What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-10 compared with 2022-02-08 · 393 added, 382 removed, 15 unchanged (98% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion

and analysis of our financial condition and results of operations should be read in conjunction with our unaudited Condensed Financial

Statements and related notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and our audited financial

statements and related notes thereto included in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended June

30, 2021 (“fiscal 2021”).

Electromed, Inc.

“our,” “us,” “Electromed” or the “Company”) develops and provides innovative airway

clearance products applying High Frequency Chest Wall Oscillation (“HFCWO”) technologies in pulmonary care for patients

We manufacture, market

and sell products that provide HFCWO, including the SmartVest® Airway Clearance System (“SmartVest System”) that

includes our newest generation SmartVest SQL® and previous generation SV2100, and related products, to patients with compromised

pulmonary function.

The SmartVest SQL is smaller, quieter and lighter than our previous product, with enhanced programmability

and ease of use.

Our products are sold in both the home health care market and the institutional market for use by patients in

hospitals, which we refer to as “institutional sales.” The SmartVest SQL has been sold in the domestic home care market

Discussion and Analysis of Financial Condition and Results of Operations.

following discussion and analysis of our financial condition and results of operations should be read in conjunction with our

unaudited Condensed Financial Statements and related notes thereto included in Part I, Item 1 of this Quarterly Report on Form

10-Q, and our audited financial statements and related notes thereto included in Part II, Item 8 of our Annual Report on Form

10-K for the fiscal year ended June 30, 2021 (“fiscal 2021”).

(“we,” “our,” “us,” “Electromed” or the “Company”) develops and

provides innovative airway clearance products applying High Frequency Chest Wall Oscillation (“HFCWO”) technologies

in pulmonary care for patients of all ages.

manufacture, market and sell products that provide HFCWO, including the SmartVest® Airway Clearance System (“SmartVest

System”) that includes our newest generation SmartVest SQL® and previous generation SV2100, and related products, to

patients with compromised pulmonary function.

The SmartVest SQL is smaller, quieter and lighter than our previous product, with

enhanced programmability and ease of use.

Our products are sold in both the home health care market and the institutional market

for use by patients in hospitals, which we refer to as “institutional sales.” The SmartVest SQL has been sold in the

domestic home care market since 2014.

In 2015, we launched the SmartVest SQL into institutional and certain international markets.

In June 2017, we announced

the launch of the SmartVest SQL with SmartVest Connect™ wireless technology, which allows data connection between physicians

and patients to track therapy performance and collaborate in treatment decisions.

SmartVest Connect is currently available to pediatric

and cystic fibrosis patients and was made available to certain targeted adult pulmonary clinics starting in November 2017.

2000, we have marketed the SmartVest System and its predecessor products to patients suffering from cystic fibrosis, bronchiectasis

and repeated episodes of pneumonia.

Additionally, we offer our products to a patient population that includes neuromuscular disorders

such as cerebral palsy, muscular dystrophies, amyotrophic lateral sclerosis (“ALS”), the combination of emphysema and

chronic bronchitis commonly known as chronic obstructive pulmonary disease (“COPD”), and patients with post-surgical

complications or who are ventilator dependent or have other conditions involving excess secretion and impaired mucus transport.

The SmartVest System is

often eligible for reimbursement from major private insurance providers, health maintenance organizations (“HMOs”),

state Medicaid systems and the federal Medicare system, which we believe is an important consideration for patients considering

an HFCWO course of therapy.

For domestic sales, the SmartVest System may be reimbursed under the Medicare-assigned billing code

(E0483) for HFCWO devices if the patient has cystic fibrosis, bronchiectasis (including chronic bronchitis or COPD that has resulted

in a diagnosis of bronchiectasis) or any one of certain enumerated neuromuscular diseases, and can demonstrate that another less

expensive physical or mechanical treatment did not adequately mobilize retained secretions.

Private payers consider a variety of

sources, including Medicare, as guidelines in setting their coverage policies and payment amounts.

Critical Accounting Policies and Estimates

For a description of our

critical accounting policies, estimates and assumptions used in the preparation of our financial statements, including the unaudited

Condensed Financial Statements in this Quarterly Report on Form 10-Q, see Note 1 to our unaudited Condensed Financial Statements

included in Part I, Item 1 of this Quarterly Report on Form 10-Q and Part II, Item 7, and Note 1 to our audited financial statements

included in Part II, Item 8, of our Annual Report on Form 10-K for fiscal 2021.

Some of our accounting

policies require us to exercise significant judgment in selecting the appropriate assumptions for calculating financial statements.

In June 2017, we announced the launch of the SmartVest SQL with SmartVest Connect™ wireless technology, which allows data

connection between physicians and patients to track therapy performance and collaborate in treatment decisions.

SmartVest Connect

is currently available to pediatric and cystic fibrosis patients and was made available to certain targeted adult pulmonary clinics

starting in November 2017.

Since 2000, we have marketed the SmartVest System and its predecessor products to patients suffering

from cystic fibrosis, bronchiectasis and repeated episodes of pneumonia.

Additionally, we offer our products to a patient population

that includes neuromuscular disorders such as cerebral palsy, muscular dystrophies, amyotrophic lateral sclerosis (“ALS”),

the combination of emphysema and chronic bronchitis commonly known as chronic obstructive pulmonary disease (“COPD”),

and patients with post-surgical complications or who are ventilator dependent or have other conditions involving excess secretion

and impaired mucus transport.

SmartVest System is often eligible for reimbursement from major private insurance providers, health maintenance organizations

(“HMOs”), state Medicaid systems and the federal Medicare system, which we believe is an important consideration for

patients considering an HFCWO course of therapy.

For domestic sales, the SmartVest System may be reimbursed under the Medicare-assigned

billing code (E0483) for HFCWO devices if the patient has cystic fibrosis, bronchiectasis (including chronic bronchitis or COPD

that has resulted in a diagnosis of bronchiectasis) or any one of certain enumerated neuromuscular diseases, and can demonstrate

that another less expensive physical or mechanical treatment did not adequately mobilize retained secretions.

Private payers consider

a variety of sources, including Medicare, as guidelines in setting their coverage policies and payment amounts.

Accounting Estimates

a description of our critical accounting policies, estimates and assumptions used in the preparation of our financial statements,

including the unaudited Condensed Financial Statements in this Quarterly Report on Form 10-Q, see Note 1 to our unaudited Condensed

Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and Part II, Item 7, and Note 1 to our audited

financial statements included in Part II, Item 8, of our Annual Report on Form 10-K for fiscal 2021.

of our accounting policies require us to exercise significant judgment in selecting the appropriate assumptions for calculating

financial statements.

Such judgments are subject to an inherent degree of uncertainty.

Among other factors, these judgments are based upon our historical

experience, known trends in our industry, terms of existing contracts and other information from outside sources, as appropriate.

We believe the critical accounting policies that require the most significant assumptions and judgments in the preparation of our

financial statements, including the unaudited Condensed Financial Statements contained in this Quarterly Report on Form 10-Q, include:

revenue recognition and the estimation of variable consideration, allowance for doubtful accounts, inventory obsolescence, share-based

compensation and warranty liability.

Impacts of COVID-19

on Our Business and Operations

In March 2020, the World

Health Organization designated COVID-19 as a global pandemic, and the U.S.

Department of Health and Human Services designated COVID-19

as a public health emergency.

The impact of the COVID-19 pandemic on our business remains uncertain, and its effects on our operational

and financial performance will depend in part on future developments, which cannot be reasonably estimated at this time.

developments include, but are not limited to, the duration, scope and severity of the COVID-19 pandemic in geographic areas in

which we operate or in which our patients live, actions taken to contain or mitigate its impact, the impact on governmental healthcare

programs and budgets, the development and distribution of treatments or vaccines, and the resumption of widespread economic activity.

Due to the inherent uncertainty of the unprecedented and evolving situation, we are unable to predict with confidence the likely

impact of the COVID-19 pandemic on our future operations.

During the second quarter

of our fiscal year ending June 30, 2022 (“fiscal 2022”), we continued to experience a reduction in the number of clinics

allowing face-to-face access by our sales team as the number of infections relating to the Omicron variant of COVID-19 increased

throughout most regions of the United States, and hospitals implemented additional safety protocols.

Our sales team continued to

utilize a hybrid sales process of virtual and face-to-face clinician interaction with strict adherence to specific clinic and healthcare

system safety protocols, which we believe allowed them to drive stronger referral growth compared to the prior-year period.

We believe that the impact

of the COVID-19 pandemic on our home care and institutional business will likely continue during the remainder of fiscal 2022.

Our home care and institutional revenue for the three months ended December 2021 has increased as compared to the three months

ended December 2020;

Among other factors, these judgments are

based upon our historical experience, known trends in our industry, terms of existing contracts and other information from outside

sources, as appropriate.

We believe the critical accounting policies that require the most significant assumptions and judgments

in the preparation of our financial statements, including the unaudited Condensed Financial Statements contained in this Quarterly

Report on Form 10-Q, include:

revenue recognition and the estimation of variable consideration, inventory valuation, share-based

compensation and warranty reserve.

of COVID-19 on Our Business and Operations

March 2020, the World Health Organization designated COVID-19 as a global pandemic, and the U.S.

Department of Health and Human

Services designated COVID-19 as a public health emergency.

The impact of the COVID-19 pandemic on our business remains uncertain,

and its effects on our operational and financial performance will depend in part on future developments, which cannot be reasonably

estimated at this time.

Such future developments include, but are not limited to, the duration, scope and severity of the COVID-19

pandemic in geographic areas in which we operate or in which our patients live, actions taken to contain or mitigate its impact,

the impact on governmental healthcare programs and budgets, the development and distribution of treatments or vaccines, and the

resumption of widespread economic activity.

Due to the inherent uncertainty of the unprecedented and evolving situation, we are

unable to predict with confidence the likely impact of the COVID-19 pandemic on our future operations.

the third quarter of our fiscal year ending June 30, 2022 (“fiscal 2022”), we continued to experience a reduction

in the number of clinics allowing face-to-face access by our sales team as the number of infections relating to the Omicron variant

of COVID-19 increased throughout most regions of the United States, and hospitals implemented additional safety protocols.

sales team continued to utilize a hybrid sales process of virtual and face-to-face clinician interaction with strict adherence

to specific clinic and healthcare system safety protocols, which we believe allowed them to drive stronger referral growth compared

to the prior year period.

During March 2022, we observed an improvement in clinic access and patient flow compared to earlier

in the quarter, which we believe is likely a result of Omicron-related case reductions throughout most of the United States, resulting

in a record high number of monthly referrals for our company.

believe that the impact of the COVID-19 pandemic on our home care and institutional business will likely continue during the remainder

of fiscal 2022.

Our home care revenue for the three months ended March 31, 2022 has increased as compared to the three months

ended March 31,2021;

however, if COVID-19 infection rates increase and federal, state and local restrictions on commerce, stay-at-home

orders or other restrictions on businesses are reinstated, then such measures could have a material adverse effect on our business.

We have observed increased

changes to our supply chain timelines and increased raw material and shipping costs during the most recent quarter, but we have

not experienced any disruptions that impacted product availability for our customers.

We anticipate that raw material costs will

increase in future quarters primarily relating to electronic components but may extend to other components.

It is possible the

COVID-19 pandemic could have a greater adverse impact on our supply chain in the future, including impacts associated with preventative

and precautionary measures taken by other businesses and applicable governments.

A reduction or interruption in any of our manufacturing

processes could have a material adverse effect on our business.

Any significant increases to our raw material or shipping costs

could reduce our gross margins.

We have also taken measures to ensure

the safety of our employees and to comply with applicable governmental orders.

We consider our business to be essential under

applicable governmental orders, primarily due to our role in manufacturing and supplying needed medical devices to patients with

respiratory-related issues and have therefore continued to operate during the government restrictions put in place in response

to the pandemic.

In response to the COVID-19

pandemic and the U.S.

federal government’s declaration of a public health emergency, the Centers for Medicare & Medicaid

Services (“CMS”) implemented a number of temporary rule changes and waivers to allow prescribers to best treat patients

during the period of the public health emergency.

orders or other restrictions on businesses are reinstated, we believe that such measures could have a material adverse effect

on our business.

observed increased changes to our supply chain timelines and increased raw material and shipping costs during the third quarter

of fiscal 2022, but we have not experienced any disruptions that materially impacted product availability for our customers.

anticipate that raw material costs will increase in future quarters primarily relating to electronic components but may extend

to other components as well.

In certain instances, we have purchased key electronic materials in advance to ensure adequate future

supply and mitigate the risk of supply chain disruption.

It is possible that the COVID-19 pandemic could have a greater adverse

impact on our supply chain in the future, including impacts associated with preventative and precautionary measures taken by other

businesses and applicable governments.

A reduction or interruption in any of our manufacturing processes could have a material

adverse effect on our business.

Any significant increases to our raw material or shipping costs could reduce our gross margins.

have also taken measures to ensure the safety of our employees and to comply with applicable governmental orders.

our business to be essential under applicable governmental orders, primarily due to our role in manufacturing and supplying needed

medical devices to patients with respiratory-related issues and have therefore continued to operate during the government restrictions

put in place in response to the pandemic.

response to the COVID-19 pandemic and the U.S.

federal government’s declaration of a public health emergency, the Centers

for Medicare & Medicaid Services (“CMS”) implemented a number of temporary rule changes and waivers to allow prescribers

to best treat patients during the period of the public health emergency.

These waivers became effective on March 1, 2020.

Clinical indications and documentation

typically required will not be enforced for respiratory-related products including the SmartVest System (solely with respect to

Medicare patients).

The minimum documentation now requires a valid order and documentation of a respiratory-related diagnosis.

Face-to-face and in-person requirements for respiratory devices are being waived while the waiver is in place.

The CMS waiver was

recently extended in conjunction with the extension of the federal public health emergency for an additional 90-day period beginning

January 16, 2022.

The Company continues to

evaluate the scope and application of existing, pending and potential COVID-19 vaccination mandates and their potential impacts

on our future financial condition and results of operations.

In September 2021, President

Joe Biden signed an executive order directing executive departments and agencies to include a clause in all covered federal contracts

to comply with guidance issued by the Safer Federal Workforce Task Force, which requires, among other things, covered federal contractor

employees, including employees working remotely related to federal contracts, to be fully vaccinated by December 8, 2021, unless

the employee is entitled to an accommodation.

indications and documentation typically required will not be enforced for respiratory-related products including the SmartVest

System (solely with respect to Medicare patients).

The minimum documentation now requires a valid order and documentation of a

respiratory-related diagnosis.

Face-to-face and in-person requirements for respiratory devices are being waived while the waiver

The CMS waiver was recently extended in conjunction with the extension of the federal public health emergency for

an additional 90-day period beginning April 16, 2022.

September 2021, President Joe Biden signed an executive order directing executive departments and agencies to include a clause

in all covered federal contracts to comply with guidance issued by the Safer Federal Workforce Task Force, which requires, among

other things, covered federal contractor employees, including employees working remotely related to federal contracts, to be fully

vaccinated, unless the employee is entitled to an accommodation.

As a federal contractor to the U.S.

Department of Veterans Affairs Federal Supply

Schedule (“Veterans Administration”), we are subject to this regulation.

In fiscal 2021, $557,000, or 1.6% of our total

revenues, were attributable to the Veterans Administration, and we intend to leverage that business as a future growth opportunity;

Department of Veterans Affairs

Federal Supply Schedule (“Veterans Administration”), we are subject to this regulation.

In fiscal 2021, $557,000,

or 1.6% of our total revenues, were attributable to the Veterans Administration, and we intend to leverage that business as a

future growth opportunity;

approximately 19 million U.S.

veterans were served by the Veterans Administration healthcare system in calendar year 2020.

During the three-month period

ended December 2021, we conducted a review process to ensure that we fully comply with the Safer Federal Workforce Task Force regulations.

Through a concerted effort to increase vaccination rates among our workforce, we were able to achieve compliance with such regulations

with minimal disruption.

Results of Operations

Net revenues for the

three and six months ended December 31, 2021 and 2020 are summarized in the table below.

Three Months Ended December 31,

Six Months Ended

Increase (Decrease)

veterans were served by the Veterans Administration healthcare system

in calendar year 2020.

During the three-month period ended December 31, 2021, we conducted a review process to ensure that we

fully comply with the Safer Federal Workforce Task Force regulations.

Through a concerted effort to increase vaccination rates

among our workforce, we were able to achieve compliance with such regulations with minimal disruption.

December 7, 2021, President Biden’s executive order was enjoined nationwide, and the federal government is appealing that

Due to the injunction, the federal government announced on December 9, 2021 that it is taking no action to enforce the

clause implementing the requirements of the executive order at this time.

Although it is unclear whether the executive order will

be upheld, we are well positioned to achieve compliance with the Safer Federal Workforce Task Force regulations if the executive

order becomes enforceable in the future.

of Operations

revenues for the three and nine months ended March 31, 2022 and 2021 are summarized in the table below.

Institutional

Home care distributor

care distributor

International

Home care revenue .

Home care revenue for the three months ended December 31, 2021 was $9,404,000, representing an increase of $501,000, or 5.6%,

compared to the same period in fiscal 2021.

For the six months ended December 31, 2021, home care revenue was $18,688,000, representing

an increase of $2,322,000, or 14.2%, compared to the same period in fiscal 2021.

The revenue increases compared to the prior-year

periods were primarily due to increases in referrals and approvals.

The increases in referrals compared to the prior-year periods

were due to the sales team adapting to a hybrid virtual and face-to-face selling model implemented to address clinic access limitations

due to the COVID-19 pandemic, benefits of the CMS waiver on the non-commercial Medicare portion of our home care revenue and an

increase in direct sales representatives.

The CMS waiver benefited

the non-commercial Medicare portion of our home care revenue by increasing the number of referrals and the approval percentage

for previously non-covered diagnoses.

We believe that our ongoing sales team execution, along with the expected return to pre-COVID-19

levels of patient face-to-face engagement with physicians and clinic access for our sales team, has the potential to mitigate the

impact of a CMS waiver expiration, which is currently set to expire in April 2022.

Institutional revenue.

Institutional revenue for the three months ended December 31, 2021 was $333,000, representing an increase of $24,000, or

7.8%, compared to the same period in fiscal 2021.

For the six months ended December 31, 2021, institutional revenue was $782,000,

an increase of $195,000, or 33.2%, compared to the same period in fiscal 2021.

The revenue increase in the current-year periods

was due to increased capital purchases and stronger disposable volumes compared to the corresponding prior-year periods, as hospitals

resumed utilization of HFCWO protocols after reducing utilization early in the COVID-19 pandemic.

Home care distributor

Home care distributor revenue for the three months ended December 31, 2021 was $387,000, representing an

increase of $238,000, or 159.7%, compared to the same period in fiscal 2021.

For the six months ended December 31, 2021, home care

distributor revenue was $543,000, an increase of $217,000, or 66.6%, compared to the same period in fiscal 2021.

care revenue .

Home care revenue for the three months ended March 31, 2022 was $9,033,000, representing an increase

of $870,000, or 10.7%, compared to the same period in fiscal 2021.

For the nine months ended March 31, 2022, home care revenue

was $27,721,000, representing an increase of $3,192,000, or 13.0%, compared to the same period in fiscal 2021.

The revenue increase

in the current-year periods was due to an increase in orders by one home care distribution partner.

We began selling to a limited

number of home medical equipment distributors during our fiscal year ended June 30, 2020, who in turn sell our SmartVest System

compared to the prior year periods was primarily due to increases in referrals and approvals.

The increase in referrals was primarily

due to increased sales representative productivity driven by increased clinic access and patient flow, our sales team adapting

to a hybrid virtual and face-to-face selling methodology, and benefits of the CMS waiver on the non-commercial Medicare portion

of our home care revenue.

Additionally, we also benefitted from a Medicare allowable rate increase that took effect on January

Annual Medicare rate increases for our device are linked closely to changes in the Urban Consumer Price Index.

CMS waiver benefited the non-commercial Medicare portion of our home care revenue by increasing the number of referrals and the

approval percentage for previously non-covered diagnoses.

We believe that our ongoing sales team execution, along with the expected

return to pre-COVID-19 levels of patient face-to-face engagement with physicians and clinic access for our sales team, has the

potential to mitigate the impact of a CMS waiver expiration, which is currently set to expire in July 2022.

Institutional

Institutional revenue for the three months ended March 31, 2022 was $392,000, representing a decrease of $51,000,

or 11.5%, compared to the same period in fiscal 2021.

For the nine months ended March 31, 2022, institutional revenue was $1,174,000,

an increase of $145,000, or 14.1%, compared to the same period in fiscal 2021.

For the three months ended March 31, 2022, the

revenue decline was driven by lower capital purchases.

Consumable volume growth during the period increased by 16.5% compared

to the prior year period, reflecting increased consumable wrap usage in hospitals.

The revenue increase for the nine months ended

March 31, 2022 was due to increased capital purchases and stronger consumable volumes compared to the corresponding prior year

periods, as hospitals resumed utilization of HFCWO protocols after reducing utilization early in the COVID-19 pandemic.

care distributor revenue .

Home care distributor revenue for the three months ended March 31, 2022 was $520,000,

representing an increase of $415,000, or 395.2%, compared to the same period in fiscal 2021.

For the nine months ended March 31,

2022, home care distributor revenue was $1,063,000, an increase of $631,000, or 146.1%, compared to the same period in fiscal

The revenue increase in the current year periods was due to increased demand from one of our primary home care distribution

We began selling to a limited number of home medical equipment distributors during our fiscal year ended June 30, 2020,

who in turn sell our SmartVest System in the U.S.

home care market.

International revenue .

International revenue for the three months ended December 31, 2021 was $124,000, representing a decrease of $11,000, or 8.1%,

compared to the same period in fiscal 2021.

For the six months ended December 31, 2021, international revenue was $236,000, an

increase of $15,000, or 6.8%, 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 $7,880,000, or 76.9% of net revenues, for the three months ended December 31, 2021, from $7,525,000, or 79.2% of net revenues,

in the same period in fiscal 2021.

Gross profit increased to $15,581,000, or 76.9% of net revenues, for the six months ended December

31, 2021, from $13,673,000, or 78.1% of net revenues, in the same period in fiscal 2021.

The decrease in gross profit as a percentage

of net revenues compared to the prior-year periods was primarily due to higher raw material and shipping costs.

Operating expenses

Selling, general and

administrative expenses.

Selling, general and administrative (“SG&A”) expenses were $6,475,000 and $13,262,000

for the three and six months ended December 31, 2021, respectively, representing increases of $1,040,000 and $2,823,000, or 19.1%

and 27.0%, respectively, compared to the same periods in the prior year.

Payroll and compensation-related

expenses were $4,025,000 and $8,040,000 for the three and six months ended December 31, 2021, respectively, representing increases

of $593,000 and $1,308,000, or 17.3% and 19.4%, respectively, compared to the same periods in the prior year.

The increase in the

current-year periods was primarily due to a higher average number of sales and marketing personnel, increased reimbursement personnel

to process higher patient referrals, increased temporary resources to assist with systems infrastructure investments and increased

incentive payments on higher home care revenue .

Field sales employees totaled 48, of which

39 were direct sales, as of December 31, 2021, compared to 45 as of December 31, 2020, of which 38 were direct sales.

Travel, meals and entertainment

expenses were $590,000 and $1,231,000 for the three and six months ended December 31, 2021, respectively, representing increases

of $124,000 and $401,000, or 26.6% and 48.3%, respectively, compared to the same periods in the prior year.

The increase in the

current-year periods was primarily due to our sales representatives resuming closer-to-normal levels of travel compared to the

COVID-19 driven travel restrictions in the prior-year periods and a national sales meeting that was held in August 2021 but was

not held in the prior fiscal year due to COVID-19.

Total discretionary marketing

expenses were $211,000 and $365,000 for the three and six months ended December 31, 2021, respectively, representing decreases

of $106,000 and $141,000, or 33.4% and 27.9%, respectively, compared to the same periods in the prior year.

The decrease in the

current-year periods was primarily due to a shift to more cost-effective direct-to-consumer marketing investments.

Professional fees were

$624,000 and $1,735,000 for the three and six months ended December 31, 2021, respectively, representing increases of $91,000 and

International

International revenue for the three months ended March 31, 2022 was $196,000, representing an increase

of $120,000, or 157.9%, compared to the same period in fiscal 2021.

For the nine months ended March 31, 2022, international revenue

was $432,000, an increase of $135,000, or 45.5%, 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

profit increased to $7,743,000, or 76.4% of net revenues, for the three months ended March 31, 2022, from $6,701,000, or 76.3%

of net revenues, in the same period in fiscal 2021.

Gross profit increased to $23,324,000, or 76.7% of net revenues, for the nine

months ended March 31, 2022, from $20,374,000, or 77.5% of net revenues, in the same period in fiscal 2021.

For the nine months

ended March 31, 2022, the decrease in gross profit as a percentage of net revenues compared to the prior year period was primarily

due to higher raw material and shipping costs, partially offset by a Medicare allowable rate increase that took effect in January

2022, increased operational efficiencies and operating leverage on higher revenue.

general and administrative expenses.

Selling, general and administrative (“SG&A”) expenses were $6,544,000

and $19,806,000 for the three and nine months ended March 31, 2022, respectively, representing increases of $493,000 and $3,316,000,

or 8.1% and 20.1%, respectively, compared to the same periods in the prior year.

Professional fees include services

related to legal costs, shareowner services and reporting requirements, information technology technical support and consulting

The increase in professional fees compared to prior periods was primarily due an increase in system infrastructure investments

and costs related to a shareholder activism matter, which concluded with a cooperation agreement in September 2021.

incur any shareholder activism costs during the three months ended December 31, 2021.

We continue to make key investments in systems

infrastructure including implementing a new enterprise resource planning (“ERP”) system, enhancing our customer relationship

management system and further optimization of the revenue cycle management system that was implemented in June 2021.

these system infrastructure investments will result in more efficient and scalable operational processes and provide enhanced analytics

to drive business performance.

Research and development expenses.

Research and development (“R&D”) expenses were $329,000 and $705,000 for the three and six months ended December

31, 2021, respectively, representing decreases of $178,000 and $284,000, or 35.1% and 28.7%, respectively, compared to the same

periods in the prior year.

The decrease in the current-year periods was primarily due to reduced professional services costs associated

with our next generation platform development.

R&D expenses were 3.2% and 3.5% of revenue for the three and six months ended

December 31, 2021, respectively.

Interest income, net

interest income for the three and six months ended December 31, 2021 was $6,000 and $15,000, respectively, compared to $10,000

and $19,000, respectively, in the comparable prior-year periods.

The decrease in the current-year periods was primarily due to

lower rates earned on our cash deposits.

Income tax expense

Income tax expense was estimated

at $244,000 and $352,000 and the effective tax rate was 22.6% and 21.6% for the three and six months ended December 31, 2021, respectively.

Estimated income tax expense for the three and six months ended December 31, 2021 each include a discrete tax benefit of $1,000

and $21,000, respectively, related to the exercise of stock options.

Income tax expense was estimated

at $389,000 and $526,000 and the effective tax rate was 24.4% and 23.2% for the three and six months ended December 31, 2020, respectively.

Estimated income tax expense for the three and six months ended December 31, 2020 each include a discrete tax expense of $7,000

and a discrete tax benefit of $32,000, respectively, related to the exercise of stock options.

Net income for the three

and six months ended December 31, 2021 was $838,000 and $1,277,000, respectively, compared to $1,204,000 and $1,738,000 for the

same periods in the prior year.

The decrease in the current-year periods was driven by increased strategic investments in SG&A

and higher shareholder activism costs in the three months ended September 30, 2021 partially offset by stronger home care and distributor

Liquidity and Capital Resources

Cash Flows and Sources of Liquidity

Cash Flows from Operating Activities

For the six months ended

December 31, 2021, net cash used by operating activities was $106,000.

Cash flows provided by operating activities consisted of

net income of $1,277,000, non-cash expenses of $863,000, a decrease in inventory of $334,000, a decrease in contract assets of

$111,000, and an increase in accounts payable and accrued liabilities of $22,000.

These cash flows from operating activities were

offset by an increase in accounts receivable of $2,082,000, an increase in prepaid expenses and other assets of $265,000, and an

increase in income tax receivable of $366,000.

The increase in accounts receivable was primarily due to continued growth in the

Medicare portion of our home care business, which has a 13-month payment cycle.

Cash Flows from Investing Activities

For the six months ended

December 31, 2021, cash used in investing activities was $580,000.

Cash used in investing activities consisted of $511,000 in expenditures

for property and equipment and $69,000 in expenditures for patent costs.

The investment in property and equipment primarily relates

to our system infrastructure investments in an ERP system, customer relationship management system and revenue cycle management

system, as well as tooling equipment for our next generation product.

Cash Flows from Financing Activities

For the six months ended

December 31, 2021, cash used in financing activities was $733,000, which consisted of $663,000 used to repurchase shares of common

stock, and $70,000 of taxes paid on net share settlements of stock option exercises.

Adequacy of Capital Resources

Our primary working capital

requirements relate to adding employees to our sales force and support functions, continuing R&D efforts, IT infrastructure

projects, 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 $27,780,000

and available borrowings under our existing credit facility will provide adequate liquidity during fiscal 2022.

Effective December 17,

2021, we renewed our credit facility, which provides us with a revolving line of credit.

Interest on borrowings on the line of

credit accrues at the prime rate (3.25% at December 31, 2021) less 1.00% and is payable monthly.

There was no outstanding principal

balance on the line of credit as of December 31, 2021 or June 30, 2021.

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 18,

2023, if not renewed.

At December 31, 2021, 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.

The documents governing

our line of credit contain certain financial and nonfinancial covenants that include a minimum tangible net worth of not less than

$10,125,000 and restrictions on our ability to incur certain additional indebtedness or pay dividends.

Any failure to comply with

these covenants in the future may result in an event of default, which if not cured or waived, could result in the lender accelerating

the maturity of our indebtedness, preventing access to additional funds under the line of credit, requiring prepayment of outstanding

indebtedness, or refusing to renew the line of credit.

If the maturity of the indebtedness is accelerated or the line of credit

is not renewed, sufficient cash resources to satisfy the debt obligations may not be available and we may not be able to continue

operations as planned.

If we are unable to repay such indebtedness, the lender could foreclose on these assets.

For the six months ended December

31, 2021 and 2020, we spent $511,000 and $54,000, respectively, on property and equipment.

We currently expect to finance planned

equipment purchases with available working capital, cash flows from operations or borrowings under our credit facility.

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.

Off-Balance Sheet Arrangements

As of December 31, 2021, we had no off-balance sheet

arrangements.

Cautionary Note Regarding Forward-Looking Statements

Statements contained in

this Quarterly Report on Form 10-Q that are not statements of historical fact should be considered forward-looking statements within

the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities

Exchange Act of 1934, as amended (the “Exchange Act”).

Forward-looking statements include, but are not limited to,

statements regarding:

and compensation-related expenses were $3,990,000 and $12,013,000 for the three and nine months ended March 31, 2022, respectively,

representing increases of $152,000 and $1,444,000, or 4.0% and 13.7%, respectively, compared to the same periods in the prior

The increase in the current year periods was primarily due to a higher average number of sales, sales support and marketing

personnel, increased reimbursement personnel to process higher patient referrals, increased temporary resources to assist with

systems infrastructure investments and increased incentive payments on higher home care revenue .

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.

sales employees totaled 51, of which 42 were direct sales, as of March 31, 2022, compared to 48 as of March 31, 2021, of which

39 were direct sales.

meals and entertainment expenses were $580,000 and $1,810,000 for the three and nine months ended March 31, 2022, respectively,

representing increases of $140,000 and $540,000, or 31.8% and 42.5%, respectively, compared to the same periods in the prior year.

The increase in the three months ended March 31, 2022 was primarily due to our sales team resuming closer-to-normal levels of

travel compared to the COVID-19 driven travel restrictions in the prior year periods and an increase in regional sales meetings

that were cancelled in the prior year due to COVID-19.

For the nine months ended March 31, 2022, we also held an in-person national

sales meeting in August 2021 whereas the national sales meeting was held virtually the prior fiscal year due to COVID-19.

discretionary marketing expenses were $241,000 and $605,000 for the three and nine months ended March 31, 2022, respectively,

representing decreases of $107,000 and $248,000, or 30.7% and 29.1%, respectively, compared to the same periods in the prior year.

The decrease in the current year periods was primarily due to a shift to more cost-effective direct-to-consumer marketing investments.

fees were $719,000 and $2,454,000 for the three and nine months ended March 31, 2022, respectively, representing increases of

$19,000 and $768,000, or 2.7% and 45.6%, respectively, compared to the same periods in the prior year.

Professional fees include

services related to legal costs, shareowner services and reporting requirements, information technology technical support and

consulting fees.

For the nine months ended March 31, 2022, the increase in professional fees was primarily due to a shareholder

activism matter, increased investment in our system infrastructure and increased clinical study costs.

Our shareholder activism

matter concluded with a cooperation agreement in September 2021, and we did not incur any shareholder activism costs during the

three months ended March 31, 2022.

We continue to make key investments in systems infrastructure including implementing a new

enterprise resource planning (“ERP”) system, enhancing our customer relationship management system and further optimizing

of the revenue cycle management system that was implemented in June 2021.

We expect these system infrastructure investments will

result in more efficient and scalable operational processes and provide enhanced analytics to drive business performance.

expect to continue investing in our on-going clinical studies in order to continue building the body of evidence around positive

outcomes from bronchiectasis patients using HFCWO/SmartVest therapy.

fees were $207,000 and $569,000 for the three and nine months ended March 31, 2022, respectively, representing increases of $124,000

and $358,000, or 149.4% and 169.7%, respectively, compared to the same periods in the prior year.

The increase in recruiting fees

is primarily due to increased recruiting for senior leadership and direct sales representative positions.

expenses were $337,000 and $972,000 for the three and nine months ended March 31, 2022, respectively, representing increases of

$50,000 and $145,000, or 17.4% and 17.5%, respectively, compared to the same periods in the prior year.

The increase in insurance

expenses primarily relate to higher health insurance, director and officer insurance costs and cyber insurance costs.

and development expenses.

Research and development (“R&D”) expenses were $336,000 and $1,041,000 for the three

and nine months ended March 31, 2022, respectively, representing decreases of $71,000 and $355,000, or 17.4% and 25.4%, respectively,

compared to the same periods in the prior year.

The decrease in the current-year periods was primarily due to reduced professional

services costs associated with our next generation platform development.

R&D expenses were 3.3% and 3.4% of revenue for the

three and nine months ended March 31, 2022, respectively.

interest income for the three and nine months ended March 31, 2022 was $6,000 and $21,000, respectively, compared to $10,000 and

$29,000, respectively, in the comparable prior year periods.

The decrease in the current year periods was primarily due to lower

rates earned on our cash deposits and lower cash deposits in the bank compared to prior fiscal periods.

tax expense was estimated at $224,000 and $576,000 and the effective tax rate was 25.8% and 23.1% for the three and nine months

ended March 31, 2022, respectively.

Estimated income tax expense for the three and nine months ended March 31, 2022 each include

a discrete tax benefit of $22,000 and $43,000, respectively, related to the exercise of stock options and other items.

tax expense was estimated at $29,000 and $555,000 and the effective tax rate was 11.5% and 22.0% for the three and nine months

ended March 31, 2021, respectively.

Estimated income tax expense for the three months ended March 31, 2021 included a discrete

tax benefit of $37,000 as a result of lower federal and state taxes than what was originally estimated in our fiscal year ended

June 30, 2020 tax provision.

Estimated income tax expense for the nine months ended March 31, 2021 included that $37,000 discrete

tax benefit as well as a $32,000 discrete tax benefit related to the exercise of stock options.

The net impact of these discrete

events decreased the estimated effective tax rates by 2.7% during the nine months ended March 31, 2021.

income for the three and nine months ended March 31, 2022 was $645,000 and $1,922,000, respectively, compared to $224,000 and

$1,962,000 for the same periods in the prior year.

The increase in net income for the three months ended March 31, 2022 was driven

by home care and distributor revenue growth, partially offset by increased strategic investments in SG&A and higher product

The decrease in net income for the nine months ended March 31, 2022 was due to increased strategic investments in SG&A,

shareholder activism costs and higher product costs, partially offset by stronger home care and distributor revenue growth.

and Capital Resources

Flows and Sources of Liquidity

Flows from Operating Activities

the nine months ended March 31, 2022, net cash provided by operating activities was $53,000.

Cash flows provided by operating

activities consisted of net income of $1,922,000, non-cash expenses of $1,191,000, a decrease in inventory of $9,000, a decrease

in contract assets of $98,000 and an increase in accounts payable and accrued liabilities of $550,000.

These cash flows from operating

activities were offset by an increase in accounts receivable of $2,582,000, an increase in prepaid expenses and other assets of

$519,000, an increase in income tax receivable of $443,000 and a decrease in accrued compensation of $173,000.

The increase in

accounts receivable was primarily due to continued growth in the Medicare portion of our home care business, which has a 13-month

payment cycle.

Three distinct items have negatively impacted our operating cash flow for the nine months ended March 31, 2022,

including tax payments on higher-than-expected fiscal 2021 net income, a one-time payout of accrued vacation balances as part

of an enhancement to our paid time off policy, and increased prepayments to secure adequate supply of key raw material components.

Our cash receipt collection remains strong, with the three months ended March 31, 2022 period having the highest cash receipt

collections in our company’s history, building upon the prior record that was set in the previous quarter.

Flows from Investing Activities

the nine months ended March 31, 2022, cash used in investing activities was $1,066,000.

Cash used in investing activities consisted

of $980,000 in expenditures for property and equipment and $86,000 in expenditures for patent costs.

The investment in property

and equipment primarily relates to our system infrastructure investments in an ERP system, customer relationship management system

and revenue cycle management system, as well as tooling equipment for our next generation product.

Flows from Financing Activities

the nine months ended March 31, 2022, cash used in financing activities was $1,032,000, which consisted of $962,000 used to repurchase

shares of common stock, and $70,000 of taxes paid on net share settlements of stock option exercises.

of Capital Resources

primary working capital requirements relate to adding employees to our sales force and support functions, continuing R&D efforts,

IT infrastructure projects, 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 $28,022,000 and available borrowings under our existing credit facility will provide adequate liquidity during fiscal

December 17, 2021, we renewed our credit facility, which provides us with a revolving line of credit.

Interest on borrowings on

the line of credit accrues at the prime rate (3.5% at March 31, 2022) less 1.0% and is payable monthly.

There was no outstanding

principal balance on the line of credit as of March 31, 2022 or June 30, 2021.

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

18, 2023, if not renewed before such date.

At March 31, 2022, the maximum $2,500,000 was available under the line of credit.

obligations under the line of credit are secured by a security interest in substantially all of our tangible and intangible assets.

documents governing our line of credit contain certain financial and nonfinancial covenants that include a minimum tangible net

worth of not less than $10,125,000 and restrictions on our ability to incur certain additional indebtedness or pay dividends.

failure to comply with these covenants in the future may result in an event of default, which if not cured or waived, could result

in the lender accelerating the maturity of our indebtedness, preventing access to additional funds under the line of credit, requiring

prepayment of outstanding indebtedness, or refusing to renew the line of credit.

If the maturity of the indebtedness is accelerated

or the line of credit is not renewed, sufficient cash resources to satisfy the debt obligations may not be available and we may

not be able to continue operations as planned.

If we are unable to repay such indebtedness, the lender could foreclose on these

the nine months ended March 31, 2022 and 2021, we spent $980,000 and $105,000, respectively, on property and equipment.

expect to finance planned equipment purchases with available working capital, 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.

Note Regarding Forward-Looking Statements

contained in this Quarterly Report on Form 10-Q that are not statements of historical fact should be considered forward-looking

statements within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section

21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Forward- looking statements include,

but are not limited to, statements regarding:

the expected impact of the COVID-19 pandemic on our business;

our business strategy, including our intended

level of investment in R&D and marketing activities;

our expectations with respect to earnings, gross margins and sales growth,

industry relationships, marketing strategies and international sales;

estimated sizes of markets into which our products are or

our business strategy,

including our intended level of investment in R&D and marketing activities;

our expectations with respect to earnings, gross

margins and sales growth, industry relationships, marketing strategies and international sales;

estimated sizes of markets into

which our products are or may be sold;

our business strengths and competitive advantages;

our ability to grow additional sales distribution channels;

intent to retain any earnings for use in operations rather than paying dividends;

our expectation that our products will continue

to qualify for reimbursement and payment under government and private insurance programs;

our intellectual property plans and practices;

our ability to grow additional sales

distribution channels;

our intent to retain any earnings for use in operations rather than paying dividends;

our expectation that

our products will continue to qualify for reimbursement and payment under government and private insurance programs;

our intellectual

property plans and practices;

the expected impact of applicable regulations on our business;

our beliefs about our manufacturing processes;

our expectations

and beliefs with respect to our employees and our relationships with them;

our belief that our current facilities are adequate

to support our growth plans;

our expectations with respect to ongoing compliance with the terms of our credit facility;

our expectations

regarding the ongoing availability of credit and our ability to renew our line of credit;

enhancements to our products and services;

our beliefs about our manufacturing

our expectations and beliefs with respect to our employees and our relationships with them;

our belief that our current

facilities are adequate to support our growth plans;

our expectations with respect to ongoing compliance with the terms of our

credit facility;

our expectations regarding the ongoing availability of credit and our ability to renew our line of credit;

to our products and services;

expected excise tax exemption for the SmartVest System;

and our anticipated revenues, expenses, capital requirements and liquidity.

Words such as “anticipate,” “believe,” “continue,” “could,” “estimate,”

“expect,” “intend,” “may,” “ongoing,” “plan,” “potential,”

“project,” “should,” “will,” “would,” and similar expressions, including the negative

of these terms, are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Although we believe these forward-looking statements are reasonable, they involve risks and uncertainties that may cause actual

results to differ materially from those projected by such statements.

Such statements involve known and unknown risks, uncertainties

and other factors that may cause our actual results or our industry’s actual results, levels of activity, performance or

achievements to be materially different from the information expressed or implied by the forward-looking statements.

Factors that could cause actual results

to differ from those discussed in the forward-looking statements include, but are not limited to, the following:

● the duration, extent and severity of the COVID-19 pandemic, including its

effects on our business, operations and employees as well as its impact on our customers and distribution channels and on economies

and markets more generally;

● the competitive nature of our market;

● changes to Medicare, Medicaid, or private insurance reimbursement policies;

● supply chain disruptions that limit our ability to produce and deliver our products to patients;

● changes to state and federal health care laws;

● changes affecting the medical device industry;

● our ability to develop new sales channels for our products such as the home care distributor channel;

● our need to maintain regulatory compliance and to gain future regulatory approvals and clearances;

● new drug or pharmaceutical discoveries;

● general economic and business conditions;

● our ability to renew our line of credit or obtain additional credit as necessary;

● our ability to protect and expand our intellectual property portfolio;

● the risks associated with expansion into international markets;

● the risks associated with cyberattacks, data breaches, computer viruses and other similar security threats;

● the risks associated with our planned sales force expansion.

This list of factors is

not exhaustive, however, and these or other factors, many of which are outside of our control, could have a material adverse effect

on us and our results of operations.

Therefore, you should consider these risk factors with caution and form your own critical

and independent conclusions about the likely effect of these risk factors on our future performance.

Forward-looking statements

speak only as of the date on which the statements are made, and we undertake no obligation, and expressly disclaim any such obligation,

to update any forward-looking statement for any reason other than as required by law, even if new information becomes available

or other events occur in the future.

You should carefully review the disclosures and the risk factors described in this and other

documents we file from time to time with the Securities and Exchange Commission (the “SEC”), including our Annual Report

on Form 10-K for fiscal 2021.

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified

in their entirety by the cautionary statements set forth herein.

Quantitative and Qualitative Disclosures

About Market Risk.

As a smaller reporting company, we are not required

to provide disclosure pursuant to this Item.

and our anticipated revenues, expenses,

capital requirements and liquidity.

Words such as “anticipate,” “believe,” “continue,” “could,”

“estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,”

“potential,” “project,” “should,” “will,” “would,” and similar expressions,

including the negative of these terms, are intended to identify forward-looking statements but are not the exclusive means of

identifying such statements.

Although we believe these forward-looking statements are reasonable, they involve risks and uncertainties

that may cause actual results to differ materially from those projected by such statements.

Such statements involve known and

unknown risks, uncertainties and other factors that may cause our actual results or our industry’s actual results, levels

of activity, performance or achievements to be materially different from the information expressed or implied by the forward-looking

that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited

to, the following:

duration, extent and severity of the COVID-19 pandemic, including its effects on our

business, operations and employees as well as its impact on our customers and distribution

channels and on economies and markets more generally;

competitive nature of our market;

to Medicare, Medicaid, or private insurance reimbursement policies;

chain disruptions that limit our ability to produce and deliver our products to patients;

to state and federal health care laws;

affecting the medical device industry;

ability to develop new sales channels for our products such as the home care distributor

need to maintain regulatory compliance and to gain future regulatory approvals and clearances;

drug or pharmaceutical discoveries;

economic and business conditions;

ability to renew our line of credit or obtain additional credit as necessary;

ability to protect and expand our intellectual property portfolio;

risks associated with expansion into international markets;

risks associated with cyberattacks, data breaches, computer viruses and other similar

security threats;

risks associated with our planned sales force expansion.

list of factors is not exhaustive, however, and these or other factors, many of which are outside of our control, could have a

material adverse effect on us and our results of operations.

Therefore, you should consider these risk factors with caution and

form your own critical and independent conclusions about the likely effect of these risk factors on our future performance.

Forward-looking

statements speak only as of the date on which the statements are made, and we undertake no obligation, and expressly disclaim

any such obligation, to update any forward-looking statement for any reason other than as required by law, even if new information

becomes available or other events occur in the future.

You should carefully review the disclosures and the risk factors described

in this and other documents we file from time to time with the Securities and Exchange Commission (the “SEC”), including

our Annual Report on Form 10-K for fiscal 2021.

All forward-looking statements attributable to us or persons acting on our behalf

are expressly qualified in their entirety by the cautionary statements set forth herein.

and Qualitative Disclosures About Market Risk.

a smaller reporting company, we are not required to provide disclosure pursuant to this Item.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis