population that includes neuromuscular disorders such as cerebral palsy, muscular dystrophies, amyotrophic lateral sclerosis (“ALS”), patients with post-surgical complications or who are ventilator dependent and patients who have other conditions involving excess secretion and impaired mucus transport.

Current wording

Our products are sold in both the homecare market and the hospital market for inpatient use, which we refer to as “hospital sales.” Since 2000, we have marketed the SmartVest System and its predecessor products to patients suffering from bronchiectasis, cystic fibrosis, and other chronic pulmonary conditions which require external chest manipulation to enhance mucus transport. Additionally, we offer our products to a patient population that includes neuromuscular disorders such as cerebral palsy, muscular dystrophies, amyotrophic lateral sclerosis (“ALS”), patients with post-surgical complications or who are ventilator dependent and patients who have other conditions involving excess secretion and impaired mucus transport.

Previous wording

Net revenues for the three and six months ended December 31, 2023 and 2022 are summarized in the table below.

Current wording

Net revenues for the three and nine months ended March 31, 2024, and 2023 are summarized in the table below.

Previous wording

Homecare revenue*.*Homecare revenue increased by $1,936,000, or 18.0%, for the three months ended December 31, 2023, compared to the same period in the prior year. For the six months ended December 31, 2023, homecare revenue was $23,821,000, representing an increase of $3,457,000, or 17.0%, compared to the same period in the prior year. The increase in revenue was due to an increase in direct sales territories and efficiencies recognized within our reimbursement department as a result of recent investments made to streamline the claims process in the six months ended December 31, 2023.

Current wording

Homecare revenue*.*Homecare revenue increased by $1,316,000, or 12.0%, for the three months ended March 31, 2024, compared to the same period in the prior year. For the nine months ended March 31, 2024, homecare revenue was $36,108,000, representing an increase of $4,773,000, or 15.2%, compared to the same period in the prior year. The increase in revenue was due to an increase in direct sales representatives, and efficiencies recognized within our reimbursement department as a result of recent investments made to streamline the claims process in the nine months ended March 31, 2024.

Previous wording

***Hospital revenue.***Hospital revenue was $619,000, an increase of $30,000, or 5.1%, for the three months ended December 31, 2023, compared to the same period in the prior year. For the six months ended December 31, 2023, hospital revenue was $1,126,000, an increase of $146,000, or 14.9%, compared to the same period in the prior year. The increases were primarily due to an increase in sales representatives focused on the hospital market.

Current wording

***Hospital revenue.***Hospital revenue was $783,000, an increase of $343,000, or 78.0%, for the three months ended March 31, 2024, compared to the same period in the prior year. For the nine months ended March 31, 2024, hospital revenue was $1,909,000, an increase of $489,000, or 34.4%, compared to the same period in the prior year. The increases were primarily due to an increase in sales representatives focused on the hospital market as well as increased capital and disposable demand.

Previous wording

Homecare distributor revenue*.*Homecare distributor revenue decreased by $56,000, or 16.7%, for the three months ended December 31, 2023, compared to the same period in the prior year. For the six months ended December 31, 2023, homecare distributor revenue was $853,000, a decrease of $37,000, or 4.2%, compared to the same period in the prior year. The decreases in homecare distributor sales were primarily a result of the timing of distributor purchases that can cause significant fluctuations in reported revenue on a quarterly basis.

Current wording

Homecare distributor revenue*.*Homecare distributor revenue increased by $23,000, or 4.6%, for the three months ended March 31, 2024, compared to the same period in the prior year. For the nine months ended March 31, 2024, homecare distributor revenue was $1,377,000, a decrease of $14,000, or 1.0%, compared to the same period in the prior year. The change in Homecare distributor sales were primarily a result of the timing of distributor purchases that can cause significant fluctuations in reported revenue on a quarterly basis.

Previous wording

Gross profit increased to $10,545,000, or 77.0% of net revenues, for the three months ended December 31, 2023, from $8,682,000, or 74.0% of net revenues, in the same period in the prior year. Gross profit increased to $20,043,000, or 77.1% of net revenues, for the six months ended December 31, 2023, from $17,013,000, or 76.0% of net revenues, in the same period in the prior year. The increases in gross profit as a percentage of net revenues compared to the same period in the prior year were primarily due to decreased shipping expenses as well as increased material costs in the prior year to expedite inventory purchases which did not recur in the current year.

Current wording

Gross profit increased to $10,382,000, or 74.8% of net revenues, for the three months ended March 31, 2024, from $9,056,000, or 75.0% of net revenues, in the same period in the prior year. Gross profit increased to $30,425,000, or 76.3% of net revenues, for the nine months ended March 31, 2024, from $26,069,000, or 75.7% of net revenues, in the same period in the prior year. The decrease in gross profit as a percentage of net revenues compared to the same three-month period in the prior year was primarily due to costs associated with the wind down of our previous generator models. The increase in gross profit as a percentage of net revenues compared to the same nine-month period in the prior year was primarily due to decreased shipping expenses and increased material costs in the prior year to expedite inventory purchases which did not recur in the current year.

Previous wording

*Selling, general and administrative expenses.*Selling, general and administrative (“SG&A”) expenses were $8,175,000 and $17,325,000 for the three and six months ended December 31, 2023, respectively, representing increases of $921,000 and $2,082,000, or 12.7% and 13.7%, respectively, compared to the same periods in the prior year.

Current wording

*Selling, general and administrative expenses.*Selling, general and administrative (“SG&A”) expenses were $8,374,000 and $25,699,000 for the three and nine months ended March 31, 2024, respectively, representing increases of $680,000 and $2,762,000, or 8.8% and 12.0%, respectively, compared to the same periods in the prior year.

Previous wording

Payroll and compensation-related expenses were $5,625,000 and $11,390,000 for the three and six months ended December 31, 2023, respectively, representing increases of $796,000 and $1,301,000, or 16.5% and 12.9%, respectively, compared to the same periods in the prior year. The increases in the current year periods were primarily due to salaries and incentive compensation related to the higher average number of sales, sales support, marketing, and reimbursement personnel to process higher patient referrals. We have also continued to provide regular merit-based increases for our employees and are regularly benchmarking our compensation ranges for new and existing employees to ensure we can hire and retain the talent needed to drive growth in our business. Field sales employees totaled 58 as of December 31, 2023, 49 of which were direct sales representatives, compared to 57 field sales employees and 48 direct sales representatives as of December 31, 2022.

Current wording

Payroll and compensation-related expenses were $5,721,000 and $17,111,000 for the three and nine months ended March 31, 2024, respectively, representing increases of $684,000 and $2,191,000, or 13.6% and 14.7%, respectively, compared to the same periods in the prior year. The increase in the current year periods were primarily due to increases in share-based compensation, salaries, and incentive compensation related to the higher average number of sales, sales support, marketing, and reimbursement personnel to process higher patient referrals. We have also continued to provide regular merit-based increases for our employees and are regularly benchmarking our compensation ranges including share-based compensation for new and existing employees to ensure we can hire and retain the talent needed to drive growth in our business. Field sales employees totaled 59 as of March 31, 2024, 51 of which were direct sales representatives, compared to 57 field sales employees and 48 direct sales representatives as of March 31, 2023.

Previous wording

Travel, meals and entertainment expenses were $745,000 and $1,693,000 for the three and six months ended December 31, 2023, respectively, representing increases of $26,000 and $61,000, or 3.6% and 3.7%, respectively, compared to the same periods in the prior year. The increases in the current year periods were due to higher travel costs and an increased number of sales territories.

Current wording

Travel, meals and entertainment expenses were $760,000 and $2,453,000 for the three and nine months ended March 31, 2024, respectively, representing increases of $102,000 and $163,000, or 15.5% and 7.1%, respectively, compared to the same periods in the prior year. The increase in the current year periods were due to a higher average number of direct sales representatives, higher travel costs, an increased number of sales territories, and a mid-year sales meeting held in Q3 FY 2024.

Previous wording

Total discretionary marketing expenses were $252,000 and $791,000 for the three and six months ended December 31, 2023, respectively, representing an increase of $70,000 and $422,000, or 38.5% and 114.4%, respectively, compared to the same periods in the prior year. The increases were primarily due to an investment in market research, direct-to-consumer and direct-to-physician marketing.

Current wording

Total discretionary marketing expenses were $304,000 and $1,095,000 for the three and nine months ended March 31, 2024, respectively, representing increases of $92,000 and $514,000, or 43.4% and 88.5%, respectively, compared to the same periods in the prior year. The increases were primarily due to an investment in market research, direct-to-consumer and direct-to-physician marketing.

Previous wording

Professional fees were $934,000 and $2,244,000 for the three and six months ended December 31, 2023, respectively, representing decreases of $97,000 and $218,000, or 9.4% and 8.9%, respectively, compared to the same periods in the prior year. Professional fees are primarily for services related to legal costs, shareowner services and reporting requirements, information technology technical support and consulting fees. The decreases were primarily due to legal fees in fiscal 2023 related to a reimbursement project that did not recur in fiscal 2024.

Current wording

Professional fees were $978,000 and $3,222,000 for the three and nine months ended March 31, 2024, respectively, representing decreases of $410,000 and $628,000, or 29.5% and 16.3%, respectively, compared to the same periods in the prior year. Professional fees are primarily for services related to legal costs, shareowner services and reporting requirements, information technology technical support and consulting fees. The decrease in the three months ended March 31, 2024, were primarily related to legal and consulting costs associated with the termination of the Public Health Emergency for COVID-19 and recruiting costs for multiple senior leadership positions that has not recurred in the fiscal year ending June 30, 2024 (“fiscal 2024”). In addition to those fees that did not recur in the third quarter, the decreases in the nine months ended March 31, 2024, were due to legal fees in fiscal 2023 related to a reimbursement project that has not recurred in fiscal 2024.

Previous wording

Research and development expenses. Research and development (“R&D”) expenses were $107,000 and $313,000 for the three and six months ended December 31, 2023, respectively, representing decreases of $47,000 and $139,000, or 30.5% and 30.8%, respectively, compared to the same periods in the prior year. The decreases were primarily due to reduced costs associated with our SmartVest Clearway platform development which has now been launched into the Homecare and hospital markets.

Current wording

Research and development expenses. Research and development (“R&D”) expenses were $167,000 and $480,000 for the three and nine months ended March 31, 2024, respectively, representing an increase of $1,000, or 0.6%, and a decrease of $138,000, or 22.3%, respectively, compared to the same periods in the prior year. The decrease in the nine months ended March 31, 2024, were primarily due to reduced costs associated with our SmartVest Clearway platform development in the prior year which has now been launched into the Homecare and Hospital markets.

Previous wording

Net interest income for the three and six months ended December 31, 2023, was $96,000 and $173,000, respectively, compared to $7,000 and $11,000, respectively, for the same periods in the prior year. The increases were primarily due to increased savings rates on higher cash balances.

Current wording

Net interest income for the three and nine months ended March 31, 2024, was $120,000 and $293,000, respectively, compared to $26,000 and $37,000, respectively, for the same periods in the prior year. These increases were due to increased savings rates on higher cash balances.

Previous wording

Income tax expense was estimated at $304,000 and $271,000, and the effective tax rate was 23.7% and 20.4%, for the three and six months ended December 31, 2022, respectively. Estimated income tax expense for the three and six months ended December 31, 2022, includes a discrete tax expense of $1,000 and a discrete tax benefit of $43,000, respectively, related to the exercise of stock options.

Current wording

Income tax expense was estimated at $468,000 and $1,217,000, and the effective tax rate was 23.9% and 26.8%, for the three and nine months ended March 31, 2024, respectively. Estimated income tax expense for the three and nine months ended March 31, 2024, includes a discrete tax benefit of $99,000 and $95,000, respectively, primarily related to the exercise of stock options.

Previous wording

Income tax expense was estimated at $685,000 and $749,000, and the effective tax rate was 28.8% and 28.9%, for the three and six months ended December 31, 2023, respectively. Estimated income tax expense for the three and six months ended December 31, 2023 includes a discrete tax expense of $1,000 and a discrete tax benefit of $1,000, respectively, related to the exercise of stock options.

Current wording

Income tax expense was estimated at $147,000 and $418,000, and the effective tax rate was 12.0% and 16.4%, for the three and nine months ended March 31, 2023, respectively. Estimated income tax expense for the three and nine months ended March 31, 2023, includes a discrete tax benefit of $176,000 and $219,000, respectively, related to the exercise of stock options.

Previous wording

Net income for the three and six months ended December 31, 2023, was $1,674,000 and $1,829,000, respectively, compared to $977,000 and $1,058,000 for the same periods in the prior year. The increase in net income in the three months ended December 31, 2023, and six months ended December 31, 2022, was driven primarily by homecare revenue growth, an increase in gross profit margin, and an increase in interest income.

Current wording

Net income for the three and nine months ended March 31, 2024, was $1,493,000 and $3,322,000, respectively, compared to $1,075,000 and $2,133,000 for the same periods in the prior year. The increases in net income were driven primarily by net revenues growth and an increase in interest income.

Previous wording

For six months ended December 31, 2023, net cash provided by operating activities was $3,227,000. Cash flows provided by operating activities consisted of net income of $1,829,000, non-cash expenses of $1,214,000, a decrease in accounts receivable of $1,142,000, and a decrease in prepaid expenses and other assets of $1,104,000. These cash flows from operating activities were offset by a decrease in accounts payable and other accrued liabilities of $1,171,000, an increase in inventory of $509,000, a decrease in accrued compensation of $212,000, an increase in contract assets of $87,000, and a decrease of taxes payable of $83,000.

Current wording

For the nine months ended March 31, 2024, net cash provided by operating activities was $4,578,000. Cash flows provided by operating activities consisted of net income of $3,322,000, non-cash expenses of $1,920,000, a decrease in prepaid expenses and other assets of $1,234,000, an increase in income tax receivable, net, of $627,000, a decrease in accounts receivable of $223,000, and a decrease in inventory of $78,000. These cash flows from operating activities were offset by a decrease in accounts payable and accrued liabilities of $1,386,000, an increase in contract assets of $155,000, and a decrease in accrued compensation of $31,000.

Previous wording

The decrease in accounts receivable is primarily due to an increased focus on cash receipts from our cash collections team. The decrease in prepaid expenses and other assets, as well as the decrease in accounts payable and other accrued liabilities are primarily due to a litigation settlement payment related to our previously disclosed cyber security breach. The payment to the settlement fund during the first quarter of fiscal 2024 for the settlement amount of $825,000 was covered by insurance resulting in a reduction in other current assets and other accrued liabilities.

Current wording

The decrease in prepaid expenses and other assets, as well as the decrease in accounts payable and other accrued liabilities are primarily due to a litigation settlement payment related to our previously disclosed cyber security breach. The payment to the settlement fund during the first quarter of fiscal 2024 for the settlement amount of $825,000 was covered by insurance resulting in a reduction in other current assets and other accrued liabilities.

Previous wording

For the six months ended December 31, 2023, cash used in investing activities was $220,000. Cash used in investing activities consisted of $180,000 of expenditures for property and equipment and $40,000 in expenditures for intangible asset costs.

Current wording

For the nine months ended March 31, 2024, cash used in investing activities was $349,000. Cash used in investing activities consisted of $265,000 in expenditures for property and equipment and $84,000 in expenditures for intangible asset costs.

Previous wording

For the six months ended December 31, 2023, cash provided by financing activities was $55,000, consisting of cash received upon stock option exercises.

Current wording

For the nine months ended March 31, 2024, cash provided by financing activities was $111,000, consisting of cash received for stock option exercises.

Previous wording

Our primary working capital requirements relate to adding employees to our sales force and support functions, continuing infrastructure investments, and supporting general corporate needs, including financing equipment purchases and other capital expenditures incurred in the ordinary course of business. Based on our current operational performance, we believe our working capital of $32,692,000 and available borrowings under our existing credit facility will provide sufficient liquidity to meet our anticipated working capital and other liquidity needs for the next twelve months from the date of this report.

Current wording

Our primary working capital requirements relate to adding employees to our sales force and support functions, continuing infrastructure investments, and supporting general corporate needs, including financing equipment purchases and other capital expenditures incurred in the ordinary course of business. Based on our current operational performance, we believe our working capital of $34,996,000 and available borrowings under our existing credit facility will provide sufficient liquidity to meet our anticipated working capital and other liquidity needs for the next twelve months from the date of this report.

Previous wording

Our credit facility provides us with a revolving line of credit. Interest on borrowings on the line of credit accrues at the prime rate (8.50% on December 31, 2023) less 1.00% and is payable monthly. There was no outstanding principal balance on the line of credit as of December 31, 2023, or June 30, 2023. The amount eligible for borrowing on the line of credit is limited to the lesser of $2,500,000 or 57.00% of eligible accounts receivable, and the line of credit expires on December 17, 2025, if not renewed. As of December 31, 2023, the maximum $2,500,000 was available under the line of credit. Payment obligations under the line of credit are secured by a security interest in substantially all our tangible and intangible assets.

Current wording

Our credit facility provides us with a revolving line of credit. Interest on borrowings on the line of credit accrues at the prime rate (8.50% on March 31, 2024) less 1.00% and is payable monthly. There was no outstanding principal balance on the line of credit as of March 31, 2024, or June 30, 2023. The amount eligible for borrowing on the line of credit is limited to the lesser of $2,500,000 or 57.00% of eligible accounts receivable, and the line of credit expires on December 17, 2025, if not renewed. As of March 31, 2024, the maximum $2,500,000 was available under the line of credit. Payment obligations under the line of credit are secured by a security interest in substantially all of our tangible and intangible assets.

Previous wording

For the six months ended December 21, 2023, and 2022, we spent $180,000 and $687,000, respectively, on property and equipment. We currently expect to finance planned equipment purchases with cash flows from operations or borrowings under our credit facility. We may need to incur additional debt if we have an unforeseen need for additional capital equipment or if our operating performance does not generate adequate cash flows.

Current wording

For the nine months ended March 31, 2024, and 2023, we spent $265,000 and $1,221,000, respectively, on property and equipment. We currently expect to finance planned equipment purchases with cash flows from operations or borrowings under our credit facility. We may need to incur additional debt if we have an unforeseen need for additional capital equipment or if our operating performance does not generate adequate cash flows.