Electromed, Inc.
Q1 2017 Earnings Call Transcript

Published: 11 Nov 2016

[Operator:]

At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to introduce your host Kalle Ahl, The Equity Group. Please go ahead sir.

[Kalle Ahl:]

Thank you, Kevin, and good morning everyone. Electromed’s first quarter fiscal 2017 financial results were released yesterday after the market close. A copy of the earnings release can be found under the Investor Relations section of the Company’s website at www.smartvest.com. As a matter of formality, I need to remind participants that remarks made by management during the course of this call may contain forward-looking statements about the Company’s results and plans. Such statements are subject to risk and uncertainties that could cause actual performance or achievements to be materially different from those projected. The words belief, expect, plan, intend, estimate, anticipate, should or could and similar expressions or words that are used to identify forward-looking statements. But their absence does not mean a statement is not forward-looking. In addition, any projections as to the Company’s future performance represents managements estimate as of today, November 9, 2016. You should now place undue reliance on these forward-looking statements. We expressly do not undertake any duty to update forward-looking statements whether as a result of new information, future events or otherwise. We ask that you please refer to the Company’s SEC filings for further guidance on this matter. Joining us from Electromed this morning are Ms. Kathleen Skarvan, President and Chief Executive Officer; and Mr. Jeremy Brock, Chief Financial Officer. Kathleen will begin with some openings remarks after which Jeremy will present a summary of the Company’s first quarter fiscal 2017 financial results and then will open up the call for questions. Now, it’s my pleasure to turn the call over to Kathleen.

[Kathleen Skarvan:]

Thank you, Kalle. Good morning everyone and thank you for joining us to discuss Electromed’s first quarter fiscal 2017 results. Let me begin by saying, we are very pleased to be in a position to more actively engage with our shareholders and other members of the financial community. Given that this is our first earnings call since I was appointed CEO of the Company in December 2012, I’d like to spend just a few minutes discussing who we are, where we have come from and the significant opportunity we see in front of us. Who is Electromed? In a nutshell, we are a profitable growing medical device company focused on developing, manufacturing and marketing innovative airway clearance products, primarily with a home care focus. Our SmartVest Airway Clearance System is used to deliver high frequency chest wall oscillation or HFCWO therapy to help clear mucus from the lungs of patients with compromised pulmonary function due to chronic diseases and conditions under the COPD umbrella such as bronchiectasis as well as cystic fibrosis and neuromuscular disorders. As in the case with many successful businesses, we are guided by a customer-centric culture that puts our patient at the centre of everything we do. In addition to operating the lightest, quietest and in our view easiest to use HSCWO device, our business model is differentiated by our high level of service. We advocate for our patients during the often times complex reimbursement process while helping physicians with paper work and provide ongoing in-home patient care and training during therapy that can last to lifetime. Our overwriting goal in this regard is to promote therapy adherence thereby improving our patients' quality of life while reducing risks of infection, which sometimes leads to hospitalization and emergency department business. Where we come from? When I joined Electromed at the end of 2012, we were unprofitable and sales were declining. Some of that had to do with external issues which we’ve spoken about out of Electromed’s control, such as downward pressure in reimbursement. But I saw that we had a number of strong core competencies on which we build, our people, our services such as in the reimbursement area where we are second to none. We took a number of steps to turnaround the business. We implemented processes and system enhancements to further build our reimbursement support capabilities among other areas. We also implemented initiative to reduce manufacturing cost in streamline operations. Finally, we improved our product design and features advancing our new SmartVest SQL model to the market. These actions along with the hard work of our employees have driven our success. We are now growing, profitable and committed to investing in our future. What is Electromed’s opportunity? Today the aging in United States population is experiencing a higher incidence of chronic lung diseases including approximately 24 million cases of COPD, a broad category that includes conditions such as bronchiectasis. We believe there is a growing and significantly underpenetrated population of bronchiectasis patients that could qualify for and benefit from HFCWO therapy. Of an estimate 370,000 Medicare patients diagnosed with bronchiectasis, we believe that only an estimated 10% to 20% have a prescription for HFCWO therapy. Our sales, marketing and reimbursement teams are squarely focused on this exciting opportunity. In September 2016, respiratory therapy magazine featured a manuscript that presented compelling arguments for use of SmartVest by bronchiectasis patients. In particular, a group of 59 bronchiectasis patients that we tracked over the course of one year registered a 60% decrease in emergency room disease. Six fold reduction steroid use and 57% fewer antibiotic prescriptions compared to the year prior to commencing these of SmartVest. These improved economic patient health and quality of health; quality of life outcomes reinforce our optimism about our market opportunity. With this context in place, I’ll now move on to a few of this quarter’s highlights. On the heels of a record fiscal 2016 sales year, we issued 11% year-over-year revenue growth in the first quarter of 2017 driven by a 14% increase in home care sales. I’d like to point out that both revenue and referrals accelerated on a month-to-month basis throughout the quarter. And we ended September 2016 with a highest level of our referrals in our history. The revenue and referral momentum has continued into October of 2016. And we are building our sales staff to further penetrate highly populated regions of the United States. We did end the quarter with 31 field sales up from 29 at the end of the same period last year. We significantly boosted our investment in research and development this quarter, primarily reflecting our ongoing development of an innovative wireless connectivity and reporting solution for the SmartVest SQL Airway Clearance System. We are very excited about this project, which will provide wireless connectivity for integration with interacted dashboard application to encourage patient engagement with HFCWO therapy and promote adherence to prescribe treatment. Wireless connectivity will allow data connection between physicians and patients with impaired airway clearance, offering real-time visibility to HFCWO treatment information to better collaborate in making patient-centered care decisions. We will pilot the integrated SmartVest System in the second half of our fiscal year with a formal launch plan prior to the end of the fiscal year. Among other product enhancements in response to patient feedback, we introduced new color options for a SmartVest garments and SmartVest SQL generators. We believe an expanded portfolio of colors help to satisfy individual aesthetic preferences further promoting patient acceptance, satisfaction in patient and therapy adherence. In summary, we've made a lot of progress this quarter. Our sales staff is growing and we're investing in the future. We aim to deliver another year of profitable organic growth in fiscal 2017 while increasing quality referrals, raising our rate of reimbursement on referrals and maintaining the highest standards of integrity, respect and privacy. I will now turn it over to Jeremy for a detailed discussion of our financial results. Jeremy?

[Jeremy Brock:]

Thank you, Kathleen, and good morning everyone. Our net revenues in quarter one of fiscal 2017 increased 10.9% to 55 million from 5 million in quarter one of fiscal 2016. This was driven by strong results in the home care market where revenue increased by 14.4%, or $600,000, compared to Q1 of fiscal 2016. Home care sales increased primarily due to an increase in the average rate of reimbursement per approval. We also had increased referrals primarily due to an increase in number of referrals per direct sales rep and an increase in approvals from third-party payers as a result of the continued improvement in our reimbursement operations. Institutional sales declined 12.4% to approximately $346,000 due to fewer capital sales at lower average sale prices, compared to the prior year. That was partially offset by recurring sales of disposable single patient used Wrap's to institutions which did increase 20% year-over-year. International revenue which is not a strategic growth area for us at Electromed totaled approximately $67,000, compared to a $120,000 in the prior year period. We remind investors that all quarter-over-quarter sales variability can be expected due to the nature of our business; we anticipate another year of overall revenue growth in fiscal 2017. In Q1 of fiscal 2017, our gross profit rose 12.9% to $4.3 million from $3.9 million in Q1 of fiscal '16, driven by an increase in domestic home care revenue, higher average selling price per unit, and a decrease in the Company’s manufacturing costs of the SmartVest SQL. Gross margins in Q1 of fiscal 2017 increased to 78.1% from 77.2% in Q1 of fiscal '16, primarily reflecting higher average selling price per unit and a decrease in our manufacturing costs as compared to the prior year. Operating expenses which include SG&A as well as R&D expenses, totaled $4 million, or 72.8% of revenue in Q1 of fiscal 2017, compared with 3.3 million, or 65.5% of revenue, in the same period of the prior year. SG&A expenses increased 14.1% to 3.7 million in Q1 of fiscal ’17 from 3.2 million in Q1 of fiscal ’16, primarily due to higher payroll compensation-related expenses, higher professional fees and increased travelled, meals and entertainment expenses. Research and development expenses increased to approximately $351,000 in Q1 of fiscal ’17, up from 42,000 in Q1 of the prior year, primarily driven by incremental investments in our wireless connectivity projects which Kathleen discussed previously. Operating income in Q1 of 2017 declined to approximately $289,000 for $585,000 in the prior year, reflecting higher SG&A and R&D expenses, which more than offset our higher revenue and gross profit. Net income before income tax in Q1 of fiscal ’17 was approximately $272,000 compared to $565,000 in Q1 of fiscal 2016. Our effective tax rate for Q1 of 2017 was 29.8% compared to the 39.4% of the prior year period. In Q1 of fiscal ’17, we reported income tax expense of approximately $81,000 compared to $224,000 in the same period of the prior year. Income tax expense for this first quarter of ’17 included a one-time tax benefit of approximately of $22,000. We anticipate that our full year effective tax rate for fiscal 2017 will return to our normalized rate. We reported net income of approximately $191,000 or $0.02 per basic and diluted share in this quarter compared to $341,000 or $0.04 per basic and diluted share in Q1 of fiscal ’16. Now moving to the balance sheet and operating cash flow, our balance sheet at September 30th, 2016 included cash and cash equivalents of $3.8 million, long-term debt of $1.1 million, working capital of 132 million and stockholders' equity of $16.7 million. I’d like to provide a clarification on our cash flow from operating activities during the quarter. Our cash flow used in operations totaled 1.2 million in Q1 of fiscal 2017 compared to cash provided by operations of approximately $311,000 in the comparable prior period. The main reason for this variance related to changes in accounts payable and accrued liabilities due to sales and management incentives paid out for fiscal ’16 bonuses as well as changes in our accounts receivables. We believe that cash flow from operations would revert to more normalize levels during the remainder of the year. Overall, we are very pleased with the direction our business is heading. And this concludes my remarks. Once again, thank you for your attention. And operator, you may now start the Q&A portion of this call. Thank you.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Ben Haynor from Feltl. Please proceed with your question.

[Ben Haynor:]

Good morning. Can you talk a little bit more about the opportunities you see in bronchiectasis and the economics that you might see using HFCWO in treating patients as compare to the typical treatment?

[Kathleen Skarvan:]

Hi, Ben, it's Kathleen. Great to have you on the call today and thank you for the question. The bronchiectasis opportunity for us is twofold. First, the market size and the fact that a significant population with bronchiectasis is not being diagnosed; and if they are diagnosed, a lot of pulmonologist are not considering HFCWO first as an airway clearance treatment for that. So, the second reason of course is that we refocused on bronchiectasis is that Medicare provides very clear criteria for reimbursement for that home care need. And a couple of primary strategies for us around that are certainly education as you can imagine, and that education is about showing the evidence from clinical studies to those pulmonologist of what that estimated population of bronchiectasis could be within that COPD population. And how they should go about looking for it, and then what a standard of treatment could be involving HFCWO as an example. So, as we said in my opening remarks, the study that we talk about a lot with our physicians is that from sites -- I’m sorry Martinez and Garcia [ph] that was done studying Medicare patients between 2004 and 2007. And that in particular show of those 115 severe chronic obstructive pulmonary disease patients, 57% of those were diagnosed at bronchiectasis as an example. So again, we think it’s a great opportunity and want to grow. And I’ll leave at that and see if you might have a follow up question.

[Ben Haynor:]

No, that makes sense. And just wondering on the wireless connectivity feature that you mentioned in the press release, can you talk a little bit about that? And how that might benefit both patients and carriers?

[Kathleen Skarvan:]

Absolutely, thank you again. The wireless connectivity will allow data connection between physicians and patients who are using our HFCWO SmartVest therapy of course. And so the whole idea is that, that information can provide better collaboration between the physician and the patient and ourselves to help with that for the patient to be improving their quality of life using this therapy. This isn't a new concept of course pharmaceutical companies are using devices in their pharmaceutical containers to ensure that people are taking their devices and they know when their drugs and they are taking when they should. CPAP machines have had this type of connectivity for years. And for us, what we’re trying to do is long-term health ensure that there is higher therapy adherence using our SmartVest device. And so that dashboard that will be created for us, for the patient, for the physician is all going to be additional information. So, we have as an example, we’ll have an earlier learn in the physician, if in fact the patient has using their therapy for a few days. And we can connect with them and say, hey, what’s going on, have you been on vacation, have you been ill or hospitalized. But early intervention is one way to ensure better therapy adherence long-term. Once a patient, particularly the bronchiectasis patient used this device for 7 to 14 days, they will start feeling better. And if we can get them through that and help them start feeling better, they're going to be more apt to continue using it. So, those are just some examples.

[Operator:]

Thank you. [Operator Instructions] Our next question today is coming from Beth Lilly from GAMCO Investors. Please proceed with your question.

[Beth Lilly:]

So, I wanted to just spend a minute and talk -- you talked a little bit in your opening comments about the increase in SG&A and R&D in the quarter, and if you look on a year-over-year basis, they're up pretty substantially and can you talk about how you expect those to trend for the rest of the year and whether or not we should see that same level of spending?

[Kathleen Skarvan:]

I'll start and we'll have Jeremy pipe in, if he needs to. Let's start with the sales organization and we are as we've spoken over the last three to four quarters in our shareholders letter and in our earnings release, we've been moving towards growing our sales organization and as importantly top grading it, making sure that we're bringing on a higher skilled sales person. So that we can have a higher productivity per sales person that we have what we believe is the formula for success in our sales organization. And so there's been turnover and replacements that we've been dealing with over the last couple of years, and now we're at a position where we've the sales force we want. And so the opportunity is to now build on that and grow the sales force over the next few months is part of where we're focused. So, we'll be adding sales people here before the 1st of the year and then we're going to take a pause because I'm very focused on making sure we add in a quality manner and a measured approach, that continues to ensure our profitable growth and that we don't dilute what we think is some great productivity going on with that sales organization. So, then we'll take a pause and we'll reevaluate what we need then as we move into the next fiscal year to ensure our profitable growth going forward. On the R&D side, you could plan on that continuing in the near future at the percent of revenue. And of course, we know how that can fluctuate based on the top line of course, but we're going to continue to invest in our future. And the wireless connectivity is one of those specific initiatives, and again that's going to take us through most of the year here, fiscal year. Jeremy.

[Beth Lilly:]

And so you said you have -- you're building out your sales staff and you're 31?

[Kathleen Skarvan:]

31 total, fields sales people, yes.

[Beth Lilly:]

And what's your goal, I mean what do you think is a good level. You said you've slowed that over the course of the year, so do you want to add an additional 10? Do you want to add an additional 5?

[Kathleen Skarvan:]

It's in the upper single digits.

[Beth Lilly:]

And then I just wanted to ask one other question, as you look at the capacity utilization and your ability to add staff and I know we’ve talked about this in the past, but would you refresh my memory. Do you need to add any capacity to as you build out the sales or you have sufficient capacity?

[Kathleen Skarvan:]

So as far as other functions that will need to keep pace with the sales organization, there could be at here and there, but it won’t be at the same rate as the sales had.

[Operator:]

Thank you. We’ve reached end of our question-and-answer session. I’d like turn the floor back over to management for any further or closing comments.

[Kathleen Skarvan:]

Thank you all for participating on our call today. We look forward to reporting back to you in February to discuss our second quarter fiscal 2017 financial results. For those of you who are in Chicago, we will be holding one-on-one meetings at the Benchmark Microcap Discovery Conference on December 1st. Please feel free to contact us or the Equity Group, if you are interested in scheduling a meeting. Otherwise, we look forward to meeting and speaking with many of you elsewhere as we become more active and interacting with the financials community. Thanks again and have a great day.

[Operator:]

Thank you. This does conclude today’s webcast. You can disconnect at this time and have a wonderful day. We thank you for your participation today.