What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-08-27 compared with 2023-08-22 · 132 added, 178 removed, 150 unchanged (67% of the section changed)

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the smallest, and lightest generator on the market, and is designed with an intuitive touchscreen to simplify programing and everyday

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

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.

In 2022, we launched the SmartVest Clearway

with SmartVest Connect technology to adult pulmonary, pediatric and cystic fibrosis patients for use in the home.

We have marketed

the SmartVest System and its predecessor products since 2000 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, ALS, and patients with post-surgical complications or who are ventilator dependent or

have other conditions involving excess secretion and impaired mucus transport.

Our products are sold in both the homecare market and the hospital market.

The SmartVest SQL has been sold in the domestic

homecare market since 2014.

In 2015, we launched the SmartVest SQL into hospital 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.

In 2022, we launched the SmartVest

Clearway to adult pulmonary, pediatric and cystic fibrosis patients for use in the home.

We have marketed the SmartVest System

and its predecessor products since 2000 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, ALS, 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

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

employ a direct-to-patient and provider model, through which we obtain patient referrals from clinicians, manage insurance claims

on behalf of our patients and their clinicians, deliver our solutions to patients and train them on proper use in their homes.

This model allows us to directly approach patients and clinicians, whereby we disintermediate the traditional durable medical

equipment channel and capture both the manufacturer and distributor margins.

We have engaged a limited number of regional durable

medical equipment distributors focused on respiratory therapies as an alternate sales channel.

Revenue through this channel was

3% of our total revenues in fiscal 2023.

have primarily employed a direct-to-patient and provider model, through which we obtain patient referrals from clinicians, manage

insurance claims on behalf of our patients and their clinicians, deliver our solutions to patients and train them on proper use

in their homes.

This model allows us to directly approach patients and clinicians, whereby we disintermediate the traditional

durable medical equipment channel and capture both the manufacturer and distributor margins.

We have engaged a limited number

of regional durable medical equipment distributors focused on respiratory therapies as an alternate sales channel.

key growth strategies for fiscal 2025 are to accelerate our revenue growth by taking market share and expanding the addressable

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Actions to support accelerating

our growth include the following:

our sales force in targets geographies with high potential, adding an additional five

our revenue growth include the following:

our sales force in targets geographies with high potential, adding an additional three

territories and direct sales reps;

Electromed brand awareness through direct-to-consumer and physician marketing, and peer

SmartVest brand awareness through direct-to-consumer and physician marketing, and peer

to peer education;

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of the SmartVest System for patients.

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 (“PHE”).

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

federal government’s declaration of a PHE, the Centers for Medicare & Medicaid Services (“CMS”) implemented

several temporary rule changes and waivers to allow prescribers to best treat patients during the period of the PHE.

These waivers

became effective on March 1, 2020.

Clinical indications and documentation typically required were not enforced for respiratory-related

products, including the SmartVest System (solely with respect to Medicare patients).

January 30, 2023, the Biden administration announced that the COVID-19 national and PHE declarations will end on May 11, 2023.

The CMS waiver was not extended and expired on May 11, 2023.

We believe that we were able to mitigate the potential effects on

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

the average timeframe to convert a Medicare patient referral to approval and re-educating clinicians on Medicare requirements

for reimbursement of HFCWO.

did not receive any direct financial assistance from any government program during fiscal 2022 or fiscal 2023 in connection with

COVID-19 relief measures.

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

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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 June 2023.

We anticipate

that these increased lead times and temporary interruption of supply have the potential to continue through the first half of

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

We expect that material costs and shipping rates will remain elevated during the first half of fiscal 2024 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 these macro-economic conditions 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

that impacted product availability for certain customers beginning in September 2022 and continued through June 2023.

2024, we experienced a return to normal supply chain lead times through renegotiated supplier agreements and improved long-term

material requirements planning.

We expect that material costs and shipping rates will continue to be a challenge during fiscal

2025 relating to supply chain availability and inflationary trends in electronic components and may extend to other components.

In certain instances, we have purchased key materials in advance to ensure adequate future supply and mitigate the risk of potential

supply chain disruptions.

It is possible that these macro-economic conditions 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

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

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and liabilities, and our reported revenues and expenses.

We update these estimates, assumptions, and judgment as appropriate.

We update these estimates, assumptions, and judgments as appropriate.

Some of our accounting policies and estimates require us to exercise significant judgment in selecting the appropriate assumptions

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to recondition and resell returned SmartVest System units.

Returned units are typically reconditioned and resold and continue

to be used for demonstration equipment and warranty replacement parts.

Returned units are typically reconditioned and resold or used for demonstration

equipment and warranty replacement parts.

are stated at the lower of cost (first-in, first-out method) or net realizable value.

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Estimated inventory to be returned

is based on how many devices that have shipped that are expected to be returned prior to completion of the insurance reimbursement

Company provides a lifetime warranty on its products to the prescribed patient for sales within the U.S.

and a three-year warranty

for all institutional sales and sales to individuals outside the U.S.

The Company estimates the costs that may be incurred under

its warranty and records a liability in the amount of such costs at the time the product is shipped.

Factors that affect the Company’s

warranty reserve include the number of units shipped, historical and anticipated rates of warranty claims, the product’s

useful life and cost per claim.

The Company periodically assesses the adequacy of its recorded warranty reserve and adjusts the

amounts as necessary.

payment awards consist of options to purchase shares of our common stock issued to employees.

Expense for share-based payment

awards consist of options to purchase shares of our common stock issued to employees for services.

Expense for options is estimated

using the Black-Scholes pricing model at the date of grant and expense for restricted stock is determined by the closing price

on the day the grant is made.

Expense is recognized on a straight-line basis over the requisite service or vesting period of the

award, or at the time services are provided for non-employee awards.

In determining the fair value of options, we make various

assumptions using the Black-Scholes pricing model, including expected risk-free interest rate, stock price volatility, and life.

See Note 8 to the Financial Statements included in Part II, Item 8, of this Annual Report on Form 10-K for a description of these

is based on the number of devices that have shipped that are expected to be returned prior to completion of the insurance reimbursement

Company provides a lifetime warranty on its products to the prescribed patient for homecare sales within the U.S.

five-year warranty for all homecare distributor, hospital and other sales.

The Company estimates the costs that may be incurred

under its warranty and records a liability in the amount of such costs at the time the product is shipped.

Factors that affect

the Company’s warranty reserve include the number of units shipped, historical and anticipated rates of warranty claims,

the product’s useful life and cost per claim.

The Company periodically assesses the adequacy of its recorded warranty reserve

and adjusts the amounts as necessary.

payment awards consist of options to purchase shares of our common stock issued to employees, restricted stock awards, and performance-based

Expense for options is estimated using the Black-Scholes pricing model at the date of grant and expense for restricted

stock is determined by the closing price on the day the grant is made.

Expense is recognized on a graded vesting basis over the

requisite service or vesting period of the award, or at the time services are provided for non-employee awards.

Expenses for performance-based

awards with market conditions is estimated using the Monte-Carlo pricing model at the date of grant and expense is recognized

on a straight-line basis.

In determining the fair value of options and performance-based awards with market conditions, we make

various assumptions using the Black-Scholes and Monte-Carlo pricing models respectively, including expected risk-free interest

rate, stock price volatility, and life.

See Note 8 to the Financial Statements included in Part II, Item 8, of this Annual Report

on Form 10-K for a description of these assumptions.

of Operations

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for the fiscal years ended June 30, 2024 and 2023 are summarized in the table below.

Years Ended June 30,

Home Care Revenue

Institutional Revenue

Home Care Distributor Revenue

International Revenue

Fiscal Years Ended June 30,

Increase (Decrease)

Homecare Revenue

Hospital Revenue

Homecare Distributor Revenue

Other Revenue

Total Revenue

Care Revenue.

Home care revenue increased by $5,941,000, or 15.6%, in fiscal 2023 compared to fiscal 2022.

The revenue increase

compared to fiscal 2022 was primarily due to increases in referrals and approvals.

The increase in referrals was primarily due

to an increase in direct sales representatives, increased sales representative productivity driven by increased clinic access

and patient flow, our sales team refining their selling process and clinic targeting methodology, and benefits of the CMS waiver

on the non-commercial Medicare portion of our home care revenue.

Additionally, we benefitted from a Medicare allowable rate increase

that took effect on January 1, 2023.

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 return

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

quarter homecare revenue impact of the CMS waiver expiration on May 11, 2023.

Institutional

Institutional revenue increased by $420,000, or 25.3%, in fiscal 2023 compared to fiscal 2022.

Institutional revenue

includes sales to group purchasing organizations, rental companies and other institutions.

The revenue increase was due to increased

capital purchases and stronger consumable volumes compared to fiscal 2022, as hospitals resumed utilization of HFCWO protocols

after reducing utilization early in the COVID-19 pandemic.

Care Distributor Revenue.

Home care distributor revenue increased by $144,000, or 9.8%, in fiscal 2023 compared to fiscal

The revenue increase in fiscal 2023 was due to increased demand from one of our primary home care distribution partners.

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

International revenue decreased by $97,000, or 18.6%, in fiscal 2023 compared to fiscal 2022.

International revenue

growth is not currently a primary focus for us, and our corporate resources are focused on supporting and maintaining our current

international distributors.

Homecare revenue increased by $5,558,000, or 12.6%, in fiscal 2024 compared to fiscal 2023.

The increase in revenue

was due to an increase in direct sales representatives, higher quality referrals, and efficiencies recognized within our reimbursement

Efficiencies were due to recent investments aimed at increasing referral conversion rates and decreasing conversion

processing time resulting in recognizing revenue on more units in fiscal 2024.

Hospital revenue increased by $455,000, or 21.9%, in fiscal 2024 compared to fiscal 2023.

Hospital revenue includes

sales to hospitals, rental companies and other institutions.

The increase was primarily

due to an increase in sales representatives focused on the hospital market as well as increased capital and disposable demand.

Distributor Revenue.

Homecare distributor revenue increased by $234,000, or 14.5%, in fiscal 2024 compared to fiscal 2023.

The revenue increase in fiscal 2024 was due to increased demand from one of our primary homecare distribution partners.

to a limited number of home medical equipment distributors, who in turn sell our SmartVest System in the U.S.

homecare market.

Other revenue increased by $402,000, or 94.8%, in fiscal 2024 compared to fiscal 2023.

The increase in other revenue

was primarily due to increased demand of international distributor purchases and purchases by customers that do not fall within

the other markets described above.

profit increased to $41,726,000 in fiscal 2024, or 76.3% of net revenues, from $36,519,000 or 76.0% of net revenues, in fiscal

The increase in gross profit was primarily related to increases in domestic home care revenue including the Medicare allowable

rate increase that took effect in January 2023.

have a goal of improving our gross margin percentage over time due to cost savings initiatives associated with Clearway, supplier

optimization, and gaining operating leverage on higher volumes.

The increase in gross profit was primarily due to increased revenue in fiscal 2024, decreased shipping expenses and increased

material costs in the prior year to expedite inventory purchases which did not recur in the current year.

General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses were $31,595,000

in fiscal 2023, representing an increase of $4,481,000 or 16.5% from $27,114,000 in fiscal 2022.

general and administrative (“SG&A”) expenses were $34,489,000 in fiscal 2024, representing an increase of $2,894,000

or 9.2% from $31,595,000 in fiscal 2023.

payroll and compensation-related expenses including health insurance benefits and other compensation increased by $2,885,000,

or 14.0%, to $23,437,000 in fiscal 2024, compared to $20,552,000 in fiscal 2023.

The increase in the current year 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.

Field sales employees totaled 55, of which 46 were direct sales, as of June 30, 2023, compared to 52 as

of June 30, 2022, of which 43 were direct sales.

We expect to continue to expand our salesforce to align with our revenue growth

and legal fees, including recruiting and insurance expenses, increased by $859,000, or 19.4%, to $5,284,000 in fiscal 2023, compared

in the current year was primarily due to increases in share-based compensation, salaries, and incentive compensation related to

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

We have also continued to provide regular merit-based increases for our employees and are regularly benchmarking our compensation

ranges including share-based compensation 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 62, of which 53 were direct sales, as of June 30, 2024, compared

to 55 as of June 30, 2023, of which 46 were direct sales.

We expect to continue to expand our salesforce to align with our revenue

growth projections.

meals and entertainment expenses increased $352,000, or 11.8%, to $3,342,000 for fiscal 2024 compared to $2,990,000 in fiscal

The increase in the current year was primarily due to a higher average number of direct sales representatives, higher travel

costs, an increased number of sales territories and a mid-year sales meeting held in fiscal 2024.

and legal fees, including recruiting and insurance expenses, decreased by $456,000, or 8.6%, to $4,828,000 in fiscal 2024, compared

to $5,284,000 in fiscal 2023.

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information technology technical support and consulting fees.

The increase in the current year was primarily due to an increased

investment in our system infrastructure and increased clinical study costs.

We continue to make key investments in systems infrastructure

including implementing a new enterprise resource planning 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.

The decrease was primarily related to fiscal 2023 costs such as

legal and consulting costs associated with the termination of the Public Health Emergency for COVID-19, recruiting costs for multiple

senior leadership positions and legal fees related to a reimbursement project, all of which did not recur in fiscal 2024.

discretionary marketing expenses increased by $452,000, or 43.7% to $1,487,000 in fiscal 2024, compared to $1,035,000 in fiscal

The increase in the current year was primarily due to discretionary investment in market research, physician marketing,

and peer to peer education engagement strategies.

meals and entertainment expenses increased $422,000, or 16.4%, to $2,990,000 for fiscal 2023 compared to $2,568,000 in fiscal

The increase in the current year period was primarily due to an increase in headcount and our annual sales meeting expenses.

The increase in the current year was primarily due to an investment in market research, direct-to-consumer and direct-to-physician

and Development Expenses

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The decrease in the

current year was primarily due to reduced professional consulting costs associated with our next generation platform development

R&D expenses were 1.9% of revenue in fiscal 2023 compared to 3.3% of revenue in fiscal 2022.

We expect R&D

spending to be between 1.0% and 2.0% of revenue during fiscal 2024.

current year was primarily due to reduced costs associated with our SmartVest Clearway platform

development in the prior year which has now been launched into the Homecare and Hospital markets .

interest income was approximately $455,000 in fiscal 2024 compared to net interest income of $78,000 in fiscal 2023.

in the current year was primarily due to higher interest rates earned on our cash deposits despite lower overall cash balances

in the current year.

in the current year was primarily due to increased savings rates on higher cash balances.

tax expense in fiscal 2024 was $1,886,000, which includes a current tax expense of $2,457,000 and a deferred benefit of $571,000.

Estimated income tax expense includes a current federal and state tax benefit of approximately $103,000 related to the excess

tax benefit for fully vested stock options and non-qualified stock options that were exercised during the period.

tax expense in fiscal 2023 was $920,000, which includes a current tax expense of $963,000 and a deferred benefit of $43,000.

income tax expense includes a current federal and state tax benefit of approximately $250,000 related to the excess tax benefit

for fully vested stock options and non-qualified stock options that were exercised during the period.

tax expense in fiscal 2022 was $692,000, which included a current tax expense of $1,181,000 and a deferred benefit of $489,000.

Estimated income tax expense included a current federal and state tax benefit of approximately $12,000 related to excess tax benefit

for fully vested stock options and non-qualified stock options that were exercised during the period.

effective tax rates were 26.8% and 22.5% for fiscal 2024 and 2023, respectively.

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income for fiscal 2024 was $5,150,000, compared to net income of $3,166,000 in fiscal 2023.

The increase in current year net income

was primarily due to stronger home care and distributor revenue growth.

The increase of $1,984,000, or 62.7%

in the current year net income was primarily due to revenue growth, decreased professional fees, and increased interest income.

and Capital Resources

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Flows from Operating Activities

Net cash provided by operating activities in fiscal 2023 was $1,315,000.

Cash flows from operating activities consisted of net income of $3,166,000, non-cash expenses of approximately $1,278,000, a decrease in prepaid expenses of $202,000 an increase in tax payable of approximately $285,000 and a $696,000 increase in accounts payable and accrued liabilities, and accrued compensation.

These cash flows from operating activities were offset by a $3,078,000 increase in accounts receivable, an increase in inventory of $1,033,000, and a $201,000 increase in contract assets.

The increase in accounts receivable was primarily due to an increase in the Medicare portion of our home care business, which has a 13-month payment cycle.

The increase in inventory was primarily due to an increase in raw materials associated with the launch of Clearway.

Our cash receipt collection remains strong, with the three months ended June 30, 2023, period having the highest cash receipt collections in our company's history, building upon the prior record that was set in the previous quarter.

cash provided by operating activities in fiscal 2024 was $9,067,000.

Cash flows from operating activities consisted of net income

of $5,150,000, non-cash expenses of approximately $1,962,000, a decrease in prepaid expenses and other assets of $1,321,000,

a decrease in accounts receivable of $797,000, a decrease in inventories of $459,000 and an increase in accrued compensation of

These cash flows from operating activities were offset by a decrease in accounts payable and accrued liabilities of

$1,206,000, an increase of $232,000 in contract assets and a decrease in income tax payable of $59,000.

Flows from Investing Activities

cash used in investing activities in fiscal 2024 was approximately $395,000.

Cash used in investing activities consisted of

approximately $1,648,000 in expenditures for property and equipment, approximately $1,083,000 for software and $565,000 for equipment,

Cash used in investing activities consisted of approximately

$287,000 in expenditures for property and equipment, which included approximately $62,000 for software and $225,000 for equipment,

and $108,000 in payments for patent and trademark costs.

Flows from Financing Activities

cash used in financing activities in fiscal 2023 was approximately $380,000, consisting of $153,000 used for our share repurchase

program and $310,000 for taxes paid on net share settlements of stock option exercises offset by $83,000 of cash provided by the

issuance of common stock upon exercise of options.

cash provided by financing activities in fiscal 2024 was approximately $36,000, consisting of $311,000 received from the issuance

of common stock upon the exercise of options, partially offset by $275,000 used for our share repurchase program.

of Capital Resources

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Based on our current operational performance, we believe our working capital of approximately

$29,734,000 and available borrowings under our existing credit facility will provide adequate liquidity for fiscal 2024.

$36,496,000 and available borrowings under our existing credit facility will provide sufficient liquidity to meet our anticipated

working capital and other liquidity needs for at least the next twelve months from the date of this report.

December 13, 2023, we renewed our credit facility, which provides us with a revolving line of credit.

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fiscal 2024 and 2023, we spent approximately $287,000 and $1,648,000, 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.

We 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 impact of macroeconomic conditions and other factors such as inflation are difficult to predict, we believe our cash, cash

equivalents and cash flows from operations will be sufficient to meet our working capital, capital expenditure, operational cash

requirements for fiscal 2024.

requirements for at least the next twelve months

from the date of this report .

Standards Recently Issued But Not Yet Adopted by the Company

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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-K

Item 7. Management’s Discussion and Analysis