PART I – FINANCIAL INFORMATION

Item 1.         Financial Statements.

Electromed, Inc.

Condensed Balance Sheets

Electromed, Inc.

Condensed Statements of Operations (Unaudited)

See Notes to Condensed Financial Statements (Unaudited).

Electromed, Inc.

Condensed Statements of Cash Flows (Unaudited)

See Notes to Condensed Financial Statements (Unaudited).

Electromed, Inc.

Condensed Statements of Shareholders’ Equity (Unaudited)

Electromed, Inc.

Notes to Condensed Financial Statements

(Unaudited)

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, 2024 (“fiscal 2024”).

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 Note 1 and Note 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 2024.

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 2024.

Results of Operations

Net Revenues

Net revenues for the three and nine months ended March 31, 2025, and 2024 are summarized in the table below.

Homecare revenue. Homecare revenue increased by $1,815,000 or 14.8%, for the three months ended March 31, 2025, compared to the same period in the prior year. For the nine months ended March 31, 2025, homecare revenue was $41,906,000, representing an increase of $5,798,000, or 16.1%, compared to the same period in the prior year. The increases were primarily due to incremental referrals and approvals driven by an increase in direct sales representatives and efficiencies within our reimbursement department, as well as higher net revenues per approval.

Hospital revenue. Hospital revenue was $724,000, a decrease of $59,000, or 7.5%, for the three months ended March 31, 2025, compared to the same period in the prior year. For the nine months ended March 31, 2025, hospital revenue was $2,137,000, an increase of $228,000, or 11.9%, compared to the same period in the prior year. The decrease in the three-month period was primarily due to the timing of hospital purchases, while the growth in the nine-month period primarily reflects the increased demand for capital and consumables in hospitals.

Homecare distributor revenue. Homecare distributor revenue increased by $172,000, or 32.8%, for the three months ended March 31, 2025, compared to the same period in the prior year. For the nine months ended March 31, 2025, homecare distributor revenue was $2,090,000, an increase of $713,000, or 51.8%, compared to the same period in the prior year. The increases in homecare distributor sales were primarily a result of increased demand from our distribution partners.

Other revenue. Other revenue was $162,000, a decrease of $115,000, or 41.5% for the three months ended March 31, 2025, compared to the same period in the prior year. For the nine months ended March 31, 2025, other revenue was $474,000, a decrease of $16,000, or 3.3%, compared to the same period in the prior year. The decreases in other revenue were primarily due to the lower demand for purchases by customers that do not fall within the other markets described above.

Gross profit

Gross profit increased to $12,229,000, or 78.0% of net revenues, for the three months ended March 31, 2025, from $10,382,000, or 74.8% of net revenues, in the same period in the prior year. Gross profit increased to $36,347,000, or 78.0% of net revenues, for the nine months ended March 31, 2025, from $30,425,000, or 76.3% 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 the increase in gross profit percentage was a result of higher net revenue per device.

Operating expenses

Selling, general and administrative expenses. Selling, general and administrative (“SG&A”) expenses were $9,812,000 and $29,033,000 for the three and nine months ended March 31, 2025, respectively, representing increases of $1,438,000 and $3,334,000, or 17.2% and 13.0%, respectively, compared to the same periods in the prior year.

Payroll and compensation-related expenses were $6,592,000 and $19,924,000 for the three and nine months ended March 31, 2025, respectively, representing increases of $871,000 and $2,813,000, or 15.2% and 16.4%, respectively, compared to the same periods in the prior year. The increases in the current-year periods were primarily due to the accelerated recognition of share-based compensation associated with the vesting of performance-based equity awards, and salaries and incentive compensation related to the higher average number of sales, sales support, 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. Field sales employees totaled 62 as of March 31, 2025, 55 of which were direct sales representatives, compared to 59 field sales employees and 51 direct sales representatives as of March 31, 2024.

Travel, meals and entertainment expenses were $922,000 and $2,880,000 for the three and nine months ended March 31, 2025, respectively, representing increases of $162,000 and $427,000, or 21.3% and 17.4%, respectively, compared to the same periods in the prior year. The increase in the current year was primarily due to a higher average number of direct sales representatives and higher travel costs.

Total discretionary marketing expenses were $325,000 and $943,000 for the three and nine months ended March 31, 2025, respectively, representing an increase of $21,000 and a decrease of $152,000, or an increase of 6.9% and a decrease of 13.9%, respectively, compared to the same periods in the prior year. The increase in the three-month period was due to increased investment in our direct-to-consumer advertising, while the decrease in the nine-month period was primarily due to a one-time investment in market research in the prior year that did not recur in the nine months ended March 31, 2025.

Professional fees were $1,285,000 and $3,604,000 for the three and nine months ended March 31, 2025, respectively, representing increases of $307,000 and $382,000, or 31.4% and 11.9%, 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 and consulting fees. The increase for the three and nine months ended March 31, 2025, was primarily related to increased expense recognition associated with the board of directors’ equity compensation.

Research and development expenses. Research and development (“R&D”) expenses were $277,000 and $694,000 for the three and nine months ended March 31, 2025, respectively, representing increases of $110,000 and $214,000, or 65.9% and 44.6%, respectively, compared to the same periods in the prior year. The increases were primarily due to increased average headcount and external spend related to product enhancements and sustaining engineering.

Operating income

Operating income increased by $299,000 or 16.2% to $2,140,000 for the three months ended March 31, 2025, compared to the same period in the prior year. Operating income increased by $2,374,000 or 55.9% to $6,620,000 for the nine months ended March 31, 2025, compared to the same period in the prior year. The increase is primarily due to an increase in revenue and gross profit in both the three- and nine-month periods, as well as a lower growth rate in selling, general and administrative expenses in the nine-month period.

Interest income, net

Net interest income for the three and nine months ended March 31, 2025, was $142,000 and $489,000, respectively, compared to $120,000 and $293,000, respectively, for the same periods in the prior year. The increases are primarily due to increased cash balances.

Income tax expense

Income tax expenses were estimated at $391,000 and $1,776,000, and the effective tax rate was 17.1% and 25.0%, for the three and nine months ended March 31, 2025, respectively. Estimated income tax expense for the three and nine months ended March 31, 2025, includes a discrete tax benefit of $338,000 and $478,000, respectively, primarily related to the exercise of stock options.

Income tax expense was estimated at $468,000 and $1,217,000, and the effective tax rate was 23.9% and 26.8%, for the three and nine months ended March 31, 2024, respectively. Estimated income tax expense for the three and nine months ended March 31, 2024, includes a discrete current tax benefit of $99,000 and $95,000, respectively, primarily related to the exercise of stock options.

Net income

Net income for the three and nine months ended March 31, 2025, was $1,891,000 and $5,333,000, respectively, compared to $1,493,000 and $3,322,000 for the same periods 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 nine months ended March 31, 2025, net cash provided by operating activities was $7,534,000. Cash flows provided by operating activities consisted of net income of $5,333,000, non-cash expenses of $3,184,000, an increase in accounts payable and accrued expenses of $877,000, a decrease in inventories of $564,000, and an increase in accrued compensation of $78,000. These cash flows from operating activities were offset by an increase in income tax receivable, net of $1,209,000, an increase in prepaid expenses and other assets of $779,000, an increase in contract assets of $405,000, and an increase in accounts receivable of 109,000.

Cash Flows from Investing Activities

For the nine months ended March 31, 2025, cash used for investing activities was $149,000. Cash used for investing activities consisted of $117,000 in expenditures for property and equipment and $32,000 in expenditures for intangible asset costs.

Cash Flows from Financing Activities

For the nine months ended March 31, 2025, cash used for financing activities was $8,228,000. Cash used for financing activities consisted of $6,331,000 used for our share repurchase program and $2,278,000 for taxes paid on net share settlement of stock awards, partially offset by $381,000 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 $35,684,000 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 (7.50% as of March 31, 2025) less 1.0% and is payable monthly. There was no outstanding principal balance on the line of credit as of March 31, 2025, or June 30, 2024. 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 renewed. As of March 31, 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 nine months ended March 31, 2025, and 2024, we spent approximately $117,000 and $265,000, 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 flows.

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 2025 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 R&D 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,” “intend,” “may,” “ongoing,” “plan,” “potential,” “project,” “goal,” “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:

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 2024. 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.

Item 3.         Quantitative and Qualitative Disclosures About Market Risk.

As a smaller reporting company, we are not required to provide disclosure pursuant to this Item.

Item 4.         Controls and Procedures.

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 March 31, 2025, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.         Legal Proceedings.

The disclosure regarding legal proceedings set forth in Note 9 to our unaudited Condensed Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference. Occasionally, we may be party to legal actions, proceedings, or claims in the ordinary course of business, including claims based on assertions of patent and trademark infringement. Corresponding costs are accrued when it is probable that loss will be incurred, and the amount can be precisely or reasonably estimated. We are not aware of any undisclosed actual or threatened litigation that would have a material adverse effect on our financial condition or results of operations.

Item 1A.      Risk Factors.

As a smaller reporting company, we are not required to provide disclosure pursuant to this Item.

Item 2.         Unregistered Sales of Equity Securities and Use of Proceeds.

On September 11, 2024, we announced the approval of a stock repurchase authorization. Under the authorization, the Company could repurchase up to $5,000,000 shares of common stock. A total of 280,017 shares were repurchased and retired under this authorization for a total cost of $5,000,000, or $17.86 per share. This repurchase authorization has been exhausted in its entirety.

On March 6, 2025, we announced the approval of a new stock repurchase authorization. Under the new authorization, the Company may repurchase up to $5,000,000 shares of common stock. This repurchase authorization has no expiration date. Through March 31, 2025, a total of 60,036 shares were repurchased and retired for a total cost of $1,449,000, or $24.14 per share. Under this authorization, shares of our common stock may be repurchased on the open market or in privately negotiated transactions subject to applicable securities laws and regulations. As of March 31, 2025, approximately $3,551,000 shares of common stock remained available for repurchase.

The following table sets forth information concerning all repurchases of shares of our common stock for the three months ended March 31, 2025:

Item 3.         Defaults Upon Senior Securities.

None.

Item 4.         Mine Safety Disclosures.

None.

Item 6.         Exhibits.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.