Electromed, Inc. (ELMD) Q3 2021 Earnings Report, Transcript and Summary

Greetings. And welcome to the Electromed, Inc. Third Quarter Fiscal 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to our host, Kalle Ahl of The Equity Group. Thank you. You may begin.

Thank you, Diego, and good afternoon, everyone. Electromed’s third quarter fiscal 2021 financial results were released today after the market closed. A copy of the earnings release can be found in the Investor Relations section of the company’s website at www.smartvest.com. The company has asked me 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 any forward-looking statement for any reason, even if new information becomes available or other events occur in the future. Please refer to the company’s SEC filings for further guidance on this matter. Joining us from Electromed this afternoon are Kathleen Skarvan, President and Chief Executive Officer; and Mike MacCourt, Chief Financial Officer. Kathleen will begin with some opening remarks, after which Mike will present a summary of the company’s third quarter fiscal 2021 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, Kalle. Good afternoon, everyone, and thank you for joining us to discuss Electromed’s third quarter fiscal 2021 financial results. This quarter our net revenue totaled $8.8 million, compared to $8.7 million in the prior year period, reflecting a 4.2% year-over-year increase in home care revenue, partially offset by year-over-year decrease in institutional home care distributor and international revenue. Although, this winter’s resurgence of new COVID-19 cases and hospitalizations dampened our home care revenue in January in February, we were pleased to finish the quarter with record monthly home care revenue and record referrals in March. Exiting the quarter, we benefited from increased patient visits to clinics and greater access for our sales representatives as vaccines started to become more widely administered throughout the country. During the pandemic, we’ve continued to benefit from our hybrid virtual and face to face selling approach and from the provisional CMS waiver that temporarily relaxes certain rules for the prescribing devices like ours to the non-commercial Medicare population. With the CMS waiver we have experienced an increase in approvals for previously non-covered diagnoses and faster approval times for covered diagnoses. Non-commercial Medicare historically represents approximately 50% of our total payer mix for home care revenue. We were pleased that CMS recently extended this waiver until July of 2021. Moving to the institutional side of our business, revenue remain challenged due to reduce hospital purchases in light of COVID-19 and precautions related to aerosol spread. That said, we are very encouraged by this quarter’s 43.4% sequential revenue growth in our institutional segment and noted stronger coding activity that is continued into the fourth quarter. Our institutional strategy remains unchanged. We are focused on fortifying the hospital call point and strengthening our partnerships with those integrated delivery networks. As a reminder, growth in our institutional business should augment our home care revenues, as the high frequency chest wall oscillation or HFCWO brand used in the hospital is often the default prescribed when discharging a patient. Shifting to the bottomline, during the quarter we generated positive net income of approximately $224,000 or $0.03 per diluted share, despite managing through ongoing COVID-19 headwinds in the early part of the quarter, while continuing to make strategic growth oriented investments in R&D and SG&A. Reflecting our optimism about the long0term market opportunity for SmartVest, this quarter we continue to make significant strategic investments in sales, marketing, infrastructure, market research and product development to augment future revenue growth. We are in the process of recruiting and hiring four additional direct sales employees and a regional manager -- sales manager, all who should be fully trained and onboarded in July, and we do anticipate continuing our sales force expansion throughout fiscal 2022. Our planned sales team expansion will incorporate metrics to measure and manage new sales reps to maximize our return on investment. Over the past years -- two years, we have benefited from our focus on sales rep productivity, fine tuning our recruiting profile, and revised our onboarding and training that has improved our time to productivity and return on investment that’s been demonstrated by strong annualized home care revenue per direct sales representative. At the end of our third quarter, we had 48 total field sales employees, of which 39 were direct sales. This compares to 44 total field sales employees, of which 37 were direct sales at the end of the prior year period. We also have added key employees in our marketing and engineering teams to strengthen our capability in clinical and market research and product development, while continuing to invest heavily in direct-to-consumer marketing campaigns to increase awareness of bronchiectasis and SmartVest as an effective treatment. Additionally, we invested in a new revenue cycle management platform, which we deployed this quarter and believe that it will increase overall productivity from our reimbursement team and provide additional analytics to help drive revenue. Furthermore, we have invested in comprehensive market research, working with leading healthcare industry consultants to gain insight that will help us make key business decisions, such as expanding adoption to physicians not currently prescribing HFCWO, growing market share by targeting HFCWO prescribers not currently prescribing SmartVest and expanding our sales force in the highest potential geographies. Finally, we continue to invest in R&D at an elevated level to develop our next-generation device for HFCWO. We are optimistic that the strategic investments we are making an SG&A and R&D today will augment our future revenue growth and position us for increased market share. In closing this quarter, we once again successfully navigated challenges related to the pandemic and really could not be more proud of our amazing dedication and for our employees whose health, safety and well being do remain our top priority. We generated two consecutive quarters of home care revenue growth versus prior year periods, and generated positive net income and strong operating cash flow. All while continuing to make increased growth oriented investments in SG&A and R&D. We know that SmartVest is associated with a lower risk of respiratory infections, which can be serious or life threatening and that can result costly hospital admissions, reducing comprehensive cost of care. We have published multiple outcome studies demonstrating that bronchiectasis exacerbation rates drop significantly when using our devices. We also know that non-cystic fibrosis bronchiectasis represents a significant and growing market opportunity estimated at more than 4 million individuals in the United States. For those of you who know our story, we believe that approximately 630,000 people with a bronchiectasis diagnosis could benefit from HFCWO therapy. Yet only an estimated 77,000 patients in the Medicare population are currently being treated with a device like SmartVest. The growing body of clinical evidence combined with the powerful patient testimonials that we routinely hear support the use of our SmartVest system as a standard-of-care for individuals with bronchiectasis. In this context, we remain committed to delivering long-term profitable growth, while maintaining the highest standards of integrity, respect and privacy. With that, I’m going to turn it over to Mike for a more detailed discussion of our financial results.

Thank you, Kathleen, and good afternoon, everyone. Our net revenue in the third quarter of fiscal 2021 increased 0.5% to $8.8 million from $8.7 million in the third quarter of fiscal 2020, driven by growth in home care revenue. Home care revenue increased 4.2% to $8.2 million, primarily due to higher referrals and approvals compared to the prior year period. Institutional revenue decreased 27.3% to $443,000 from $609,000 in the prior year period, primarily due to a decrease in the volume of devices and disposable rep sold due to COVID-19 continued impact on hospital purchasing activity. Home care distributor revenue decreased 36% to $105,000 from $165,000 in the prior year period. International revenue which is not a strategic growth area for Electromed decreased 44.5% to $76,000, compared to $137,000 in the prior year period. Gross profit in the third quarter of fiscal 2021 increased 1.6% to $6.7 million or 76.3% of net revenue from $6.6 million or 75.4% of net revenue in the prior year period. The increase in gross profit percentage was primarily due to a higher mix of home care revenue and a favorable mix of Medicare within home care. Operating expenses, which include SG&A, as well as R&D expenses totaled $6.5 million or 73.5% of revenue in the third quarter of fiscal 2021, compared with $5.7 million or 65% of revenue in the same period of the prior year. SG&A expenses increased 14.4% to $6.1 million in the third quarter fiscal 2021 from $5.3 million in the same period of the prior year, primarily due to increased payroll and compensation-related expenses associated with a higher average number of sales and marketing personnel, greater temporary resources to assist with systems infrastructure investments and increase incentive payments on higher home care revenue. We also incur higher discretionary marketing expenses related to a direct-to-consumer marketing campaign and a comprehensive market research project, as well as higher professional fees. These increase expenses were partially offset by lower travel, meals and entertainment expenses. R&D expenses increased to $407,000 or 4.6% of net revenue in the third quarter of fiscal 2021 from $392,000 or 4.5% of net revenue in the prior year comparable period, primarily due to investment in our next-generation product development. We estimate that R&D expenses will continue to be in the 4% to 6% of net revenue range through the remainder of calendar year 2021. Operating income totaled $243,000 in the third quarter of 2021, compared to $913,000 in the prior year period. Net income before income tax expense totaled $253,000 in the third quarter of fiscal 2021, compared to $947,000 in the third quarter of fiscal 2020. In the quarter income tax expense totaled $29,000, compared to $294,000 in the same period of the prior year. Our effective tax rate in the third quarter of fiscal 2021 was 11.5%, compared to 31% in the prior year period. The third quarter of fiscal 2021 included a $37,000 discrete tax benefit as a result of lower state and federal taxes than what was originally estimated in the company’s 2020 fiscal tax provision. Our net income totaled $224,000 or $0.03 per diluted share in the third quarter of fiscal 2021, compared to $653,000 or $0.07 per diluted share in the prior year period. Now moving on to the balance sheet and operating cash flow. Our balance sheet on March 31, 2021, included cash and cash equivalents of $12.5 million, no long term debt, working capital of $28.1 million and shareholders’ equity of $32.9 million. Cash flow from operations in the third quarter of fiscal 2021 totaled $834,000, compared to $889,000 in the comparable prior year period. We are pleased to be debt free and with a strong balance sheet to support our long-term growth strategies. We are currently evaluating options regarding the optimal use of our cash to maximize shareholder value. We are still on track to complete our long range planning and review of capital allocation by the end of our fiscal year and plan to communicate our strategy during our Q4 earnings call. This concludes our prepared remarks. Operator, please start the Q&A portion of the call.

Thank you. [Operator Instructions] First question comes from Kyle Bauser with Colliers Securities. Please state your question.

Great. Thanks. Thanks for all the updates today and congrats on the quarter. Maybe I’ll start on the distributor bucket. I know it’s not all that material. But I’m just curious, as you think about adding reps and building out the sales organization, can you talk about, how you’re thinking about layering in new reps? Is it by geography? Is it under a new structure? Do you plan on maybe focusing on the western regions where you do have a distributor to increase margins? Just kind of curious how you’re thinking about building out the sales force?

Yeah. Hi, Kyle, and thank you for the question. The -- when we entered into the distributor market, about a year and a half, almost two years ago, our intent was to understand if it was an opportunity or sales channel that could help us to increase awareness with physicians around bronchiectasis and really increase the sales of SmartVest. And I think that it’s still a little bit of a pilot yet or to be determined what the value maybe longer term. With COVID-19 pandemic, it did dampen the ramp that we anticipated with a couple of those distributors. So I think we’ll have more to report on that next quarter on how that’s progressing and what our direction maybe. You are right, though, we will be looking at alternatives to determine should we stick with some of those distributors in the western region or is it going to be more appropriate for us to put direct reps there. So I appreciate the question and I think that is something, again, as I said, we’re in the process of evaluating and we’ll have more to report next quarter.

Okay. Got it. Appreciate that. And I think you mentioned in the prepared remarks there was some kind of non-recurring expenses that related to a market research project. Is that have to do with hiring a consultant and kind of evaluating market strategy for deploying resources and sales organization or is that internal project, just kind of curious?

Yeah. Thanks, Kyle, for that question, as well. So we actually pulled in some of those expenses. Earlier we were thinking about doing most of that research in quarter four, decided to pull it in, because as we anticipated adding new reps sooner, we determined that that information would be highly valued, as we understand better where to place reps. So this is market research, and yes, we did work with a very reputable market research firm that understands claims, claims data, they understand how to research and better quantify a market for durable medical equipment or those devices that are placed into the home care market. And so it’s really going to be beneficial since we can actually trace bronchiectasis claims and also claims for or prescriptions for high frequency chest wall oscillation by physician and that’s going to help us understand better where we should position our sales reps from a prescribing standpoint, but also, as a sales leader of mine previous, historically, would say fish where the fish are and this is really going to be beneficial. And also because we’re really focused on market share gain over the next two years to three years and certainly beyond, but that’s really where we’re going to have the growth engine here for revenue and it’s going to be extremely beneficial for us to get to assure that we’re getting the maximizing return on investment for those new sales reps.

Okay. Got it. And then, obviously, a very strong quarter in the home care bucket as it relates to Medicare and it’s nice to see the waiver was extended into July, so that the year-over-year growth has been very strong there for the last three quarters. If we think about the commercial home care bucket, it’s kind of hit or miss each quarter. I think it was down a little bit this quarter. Can you just talk about the dynamics between those two buckets in terms of approval rates and you think that the Medicare Advantage waiver or the Medicare waiver would kind of streamline things on the private side eventually. But I’m just kind of curious how things are going in both of those buckets? Thank you.

Yeah. There’s a fair amount of complexity related to those -- the dynamic between the traditional Medicare, where the CMS waiver applies versus in the commercial. So the commercial would contain commercial Medicare and just an overall commercial plans. And so what the challenge there is, is with access to the clinic still being somewhat limited, and particularly limited last quarter in January and February, it makes it more challenging to be able to collect the requisite medical records that may be needed in order to gain an approval for a covered diagnosis. And because oftentimes we’re managing that here at corporate, the reimbursement team is calling the clinic asking for that. But there are situations where we need a rep to go in and talk to the medical assistant, and say, hey, can you take a moment right now and go copy those and fax them to our corporate office and that helps really trigger and make that happen often more effectively. So I really think that there’s some of that that happened with the commercial here between quarter two and quarter three, changing a little of that momentum. Then as we said, March was record home care revenue and referrals, and we’re anticipating that that came across for the commercial and the traditional Medicare. So hopefully that makes sense.

Got it. Okay. Great. Thank you for all the updates and for taking my questions. I’ll jump back and queue here.

Hey. Thanks, Kyle.

Our next question comes from James Terwilliger with Northland Securities. Please state your question.

Hey, guys. Can you hear me?

Yes. We can. Hi, James.

Hello. Thank you for taking my questions. First two ones are housekeeping and I may have missed it as I was scribbling notes as fast as I could. R&D as a percentage of revenue, you are guiding to 4% to 6% and is that correct? And then you said that should be extended for the rest of calendar 2021?

Yes. That’s correct.

Did I get that correct?

Yes.

And -- okay. Great. And then did you give any guidance on maybe the SG&A as a percentage of revenue?

No. We guided that…

Okay.

We mentioned that.

And it was a little bit higher than what I was looking for, but there were some one-time items in there. So should I kind of look, is this a good number to maybe go forward with or does it decline a little bit if those one-time items, but I know you want to hire some sales people? So how should I think of SG&A going forward?

Yeah. I’ll take that question. James, I -- we -- if we look at our history versus these continued strategic investments that will carry over into next year. We -- and yeah -- and realizing that when we hire a sales rep, often their time to productivity can be anywhere from between six months and 12 months, depending on the region of the country that they’re going into and how strong our brand awareness is. So we would estimate that that will be at a slightly elevated rate as we move into the next year and it could be a range of 65% to 68%, something like that.

No. Fantastic. I think sales reps start to grow the business. Okay. Great. Thank you. Very quickly then the balance sheet, inventory has trended down nicely. Is there anything I’m missing there or any comments you would like to make, when I look at the balance sheet going back? They’ve trended down from almost like a $3 million number down to $2.2 million, anything going on with the inventory?

Yeah. I mean, to some extent the $3 million peak was an inflated number, right? When COVID hit we decided to proactively build up inventory just to have some cushion in case we have supply chain issues. We haven’t and so we’ve been just more proactive about managing our inventory back down to more of our historical limits and even creating a little bit of efficiencies and even getting a bit below our normal levels. So just a little more proactive management and feeling more confident about the supply chain versus the COVID timeframe.

No. No. Was I mean when you hear the supply issues, it was smart to have a little bit in your back pocket and then, of course, it’s nice to see you trending in a nice direction. It’s a nice decline. And then I know you’re growing the business. AR is tweaking up a little bit. Is there anything of the AR that you would -- accounts receivable that you’d like to highlight? I mean, I know…

Yeah. There is…

[Inaudible]

A lot of our growth here over the last year has been in the home care channel, and obviously, we’ve had declines in the distributor international and institutional markets. And even within home care, a lot of our growth has come in the Medicare space. And that’s got a 13-month payment cycle and it’s really high quality AR. We are collecting it just at the rates that we always have, which is a very high collection rate. But it does build your AR balance when you’re growing your business through that channel. Conversely, we’re obviously declining in our other channels and those typically have zero day to 30-day AR balances on it. So it’s really just a mix of where we’re generating our revenue growth, our cash collections have continued within their normal historical ranges for different types of revenue by payer.

Okay. Great. That’s extremely helpful. And then, lastly, I want to go to the comment that was said earlier about the, maybe if we could expand on it, the March record. I’ve heard this from some other medical device companies or medical technology companies that the COVID that we talked about, especially in California, in December, kind of drifted into that January and February and really put pressure on patient volumes. But it seems like March, you said that was a record? And can you expand on what that meant, I think, it is very important that that -- the trajectory and the speed at which you’re exiting the March quarter here, as you move into the next quarter. Is it staying at that level? Can you expand anything on the record from March? And also, is there any way to quantify how much lower January and February would have been without COVID, if we could normalize it?

Well, I -- it’s a -- we to, of course, having many other publicly traded companies come out ahead of us with earnings and noticed, of course, that many companies had the same experience that we did that access to clinics was sharply declining -- declined in January and February, but probably, even more importantly, patient census was down significantly. And we anticipated that that was primarily due to, of course, cases being up and people being concerned, but also they were anticipating vaccinations being available. So why would you go out to the clinic, if you can avoid it, if you can wait until you receive your vaccine and then you’re more protected. So I think that that’s the combination that was going on there. And again, March was really a great month for us. We don’t provide guidance into the next quarter. But again, March was terrific. And when you think about the number of people here in Minnesota, we -- I think we reach 60% of the population now has had their first vaccine and they’re targeting, of course, 70% for your second vaccine here too. It’s really exciting and we think that that bodes really well, as well as cases in hospitalizations and deaths are all declining across the United States. We think that bodes well for us and we’re optimistic.

No. That’s fantastic those vaccination trends. I will jump back in queue and thanks for taking my questions. Thank you very much.

Thanks, James.

[Operator Instructions] Our next question comes from Patrick Mulvehill with Baztec Capital. Please state your question.

Hey, Kathleen. How are you doing?

Hey. We’re doing well. Thank you, Patrick. How are you?

Doing great. Thank you. So I just wanted to ask with the step up in investments. I’m really curious as to aside from some of the recent momentum from reopening, what are you seeing in the marketplace that has given you conviction that the jump up in investment is going to result in a positive return over the next, say, 12 months, 18 months? What’s different about today versus maybe a couple years ago when we had a similar investment cycle?

Hey. Thank you, Patrick, for that question. I say that the optimism is more us internally and what we’ve done to improve our leadership capability. Also, what I mentioned to you about the sales organization in general, we’ve been really focused on sales productivity and we’ve demonstrated strong sales productivity as measured by our home care annualized revenue per rep. It’s continued to stay above 850,000 and in quarter two, we were up over 950,000 are in that range. So that gives us optimism. We’ve added additional support for the sales organization as we bring on new reps from a training, onboarding and ongoing coaching standpoint. And also the market research that we’ve done continues to give us optimism and also validate much of what we’ve already been talking about in regard to the number of patients with diagnosis of bronchiectasis and how few are using HFCWO, but yet, based on our clinical studies and outcome studies, we know that it’s beneficial, and it’s going to improve quality of life, it’s going to include -- also improved healthcare economics for the healthcare system. So it’s really a combination of all of that that’s coming together and providing that optimism overall.

And if I can just ask one last question, the sort of addendum to that would be, on the competitive front, have you witnessed any noticeable change in terms of win rates or changes in competitive behavior as things start to normalize and go back to sort of a pre-pandemic state? Is there anything to call out there?

When it comes to the home care market, I would say that, we have not seen a significant activity different from what we’ve experienced the last year or so with the competition, again, in the home care area. And I think that our team has done an exceptional work in being the first in and gaining access in creative and innovative ways that are ethical, and still following the guidelines of clinics. And also -- but I would comment on the institutional side, the institutional side is probably facing some headwinds from the competition. And we have larger competitors with a bag of respiratory products, so -- and they do have a presence in the hospital with other products and diagnostics. And so that becomes a little more challenging for us, but what -- how we’ve been able to compete is on a differentiated product, higher quality garments that have 360 coverage compared to our competition. And also we can be a little more flexible on our proposals and still really believe its good margin business. So I’m not concerned about it, but that has a little more pressure than the home care, but the home care we seem to be really hitting their stride, and I think, doing really well.

Great. Well, thank you very much and good luck with everything. Appreciate it.

Hey. Thanks, Patrick.

Thank you. We have reached the end of our question-and-answer session and I will turn the call over to Kathleen Skarvan for closing remarks. Thank you.

Thank you all for participating on our call this afternoon. We look forward to reporting back to you in August, when we’ll release our fourth quarter fiscal 2021 financial results. Have a good evening.

Thank you. This concludes today’s conference. All parties you may disconnect. Have a good evening.