Electromed, Inc. (ELMD) Q3 2020 Earnings Report, Transcript and Summary

Greetings and welcome to the Electromed Third Quarter Fiscal 2020 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Kalle Ahl of The Equity Group. Please go ahead.

Thank you, Rachel and good morning everyone. Electromed’s third quarter fiscal 2020 financial results were released yesterday after the market close. A copy of the earnings release can be found in the Investor Relations section of the company’s website at www.smartvest.com. As a matter of formality, I need to remind you that some of the statements that management will make on this call are considered forward-looking statements, including statements about the company’s future operating and financial 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. Any such statements represent management’s expectations as of today’s date. You should not place undue reliance on these forward-looking statements and the company does not undertake any obligation to update or revise forward-looking statements whether as a result of new information, future events or otherwise. 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 opening remarks, after which Jeremy will present a summary of the company’s third quarter fiscal 2020 financial results and then we will open the call for questions. Now, it’s my pleasure to turn the call over to Kathleen.

Thank you, Kelly. Good morning, everyone and thank you for joining us to discuss Electromed’s third quarter fiscal 2020 financial results and recent developments. Much has changed in the world since our last conference call in February. Coronavirus or COVID-19 has disrupted global economies, healthcare systems and people’s lives. Our thoughts are with those individuals whose health has been jeopardized by this crisis and we extend our gratitude to the healthcare professionals fighting COVID-19 on the frontlines. I am proud of our team’s unwavering commitment to ensuring the seamless manufacturing and delivery of SmartVest airway clearance devices during these challenging times. Amidst the onset of the COVID-19 outbreak, we achieved strong revenue growth 18% from the prior year period and net income of $653,000 in our fiscal third quarter, while prioritizing the health and safety of our employees, clinicians and patients. Before discussing our financial results, I would like to review the measures we have taken to protect the well-being of our people and the actions we have taken to mitigate the impact of the COVID-19 pandemic on our business. Regarding our safety initiatives, we instituted staggered work shifts and created separate workstations to accommodate social distancing. We implemented a policy requiring all employees to wear masks and additionally gloves in our manufacturing areas. We encourage remote and flexible work arrangements for employees where feasible. We ceased all non-essential travel and we established strict on and off-site sanitation and infection control practices. Regarding our actions to mitigate the impact of COVID- 19 on Electromed’s business, we strengthened our communication to clinics via videoconference for virtual in-services, therapy demonstrations and patient follow-up. We implemented virtual training options for patients to minimize patient to train or contact. We focused on building awareness among practitioners of recent Centers for Medicare and Medicaid Services or CMS waiver that modifies certain rules for prescribing respiratory-related devices, of which SmartVest is included. Under the waiver, clinical indications and documentation typically required will not be enforced for respiratory-related products. This waiver applies to Medicare patients only with non-commercial Medicare plans. The minimum documentation now requires a valid order and documentation of a respiratory-related diagnosis. Face-to-face and in-person requirements for respiratory devices are being waved also. While it is difficult to quantify precisely the impact of COVID-19 on Electromed’s operations, as we exited March and through April, many clinics closed temporarily, restricted their operating hours or moved to virtual visit. Many consultations now are happening exclusively via telehealth. For those locations that remain open, pulmonologists often are working significant hours in the hospitals treating COVID-19 patients leaving less time for traditional consultations. Electromed’s home care referral pipeline and subsequent revenue has been negatively impacted as a result of fewer in-person visits during the onset of COVID-19. The CMS waivers I discussed earlier may somewhat offset the negative impact of fewer in-person consultations and we have quickly reengaged face-to-face access to clinics and hospitals in those states, where restrictions have started to ease. Clinicians, who prescribe high frequency chest wall oscillation, or HFCWO therapy, ultimately are keeping individuals out of hospital emergency rooms and intensive care units minimizing their exposure to coronavirus, while freeing the capacity of healthcare professionals to care for the sickest COVID-19 patients. With the CMS waiver we believe that a higher than average percentage of the Medicare patient referrals we receive will convert to approvals, non-commercial Medicare referrals represent about 55% of our business typically. Overall, due to the inherent uncertainty of the unprecedented and rapidly evolving situation, we are unable to predict with confidence the likely impact of COVID-19 pandemic on our future business and financial performance. Given these uncertainties, we are implementing cost savings measures, which include reducing discretionary and variable spend such as travel and the use of contractors, consultants temporary help and employee furloughs in our manufacturing in general and administrative functions in response to the lower near-term demand for our products. We expect these cost reductions will lead to approximately $450,000 of savings per quarter, which we expect to partially realize in our fiscal fourth quarter. With the interim situation while it is uncertain we remain confident that we can achieve longer term double-digit revenue growth once the impact of COVID-19 subsides. We are hopeful that this current scenario will be temporary. However, if this pandemic persists for an extended period or worsens, we are in a strong position to weather the storm. First, Electromed is considered an essential business under federal guidelines. Second, we have a strong balance sheet, with approximately $9.9 million of cash, no debt and future cash flow on accounts receivable of approximately $13.3 million at the end of March. We also have $2.5 million of availability under our credit facility providing us extra financial flexibility if needed. Finally, we participate in a growing industry with favorable long-term tailwinds. Now, moving on to our financial results for the third quarter of fiscal 2020, starting with our home care business, net revenue increased 14.3% year-over-year primarily reflecting a higher average selling price per device due to payer mix in a greater percentage of referrals getting approved. At quarter end, our field sales employees totaled 44, of which 37 were direct sales compared to 41 at the end of the third quarter of fiscal 2019, of which 35 are direct sales. We produced approximately $880,000 of annualized home care revenue per direct field sales employees well ahead of the comparable figure of $669,000 for the third quarter of fiscal 2019 and above our target range of between $750,000 and $850,000. Our institutional business logged another strong performance, with revenue up approximately 47% compared to last year’s third quarter driven by higher average selling price and increased volume, which was driven by some of it which was driven by the COVID-19 pandemic. Shifting to the bottom line, we achieved strong third quarter net income of approximately $653,000 or $0.07 per diluted share underscored by year-over-year operating margin between – of improvement of 10.4%. We accomplished improved margin despite increases in consulting and professional fees and more than doubling our investment in R&D during the quarter for our next generation product. I would like to make a brief comment on our CFO transition. As announced in March, Jeremy Brock has agreed to continue in the CFO role until July 1, 2020. First of all, I want to thank Jeremy for his many significant contributions to Electromed over the last 8 years. He has been an invaluable part of the team and will be missed. Our national search process is progressing well. We have identified and interviewed an impressive group of candidates. We remain on track to bringing a new CFO on board prior to July 1 and plan to provide an update soon. In closing, we wrapped up a strong first 9 months of fiscal 2020 and our employees have responded admirably during the COVID-19 pandemic. Our long-term thesis remains intact. Non-cystic fibrosis bronchiectasis represents a significant and growing market opportunity, conservatively estimated at more than 4 million individuals in the United States. Serving our patients particularly at this time when healthcare systems maybe overwhelmed by COVID-19 patients is critically important to improve their airway clearance, enhance respiratory function and reduce hospitalizations. As the nation emerges from this crisis, we anticipate Electromed returning to the strong cadence of profitable growth that we achieved the last several quarters. With that, I will turn it over to Jeremy for a detailed discussion of our financial results.

Thank you, Kathleen and good morning everyone. As Kathleen shared, our net revenue in the third quarter of fiscal 2020 increased 18% to $8.7 million from $7.4 million in the third quarter of fiscal 2019 driven by growth in home care revenue. Home care revenue increased 14.3% to $7.8 million primarily due to higher average allowable based on payer mix and a greater percentage of referrals getting approved. Institutional revenue increased 46.9% to $609,000 from $414,000 in the prior year period due to higher average selling price per device and an increase in volume of devices and garments sold. In the first quarter of fiscal 2020, we began selling into the home medical equipment distributors. Distributor revenue totaled $165,000 during the third quarter of fiscal 2020. To reiterate, our direct sales channel remains our primary focus. We believe the home care distributor channel is complementary to our core business, particularly in those areas of the country where our SmartVest brand is under recognized and we see opportunities for accelerating growth on a supplemental basis. International revenue, which is not a strategic growth area for Electromed, totaled approximately $137,000 compared to $142,000 in the prior year period. Quarter-to-quarter sales variability can be expected due to the nature of our business and the COVID-19 outbreak will likely have a temporary – will have a temporary overall negative impact on our revenue. That said, we anticipate a resumption of long-term double-digit revenue growth on the back end of this pandemic. Gross profit increased 18.3% to $6.6 million or 75.4% of net revenue in the third quarter of fiscal 2020 from $5.6 million or 75.2 % of net revenue in the third quarter of fiscal 2019. The increase in gross profit resulted primarily from an increase in home care revenue and the increase in gross profit as a percentage of net revenue was driven by a higher average allowable based on payer mix as compared to the prior year and we expect our long-term gross margins to continue to range in the mid-to-high 70s. Operating expenses, which include SG&A as well as R&D totaled $5.7 million or 65% of revenue in the third quarter of fiscal 2020 compared to $5.1 million or 69% of revenue in the same period of the prior year. SG&A expenses increased 7.1% to $5.3 million in the third quarter of fiscal 2020 from $4.9 million in the third quarter of fiscal 2019 primarily due to higher consulting and professional fees. R&D expenses increased to $392,000 in the third quarter of fiscal 2020 from $171,000 in the prior year period and we expect R&D expenses in our fiscal fourth quarter will be slightly higher than this quarter based on the timing of projects related to our continued investment in new product development. Operating income increased to $913,000 in the third quarter of fiscal 2020 from $465,000 in the third quarter of the prior year. Net income before income tax expense totaled $947,000 in the third quarter of fiscal 2020 compared to $492,000 in the prior year quarter. And in the quarter, income tax expense totaled $294,000 compared to $139,000 in the same period of the prior year. Our effective tax rate in the third quarter of fiscal 2020 was 31% compared to 28.3% in the prior year period. Our net income totaled $653,000, or $0.07 per diluted share in the third quarter of fiscal 2020 compared to $353,000 or $0.04 per diluted share in the prior year period. Moving to the balance sheet and operating cash flow, our balance sheet at March 31, 2019 included cash of $9.9 million, no long-term debt, working capital of $24.2 million, and shareholders’ equity of $29.3 million. Cash flows from operations in the third quarter of fiscal 2020 totaled $889,000 compared to $351,000 in the third quarter of fiscal 2019. We are very pleased to be debt free and we continue building our cash reserves which will support Electromed’s long-term growth strategies. Moreover, given uncertainty surrounding the COVID-19 crisis, we are fortunate to have the financial flexibility that our balance sheet affords us. I would like to point out that subsequent to the quarter end, we received a stimulus payment in the amount of $913,000 related to the Coronavirus Aid Relief and Economic Securities Act, or the CARES act. And it was related to the Provider Relief Fund, which may partially offset losses in revenue due to the impact of COVID-19 pandemic. Our ability to utilize the full amount receivable is depend on the guidelines and rules of the CARES act such as the cost incurred to support healthcare related expenses or loss revenue attributable to COVID-19 pandemic. Finally, as this will be my last earnings call with Electromed, I would like to thank our shareholders for their support during the past 8 years. It’s been a great journey and I look forward to watching Electromed’s business continue to thrive in the years to come. This concludes our prepared remarks. Operator, please start the Q&A portion of the call.

Thank you. [Operator Instructions] Your first question is from Kyle Bauser from Dougherty & Co. Please go ahead.

Hi, good morning, Kathleen and Jeremy. Thanks for taking the questions. So, maybe first on the relaxed CMS guidelines regarding the waiver, so I imagine this has been very useful in the institutional channel, but just kind of curious, are you utilizing that more in the institutional setting or home care setting kind of what's been the implication of that? Thanks.

Well, good morning, Kyle and thank you for the question. The waiver is going to assist patients and pulmonologists, primarily in the home care environment and also that will help us with the discharge patients. So as people are admitted to the hospital, maybe if they have the COVID-19 suffering from a lower respiratory infection, they are being discharged and by the way, many of those patients are being discharged into a long-term healthcare facility or a skilled nursing home and from there they are being discharged home. So, this would be primarily for our home care part of the business, because it really has to do with the requirements for prescribing and the medical documentation that’s needed in order to be able to qualify for reimbursement.

Great. So, 90% of sales come from that channel. So that’s great to hear. Are you right now during the pandemic – have you seen SmartVest being used in a lot of conditions outside of the normal call point, bronchiectasis, cystic fibrosis etcetera?

What we would typically see that will qualify under the waiver that we may not have qualified or would have been approved previously would be COPD that would be the primary diagnosis that we're seeing at this time we have received some prescriptions with COVID-19 diagnosis. They also would have typically other comorbidities or underlying issues that they've had even prior to contracting the COVID-19 but we do think this is a wonderful opportunity for physicians and patients who normally wouldn't be able to access HFCWO or SmartVest to utilize the waiver to help more patients and it gives us an opportunity to follow those patients and understand how they too are showing improved quality of life and reduced hospitalization so we're looking forward to understanding how this will continue to help more patients over the next few weeks.

Got it. And just a couple more here if I may now that you expect a higher percentage of Medicare patients that will convert over then for the waiver and that's within the Medicare population can you remind me what was the conversion rate in the past and can I go high 90’s even a 100% how should we think about that?

We think in that Medicare population that will qualify for the waiver that as you stated it could be in that 90% or above and that's been the experience we've seen in the last few weeks already again if it's a respiratory related disease and the doctor the physician or practitioner has been clear about that that will qualify.

Okay. And then you talked about a lot of clinics being closed who are having restricted hours but some have moved to it being a virtual to the extent you can share I mean any sense as to what percentage of accounts active accounts has re opened and are reengaging?

Thank you for that question. So we have been doing pulse surveys with our clinics across all of our territories and so in the beginning of April versus the beginning of May we have now started to see the number of offices opening. starting to increase and also the number of offices doing face to face visits increasing also I would say it's in the in the high single digit percentage that that has shifted but it's a trend that we're watching very closely and will continue to do that it to conduct those pulse surveys and that's how the sales organization is being made aware that they can then move out and visit those offices they're contacting them on a regular basis regardless and this way they can get back in and understand the rate of patients that they're seeing how many appointments they're having per day and we will see that gradually increase we believe over across the United States again that's going to be dependent on that stage and what the governor of that state has for specific orders about opening up their particular geographic area but we're encouraged.

Okay great. Thanks for the updates and Jeremy, all the best. Thank you so much.

Thanks Kyle.

Thank you. [Operator Instructions] Your next question comes from Mike [indiscernible] from MNX Holdings. Please go ahead.

Thank you. Good morning folks. How are you? I just wanted to say I am always brief as you guys know both you, Kathleen and Jeremy, as a very long-term shareholder I just want to thank you again for your forthrightness and clarity on your presentations. It seems completely thorough and totally honest and have been through the year. So thank you for that. And on a personal note, Jeremy, I am wishing you all the best in your future endeavors and your next adventure maybe as wonderful as this one has been and thank you as a shareholder and that’s it guys I know how difficult this time is and I think you are doing a fabulous job.

Thank you so much Mike for those comments and thank you for being a long-term shareholder. We very much appreciate it. Jeremy?

Yes, thanks Mike. We appreciate your support over the last 8 plus years, so…

Thank you. There are no further questions at this time. I will now turn the call back to Kathleen Skarvan for closing remarks.

Thank you, Rachel. Thank you all for participating on our call this morning. While we won’t be on the road for investor conferences in the near-term, given COVID-19 we remain accessible for one-on-one calls. Please reach out to our Investor Relations firm, The Equity Group, if you are interested in scheduling a follow-up call. We look forward to reporting back to you in August when we will release our fourth quarter fiscal 2020 financial results. Have a good day and stay well.

Thank you. This does conclude today’s conference. You may disconnect your lines. Thank you for participating.