Electromed, Inc. (ELMD) Q2 2017 Earnings Report, Transcript and Summary

Greetings and welcome to the Electromed, Inc.’s Second Quarter Fiscal 2017 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to introduce your host Kalle Ahl, The Equity Group. Thank you, Mr. Ahl. You may begin.

Thank you, Audrey, and good morning, everyone. Electromed’s second quarter fiscal 2017 financial results were released yesterday after the market close. A copy of the earnings release can be found under the Investor Relations section of the Company’s website at www.smartvest.com. As a matter of formality, I need to remind participants that remarks made by management during the course of this call may contain forward-looking statements about the Company’s results and plans. Such statements are subject to risks and uncertainties that could cause actual performance or achievements to be materially different from those projected. The words belief, expect, plan, intend, estimate, anticipate, should or could and similar expressions or words that are used to identify forward-looking statements. But their absence does not mean a statement is not forward-looking. In addition, any projections as to the Company’s future performance represents managements estimate as of today, February 8, 2017. You should not place undue reliance on these forward-looking statements. We expressly do not undertake any duty to update forward-looking statements whether as a result of new information, future events or otherwise. We ask that you please refer to the Company’s SEC filings for further guidance on this matter. Joining us from Electromed this morning are Ms. Kathleen Skarvan, President and Chief Executive Officer; and Mr. Jeremy Brock, Chief Financial Officer. Kathleen will begin with some openings remarks after which Jeremy will present a summary of the Company’s second quarter fiscal 2017 financial results and then we’ll open the call for questions. Now, it’s my pleasure to turn the call over to Kathleen.

Thank you, Kalle. Good morning, everyone, and thank you for joining us to discuss Electromed’s second quarter fiscal 2017 results. This quarter we reported record net revenue of $6.4 million despite incurring a onetime revenue reduction of $212,000 for retroactive Medicaid repayment, which Jeremy will discuss later. Our revenue grew approximately 15% sequentially and exceeded a very strong prior year comparable quarter, reflecting our ongoing investment in sales, reimbursement and product innovation. Among second quarter fiscal 2017 highlights, our sales team achieved the highest level of referrals in Electromed’s history and we increase the level of referrals per field sales employee, a key measure of productivity. Revenue tends to late referrals. So we remain very optimistic about continued revenue growth in the second half of fiscal 2017. We ended the quarter with 35 field sales reps up from 27 at the end of the same period last year. In addition to benefiting from a larger salesforce and a ramp in new employee sales productivity, we are gaining significant traction from an evidence based marketing approach rooted in quantifiable outcomes. In particular, we are leveraging two recently published studies that verify the effectiveness of SmartVest use by patients with non-cystic fibrosis bronchiectasis. Our most recent study, published in January 2017, demonstrated a 60% reduction in overall healthcare utilization and cost as a result of a material decrease in bronchiectasis-related exacerbations for a population of patients who used SmartVest. Additionally secondary benefits such as the potential to reduce hospital readmissions and the potential to impact deterring antibiotic resistance may have even greater benefits than decreasing cost. This is a powerful message that has resonated quite well with physicians. Our field reps also are hearing enthusiasm from patients and clinicians about the opportunity to further personalize their therapy with our new garment colors and first-to-market generator color choices, which we began shipping in October of 2016. As you can imagine these design options have been embraced particularly by the pediatric segment of the market. Finally, we continue to make progress targeting and penetrating highly populated regions of the United States. As we committed to you in our last conference call, we began beta testing of our wireless enabled SmartVest SQL device in January of 2017, which include shipping devices with wireless connectivity to patients at five clinics throughout the country. We remain on target for a formal launch by the end of this fiscal year 2017. As healthcare continues to transition to value-based care models providing information to physicians and payers to drive efficient, effective and personalized clinician outcomes will be increasingly important as well as involving the patient in their own treatment plan. We continue to be very excited about this new wireless connectivity feature, which will allow for integration with interacted dashboard application to encourage patient engagement with HFCWO therapy and promote adherence to the prescribe treatment. Despite stepping up our investment in sales team and product innovation, both of which we believe will drive enhanced future revenue growth. We remain profitable and generated strong cash flow. In fact, this quarter we achieved record cash flow from operations, which Jeremy will touch on a bit later. In summary, we have made a lot of progress this quarter and we are investing in the future. We remain on target for another year of profitable organic sales growth in fiscal 2017, while increasing quality referrals, raising our rate of reimbursement on referrals and maintaining the highest standards of integrity, respect and privacy. I will now turn it over to Jeremy for a detailed discussion of our financial results. Jeremy?

Thank you, Kathleen, and good morning, everyone. Our net revenue in the second fiscal quarter of 2017 reached $6.4 million, a new record up from $6.3 million in the second fiscal quarter of 2016. As Kathleen pointed out, our home care revenue in the second fiscal quarter was negatively impacted by approximately $212,000 related to a reinterpretation of a reimbursement allowable and process by a participating state Medicaid program that required retroactive repayment of previously collected and recognized revenue. We believe this payment is a onetime event and is not reflective of other state Medicaid reimbursement processes. During the second quarter of fiscal 2016, our home care revenue benefited by approximately $250,000 from processing a backlog of referrals from the prior fiscal year in a certain state. That backlog accumulated while we reapplied for a state home medical equipment license until we met – when we met a newly imposed requirement to have an approved in-state presence. This license was reinstated in October of 2015. After taking into consideration the negative impact of the retroactive repayment during the second quarter of 2017, and the favorable impact of the processing the backlog referrals during the second quarter of fiscal 2016, home care revenue for the second quarter of fiscal 2017 increased primarily due to increases in both approvals and referrals. The increase in referrals was predominately due to growth in the number of field sales employees and a higher number of referrals per field sales employee as compared to the comparable prior year period. Institutional revenue was $605,000, up 14.4% compared to the prior year. The increase in revenue was primarily due to a higher average selling price for devices sold compared to the same period in the prior year. International revenue which is not a strategic growth area for Electromed totaled approximately $265,000, compared to $232,000 in the prior year period. We remind investors that all the quarter-to-quarter sales variability can be expected due to the nature of our business; we anticipate another year of overall revenue growth in fiscal 2017. Gross profit in both the second quarter of fiscal 2017 and the second quarter of fiscal 2016 approximated $4.9 million. Gross profit as a percentage of net revenues in the second quarter of fiscal 2017 was 77.3% slightly below the comparable period figure of 78.2%. The increase in gross profit dollars resulted from an increase in domestic home care revenues and an increase in our manufacturing costs of the SmartVest SQL. I just say a decrease in our manufacturing cost of the SmartVest SQL as compared to the prior fiscal year. The increase in gross profit was primarily –was partially offset by the reinterpretation of reimbursement process by participating state Medicaid as previously discussed. Operating expenses, which include SG&A as well as R&D expenses, totaled $4.2 million, or 65.9% of revenue, in the second quarter of fiscal 2017, compared with $3.6 million, or 58.3% of revenue, in the same period of the prior year. SG&A expenses increased 14% to $4.1 million in the second quarter of fiscal 2017 from $3.6 million in the second quarter of fiscal 2016, primarily due to higher payroll and compensation-related expenses, law from the amendment of patents, higher professional fees, increased travel, meals and entertainment expenses, and higher recruiting fees as compared to the prior year. Research and development expenses increased to approximately $101,000 in the second quarter of fiscal 2017 from $57,000 in the prior year, primarily driven by incremental investment in our wireless connectivity project, which Kathleen discussed previously. In the second quarter of fiscal 2017, we capitalized $190,000 related to software development of the patient and clinic communication portal for wireless connectivity project. Operating income in the second quarter of fiscal 2017 declined to approximately $729,000 from $1.2 million in the prior year period, reflecting higher SG&A and R&D expenses. Net income before tax expense in the second quarter of fiscal 2017 was $714,000, compared to $1.2 million in the prior year period. And our effective tax rate for the second quarter of fiscal 2017 was 37.8%, compared to 13.3% in the prior year period. In the second quarter of fiscal 2017 net – income tax expense totaled $270,000 compared to $164,000 in the same period of prior year and the prior year did have a benefit of a discrete tax benefit of $294,000. We reported net income of approximately $440,000 or $0.05 per basic and diluted share in the second quarter of fiscal 2017, compared to $1.1 million, or $0.13 per basic and diluted share in the second quarter of fiscal 2016. Now briefly recapping our six months year-to-date fiscal 2017 performance, in the first half of fiscal 2017 revenue increased 5.8% to $11.9 million from $11.3 million in the same period of fiscal 2016. Gross margins were 77.7%, compared to 77.8% in the same period of the prior year, while net income was $635,000, or $0.08 per diluted share, compared to $1.4 million, or $0.17 per diluted share in the same period of the prior year. Now moving to the balance sheet and operating cash flow, our balance sheet at December 31 included cash and cash equivalents of $4.8 million, long-term debt including current maturities was $1.2 million and working capital of $13.7 million with stockholders’ equity at $17.2 million. As we discussed on the last quarter’s calls, we anticipated reversion of cash flow from operations to a more normalize level during the remainder of the year and that was the case this quarter, we actually reported record cash – record quarterly cash flows from operations of $1.3 million, up 47% from approximately $856,000 in the comparable prior year period. Overall, we remain pleased with the direction our business is heading and this concludes my remarks. Operator, we can now start the Q&A portion of the call please.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Michael Disler, a Private Investor. Please proceed with your question.

Good morning, folks, and congratulations on a great quarter. Just two quick things. One, I believe Jeremy you said the tax – effective tax rate for the quarter was 37.8% versus 13.3% the prior year. Is that correct?

Yes, that is correct.

Okay. So I just I’m looking at the pretty big tax rate perhaps there will be some changes in Washington, which might affect you positively in that regard. And the second thing, just a minor thing, well, I’m not asking you today. Well, Jeremy inside information on which state you had to pay that reversal on the $200,000 in revenues recognized of $212,000 approximately. My – just question is, you think that’s a onetime event from that particular state, fine. Is there anything out there that you think looming from other states looking to clawback revenues in any kind of fashion?

Yes, thank you for your question. To clarify that if we believe this is a onetime, that is for all state Medicaid’s. Looking at the way that this individual state interpreted their own regulations and their payment and allowable, we don’t believe that based on the other state regulations and allowables and payment processes that they could actually make this reinterpretation. So while we never know what our individual state will go on – we’ll do on a prospective basis. We do believe that this is a onetime event when it comes to any adjustments from a state Medicaid on a look back basis.

Okay and thank you very much for clarifying, continued success. Ms. Skarvan, thank you. And Jeremy I’ll be speaking to you on the phone most likely. And keep up the good work. I’ll speak to you soon. Thank you.

Thank you, Michael.

[Operator Instructions] Our next question comes from the line of Ryan Crackel, Private Investor. Please proceed with your question.

Good morning, everybody. Thank you for taking my question. I was just hoping you could comment on where you are in the process of wrapping up your salesforce and how you expect that process to impact operating expenses going forward. Thank you.

Thank you for the question Ryan. This is Kathleen, of course. We will be continuing to expand our salesforce. It’s going to be at a moderated level. We’re continuing to balance those additional investment costs with the return and we do believe though that there still is opportunity to expand the salesforce that will contribute to growing revenues at a continued rate similar to what we have historically. But again, we don’t expect that likely to have the same impact that you are seeing this year-over-year. And so hopefully, that helps you get some inside on how we are thinking about that going forward.

Okay, thank you. And do you guys publish any information about your backlog?

We do not. Not at this time.

Okay, thank you.

Thank you. At this time, there are no further questions. This does conclude our question-and-answer session. I will turn it back to Ms. Kathleen Skarvan for closing comments.