Electromed, Inc.

Greetings and welcome to the ElectroMed second quarter fiscal 2024 earnings call. At this time all participants are in a listen only mode. A brief 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 Kavanaugh, Investor Relations. Thank you. You may begin.

Good afternoon and thank you for joining the ElectroMed earnings call. Earlier today, ElectroMed incorporated released financial results for the second fiscal quarter of 2024. The quarter ended December 31, 2023. The release is currently available on the company's website at .smartbest.com. Before we get started, I would like to remind everyone that some of the statements that 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 any undue reliance on those forward-looking statements and the company does not undertake any obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise. Please refer to the company's SEC filings for further guidance on this matter. With that, I will now turn the call over to Jim Kniff, President and Chief Executive Officer of ElectroMed.

Thanks, Mike, and thank you to everyone joining today's call. I'm thrilled to announce another record revenue quarter for ElectroMed. Total net revenue for the second quarter of fiscal year 2024 came in at $13.7 million, representing 17 percent -over-year growth from the same period in fiscal year 2023. This is the fifth straight quarter of mid-teens or better revenue growth and resulted in record quarterly earnings of $1.7 million, or $0.19 per share. Similarly, I'm proud to highlight operating income for the quarter was a record $2.3 million, a growth of 78 percent over the same period in the prior fiscal year. As with the first quarter, we saw growth across all three of our revenue categories. Home care, hospital, and international, which further reinforces the strategic growth investments we have made, are yielding considerable results. I'll hand the call over to Brad to discuss the quarter's financials in more detail shortly, but first I want to take some time to reflect on what I've learned and observed since joining the company in July as CEO, provide a market update, and expand on what our objectives will look like moving forward. First, the company's consistent growth strategies focusing on developing -in-class products, exemplary customer service, disciplined commercial expansion, and operational excellence are generating positive results. We see these investments paying off through continued revenue growth and increased profitability. Going forward, we remain committed to growing our top line, but we are also focused on capturing the operating leverage our growth investments were designed to produce. Additionally, since joining the company, I've spent a lot of time meeting with and gathering feedback from both current and potential investors. From these discussions, a few themes have emerged. First, we are a micro-cap standout in that we are growing yet profitable, generating cash and have no debt. This makes us unique in the small medtech space and our strong financial position will enable us to continue to invest in our commercial teams and market development initiatives. Second, in a high interest rate environment, cash is king and the investors like that our business is generating cash from operations. And third, investors like that my incentive reward is based on increasing total sharehold return and management's incentive compensation is focused solely on delivering financial results, which aligns us to our investors' goals. Lastly, with over $10 million of cash currently on our balance sheet and our belief that ElectroMed shares are undervalued, there has been a lot of questions about how we are thinking about deploying our surplus capital. We will continue to assess every opportunity that would be beneficial to ElectroMed and our shareholders and all options are being thoughtfully reviewed and taken under consideration. Next, since joining the company, we have seen a critical need for further market development. A recent market study confirmed that there are roughly 824,000 patients in the U.S. that have been diagnosed with bronchiectasis. Of that total, roughly 230,000 are managed by a pulmonologist and the remaining patients are being managed by a primary care physician. If all of these 230,000 patients were prescribed HFCWO at an estimated average sale price of $10,000 per patient, it equates to a $2.3 billion revenue opportunity. However, only a fraction of these patients are being prescribed HFCWO therapy. We believe there is work to be done in unlocking the market opportunity through creating more awareness with providers of the benefits in treating bronchiectasis patients with our SmartVest airway clearance technology earlier in the care continuum. There is also a need to publish guidelines for treating bronchiectasis patients with HFCWO, which currently do not exist. We will engage with key opinion leaders and societies to establish guidelines and get those published. These results will not happen overnight, but it's an area of focus for us. This segues nicely into an update on our commercial initiatives. We plan to continue our Salesforce expansion plan to drive further market penetration.

We ended the

quarter with 49 sales representatives and in the second half of our fiscal year, we intend to hire five additional reps to deepen our penetration in key markets for ElectraMed and to support a larger pool of physician prescribers. Being a sales rep at ElectraMed is like owning a franchise, but without the required capital outlay. Our reps have an uncapped commission plan, so the more they grow, the more they can earn. We take a conservative approach to hiring the right sales reps who can successfully execute what is largely a clinical sale. That is, ElectraMed's reps work with healthcare providers to demonstrate the utility of our SmartVest ClearWay device to both patients and by extension, the providers practice. Additionally, to complement our direct sales team, I've been engaging our distributor partners to better support our sales team's efforts in the field. We've had a passive relationship with our distributors and believe they can provide additional focus for us in the hospital market where we have a small presence as well as help expand our rural market coverage. Recently, we signed a new distribution agreement with Marathon Medical, a medical supply distribution company and service disabled veteran-owned small business. As a distributor partner, Marathon Medical focuses on providing medical products to federal agencies, including VA hospitals and clinics and other federal agencies. This partnership will improve the ordering process for all government facilities, allowing easier access to our products, helping our veterans to breathe easier and live better. While a direct home care sales model continues to serve us well, we believe forging new partnerships like the Marathon Medical Agreement enhances our commercial initiatives and allows us to further drive market expansion and development. Also in Q3, we will be rolling out SmartAdvantage, which are sales programs and clinic support resources that showcase our exceptional customer service and seamless ordering process in support of the clinics we serve. SmartAdvantage is another way for ElectraMed to differentiate ourselves and strengthen our position in the market. My last reflection is centered around the sheer caliber of talent of the ElectraMed team. What may not be well known to investors is that in the last 12 to 18 months, we've added a new CEO, a new CFO, a new controller, and new leaders across a number of critical departments, operations, R&D, RAQA, and sales operations. These seasoned leaders bring together robust backgrounds of domain expertise, new ideas, and fresh energy to the company. This energy and excitement extend to our teammates in all positions throughout the company. Our Glassdoor rating at the end of 2023 was a solid 4.44, up from 3.7 only two years ago, reflecting the strong chemistry and connectedness of the team. As any good leader knows, engagement is a leading indicator of success, and it shows up in how we work together as a team, how we interact with our customers, and the patients we serve. Moreover, having an engaged team helps us to recruit equally strong candidates for us to continue to execute on our strategic deliverables. I'd like to share some real-world examples of how our talent has made a difference in a short time. Last year, we struggled with some operational issues like many other companies had during the pandemic. Today, under the leadership of our Senior Director of Operations and Materials, Steve Trinka, we have zero backorders and first-pass yields of 99%, which allows us to get products to patients sooner so they can breathe easier. Also, while focused on maintaining excellent service levels, our operations team is focused on reducing our non-finished goods inventory, which was built up during the pandemic when raw materials were in short supply. This improvement will happen in the subsequent quarters. Additionally, as mentioned in our last call, Amy Yonta, our Head of RAQing Compliance in her team, have upgraded our quality systems and have had three successful external audits in the last quarter. Lastly, I'd like to recognize my predecessor, Kathleen Scarvan, for leading the charge in developing the next-gen VEST technology we are now commercializing. As someone who grew up in the medical device world with a commercial background and excited about the market reception for our new SmartVest Clearway product introductions to the hospital and home markets, we are the only HFCWO supplier in the market with new technology that is smaller, lighter, and more intuitive to use than competitive products in the field. I look forward to continuing to drive top-line growth combined with expanding operating leverage as we grow and take market share in the coming quarters and years ahead. With that, I will turn the call to Brad to discuss our financials. Brad?

Thank you, Jim. Net revenue for our second quarter grew 17 percent over Q2 of last year to a record $13.7 million. Home care revenue for the quarter was $12.7 million, an increase of 18 percent over Q2 last year. This growth was driven primarily by the increase in the number of our sales territories, as well as efficiencies recognized within our reimbursement department as a result of recent investments made to streamline the claims process. The annualized home care revenue per sales representative in Q2 was $1 million, slightly higher than ElectraMed's annual target range of $850,000 to $950,000. Q2 hospital revenue increased year over year by 5 percent to $619,000. This revenue increase was due to the addition of a strategic account manager focused on delivering hospital revenue. Home care distributor revenue for the quarter was $280,000, a decrease of 17 percent from Q2 last year. Home care distributor sales are affected by the timing of distributor purchases that can significant fluctuations in the reported revenue on a quarterly basis. Q2 international revenue increased year over year by 69 percent to $122,000. As mentioned in previous updates, we continue to support and maintain our current distributors in the international markets, but growing our international business is currently not a primary focus for us. Gross profit increased to $10.5 million, or 77 percent of net revenues for the quarter, compared to $8.7 million, or 74 percent of net revenues in Q2 of FY23. The increase in gross profit was primarily due to decreased shipping costs as well as increased material cost in the prior year to expedite inventory purchases which did not reoccur in the current year. Selling general and administrative, or SG&A, expenses were $8.2 million for Q2, representing an increase of $0.9 million, or 12.7 percent, compared to the same period last year. The increase was primarily due to additional headcount in our sales and supporting teams to enable our growth. Research and development expenses decreased $47,000, or 31 percent, versus Q2 last year, to $107,000. The decrease was primarily due to reduced costs associated with our Clearway product development. Net interest income increased $89,000 to $96,000 for the quarter. The over 1200 percent increase over Q2 of last year is primarily due to the increased savings rates associated with our cash balances. When putting all these Q2 results together, we are thrilled to have executed a record earnings quarter with pre-tax income of $2.4 million, record net income of $1.7 million, and record quarterly EPS of $0.19 per diluted share. As of December 31, 2023, Electromet had $10.4 million in cash, $23 million in accounts receivable, and no debt, achieving a working capital of $32.7 million and total shareholders equity of $40.3 million. The cash balance reflects a record increase of $3.1 million for the six months ended December 31, 2023, compared to a decrease in cash of $1.2 million in the same period last year. With that, we'd like to move to the Q&A portion of our call. Operator, please open the call to questions.

Thank you. Ladies and gentlemen, at this time, we'll be conducting our question and answer session. If you would like to ask a question, press star one on your telephone keypad. A confirmation tone will indicate that 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 keys. One moment, please, while we

poll for questions.

Our first question comes from Aaron Wuchmier with Lake Street Capital Markets. Please state your question.

Hey, good afternoon, guys. This is Aaron on the line for Brooks. Congrats on the strong momentum and record quarter. I guess I just want to start with the transition of patients onto the HFCWO therapy. Just trying to get a sense of the general direction. You talked a little bit last quarter about some people just staying purely on antibiotics and not necessarily moving towards the best. So have you seen an increase in the level of, I guess, awareness, you could call it, of bronchiectasis in the physician space that would cause these patients to grab gravitate towards your technology? And then I guess the second part of the question, what factors are you going to continue to get these patients over the hump quicker and onto your technology to ultimately gain market share?

Aaron, how are you doing? This is Jim. I'll answer that question. I think there's a couple of things, one of which is I think today, and I mentioned this in my comments, is the fact that there's a lot of patients that are out there with bronchiectasis. Unfortunately, within their care continuum, they're getting on the vest at a later date versus sooner. And that's mainly because their underlying condition, as many times as you had mentioned, are being treated by antibiotics. And so we are seeing that the recognition that many patients that the pulmonologists are seeing, they are now starting to diagnose bronchiectasis more frequently. And that's a good sign. The challenge we have is not only for that to happen for them, also to put the patient on the vest sooner rather than later. And so one of the areas of opportunity for us and one of the areas of focus for us, and actually can be for the market as a whole, is working with key opinion leaders and also societies to get guidelines put into place for bronchiectasis patients and their protocols for care. And so that's a focal point for us going forward.

Great. Makes all sense. I guess another question. So last quarter, you sort of modified the training program for your sales force. You took down the training time a little bit and there was some learning happening with some engagement with customers. What the sales team focused solely on HFCWL, has this new strategy been tracking to your liking and how comfortable are you with the changes that you have made and reps that you've added since Q1 and are planning to add here in the next couple quarters?

Well, we're excited about it, Aaron. I mean, the sooner we can get our sales reps out there being productive and selling, the better off it's going to be for our company and for the patients that we serve. I would say we've only gone through one training class with the new protocols that we've put in place for our sales reps. And so I feel good about what we're doing, but this is a work in process and we're going to continue to refine that. As I mentioned in my comments, we are going to be adding, we're anticipating adding five new reps within the next six months. And so I anticipate that we're going to be having a training class in March and that'll be a chance for us to further refine that training protocol for those reps. And we're excited because we did get some really good feedback from the first group that went through and we're going to apply that to the next group that goes through. But that's it's a continuous process that we're going to refine for those reps to make it more beneficial for them and for them to hit the ground running sooner rather than later.

Awesome. Makes total sense. And then one last one for me. You mentioned a little bit in the prepared remarks, but how's the story in hospitals with the initial launch of Clearway? Are you seeing the growth that you'd like to see in that space? I know it's kind of early stages and I think you mentioned general feedback has been positive, but just trying to get a better sense or an update on your thoughts there. Thanks for taking the questions, guys.

No, I appreciate, Aaron, the questions that you've provided to us. The hospital market, again, it's a pretty nascent market for us right now. And we just introduced the hospital, the Clearway device for the hospital in the last quarter. It's early days there. Our business grew 5% in the quarter. But the selling cycle within the hospital market is a lot longer than the home market. And so we're anticipating that we're going to see improvements in that space. Also, as I mentioned in my remarks, one of our opportunities, I believe, is to work with some distributors who have a stronger footprint within that market space because our sales reps are really predominantly focused on selling to pulmonologists and clinics. And so when we do pick up hospital business, many times it's because we have a relationship with a pulmonologist who's rounding within that facility and wants to have access to a -in-class product. So we feel great about the new product that we've introduced, but we still, I think, have some opportunities to make sure that in going after that hospital market, we're not distracting our sales reps from their primary call point, which is the clinic.

Got you. Okay. Makes total sense. Again, thanks for taking the questions and congrats on the strong core. We're excited to keep following you guys.

They appreciate it. And thanks for the questions and thanks for being on the call. Well, unless there's no other questions, I'm going to wrap up the call and thank everybody for joining the call today and thank you for continued support of ElectraMed. As I mentioned, I'm excited to continue executing against our growth and profitability plans. If we can do that, we will continue to drive increased value to our shareholders. And that's one of our primary objectives. If you're interested in the follow-up call, please contact our investor relation partners at ICR Westwick. I appreciate your time today and appreciate your investment in ElectraMed. Thank you, everybody.

Thank you. That concludes today's conference call. All parties may now disconnect. Have a good day.