Electromed, Inc.: Form 10-Q for the period ended Sep 30, 2025

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited Condensed Financial Statements and related notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and our audited financial statements and related notes thereto included in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2025 (“fiscal 2025”).

Overview

Electromed, Inc. (“we,” “our,” “us,” “Electromed” or the “Company”) develops and provides innovative airway clearance products applying High Frequency Chest Wall Oscillation (“HFCWO”) technologies in pulmonary care for patients.

We manufacture, market and sell products that provide HFCWO, including the SmartVest® Airway Clearance System (“SmartVest System”) that includes our newest generation SmartVest Clearway® Airway Clearance System (“Clearway”), previous generation SmartVest SQL®, and related garments and accessories to patients with compromised pulmonary function. The SmartVest Clearway, which received 510(k) clearance from the U.S. Food and Drug Administration in November 2022, provides patients with proven quality of life outcomes while offering a state-of-the-art patient experience with a simple touch screen user interface, small generator footprint and comfortable, lightweight vests.

Our products are sold in both the homecare market and the hospital market for inpatient use, which we refer to as “hospital sales.” Since 2000, we have marketed the SmartVest System and its predecessor products to patients suffering from bronchiectasis, cystic fibrosis, and other chronic pulmonary conditions which require external chest manipulation to enhance mucus transport. Additionally, we offer our products to a patient population that includes neuromuscular disorders such as cerebral palsy, muscular dystrophies, amyotrophic lateral sclerosis (“ALS”), patients with post-surgical complications or who are ventilator dependent and patients who 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 myopathies 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.

Critical Accounting Estimates

For a description of our critical accounting estimates and assumptions used in the preparation of our financial statements, including the unaudited Condensed Financial Statements in this Quarterly Report on Form 10-Q, see Notes 1 and 2 to our unaudited Condensed Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and Part II, Item 7, and Note 1 to our audited financial statements included in Part II, Item 8, of our Annual Report on Form 10-K for fiscal 2025.

There were no material changes in our critical accounting estimates and assumptions since the filing of our Annual Report on Form 10-K for fiscal 2025.

Results of Operations

Net Revenues

Net revenues for the three months ended September 30, 2025, and 2024 are summarized in the table below.

Homecare revenue. Homecare revenue increased by $1,678,000 or 12.7%, for the three months ended September 30, 2025, compared to the same period in the prior year. The increase was primarily due to an increase in direct sales representatives and higher net revenues per sales representative. Throughout the three months ended September 30, 2025, we averaged 57 homecare field sales representatives.

Hospital revenue. Hospital revenue was $1,047,000, an increase of $357,000, or 51.7%, for the three months ended September 30, 2025, compared to the same period in the prior year. The growth in the current period primarily reflects an increase in sales representatives focused on the hospital market and higher capital and disposal demand.

Homecare distributor revenue. Homecare distributor revenue increased by $242,000, or 41.2%, for the three months ended September 30, 2025, compared to the same period in the prior year. The increase in homecare distributor sales was primarily a result of an increased number of distribution partners.

Other revenue. Other revenue was $122,000, a decrease of $58,000, or 32.2% for the three months ended September 30, 2025, compared to the same period in the prior year. The decrease in other revenue was primarily due to the lower demand for purchases by international distributors and other customers that do not fall within the markets described above.

Gross profit

Gross profit dollars increased to $13,197,000, or 78.1% of net revenues, for the three months ended September 30, 2025, from $11,491,000, or 78.3% of net revenues, in the same period in the prior year. The increase in gross profit dollars was primarily a result of increased overall revenue and higher net revenues per device. The decrease in gross profit percentage was a result of higher costs which were partially offset by higher net revenues per device.

Operating expenses

Selling, general and administrative expenses. Selling, general and administrative (“SG&A”) expenses were $10,286,000 for the three months ended September 30, 2025, representing an increase of $899,000, or 9.6%, compared to the same period in the prior year.

Payroll and compensation-related expenses were $6,876,000 for the three months ended September 30, 2025, representing an increase of $419,000, or 6.5%, compared to the same period in the prior year. The increase in the current-year period was primarily due to the increase in salaries and incentive compensation related to the higher average number of sales, 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.

Travel, meals and entertainment expenses were $1,274,000 for the three months ended September 30, 2025, representing an increase of $310,000, or 32.2%, compared to the same period in the prior year. The increase in the current year was primarily due to a higher average number of direct sales representatives, training, and increased travel to support sales activity as well as market development.

Total discretionary marketing expenses were $410,000 for the three months ended September 30, 2025, representing an increase of $146,000, or 55.3%, compared to the same period in the prior year. The increase in the current period was due to increased investment in our direct-to-consumer advertising and other market development initiatives in the three months ended September 30, 2025.

Professional fees were $1,090,000 for the three months ended September 30, 2025, representing a decrease of $50,000, or 4.4%, compared to the same period in the prior year. Professional fees are primarily for services related to legal costs, shareowner services and reporting requirements, information technology technical support, insurance and consulting fees. The decrease in the current year was primarily due to external recruiting spend in the prior year that did not recur in the three months ended September 30, 2025.

Research and development expenses. Research and development (“R&D”) expenses were $241,000 for the three months ended September 30, 2025, representing an increase of $75,000, or 45.2%, compared to the same period in the prior year. The increase was primarily due to increased average headcount and external spend related to product enhancements and sustaining engineering.

Operating income

Operating income increased by $732,000 or 37.8% to $2,670,000 for the three months ended September 30, 2025, compared to the same period in the prior year. The increase is primarily due to an increase in revenue and gross profit.

Interest income, net

Net interest income for the three months ended September 30, 2025, was $134,000, compared to $195,000, for the same period in the prior year. The decrease is primarily due to decreased interest rates and cash balances.

Income tax expense

Income tax expense was estimated at $668,000, and the effective tax rate was 23.8%, for the three months ended September 30, 2025. Estimated income tax expense for the three months ended September 30, 2025, includes a discrete tax benefit of $81,000, primarily related to the windfall tax benefit of vested restricted stock and the exercise of stock options.

Income tax expense was estimated at $659,000, and the effective tax rate was 30.9%, for the three months ended September 30, 2024. Estimated income tax expense for the three months ended September 30, 2024, includes a discrete current tax benefit of $4,000, primarily related to the vesting of restricted stock awards.

Net income

Net income for the three months ended September 30, 2025, was $2,136,000, an increase of 44.9%, compared to $1,474,000 for the same period in the prior year. The increase in net income was primarily due to increased revenue and gross profit.

Liquidity and Capital Resources

Cash Flows and Sources of Liquidity

Cash Flows from Operating Activities

For the three months ended September 30, 2025, net cash provided by operating activities was $169,000. Cash flows provided by operating activities consisted of net income of $2,136,000, non-cash expenses of $717,000, an increase in accounts payable and accrued expenses of $448,000 and a decrease in income tax receivable, net of $202,000. These cash flows from operating activities were offset by a decrease in accrued compensation of $2,348,000, an increase in inventories of $515,000, an increase in prepaid expenses and other assets of $241,000, an increase in contract assets of $134,000, and an increase in accounts receivable of 96,000.

Cash Flows from Investing Activities

For the three months ended September 30, 2025, cash used for investing activities was $267,000. Cash used for investing activities consisted of $252,000 in expenditures for property and equipment and $15,000 in expenditures for intangible assets.

Cash Flows from Financing Activities

For the three months ended September 30, 2025, cash used for financing activities was $1,076,000. Cash used for financing activities consisted of $1,003,000 used for our share repurchase program and $229,000 for taxes paid on net share settlement of stock awards, partially offset by $156,000 from the issuance of common stock upon exercise of options.

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 $35,800,000 and available borrowings under our existing credit facility will provide sufficient liquidity to meet our anticipated working capital and other liquidity needs for 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 (7.25% as of September 30, 2025) less 1.0% and is payable monthly. There was no outstanding principal balance on the line of credit as of September 30, 2025, or June 30, 2025. 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 replaced or renewed. As of September 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 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.

For the three months ended September 30, 2025, and 2024, we spent approximately $252,000 and $37,000, 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 flow.

While the impact of macroeconomic 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 2026 and the foreseeable future. We will continue to evaluate our projected expenditures relative to our available cash and evaluate financing alternatives to satisfy our working capital and other cash requirements.

Information Regarding Forward-Looking Statements

Statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact should be considered forward-looking statements within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include, but are not limited to, statements regarding: our business strategy, including our intended level of investment in research and development and marketing activities; our expectations with respect to earnings, gross margins and sales growth, industry relationships, marketing strategies and international sales; estimated sizes of markets into which our products are or may be sold; our business strengths and competitive advantages; our ability to grow additional sales distribution channels; our intent to retain any earnings for use in operations rather than paying dividends; our expectation that our products will continue to qualify for reimbursement and payment under government and private insurance programs; our intellectual property plans and practices; the expected impact of applicable regulations on our business; our beliefs about our manufacturing processes; our expectations and beliefs with respect to our employees and our relationships with them; our belief that our current facilities are adequate to support our growth plans; our expectations with respect to ongoing compliance with the terms of our credit facility; our expectations regarding the ongoing availability of credit and our ability to renew our line of credit; enhancements to our products and services; expected excise tax exemption for the SmartVest System; and our anticipated revenues, expenses, capital requirements and liquidity. Words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “goal,” “intend,” “may,” “ongoing,” “plan,” “potential,” “project,” “target,” “should,” “will,” “would,” and similar expressions, including the negative of these terms, are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Although we believe these forward-looking statements are reasonable, they involve risks and uncertainties that may cause actual results to differ materially from those projected by such statements. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results or our industry’s actual results, levels of activity, performance, or achievements to be materially different from the information expressed or implied by the forward-looking statements.

Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, the following:

• ability to obtain and maintain reimbursement from Medicare, Medicaid, or private insurance payers for our products;
• component or raw material shortages, changes to lead times or significant price increases and changes to trade regulations (including, but not limited to, changes to tariffs);
• adverse changes to state and federal health care regulations;
• our ability to maintain regulatory compliance and to gain future regulatory approvals and clearances;
• entry of new competitors including new drug or pharmaceutical discoveries;
• adverse economic and business conditions or intense competition;
• wage inflation;
• technical problems with our research and products;
• the risks associated with cyberattacks, data breaches, computer viruses and other similar security threats;
• changes affecting the medical device industry;
• our ability to develop new sales channels for our products such as the hospital or homecare distributor channels;
• adverse international health care regulation impacting current international business;
• our ability to renew our line of credit or obtain additional credit as necessary; and
• our ability to protect and expand our intellectual property portfolio.

This list of factors is not exhaustive, however, and these or other factors, many of which are outside of our control, could have a material adverse effect on us and our results of operations. Therefore, you should consider these risk factors with caution and form your own critical and independent conclusions about the likely effect of these risk factors on our future performance. Forward-looking statements speak only as of the date on which the statements are made, and we undertake no obligation, and expressly disclaim any such obligation, to update any forward-looking statement for any reason other than as required by law, even if new information becomes available or other events occur in the future. You should carefully review the disclosures, and the risk factors described in this and other documents we file from time to time with the Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K for fiscal 2025. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth herein.

Evaluation of Disclosure Controls and Procedures

Our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of the end of the period subject to this Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the date of such evaluation to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.

Changes to Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2025, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.