Electromed, Inc. Announces Fiscal 2017 Second Quarter Financial Results

Reports Record Revenue and Cash Flow from Operations

NEW PRAGUE, Minn.–(BUSINESS WIRE)–Electromed, Inc. (“Electromed” or “the Company”) (NYSE MKT:ELMD), a
leader in innovative airway clearance technologies, today announced
financial results for its three months ended December 31, 2016 (“Q2 FY
2017”).

Q2 FY 2017 Highlights

• Net revenue reached a record $6.4 million, up from $6.3 million in the
  three months ended December 31, 2015 (“Q2 FY 2016”). Net revenue was
  negatively impacted during Q2 FY 2017 by $212,000 while Q2 FY 2016
  included a favorable impact of $250,000 from one-time items which are
  described in more detail below under the heading “Q2 FY 2017 Review”.
• Gross profit totaled $4.9 million, or 77.3% of net revenue,
  approximately flat with the comparable figure in Q2 FY 2016.
• Operating income declined to $729,000 from $1.2 million in Q2 FY 2016,
  primarily reflecting higher SG&A expense to support the growth of the
  business.
• Net income totaled $444,000, or $0.05 per diluted share, compared to
  $1.1 million, or $0.13 per diluted share, in Q2 FY 2016.
• Cash flow from operations for Q2 FY 2017 increased 46.6% to a record
  $1.3 million from $856,000 in Q2 FY 2016.
• Beta testing of the SmartVest® Airway Clearance System wireless
  connectivity and reporting solution commenced in January 2017.
• Field sales staff increased to 35 at the end of Q2 FY 2017 from 27 at
  the end of Q2 FY 2016.

Kathleen Skarvan, President and Chief Executive Officer of Electromed,
commented, “In our second quarter we achieved record revenue and cash
flow from operations while continuing to invest in our sales team,
reimbursement platform, and product innovation. These investments,
combined with an evidence-based sales approach and improved sales force
productivity, drove a record level of referrals and higher approvals in
Q2 FY 2017, positioning Electromed for ongoing revenue growth during the
second half of the fiscal year. We remain excited about the large market
opportunity for our SmartVest® Airway Clearance System and are extremely
pleased with this quarter’s improving level of referrals per sales
representative and our progress in educating physicians to better
identify patients who may benefit from therapy with our devices.”

Ms. Skarvan continued, “Our sales team has gained significant traction
using two recently published studies verifying the effectiveness of
SmartVest use by patients with non-cystic fibrosis bronchiectasis. The
most recent study, published in January 2017, demonstrates a 60%
reduction in overall health care utilization and cost as a result of a
material decrease in bronchiectasis-related exacerbations for a
population of patients who used our SmartVest device. Our field reps
also are hearing enthusiasm from patients and clinicians about the
opportunity to further personalize their therapy with our new garment
colors and first-to-market generator color choices, which we began
shipping in October 2016. As announced last quarter, we are developing
wireless connectivity for the SmartVest SQL® and this January began
shipping wireless enabled devices to patients in five clinics throughout
the country as part of our beta testing process. We remain on target for
a formal launch by the end of fiscal 2017. We believe that continued
product innovation, combined with SmartVest SQL’s light weight, quiet
operation and ease-of-use, will promote greater patient acceptance and
satisfaction.”

Q2 FY 2017 Review

Net revenues in Q2 FY 2017 increased 1.8% to $6.4 million from $6.3
million in Q2 FY 2016.

Home care revenue in Q2 FY 2017 was negatively impacted by the
retroactive repayment of previously collected and recognized revenue to
a state Medicaid program totaling approximately $212,000. The repayment
resulted from the state Medicaid program’s reinterpretation of its
reimbursement process and a reduction in its allowable payments. We
believe that the repayment is a one-time event and is not reflective of
other state Medicaid reimbursement processes. During the three months
ended December 31, 2015, home care revenue benefited by approximately
$250,000 from processing a backlog of referrals from the prior fiscal
year in a certain state. The backlog accumulated while we reapplied for
a state home medical equipment license until we met a newly imposed
requirement to have an approved in-state presence. The license was
reinstated in October 2015.

After taking into consideration the negative impact of the retroactive
repayment during Q2 FY 2017, and the favorable impact of the processing
of the backlogged referrals during Q2 FY 2016, home care revenue
increased primarily due to an increase in both approvals and referrals.
The increase in referrals was predominately due to growth in the number
of field sales employees and a higher referral per field sales employee
as compared to the comparable prior year period.

Gross profit in both Q2 FY 2017 and Q2 FY 2016 approximated $4.9
million. Gross profit in Q2 FY 2017 was 77.3% of net revenues, compared
to 78.2% of net revenues in Q2 FY 2016.

Operating expenses, which include selling, general and administrative
(“SG&A”) as well as research and development (“R&D”) expenses, totaled
$4.2 million, or 65.9% of revenue, in Q2 FY 2017 compared with $3.6
million, or 58.3% of revenue, in the same period of the prior year. SG&A
expenses increased 14.0% to $4.1 million in Q2 FY 2017 from $3.6 million
in Q2 FY 2016, primarily due to higher payroll and compensation-related
expenses, higher professional fees, and increased travel, meals and
entertainment expenses. R&D expenses increased to $101,000 in Q2 FY 2017
from $57,000 in Q2 FY 2016, primarily driven by incremental investment
in the Company’s wireless connectivity project. In Q2 FY 2017 the
Company capitalized an additional $190,000 related to software
development of its patient and clinician communication portal for its
wireless connectivity project.

Operating income in Q2 FY 2017 declined to $729,000 from $1.2 million in
Q2 FY 2016, reflecting higher operating expenses. The year-over-year
decrease in operating income was driven primarily by increased payroll
and compensation expenses in sales and administrative positions and
increased research and development costs, which were partially offset by
increased gross profit driven by higher revenue.

Net income before income tax expense in Q2 FY 2017 was $714,000,
compared to $1.2 million in Q2 FY 2016.

The Company reported net income of $444,000, or $0.05 per basic and
diluted share, in Q2 FY 2017, compared to $1.1 million, or $0.13 per
basic and diluted share, in Q2 FY 2016. In Q2 FY 2017, the Company
reported income tax expense of $270,000, compared to $164,000 in the
same period of the prior year. The prior year benefited by a discrete
tax benefit of $294,000.

Year-to-Date FY 2017 Summary

For the six months ended December 31, 2016, revenue increased 5.8% to
$11.9 million from $11.3 million in the same period of fiscal 2016.
Gross margins were 77.7%, compared to 77.8% in the same period of the
prior year, while net income was $635,000, or $0.08 per diluted share,
compared to $1.4 million, or $0.17 per diluted share in the same period
of the prior year.

Financial Condition

Electromed’s balance sheet at December 31, 2016 included cash and cash
equivalents of $4.8 million, long-term debt including current maturities
of $1.2 million, working capital of $13.7 million, and shareholders’
equity of $17.2 million.

Conference Call

Management will host a conference call on February 8, 2017 at 8:00 am CT
(9:00 am ET) to discuss Q2 FY 2017 financial results and other matters.

Interested parties may participate in the call by dialing:

• (877) 407-9753 (Domestic)
• (201) 493-6739 (International)

The conference call will also be accessible via the following link: http://www.investorcalendar.com/IC/CEPage.asp?ID=175581.

For those who cannot listen to the live broadcast, an online webcast
replay will be available in the Investor Relations section of
Electromed’s web site at: http://www.smartvest.com/electromed/investor-relations/.

About Electromed, Inc.

Electromed, Inc. manufactures, markets, and sells products that provide
airway clearance therapy, including the SmartVest^® Airway
Clearance System, to patients with compromised pulmonary function. The
Company is headquartered in New Prague, Minnesota and was founded in
1992. Further information about Electromed can be found at www.smartvest.com.

Cautionary Statements

Certain statements in this release constitute forward-looking
statements as defined in the U.S. Private Securities Litigation Reform
Act of 1995. Forward-looking statements reflect current views with
respect to future events and financial performance and include any
statement that does not directly relate to a current or historical fact.
Forward-looking statements can generally be identified by the words
“anticipate,” “believe,” “estimate,” “expect,” “will” and similar words.
Forward-looking statements in this release include estimated revenue
trends, changes in sales opportunities and our sales force, product and
service innovations, referral quality and processing, financial
performance, profitability and market trends. Forward-looking statements
cannot be guaranteed and actual results may vary materially due to the
uncertainties and risks, known and unknown, associated with such
statements. Examples of risks and uncertainties for the Company include,
but are not limited to, the impact of emerging and existing competitors,
the effect of new legislation on the Company’s industry and business,
the effectiveness of the Company’s sales and marketing and cost control
initiatives, changes to reimbursement programs, as well as other factors
described from time to time in the Company’s reports to the Securities
and Exchange Commission (including the Company’s most recent Annual
Report on Form 10-K, as amended from time to time, and subsequent
reports on Form 10-Q and Form 8-K). Investors should not consider any
list of such factors to be an exhaustive statement of all of the risks,
uncertainties or potentially inaccurate assumptions investors should
take into account when making investment decisions. Shareholders and
other readers should not place undue reliance on “forward-looking
statements,” as such statements speak only as of the date of this
release.

Contacts

Electromed, Inc.
Jeremy Brock, 952-758-9299
Chief
Financial Officer
investorrelations@electromed.com
or
The
Equity Group Inc.
Kalle Ahl, CFA, 212-836-9614
kahl@equityny.com
or
Devin
Sullivan, 212-836-9608
dsullivan@equityny.com