Electromed, Inc. (ELMD) FY 2026 MD&A

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 $224,000, or 34.7%, in fiscal 2026 compared to fiscal 2025. The decrease in other revenue was primarily due to decreased demand from customers that do not fall within the other markets described above.

Gross Profit

Gross profit increased to $57,943,000 in fiscal 2026, or 78.5% of net revenues, from $49,971,000 or 78.1% of net revenues, in fiscal 2025. The increase in gross profit and gross margin was primarily due to increased revenue and higher net revenue per device.

Operating Expenses

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses were $42,748,000 in fiscal 2026, representing an increase of $3,433,000, or 8.7%, from $39,315,000 in fiscal 2025.

Payroll and compensation-related expenses including health insurance benefits and other compensation increased by $2,269,000, or 8.5%, to $28,868,000 in fiscal 2026, compared to $26,599,000 in fiscal 2025. The increase in the current year was 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 continue 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 increased $488,000, or 12.5%, to $4,407,000 for fiscal 2026 compared to $3,919,000 in fiscal 2025. The increase in the current year was primarily due to a higher average number of direct sales representatives, sales training, and increased travel to support sales activity as well as market development.

Professional and legal fees, including recruiting and insurance expenses, increased by $69,000, or 1.4%, to $4,995,000 in fiscal 2026, compared to $4,926,000 in fiscal 2025. Professional fees include services related to legal costs, shareowner services and reporting requirements, board of directors compensation, information technology technical support and consulting fees. The increase was primarily related to increased legal and insurance costs.

Total discretionary marketing expenses increased by $259,000, or 18.2% to $1,680,000 in fiscal 2026, compared to $1,421,000 in fiscal 2025. The increase in the current year was primarily due to increased investments in our direct-to-consumer advertising and other market development initiatives.

Research and Development Expenses

R&D expenses increased by $318,000, or 31.9%, to $1,314,000 in fiscal 2026 compared to $996,000 in fiscal 2025. The increase in the current year was primarily due to increased average headcount and consulting expenses related to product enhancements and sustaining engineering.

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Operating Income

Operating income increased by $4,221,000, or 43.7%, to $13,881,000 in fiscal 2026, compared to $9,660,000 in fiscal 2025. The increase in operating income was primarily due to increases in net revenues and gross profit.

Interest Income, net

Net interest income was approximately $479,000 in fiscal 2026 compared to net interest income of $624,000 in fiscal 2025. The decrease in the current year was primarily due to decreased interest rates.

Income Tax Expense

Income tax expense in fiscal 2026 was $3,059,000, which includes a current tax expense of $2,633,000, and a deferred expense of $426,000. Income tax expense in fiscal 2025 was $2,747,000, which includes a current tax expense of $3,057,000, and a deferred benefit of $310,000.

The effective tax rates were 21.3% and 26.7% for fiscal 2026 and 2025, respectively. The decrease in the effective tax rate for the current year was primarily driven by research and development tax credits in the current year and non-deductible officer compensation in the prior year that did not recur in the current year. The effective tax rates differ from the statutory federal rate because of state income taxes and other permanent items that are non-deductible for tax purposes relative to the amount of taxable income.

Net Income

Net income for fiscal 2026 was $11,301,000 compared to net income of $7,537,000 in fiscal 2025. The increase of $3,764,000, or 49.9%, in the current year net income was primarily due to increased net revenues and gross profit.

Liquidity and Capital Resources

Cash Flows and Sources of Liquidity

Cash Flows from Operating Activities

Net cash provided by operating activities in fiscal 2026 was $9,665,000. Cash flows from operating activities consisted of net income of $11,301,000, non-cash expenses of approximately $4,224,000, an increase in accrued compensation of $992,000, and an increase in accounts payable and accrued liabilities of $652,000. These cash flows from operating activities were partially offset by an increase in accounts receivable of $5,145,000, an increase in prepaid expenses and other assets of $1,024,000, an increase in inventories of $517,000, an increase in income tax receivable of $760,000, and an increase in contract assets of $58,000.

Cash Flows from Investing Activities

Net cash used for investing activities in fiscal 2026 was approximately $1,300,000. Cash used for investing activities consisted of approximately $1,252,000 in expenditures for property and equipment and $48,000 in payments for patent and trademark costs.

Cash Flows from Financing Activities

Net cash used for financing activities in fiscal 2026 was approximately $3,202,000, consisting of $3,918,000 used for the repurchase of our common stock and $249,000 used for tax payments on net share settlement of stock awards, partially offset by cash received from the issuance of common stock upon the exercise of options of $965,000.

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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 $45,146,000 and available borrowings under our existing credit facility will provide sufficient liquidity to meet our anticipated working capital and other liquidity needs for at least the next twelve months from the date of this report.

We maintain a credit facility that provides us with a revolving line of credit. Our December 2025 credit agreement provides a senior security credit facility with a $10,000,000 revolving line of credit. Any borrowings under the credit facility will bear interest at the applicable one-month Term SOFR (3.62% on June 30, 2026), plus 1.75%, payable monthly. The credit agreement provides that the credit facility will mature on December 16, 2026, if not renewed before such date. There was no outstanding principal balance on the line of credit as of June 30, 2026. The Company provided a first priority security interest in substantially all of its existing and future assets to secure the payment obligations under the credit agreement.

The documents governing the credit facility contain certain customary financial and non-financial covenants that include a maximum total funded debt ratio of not more than 2.50x and a minimum fixed charge coverage ratio of at least 1.20x (as each such term is defined in the credit agreement), as well as restrictions on the Company's ability to incur certain additional indebtedness. So long as there is no default or event of default, the governing documents do not restrict the Company's ability to pay dividends or repurchase common stock.

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.

During fiscal 2026 and 2025, we spent approximately $1,252,000 and $262,000, respectively, on property and equipment. The increase over the prior year was primarily related to manufacturing and building improvement projects which were completed in fiscal 2026. 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 flows.

While the impact of macroeconomic conditions and other factors such as inflation and trade regulations 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 at least the next twelve months from the date of this report.

Accounting Standards Recently Issued But Not Yet Adopted by the Company

See Note 1 of the Notes to our Financial Statements in this Annual Report on Form 10-K for information on new accounting standards adopted in fiscal 2026 or pending adoption.