Electromed, Inc.

Greetings and welcome to the Electromed Third Quarter Fiscal 2024 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Mike Kavanaugh, Investor Relations. Please go ahead.

Good afternoon and thank you for joining the Electromed earnings call. Earlier today Electromed incorporated released financial results for the third quarter of fiscal year 2024. The quarter ended March 31, 2024. 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 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 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. This is the second quarter in a row of record revenue that I've been able to share with you. Total net revenue for the third quarter of fiscal year 2024 came in at $13.9 million, representing a 15% -over-year growth from the same period in fiscal year 2023. This is the sixth straight quarter of mid-teens or better revenue growth and resulted in quarterly earnings of $1.5 million, or 17 cents per diluted share. Similarly, I'm proud to highlight that operating income for the quarter was $1.8 million, a growth of 54% over the same period in the prior fiscal year. Additionally, for a third straight quarter, we grew revenue in all three of our categories, home care, hospital, and other. I'll hand the call over to Brad to discuss the quarter's financials in more detail shortly. But first, I want to provide a business update and address the cyberattack on change health care and its impact on Electromed. First, the company's consistent growth strategies are generating positive results through our focus on developing -in-class products, exemplary customer service, disciplined commercial expansion, and operating excellence. We have continued to generate double-digit revenue growth and capture operating leverage, which we believe is a compelling combination for investors in a difficult market for small and micro-cap companies.

As discussed

on last quarter's call, we believe Electromed shares are undervalued given our prospects for growth, profitability, cash generation, and our rock-solid balance sheet with no debt, which makes us a micro-cap standout in the medtech space. Investor feedback highlighted that our story is resonating since our last earnings call, which was also reflected in our stock price, as our shares have appreciated substantially since we reported fiscal year 2024 Q2 results. Even after our stock appreciated, I invested in the stock this past quarter, because of the optimism I have and the ability of the Electromed team to continue to generate positive results, namely double-digit revenue growth coupled with operating leverage. Additionally, I want to remind investors that my equity incentive reward is based largely on increasing total shareholder return, and management's cash incentive compensation is focused solely on delivering financial results, which aligns us to our investors' goals and helps keep shareholder value as a top priority. This segues nicely into an update on our commercial initiatives. I'm happy to report that we have expanded our sales team from 49 direct sales reps in Q2 to 51 at the end of Q3. We continue to attract top-flight sales talent to represent the newest, and we believe the best, HFCWO technology in the market today. We will continue our deliberate sales force expansion plans to drive further market penetration and to support a larger pool of physician prescribers. We have also revamped our sales hiring process by recruiting sales reps whose backgrounds and experiences most closely match our top performers and can successfully execute what is largely a clinical sale. Additionally, we have upgraded our sales training so reps can be more effective sooner in serving our customers and drive revenue growth. Recently, we were awarded the Corporate Partner of the Year by the California Society of Respiratory Care in recognition of the impact our sales and clinical teams are having in serving our customers. Also, we recently conducted a survey from our SmartVest Connect program where respiratory therapists provide personalized in-home training, follow-up tele-respiratory support, and stay connected with patients to support therapy utilization, and we are pleased to report that 95% of the patients stated they would recommend SmartVest to others. Also, as mentioned on our last earnings call, our 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 sales 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's 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. In support of that objective in April, we launched a live continuing education units or CEU webinar tailored to the respiratory therapists regarding the use of airway clearance and the treatment of bronchiectasis, which is designed to result in patients getting the benefits of HFCWO sooner so they can breathe easier and live more actively. This program was well attended by over 190 participants. In that same vein, I'm pleased to report that we have launched a new clinical resource center as part of our website. The clinical resource center is tailored to the needs of clinicians where they can explore our prescriber resources, upcoming events, programs for CME credits, educational videos, and our latest clinical studies. Also in Q3, we rolled out Smart Advantage, 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. Feedback from our providers and patients regarding Smart Advantage has been excellent. They appreciate how we have alleviated some of the administrative challenges both providers and patients deal with in navigating payer requirements for our technology. Lastly, on February 21, there was a cyber attack which began against Change Healthcare, crippling financial operations for hospitals, insurers, pharmacies, and medical groups nationwide. Change Healthcare is a financial clearinghouse that works across the health system to make clinical, administrative, and financial processes simpler and more efficient for payers, providers, and consumers. Unfortunately, because of the breach, provider claims to payers dropped significantly. Fortunately, because of the excellent work by Christine Beiersdorf, our vice president of reimbursement and payer relations, and her team, I am happy to report that we resolved nearly 75% of our delayed claims by the end of the quarter with a successful submission through an alternative clearinghouse to Change Healthcare. Although we experienced a three-week delay in non-Medicare claim submissions, there are still providers that have not been able to submit claims at all today. Our cash position of $11.7 million by the end of Q3 allowed us to endure the payment delays providing the time necessary to develop contingency plans to the crisis. Lastly, as of today, we have resolved 98% of our delayed claims and expect to be 100% resolved in Q4. I'm excited about the trajectory of the business and look forward to continuing to drive top-line growth combined with expanding operating leverage. With that, I'll turn the call over to Brad to discuss our financials. Brad?

Thank you, Jim. All amounts I will be discussing represent amounts for the three months ended March 31, 2024, or Q3 fiscal 2024, and compare to the prior year amounts for the three months ended March 31, 2023, or Q3 fiscal 2023. The net revenue for our third fiscal quarter grew 15% over last year to a record $13.9 million. Home care revenue for the quarter increased by ,316,000, or 12%, compared to 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. Q3 hospital revenue was $783,000, an increase of $343,000, or 78%, compared to the prior year. The increases were primarily due to an increase in sales representatives focused on the hospital market and increased capital and disposable demand. As a reminder, the sales cycle for our hospital business is long, which can result in large revenue changes on a quarterly basis. Home care distributor revenue for the quarter increased by $23,000, or 4.6%, compared to 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. Other revenue was $277,000, an increase of $121,000, or 77.6%, compared to the prior year. Other sales are affected by the timing of international distributor purchases and purchases by customers that do not fall within the aforementioned markets that can cause significant fluctuations in reported revenue on a quarterly basis. Gross profit increased to ,382,000, or .8% of net revenues from ,056,000, or 75% of net revenues in the prior year. The slight decrease in gross profit as a percentage of net revenues compared to the prior year was primarily due to costs associated with the wind down of our previous generator models. Turning now to our operating expenses. Selling general and administrative, or SG&A, expenses were ,374,000, representing an increase of $680,000, or 8.8%, compared to the prior year. Payroll and compensation related expenses were ,721,000, representing an increase of $684,000, or 13.6%, compared to the prior year. The increase was primarily due to increased 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. Travel, meals, and entertainment expenses were $760,000, representing an increase of $102,000, or 15.5%, compared to the prior year. The increase was due to a higher average number of direct sales representatives, higher travel costs, and an increased number of sales territories and a midyear sales meeting held in Q3. Total discretionary marketing expenses were $304,000, representing an increase of $92,000, or 43.4%, compared to the prior year. The increase was primarily due to an investment in market research as well as -to-consumer and -to-physician marketing. Professional fees were $978,000, representing a decrease of $410,000, or 29.5%, compared to last year. Professional fees are primarily for services related to legal costs, share owner services, and reporting requirements, information technology, technical support, and consulting fees. The decrease was primarily related to legal and consulting costs last year associated with the termination of the public health emergency for COVID-19 and previous year recruiting costs for multiple senior leadership positions that did not recur in fiscal 2024. Research and development, or R&D, expenses were $167,000, representing an increase of $1,000, or 0.6%, compared to the prior year. Net interest income increased $94,000 to $120,000 for the quarter. The greater than 360% increase over last year is primarily due to increased savings rates associated with our cash balances. When putting these Q3 results together, we are happy to report another strong earnings quarter with pre-tax income of $2 million, net income of $1.5 million, and quarterly EPS for our shareholders of 17 cents per diluted share. As of March 31, 2024, the company had $11.7 million in cash and cash equivalents, $23.9 million in accounts and no debt. Total shareholders equity was $42.6 million. With that, we'd like to move to the Q&A portion of our call. Operator, please open the call to questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Brooks O'Neill with Lake Street Capital Markets. Please go ahead.

Hi, Jim and Brad. This is Aaron on the line for Brooks. Are you able to hear me okay? Yeah. Hi, Aaron. How are you? I'm doing well. Thank you. Congrats on another record quarter. It really shows the discipline you guys are implementing. Just to start, what actions have you taken in terms of bringing more awareness to bronchiectasis in the physician space? I guess a different way to phrase that is, how is the time between diagnosis from the actual pulmonologist and actually getting patients onto the vest therapy developed? I think you mentioned in your prepared remarks a CE webinar launch and then as well as a new clinical resource on your site. Maybe just a little bit more color on those two things would be helpful.

First off, thanks for the question. It's a difficult one because part of our challenge, and I think you've seen this in our investor deck as well, is that today there's 824,000 people who have been diagnosed with bronchiectasis, but there's really only 127,000 of those patients, Aaron, that are on the technology today. As I mentioned on the previous quarterly call as well, this is a work in process. These physicians are seeing these patients. They are diagnosing them with this disease state. What they're doing today is they're putting them on a combination of antibiotics to address the infection that the patient has and then they're putting them on probably a lower modality of airway clearance. It's not until the patient's disease state really progresses that they then put them on HFCWO. Our opportunity in really unlocking these patients who have this disease state and getting them on the technology sooner rather than later is getting in front of these pulmonologists and respiratory therapists and showing them the value of doing that. Value in reductions in antibiotic use, value in readmission rates into hospitals. That just doesn't happen overnight, but we feel great about the trajectory that we have on that. I would also tell you that we're not operating in a vacuum. Our competitors and even some of the need for different treatment of these bronchiectasis patients so that their quality of life improves sooner rather than later.

Understood. That's definitely helpful. Thank you for that. I guess moving towards clearway, has that in the hospital setting been tracking to your liking? I'm definitely recognizing that it's still early stages on that front, but maybe just a little bit info on that would be great, Jim.

That's a great question. Our hospital market is a nascent market for us. Most of our resources are focused on the clinical sale, and that's mainly because the pulmonologists are the ones primarily who are writing the prescriptions for, in fact, really the only people writing the prescriptions for our technology outside of the VA hospitals. The hospitals in our mind, it's a different type of sale for us because instead of it being a -to-one relationship between us and the patient, basically what you're doing is you're selling capital into these facilities. It's a focus for us in that there's demand there, Aaron, but really where our sales team is focused, that isn't the primary focus that they have. We really see the hospital market more as a gateway to the home, so if a patient does get admitted to the hospital, they do need airway clearance technology, and we believe we've got the -in-class technology in the marketplace. We certainly want to have that available for those patients, but really with the hope that as they get discharged, if they need to continue to be on that technology, that they go home on a clear way. Our results this year have been really in line with what our expectations have been. Our hospital business in the quarter was up substantially, and for the year it's over 30% up over a prior year, so we're getting good traction there, and we hope to continue that, but we only have a few resources focused on that market today.

Understandable, yeah, and like you mentioned, you're obviously showing great traction there, so that's good to see. Maybe Brad can jump in on this one too. I'm just wondering on specific uses of cash. Have you had any specific conversations or avenues that you explored for uses of cash? I mean, just any sort of ideas that you guys have been talking about recently?

Yeah, as we said in the past, Aaron, what we like about the ability to generate cash as a business is that it gives us more options. First and foremost, we want to be able to reduce our risk, and like we saw this quarter with Change Healthcare, things can move quickly and cause headwinds for us, and our cash reserves allow us to weather those storms without any really material impact on the business. Looking forward, as our cash balance continues to grow, we do continue to consider any and all options to make the most use of that cash, including reinvesting into the business and thinking through ways that we can provide more value to shareholders.

Absolutely, completely understood, and then last one for me, just with all the new leadership being incorporated within the last year or so, and I guess you guys can both comment on this, but how have you just developed the company into what it is today? I guess what are one or two significant or vital things that you're looking at that you can maybe do better or are currently doing to accelerate growth and improve the profitability you guys are seeing going forward here?

Yeah, I think I mentioned this on the previous call, and I gave a shout out to Christine Byersdorf during my prepared remarks as well, who's in charge of reimbursement and pair relations, but I must say, and Brad can perhaps echo this, maybe not, but I would tell you I feel great about the talent that we have on the team. I feel great about the talent that we're hiring into our sales ranks as well. Aaron, I think as you know, my background is really in commercial roles in addition to leading businesses, and I feel really good about the talent that we're bringing on board to represent the company, but I would also tell you that it's nice having a shared vision. Everybody that joins Electromed, I think, is fired up about the impact that we can have on patients' lives and the impact that our technology does in serving that mission, but I would also tell you that we are in literally every functional facet of the business improving our productivity. We're improving our insights into the business, and we're really just going from strength to strength, so I wouldn't point to one specific thing. I would say that our systems, thanks to Brad and his team, implementing an ERP system a while back, which is really paying dividends for us to give us different insights to our business, both financially and operationally, as well as what we've been able to do to improve our productivity within our reimbursement team. Before, that was an area of our business where it was a -to-one correlation almost between when we hired a sales rep providing that same level of back office support, and what we're finding is we're getting a lot more -to-many leverage within that ratio, so we don't need the same ratio of -to-one between our sales reps and our reimbursement personnel, and I think that's giving us terrific leverage in our P&L. Brad, I'm not sure if there's anything else you want to add to that.

No, well said, Jim. I think we have been blessed with a lot of great talent across the commercial, operational, and even the back office functions of the business, and as those new people come in and bring great ideas to the business that fuel our financial success, it makes the story easier to tell, and the financial success combined with the great culture that we have here at Electromed allows us to continue to attract great talent into the team, so really excited to be a part of it.

Absolutely, no, that's all great color and commentary. Thank you guys for taking the questions, and again, congrats on the continued momentum here.

Thanks, Aaron. We appreciate it.

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

Thank you very much, operator, and thank you very much for everyone who joined the call today and for your continued support of Electromed. As I mentioned, I'm really excited about the trajectory of the business and our continued growth and improved profitability with the end goal of optimizing long-term shareholder value. If you're interested in a follow-up call, please contact our investor relation partners at ICR Westwick. I appreciate your time today and appreciate your investment in Electromed, and with that, thank you everyone. Have a great rest of the day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.