What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-14 compared with 2022-11-08 · 182 added, 145 removed, 177 unchanged (65% of the section changed)

8 unchanged sentences

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.

System”) that includes our 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

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.

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.

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

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

December 2022, we received 510(k) clearance of our newest generation SmartVest® Clearway® Airway Clearance System

(“Clearway”) from the U.S.

Food and Drug Administration and began a limited market release, with the expectation of

a full product launch this year in our third fiscal quarter which ends March 31, 2023.

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

20 unchanged sentences

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.

We believe the critical accounting policies that require the most significant estimates,

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

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

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

half of our fiscal year ending June 30, 2023 (“fiscal 2023”).

Our home care and institutional revenue for the three

months ended September 30, 2022 increased as compared to the three months ended September 30, 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, we believe that such measures could have a material adverse effect on our business.

observed increased changes to our supply chain timelines and increased material and shipping rates during the second half of fiscal

2022 and into the three months ended September 30, 2022.

The changes to our supply chain timelines resulted in a temporary

interruption that impacted product availability for certain customers in September 2022.

We do not anticipate this will have an

effect on our fiscal 2023 revenue.

We expect that material and shipping rates will remain elevated during fiscal 2023 relating to

supply chain availability and inflationary trends in electronic components and may extend to other components.

In certain instances,

we have purchased key electronic materials in advance to ensure adequate future supply and mitigate the risk of potential supply

chain disruptions.

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.

reduction or further interruption in any of our manufacturing processes could have a material adverse effect on our business.

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

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

remainder of fiscal 2023.

Our home care and institutional revenue for the three months ended December 31, 2022 increased as compared

to the three months ended December 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, we believe that such measures could have

a material adverse effect on our business.

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

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

an additional 90-day period beginning October 13, 2022.

an additional 90-day period beginning January 11, 2023.

January 30, 2023, the Biden administration announced that the COVID-19 national and public health emergency declarations will

end on May 11, 2023 (the “PHE End Date”), one month after the current PHE was previously set to expire, or April 11,

Without further action from the U.S.

federal government, we expect the CMS waiver will terminate no later than the PHE End

Date and we may experience a one-time delay in some percentage of our Medicare net revenue as we expect our average Medicare patient

referral to approval timeframe will extend to pre-COVID-19 pandemic timeframes and referrals with diagnoses not covered pre-COVID-19

pandemic may be cancelled or need to be submitted to CMS for an appeal.

We are executing our plans to mitigate the effects on

our net revenue resulting from the likely termination of the CMS waiver by hiring additional employees to increase capacity and

minimize the average timeframe to convert a Medicare patient referral to approval.

of Certain Macro-Economic Conditions and the Supply Chain on Our Business and Operations

observed increased lead times for certain components in our supply chain and increased material costs and shipping rates during

the second half of fiscal 2022 and into the six months ended December 31, 2022.

The changes to our supply chain lead times resulted

in a temporary interruption that impacted product availability for certain customers beginning in September 2022 and continuing

through December 2022.

We anticipate that these increased lead times and temporary interruption of supply have the potential to

continue through the second half of fiscal 2023.

If we are unable to procure components to meet our demand or if we extend delivery

lead-times to our customers, there may be an adverse impact to our revenue and, longer term, the potential of market share losses.

We are taking actions to expedite components and to identify and qualify alternate suppliers for certain components to minimize

any impact to our revenue and customer deliveries.

expect that material costs and shipping rates will remain elevated during the second half of fiscal 2023 relating to supply chain

availability and inflationary trends in electronic components and may extend to other components.

In certain instances, we have

purchased key electronic materials in advance to ensure adequate future supply and mitigate the risk of potential supply chain

It is possible that these macro-economic conditions and 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 further 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.

of Operations

revenues for the three months ended September 30, 2022 and 2021 are summarized in the table below.

Three Months Ended September 30,

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

Three Months Ended December 31,

Six Months Ended

Increase (Decrease)

Home Care Revenue

Home Care Distributor Revenue

Institutional Revenue

International Revenue

Total Revenue

Increase (Decrease)

Institutional

Home care distributor

International

care revenue .

Home care revenue increased by $348,000, or 3.7%, for the three months ended September 30, 2022 compared

to the same period in fiscal 2022.

The increase was primarily due to an increase in referrals and approvals.

The increase in referrals

was due to an increase in direct sales representatives.

The increase was slightly offset by

a temporary interruption in supply chain and associated operations in September 2022.

Home care revenue increased by $1,328,000, or 14.1%, for the three months ended December 31, 2022

compared to the same period in the prior year.

For the six months ended December 31, 2022, home care revenue was $20,364,000,

representing an increase of $1,676,000, or 9.0%, compared to the same period in the prior year.

The increase was primarily due

to an increase in referrals and approvals.

The increase in referrals was due to an increase in direct sales representatives and

was offset by a temporary interruption in supply chain and associated operations in the six months ended December 31, 2022.

CMS waiver continues to benefit the non-commercial Medicare portion of our home care revenue by increasing the number of referrals

and the approval percentage for non-covered diagnoses.

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

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

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 effective until January 2023.

potential to mitigate much of the impact of a CMS waiver expiration.

care distributor revenue .

Home care distributor revenue increased by $398,000, or 255.1%, for the three months

ended September 30, 2022 compared to the same period in fiscal 2022.

The revenue increase was due to increased demand from one

of our primary home care distribution partners.

Home care distributor revenue decreased by $51,000, or 13.2%, for the three months ended

December 31, 2022 compared to the same period in the prior year.

For the six months ended December 31, 2022, home care distributor

revenue was $890,000, an increase of $347,000, or 63.9%, compared to the same period in the prior year.

Home care distributor

sales are affected by the timing of distributor purchases that can cause significant fluctuations in reported revenue on a quarterly

The year-to-date revenue increase was due to increased demand from one of our primary home care distribution partners.

Institutional

Institutional revenue decreased by $58,000, or 12.9%, for the three months ended September 30, 2022 compared

to the same period in fiscal 2022.

Institutional revenue was $589,000, an increase of $256,000, or 76.9%, for the three months ended December 31,

2022 compared to the same period in the prior year.

For the six months ended December 31, 2022, institutional revenue was $980,000,

an increase of $198,000, or 25.3%, compared to the same period in the prior year.

The increase in the current year periods was

primarily due to increased capital sales to institutional customers.

International

International revenue decreased by $31,000, or 27.7%, for the three months ended September 30, 2022 compared

to the same period in fiscal 2022.

profit increased to $8,331,000, or 78.2% of net revenues, for the three months ended September 30, 2022, from $7,701,000, or 77.0%

of net revenues, in the same period in fiscal 2022.

The increase in gross profit dollars and percentage for the three months ended

September 30, 2022 was primarily due to increased revenue and operational efficiencies

partially offset by increased direct expenses and patient training related expenses due to increased face-to-face trainings.

International revenue was $72,000, a decrease of $52,000, or 41.9%, for the three months ended December

31, 2022 compared to the same period in the prior year.

For the six months ended December 31, 2022, international revenue was

$153,000, a decrease of $83,000, or 35.2%, compared to the same period in the prior year.

profit increased to $8,682,000, or 74.0% of net revenues, for the three months ended December 31, 2022, from $7,880,000, or 76.9%

of net revenues, in the same period in the prior year.

Gross profit increased to $17,013,000, or 76.0% of net revenues, for the

six months ended December 31, 2022, from $15,581,000, or 76.9% of net revenues, in the same period in the prior year.

in gross profit as a percentage of net revenues compared to the same period in the prior year was primarily due to increased material

costs and higher shipping expenses to expedite inventory purchases.

general and administrative expenses.

Selling, general and administrative (“SG&A”) expenses were $7,254,000

for the three months ended September 30, 2022, representing an increase of $1,202,000 or 17.7%, compared to the same period in

the prior year.

and compensation-related expenses increased by $671,000, or 15.9%, to $4,884,000 for the three months ended September 30, 2022,

compared to the same period in the prior year.

The increase was primarily due salaries and incentive compensation related to the

higher average number of sales, sales support and marketing personnel, and reimbursement personnel to process higher patient

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.

Field sales employees totaled 53 as of September 30, 2022, 44 of

which were direct sales representatives, compared to 51 field sales employees and 41 direct sales representatives as of September

meals and entertainment expenses increased $253,000, or 39.5%, to $894,000 for the three months ended September 30, 2022, compared

to the same period in the prior year.

The increase was primarily due to airfare, lodging and inflationary expenses for our annual

sales meeting as well a higher average number of direct sales representatives.

discretionary marketing expenses increased $80,000, or 46.2%, to $253,000 for the three months ended September 30, 2022, compared

to the same period in the prior year.

The increase was primarily due to an investment in direct-to-consumer and direct-to-physician

fees increased $75,000, or 5.5%, to $1,431,000 for the three months ended September 30, 2022, compared to the same period in the

Professional fees are primarily for services related to legal costs, shareowner services and reporting requirements,

information technology technical support and consulting fees.

The increase was primarily due to nonrecurring legal compliance fees

of approximately $400,000 incurred for a reimbursement-related project offset by a reduction in expenses related to

shareholder activism incurred during the three months ended September 30, 2021, which concluded with a cooperation agreement that

became effective in September 2021.

and $15,243,000 for the three and six months ended December 31, 2022, respectively, representing increases of $779,000 and $1,981,000,

or 12.0% and 14.9%, respectively, compared to the same periods in the prior year.

and compensation-related expenses were $4,940,000 and $9,884,000 for the three and six months ended December 31, 2022, respectively,

representing increases of $614,000 and $1,292,000, or 14.2% and 15.0%, respectively, compared to the same periods in the prior

The increase in the current year periods was primarily due to salaries and incentive compensation related to the higher

average number of sales, sales support, marketing, and reimbursement personnel to process higher patient referrals.

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.

Field sales employees

totaled 57 as of December 31, 2022, 48 of which were direct sales representatives, compared to 48 field sales employees and 39

direct sales representatives as of December 31, 2021.

meals and entertainment expenses were $719,000 and $1,632,000 for the three and six months ended December 31, 2022, respectively,

representing increases of $102,000 and $371,000, or 16.5% and 29.4%, respectively, compared to the same periods in the prior year.

The increase in the current year periods was due to a higher average number of direct sales representatives as well as increases

in airfare, lodging and inflationary expenses for our annual sales meeting in August 2022.

discretionary marketing expenses were $182,000 and $369,000 for the three and six months ended December 31, 2022, respectively,

representing a decrease of $29,000 and an increase of $4,000, or a decrease of 13.7% and an increase of 1.1%, respectively, compared

to the same periods in the prior year.

fees were $1,031,000 and $2,462,000 for the three and six months ended December 31, 2022, respectively, representing increases

of $94,000 and $264,000, or 10.0% and 12.0%, respectively, compared to the same periods in the prior year.

Professional fees are

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

support and consulting fees.

The increase in the six months ended December 31, 2022 was primarily due to nonrecurring legal compliance

fees of approximately $400,000 for a reimbursement-related project offset by a reduction in expenses related to shareholder activism

incurred during the three months ended September 30, 2021, which concluded with a cooperation agreement that became effective

in September 2021.

and development expenses .

Research and development (“R&D”) expenses decreased $78,000, or 20.7%, to

$298,000 for the three months ended September 30, 2022 compared to the same period in the prior year.

The decrease was

primarily due to reduced professional services costs associated with our next generation platform development.

expenses for the three months ended September 30, 2022 were 2.8% of revenue compared to 3.8% of revenue for the same period

in the prior year.

interest income decreased $5,000, or 55.6%, to $4,000 for the three months ended September 30, 2022, compared to the same period

in the prior year.

tax benefit was estimated at $33,000 for the three months ended September 30, 2022 and the income tax expense was estimated at

$108,000 for the three months ended September 30, 2021.

The effective tax rate was (68.8%) and 19.7% for the three months ended

September 30, 2022 and 2021, respectively.

Estimated income tax benefit for the three months ended September 30, 2022 included

a $44,000 discrete tax benefit related to the exercise of stock options.

The net impact of this discrete event created an income

The income tax expense for the three months ended September 30, 2021 included a discrete tax benefit of $20,000 related

to the exercise of stock options.

income for the three months ended September 30, 2022 was $81,000 compared to $439,000 for the same period in the prior year.

decrease in net income was primarily due to increased S&GA expenses related to our sales and reimbursement related investments

in revenue growth partially offset by increased gross profit.

Research and development (“R&D”) expenses were $153,000 and $452,000 for the three

and six months ended December 31, 2022, respectively, representing decreases of $176,000 and $253,000, or 53.5% and 35.9%, respectively,

compared to the same periods in the prior year.

The decrease was primarily due to reduced professional services costs associated

with our next generation Clearway development.

R&D expenses were 1.3% and 2.0% of revenue for the three and six months ended

December 31, 2022, respectively.

interest income for the three and six months ended December 31, 2022 was $7,000 and $11,000, respectively, compared to $6,000

and $15,000, respectively, for the same periods in the prior year.

tax expense was estimated at $304,000 and $271,000, and the effective tax rate was 23.7% and 20.4%, for the three and six months

ended December 31, 2022, respectively.

Estimated income tax expense for the three and six months ended December 31, 2022 includes

a discrete tax expense of $1,000 and a discrete tax benefit of $43,000, respectively, related to the exercise of stock options.

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 includes

a discrete tax benefit of $1,000 and $21,000, respectively, related to the exercise of stock options.

income for the three and six months ended December 31, 2022 was $977,000 and $1,058,000, respectively, compared to $838,000 and

$1,277,000 for the same periods in the prior year.

The increase in net income in the three months ended December 31, 2022 was

driven primarily by revenue growth while the decrease in net income in the six months ended December 31, 2022 was primarily due

to increased SG&A expenses related to our sales and reimbursement investments in revenue growth partially offset by increased

gross profit.

and Capital Resources

1 unchanged sentence

Flows from Operating Activities

the three months ended September 30, 2022, net cash used in operating activities was $1,694,000.

Cash flows provided by operating

activities consisted of net income of $81,000, an increase in non-cash expenses of $255,000, and a decrease in accounts receivable

These cash flows from operating activities were offset by a decrease in accrued compensation of $1,132,000, a decrease

in accounts payable and other accrued liabilities of $26,000, an increase in inventory of $500,000, an increase in contract assets

of $167,000, an increase in prepaid expenses and other assets of $125,000, and an increase in income tax receivable of $175,000.

decrease in accrued compensation was primarily due to the payment of annual incentives.

six months ended December 31, 2022, net cash used in operating activities was $330,000.

Cash flows provided by operating activities

consisted of net income of $1,058,000, non-cash expenses of $645,000, a decrease in prepaid expenses and other assets of $176,000,

and an increase in income tax payable of $79,000.

These cash flows from operating activities were offset by a decrease in accrued

compensation of $532,000, a decrease in accounts payable and other accrued liabilities of $711,000, an increase in accounts receivable

of $503,000, an increase in inventory of $321,000, and an increase in contract assets of $221,000.

Flows from Investing Activities

the three months ended September 30, 2022, cash used in investing activities was $256,000.

the six months ended December 31, 2022, cash used in investing activities was $717,000.

Cash used in investing activities consisted

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Flows from Financing Activities

the three months ended September 30, 2022, cash used in financing activities was $205,000, which consisted of $145,000 used for

our share repurchase program and $60,000 for taxes paid on net share settlement of stock option exercises.

the six months ended December 31, 2022, cash used in financing activities was $197,000.

Cash used in financing activities consisted

of $153,000 used for our share repurchase program and $60,000 for taxes paid on net share settlement of stock option exercises.

of Capital Resources

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Interest on borrowings on the line of credit accrues at the prime

rate (6.25% at September 30, 2022) less 1.00% and is payable monthly.

rate (7.5% at December 31, 2022) less 1.00% and is payable monthly.

There was no outstanding principal balance on the line of

credit as of September 30, 2022 or June 30, 2022.

credit as of December 31, 2022 or June 30, 2022.

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.

As of September 30, 2022, the maximum $2,500,000 was available under the line of credit.

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

Payment obligations under the line of

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

the three months ended September 30, 2022 and 2021, we spent $241,000 and $225,000, respectively, on property and equipment.

currently expect to finance planned equipment purchases with 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.

the six months ended December 21, 2022 and 2021, we spent $687,000 and $511,000, respectively, on property and equipment.

expect to finance planned equipment purchases with 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.

the impact of the COVID-19 pandemic and other factors such as inflation are difficult to predict, we believe our cash, cash equivalents

49 unchanged sentences

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;

to obtain reimbursement from Medicare, Medicaid, or private insurance payers for our

2 unchanged sentences

or raw material shortages, changes to lead times or significant price increases;

risks associated with our anticipated launch of Clearway;

changes to state and federal health care regulations;

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

ability to maintain regulatory compliance and to gain future regulatory approvals and

1 unchanged sentence

economic and business conditions or intense competition;

risks associated with our planned sales force expansion;

and component price inflation;

problems with our research and products;

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;

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

security threats;

affecting the medical device industry;

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

international health care regulation impacting current international business;

1 unchanged sentence

ability to protect and expand our intellectual property portfolio.

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

14 unchanged sentences

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