Electromed, Inc.

Greetings and welcome to ElectroMed Fiscal Second 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mike Cavanaugh, Investor Relations. Thank you. You may begin.

Good afternoon and thank you for joining the ElectroMed Earnings Call. Earlier today, ElectraMed Incorporated released financial results for the second fiscal quarter of 2023. The quarter ended December 31, 2022. The release is currently available on the company's website at www.smartbest.com. Joining me on the call today is Kathleen Scarvin, President and Chief Executive Officer, and Brad Nagel, Chief Financial Officer. Before we get started, I'd like to remind everyone that 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. We 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. I'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. It is a pleasure for me to report strong results for the second fiscal quarter as Electromet's team's hard work resulted in record quarterly net revenue of $11.7 million, a 15% year-over-year increase from the same period in 2022. The record revenue resulted in an improved operating margin and cash flow compared to our first fiscal quarter. Revenues for the first six months of the fiscal 2023 were also a record at $22.4 million. I'm especially proud of the team's efforts despite lingering macroeconomic inflationary pressures that continue to weigh on our component and shipping costs and certain component availability. The highlight of the record quarter was a highly anticipated next-generation SmartVest Clearway airway clearance system receiving 510K clearance from the FDA in November, allowing for limited commercialization of this device to commence in December. The Clearway is smaller, easier to use, and more comfortable than any other high-frequency Cheswell oscillation systems on the market, and all these benefits are achieved without sacrificing efficacy. We are confident that an improved airway clearance therapy will gain solid traction as our singularly focused organization brings it to the growing market of bronchiectasis patients who turn increasingly to HFCWO over manual percussive therapy, antibiotics, and other legacy treatments. We have received extremely positive feedback from our patients during our limited commercialization of Clearway and estimate volume shipments beginning later in fiscal quarter three, although we expect a mix of Clearway and our previous generation, SQL, through the fiscal year. Referrals in the quarter were higher year over year as our expanded sales force continues to get results and generate a strong return on our investment in that team. The productivity of the team was $927,000 per rep in the quarter, solidly within our target range of $850,000 to $950,000 per rep. We do expect this level to fluctuate quarter to quarter as we onboard new sales personnel and they ramp their productivity. However, we also expect that productivity will continue to improve over the long term. We ended the quarter with 48 sales reps and have a fully staffed reimbursement team, which takes the administrative burden from the patients and providers and converts the incoming referrals efficiently into approvals and shipped product. Chris Holland, our Chief Commercial Officer, has done a remarkable job in expanding the sales team while also overseeing improved productivity per rep, an impressive feat as newly hired reps do take time to reach their targeted productivity. Referral volume once again benefited from the CMS waiver, which removes some bureaucratic hurdles making the prescription process easier and faster, which benefits both providers and patients. The CMS waiver tied to the public health emergency for COVID-19 was renewed again by Health and Human Services through April 11th. And recently, the Biden administration communicated that they planned to end the public health emergency for COVID-19 on May 11th, one month after the current public health emergency was previously set to expire. Without further action from the US federal government, we expect the CMS waiver will terminate May 11th for certain respiratory devices, including HFCWO. The benefit of the waiver allowed indications and documentation typically required not to be enforced. So upon termination of the public health emergency, we will revert to pre-COVID CMS requirements for HFCWO reimbursement. We understand these requirements very well, And most physicians do too, since they followed them pre-COVID-19. And most commercial insurance plans did not waive these requirements during the public health emergency. During the fiscal quarter four, we do expect our average Medicare patient referral to approval timeframe will extend. And referrals with a diagnosis not covered pre-COVID-19 pandemic, like COPD, may be canceled or need to be submitted to CMS for an appeal. We have a plan in place to minimize the impact of the waiver termination, which includes extensive physician education on the anticipated change and adding temporary reimbursement capacity. Turning to an update on our strategic growth initiatives, it is extremely gratifying to see progress across all our strategic growth initiatives, key among them being the continued expansion of the sales force and finalizing development and beginning the commercialization of the new Clearway Vest. We clearly have strong momentum in both of these areas. One of our other key strategic goals is to generate further data supporting the use of HFCWO therapy and the SmartVest as a treatment for bronchiectasis. Our prospective multi-site outcome study with bronchiectasis patients is enrolled at 37% for the intended 100 total enrollees. To increase enrollment, an additional site has been approved and will begin enrollment in fiscal quarter three. Our bronchiectasis quality of life outcome study analysis paper is near completion, and we were informed recently that our quality of life outcome study with COPD patients was accepted as an oral presentation at the May American Thoracic Society 2023 International Conference. Our studies are designed to generate data supporting SmartVest HFCWO therapy, which is intended to raise awareness with physicians and key opinion leaders who are active in the airway clearance space. Our final growth initiative is focused on our strong push in direct-to-consumer efforts, as well as marketing targeted at pulmonologists who treat bronchiectasis. These four initiatives are synergistic. and are designed to impact the full sales cycle beginning with physician and patient awareness of HFCWO therapy as a vital treatment, all the way through to approval and final order fulfillment of the device to the patient. The results are demonstrating that our approach is working. To close my prepared remarks, I'd like to address my recently announced retirement and the pending CEO transition. I have had a wonderful experience leading Electromed since 2012, overseeing a tripling of revenue and achieving consistent profitability since 2015. With recent senior key appointments made, an expanded and effective sales force in place, and our next generation product approved and being shipped, the company is well positioned for future long-term success, and I concluded that now is the time to step away. The targeted date of my retirement as CEO is for July 1st, 2023, and afterwards, I will remain a non-employee member and chair of the board of directors. And rest assured that I will work closely with the board to identify a highly qualified successor. I want to thank you for all of your support over the years. With that, I'd like to hand the call over to Brad for a review of our financials.

Thank you, Kathleen. Net revenues for the quarter were $11.7 million, a 15% increase over the same period in the prior year. Home care revenue for the quarter was $10.7 million, a year-over-year increase of 14% from the same period in the prior year. This growth was primarily due to an increase in referrals and approvals, which were made possible by the increase in our direct sales representatives. and was slightly offset by a temporary interruption in supply chain and associated operations in the quarter. As Kathleen mentioned, the CMS referral waiver continues to benefit the Medicare portion of our home care revenue. Home care distributor revenue for the quarter was $336,000, a year-over decrease of 13% from the same period in the prior year. Home care distributor sales are affected by the timing of distributor purchases that can cause significant fluctuations in reported revenue on a quarterly basis and our year to date growth remains at 64% at the midpoint of our fiscal year 2023. Institutional revenue was $589,000 and increased by $256,000 or 77% for the quarter. primarily due to increased capital sales to institutional customers. International revenue was $72,000 and decreased by $52,000 or 42% for the quarter. Gross profit for the quarter increased to $8.7 million or 74% of net revenues compared to $7.9 million or 77% of net revenues in Q2 of FY22. The decrease in gross profit as a percentage of net revenues compared to the same period in the prior year was primarily due to increased material costs and by higher shipping expenses to expedite inventory purchases. While these additional costs were higher than anticipated, we saw significant improvement in gross profit rate in the back half of Q2 with our December margin rate back up above mid-70s as a percentage of sales. Selling general and administrative expenses were $7,254,000 for Q2, representing an increase of $779,000, or 12%, compared to the same period in the prior year. The increase was primarily due to additional headcount in our sales and reimbursement departments, representing our investments in growth. Travel, meals, and entertainment expenses were $719,000 for Q2, representing an increase of $102,000, or 17%, compared to Q2 of fiscal year 2022. The increase was due to higher average number of direct sales representatives and the impact of inflationary pressure. Operating income for Q2 FY23 was $1,274,000 compared to $1,076,000 for the same period in the prior year. The increase in operating income in the quarter was primarily due to revenue growth, partially offset by increased operating expenses, reflecting our expansion of headcount and other growth initiatives. Net income for Q2 FY23 was $977,000 compared to $838,000 for the same period in the prior year. As of December 31st, 2022, ElectraMed had $7 million in cash, an increase of about $1 million over our cash position of $6 million at the end of Q1. We also closed Q2 with $22 million in accounts receivable. working capital of $28 million, and total shareholders' equity of $35 million. With that, we'd like to move to the Q&A portion of the call. Operator, please open the call to questions.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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 star key. Our first question comes from the line of Brooks O'Neill with Lake Street. Please proceed with your question.

Thank you very much, and good afternoon, everyone. Kathleen, congratulations on your retirement. I was looking at the... DMBC website, or no, the Yahoo website, and I noticed we're the same age. But I've always known you're a lot smarter than me, and you're taking the right steps here in terms of your life. So congratulations on that.

Well, thank you, Brooks. That's very kind.

So let me just ask you a couple questions here. I guess first you mentioned the limited commercialization of the new SmartVest and the overwhelmingly positive response. I'm guessing that as you continue that rollout, we should expect some acceleration in the rate of sales growth. Is that a reasonable expectation?

We certainly are excited that we are receiving that overwhelmingly positive feedback from the initial commercialization and that what we call maybe a limited release. And it really revolves around the lighter weight, but primarily the ease of use. We have a unique and innovative user interface, and that's really resounding very well with our patients. So as far as the Clearway device, we do expect that it will be a preferred device with our patients and our physicians, and it will contribute to our ongoing sales growth. Absolutely. And it could be a great product for us to work on that market share that's so important for our growth as well.

Absolutely. You mentioned the CMS expiration of the waiver or termination of the waiver. Any chance they'd see, hey, maybe that had a really positive effect on patients during the pandemic? Maybe we should leave the waiver in place? Or do you think it's almost inevitable that it'll expire with the health emergency later this spring?

You know, I think we're leaning more toward that it will expire with the public health emergency, although I do share the comment you're sharing is very relevant. The idea that we are serving so many patients that previously might have been challenged to receive reimbursement for SmartVest is really important, and We do have a study with COPD patients that I mentioned in my comments that is going to be presented at the American Thoracic Society this spring. And it is studies like that that could change the mind of CMS. You're absolutely right. Do I think that's possible? Yes. Do I know if that's going to happen? Not quite sure. But we're going to prepare as if it will expire to assure that it has minimal impact on business.

Absolutely. Makes sense. Let me just have two more quick ones. One, sounds like you were affected to some extent by disruptions, ongoing disruption with the supply chain and inflation and to some extent access to supplies. Is it your expectation that those disruptions will begin to moderate as we go through the rest of the year or not? Do you see any evidence that things are getting better out there yet, or should we expect more of the same going forward?

Yeah, thanks for the question, Brooks. You're right, we did experience some intermittent supply delay on certain components. Fortunately, it had minimal impact to our quarter overall, so we're happy with where we've landed. And we'll add that we continue to monitor and manage all of our suppliers really closely to minimize that impact to our customers and feel like we have increasingly better plans in place with those suppliers as we move into the back half of our fiscal year.

Sure. Makes sense. Let me ask one last one, and I appreciate all your comments. The competitive environment, you know, there's been quite a bit of consolidation in your space. Can you just comment on what you're seeing out there in the marketplace right now, particularly as it relates to some of the competitors who have been affected by changes in ownership or structure over the last year or two?

You know, we're really, really continue to be very pleased with our position in the market. SmartVest continues to gain brand awareness throughout the United States and with physicians as a highly efficacious high-frequency chest wall oscillation and device for clearing airways. We are certainly paying attention to competitors, but we're not thinking too much about that as being an issue for us going forward and for us to continue to grow. So right now, it's... not really an issue that we're totally concerned about. We continue to think that Hill-Rom and Respitech are vulnerable, and we continue to visit those competitive physicians to continue to share our brand. And also with Clearway, we think that's going to be a great opportunity for access to those accounts as well.

Great. Well, thank you for taking my questions. And again, congratulations on what I'm sure is going to be a great future.

Thank you, Brooks.

There are no further questions in the queue. I'd like to hand the call back to Kathleen Scarvan for closing remarks.

As always, thank you very much for joining us today and for your interest in Electromed. We continue to execute against our strategic growth plans, and we're excited as we look forward to the scaling of distribution of Clearway in calendar 2023 and beyond. If you would like to schedule a follow-up call, please reach out to our investor relations partners at ICR Westwick. Thank you so much and have a good evening.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.