ELMD 10-K & 10-Q changes, risk factors and insider trading

We expect that component and raw material costs will continue to be a challenge in fiscal 20262027, relatingdue to supply chain availabilityconstraints, rising energy costs due to ongoing geopolitical conflict, uncertainty related to trade regulations such as tariffs, and inflationary trends in electronic components and may extend to other components resulting from uncertain trade regulations such as tariffs.components. In certain instances, we have purchased key materials in advance to ensure adequate future supply and mitigate the risk of potential supply chain disruptions. It is possible that these macro-economic conditions could have a greater adverse impact on our supply chain in the future, including impacts associated with preventative and precautionary measures taken by other businesses and applicable governments. A reduction or further interruption in any of our manufacturing processes orprocesses, significant changes in trade regulationsregulations, or rising energy prices could have a material adverse effect on our business. Any significant increases to our raw material or shipping costs couldwould reduce our gross margins.

TheWe Company includesinclude shipping and handling fees in net revenues. Shipping and handling costs associated with the shipment of the Company’sour SmartVest System after control has transferred to a customer are accounted for as a fulfillment cost and are included in cost of revenues.

Homecare Revenue. Homecare revenue increased by $7,784,000,$9,325,000, or 15.7%,16.3%, in fiscal 20252026 compared to fiscal 2024.2025. TheApproximately $7,959,000 of the increase in revenue was due to anhigher increasevolume, inwhich directwas driven by additional sales representatives and increased sales representative productivity, and approximately $1,366,000 was due to higher net revenues per approval. For the year ended June 30, 2026, we averaged 58 homecare field sales representatives compared to an average of 54 for the year ended June 30, 2025.

Homecare Distributor Revenue. Homecare distributor revenue increased by $1,076,000,$373,000, or 58.1%,12.7%, in fiscal 20252026 compared to fiscal 2024.2025. The revenue increase in fiscal 20252026 was due to an increased numberdemand offrom homecareour distributiondistributor partners. We sell to a limited number of home medical equipment distributors, who in turn sell our SmartVest System in the U.S. homecare market.

Other Revenue. Other revenue decreased by $181,000,$224,000, or 21.9%,34.7%, in fiscal 20252026 compared to fiscal 2024.2025. The decrease in other revenue was primarily due to decreased demand of international distributor purchases and purchases byfrom customers that do not fall within the other markets described above.

SG&A payrollPayroll and compensation-related expenses including health insurance benefits and other compensation increased by $3,162,000,$2,269,000, or 13.5%,8.5%, to $28,868,000 in fiscal 2026, compared to $26,599,000 in fiscal 2025, compared to $23,437,000 in fiscal 2024.2025. The increase in the current year was primarily due to the acceleratedincrease recognition of share-based compensation associated with the vesting of performance-based equity awards andin salaries and incentive compensation related to the higher average number of sales, sales support, marketing,representatives and reimbursement personnel to process higher patientoverall referrals.compensation costs. We have also continuedcontinue to provide regular merit-based increases for our employees and are regularly benchmarking our compensation rangesranges, including share-based compensationcompensation, for new and existing employees to ensure we can hire and retain the talent needed to drive growth in our business. Field sales employees totaled 62, of which 55 were direct sales, as of June 30, 2025, compared to 62 as of June 30, 2024, of which 53 were direct sales. We expect to continue to expand our salesforce to align with our revenue growth projections.

Travel, meals and entertainment expenses increased $577,000,$488,000, or 17.3%,12.5%, to $4,407,000 for fiscal 2026 compared to $3,919,000 for fiscal 2025 compared to $3,342,000 in fiscal 2024.2025. The increase in the current year was primarily due to ana increasedhigher average number of direct sales territoriesrepresentatives, sales training, and higherincreased travel costs.to support sales activity as well as market development.

Professional and legal fees, including recruiting and insurance expenses, increased by $98,000,$69,000, or 2.0%,1.4%, to $4,995,000 in fiscal 2026, compared to $4,926,000 in fiscal 2025, compared to $4,828,000 in fiscal 2024.2025. Professional fees include services related to legal costs, shareowner services and reporting requirements, board of directors compensation, information technology technical support and consulting fees. The increase was primarily related to expenseincreased recognitionlegal associatedand withinsurance the annual equity compensation payable to non-employee directors.costs.

Total discretionary marketing expenses decreasedincreased by $66,000,$259,000, or 4.4%18.2% to $1,680,000 in fiscal 2026, compared to $1,421,000 in fiscal 2025, compared to $1,487,000 in fiscal 2024.2025. The decreaseincrease in the current year was primarily due to aincreased one-time investmentinvestments in our direct-to-consumer advertising and other market researchdevelopment in the prior year that did not recur in fiscal 2025.initiatives.

R&D expenses increased by $340,000,$318,000, or 51.8%,31.9%, to $1,314,000 in fiscal 2026 compared to $996,000 in fiscal 2025 compared to $656,000 in fiscal 2024.2025. The increase in the current year was primarily due to increased average headcount and externalconsulting spendexpenses related to product enhancements and sustaining engineering.

Net interest income was approximately $624,000$479,000 in fiscal 20252026 compared to net interest income of $455,000$624,000 in fiscal 2024.2025. The increasedecrease in the current year was primarily due to higherdecreased cashinterest balances.rates.

The effective tax rates were 26.7%21.3% and 26.8%26.7% for fiscal 20252026 and 2024,2025, respectively. The decrease in the effective tax rate for the current year was primarily driven by research and development tax credits in the current year and non-deductible officer compensation in the prior year that did not recur in the current year. The effective tax rates differ from the statutory federal rate because of state income taxes and other permanent items that are non-deductible for tax purposes relative to the amount of taxable income.

Net cash provided by operating activities in fiscal 20252026 was $11,393,000.$9,665,000. Cash flows from operating activities consisted of net income of $7,537,000,$11,301,000, non-cash expenses of approximately $4,133,000,$4,224,000, an increase in accrued compensation of $992,000, and an increase in accounts payable and accrued liabilities of $1,650,000, an increase in accrued compensation of $1,186,000, and a decrease in inventories of $175,000.$652,000. These cash flows from operating activities were partially offset by an increase in accounts receivable of $1,327,000,$5,145,000, an increase in prepaid expenses and other assets of $959,000,$1,024,000, an increase in inventories of $517,000, an increase in income tax receivable of $685,000,$760,000, and an increase in contract assets of $317,000.$58,000.

The documents governing our line ofthe credit facility contain certain customary financial and non-financial covenants that include a minimummaximum tangibletotal netfunded worthdebt ratio of not lessmore than $10,125,0002.50x and a minimum fixed charge coverage ratio of at least 1.20x (as each such term is defined in the credit agreement), as well as restrictions on ourthe Company's ability to incur certain additional indebtednessindebtedness. So long as there is no default or event of default, the governing documents do not restrict the Company's ability to pay dividends.dividends or repurchase common stock.

During fiscal 20252026 and 2024,2025, we spent approximately $262,000$1,252,000 and $287,000,$262,000, respectively, on property and equipment. The increase over the prior year was primarily related to manufacturing and building improvement projects which were completed in fiscal 2026. We currently expect to finance planned equipment purchases with cash flows from operations or borrowings under our credit facility. We may need to incur additional debt if we have an unforeseen need for additional capital equipment or if our operating performance does not generate adequate cash flows.

Our products are sold in both the homecare market and the hospital market for inpatient use, which we refer to as “hospital sales.” Since 2000, we have marketed the SmartVest System and its predecessor products to patients suffering from bronchiectasis, cystic fibrosis, and other chronic pulmonary conditions whichthat require external chest manipulation to enhance mucus transport. Additionally, we offer our products to a patient population that includes neuromuscular disorders such as cerebral palsy, muscular dystrophies, amyotrophic lateral sclerosis (“ALS”), patients with post-surgical complications or who are ventilator dependent and patients who have other conditions involving excess secretion and impaired mucus transport.

There werehave been no material changes into our critical accounting estimates and assumptions since the filing of our Annual Report on Form 10-K for fiscal 2025.

Net revenues for the three and sixnine months ended DecemberMarch 31, 2025,2026, and 20242025 are summarized in the table below.

Homecare revenue. Homecare revenue increased by $2,681,000,$2,630,000, or 18.4%,18.6%, for the three months ended DecemberMarch 31, 2025,2026, compared to the same period in the prior year. Approximately $1,959,000 of the increase in revenue was due to higher volume, which was driven by additional sales representatives and increased sales representative productivity, and approximately $671,000 was due to higher net revenues per approval. For the sixnine months ended DecemberMarch 31, 2025,2026, homecare revenue increased by $4,359,000,$6,989,000, or 15.7%,16.7%, compared to the same period in the prior year. TheApproximately increases$5,699,000 wereof primarilythe increase in revenue was due to anhigher increasevolume, inwhich directwas driven by additional sales representatives and increased sales representative productivity, and approximately $1,290,000 was due to higher net revenues per sales representative.approval. For the three months ended DecemberMarch 31, 2025,2026, we averaged 5857 homecare field sales representatives.

Hospital revenue. Hospital revenue was $655,000,$1,032,000, aan decreaseincrease of $68,000,$308,000, or 9.4%,42.5%, for the three months ended DecemberMarch 31, 2025,2026, compared to the same period in the prior year. For the sixnine months ended DecemberMarch 31, 2025,2026, hospital revenue was $1,702,000,$2,734,000, an increase of $289,000,$597,000, or 20.5%,27.9%, compared to the same period in the prior year. The decreasegrowth in the three months ended December 31, 2025, was due to fewer capital equipment orders as hospital capital revenue is a long-cycle sale and revenue from quarter to quarter can vary depending on capital budget allocations at the hospital. The growth in the sixnine months ended DecemberMarch 31, 2025,2026, primarily reflects an increase in sales representatives focused on the hospital market and higher capital and disposal demand.

Homecare distributor revenue. Homecare distributor revenue increased by $98,000,$19,000, or 12.1%,2.7%, for the three months ended DecemberMarch 31, 2025,2026, compared to the same period in the prior year. For the sixnine months ended DecemberMarch 31, 2025,2026, homecare distributor revenue increased by $340,000,$359,000, or 24.4%,17.2%, compared to the same period in the prior year. The increases in homecare distributor sales were primarily a result of increased orders from our distribution partners.

Other revenue. Other revenue was $63,000,$96,000, a decrease of $69,000,$66,000, or 52.3%40.7%, for the three months ended DecemberMarch 31, 2025,2026, compared to the same period in the prior year. For the sixnine months ended DecemberMarch 31, 2025,2026, other revenue was $185,000,$281,000, a decrease of $127,000,$193,000, or 40.7%, compared to the same period in the prior year. The decreases in other revenue were primarily due to the lower demand for purchases by international distributors and other customers that do not fall within the markets described above.

Gross profit dollars increased to $14,819,000,$14,643,000, or 78.4%78.8% of net revenues, for the three months ended DecemberMarch 31, 2025,2026, from $12,627,000,$12,229,000, or 77.7%78.0% of net revenues, in the same period in the prior year. Gross profit dollars increased to $28,016,000,$42,659,000, or 78.3%78.5% of net revenues, for the sixnine months ended DecemberMarch 31, 2025,2026, from $24,118,000,$36,347,000, or 78.0% of net revenues, in the same period in the prior year. The increases in gross profit were primarily a result of increased overall revenue and higher net revenues per device.

Selling, general and administrative expenses. Selling, general and administrative (“SG&A”) expenses were $10,815,000$10,516,000 and $21,101,000$31,617,000 for the three and sixnine months ended DecemberMarch 31, 2025,2026, respectively, representing an increase of $981,000$704,000 and $1,880,000,$2,584,000, or 10.0%7.2% and 9.8%,8.9%, respectively, compared to the same periods in the prior year.

Payroll and compensation-related expenses were $7,496,000$6,955,000 and $14,372,000$21,326,000 for the three and sixnine months ended DecemberMarch 31, 2025,2026, respectively, representing an increase of $621,000$363,000 and $1,040,000,$1,402,000, or 9.0%5.5% and 7.8%,7.0%, respectively, compared to the same periods in the prior year. The increases in the current-year periods were primarily due to the increase in salaries and incentive compensation related to the higher average number of sales representatives and higher overall compensation costs. We have also continued to provide regular merit-based increases for our employees and are regularly benchmarking our compensation ranges, including share-based compensation, for new and existing employees to ensure we can hire and retain the talent needed to drive growth in our business.

Travel, meals and entertainment expenses were $1,013,000$1,070,000 and $2,287,000$3,357,000 for the three and sixnine months ended DecemberMarch 31, 2025,2026, respectively, representing an increase of $20,000$148,000 and $330,000,$477,000, or 2.0%16.1% and 16.9%,16.6%, respectively, compared to the same periods in the prior year. The increases in the current year were primarily due to a higher average number of direct sales representatives, training, and increased travel to support sales activity as well as market development.

Total discretionary marketing expenses were $443,000$293,000 and $853,000$1,146,000 for the three and sixnine months ended DecemberMarch 31, 2025,2026, respectively, representing a decrease of $32,000 and an increase of $88,000$203,000, or a decrease of 9.8% and $234,000,an orincrease 24.8%of and 37.8%,21.5%, respectively, compared to the same period in the prior year. The increasesdecrease in the currentthree yearmonths wereended March 31, 2026, was due to timing of routine marketing spend. The increase in the nine months ended March 31, 2026, was due to increased investment in our direct-to-consumer advertising and other market development initiatives in the six months ended December 31, 2025.initiatives.

Professional fees were $1,166,000$1,452,000 and $2,256,000$3,708,000 for the three and sixnine months ended DecemberMarch 31, 2025,2026, respectively, representing aan decreaseincrease of $13,000$167,000 and $63,000,$104,000, or 1.1%13.0% and 2.7%,2.9%, respectively, compared to the same periods in the prior year. Professional fees are primarily for services related to legal costs, shareowner services and reporting requirements, information technology technical support, insurance and consulting fees. The decreaseincreases in the sixthcurrent monthsperiods ended December 31, 2025, waswere primarily due to externalincreased recruitinglegal spendand ininsurance the prior year that did not recur in the six months ended December 31, 2025.costs.

Research and development expenses. Research and development (“R&D”) expenses were $384,000$361,000 and $625,000$986,000 for the three and sixnine months ended DecemberMarch 31, 2025,2026, respectively, representing an increase of $133,000$84,000 and $208,000,$292,000, or 53.0%30.3% and 49.9%,42.1%, respectively, compared to the same periods in the prior year. The increases were primarily due to increased average headcount and consulting expenses related to product enhancements and sustaining engineering.

Operating income increased by $1,078,000$1,626,000 or 42.4%76.0% to $3,620,000,$3,766,000, or 19.2%20.3% of net revenues, for the three months ended DecemberMarch 31, 2025,2026, compared to the same period in the prior year. Operating income increased by $1,810,000$3,436,000 or 40.4%51.9% to $6,290,000$10,056,000, or 18.5% of net revenues, for the sixnine months ended DecemberMarch 31, 2025,2026, compared to the same period in the prior year. The increases were primarily due to an increase in revenue and gross profit.

Net interest income for the three and sixnine months ended DecemberMarch 31, 2025,2026, was $109,000$100,000 and $243,000,$343,000, respectively, compared to $152,000$142,000 and $347,000,$489,000, respectively, for the same period in the prior year. The decreases were primarily due to decreased interest rates and lower average cash balances.balances throughout the period.

Income tax expense was estimated at $968,000$863,000 and 1,636,000,$2,499,000, and the effective tax rate was 26.0%22.3% and 25.1%,24.0%, for the three and sixnine months ended DecemberMarch 31, 2025,2026, respectively. Estimated income tax expense for the three and sixnine months ended DecemberMarch 31, 2025,2026, includes a discrete current tax benefit of $22,000$94,000 and $103,000,$197,000, respectively, primarily related to the windfall tax benefit of vested restricted stock andawards, the exercise of stock options.options, and the true up for the prior year Federal R&D credit.

Income tax expense was estimated at $726,000$391,000 and $1,385,000,$1,776,000, and the effective tax rate was 26.9%17.1% and 28.7%,25.0%, for the three and sixnine months ended DecemberMarch 31, 2024,2025, respectively. Estimated income tax expense for the three and sixnine months ended DecemberMarch 31, 2024,2025, includes a discrete current tax benefit of $135,000$338,000 and $139,000,$478,000, respectively, primarily related to the exercise of stock options and the vesting of restricted stock awards.options.

Net income for the three and sixnine months ended DecemberMarch 31, 2025,2026, was $2,761,000$3,003,000 and $4,897,000,$7,900,000, representing an increase of 40.3%58.8% and 42.3%,48.1%, respectively, compared to $1,968,000$1,891,000 and $3,442,000$5,333,000 for the same periods in the prior year. The increases in net income were primarily due to increased revenue and gross profit.

For the sixnine months ended DecemberMarch 31, 2025,2026, net cash provided by operating activities was $3,195,000.$6,671,000. Cash flows provided by operating activities consisted of net income of $4,897,000,$7,900,000, non-cash expenses of $1,631,000,$2,764,000, a decrease in income tax receivable, net of $393,000, and an increase in incomeaccounts taxpayable payable,and netaccrued expenses of $790,000.$291,000. These cash flows from operating activities were offset by an increase in accounts receivable of $1,600,000,$3,591,000, a decrease in accrued compensation of $1,368,000,$549,000, an increase in prepaid expenses and other assets of $691,000,$364,000, an increase in inventories of $260,000,$123,000, and an increase in contract assets of $116,000, and a decrease in accounts payable and accrued expenses of $88,000.$50,000.

For the sixnine months ended DecemberMarch 31, 2025,2026, cash used for investing activities was $923,000.$1,077,000. Cash used for investing activities consisted of $886,000$1,033,000 in expenditures for property and equipment and $37,000$44,000 in expenditures for intangible assets.

For the sixnine months ended DecemberMarch 31, 2025,2026, cash used for financing activities was $3,768,000.$3,896,000. Cash used for financing activities consisted of $3,766,000$3,918,000 used for our share repurchase program and $234,000$246,000 for taxes paid on net share settlement of stock awards, partially offset by $232,000$268,000 from the issuance of common stock upon exercise of options.

We maintain a credit facility that was entered into in December 2025, which provides us with a revolving line of credit. The credit agreement provides the Company with a senior security credit facility with a $10,000,000 revolving line of credit. Any borrowings under the credit facility will bear interest at the applicable one-month Term SOFR (3.87%3.67% on DecemberMarch 31, 20252026), plus 1.75%, payable monthly. The credit agreement provides that the credit facility will mature on December 16, 2026, if not renewed before such date. There was no outstanding principal balance on the line of credit as of DecemberMarch 31, 2025.2026. The Company provided a first priority security interest in substantially all of its existing and future assets to secure the payment obligations under the credit agreement.

For the sixnine months ended DecemberMarch 31, 2025,2026, and 2024,2025, we spent approximately $886,000$1,033,000 and $270,000,$117,000, respectively, on property and equipment. We currently expect to finance planned equipment purchases with cash flows from operations or borrowings under our credit facility. We may need to incur additional debt if we have an unforeseen need for additional capital equipment or if our operating performance does not generate adequate cash flow.

While the impact of macroeconomic factors such as inflation are difficult to predict, we believe our cash, cash equivalents and cash flows from operations will be sufficient to meet our working capital, capital expenditure, and operational cash requirements for fiscal 2026 and the foreseeable future. We will continue to evaluate our projected expenditures relative to our available cash and evaluate financing alternatives to satisfy our working capital and other cash requirements.

Statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact should be considered forward-looking statements within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include, but are not limited to, statements regarding: our business strategy, including our intended level of investment in research and development and marketing activities; our expectations with respect to earnings, gross margins and sales growth, industry relationships, marketing strategies and international sales; estimated sizes of markets into which our products are or may be sold; our business strengths and competitive advantages; our ability to grow additional sales distribution channels; our intent to retain any earnings for use in operations rather than paying dividends; our expectation that our products will continue to qualify for reimbursement and payment under government and private insurance programs; our intellectual property plans and practices; the expected impact of applicable regulations on our business; our beliefs about our manufacturing processes; our expectations and beliefs with respect to our employees and our relationships with them; our belief that our current facilities are adequate to support our growth plans; our expectations with respect to ongoing compliance with the terms of our credit facility; our expectations regardingand the ongoing availability of credit and our ability to renew our line of credit; enhancements to our products and services; expected exciseanticipated tax exemption for the SmartVest Systembenefits; and our anticipated revenues, expenses, capital requirements and liquidity. Words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “goal,” “intend,” “may,” “ongoing,” “plan,” “potential,” “project,” “target,” “should,” “will,” “would,” and similar expressions, including the negative of these terms, are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Although we believe these forward-looking statements are reasonable, they involve risks and uncertainties that may cause actual results to differ materially from those projected by such statements. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results or our industry’s actual results, levels of activity, performance, or achievements to be materially different from the information expressed or implied by the forward-looking statements.