Electromed, Inc.

Greetings. Welcome to the ElectroMed Fiscal Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I'll now turn the conference over to your host, Mike Cavanaugh.

You may begin. Good afternoon, and thank you for joining us today. Earlier today, ElectroMed Incorporated released financial results for the quarter-ended March 31, 2022. The release is currently available on the company's website at www.smartbest.com. Kathleen Scarvan, President and Chief Executive Officer, and Mike McCourt, Chief Financial Officer, will host this afternoon's call. As a reminder, some of the statements that management will make on this call are considered forward-looking statements including statements about the company's future operating and financial results and plans. Such statements are subject to risks and uncertainties that could cause actual performance or achievements to be materially different from those projected. Any such statements represent management's expectations as of today's date. You should not place undue reliance on these forward-looking statements. And the company does not undertake any obligation to update or revise forward-looking statements whether as a result of new information, future events, or otherwise. Please refer to the company's SEC filings for further guidance on this matter. We'll now turn the call over to Kathleen Scarvan, President and CEO of Electromed.

Thank you, Mike, and thank you to everyone joining the call today. As always, we appreciate your continued support of Electromed and look forward to updating you on our progress on the four key pillars in our strategic growth plan. continued Salesforce growth, direct-to-consumer marketing, infrastructure to support our anticipated sales growth, and clinical studies to further promulgate the body of evidence supporting SmartVest airway clearance and its ability to provide positive outcomes for bronchiectasis patients. I am incredibly proud of our team's hard work and results positioning ElectroMed as a leading provider of airway clearance devices. In the third quarter of fiscal year 2022, we recorded 15.4% year-over-year growth, which is a testament to our team's execution, managing through a highly challenging operating environment. During the months of January and February, we experienced a reduction in clinic access and patient flow due to COVID-19-related issues as the Omicron variant spiked across the United States. Additionally, we also observed longer approval timelines for our non-Medicare insurance payers, which resulted in fewer referrals being converted into approvals during the period, negatively impacting our home care revenue for the quarter. In March, we experienced a rapid pickup in referrals as Omicron cases declined, clinic access and patient flow improved, and we increased our number of direct sales representatives in the field. This culminated into March being the highest referral month in company history. We also maintained strong sales representative productivity in the quarter despite the headwinds from the ongoing pandemic. Home care direct annualized sales productivity during the quarter was $943,000 per sales representative, above our targeted range of $800,000 to $900,000. This is a direct testament not only to the hard work and dedication of the team, but also emphasizes the value that SmartVest offers to patients, providers, and payers. I would like to take a moment to comment on the progress we made in the third quarter expanding our sales force. As mentioned in prior updates, our goal is to staff 43 direct sales territories. At the close of the third quarter, we were staffed at 42 direct sales representatives, nearing our fully staffed level. We are pleased with the quality of our new sales reps and our efforts to grow the sales force in a difficult hiring environment. And we believe our decision to internalize the recruiting function and strengthen training and onboarding processes are paying off. Additionally, we were extremely pleased to announce the hire of Chris Holland, our new Chief Commercial Officer in February. Chris holds a fundamental role in our strategic initiatives and growth plans. He provides direct oversight and additional energy and focus to the sales and marketing initiatives that will directly increase Electromed's market share and support our revenue growth goals, ultimately enhancing shareholder value. He has onboarded quickly traveled extensively in the field visiting our key accounts, and is deeply engaged in assessing current revenue growth strategies. Chris is already adding significant value outlining our plan to accelerate future revenue growth, and we look forward to continued execution of our commercial initiative. Shifting gears to provide an update on our next generation product and clinical evidence to support the use of SmartVest as a key treatment for bronchiectasis, We remain on track to launch the new SmartVest airway clearance device in the first half of fiscal year 2023. As a reminder, the new SmartVest will have multiple value added innovations to enhance the patient experience. It will be smaller and lighter weight while maintaining the same performance differentiation as our current SQL model, which allows patients to breathe more easily during therapy and provides patients and physicians with more information about treatment outcomes through our SmartVest Connect technology. Data suggests that there is a significant untapped market for HFCWO therapy, and we strongly believe the next generation SmartVest will provide a competitive advantage as we seek to penetrate that market. As previously discussed, we continue to invest in clinical studies to generate clinical evidence to demonstrate the importance of our SmartVest airway clearance therapy to improve outcomes for patients diagnosed with bronchiectasis. Our multi-center bronchiectasis outcome study utilizing SmartVest continues to enroll patients, although at a slow pace due to patient concerns, with face-to-face follow-up visits. This is a concern that is impacting other observational studies, according to physicians at our study site. We are in the process of bringing on additional sites to address this issue. Our second study, a post-surveillance study with chronic obstructive pulmonary disease and bronchiectasis patients prescribed SmartVest, has reached its patient enrollment targets and completion of the follow-up assessment. A reminder, this study is utilizing quality of life questionnaires to measure outcomes prior to therapy and at two intervals following initiation of the therapy. We are now in the statistical analysis and review process. We believe we are the industry leader in advancing clinical studies, providing ElectroMed with further differentiation during the sales process and increasing physician awareness of HFCWO devices for effective treatment of bronchiectasis. Before I turn the call over to Mike, I want to comment on the CFO transition, announcing resignation and the appointment of Michelle Wertz, our controller to the position of interim CFO. On behalf of the entire Electromed team, I want to thank Mike for his contributions to the company and wish him well in his future endeavors. Over the past two years, Mike has been invaluable, working tirelessly to support our growth strategies and to successfully lead and manage the corporate finance role. I appreciate that he will remain through July 1st to facilitate a smooth transition. I look forward to collaborating with Michelle in her interim CFO role and leveraging her many years of experience in corporate finance, accounting and external reporting and in the healthcare industry. I cannot think of a better candidate with her intimate familiarity with ElectroMed strategies and business model as we explore options for a permanent replacement. And with that, I will now like to turn the call over to Mike, our Chief Financial Officer, to review our financial results.

Thank you, Kathleen. Net revenues were $10.1 million in the quarter, a 15.4% increase year-over-year from $8.8 million in the same period a year ago, driven by higher home care, home care distributor, and international revenue. Home care revenue for the three months ended March 31st, 2022 was 9.0 million, representing a 10.7% increase compared to the same period in fiscal 2021. The home care revenue increase compared to the prior year period was primarily due to increases in referrals and approvals, and we also benefited from a Medicare allowable rate increase that took effect on January 1st, 2022. Institutional revenue for the three months ended March 31st, 2022 was 392,000 representing a decrease of 51,000 or 11.5% compared to the same period in fiscal 2021. The revenue decline was driven by lower generator sales as compared to the prior year period. Home care distributor revenue for the three months ended March 31st, 2022 was 520,000 representing an increase of 415,000 or 395.2%. compared to the same period in fiscal 2021. The revenue increase in the period was due to increased demand from one of our key distribution partners. International revenue for the three months ended March 31st, 2022 was 196,000, representing an increase of 120,000 or 157.9% compared to the same period in fiscal 2021. International sales are affected by the timing of international distributor purchases that can cause significant fluctuations in reported revenue on a quarterly basis. Gross profit increased to 7.7 million or 76.4% of net revenues for the three months ended March 31st, 2022 from 6.7 million or 76.3% of net revenues in the same period in fiscal 2021. We have continued to experience increasing raw material and shipping costs, which were offset in the quarter by a Medicare allowable rate increase in January increased operational efficiencies, and increased operating leverage on higher revenue as compared to the prior year period. We expect continued higher costs for raw material and shipping costs for the remainder of our fiscal year. We are being highly proactive in making advanced purchases of inventory whenever possible to mitigate both potential supply chain risk and additional future cost increases. Selling, general, and administrative expenses, or 6.5 million in the quarter, representing an 8.1% increase over the same period a year ago. Payroll and compensation-related expenses were $4.0 million, a 4% increase over the comparable prior year period. The increase was primarily due to a higher average number of sales support and marketing personnel, higher commissions on stronger home care revenue, and increased reimbursement personnel to process higher patient referrals, partially offset by lower temporary labor costs. Travel meals and entertainment expenses were 0.6 million in the quarter, representing a 31.8% increase compared to the same period a year ago. The increase was primarily due to our sales representatives resuming closer to normal levels of travel compared to the COVID-19 driven travel restrictions in their prior year periods and regional sales meetings that were held in January 2022, but were not held in the prior fiscal year due to COVID-19. Travel meals and entertainment expenses as a percentage of revenue remain slightly below our pre-COVID-19 spending levels, despite recent inflationary trends in travel costs. Total discretionary marketing expenses were $241,000 in the quarter, a decrease of 30.7% from the same period a year ago. The decrease was primarily due to a shift to more cost-effective direct and consumer marketing investments. Professional fees were $719,000 in the quarter, representing an increase of 2.7% over the prior year period. Professional fees include services related to legal costs, share owner services and reporting requirements, information technology, technical support, and consulting fees. The increase in professional fees compared to the prior year period was primarily due to an increase in system infrastructure investments and increased clinical study costs, partially offset by lower legal costs. Research and development expenses were $336,000 in the quarter, representing a decrease of 17.4% compared to the same period in the prior year. The reduced spending was primarily due to reduced professional services costs associated with our next-generation platform development. We continue to invest in our next-generation device and expect to launch the product in the first half of fiscal 2023, following 510K clearance by the U.S. Food and Drug Administration. R&D expenses were 3.3% of revenue in the quarter. Following the submission of our 510K, we expect R&D as a percentage of revenue to be in the 2% to 3% of revenue range moving forward. Net income was $645,000 compared to $224,000 for the same period in the prior year. The increase in net income was driven by home care and home care distributor revenue growth, partially offset by increased strategic investments in SG&A and higher product and shipping costs. Now moving on to the balance sheet and statement of cash flows. Our balance sheet as of March 31st, 2022 includes cash of 9.8 million, accounts receivable of 19.6 million, no debt, working capital of 28.0 million, and shareholders' equity of 34.0 million. Operating cash flow during the quarter was 0.2 million. During the quarter, operating cash flow was reduced due to increased advance prepayments for future inventory and a one-time payout for vacation balances as we transition to a new paid time off policy. Both of these items will reduce cash outlays in future periods. During the quarter, we also repurchased 24,551 shares at a total cost of $299,000 and continued investment in our major system infrastructure investments. On a more personal note, as Kathleen stated earlier, I am leaving ElectroMed at the end of our current fiscal year to pursue another career opportunity. It has been an exceptional two years at Electromed, and I'm grateful for the opportunity I've had to contribute to the company's success and work with such a talented and collaborative team. We've made meaningful progress on accelerating our top-line growth, enhancing our system and process infrastructure, and executing on the key strategic initiatives that will drive future growth. I'm excited to hand the interim CFO role to Michelle Wirtz. I hired Michelle last December and have had the pleasure of working closely with her over the last five months. and I believe she has the right skill sets and experience to lead ElectroMed's finance organization moving forward. We appreciate your continued support of ElectroMed and look forward to the team's next update on the continued progress on ElectroMed's four strategic pillars during the next quarterly call. Operator, please open up the call to questions.

And at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. And again, as a reminder, if anyone has any questions, you may press star 1 on your telephone keypad to join the queue. And it looks like there are no questions at this moment. Therefore, I will now turn the call back over to Kathleen for closing remarks.

Thank you all for joining our call this evening. We are proud of another strong quarter and appreciate your continued support of Electromed. We look forward to continuing the momentum from Q3 into our final quarter of fiscal year 2022. Should you like to schedule a follow-up call, please reach out to our investor relations firm, ICR Westwick. Otherwise, have a great evening.

And this concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.