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What changed in Electromed, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Electromed, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+151 added−167 removedSource: 10-K (2023-08-22) vs 10-K (2022-08-23)

Top changes in Electromed, Inc.'s 2023 10-K

151 paragraphs added · 167 removed · 127 edited across 4 sections

Item 1. Business

Business — how the company describes what it does

64 edited+14 added−21 removed86 unchanged
Biggest changeThe HIPAA and HITECH health care fraud and false statement statutes also prohibit, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any health care benefit program, including private payers, and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation in connection with the delivery of or payment for health care benefits, items or services.
Biggest changeIf a governmental authority were to conclude that we are not in compliance with applicable laws and regulations, we and our officers and employees could be subject to severe criminal and civil penalties and disbarment from participation as a supplier of product to beneficiaries covered by Medicare or Medicaid. 10 Health care fraud and false statement statutes, such as the Health Insurance Portability and Accountability Act of 1996 and its implementing regulations (“HIPAA”) and the Health Information Technology for Economic and Clinical Health Act (“HITECH”), also prohibit, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any health care benefit program, including private payers, and knowingly and willfully falsifying, concealing, or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation in connection with the delivery of or payment for health care benefits, items or services.
Several recent studies have estimated prevalence of bronchiectasis, which we believe are helpful for estimating a range of the overall market size. 3 ● Weycker (2017) projected 4.2 million adults in the United States over the age of 40 may have bronchiectasis, suggesting there is a large pool of patients with undiagnosed disease. 7 ● Henkle (2018) confirmed a high prevalence of bronchiectasis in the United States, identifying over 600,000 unique patients with at least one bronchiectasis claim (ICD-9 claims 494.0 or 494.1).
Several recent studies have estimated prevalence of bronchiectasis, which we believe are helpful for estimating a range of the overall market size. ● Weycker (2017) projected 4.2 million adults in the United States over the age of 40 may have bronchiectasis, suggesting there is a large pool of patients with undiagnosed disease. 7 ● Henkle (2018) confirmed a high prevalence of bronchiectasis in the United States, identifying over 600,000 unique patients with at least one bronchiectasis claim (ICD-9 claims 494.0 or 494.1).
We are currently working on finalizing updates to the quality system to achieve full compliance with Regulation (EU) 2017/745 (EU MDR) which came into effect in May 2021. We also require all of our distributors in the European Union and other regions to comply with their home country regulations in our distributor agreements.
We are currently working on finalizing updates to the quality system to achieve full compliance with Regulation (EU) 2017/745 (EU MDR) which came into effect in May 2021. We also require all our distributors in the European Union and other regions to comply with their home country regulations in our distributor agreements.
The reimbursement department includes the payer relations function working directly with all payer types to increase the covered lives for the SmartVest System with national and regional private insurers and applicable state and federal government entities as well as to maintain all of the current licenses with state and federal government and payer contracts. 6 Our SmartVest System is reimbursed under HCPCS code E0483.
The reimbursement department includes the payer relations function working directly with all payer types to increase the covered lives for the SmartVest System with national and regional private insurers and applicable state and federal government entities as well as to maintain the current licenses with state and federal government and payer contracts. 6 Our SmartVest System is reimbursed under HCPCS code E0483.
Enforcement of all of these regulations has become increasingly stringent, particularly due to more prevalent use of the whistleblower provisions under the False Claims Act, which allow a private individual to bring actions on behalf of the federal government alleging that the defendant has submitted a false claim to the federal government and to share in any monetary recovery.
Enforcement of these regulations has become increasingly stringent, particularly due to more prevalent use of the whistleblower provisions under the False Claims Act, which allow a private individual to bring actions on behalf of the federal government alleging that the defendant has submitted a false claim to the federal government and to share in any monetary recovery.
In March 2020, we launched the SmartVest Connect app for both the iOS and Android operating systems. The SmartVest Connect app securely connects to the SmartVest SQL System through Bluetooth™ technology. This interface allows patients and healthcare teams to track therapy in real-time and collaborate on care decisions to improve therapy adherence and patient outcomes.
In March 2020, we launched the SmartVest Connect app for both the iOS and Android operating systems. The SmartVest Connect app securely connects to the SmartVest System through Bluetooth™ technology. This interface allows patients and healthcare teams to track therapy in real-time and collaborate on care decisions to improve therapy adherence and patient outcomes.
These initiatives have created an increasing level of price sensitivity among our customers. 8 Home Medical Equipment Licensing Although we do not fall under competitive bidding for Medicare, we often must satisfy the same licensing requirements as other DME providers that qualify for competitive bidding.
These initiatives have created an increasing level of price sensitivity among our customers. Home Medical Equipment Licensing Although we do not fall under competitive bidding for Medicare, we often must satisfy the same licensing requirements as other DME providers that qualify for competitive bidding.
For each home care SmartVest System initially purchased and currently located in the U.S. and Canada, we provide a lifetime warranty to the individual patient for whom the SmartVest System is prescribed. For sales to institutions and HME distributors within the U.S., and for all international sales, except Canadian home care, we provide a three-year warranty.
For each homecare SmartVest System initially purchased and currently located in the U.S. and Canada, we provide a lifetime warranty to the individual patient for whom the SmartVest System is prescribed. For sales to institutions and HME distributors within the U.S., and for all international sales, except Canadian home care, we provide a three-year warranty.
We also must maintain certain certifications to sell products internationally, and we undergo periodic inspections by notified bodies to obtain and maintain these certifications. 9 Advertising and marketing of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission and by state regulatory and enforcement authorities.
We also must maintain certain certifications to sell products internationally, and we undergo periodic inspections by notified bodies to obtain and maintain these certifications. Advertising and marketing of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission and by state regulatory and enforcement authorities.
In addition, the U.S. Foreign Corrupt Practices Act can be used to prosecute companies in the U.S. for arrangements with physicians, or other parties outside the U.S. if the physician or party is a government official of another country and the arrangement violates the law of that country.
Foreign Corrupt Practices Act can be used to prosecute companies in the U.S. for arrangements with physicians, or other parties outside the U.S. if the physician or party is a government official of another country and the arrangement violates the law of that country.
The SEC also maintains an Internet site that contains our reports, proxy and information statements, and other information we file or furnish with the SEC, available at www.sec.gov.
The SEC also maintains an Internet site that contains our reports, proxy and information statements, and other information we file or furnish with the SEC, available at www.sec.gov. 12
Our payment terms generally allow patients to acquire the SmartVest System over a period of one to 15 months, which is consistent with reimbursement procedures followed by Medicare and other third parties. The payment amount we receive for any single referral may vary based on a number of factors, including Medicare and third-party reimbursement processes and policies.
Our payment terms generally allow patients to acquire the SmartVest System over a period of one to 15 months, which is consistent with reimbursement procedures followed by Medicare and other third parties. The payment amount we receive for any single referral may vary based on several factors, including Medicare and third-party reimbursement processes and policies.
We also had approximately 250 respiratory therapists and health care professionals retained on a non-exclusive, independent contractor basis to provide training to our customers in the U.S. None of our employees are covered by a collective bargaining agreement. We believe our relations with our employees are good.
We also had approximately 170 respiratory therapists and health care professionals retained on a non-exclusive, independent contractor basis to provide training to our customers in the U.S. None of our employees are covered by a collective bargaining agreement. We believe our relations with our employees are good.
Currently, the Medicare total allowable amount of reimbursement for this billing code is approximately $13,000. The allowed amount for state Medicaid programs ranges from approximately $8,000 to $13,000, which is similar to commercial payers. Actual reimbursement from third-party payers can vary and can be significantly less than the full allowable amount.
Currently, the Medicare total allowable amount of reimbursement for this billing code is approximately $15,000. The allowed amount for state Medicaid programs ranges from approximately $8,000 to $15,000, which is similar to commercial payers. Actual reimbursement from third-party payers can vary and can be significantly less than the full allowable amount.
We believe the market for HFCWO is continuing to expand due to an aging population, higher incidence of chronic lung disease, growing awareness by physicians of diseases and conditions for which patients can benefit from using HFCWO therapy, and treatments moving to lower cost home care settings.
We believe the market for HFCWO is under recognized and underdiagnosed and is continuing to expand due to an aging population, higher incidence of chronic lung disease, growing awareness by physicians of diseases and conditions for which patients can benefit from using HFCWO therapy, and treatments moving to lower cost home care settings.
By conservatively assessing the market size in relation to the clinical studies cited above, we calculate that current HFCWO adoption may account for only 90,000 patients of the 500 to 600 thousand currently diagnosed and treatable patients (see Figure 1 below).
By conservatively assessing the market size in relation to the clinical studies cited above, we calculate that current HFCWO adoption may account for only 100,000 patients of the 500,000 to 600,000 currently diagnosed and treatable patients (see Figure 1 below).
Because the sale of the SmartVest System requires a physician's prescription, we market to physicians and health care providers as well as directly to patients. The majority of our revenue comes from domestic home care sales through a physician referral model.
Because the sale of the SmartVest System requires a physician’s prescription, we market to physicians and health care providers as well as directly to patients. Most of our revenue comes from domestic homecare sales through a physician referral model.
We generally pursue patent protection for patentable subject matter in our proprietary devices in foreign countries that we have identified as key markets for our products. These markets include the European Union, Japan, and other countries. 7 We also have received 10 U.S. and 100 foreign trademark and service mark registrations.
We generally pursue patent protection for patentable subject matter in our proprietary devices in foreign countries that we have identified as key markets for our products. These markets include the European Union, Japan, and other countries. We also have received 13 U.S. and 111 foreign trademark and service mark registrations.
(now RespirTech, part of Koninklijke Phillips N.V.) received FDA clearance to market their HFCWO product, the inCourage ® Airway Clearance Therapy in 2005. Both Hillrom and RespirTech employ a direct-to-patient model, with RespirTech additionally offering its HFCWO device through selected DME distributors. The AffloVest ® from Tactile Systems Technology Inc.
Respiratory Technologies, Inc. (formerly RespirTech, now part of Koninklijke Phillips N.V.) (“Philips”) received FDA clearance to market their HFCWO product, the inCourage ® Airway Clearance Therapy in 2005. Both Baxter and Philips employ a direct-to-patient model, with Philips additionally offering its HFCWO device through selected DME distributors. The AffloVest ® from Tactile Systems Technology Inc.
As of June 30, 2022, we had 52 field sales employees, including six regional sales managers, 43 clinical area managers (“CAMs”) and three clinical educators. We also have developed a network of approximately 250 respiratory therapists and health care professionals across the U.S. to assist with in-home SmartVest System patient training on a non-exclusive, independent contractor basis.
As of June 30, 2023, we had 55 field sales employees, including six regional sales managers, 46 clinical area managers (“CAMs”) and three clinical educators. We also have developed a network of approximately 170 respiratory therapists and health care professionals across the U.S. to assist with in-home SmartVest System patient training on a non-exclusive, independent contractor basis.
We are committed to ensuring a diverse workforce in a safe environment by maintaining compliance with applicable employment laws and governmental regulations. Treating employees with dignity and equality is of utmost importance in everything we do. We take pride in the fact that women represent 53% of our total managerial roles and comprise 57% of our executive leadership team.
We are committed to ensuring a diverse workforce in a safe environment by maintaining compliance with applicable employment laws and governmental regulations. Treating employees with dignity and equality is of utmost importance in everything we do. We take pride in the fact that women represent 50% of our total managerial roles..
Intellectual Property As of June 30, 2022, we held 13 United States and 43 foreign-issued patents covering the SmartVest System and its underlying technology and had 13 pending United States and foreign patent applications. These patents and patent applications offer coverage in the field of air pressure pulse delivery to a human in support of airway clearance.
Intellectual Property As of June 30, 2023, we held 12 United States and 41 foreign-issued patents covering the SmartVest System and its underlying technology and had 9 pending United States and foreign patent applications. These patents and patent applications offer coverage in the field of air pressure pulse delivery to a human in support of airway clearance.
We have made available on our website, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports, as soon as reasonably practicable after we electronically file these materials with, or furnish them to, the SEC.
Available Information Our Internet address is www.smartvest.com. We have made available on our website, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports, as soon as reasonably practicable after we electronically file these materials with, or furnish them to, the SEC.
Competition The original HFCWO technology was licensed to American Biosystems, Inc. (now part of Hill-Rom Holdings, Inc.) (“Hillrom”), which, until the introduction of our original MedPulse Respiratory Vest System ® in 2000, was the only manufacturer of a product with HFCWO technology cleared for market by the FDA (Hillrom’s The Vest ® Airway Clearance System). Respiratory Technologies, Inc.
Competition The original HFCWO technology was licensed to American Biosystems, Inc. (formerly Hill-Rom Holdings, Inc., now part of Baxter International Inc.) (“Baxter”), which, until the introduction of our original MedPulse Respiratory Vest System ® in 2000, was the only manufacturer of a product with HFCWO technology cleared for market by the FDA (Hill Rom’s The Vest ® Airway Clearance System).
We believe that sharing rewards is essential to increasing employee engagement and improving morale and creating a positive culture. We also offer our employees a competitive salary and benefits package and are committed to continuous review of these programs.
We believe that this commitment assists in our efforts to attract and retain employees. We believe that sharing rewards is essential to increasing employee engagement and improving morale and creating a positive culture. We also offer our employees a competitive salary and benefits package and are committed to continuous review of these programs.
We continue to evaluate opportunities to offer the SmartVest System through selected Home Medical Equipment (“HME”) distributors. We maintain agreements with three HME distributors, one national and two regional, to distribute and sell the SmartVest System in the United States home care market. We expect to continue our direct sales channel as our primary homecare revenue source.
We continue to evaluate opportunities to offer the SmartVest System through selected Home Medical Equipment (“HME”) distributors. We maintain agreements with a limited number of HME distributors to distribute and sell the SmartVest System in the United States home care market. We expect to continue our direct sales channel as our primary homecare revenue source.
A HCPCS code is assigned to services and products by the Centers for Medicare and Medicaid Services (“CMS”). ● Of the $41.7 million of our revenue derived from the U.S. in fiscal 2022, approximately 91% represented home care and 4% represented hospital sales.
A HCPCS code is assigned to services and products by the Centers for Medicare and Medicaid Services (“CMS”). Of the $47.6 million of our revenue derived from the U.S. in fiscal 2023, approximately 92% represented home care and 4% represented hospital sales.
We obtained clearance to use the CE mark on our products in April 2005. Renewal of CE marking is required every five years, and our notified body performs an annual audit to ensure that we are in compliance with all applicable regulations.
Products that bear CE mark can be imported to, sold or distributed within the European Union. We obtained clearance to use the CE mark on our products in April 2005. Renewal of CE marking is required every five years, and our notified body performs an annual audit to ensure that we are in compliance with all applicable regulations.
We generate sales interest through multiple channels that include visits to pulmonology clinics and medical centers, participation in medical conferences, maintenance of industry contacts to increase the visibility and acceptance of our products by physicians and health care professionals, participation with patient organizations such as the Cystic Fibrosis Foundation, as well as through a focus on increasing patients by word of mouth and traffic to our website and social media channels.
We generate sales interest through multiple channels that include visits to pulmonology clinics and medical centers, participation in medical conferences, maintenance of industry contacts to increase the visibility and acceptance of our products by physicians and health care professionals, support of industry events such as the Cystic Fibrosis Foundation World Bronchiectasis Day and American Lung Association Fight for Air Climb, as well as through a focus on increasing patients by word of mouth and traffic to our website and social media channels.
NPJ Prim Care Respir Med . 2017;27:18. 15 Internal company estimates derived from IQVIA 2018 PharMetrics Plus Database 4 Estimated HFCWO Market Opportunity - Bronchiectasis Patients (U.S.) – Figure 1 The heightened awareness of bronchiectasis speaks to the growing body of clinical evidence supporting treatments to improve symptoms and manage disease progression. ● In 2019, an observational comparative retrospective cohort study published in BMC Pulmonary Medicine evaluated the efficacy of a treatment algorithm in 65 patients with radiographic and symptom confirmed bronchiectasis, centered on initiation of HFCWO therapy with the SmartVest System. 5 Patients were treated per the algorithm if they reported greater than two exacerbations in the previous year and symptoms, including chronic cough, sputum production, or dyspnea.
Poster Abstract 310-B 4 Estimated HFCWO Market Opportunity - Bronchiectasis Patients (U.S.) – Figure 1 The heightened awareness of bronchiectasis speaks to the growing body of clinical evidence supporting treatments to improve symptoms and manage disease progression. ● In 2019, an observational comparative retrospective cohort study published in BMC Pulmonary Medicine evaluated the efficacy of a treatment algorithm in 65 patients with radiographic and symptom confirmed bronchiectasis, centered on initiation of HFCWO therapy with the SmartVest System. 5 Patients were treated per the algorithm if they reported greater than two exacerbations in the previous year and symptoms, including chronic cough, sputum production, or dyspnea.
As of June 30, 2022, we had 156 employees, an increase of 15.4% from fiscal 2021, who are located in 29 states throughout the United States. 18 of our employees were respiratory therapists licensed by appropriate state professional organizations.
As of June 30, 2023, we had 170 employees, an increase of 9% from fiscal 2022, who are in 30 states throughout the United States. 18 of our employees were respiratory therapists licensed by appropriate state professional organizations.
Environmental Laws We are subject to various environmental laws and regulations both within and outside the U.S. Like other medical device companies, our operations involve the use of substances regulated under environmental laws, primarily manufacturing, sterilization, and disposal processes.
If we fail to comply with applicable state laws and regulations, we could be subject to additional sanctions. Environmental Laws We are subject to various environmental laws and regulations both within and outside the U.S. Like other medical device companies, our operations involve the use of substances regulated under environmental laws, primarily manufacturing, sterilization, and disposal processes.
International Marketing Approximately 1.3% and 1.8% of our net revenues were from sales outside of the U.S. in our fiscal 2022 and our fiscal year ended June 30, 2021 (“fiscal 2021”), respectively. We sell our products outside of the U.S. primarily through independent distributors specializing in respiratory products.
International Marketing Approximately 1% of our net revenues were from sales outside of the U.S. in both of our fiscal 2023 and our fiscal year ended June 30, 2022 (“fiscal 2022”), respectively. We sell our products outside of the U.S. primarily through independent distributors specializing in respiratory products. Through June 30, 2023, most of our distributors operated in exclusive territories.
We also maintain an in-state presence in California in order to meet their state Medicaid requirements. In-state presence requirements vary from state to state, but generally require a physical location that is staffed and open during regular business hours. We are licensed to do business in all states except for Alaska and Hawaii.
We also maintain an in-state presence in California to meet their state Medicaid requirements. In-state presence requirements vary from state to state, but generally require a physical location that is staffed and open during regular business hours.
The principal applicable federal laws include: ● the False Claims Act, which prohibits the submission of false or otherwise improper claims for payment to a federally funded health care program; ● the Anti-Kickback Statute, which prohibits offers to pay or receive remuneration of any kind for the purpose of inducing or rewarding referrals of items or services reimbursable by a federal health care program; and ● the Stark Law, which prohibits physicians from profiting (actually or potentially) from their own referrals. 10 There are often similar state false claims, anti-kickback, and anti-self-referral and insurance laws that apply to state-funded Medicaid and other health care programs and private third-party payers.
The principal applicable federal laws include: ● the False Claims Act, which prohibits the submission of false or otherwise improper claims for payment to a federally funded health care program; ● the Anti-Kickback Statute, which prohibits offers to pay or receive remuneration of any kind for the purpose of inducing or rewarding referrals of items or services reimbursable by a federal health care program; and ● the Stark Law, which prohibits physicians from profiting (actually or potentially) from their own referrals.
Government programs, including Medicare and Medicaid, have attempted to control costs by limiting the amount of reimbursement the program will pay for particular procedures or treatments, restricting coverage for certain products or services, and implementing other mechanisms designed to constrain utilization and contain costs.
Government programs, including Medicare and Medicaid, have attempted to control costs by limiting the amount of reimbursement the program will pay for procedures or treatments, restricting coverage for certain products or services, and implementing other mechanisms designed to constrain utilization and contain costs. Many private insurance programs look to Medicare as a guide in setting coverage policies and payment amounts.
As part of our growth strategies, we periodically evaluate opportunities involving products and services, especially those that may provide value to the respiratory homecare and institutional market.
We will continue to support and service earlier SmartVest models pursuant to the applicable product warranty. As part of our growth strategies, we periodically evaluate opportunities involving products and services, especially those that may provide value to the respiratory homecare and institutional market.
Product Regulations Our medical devices are subject to regulation by numerous government agencies, including the FDA and comparable foreign regulatory agencies.
We are licensed to do business in all states except for Alaska and Hawaii. 8 Product Regulations Our medical devices are subject to regulation by numerous government agencies, including the FDA and comparable foreign regulatory agencies.
The Health Insurance Portability and Accountability Act of 1996 and its implementing regulations (“HIPAA”) and the Health Information Technology for Economic and Clinical Health Act (“HITECH”) set forth privacy and security standards that govern the use and disclosure of protected electronic health information by “covered entities,” which include healthcare providers, health plans and healthcare clearinghouses.
HIPAA and HITECH set forth privacy and security standards that govern the use and disclosure of protected electronic health information by “covered entities,” which include healthcare providers, health plans and healthcare clearinghouses.
SmartVest Connect is available to pediatric and cystic fibrosis patients, and targeted adult pulmonary clinics using a Bluetooth-enabled SmartVest SQL System. Other Products We market the Single Patient Use (“SPU”) SmartVest and SmartVest Wrap ® to health care providers in the acute care setting. Hospitals issue the SPU SmartVest or SmartVest Wrap to an individual patient for managing airway clearance.
Other Products We market the Single Patient Use (“SPU”) SmartVest and SmartVest Wrap ® to health care providers in the acute care setting. Hospitals issue the SPU SmartVest or SmartVest Wrap to an individual patient for managing airway clearance while inpatient.
Both SPU products provide full coverage oscillation and facilitate continuity of care because they introduce the patient to our product and may encourage use of the SmartVest System for home care, which can be provided to patients with a chronic condition upon discharge.
Both SPU products provide full coverage oscillation and facilitate continuity of care when the SmartVest System is prescribed for patients with a chronic condition upon discharge for use in the home.
We are proud of our employees’ collective commitment to secure and maintain safe work practices that have resulted in zero lost time injuries within our manufacturing operations.
We are proud of our employees’ collective commitment to secure and maintain safe work practices that have resulted in zero lost time injuries within our manufacturing operations. We also provide wellbeing services to support each employee’s physical and mental health and will continue to emphasize the importance of the safety and health of our employees in all we do.
Units are sold at a fixed contract price with payments made directly from the distributor, rather than being tied to reimbursement rates of a patient’s insurance provider as is the case for domestic sales. Our sales strategy outside of the U.S. is to maintain our current distributors with less emphasis on contracting with new distributors.
Our principal distributors are located in Europe, the Arab states of the Persian Gulf, Southeast Asia, South America and Central America. Units are sold at a fixed contract price with payments made directly from the distributor, rather than being tied to reimbursement rates of a patient’s insurance provider as is the case for domestic sales.
Other federal, state or foreign enforcement authorities could also take similar action if they were to determine that our promotional or training materials constitute promotion of an unapproved use, which could result in significant fines or penalties.
Other federal, state or foreign enforcement authorities could also take similar action if they were to determine that our promotional or training materials constitute promotion of an unapproved use, which could result in significant fines or penalties. 9 European Union and Other Regions European Union rules require that medical products receive the right to affix the CE mark, demonstrating adherence to quality standards and compliance with relevant European Union Medical Device Directives (“MDD”).
We believe we distinguish ourselves in these areas with competitive advantages over alternative treatments ultimately improving the patient comfort, ease of use, and the effectiveness of HFCWO treatment. Because HFCWO is not “technique dependent,” as compared to most other alternative pulmonary therapy products, therapy remains consistent and controlled for the duration of treatment.
Because HFCWO is not “technique dependent,” as compared to most other alternative pulmonary therapy products, therapy remains consistent and controlled for the duration of treatment.
Oscillations are delivered evenly from the base of the SmartVest garment, extending the forces upward and inward in strong but smooth cycles surrounding the chest. ● Open system design with active inflate – active deflate: The active inflate – active deflate mechanism of the SmartVest System provides patients a more comfortable treatment experience by allowing them to take deep breaths and breathe more easily without feeling restricted. ● Soft-fabric garment is lightweight and comfortable: The SmartVest garment is lightweight and designed to resemble an article of clothing.
Oscillations are delivered evenly from the base of the SmartVest garment, extending the forces upward and inward in strong but smooth cycles surrounding the chest. ● Soft-fabric garment is lightweight and comfortable: The SmartVest garment is the lightest HFCWO garment available and is designed to resemble an article of clothing.
Our cyber insurance policies include dedicated support for remediating a specific cybersecurity or data privacy incident and limit the potential financial risk associated with an actual incident. 11 Even though we have implemented administrative, physical and technical safeguards designed to help protect the confidential data we possess and the integrity of our information systems and infrastructure, these safeguards may not be effective in preventing future cybersecurity incidents or data breaches.
Even though we have implemented administrative, physical, and technical safeguards designed to help protect the confidential data we possess and the integrity of our information systems and infrastructure, these safeguards may not be effective in preventing future cybersecurity incidents or data breaches. 11 Human Capital We believe that our dedicated, talented employees are our most valuable resource and a key strength in accomplishing our collective mission and goals.
This includes the most recent clinical study, a 2022 publication in the American Journal of Respiratory and Critical Care Medicine reviewing outcomes among non-cystic fibrosis bronchiectasis patients with HFCWO Therapy. 2-6 Generating additional clinical evidence to further support the SmartVest System as a preferred treatment for bronchiectasis patients will remain a focus for us in fiscal 2023, with two clinical studies in progress.
This includes a 2022 publication in the American Journal of Respiratory and Critical Care Medicine reviewing outcomes among non-cystic fibrosis bronchiectasis patients with HFCWO Therapy 2-6.
Our Market We estimate the total served U.S. market for HFCWO has returned to pre-pandemic levels and is estimated at approximately $220 million to $240 million, with growth in HFCWO adoption at approximately 5% based on independent third-party market research.
Our Market We estimate the total served U.S. market for HFCWO is approximately $250 million in 2022 growing at a 9% compound annual growth rate based on independent third-party market research.
To cultivate a learning culture that provides enhancement and growth for our people, we offer educational assistance, online training (220 courses completed during fiscal 2022), seminars, specific skill training, and participation in business and industry organizations.
To cultivate a learning culture that provides enhancement and growth for our people, we offer educational assistance, online training, seminars, specific skill training, and participation in business and industry organizations. We are also committed to contributing our talents and resources to serve the communities in which we live and work through various charitable campaigns, employee programs and volunteerism.
Product Warranties We provide a warranty on the SmartVest System that covers the cost of replacement parts and labor, or a new SmartVest System in the event we determine a full replacement is necessary.
During fiscal 2022 and 2023, we experienced longer lead times for critical electronic components related to worldwide supply shortages due to COVID-19 and the related U.S. and global economic recovery. 7 Product Warranties We provide a warranty on the SmartVest System that covers the cost of replacement parts and labor, or a new SmartVest System in the event we determine a full replacement is necessary.
The SmartVest SQL System The SmartVest SQL System consists of an inflatable therapy garment, a programmable air pulse generator and a patented single-hose that delivers air pulses from the generator to the garment. The SmartVest SQL is designed for maximum comfort and lifestyle convenience, so patients can readily fit therapy into their daily routines.
The SmartVest Clearway System The SmartVest Clearway System consists of an inflatable therapy garment, a programmable air pulse generator and a patented single-hose that delivers air pulses from the generator to the garment to create oscillatory pressure on the chest wall.
Consequently, our sales will continue to depend in part on the availability of coverage and reimbursement from third-party payers, even though our devices may have been cleared for marketing by the FDA. The manner in which reimbursement is sought and obtained varies based upon the type of payer involved and the setting in which the procedure is furnished.
Most patients can qualify for reimbursement and payment from Medicare, Medicaid, private insurance or combinations of the foregoing. Our sales continue to be dependent, in part, on the availability of coverage and reimbursement from third-party payers, even though our devices have been cleared for marketing by the FDA.
(“Tactile Medical”) also participates in the same market as our SmartVest System. Tactile Medical primarily sells its device through DME companies who distribute home care medical devices and supplies. Based on annual revenue, we estimate that Hillrom maintains the highest market share in HFCWO followed by RespirTech with Electromed in the third position.
(“Tactile Medical”) also participates in the same market as our SmartVest System. Tactile Medical primarily sells its device through DME companies who distribute home care medical devices and supplies. Alternative products for administering pulmonary therapy include: Positive Expiratory Pressure, Intrapulmonary Percussive Ventilation, CPT and breathing techniques.
The SmartVest SQL was designed to be significantly smaller, quieter, and lighter than its predecessor, and offers features that make it easier to use and enable greater patient freedom. ● Patented single-hose design: A single-hose delivers oscillations to the SmartVest garment, which we believe provides therapy in a more comfortable and unobtrusive manner than a two-hose system.
An enhanced pause feature allows the physician to program dedicated times for the patient to clear secretions during therapy. ● Patented single-hose design: A single-hose delivers oscillations to the SmartVest garment, which we believe provides therapy in a more comfortable and unobtrusive manner than a two-hose system.
The CMS waiver was recently extended in conjunction with the extension of the federal public health emergency for an additional 90-day period beginning July 15, 2022. Research and Development Our research and development (“R&D”) capabilities consist of full-time engineering staff and several consultants. We periodically engage consultants and contract engineering employees to supplement our development initiatives.
The way reimbursement is sought and obtained varies based upon the type of payer involved and the setting in which the procedure is furnished. Research and Development Our research and development (“R&D”) capabilities consist of full-time engineering staff and several consultants. We periodically engage consultants and contract engineering employees to supplement our development initiatives.
Our team has a demonstrated record of developing new products that receive the appropriate product approvals and regulatory clearances around the world. During fiscal 2022 and 2021, we incurred R&D expenses of approximately $1,356,000 and $1,722,000, or 3.3% and 4.8% of our net revenues, respectively.
Our team has a demonstrated record of developing new products that receive the appropriate product approvals and regulatory clearances around the world as demonstrated by the FDA 510(k) clearance for the SmartVest Clearway Airway Clearance System received November 2022.
Further, an enhanced pause feature allows the physician to program dedicated times for the patient to clear secretions. SmartVest Connect In June 2017, we launched the SmartVest SQL with SmartVest Connect ® wireless technology, a personalized HFCWO therapy management portal for patients with compromised pulmonary function.
The lightweight design, ergonomic carrying handle and compact storage case make it easier for patients to move throughout their home, store and integrate HFCWO therapy into their daily lives. SmartVest Connect In June 2017, we launched SmartVest Connect ® wireless technology, a personalized HFCWO therapy management portal for patients with compromised pulmonary function.
We believe that bronchiectasis is under recognized and underdiagnosed but is experiencing a surge in clinical interest and awareness, including the relationship to COPD, commonly referred to as bronchiectasis COPD overlap syndrome. The overlap of bronchiectasis and COPD increases exacerbations and hospitalizations, reduces pulmonary function, and increases mortality.
We have also shared data from our bronchiectasis quality of life trial at the 2023 World Bronchiectasis and NTM Conference highlight effects of HFCWO on clinical symptoms of patients with bronchiectasis Generating additional clinical evidence to further support the SmartVest System as a preferred treatment for bronchiectasis patients will remain a focus in fiscal 2024. 3 We believe that bronchiectasis is under recognized and underdiagnosed but is experiencing a surge in clinical interest and awareness, including the relationship to COPD, commonly referred to as bronchiectasis COPD overlap syndrome.
Alternative products for administering pulmonary therapy include: Positive Expiratory Pressure, Intrapulmonary Percussive Ventilation, CPT and breathing techniques. Physicians may prescribe some or all of these devices and techniques, depending upon each patient's health status, severity of disease, compliance, or personal preference.
Physicians may prescribe some or all of these devices and techniques, depending upon each patient’s health status, severity of disease, compliance, or personal preference. Key drivers of HFCWO product sales continue to be improved quality of life through documented clinical outcomes and reduction in healthcare costs through resource utilization evidence.
Quick fit Velcro ® -like closures allow for a secure, comfortable fit without bulky straps and buckles. The simple design creates a broad size adjustment range to ensure a properly tailored fit to accommodate pediatric and adult patients. ● Patented Soft Start ® and 360° garment oscillation coverage: Soft Start gently fills the garment to acclimate the patient to therapy.
The light design takes weight off of the patients shoulders and torso enhancing the therapy experience. Quick fit Velcro ® -like closures allow for a secure, comfortable fit without bulky straps and buckles.
The SmartVest System is currently available in one model – SQL ® – which is sold into home care and hospital markets. We will continue to support and service earlier SmartVest models pursuant to the applicable product warranty.
The SmartVest System is currently available in two models, The SmartVest SQL ® and SmartVest Clearway ® – which are sold into home care and hospital markets. In November 2022, we announced the introduction of SmartVest Clearway ® , our next generation HFCWO system designed around an enhanced patient experience and modern design.
As a percentage of sales, we expect spending on R&D expenses to decrease significantly during fiscal 2023 as compared with fiscal 2022, as we conclude the design and testing of our next generation device in preparation for an anticipated product launch during the first half of fiscal 2023.
During fiscal 2023 and 2022, we incurred R&D expenses of approximately $916,000 and $1,356,000, or 1.9% and 3.3% of our net revenues, respectively. As a percentage of sales, we expect spending on R&D expenses to remain within a range of 1-2% of net revenues for fiscal 2024.
We maintain established inventory levels for critical components and finished goods to assure continuity of supply. During fiscal 2022 we experienced longer lead times for critical electronic components related to worldwide supply shortages due to COVID-19 and the related U.S. and global economic recovery. We did not experience any material disruptions to customer shipments in fiscal 2022.
We maintain established inventory levels for critical components and finished goods to assure continuity of supply.
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To that end, we made meaningful progress in the development of our next generation SmartVest System during our fiscal year ended June 30, 2022 (“fiscal 2022”) and estimate launching such device and completing the corresponding FDA 510(k) clearance process in the first half of our fiscal year ending June 30, 2023 (“fiscal 2023”).
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The SmartVest Clearway is designed for maximum comfort and lifestyle convenience, so patients can readily fit therapy into their daily routines. The SmartVest Clearway was designed with the patient experience in mind continuing our history of offering the smallest, lightest weight generator on the market and introduces an intuitive touch screen to simplify use.
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All SmartVest garments provide 360° oscillation coverage, which delivers simultaneous treatment to all lobes of the lungs. ● Smaller, quieter and lighter: The SmartVest SQL System is 25% smaller, 5db quieter and 30% lighter than the prior SmartVest SV2100 System, which we previously discontinued on July 1, 2021.
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The enhanced features make it easier to use and enable greater patient freedom in completing therapy. ● 360° oscillation coverage and patented Soft Start (R) technology: All SmartVest garments provide 360° oscillation coverage, which delivers simultaneous treatment to all lobes of the lungs.
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The SmartVest SQL is the lightest and overall quietest HFCWO generator on the market, weighing less than 16 pounds, making it easier for patients to use and integrate HFCWO therapy into their daily lives. 2 ● Programmable generator with user-friendly device operation: The SmartVest SQL features multiple operating modes, including ramp, and options for saving, locking and restoring protocols.
Added
The oscillatory squeeze-and-release technology delivers therapeutic pressure to the chest wall to loosen, sheer and propel mucus into the upper airways where it can be more easily expectorated.
Removed
The first such clinical study is a prospective, multi-center bronchiectasis outcomes study utilizing SmartVest therapy, and the second is a post surveillance study with chronic obstructive pulmonary disease ("COPD") and bronchiectasis patients prescribed SmartVest utilizing quality of life questionnaires to measure outcomes prior to therapy and at two intervals following initiation of the therapy.
Added
Our patented Soft Start technology gently inflates the garment to better acclimate the patient to therapy. ● Open system design with Breathing Room TM : The active inflate – active deflate mechanism of the SmartVest System enables patients to take deep breaths during therapy without feeling restricted, providing patients with a more comfortable treatment experience. ● Programmable generator with user-friendly device operation: The SmartVest Clearway introduces an intuitive touchscreen with single touch start.
Removed
Raising awareness of bronchiectasis in primary care: overview of diagnosis and management strategies in adults.
Added
The improved user interface enhances device programming and simplifies every-day use. The system features multiple operating modes, including ramp, favorite settings designations, and options for saving, locking and restoring protocols.
Removed
Through June 30, 2022, the majority of our distributors operated in exclusive territories. Our principal distributors are located in Europe, the Arab states of the Persian Gulf, Southeast Asia, South America and Central America.
Added
The simple design creates a broad size adjustment range to ensure a properly tailored fit to accommodate pediatric and adult patients. 2 ● Smaller and lighter: SmartVest Clearway is the smallest and lightest HFCWO generator on the market, weighing less than 14 pounds.
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The patient retains the risk of reimbursement to the Company in the event of non-payment by third-party payers.
Added
In addition, we designed and ran a quality-of-life study for COPD patients using SmartVest, which was shared at the 2023 American Thoracic Society International Conference and published in American Journal of Respiratory and Critical Care Medicine. The study’s results demonstrated statistically significant favorable responses to HFCWO as add on therapy for patients with a primary diagnosis of COPD.
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Most patients are able to qualify for reimbursement and payment from Medicare, Medicaid, private insurance or combinations of the foregoing. We expect that subsequent generations of HFCWO products also will qualify for reimbursement under Medicare and most major health plans.
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The overlap of bronchiectasis and COPD increases exacerbations and hospitalizations, reduces pulmonary function, and increases mortality.

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Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeThe shares of our common stock may be repurchased on the open market or in privately negotiated transactions subject to applicable securities laws and regulations.
Biggest changeOn May 26, 2022, our Board of Directors removed the date limitation. The 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 June 30, 2023, the approximate dollar value of shares that may yet be purchased under the aforementioned authorization was $275,000.
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information Our common stock is listed on the NYSE American under the symbol “ELMD”. As of August 23, 2022, there were 59 registered holders of our common stock. Dividends We have never paid cash dividends on any of our shares of common stock.
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information Our common stock is listed on the NYSE American under the symbol “ELMD”. As of August 15, 2023, there were 55 registered holders of our common stock. Dividends We have never paid cash dividends on any of our shares of common stock.
Purchases of Equity Securities by the Company and Affiliated Purchasers On May 26, 2021, our Board of Directors approved a stock repurchase authorization. Under the authorization, we were originally able to repurchase up to $3.0 million of outstanding shares of our common stock through May 26, 2022. On May 26, 2022, our Board of Directors removed the date limitation.
Recent Sales of Unregistered Equity Securities None. 13 Purchases of Equity Securities by the Company and Affiliated Purchasers On May 26, 2021, our Board of Directors approved a stock repurchase authorization. Under the authorization, we were originally able to repurchase up to $3.0 million of outstanding shares of our common stock through May 26, 2022.
We currently intend to retain any earnings for use in operations and do not anticipate paying cash dividends to our shareholders in the foreseeable future. The agreement governing our credit facility restricts our ability to pay dividends. 13 Recent Sales of Unregistered Equity Securities None.
We currently intend to retain any earnings for use in operations and do not anticipate paying cash dividends to our shareholders in the foreseeable future. The agreement governing our credit facility restricts our ability to pay dividends.
The following table sets forth information concerning purchases of shares of our common stock for the three months ended June 30, 2022: Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs April 1 to April 30, 2022 1,253 $ 12.53 1,253 $ 898,000 May 1 to May 31, 2022 28,126 $ 12.33 28,126 $ 551,000 June 1 to June 30, 2022 10,799 $ 11.48 10,799 $ 427,000 Total 40,178 $ 12.10 40,178 Item 6. [Reserved].
The following table sets forth information concerning purchases of shares of our common stock for the three months ended June 30, 2023: Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs April 1 – April 30, 2023 — $ — — $ 275,000 May 1 – May 31, 2023 — — — $ 275,000 June 1 – June 30, 2023 — — — $ 275,000 Total — $ — — Item 6. [Reserved].

Item 6. [Reserved]

Selected Financial Data — reserved (removed by SEC in 2021)

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Biggest changeOther Information 23 Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 24 PART III 24 Item 10. Directors, Executive Officers and Corporate Governance 24 Item 11. Executive Compensation 25 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 25 Item 13. Certain Relationships and Related Transactions, and Director Independence 25 Item 14.
Biggest changeOther Information 22 Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 23 PART III 23 Item 10. Directors, Executive Officers and Corporate Governance 23 Item 11. Executive Compensation 23 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 24 Item 13. Certain Relationships and Related Transactions, and Director Independence 24 Item 14.
Item 6. [Reserved] 14 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 14 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 22 Item 8. Financial Statements and Supplementary Data F-1 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 23 Item 9A. Controls and Procedures 23 Item 9B.
Item 6. [Reserved] 14 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 14 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 21 Item 8. Financial Statements and Supplementary Data F-1 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 22 Item 9A. Controls and Procedures 22 Item 9B.
Principal Accountant Fees and Services 25 PART IV 25 Item 15. Exhibits and Financial Statement Schedules 25
Principal Accountant Fees and Services 24 PART IV 24 Item 15. Exhibits and Financial Statement Schedules 24

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeAdditionally, we offer our products to a patient population that includes neuromuscular disorders such as cerebral palsy, muscular dystrophies, ALS, the combination of emphysema and chronic bronchitis commonly known as COPD, and patients with post-surgical complications or who are ventilator dependent or have other conditions involving excess secretion and impaired mucus transport. 14 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.
Biggest changeAdditionally, 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.
Payment obligations under the line of credit are secured by a security interest in substantially all of our tangible and intangible assets. The documents governing our line of credit contain certain financial and nonfinancial 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.
Payment obligations under the line of credit are secured by a security interest in substantially all of our tangible and intangible assets. 20 The documents governing our line of credit contain certain financial and nonfinancial 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.
Private payers consider a variety of sources, including Medicare, as guidelines in setting their coverage policies and payment amounts. We employ 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.
Private payers consider a variety of sources, including Medicare, as guidelines in setting their coverage policies and payment amounts. 14 We employ 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.
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. 16 The Company includes shipping and handling fees in net revenues.
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. The Company includes shipping and handling fees in net revenues.
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, 2023, if not renewed. As of June 30, 2022, the maximum $2,500,000 was available under the line of credit.
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, 2023, if not renewed. As of June 30, 2023, the maximum $2,500,000 was available under the line of credit.
We request that customers return previously sold units that are no longer in use to us in order to limit the possibility that such units would be resold by unauthorized parties or used by individuals without a prescription.
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.
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 SQL® and previous generation SV2100 and related products, to patients with compromised pulmonary function.
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.
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 2022 or pending adoption. 21
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 2023 or pending adoption.
Additionally, we also benefitted from a Medicare allowable rate increase that took effect on January 1, 2022. Annual Medicare rate increases for our device are linked closely to changes in the Urban Consumer Price Index.
Additionally, we benefitted from a Medicare allowable rate increase that took effect on January 1, 2023. Annual Medicare rate increases for our device are linked closely to changes in the Urban Consumer Price Index.
Revenue through this channel was 4% of our total revenues in fiscal 2022. Our key growth strategies for fiscal 2023 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.
Revenue through this channel was 3% of our total revenues in fiscal 2023. Our key growth strategies for fiscal 2024 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.
See Note 8 to the Financial Statements included in Part II, Item 8, of this Annual Report on Form 10-K for a description of these assumptions. 17 Results of Operations Fiscal Year Ended June 30, 2022 Compared to Fiscal Year Ended June 30, 2021 Revenues Revenue for the fiscal years ended June 30, 2022 and 2021 are summarized in the table below (dollar amounts in thousands).
See Note 8 to the Financial Statements included in Part II, Item 8, of this Annual Report on Form 10-K for a description of these assumptions. 17 Results of Operations Fiscal Year Ended June 30, 2023 Compared to Fiscal Year Ended June 30, 2022 Revenues Revenue for the fiscal years ended June 30, 2023 and 2022 are summarized in the table below.
During fiscal 2022 and 2021, we spent approximately $1,425,000 and $287,000, respectively, on property and equipment. We currently expect to finance planned equipment purchases with cash flows from operations or borrowings under our credit facility.
During fiscal 2023 and 2022, we spent approximately $1,648,000 and $1,425,000, respectively, on property and equipment. We currently expect to finance planned equipment purchases with cash flows from operations or borrowings under our credit facility.
Based on our current operational performance, we believe our working capital of approximately $27,389,000 and available borrowings under our existing credit facility will provide adequate liquidity for fiscal 2023. Effective December 17, 2021, we renewed our credit facility, which provides us with a revolving line of credit.
Based on our current operational performance, we believe our working capital of approximately $29,734,000 and available borrowings under our existing credit facility will provide adequate liquidity for fiscal 2024. Effective December 17, 2021, we renewed our credit facility, which provides us with a revolving line of credit.
Actions to support accelerating our growth include the following: ● Expand our sales force in targeted geographies with high potential, adding an additional five territories and direct sales reps; ● Increase Electromed brand awareness through direct-to-consumer and physician marketing, and peer to peer education; ● Provide best-in-class customer care and support; ● Develop and promulgate the body of bronchiectasis clinical evidence to increase physician adoption of the SmartVest System for patients; and ● Introduce our innovative next generation device that appeals to patients.
Actions to support accelerating our growth include the following: ● Expand our sales force in targets geographies with high potential, adding an additional five territories and direct sales reps; ● Increase Electromed brand awareness through direct-to-consumer and physician marketing, and peer to peer education; ● Provide best-in-class customer care and support; and ● Develop and promulgate the body of bronchiectasis clinical evidence to increase physician adoption of the SmartVest System for patients.
It is possible that the COVID-19 pandemic 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 interruption in any of our manufacturing processes could have a material adverse effect on our business.
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 could have a material adverse effect on our business.
We began selling to a limited number of home medical equipment distributors during our fiscal year ended June 30, 2020, who in turn sell our SmartVest System in the U.S. home care market. International Revenue. International revenue decreased by $137,000, or 20.8%, in fiscal 2022 compared to fiscal 2021.
We began selling to a limited number of home medical equipment distributors during our fiscal year ended June 30, 2020, who in turn sell our SmartVest System in the U.S. home care market. International Revenue. International revenue decreased by $97,000, or 18.6%, in fiscal 2023 compared to fiscal 2022.
Interest on borrowings on the line of credit accrues at the prime rate (4.75% as of June 30, 2022) less 1.0% and is payable monthly. There was no outstanding principal balance on the line of credit as of June 30, 2022 or June 30, 2021.
Interest on borrowings on the line of credit accrues at the prime rate (8.25% as of June 30, 2023) less 1.0% and is payable monthly. There was no outstanding principal balance on the line of credit as of June 30, 2023 or June 30, 2022.
While the impact of the COVID-19 pandemic and other 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 2023.
While the impact of macroeconomic conditions and other 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 2024.
Home Care Distributor Revenue. Home care distributor revenue increased by $911,000, or 161.8%, in fiscal 2022 compared to fiscal 2021. The revenue increase in fiscal 2022 was due to increased demand from one of our primary home care distribution partners.
Home care distributor revenue increased by $144,000, or 9.8%, in fiscal 2023 compared to fiscal 2022. The revenue increase in fiscal 2023 was due to increased demand from one of our primary home care distribution partners.
Institutional revenue increased by $111,000, or 7.2%, in fiscal 2022 compared to fiscal 2021. Institutional revenue includes sales to group purchasing organizations, rental companies and other institutions. The revenue increase was due to increased capital purchases and stronger consumable volumes compared to fiscal 2021, as hospitals resumed utilization of HFCWO protocols after reducing utilization early in the COVID-19 pandemic.
Institutional revenue includes sales to group purchasing organizations, rental companies and other institutions. The revenue increase was due to increased capital purchases and stronger consumable volumes compared to fiscal 2022, as hospitals resumed utilization of HFCWO protocols after reducing utilization early in the COVID-19 pandemic. Home Care Distributor Revenue.
Home care revenue increased by $5,018,000, or 15.2%, in fiscal 2022 compared to fiscal 2021. The revenue increase compared to fiscal 2021 was primarily due to increases in referrals and approvals.
Home care revenue increased by $5,941,000, or 15.6%, in fiscal 2023 compared to fiscal 2022. The revenue increase compared to fiscal 2022 was primarily due to increases in referrals and approvals.
These cash flows from operating activities were offset by a $4,020,000 increase in accounts receivable, an increase in inventory of $1,072,000, and a $1,322,000 increase in prepaid expenses. The increase in accounts receivable was primarily due to an increase in the Medicare portion of our home care business, which has a 13-month payment cycle.
These cash flows from operating activities were offset by a $3,078,000 increase in accounts receivable, an increase in inventory of $1,033,000, and a $201,000 increase in contract assets. The increase in accounts receivable was primarily due to an increase in the Medicare portion of our home care business, which has a 13-month payment cycle.
We continue to make key investments in systems infrastructure including implementing a new enterprise resource planning (“ERP”) system, enhancing our customer relationship management system and further optimizing of the revenue cycle management system that was implemented in June 2021.
The increase in the current year was primarily due to an increased investment in our system infrastructure and increased clinical study costs. We continue to make key investments in systems infrastructure including implementing a new enterprise resource planning system, enhancing our customer relationship management system and further optimizing of the revenue cycle management system that was implemented in June 2021.
In response to the COVID-19 pandemic and the U.S. federal government’s declaration of a public health emergency, the CMS implemented a number of temporary rule changes and waivers to allow prescribers to best treat patients during the period of the public health emergency. These waivers became effective on March 1, 2020.
In response to the COVID-19 pandemic and the U.S. federal government’s declaration of a PHE, the Centers for Medicare & Medicaid Services (“CMS”) implemented several temporary rule changes and waivers to allow prescribers to best treat patients during the period of the PHE. These waivers became effective on March 1, 2020.
We anticipate that increased material and shipping costs will continue during fiscal 2023 relating to supply chain availability and inflationary trends in electronic components but may extend to other components as well. In certain instances, we have purchased key electronic materials in advance to ensure adequate future supply and mitigate the risk of supply chain disruption.
We expect that material costs and shipping rates will remain elevated during the first half of fiscal 2024 relating to supply chain availability and inflationary trends in electronic components and may extend to other components. In certain instances, we have purchased key electronic materials in advance to ensure adequate future supply and mitigate the risk of potential supply chain disruptions.
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.
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.
The decrease in the current year was primarily due to reduced professional consulting costs associated with our next generation platform development activities. R&D expenses were 3.3% of revenue in fiscal 2022 compared to 4.8% of revenue in fiscal 2021.
The decrease in the current year was primarily due to reduced professional consulting costs associated with our next generation platform development activities. R&D expenses were 1.9% of revenue in fiscal 2023 compared to 3.3% of revenue in fiscal 2022. We expect R&D spending to be between 1.0% and 2.0% of revenue during fiscal 2024.
In 2015, we launched the SmartVest SQL into institutional 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 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 with SmartVest Connect technology to adult pulmonary, pediatric and cystic fibrosis patients for use in the home.
The SmartVest SQL is smaller, quieter and lighter than our previous product with enhanced programmability, ease of use. Our products are sold in both the home health care market and the institutional market for use by patients in hospitals, which we refer to as “institutional sales.” The SmartVest SQL has been sold in the domestic home care market since 2014.
Our products are sold in both the home health care market and the institutional market for use by patients in hospitals, which we refer to as “institutional sales.” The SmartVest SQL has been sold in the domestic home care market since 2014. In 2015, we launched the SmartVest SQL into institutional and certain international markets.
The effective tax rates were 23.1% and 25.4% for fiscal 2022 and 2021, respectively. The effective tax rates differ from the statutory federal rate due to the effect of state income taxes, R&D tax credits, and other permanent items that are non-deductible for tax purposes relative to the amount of taxable income.
The effective tax rates differ from the statutory federal rate because of state income taxes, R&D tax credits, and other permanent items that are non-deductible for tax purposes relative to the amount of taxable income. Net Income Net income for fiscal 2023 was $3,166,000, compared to net income of $2,305,000 in fiscal 2022.
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 judgment as appropriate.
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 judgment as appropriate. Some of our accounting policies and estimates require us to exercise significant judgment in selecting the appropriate assumptions for calculating financial statements.
SmartVest Connect is currently available to pediatric and cystic fibrosis patients and was made available to certain targeted adult pulmonary clinics starting in November 2017. Since 2000, we have marketed the SmartVest System and its predecessor products to patients suffering from cystic fibrosis, bronchiectasis and repeated episodes of pneumonia.
We have marketed the SmartVest System and its predecessor products since 2000 to patients suffering from cystic fibrosis, bronchiectasis and repeated episodes of pneumonia.
Cash Flows from Financing Activities Net cash used in financing activities in fiscal 2022 was approximately $1,525,000, consisting of $1,448,000 used for our share repurchase program and $77,000 for taxes paid on net share settlements of stock option exercises.
Cash Flows from Financing Activities Net cash used in financing activities in fiscal 2023 was approximately $380,000, consisting of $153,000 used for our share repurchase program and $310,000 for taxes paid on net share settlements of stock option exercises offset by $83,000 of cash provided by the issuance of common stock upon exercise of options.
Estimated income tax expense included a discrete deferred tax expense of approximately $81,000 related to unexercised fully vested stock options that expired and a discrete current tax benefit of approximately $33,000 related to the excess tax benefit of non-qualified stock options that were exercised during the period.
Estimated income tax expense includes a current federal and state tax benefit of approximately $250,000 related to the excess tax benefit for fully vested stock options and non-qualified stock options that were exercised during the period. 19 Income tax expense in fiscal 2022 was $692,000, which included a current tax expense of $1,181,000 and a deferred benefit of $489,000.
Cash used in investing activities consisted of approximately $1,425,000 in expenditures for property and equipment, approximately $943,000 for software and $482,000 for equipment, and $100,000 in payments for patent and trademark costs.
Cash Flows from Investing Activities Net cash used in investing activities in fiscal 2023 was approximately $1,716,000. Cash used in investing activities consisted of approximately $1,648,000 in expenditures for property and equipment, approximately $1,083,000 for software and $565,000 for equipment, and $68,000 in payments for patent and trademark costs.
Selling, general and administrative (“SG&A”) expenses were $27,114,000 in fiscal 2022, representing an increase of $4,671,000 or 20.8% from $22,443,000 in fiscal 2021. SG&A payroll and compensation-related expenses increased by $2,206,000, or 15.3%, to $16,640,000 in fiscal 2022, compared to $14,434,000 in fiscal 2021.
Operating Expenses Selling, General and Administrative Expenses. Selling, general and administrative (“SG&A”) expenses were $31,595,000 in fiscal 2023, representing an increase of $4,481,000 or 16.5% from $27,114,000 in fiscal 2022. SG&A payroll and compensation-related expenses including health insurance benefits and other compensation increased by $2,629,000, or 14.7%, to $20,552,000 in fiscal 2023, compared to $17,923,000 in fiscal 2022.
Income tax expense in fiscal 2021 was $805,000, which included a current tax expense of $1,099,000 and a deferred benefit of $294,000.
Income Tax Expense Income tax expense in fiscal 2023 was $920,000, which includes a current tax expense of $963,000 and a deferred benefit of $43,000.
Warranty Reserve The Company provides a lifetime warranty on its products to the prescribed patient for sales within the U.S. and a three-year warranty for all institutional sales and sales to individuals outside the U.S.
Estimated inventory to be returned is based on how many devices that have shipped that are expected to be returned prior to completion of the insurance reimbursement process. 16 Warranty Reserve The Company provides a lifetime warranty on its products to the prescribed patient for sales within the U.S. and a three-year warranty for all institutional sales and sales to individuals outside the U.S.
Estimated income tax expenses include a discrete current tax benefit of approximately $37,000 related to exercised fully vested stock options and a discrete current benefit of approximately $21,000 related to the excess tax benefit of non-qualified stock options that were exercised during the period.
Estimated income tax expense included a current federal and state tax benefit of approximately $12,000 related to excess tax benefit for fully vested stock options and non-qualified stock options that were exercised during the period. The effective tax rates were 22.5% and 23.1% for fiscal 2023 and 2022, respectively.
We believe that our ongoing sales team execution, along with the expected return to pre-COVID-19 levels of patient face-to-face engagement with physicians and clinic access for our sales team, has the potential to mitigate the impact of a CMS waiver expiration, which is currently effective until October 2022. Institutional Revenue.
We believe that our ongoing sales team execution, along with the return to pre-COVID-19 levels of patient face-to-face engagement with physicians and clinic access for our sales team mitigated the fourth quarter homecare revenue impact of the CMS waiver expiration on May 11, 2023. Institutional Revenue. Institutional revenue increased by $420,000, or 25.3%, in fiscal 2023 compared to fiscal 2022.
Our cash receipt collection remains strong, with the three months ended June 30, 2022 period having the highest cash receipt collections in our company's history, building upon the prior record that was set in the previous quarter. 20 Cash Flows from Investing Activities Net cash used in investing activities in fiscal 2022 was approximately $1,525,000.
The increase in inventory was primarily due to an increase in raw materials associated with the launch of Clearway. Our cash receipt collection remains strong, with the three months ended June 30, 2023, period having the highest cash receipt collections in our company's history, building upon the prior record that was set in the previous quarter.
The CMS waiver was recently extended in conjunction with the extension of the federal public health emergency for an additional 90-day period beginning July 15, 2022. We did not receive any direct financial assistance from any government program during fiscal 2021 or fiscal 2022 in connection with COVID-19 relief measures.
We did not receive any direct financial assistance from any government program during fiscal 2022 or fiscal 2023 in connection with COVID-19 relief measures.
Liquidity and Capital Resources Cash Flows and Sources of Liquidity Cash Flows from Operating Activities Net cash used in operating activities in fiscal 2022 was $686,000. Cash flows from operating activities consisted of net income of $2,305,000, non-cash expenses of approximately $1,115,000, a $2,170,000 increase in accounts payable and accrued liabilities and a decrease in contract assets of $107,000.
Cash flows from operating activities consisted of net income of $3,166,000, non-cash expenses of approximately $1,278,000, a decrease in prepaid expenses of $202,000 an increase in tax payable of approximately $285,000 and a $696,000 increase in accounts payable and accrued liabilities, and accrued compensation.
The increase in the current year is primarily due to higher health insurance, director and officer insurance costs and cyber insurance costs. 19 Research and Development Expenses R&D expenses decreased by $366,000, or 21.3%, to $1,356,000 in fiscal 2022 compared to $1,722,000 in fiscal 2021.
The increase in the current year period was primarily due to an increase in headcount and our annual sales meeting expenses. Research and Development Expenses R&D expenses decreased by $440,000, or 32.4%, to $916,000 in fiscal 2023 compared to $1,356,000 in fiscal 2022.
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. Impacts of COVID-19 on Our Business and Operations In March 2020, the World Health Organization designated COVID-19 as a global pandemic, and the U.S.
See also Note 1 to the Financial Statements, included in Part II, Item 8, of this Annual Report on Form 10-K.
Fiscal Years Ended June 30, 2022 2021 Increase (Decrease) Home Care Revenue $ 38,004,000 $ 32,986,000 $ 5,018,000 15.2 % Institutional Revenue 1,660,000 1,549,000 111,000 7.2 % Home Care Distributor Revenue 1,474,000 563,000 911,000 161.8 % International Revenue 521,000 658,000 (137,000 ) (20.8 %) Total Revenue $ 41,659,000 $ 35,756,000 $ 5,903,000 16.5 % Home Care Revenue.
Fiscal Years Ended June 30, 2023 2022 Increase (Decrease) Home Care Revenue $ 43,945,000 $ 38,004,000 $ 5,941,000 15.6 % Institutional Revenue 2,080,000 1,660,000 420,000 25.3 % Home Care Distributor Revenue 1,618,000 1,474,000 144,000 9.8 % International Revenue 424,000 521,000 (97,000 ) (18.6 %) Total Revenue $ 48,067,000 $ 41,659,000 $ 6,408,000 15.4 % Home Care Revenue.
The decrease in the current year was primarily due to lower rates earned on our cash deposits and lower cash deposits in the bank compared to prior fiscal periods. Income Tax Expense Income tax expense in fiscal 2022 was 692,000, which includes a current tax expense of $1,181,000 and a deferred benefit of $489,000.
Interest Income, net Net interest income was approximately $78,000 in fiscal 2023 compared to net interest income of $25,000 in fiscal 2022. The increase in the current year was primarily due to higher interest rates earned on our cash deposits despite lower overall cash balances in the current year.
We have a goal of improving our gross margin percentage over time due to lower product costs associated with our next generation product, supplier optimization, and gaining operating leverage on higher volumes. Operating Expenses Selling, General and Administrative Expenses.
The increase in gross profit was primarily related to increases in domestic home care revenue including the Medicare allowable rate increase that took effect in January 2023. 18 We have a goal of improving our gross margin percentage over time due to cost savings initiatives associated with Clearway, supplier optimization, and gaining operating leverage on higher volumes.
International revenue growth is not currently a primary focus for us, and our corporate resources are focused on supporting and maintaining our current distributors. International sales are affected by the timing of international distributor purchases that can cause significant fluctuations in reported revenue on a quarterly basis.
International revenue growth is not currently a primary focus for us, and our corporate resources are focused on supporting and maintaining our current international distributors. Gross Profit Gross profit increased to $36,519,000 in fiscal 2023, or 76.0% of net revenues, from $31,442,000 or 75.5% of net revenues, in fiscal 2022.
Total discretionary marketing expenses decreased by $238,000, or 22.4% to $824,000 in fiscal 2022, compared to $1,062,000 in fiscal 2021. The decrease in the current year was primarily due to a shift to more cost-effective direct-to-consumer marketing investments. Travel, meals and entertainment expenses increased $734,000, or 41.2%, to $2,514,000 for fiscal 2022 compared to $1,780,000 in fiscal 2021.
The increase in the current year was primarily due to discretionary investment in market research, physician marketing, and peer to peer education engagement strategies. Travel, meals and entertainment expenses increased $422,000, or 16.4%, to $2,990,000 for fiscal 2023 compared to $2,568,000 in fiscal 2022.
Any significant increases to our raw material or shipping costs could reduce our gross margins. We have also taken measures to ensure the safety of our employees and to comply with applicable governmental orders.
Any significant increases to our raw material or shipping costs could reduce our gross margins. 15 Critical Accounting Estimates During the preparation of our financial statements, we are required to make estimates, assumptions and judgment that affect reported amounts.
Net Income Net income for fiscal 2022 was $2,305,000, compared to net income of $2,362,000 in fiscal 2021. The decrease in current year net income was primarily due to increased strategic investments in SG&A, shareholder activism costs and higher product costs partially offset by stronger home care and distributor revenue growth.
The increase in current year net income was primarily due to stronger home care and distributor revenue growth. Liquidity and Capital Resources Cash Flows and Sources of Liquidity Cash Flows from Operating Activities Net cash provided by operating activities in fiscal 2023 was $1,315,000.
Department of Health and Human Services designated COVID-19 as a public health emergency. The impact of the COVID-19 pandemic on our business remains uncertain, and its effects on our operational and financial performance will depend in part on future developments, which cannot be reasonably estimated at this time.
Impacts of COVID-19 on Our Business and Operations In March 2020, the World Health Organization designated COVID-19 as a global pandemic, and the U.S. Department of Health and Human Services designated COVID-19 as a public health emergency (“PHE”).
We observed increased changes to our supply chain timelines and increased material and shipping costs during the second half of fiscal 2022, but we did not experience any disruptions that materially impacted product availability for our customers.
Impacts of Certain Macro-Economic Conditions and the Supply Chain on Our Business and Operations We observed increased lead times for certain components in our supply chain and increased material costs and shipping rates during the second half of fiscal 2022 and all of fiscal 2023.
Clinical indications and documentation typically required will not be enforced for respiratory-related products including the SmartVest System (solely with respect to Medicare patients). The minimum documentation now requires a valid order and documentation of a respiratory-related diagnosis. Face-to-face and in-person requirements for respiratory devices are being waived while the waiver is in place.
Clinical indications and documentation typically required were not enforced for respiratory-related products, including the SmartVest System (solely with respect to Medicare patients). On January 30, 2023, the Biden administration announced that the COVID-19 national and PHE declarations will end on May 11, 2023. The CMS waiver was not extended and expired on May 11, 2023.
Removed
Such future developments include, but are not limited to, the duration, scope and severity of the COVID-19 pandemic in geographic areas in which we operate or in which our patients live, actions taken to contain or mitigate its impact, the impact on governmental healthcare programs and budgets, the development and distribution of treatments or vaccines, and the resumption of widespread economic activity.
Added
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 360 o oscillatory pressure through our proprietary rapid inflate-deflate technology which improves the patient’s ability to breathe deeply during therapy.
Removed
Due to the inherent uncertainty of the unprecedented and evolving situation, we are unable to predict with confidence the likely impact of the COVID-19 pandemic on our future operations. 15 During fiscal 2022, we experienced a reduction in the number of clinics allowing face-to-face access by our sales team although not to the extent experienced in fiscal 2021 as the number of infections relating to the Omicron variant and related subvariants of COVID-19 increased throughout most regions of the United States, and hospitals implemented additional safety protocols.
Added
SmartVest Clearway is the smallest, and lightest generator on the market, and is designed with an intuitive touchscreen to simplify programing and everyday use.
Removed
Our sales team continued to utilize a hybrid sales process of virtual and face-to-face clinician interaction with strict adherence to specific clinic and healthcare system safety protocols, which we believe allowed them to drive stronger referral growth compared to fiscal 2021.
Added
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.
Removed
During the second half of fiscal 2022, we observed an improvement in clinic access and patient flow compared to earlier in the fiscal year, which we believe is likely a result of Omicron-related case reductions throughout most of the United States, contributing to a record high number of monthly referrals for our company.
Added
We believe that we were able to mitigate the potential effects on our net revenue resulting from the expiration of the CMS waiver by hiring additional employees to increase capacity and minimize the average timeframe to convert a Medicare patient referral to approval and re-educating clinicians on Medicare requirements for reimbursement of HFCWO.
Removed
We believe that the impact of the COVID-19 pandemic on our home care and institutional business will continue during at least the beginning of fiscal 2023.
Added
The changes to our supply chain lead times resulted in a temporary interruption that impacted product availability for certain customers beginning in September 2022 and continuing through June 2023. We anticipate that these increased lead times and temporary interruption of supply have the potential to continue through the first half of fiscal 2024.
Removed
Our home care revenue for fiscal 2022 has increased as compared to fiscal 2021; however, if COVID-19 infection rates increase and federal, state and local restrictions on commerce, stay-at-home orders or other restrictions on businesses are reinstated, we believe that such measures could have a material adverse effect on our business.
Added
If we are unable to procure components to meet our demand or if we extend delivery lead-times to our customers, there may be an adverse impact to our revenue and, longer term, the potential of market share losses.
Removed
We consider our business to be essential under applicable governmental orders, primarily due to our role in manufacturing and supplying needed medical devices to patients with respiratory-related issues and have therefore continued to operate during the government restrictions put in place in response to the pandemic.
Added
We are taking actions to expedite components and to identify and qualify alternate suppliers for certain components to minimize any impact to our revenue and customer deliveries.
Removed
Estimated inventory to be returned is based on how many devices that have shipped that are expected to be returned prior to completion of the insurance reimbursement process.
Added
Field sales employees totaled 55, of which 46 were direct sales, as of June 30, 2023, compared to 52 as of June 30, 2022, of which 43 were direct sales. We expect to continue to expand our salesforce to align with our revenue growth projections.
Removed
Gross Profit Gross profit increased to $31,442,000 in fiscal 2022, or 75.5% of net revenues, from $27,305,000, or 76.4% of net revenues, in fiscal 2021. The increase in gross profit was primarily related to increases in domestic home care revenue including the Medicare allowable rate increase that took effect in January 2022.
Added
Professional and legal fees, including recruiting and insurance expenses, increased by $859,000, or 19.4%, to $5,284,000 in fiscal 2023, compared to $4,425,000 in fiscal 2022. Professional fees include services related to legal costs, shareowner services and reporting requirements, information technology technical support and consulting fees.
Removed
The decrease in gross profit as a percentage of net revenue was driven by higher raw material and shipping costs as well as patient training related expenses due to increase in face-to-face trainings. 18 We believe as we continue to grow revenue, we will be able to leverage manufacturing costs, although there may be fluctuations on a short-term basis related to increased material and shipping costs as well as average reimbursement based on the mix of referrals during any given period.
Added
We expect these system infrastructure investments will result in more efficient and scalable operational processes and provide enhanced analytics to drive business performance. Total discretionary marketing expenses increased by $211,000, or 25.6% to $1,035,000 in fiscal 2023, compared to $824,000 in fiscal 2022.
Removed
Factors such as diagnoses that are not assured of reimbursement, insurance programs with lower allowable reimbursement amounts (for example, state Medicaid programs), whether an individual patient meets prerequisite medical criteria for reimbursement, and continuation of the Medicare waiver currently in place may have an effect on average reimbursement received on a short-term basis.
Removed
Field sales employees totaled 52, of which 43 were direct sales, as of June 30, 2022, compared to 46 as of June 30, 2021, of which 37 were direct sales. Professional and legal fees increased by $875,000, or 36.0%, to $3,308,000 in fiscal 2022, compared to $2,433,000 in fiscal 2021.
Removed
Professional fees include services related to legal costs, shareowner services and reporting requirements, information technology technical support and consulting fees. The increase in the current year was primarily due to a shareholder activism matter, increased investment in our system infrastructure and increased clinical study costs. Our shareholder activism matter concluded with a cooperation agreement in September 2021.
Removed
We expect these system infrastructure investments will result in more efficient and scalable operational processes and provide enhanced analytics to drive business performance. We also expect to continue investing in our on-going clinical studies in order to continue building the body of evidence around positive outcomes from bronchiectasis patients using HFCWO and SmartVest therapy.
Removed
The increase in the current year period was primarily due to our sales team resuming closer-to-normal levels of travel compared to the COVID-19 driven travel restrictions in the prior year and an increase in regional sales meetings that were cancelled in the prior year due to COVID-19.

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