Electromed, Inc. (ELMD)

Item 2.         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 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 that 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 have been no material changes to our critical accounting estimates and assumptions since the filing of our Annual Report on Form 10-K for fiscal 2025.

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Results of Operations

Net Revenues

Net revenues for the three and nine months ended March 31, 2026, and 2025 are summarized in the table below.

Homecare revenue. Homecare revenue increased by $2,630,000, or 18.6%, for the three months ended March 31, 2026, compared to the same period in the prior year. Approximately $1,959,000 of the increase in revenue was due to higher volume, which was driven by additional sales representatives and increased sales representative productivity, and approximately $671,000 was due to higher net revenues per approval. For the nine months ended March 31, 2026, homecare revenue increased by $6,989,000, or 16.7%, compared to the same period in the prior year. Approximately $5,699,000 of the increase in revenue was due to higher volume, which was driven by additional sales representatives and increased sales representative productivity, and approximately $1,290,000 was due to higher net revenues per approval. For the three months ended March 31, 2026, we averaged 57 homecare field sales representatives.

Hospital revenue. Hospital revenue was $1,032,000, an increase of $308,000, or 42.5%, for the three months ended March 31, 2026, compared to the same period in the prior year. For the nine months ended March 31, 2026, hospital revenue was $2,734,000, an increase of $597,000, or 27.9%, compared to the same period in the prior year. The growth in the three and nine months ended March 31, 2026, 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 $19,000, or 2.7%, for the three months ended March 31, 2026, compared to the same period in the prior year. For the nine months ended March 31, 2026, homecare distributor revenue increased by $359,000, or 17.2%, compared to the same period in the prior year. The increases in homecare distributor sales were primarily a result of increased orders from our distribution partners.

Other revenue. Other revenue was $96,000, a decrease of $66,000, or 40.7%, for the three months ended March 31, 2026, compared to the same period in the prior year. For the nine months ended March 31, 2026, other revenue was $281,000, a decrease of $193,000, or 40.7%, compared to the same period in the prior year. The decreases in other revenue were 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 $14,643,000, or 78.8% of net revenues, for the three months ended March 31, 2026, from $12,229,000, or 78.0% of net revenues, in the same period in the prior year. Gross profit dollars increased to $42,659,000, or 78.5% of net revenues, for the nine months ended March 31, 2026, from $36,347,000, or 78.0% of net revenues, in the same period in the prior year. The increases in gross profit were primarily a result of increased overall revenue and higher net revenues per device.

Operating expenses

Selling, general and administrative expenses. Selling, general and administrative (“SG&A”) expenses were $10,516,000 and $31,617,000 for the three and nine months ended March 31, 2026, respectively, representing an increase of $704,000 and $2,584,000, or 7.2% and 8.9%, respectively, compared to the same periods in the prior year.

Payroll and compensation-related expenses were $6,955,000 and $21,326,000 for the three and nine months ended March 31, 2026, respectively, representing an increase of $363,000 and $1,402,000, or 5.5% and 7.0%, respectively, compared to the same periods in the prior year. The increases in the current-year periods were primarily due to the increase in salaries and incentive compensation related to the higher average number of sales representatives and higher overall compensation costs. 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.

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Travel, meals and entertainment expenses were $1,070,000 and $3,357,000 for the three and nine months ended March 31, 2026, respectively, representing an increase of $148,000 and $477,000, or 16.1% and 16.6%, respectively, compared to the same periods in the prior year. The increases in the current year were 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 $293,000 and $1,146,000 for the three and nine months ended March 31, 2026, respectively, representing a decrease of $32,000 and an increase of $203,000, or a decrease of 9.8% and an increase of 21.5%, respectively, compared to the same period in the prior year. The decrease in the three months ended March 31, 2026, was due to timing of routine marketing spend. The increase in the nine months ended March 31, 2026, was due to increased investment in our direct-to-consumer advertising and other market development initiatives.

Professional fees were $1,452,000 and $3,708,000 for the three and nine months ended March 31, 2026, respectively, representing an increase of $167,000 and $104,000, or 13.0% and 2.9%, respectively, compared to the same periods 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 increases in the current periods were primarily due to increased legal and insurance costs.

Research and development expenses. Research and development (“R&D”) expenses were $361,000 and $986,000 for the three and nine months ended March 31, 2026, respectively, representing an increase of $84,000 and $292,000, or 30.3% and 42.1%, respectively, compared to the same periods in the prior year. The increases were primarily due to increased average headcount and consulting expenses related to product enhancements and sustaining engineering.

Operating income

Operating income increased by $1,626,000 or 76.0% to $3,766,000, or 20.3% of net revenues, for the three months ended March 31, 2026, compared to the same period in the prior year. Operating income increased by $3,436,000 or 51.9% to $10,056,000, or 18.5% of net revenues, for the nine months ended March 31, 2026, compared to the same period in the prior year. The increases were primarily due to an increase in revenue and gross profit.

Interest income, net

Net interest income for the three and nine months ended March 31, 2026, was $100,000 and $343,000, respectively, compared to $142,000 and $489,000, respectively, for the same period in the prior year. The decreases were primarily due to decreased interest rates and lower average cash balances throughout the period.

Income tax expense

Income

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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 360o 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 2027 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:

Impacts of Certain Macro-Economic Conditions and the Supply Chain on Our Business and Operations

We expect that component and raw material costs will continue to be a challenge in fiscal 2027, due to supply chain constraints, rising energy costs due to ongoing geopolitical conflict, uncertainty related to trade regulations such as tariffs, and inflationary trends in electronic components. 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, significant changes in trade regulations, or rising energy prices could have a material adverse effect on our business. Any significant increases to our raw material or shipping costs would reduce our gross margins.

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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.

We include shipping and handling fees in net revenues. Shipping and handling costs associated with the shipment of our 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.

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Results of Operations

Fiscal Year Ended June 30, 2026 Compared to Fiscal Year Ended June 30, 2025

Revenues

Revenue for the fiscal years ended June 30, 2026, and 2025 are summarized in the table below.

Homecare Revenue. Homecare revenue increased by $9,325,000, or 16.3%, in fiscal 2026 compared to fiscal 2025. Approximately $7,959,000 of the increase in revenue was due to higher volume, which was driven by additional sales representatives and increased sales representative productivity, and approximately $1,366,000 was due to higher net revenues per approval. For the year ended June 30, 2026, we averaged 58 homecare field sales representatives compared to an average of 54 for the year ended June 30, 2025.

Hospital Revenue. Hospital revenue increased by $302,000, or 9.6%, in fiscal 2026 compared to fiscal 2025. 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 $373,000, or 12.7%, in fiscal 2026 compared to fiscal 2025. The revenue increase in fiscal 2026 was due to increased demand from our distributor 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.

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Other Revenue. Other revenue decreased by $22

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