Electromed, Inc. 10-K

Item 5. Market For Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information Our common stock is listed on the NYSE American under the symbol “ELMD”. As of August 20, 2025, there were 45 registered holders of our common stock. 12 Table of Contents Dividends We have never paid cash dividends on any of our shares of common stock. We currently intend to first retain any earnings for use in operations and do not anticipate paying cash dividends to our shareholders in the foreseeable future. The agreement governing our credit facility restricts our ability to pay dividends. Recent Sales of Unregistered Equity Securities None. Purchases of Equity Securities by the Company and Affiliated Purchasers On March 6, 2025, we announced the approval of a stock repurchase authorization. Under the authorization, the Company could repurchase up to $5,000,000 shares of common stock. A total of 220,899 shares were repurchased and retired for a total cost of $5,000,000, or $22.63 per share. As of June 30, 2025, this repurchase authorization was exhausted in its entirety. The following table sets forth information concerning purchases of shares of our common stock for the three months ended June 30, 2025: Total Number of Approximate Dollar Value Average Shares Purchased as Part of Shares that May Yet Total Number of Price Paid of Publicly Announced be Purchased Under the Period Shares Purchased per Share Plans or Programs Plans or Programs April 1 – April 30, 2025 90,228 $ 22.52 90,228 $ 1,518,000 May 1 – May 31, 2025 70,635 21.49 70,635 $ — June 1 – June 30, 2025 (1) 1,222 21.99 — $ — Total 162,085 $ 22.07 160,863 (1) Consists of 1,222 shares forfeited to the Company in connection with the vesting of restricted stock awards that were outstanding under the 2017 Omnibus Incentive Plan. The average price paid per share reflects the closing price of our common stock on the date of forfeiture. Item 6. [Reserved]. 13 Table of Contents Item 7. 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 financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K. The forward-looking statements include statements that reflect management ’ s good faith beliefs, plans, objectives, goals, expectations, anticipations and intentions with respect to our future development plans, capital resources and requirements, results of operations, and future business performance. Our actual results could differ materially from those anticipated in the forward-looking statements included in this discussion as a result of certain factors, including, but not limited to, those discussed in the section entitled “ Information Regarding Forward-Looking Statements ” immediately preceding Part I of this Annual Report on Form 10-K. Overview Electromed develops and provides innovative airway clearance products applying HFCWO technologies in pulmonary care for patients of all ages. We manufacture, market and sell products that provide HFCWO, including the SmartVest System that includes our newest generation SmartVest Clearway, previous generation SmartVest SQL and related products, to patients with compromised pulmonary function. The SmartVest Clearway is an updated and modern approach to HFCWO focused on an enhanced patient experience and proven patient outcomes. The product delivers effective 360 o oscillatory pressure through our proprietary rapid inflate-deflate technology which improves the patient’s ability to breathe deeply during therapy. SmartVest Clearway delivers a sleek and lightweight generator and is designed with an intuitive touchscreen to simplify programing and everyday use. 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. 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. We 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 HME distributors and capture both the manufacturer and distributor margins. We have engaged a limited number of regional HME distributors focused on respiratory therapies as an alternate sales channel. Our key growth strategies for fiscal 2026 are to accelerate our revenue growth by taking market share and expanding the addressable population for the largest and fastest growing segments of the market: adult pulmonology/bronchiectasis. Actions to support accelerating our revenue growth in this area include the following: ● Expand our sales force in geographies with high potential, adding an additional four territories and direct sales reps; ● Increase SmartVest brand awareness through direct-to-consumer and physician marketing, and peer-to-peer education; ● Provide best-in-class customer care and support; and ● Develop and promulgate the body of bronchiectasis clinical evidence to increase physician adoption of the SmartVest System for patients. Impacts of Certain Macro-Economic Conditions and the Supply Chain on Our Business and Operations We expect that component and raw material costs will be a challenge in fiscal 2026 relating to supply chain availability and inflationary trends in electronic components and may extend to other components resulting from uncertain trade regulations such as tariffs. 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 governments. A reduction or further interruption in any of our manufacturing processes or significant changes in trade regulations could have a material adverse effect on our business. Any significant increases to our raw material or shipping costs could reduce our gross margins. 14 Table of Contents Critical Accounting Estimates During the preparation of our financial statements, we are required to make estimates, assumptions and judgment that affect reported amounts. Those estimates and assumptions affect our reported amounts of assets and liabilities, our disclosure of contingent assets and liabilities, and our reported revenues and expenses. 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 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. The following is a summary of our primary critical accounting policies and estimates. See also Note 1 to the Financial Statements, included in Part II, Item 8, of this Annual Report on Form 10-K. Revenue Recognition Revenue is measured based on consideration specified in the contract with a customer, adjusted for any applicable estimates of variable consideration and other factors affecting the transaction price, including consideration paid or payable to customers and significant financing components. Revenue from all customers is recognized when a performance obligation is satisfied by transferring control of a distinct good or service to a customer. Individual promised goods and services in a contract are considered a performance obligation and accounted for separately if the individual good or service is distinct (i.e., the customer can benefit from the good or service on its own or with other resources that are readily available to the customer and the good or service is separately identifiable from other promises in the arrangement). If an arrangement includes multiple performance obligations, the consideration is allocated between the performance obligations in proportion to their estimated standalone selling price, unless discounts or variable consideration is attributable to one or more but not all the performance obligations. Costs related to products delivered are recognized in the period incurred, unless criteria for capitalization of costs under Accounting Standards Codification (“ASC”) 340-40, “Other Assets and Deferred Costs,” or the requirements under other applicable accounting guidance are met. The Company includes shipping and handling fees in net revenues. Shipping and handling costs associated with the shipment of the Company’s SmartVest System after control has transferred to a customer are accounted for as a fulfillment cost and are included in cost of revenues. We request that customers return previously sold units that are no longer in use to us to limit the possibility that such units would be resold by unauthorized parties or used by individuals without a prescription. The customer is under no obligation to return the product; however, we do reclaim many previously sold units upon the discontinuance of patient usage. We are certified to recondition and resell returned SmartVest System units. Returned units are typically reconditioned and resold or used for demonstration equipment and warranty replacement parts. Inventory Valuation Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. Work in process and finished goods are carried at standard cost, which approximates actual cost, and includes materials, labor and allocated overhead. The reserve for obsolescence is determined by analyzing the inventory on hand and comparing it to expected future sales. Estimated inventory to be returned is based on the number of devices that have shipped that are expected to be returned prior to completion of the insurance reimbursement process. 15 Table of Contents Warranty Reserve The Company provides a lifetime warranty on its products to the prescribed patient for homecare sales within the U.S. and a one to 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 routinely assesses the adequacy of its recorded warranty reserve and adjusts the amounts as necessary. Share-Based Compensation Share-based payment awards consist of options to purchase shares of our common stock, restricted stock awards, restricted stock units, and performance-based awards. 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 are 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, 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. Results of Operations Fiscal Year Ended June 30, 2025 Compared to Fiscal Year Ended June 30, 2024 Revenues Revenue for the fiscal years ended June 30, 2025, and 2024 are summarized in the table below. Fiscal Year Ended June 30, 2025 2024 Increase (Decrease) Homecare Revenue $ 57,287,000 $ 49,503,000 $ 7,784,000 15.7 % Hospital Revenue 3,140,000 2,535,000 605,000 23.9 % Homecare Distributor Revenue 2,928,000 1,852,000 1,076,000 58.1 % Other Revenue 645,000 826,000 (181,000 ) (21.9 )% Total Revenue $ 64,000,000 $ 54,716,000 $ 9,284,000 17.0 % Homecare Revenue. Homecare revenue increased by $7,784,000, or 15.7%, in fiscal 2025 compared to fiscal 2024. The increase in revenue was due to an increase in direct sales representatives and higher net revenues per approval. Hospital Revenue. Hospital revenue increased by $605,000, or 23.9%, in fiscal 2025 compared to fiscal 2024. 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 higher capital and disposable demand. Homecare Distributor Revenue. Homecare distributor revenue increased by $1,076,000, or 58.1%, in fiscal 2025 compared to fiscal 2024. The revenue increase in fiscal 2025 was due to an increased number of homecare distribution partners. We sell to a limited number of home medical equipment distributors, who in turn sell our SmartVest System in the U.S. homecare market. 16 Table of Contents Other Revenue. Other revenue decreased by $181,000, or 21.9%, in fiscal 2025 compared to fiscal 2024. The decrease in other revenue was primarily due to decreased demand of international distributor purchases and purchases by customers that do not fall within the other markets described above. Gross Profit Gross profit increased to $49,971,000 in fiscal 2025, or 78.1% of net revenues, from $41,726,000 or 76.3% of net revenues, in fiscal 2024. The increase in gross profit and gross margin was primarily due to increased revenue and higher net revenue per device. Operating Expenses Selling, General and Administrative Expenses Selling, general and administrative (“SG&A”) expenses were $39,315,000 in fiscal 2025, representing an increase of $4,826,000 or 14.0% from $34,489,000 in fiscal 2024. SG&A payroll and compensation-related expenses including health insurance benefits and other compensation increased by $3,162,000, or 13.5%, to $26,599,000 in fiscal 2025, compared to $23,437,000 in fiscal 2024. The increase in the current year was primarily due to the accelerated recognition of share-based compensation associated with the vesting of performance-based equity awards and 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 55 were direct sales, as of June 30, 2025, compared to 62 as of June 30, 2024, of which 53 were direct sales. We expect to continue to expand our salesforce to align with our revenue growth projections. Travel, meals and entertainment expenses increased $577,000, or 17.3%, to $3,919,000 for fiscal 2025 compared to $3,342,000 in fiscal 2024. The increase in the current year was primarily due to an increased number of sales territories and higher travel costs. Professional and legal fees, including recruiting and insurance expenses, increased by $98,000, or 2.0%, to $4,926,000 in fiscal 2025, compared to $4,828,000 in fiscal 2024. Professional fees include services related to legal costs, shareowner services and reporting requirements, board of directors compensation, information technology technical support and consulting fees. The increase was primarily related to expense recognition associated with the annual equity compensation payable to non-employee directors. Total discretionary marketing expenses decreased by $66,000, or 4.4% to $1,421,000 in fiscal 2025, compared to $1,487,000 in fiscal 2024. The decrease in the current year was primarily due to a one-time investment in market research in the prior year that did not recur in fiscal 2025. Research and Development Expenses R&D expenses increased by $340,000, or 51.8%, to $996,000 in fiscal 2025 compared to $656,000 in fiscal 2024. The increase in the current year was primarily due to increased average headcount and external spend related to product enhancements and sustaining engineering. 17 Table of Contents Operating Income Operating income increased by $3,079,000 or 46.8% to 9,660,000 in fiscal 2025, compared to $6,581,000 in fiscal 2024. The increase in operating income was primarily due to increases in net revenues and gross profit. Interest Income, net Net interest income was approximately $624,000 in fiscal 2025 compared to net interest income of $455,000 in fiscal 2024. The increase in the current year was primarily due to higher cash balances. Income Tax Expense Income tax expense in fiscal 2025 was $2,747,000, which includes a current tax expense of $3,057,000, and a deferred benefit of $310,000. Estimated income tax expense includes a current federal and state tax benefit of approximately $1,004,000 primarily related to the excess tax benefit for non-qualified stock options that were exercised during the period. Income 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, primarily related to the excess tax benefit for non-qualified stock options that were exercised during the period. The effective tax rates were 26.7% and 26.8% for fiscal 2025 and 2024, respectively. The effective tax rates differ from the statutory federal rate because of state income taxes and other permanent items that are non-deductible for tax purposes relative to the amount of taxable income. Net Income Net income for fiscal 2025 was $7,537,000 compared to net income of $5,150,000 in fiscal 2024. The increase of $2,387,000, or 46.3%, in the current year net income was primarily due to increased net revenues and gross profit. Liquidity and Capital Resources Cash Flows and Sources of Liquidity Cash Flows from Operating Activities Net cash provided by operating activities in fiscal 2025 was $11,393,000. Cash flows from operating activities consisted of net income of $7,537,000, non-cash expenses of approximately $4,133,000, an increase in accounts payable and accrued liabilities of $1,650,000, an increase in accrued compensation of $1,186,000, and a decrease in inventories of $175,000. These cash flows from operating activities were offset by an increase in accounts receivable of $1,327,000, an increase in prepaid expenses and other assets of $959,000, an increase in income tax receivable of $685,000, and an increase in contract assets of $317,000. Cash Flows from Investing Activities Net cash used for investing activities in fiscal 2025 was approximately $306,000. Cash used for investing activities consisted of approximately $262,000 in expenditures for property and equipment and $44,000 in payments for patent and trademark costs. Cash Flows from Financing Activities Net cash used for financing activities in fiscal 2025 was approximately $11,880,000, consisting of $10,000,000 used for the repurchase of our common stock and $2,278,000 used for tax payments on net share settlement of stock awards, partially offset by cash received from the issuance of common stock upon the exercise of options of $398,000. 18 Table of Contents Adequacy of Capital Resources Our primary working capital requirements relate to adding employees to our sales force and support functions, continuing infrastructure investments, 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 approximately $34,614,000 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. We maintain a credit facility that was last amended in December 2023, which provides us with a revolving line of credit. Interest on borrowings on the line of credit accrues at the prime rate (7.50% as of June 30, 2025) less 1.0% and is payable monthly. There was no outstanding principal balance on the line of credit as of June 30, 2025, or June 30, 2024. The amount eligible for borrowing on the line of credit is limited to the lesser of $2,500,000 or 57.0% of eligible accounts receivable, and the line of credit expires on December 18, 2025, if not renewed prior to that date. As of June 30, 2025, 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 non-financial 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. During fiscal 2025 and 2024, we spent approximately $262,000 and $287,000, respectively, on property and equipment. 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. While the impact of macroeconomic conditions and other factors such as inflation and trade regulations 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 at least the next twelve months from the date of this report. Accounting Standards Recently Issued But Not Yet Adopted by the Company See Note 1 of the Notes to our Financial Statements in this Annual Report on Form 10-K for information on new accounting standards adopted in fiscal 2025 or pending adoption. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. As a smaller reporting company, we are not required to provide disclosure pursuant to this item. 19 Table of Contents