|
|
Item
1.
|
Financial
Statements.
|
Electromed,
Inc.
Condensed
Balance Sheets
|
|
|
December
31, 2021
|
|
|
June
30, 2021
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
10,470,000
|
|
|
$
|
11,889,000
|
|
|
Accounts
receivable (net of allowances for doubtful accounts of $45,000)
|
|
|
19,114,000
|
|
|
|
17,032,000
|
|
|
Contract
assets
|
|
|
282,000
|
|
|
|
393,000
|
|
|
Inventories
|
|
|
1,790,000
|
|
|
|
2,114,000
|
|
|
Prepaid
expenses and other current assets
|
|
|
716,000
|
|
|
|
276,000
|
|
|
Income
tax receivable
|
|
|
78,000
|
|
|
|
-
|
|
|
Total
current assets
|
|
|
32,450,000
|
|
|
|
31,704,000
|
|
|
Property
and equipment, net
|
|
|
4,027,000
|
|
|
|
3,605,000
|
|
|
Finite-life
intangible assets, net
|
|
|
617,000
|
|
|
|
663,000
|
|
|
Other
assets
|
|
|
98,000
|
|
|
|
88,000
|
|
|
Deferred
income taxes
|
|
|
1,012,000
|
|
|
|
1,049,000
|
|
|
Total
assets
|
|
$
|
38,204,000
|
|
|
$
|
37,109,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
Current
maturities of other long-term liabilities
|
|
$
|
51,000
|
|
|
$
|
33,000
|
|
|
Accounts
payable
|
|
|
1,295,000
|
|
|
|
685,000
|
|
|
Accrued
compensation
|
|
|
2,061,000
|
|
|
|
2,474,000
|
|
|
Income
tax payable
|
|
|
-
|
|
|
|
288,000
|
|
|
Warranty
reserve
|
|
|
940,000
|
|
|
|
940,000
|
|
|
Other
accrued liabilities
|
|
|
323,000
|
|
|
|
219,000
|
|
|
Total
current liabilities
|
|
|
4,670,000
|
|
|
|
4,639,000
|
|
|
Other
long-term liabilities
|
|
|
47,000
|
|
|
|
54,000
|
|
|
Total
liabilities
|
|
|
4,717,000
|
|
|
|
4,693,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
|
|
|
|
|
|
|
Common
stock, $0.01 par value per share, 13,000,000 shares authorized; 8,533,339 and 8,533,209 shares issued and outstanding, respectively
|
|
|
85,000
|
|
|
|
85,000
|
|
|
Additional
paid-in capital
|
|
|
17,865,000
|
|
|
|
17,409,000
|
|
|
Retained
earnings
|
|
|
15,537,000
|
|
|
|
14,922,000
|
|
|
Total
shareholders’ equity
|
|
|
33,487,000
|
|
|
|
32,416,000
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
38,204,000
|
|
|
$
|
37,109,000
|
|
See
Notes to Condensed Financial Statements (Unaudited).
Electromed,
Inc.
Condensed
Statements of Operations (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
December
31,
|
|
|
Six
Months Ended
December
31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Net
revenues
|
|
$
|
10,248,000
|
|
|
$
|
9,496,000
|
|
|
$
|
20,249,000
|
|
|
$
|
17,500,000
|
|
|
Cost
of revenues
|
|
|
2,368,000
|
|
|
|
1,971,000
|
|
|
|
4,668,000
|
|
|
|
3,827,000
|
|
|
Gross
profit
|
|
|
7,880,000
|
|
|
|
7,525,000
|
|
|
|
15,581,000
|
|
|
|
13,673,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
6,475,000
|
|
|
|
5,435,000
|
|
|
|
13,262,000
|
|
|
|
10,439,000
|
|
|
Research
and development
|
|
|
329,000
|
|
|
|
507,000
|
|
|
|
705,000
|
|
|
|
989,000
|
|
|
Total
operating expenses
|
|
|
6,804,000
|
|
|
|
5,942,000
|
|
|
|
13,967,000
|
|
|
|
11,428,000
|
|
|
Operating
income
|
|
|
1,076,000
|
|
|
|
1,583,000
|
|
|
|
1,614,000
|
|
|
|
2,245,000
|
|
|
Interest
income, net
|
|
|
6,000
|
|
|
|
10,000
|
|
|
|
15,000
|
|
|
|
19,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
244,000
|
|
|
|
389,000
|
|
|
|
352,000
|
|
|
|
526,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
838,000
|
|
|
$
|
1,204,000
|
|
|
$
|
1,277,000
|
|
|
$
|
1,738,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.10
|
|
|
$
|
0.14
|
|
|
$
|
0.15
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.10
|
|
|
$
|
0.13
|
|
|
$
|
0.15
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,478,394
|
|
|
|
8,570,313
|
|
|
|
8,501,041
|
|
|
|
8,560,590
|
|
|
Diluted
|
|
|
8,760,946
|
|
|
|
8,924,861
|
|
|
|
8,788,194
|
|
|
|
8,926,182
|
|
See
Notes to Condensed Financial Statements (Unaudited).
Electromed,
Inc.
Condensed
Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,277,000
|
|
|
$
|
1,738,000
|
|
|
Adjustments
to reconcile net income to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
221,000
|
|
|
|
250,000
|
|
|
Amortization
of finite-life intangible assets
|
|
|
79,000
|
|
|
|
65,000
|
|
|
Share-based
compensation expense
|
|
|
526,000
|
|
|
|
430,000
|
|
|
Deferred
income taxes
|
|
|
37,000
|
|
|
|
77,000
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(2,082,000
|
)
|
|
|
(2,454,000
|
)
|
|
Contract
assets
|
|
|
111,000
|
|
|
|
206,000
|
|
|
Inventories
|
|
|
334,000
|
|
|
|
490,000
|
|
|
Prepaid
expenses and other assets
|
|
|
(265,000
|
)
|
|
|
8,000
|
|
|
Income
tax receivable
|
|
|
(366,000
|
)
|
|
|
186,000
|
|
|
Accounts
payable and accrued liabilities
|
|
|
22,000
|
|
|
|
495,000
|
|
|
Net
cash (used in) provided by operating activities
|
|
|
(106,000
|
)
|
|
|
1,491,000
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
Expenditures
for property and equipment
|
|
|
(511,000
|
)
|
|
|
(54,000
|
)
|
|
Expenditures
for finite-life intangible assets
|
|
|
(69,000
|
)
|
|
|
(90,000
|
)
|
|
Net
cash used in investing activities
|
|
|
(580,000
|
)
|
|
|
(144,000
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock upon exercise of options
|
|
|
-
|
|
|
|
46,000
|
|
|
Taxes
paid on net share settlement of stock option exercises
|
|
|
(70,000
|
)
|
|
|
(130,000
|
)
|
|
Repurchase
of common stock
|
|
|
(663,000
|
)
|
|
|
-
|
|
|
Net
cash used in provided by financing activities
|
|
|
(733,000
|
)
|
|
|
(84,000
|
)
|
|
Net
(decrease) increase in cash
|
|
|
(1,419,000
|
)
|
|
|
1,263,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
|
|
Beginning
of period
|
|
|
11,889,000
|
|
|
|
10,479,000
|
|
|
End
of period
|
|
$
|
10,470,000
|
|
|
$
|
11,742,000
|
|
See
Notes to Condensed Financial Statements (Unaudited).
Electromed,
Inc.
Condensed
Statements of Shareholders’ Equity (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Additional
Paid-
|
|
|
Retained
|
|
|
Total Shareholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
in
Capital
|
|
|
Earnings
|
|
|
Equity
|
|
|
Balance
at June 30, 2020
|
|
8,567,834
|
|
|
$
|
86,000
|
|
|
$
|
16,480,000
|
|
|
$
|
13,684,000
|
|
|
$
|
30,250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
535,000
|
|
|
|
535,000
|
|
|
Issuance
of restricted stock
|
|
19,090
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Issuance
of common stock upon exercise of options
|
|
19,256
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Taxes
paid on stock options exercised on a net basis
|
|
-
|
|
|
|
-
|
|
|
|
(120,000
|
)
|
|
|
-
|
|
|
|
(120,000
|
)
|
|
Share-based
compensation expense
|
|
-
|
|
|
|
-
|
|
|
|
191,000
|
|
|
|
-
|
|
|
|
191,000
|
|
|
Balance
at September 30, 2020
|
|
8,606,180
|
|
|
|
86,000
|
|
|
|
16,551,000
|
|
|
|
14,219,000
|
|
|
|
30,856,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,204,000
|
|
|
|
1,204,000
|
|
|
Issuance
of restricted stock
|
|
18,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Issuance
of common stock upon exercise of options
|
|
10,865
|
|
|
|
-
|
|
|
|
46,000
|
|
|
|
-
|
|
|
|
46,000
|
|
|
Taxes
paid on stock options exercised on a net basis
|
|
-
|
|
|
|
-
|
|
|
|
(10,000
|
)
|
|
|
-
|
|
|
|
(10,000
|
)
|
|
Share-based
compensation expense
|
|
-
|
|
|
|
-
|
|
|
|
239,000
|
|
|
|
-
|
|
|
|
239,000
|
|
|
Balance
at December 31, 2020
|
|
8,635,045
|
|
|
$
|
86,000
|
|
|
$
|
16,826,000
|
|
|
$
|
15,423,000
|
|
|
$
|
32,335,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Additional
Paid-
|
|
|
Retained
|
|
|
Total Shareholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
in
Capital
|
|
|
Earnings
|
|
|
Equity
|
|
|
Balance
at June 30, 2021
|
|
8,533,209
|
|
|
$
|
85,000
|
|
|
$
|
17,409,000
|
|
|
$
|
14,922,000
|
|
|
$
|
32,416,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
439,000
|
|
|
|
439,000
|
|
|
Issuance
of restricted stock
|
|
25,900
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Issuance
of common stock upon exercise of options
|
|
10,530
|
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000
|
|
|
Taxes
paid on stock options exercised on a net basis
|
|
-
|
|
|
|
-
|
|
|
|
(64,000
|
)
|
|
|
-
|
|
|
|
(64,000
|
)
|
|
Share-based
compensation expense
|
|
-
|
|
|
|
-
|
|
|
|
249,000
|
|
|
|
-
|
|
|
|
249,000
|
|
|
Balance
at September 30, 2021
|
|
8,569,639
|
|
|
|
86,000
|
|
|
|
17,594,000
|
|
|
|
15,361,000
|
|
|
|
33,041,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
838,000
|
|
|
|
838,000
|
|
|
Issuance
of restricted stock
|
|
18,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Issuance
of common stock upon exercise of options
|
|
1,387
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Taxes
paid on stock options exercised on a net basis
|
|
-
|
|
|
|
-
|
|
|
|
(6,000
|
)
|
|
|
-
|
|
|
|
(6,000
|
)
|
|
Share-based
compensation expense
|
|
-
|
|
|
|
-
|
|
|
|
277,000
|
|
|
|
-
|
|
|
|
277,000
|
|
|
Repurchase
of common stock
|
|
(55,687
|
)
|
|
|
(1,000
|
)
|
|
|
-
|
|
|
|
(662,000
|
)
|
|
|
(663,000
|
)
|
|
Balance
at December 31, 2021
|
|
8,533,339
|
|
|
$
|
85,000
|
|
|
$
|
17,865,000
|
|
|
$
|
15,537,000
|
|
|
$
|
33,487,000
|
|
See
Notes to Condensed Financial Statements (Unaudited).
Electromed,
Inc.
Notes
to Condensed Financial Statements
(Unaudited)
Note
1. Interim Financial Reporting
Basis
of presentation: Electromed, Inc. (the “Company”) develops, manufactures and markets innovative airway clearance
products that apply High Frequency Chest Wall Oscillation (“HFCWO”) therapy in pulmonary care for patients of all ages.
The Company markets its products in the U.S. to the home health care and institutional markets for use by patients in personal
residences, hospitals and clinics. The Company also sells internationally both directly and through distributors. International
sales were $236,000 and
$221,000 for
the six months ended December 31, 2021 and 2020, respectively. Since its inception, the Company has operated in a single industry
segment: developing, manufacturing and marketing medical equipment.
The
accompanying unaudited Condensed Financial Statements of the Company have been prepared in accordance with U.S. generally accepted
accounting principles (“U.S. GAAP”) for interim financial statements and pursuant to the rules and regulations of
the U.S. Securities and Exchange Commission. In the opinion of management, the accompanying unaudited Condensed Financial Statements
reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation of the Company’s financial
position and results of operations as required by Regulation S-X. Interim results of operations are not necessarily indicative
of the results that may be achieved for the full year. The financial statements and related notes do not include all information
and footnotes required by U.S. GAAP for annual reports. This interim report should be read in conjunction with the financial statements
included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2021 (“fiscal 2021”).
Impacts
of COVID-19 on the Company’s business:
The
impact of the COVID-19 pandemic on the Company’s business remains uncertain, and its effects on its operational and financial
performance will depend in large part on future developments, which cannot be reasonably estimated at this time. Such future developments
include, but are not limited to, the duration, scope and severity of the COVID-19 pandemic in geographic areas where the Company
operates or in which its 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.
Due to the inherent uncertainty of the unprecedented and rapidly evolving situation, the Company is unable to predict with confidence
the likely impact of the COVID-19 pandemic on its future operations. For a more detailed discussion, see “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Quarterly Report on
Form 10-Q.
A
summary of the Company’s significant accounting policies follows:
Use
of estimates. Management uses estimates and assumptions in preparing the unaudited Condensed Financial Statements in accordance
with U.S. GAAP. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were used. The
Company believes the critical accounting policies that require the most significant assumptions and judgments in the preparation
of its unaudited Condensed Financial Statements include revenue recognition and the related estimation of variable consideration,
allowance for doubtful accounts, inventory obsolescence, share-based compensation and warranty liability.
Net
income per common share. Net income is presented on a per share basis for both basic and diluted common shares. Basic net
income per common share is computed using the weighted average number of common shares outstanding during the period, excluding
any restricted stock awards which have not vested. The diluted net income per common share calculation includes outstanding restricted
stock grants and assumes that all stock options were exercised and converted into common stock at the beginning of the period
unless their effect would be anti-dilutive. Common stock equivalents excluded from the calculation of diluted earnings per share
because their impact was anti-dilutive were 108,044 and 46,800 for the three months ended December 31, 2021 and 2020, respectively,
and were 112,170 and 46,800 for the six months ended December 31, 2021 and 2020, respectively.
Note
2. Revenues
Revenue
is measured based on consideration specified in the contract with a customer, adjusted for any applicable estimates of variable
consideration and other factors affecting the transaction price, including non-cash consideration, consideration paid or payable
from customers and significant financing components. Revenue from all customers is recognized when a performance obligation is
satisfied by transferring control of a distinct good or service to a customer, as further described below under Performance
obligations and transaction price.
Individual
promised goods and services in a contract are considered a performance obligation and accounted for separately if the individual
good or service is distinct (i.e., the customer can benefit from the good or service on its own or with other resources that are
readily available to the customer and the good or service is separately identifiable from other promises in the arrangement).
If an arrangement includes multiple performance obligations, the consideration is allocated between the performance obligations
in proportion to their estimated standalone selling price, unless discounts or variable consideration is attributable to one or
more but not all the performance obligations. 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” (“ASC 340”), or other applicable guidance are met.
The
Company includes shipping and handling fees in net revenues. Shipping and handling costs associated with the shipment of the Company’s
SmartVest® Airway Clearance System (“SmartVest System”) after control has transferred to a customer are accounted
for as a fulfillment cost and are included in cost of revenues in the Condensed Statements of Operations.
The
timing of revenue recognition, billings and cash collections results in accounts receivable on the Condensed Balance Sheets as
further described below under Accounts receivable and Contract assets.
Disaggregation
of revenues. In the following table, net revenues are disaggregated by market:
Schedule
of disaggregated revenue
|
|
|
Three
Months Ended December 31,
|
|
|
Six Months Ended December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Home care
|
|
$
|
9,404,000
|
|
|
$
|
8,903,000
|
|
|
$
|
18,688,000
|
|
|
$
|
16,366,000
|
|
|
Institutional
|
|
|
333,000
|
|
|
|
309,000
|
|
|
|
782,000
|
|
|
|
587,000
|
|
|
Home care distributor
|
|
|
387,000
|
|
|
|
149,000
|
|
|
|
543,000
|
|
|
|
326,000
|
|
|
International
|
|
|
124,000
|
|
|
|
135,000
|
|
|
|
236,000
|
|
|
|
221,000
|
|
|
Total
|
|
$
|
10,248,000
|
|
|
$
|
9,496,000
|
|
|
$
|
20,249,000
|
|
|
$
|
17,500,000
|
|
In
the following table, net home care revenue is disaggregated by payer type:
|
|
|
Three
Months Ended December 31,
|
|
|
Six
Months Ended December 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Commercial
|
|
$
|
3,595,000
|
|
|
$
|
3,375,000
|
|
|
$
|
7,380,000
|
|
|
$
|
6,101,000
|
|
|
Medicare
|
|
|
5,400,000
|
|
|
|
5,219,000
|
|
|
|
10,576,000
|
|
|
|
9,602,000
|
|
|
Medicaid
|
|
|
242,000
|
|
|
|
165,000
|
|
|
|
417,000
|
|
|
|
353,000
|
|
|
Other
|
|
|
167,000
|
|
|
|
144,000
|
|
|
|
315,000
|
|
|
|
310,000
|
|
|
Total
|
|
$
|
9,404,000
|
|
|
$
|
8,903,000
|
|
|
$
|
18,688,000
|
|
|
$
|
16,366,000
|
|
Revenues
in the Company’s home care, home care distributor, and international markets are recognized at a point-in-time when control
passes to the customer upon product shipment or delivery. Revenues in the Company’s institutional market include sales recognized
at a point-in-time upon shipment or delivery as well as revenues recognized over time under operating leases.
Performance
obligations and transaction price. A performance obligation is a promise in a contract to transfer a distinct good or service
to the customer and is the unit of account under ASC 606, “Revenue From Contracts With Customers” (“ASC 606”).
A contract’s transaction price is allocated to each distinct performance obligation in proportion to the standalone selling
price for each and recognized as revenue when, or as, the performance obligation is satisfied. The Company’s performance
obligations and the timing or method of revenue recognition in each of the Company’s markets are discussed below:
Home
care market. In the Company’s home care market, its customers are patients who use the SmartVest System. The various
models of the SmartVest System are comprised of three main components - a generator, a vest and a connecting hose - that are sold
together as an integrated unit. Accordingly, in contracts within the home care market, the Company regards the SmartVest System
to be a single performance obligation.
The
Company makes available to its home care patients limited post-sale services that are not material in the context of the contracts,
either individually or taken together, and therefore does not consider them to be performance obligations. The costs associated
with the services are accrued and expensed when the related revenues are recognized. As such, transactions in the home care market
consist of a single performance obligation: the SmartVest System.
Home
care patients generally will rely on third-party payers, including commercial payers and governmental payers such as Medicare,
Medicaid and the U.S. Department of Veterans Affairs to cover and reimburse all or part of the cost of the SmartVest System. The
third-party payers’ reimbursement programs fall into three types, distinguished by the differences in the timing of payments
from the payer, consisting of either (i) outright sale, in which payment is received from the payer based on standard terms, (ii)
capped installment sale, under which the SmartVest System is sold for a series of payments that are capped not to exceed a prescribed
or negotiated amount over a period of time or (iii) installment sale, under which the SmartVest System is paid for over a period
of several months as long as the patient continues to use the SmartVest System.
Regardless
of the type of transaction, provided criteria for an enforceable contract are met, it is the Company’s long-standing business
practice to regard all home care agreements as transferring control to the patient upon shipment or delivery, in spite of possible
payment cancellation under government or commercial programs where the payer is controlling the payment over specified time periods.
For home care sales that feature installment payments, the ultimate amount of consideration received from Medicare, Medicaid or
commercial payers can be significantly less than expected if the contract is terminated due to changes in the patient’s
status, including insurance coverage, hospitalization, death or otherwise becoming unable to use the SmartVest System. However,
once delivered to a patient who needs the SmartVest System, the patient is under no obligation to return the SmartVest System
should payments be terminated as a result of the described contingencies. As a result, the Company’s product sales qualify
for point-in-time revenue recognition. Control transfers to the patient, and revenue is recognized, upon shipment of the SmartVest
System. At this point, physical possession and the significant risks and rewards of ownership are transferred to the patient and
either a current or future right to payment is triggered, as further discussed under Accounts receivable and Contract
assets below.
The
Company’s contractually stated transaction prices in the home care market are generally set by the terms of the contracts
negotiated with insurance companies or by government programs. The transaction price for the Company’s products may be further
impacted by variable consideration. ASC 606 requires the Company to adjust the transaction price at contract inception and throughout
the contract duration for the estimated value of payments to be received from insurance payers based on historical experience
and other available information, subject to the constraint on estimates of variable consideration. Transactions requiring estimates
of variable consideration primarily include (i) capped installment payments, which are subject to the third-party payer’s
termination due to changes in insurance coverage, death or the patient’s discontinued use of the SmartVest System, (ii)
contracts under appeal and (iii) patient responsibility amounts for deductibles, coinsurance, copays and other similar payments.
Although
estimates may be made on a contract-by-contract basis, whenever possible, the Company uses all available information, including
historical collection patterns, to estimate variable consideration for portfolios of contracts. The Company’s estimates
of variable consideration consist of amounts it may receive from insurance providers in excess of its initial revenue estimate
due to patients meeting deductibles or coinsurance during the payment duration, changes to a patient’s insurance status,
changes in an insurance allowable, claims in appeals with Medicare and amounts received directly from patients for their allowable
or coinsurance. The Company believes it has representative historical information to estimate the amount of variable consideration
in relevant portfolios considering the significant experience it has with each portfolio and the similarity of patient accounts
within a portfolio. The analysis includes steps to ensure that revenue recognized on a portfolio basis does not result in a material
difference when compared with an individual contract approach. The Company also leverages its historical experience and all available
relevant information for each portfolio of contracts to minimize the risk its estimates used to arrive at the transaction price
will result in a significant reversal in the amount of cumulative revenue recognized when the uncertainty associated with the
variable consideration is subsequently resolved. Variable consideration is included in the transaction price if, in the Company’s
judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.
For
example, for contracts in which the Company believes the criteria for reimbursement under government or commercial payer contracts
have been met but for which coverage is unconfirmed or payments are under appeal, the Company has significant observable evidence
of relatively consistent claims recovery experience over the prior three to five years. The Company believes the low volatility
in historical claims approval rates for populations of patients whose demographics are similar to those of current patients provides
reliable predictive value in arriving at estimates of variable consideration in such contracts. Similarly, historical payment
trends for recovery of claims subject to payer installments and payments from patients have remained relatively consistent over
the past five years. No significant changes in patient demographics or other relevant factors have occurred that would limit the
predictive value of such payment trends in estimating variable consideration for current contracts. As a result, the Company believes
its estimates of variable consideration are generally not subject to the risk of significant revenue reversal.
For
each type of variable consideration discussed above, there are a large number of contracts with similar characteristics with a
wide range of possible transaction prices. For that reason, the Company uses the probability-weighted expected value method provided
under ASC 606 to estimate variable consideration.
The
Company often receives payment from third-party payers for SmartVest System sales over a period of time that may exceed one year.
Despite these extended payment terms, no significant financing component is deemed to exist because the purpose of such terms
is not to provide financing to the patient, the payer or the Company. Rather, the extended payment terms are mandated by the government
or commercial insurance programs; the fundamental purpose of which is to avoid paying the full purchase price of equipment that
may potentially be used by the patient for only a short period of time.
Home
care distributors. Sales to distributors, who sell direct to patients, are made at fixed contract prices and may include
tiered pricing structures or volume-based rebates which offer more favorable pricing once certain volumes are achieved per the
negotiated contract. The distributor’s purchases accumulate to give the distributor a right to a higher discount on purchases
in excess of the specified level within the contract period. As a result, to the extent the Company expects the distributor to
exceed the specified volume of purchases in the annual period, it recognizes revenue at a blended rate based on estimated total
annual volume and sales revenue. This effectively defers a portion of the transaction price on initial purchases below the specified
volumes for recognition when the higher discount is earned on purchases in excess of specified volumes. Transfer of control of
the products occurs upon shipment or delivery to the distributor, as applicable.
Institutional
market. The Company’s institutional sales are made to hospitals and home health care centers, pulmonary rehabilitation
centers and other clinics. Sales to these institutions are negotiated with the individual institution or with group purchasing
organizations, with payments received directly from the institution. No insurance reimbursement is involved. Generators are either
sold or leased to the institutions and associated hoses and wraps (used in institutional settings rather than vests) are sold
separately. Accordingly, each product is distinct and considered a separate performance obligation in sales to institutional customers.
The agreements with institutions fall into three main types, distinguished by differences in the timing of transfer of control
and timing of payments:
|
|
●
|
Outright
sale – Under these transactions, the Company sells its products for a prescribed
or negotiated price. Transfer of control of the product, and associated revenue recognition,
occurs at the time of shipment and payment is made within normal credit terms, usually
30 days.
|
|
|
●
|
Wrap
usage agreements – Under these transactions, the Company provides a generator device at no cost to the hospital in return for
a fixed annual commitment to purchase disposable wraps. These agreements are cancellable upon at least sixty days prior written
notice by either party. If cancelled, the generator is returned to the Company, where
it can be refurbished and used again at a later date. Revenue for the disposable wraps is recognized when control transfers to the
customer.
|
|
|
●
|
Rental
– Under these transactions, the customer obtains a right to use the product for
a period of time in exchange for consideration as usage occurs. These transactions are
treated as operating leases and revenue is recognized ratably over the applicable rental
period. Lease revenue recognized during the three months ended December 31, 2021 and
2020 was $2,000 and zero, respectively, and was $3,000 and zero for the six months ended
December 31, 2021 and 2020, respectively.
|
International
market. Sales to international markets are made directly to a number of independent distributors at fixed contract prices
that are not subject to further adjustments for variable consideration. Transfer of control of the products occurs upon shipment
or delivery to the distributor, as applicable.
Product
warranty. The Company offers warranties on its products. These warranties are assurance-type warranties not sold on a standalone
basis or are otherwise considered immaterial in the context of the contract, and therefore are not considered distinct performance
obligations under ASC 606. The Company estimates the costs that may be incurred under its warranties and records a liability in
the amount of such costs at the time the product is sold.
Accounts
receivable. Accounts receivable include amounts billed to customers and third-party payers, for which only the passage of
time is required before payment of consideration is due. Amounts due are stated at their net estimated realizable value.
Contract
assets. Contract assets include amounts recognized as revenue that are estimates of variable consideration for Medicare appeals
where the final determination of the insurance coverage amount is dependent on future approval of an appeal, or when the consideration
due to the Company is dependent on a future event such as the patient meeting a deductible prior to the Company’s claim
being processed by the payer. Contract assets are classified as current as amounts will turn into accounts receivable and be collected
during the Company’s normal business operating cycle. Contract assets are reclassified to accounts receivable when the right
to receive payment is unconditional.
Incremental
costs to obtain a contract. Sales incentives paid to sales representatives are eligible for capitalization as they are incremental
costs that would not have been incurred without entering into a specific sales arrangement and are
recoverable
through the expected margin on the transaction. However, the recovery period is less than one year as the performance obligation
is satisfied upon shipment or delivery. Consequently, the Company applies the practical expedient provided by ASC 340 and expenses
sales incentives as incurred. These costs are included in selling, general and administrative expenses in the Condensed Statements
of Operations.
Contract
balances. The following table provides information about accounts receivable and contract assets from contracts with customers:
Schedule of contract assets
|
|
|
December
31, 2021
|
|
|
June
30, 2021
|
|
Receivables,
included in “Accounts receivable, net of allowance for doubtful accounts”
|
|
$
|
19,114,000
|
|
|
$
|
17,032,000
|
|
|
Contract
assets
|
|
$
|
282,000
|
|
|
$
|
393,000
|
|
Significant
changes in contract assets during the period are as follows:
|
|
|
Six
Months Ended
December 31, 2021
|
|
|
Fiscal
Year Ended
June 30, 2021
|
|
|
|
|
Increase
(decrease)
|
|
|
Increase
(decrease)
|
|
|
Contract
assets, beginning
|
|
$
|
393,000
|
|
|
$
|
903,000
|
|
|
Reclassification
of contract assets to accounts receivable
|
|
|
(206,000
|
)
|
|
|
(1,551,000
|
)
|
|
Contract
assets recognized
|
|
|
155,000
|
|
|
|
1,060,000
|
|
|
Decrease
as a result of changes in the estimate of amounts to be realized from payers, excluding amounts transferred to receivables
during the period
|
|
|
(60,000
|
)
|
|
|
(19,000
|
)
|
|
Contract
assets, ending
|
|
$
|
282,000
|
|
|
$
|
393,000
|
|
Note
3. Inventories
The
components of inventory were as follows:
Schedule of components of inventories
|
|
|
December
31, 2021
|
|
|
June 30,
2021
|
|
|
Parts
inventory
|
|
$
|
1,392,000
|
|
|
$
|
1,779,000
|
|
|
Work
in process
|
|
|
82,000
|
|
|
|
23,000
|
|
|
Finished
goods
|
|
|
432,000
|
|
|
|
445,000
|
|
|
Estimated
inventory to be returned
|
|
|
161,000
|
|
|
|
167,000
|
|
|
Less:
Reserve for obsolescence
|
|
|
(277,000
|
)
|
|
|
(300,000
|
)
|
|
Total
|
|
$
|
1,790,000
|
|
|
$
|
2,114,000
|
|
Note
4. Warranty Liability
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. The Company estimates the costs that may be incurred under
its warranty and records a liability in the amount of such costs at the time the product is shipped. Factors that affect the Company’s
warranty liability include the number of units shipped, historical and anticipated rates of warranty claims, the product’s
useful life and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts
the amounts as necessary.
Changes
in the Company’s warranty liability were as follows:
Schedule of changes in warranty liability
|
|
|
Six Months Ended December 31, 2021
|
|
|
Fiscal Year Ended June 30, 2021
|
|
|
Warranty reserve, beginning
|
|
$
|
940,000
|
|
|
$
|
740,000
|
|
|
Accrual for products sold
|
|
|
83,000
|
|
|
|
354,000
|
|
|
Expenditures and costs incurred for warranty claims
|
|
|
(83,000
|
)
|
|
|
(154,000
|
)
|
|
Warranty reserve, ending
|
|
$
|
940,000
|
|
|
$
|
940,000
|
|
Note 5. Income Taxes
Income tax expense was estimated at $244,000
and $352,000 and the effective tax rate was 22.6% and 21.6% for the three and six months ended December 31, 2021, respectively.
Estimated income tax expense for the three and six months ended December 31, 2021 includes a discrete tax benefit of $1,000 and
$21,000, respectively, related to the exercise of stock options.
Income tax expense was estimated at $389,000
and $526,000 and the effective tax rate was 24.4% and 23.2% for the three and six months ended December 31, 2020, respectively.
Estimated income tax expense for the three and six months ended December 31, 2020 includes a discrete tax expense of $7,000 and
a discrete tax benefit of $32,000, respectively, related to the exercise of stock options.
Note 6. Financing Arrangements
The Company has a credit facility that provides
for a revolving line of credit. Effective December 17, 2021, the Company renewed its $2,500,000 revolving line of credit. There
was no outstanding principal balance on the line of credit as of December 31, 2021, or June 30, 2021. Interest on borrowings under
the line of credit, if any, accrues at the prime rate (3.25% at December 31, 2021) less 1.00% and is payable monthly. The amount
eligible for borrowing on the line of credit is limited to the lesser of $2,500,000 or 57.00% of eligible accounts receivable and
the line of credit expires on December 18, 2023, if not renewed. At December 31, 2021, the maximum $2,500,000 was eligible for
borrowing. Payment obligations under the line of credit, if any, are secured by a security interest in substantially all of the
tangible and intangible assets of the Company.
The documents governing
the line of credit contain certain financial and nonfinancial covenants that include a minimum tangible net worth covenant of not
less than $10,125,000 and restrictions on the Company’s ability to incur certain additional indebtedness or pay dividends.
Note 7. Share-Based Compensation
The Company’s share-based compensation
plans are described in Note 8 to the financial statements included in the Company’s Annual Report on Form 10-K for fiscal
2021. Share-based compensation expense was $526,000 and $430,000 for the six months ended December 31, 2021 and 2020, respectively.
This expense is included in selling, general and administrative expense in the Condensed Statements of Operations.
Stock Options
Stock option transactions during
the six months ended December 31, 2021 are summarized as follows:
|
|
|
Number of Shares
|
|
|
Weighted
Average Exercise Price per Share
|
|
|
Outstanding at June 30, 2021
|
|
|
468,049
|
|
|
$
|
4.98
|
|
|
Granted
|
|
|
70,800
|
|
|
$
|
11.40
|
|
|
Exercised
|
|
|
(28,667
|
)
|
|
$
|
5.45
|
|
|
Cancelled or Forfeited
|
|
|
(15,866
|
)
|
|
$
|
11.30
|
|
|
Outstanding at December 31, 2021
|
|
|
494,316
|
|
|
$
|
5.67
|
|
The following assumptions were
used to estimate the fair value of stock options granted:
|
|
|
Six
Months Ended
December 31, 2021
|
|
|
Fiscal
Year Ended
June
30, 2021
|
|
|
Risk-free interest
rate
|
|
|
0.93%
- 1.07%
|
|
|
|
0.31
- 0.59%
|
|
|
Expected
term (years)
|
|
|
6
|
|
|
|
6
|
|
|
Expected volatility
|
|
|
338%
|
|
|
|
283-335%
|
|
The intrinsic value of an option is the amount
by which the fair value of the underlying stock exceeds its exercise price. At December 31, 2021, the weighted average remaining
contractual term for all outstanding stock options was 5.8 years and the aggregate intrinsic value of the options was $3,691,455.
Outstanding at December 31, 2021 were 494,316 stock options issued to employees, of which 379,141 were vested and exercisable and
had an aggregate intrinsic value of $3,397,122. As of December 31, 2021, $709,000 of total unrecognized compensation expense related
to stock options is expected to be recognized over a weighted-average period of approximately 2.2 years.
Restricted Stock
During the six months ended December 31, 2021, the Company
issued restricted stock awards to employees totaling 25,900 shares of common stock, with a vesting term of three years and a
weighted average fair value of $11.35 per share and to directors totaling 18,000 shares of common stock, with a vesting
term of six months and a weighted average fair value of $12.09 per share. As of December 31, 2021, there were 69,403 shares
of unvested restricted stock with a weighted average fair value of $11.87 per share outstanding. As of December 31, 2021,
$498,000 of total unrecognized compensation expense related to restricted stock awards is expected to be recognized over a
weighted-average period of approximately 1.5 years.
Note 8. Commitments and Contingencies
The Company is occasionally involved in claims
and disputes arising in the ordinary course of business. The Company insures certain business risks where possible to mitigate
the financial impact of individual claims and establishes reserves for an estimate of any probable cost of settlement or other
disposition.
On September 8, 2021, a state court putative
class action lawsuit was filed in Minnesota against the Company asserting injury resulting from the previously announced data breach
that impacted the Company’s customer protected health information and employee personal information and seeking compensatory
damages, equitable relief and attorneys’ fees and costs. On October 6, 2021, the proceeding was removed to the District of
Minnesota. The Company believes the plaintiff was not injured as a result of the data privacy incident, and, as a result, the claims
are without merit. Accordingly, on November 11, 2021, the Company moved to dismiss the complaint in its entirety, and the hearing
on such motion is currently set for March 2022. The Company expects to continue to vigorously defend the lawsuit; however, it is
currently unable to determine the ultimate outcome or potential exposure to loss, if any.
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
The following discussion
and analysis of our financial condition and results of operations should be read in conjunction with our unaudited Condensed Financial
Statements and related notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and our audited financial
statements and related notes thereto included in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended June
30, 2021 (“fiscal 2021”).
Overview
Electromed, Inc. (“we,”
“our,” “us,” “Electromed” or the “Company”) develops and provides innovative airway
clearance products applying High Frequency Chest Wall Oscillation (“HFCWO”) technologies in pulmonary care for patients
of all ages.
We manufacture, market
and sell products that provide HFCWO, including the SmartVest® Airway Clearance System (“SmartVest System”) that
includes our newest generation SmartVest SQL® and previous generation SV2100, and related products, to patients with compromised
pulmonary function. The SmartVest SQL is smaller, quieter and lighter than our previous product, with enhanced programmability
and 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. 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. 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. Additionally, we offer our products to a patient population that includes neuromuscular disorders
such as cerebral palsy, muscular dystrophies, amyotrophic lateral sclerosis (“ALS”), the combination of emphysema and
chronic bronchitis commonly known as chronic obstructive pulmonary disease (“COPD”), and patients with post-surgical
complications or who are ventilator dependent or have other conditions involving excess secretion and impaired mucus transport.
The SmartVest System is
often eligible for reimbursement from major private insurance providers, health maintenance organizations (“HMOs”),
state Medicaid systems and the federal Medicare system, which we believe is an important consideration for patients considering
an HFCWO course of therapy. For domestic sales, the SmartVest System may be reimbursed under the Medicare-assigned billing code
(E0483) for HFCWO devices if the patient has cystic fibrosis, bronchiectasis (including chronic bronchitis or COPD that has resulted
in a diagnosis of bronchiectasis) or any one of certain enumerated neuromuscular diseases, and can demonstrate that another less
expensive physical or mechanical treatment did not adequately mobilize retained secretions. Private payers consider a variety of
sources, including Medicare, as guidelines in setting their coverage policies and payment amounts.
Critical Accounting Policies and Estimates
For a description of our
critical accounting policies, estimates and assumptions used in the preparation of our financial statements, including the unaudited
Condensed Financial Statements in this Quarterly Report on Form 10-Q, see Note 1 to our unaudited Condensed Financial Statements
included in Part I, Item 1 of this Quarterly Report on Form 10-Q and Part II, Item 7, and Note 1 to our audited financial statements
included in Part II, Item 8, of our Annual Report on Form 10-K for fiscal 2021.
Some of our accounting
policies 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.
We believe the critical accounting policies that require the most significant assumptions and judgments in the preparation of our
financial statements, including the unaudited Condensed Financial Statements contained in this Quarterly Report on Form 10-Q, include:
revenue recognition and the estimation of variable consideration, allowance for doubtful accounts, inventory obsolescence, share-based
compensation and warranty liability.
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. 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. 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.
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.
During the second quarter
of our fiscal year ending June 30, 2022 (“fiscal 2022”), we continued to experience a reduction in the number of clinics
allowing face-to-face access by our sales team as the number of infections relating to the Omicron variant of COVID-19 increased
throughout most regions of the United States, and hospitals implemented additional safety protocols. 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 the prior-year period.
We believe that the impact
of the COVID-19 pandemic on our home care and institutional business will likely continue during the remainder of fiscal 2022.
Our home care and institutional revenue for the three months ended December 2021 has increased as compared to the three months
ended December 2020; 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, then such measures could have a material adverse effect on our business.
We have observed increased
changes to our supply chain timelines and increased raw material and shipping costs during the most recent quarter, but we have
not experienced any disruptions that impacted product availability for our customers. We anticipate that raw material costs will
increase in future quarters primarily relating to electronic components but may extend to other components. It is possible 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. 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. 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.
In response to the COVID-19
pandemic and the U.S. federal government’s declaration of a public health emergency, the Centers for Medicare & Medicaid
Services (“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. 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. The CMS waiver was
recently extended in conjunction with the extension of the federal public health emergency for an additional 90-day period beginning
January 16, 2022.
The Company continues to
evaluate the scope and application of existing, pending and potential COVID-19 vaccination mandates and their potential impacts
on our future financial condition and results of operations.
In September 2021, President
Joe Biden signed an executive order directing executive departments and agencies to include a clause in all covered federal contracts
to comply with guidance issued by the Safer Federal Workforce Task Force, which requires, among other things, covered federal contractor
employees, including employees working remotely related to federal contracts, to be fully vaccinated by December 8, 2021, unless
the employee is entitled to an accommodation. As a federal contractor to the U.S. Department of Veterans Affairs Federal Supply
Schedule (“Veterans Administration”), we are subject to this regulation. In fiscal 2021, $557,000, or 1.6% of our total
revenues, were attributable to the Veterans Administration, and we intend to leverage that business as a future growth opportunity;
approximately 19 million U.S. veterans were served by the Veterans Administration healthcare system in calendar year 2020.
During the three-month period
ended December 2021, we conducted a review process to ensure that we fully comply with the Safer Federal Workforce Task Force regulations.
Through a concerted effort to increase vaccination rates among our workforce, we were able to achieve compliance with such regulations
with minimal disruption.
Results of Operations
Net Revenues
Net revenues for the
three and six months ended December 31, 2021 and 2020 are summarized in the table below.
|
|
|
Three Months Ended December 31,
|
|
|
|
|
|
|
|
|
|
Six Months Ended
December 31,
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Increase (Decrease)
|
|
|
|
2021
|
|
|
2020
|
|
|
Increase
|
|
|
Home care
|
|
$
|
9,404,000
|
|
|
$
|
8,903,000
|
|
|
$
|
501,000
|
|
|
5.6
|
%
|
|
|
$
|
18,688,000
|
|
|
$
|
16,366,000
|
|
|
$
|
2,322,000
|
|
|
14.2
|
%
|
|
Institutional
|
|
|
333,000
|
|
|
|
309,000
|
|
|
|
24,000
|
|
|
7.8
|
%
|
|
|
|
782,000
|
|
|
|
587,000
|
|
|
|
195,000
|
|
|
33.2
|
%
|
|
Home care distributor
|
|
|
387,000
|
|
|
|
149,000
|
|
|
|
238,000
|
|
|
159.7
|
%
|
|
|
|
543,000
|
|
|
|
326,000
|
|
|
|
217,000
|
|
|
66.6
|
%
|
|
International
|
|
|
124,000
|
|
|
|
135,000
|
|
|
|
(11,000
|
)
|
|
(8.1
|
%)
|
|
|
|
236,000
|
|
|
|
221,000
|
|
|
|
15,000
|
|
|
6.8
|
%
|
|
Total
|
|
$
|
10,248,000
|
|
|
$
|
9,496,000
|
|
|
$
|
752,000
|
|
|
7.9
|
%
|
|
|
$
|
20,249,000
|
|
|
$
|
17,500,000
|
|
|
$
|
2,749,000
|
|
|
15.7
|
%
|
Home care revenue.
Home care revenue for the three months ended December 31, 2021 was $9,404,000, representing an increase of $501,000, or 5.6%,
compared to the same period in fiscal 2021. For the six months ended December 31, 2021, home care revenue was $18,688,000, representing
an increase of $2,322,000, or 14.2%, compared to the same period in fiscal 2021. The revenue increases compared to the prior-year
periods were primarily due to increases in referrals and approvals. The increases in referrals compared to the prior-year periods
were due to the sales team adapting to a hybrid virtual and face-to-face selling model implemented to address clinic access limitations
due to the COVID-19 pandemic, benefits of the CMS waiver on the non-commercial Medicare portion of our home care revenue and an
increase in direct sales representatives.
The CMS waiver benefited
the non-commercial Medicare portion of our home care revenue by increasing the number of referrals and the approval percentage
for previously non-covered diagnoses. 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 set to expire in April 2022.
Institutional revenue.
Institutional revenue for the three months ended December 31, 2021 was $333,000, representing an increase of $24,000, or
7.8%, compared to the same period in fiscal 2021. For the six months ended December 31, 2021, institutional revenue was $782,000,
an increase of $195,000, or 33.2%, compared to the same period in fiscal 2021. The revenue increase in the current-year periods
was due to increased capital purchases and stronger disposable volumes compared to the corresponding prior-year periods, as hospitals
resumed utilization of HFCWO protocols after reducing utilization early in the COVID-19 pandemic.
Home care distributor
revenue. Home care distributor revenue for the three months ended December 31, 2021 was $387,000, representing an
increase of $238,000, or 159.7%, compared to the same period in fiscal 2021. For the six months ended December 31, 2021, home care
distributor revenue was $543,000, an increase of $217,000, or 66.6%, compared to the same period in fiscal 2021. The revenue increase
in the current-year periods was due to an increase in orders by one home care distribution partner. 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 for the three months ended December 31, 2021 was $124,000, representing a decrease of $11,000, or 8.1%,
compared to the same period in fiscal 2021. For the six months ended December 31, 2021, international revenue was $236,000, an
increase of $15,000, or 6.8%, compared to the same period in fiscal 2021. International sales are affected by the timing of international
distributor purchases that can cause significant fluctuations in reported revenue on a quarterly basis.
Gross profit
Gross profit increased
to $7,880,000, or 76.9% of net revenues, for the three months ended December 31, 2021, from $7,525,000, or 79.2% of net revenues,
in the same period in fiscal 2021. Gross profit increased to $15,581,000, or 76.9% of net revenues, for the six months ended December
31, 2021, from $13,673,000, or 78.1% of net revenues, in the same period in fiscal 2021. The decrease in gross profit as a percentage
of net revenues compared to the prior-year periods was primarily due to higher raw material and shipping costs.
Operating expenses
Selling, general and
administrative expenses. Selling, general and administrative (“SG&A”) expenses were $6,475,000 and $13,262,000
for the three and six months ended December 31, 2021, respectively, representing increases of $1,040,000 and $2,823,000, or 19.1%
and 27.0%, respectively, compared to the same periods in the prior year.
Payroll and compensation-related
expenses were $4,025,000 and $8,040,000 for the three and six months ended December 31, 2021, respectively, representing increases
of $593,000 and $1,308,000, or 17.3% and 19.4%, respectively, compared to the same periods in the prior year. The increase in the
current-year periods was primarily due to a higher average number of sales and marketing personnel, increased reimbursement personnel
to process higher patient referrals, increased temporary resources to assist with systems infrastructure investments and increased
incentive payments on higher home care revenue. Field sales employees totaled 48, of which
39 were direct sales, as of December 31, 2021, compared to 45 as of December 31, 2020, of which 38 were direct sales.
Travel, meals and entertainment
expenses were $590,000 and $1,231,000 for the three and six months ended December 31, 2021, respectively, representing increases
of $124,000 and $401,000, or 26.6% and 48.3%, respectively, compared to the same periods in the prior year. The increase in the
current-year periods was primarily due to our sales representatives resuming closer-to-normal levels of travel compared to the
COVID-19 driven travel restrictions in the prior-year periods and a national sales meeting that was held in August 2021 but was
not held in the prior fiscal year due to COVID-19.
Total discretionary marketing
expenses were $211,000 and $365,000 for the three and six months ended December 31, 2021, respectively, representing decreases
of $106,000 and $141,000, or 33.4% and 27.9%, respectively, compared to the same periods in the prior year. The decrease in the
current-year periods was primarily due to a shift to more cost-effective direct-to-consumer marketing investments.
Professional fees were
$624,000 and $1,735,000 for the three and six months ended December 31, 2021, respectively, representing increases of $91,000 and
$748,000, or 17.1% and 75.8%, respectively, compared to the same periods in the prior year. Professional fees include services
related to legal costs, shareowner services and reporting requirements, information technology technical support and consulting
fees. The increase in professional fees compared to prior periods was primarily due an increase in system infrastructure investments
and costs related to a shareholder activism matter, which concluded with a cooperation agreement in September 2021. We did not
incur any shareholder activism costs during the three months ended December 31, 2021. 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 optimization of the revenue cycle management system that was implemented in June 2021. We expect
these system infrastructure investments will result in more efficient and scalable operational processes and provide enhanced analytics
to drive business performance.
Research and development expenses.
Research and development (“R&D”) expenses were $329,000 and $705,000 for the three and six months ended December
31, 2021, respectively, representing decreases of $178,000 and $284,000, or 35.1% and 28.7%, respectively, compared to the same
periods in the prior year. The decrease in the current-year periods was primarily due to reduced professional services costs associated
with our next generation platform development. R&D expenses were 3.2% and 3.5% of revenue for the three and six months ended
December 31, 2021, respectively.
Interest income, net
Net
interest income for the three and six months ended December 31, 2021 was $6,000 and $15,000, respectively, compared to $10,000
and $19,000, respectively, in the comparable prior-year periods. The decrease in the current-year periods was primarily due to
lower rates earned on our cash deposits.
Income tax expense
Income tax expense was estimated
at $244,000 and $352,000 and the effective tax rate was 22.6% and 21.6% for the three and six months ended December 31, 2021, respectively.
Estimated income tax expense for the three and six months ended December 31, 2021 each include a discrete tax benefit of $1,000
and $21,000, respectively, related to the exercise of stock options.
Income tax expense was estimated
at $389,000 and $526,000 and the effective tax rate was 24.4% and 23.2% for the three and six months ended December 31, 2020, respectively.
Estimated income tax expense for the three and six months ended December 31, 2020 each include a discrete tax expense of $7,000
and a discrete tax benefit of $32,000, respectively, related to the exercise of stock options.
Net income
Net income for the three
and six months ended December 31, 2021 was $838,000 and $1,277,000, respectively, compared to $1,204,000 and $1,738,000 for the
same periods in the prior year. The decrease in the current-year periods was driven by increased strategic investments in SG&A
and higher shareholder activism costs in the three months ended September 30, 2021 partially offset by stronger home care and distributor
revenue.
Liquidity and Capital Resources
Cash Flows and Sources of Liquidity
Cash Flows from Operating Activities
For the six months ended
December 31, 2021, net cash used by operating activities was $106,000. Cash flows provided by operating activities consisted of
net income of $1,277,000, non-cash expenses of $863,000, a decrease in inventory of $334,000, a decrease in contract assets of
$111,000, and an increase in accounts payable and accrued liabilities of $22,000. These cash flows from operating activities were
offset by an increase in accounts receivable of $2,082,000, an increase in prepaid expenses and other assets of $265,000, and an
increase in income tax receivable of $366,000. The increase in accounts receivable was primarily due to continued growth in the
Medicare portion of our home care business, which has a 13-month payment cycle.
Cash Flows from Investing Activities
For the six months ended
December 31, 2021, cash used in investing activities was $580,000. Cash used in investing activities consisted of $511,000 in expenditures
for property and equipment and $69,000 in expenditures for patent costs. The investment in property and equipment primarily relates
to our system infrastructure investments in an ERP system, customer relationship management system and revenue cycle management
system, as well as tooling equipment for our next generation product.
Cash Flows from Financing Activities
For the six months ended
December 31, 2021, cash used in financing activities was $733,000, which consisted of $663,000 used to repurchase shares of common
stock, and $70,000 of taxes paid on net share settlements of stock option exercises.
Adequacy of Capital Resources
Our primary working capital
requirements relate to adding employees to our sales force and support functions, continuing R&D efforts, IT infrastructure
projects, and supporting general corporate needs, including financing equipment purchases and other capital expenditures incurred
in the ordinary course of business. Based on our current operational performance, we believe our working capital of $27,780,000
and available borrowings under our existing credit facility will provide adequate liquidity during fiscal 2022.
Effective December 17,
2021, we renewed our credit facility, which provides us with a revolving line of credit. Interest on borrowings on the line of
credit accrues at the prime rate (3.25% at December 31, 2021) less 1.00% and is payable monthly. There was no outstanding principal
balance on the line of credit as of December 31, 2021 or June 30, 2021. The amount eligible for borrowing on the line of credit
is limited to the lesser of $2,500,000 or 57.00% of eligible accounts receivable, and the line of credit expires on December 18,
2023, if not renewed. At December 31, 2021, the maximum $2,500,000 was available under the line of credit. Payment obligations
under the line of credit are secured by a security interest in substantially all 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.
Any failure to comply with
these covenants in the future may result in an event of default, which if not cured or waived, could result in the lender accelerating
the maturity of our indebtedness, preventing access to additional funds under the line of credit, requiring prepayment of outstanding
indebtedness, or refusing to renew the line of credit. If the maturity of the indebtedness is accelerated or the line of credit
is not renewed, sufficient cash resources to satisfy the debt obligations may not be available and we may not be able to continue
operations as planned. If we are unable to repay such indebtedness, the lender could foreclose on these assets.
For the six months ended December
31, 2021 and 2020, we spent $511,000 and $54,000, respectively, on property and equipment. We currently expect to finance planned
equipment purchases with available working capital, 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.
Off-Balance Sheet Arrangements
As of December 31, 2021, we had no off-balance sheet
arrangements.
Cautionary Note Regarding Forward-Looking Statements
Statements contained in
this Quarterly Report on Form 10-Q that are not statements of historical fact should be considered forward-looking statements within
the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include, but are not limited to,
statements regarding: the expected impact of the COVID-19 pandemic on our business; our business strategy, including our intended
level of investment in R&D and marketing activities; our expectations with respect to earnings, gross margins and sales growth,
industry relationships, marketing strategies and international sales; estimated sizes of markets into which our products are or
may be sold; our business strengths and competitive advantages; our ability to grow additional sales distribution channels; our
intent to retain any earnings for use in operations rather than paying dividends; our expectation that our products will continue
to qualify for reimbursement and payment under government and private insurance programs; our intellectual property plans and practices;
the expected impact of applicable regulations on our business; our beliefs about our manufacturing processes; our expectations
and beliefs with respect to our employees and our relationships with them; our belief that our current facilities are adequate
to support our growth plans; our expectations with respect to ongoing compliance with the terms of our credit facility; our expectations
regarding the ongoing availability of credit and our ability to renew our line of credit; enhancements to our products and services;
expected excise tax exemption for the SmartVest System; and our anticipated revenues, expenses, capital requirements and liquidity.
Words such as “anticipate,” “believe,” “continue,” “could,” “estimate,”
“expect,” “intend,” “may,” “ongoing,” “plan,” “potential,”
“project,” “should,” “will,” “would,” and similar expressions, including the negative
of these terms, are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
Although we believe these forward-looking statements are reasonable, they involve risks and uncertainties that may cause actual
results to differ materially from those projected by such statements. Such statements involve known and unknown risks, uncertainties
and other factors that may cause our actual results or our industry’s actual results, levels of activity, performance or
achievements to be materially different from the information expressed or implied by the forward-looking statements.
Factors that could cause actual results
to differ from those discussed in the forward-looking statements include, but are not limited to, the following:
|
|
●
|
the duration, extent and severity of the COVID-19 pandemic, including its
effects on our business, operations and employees as well as its impact on our customers and distribution channels and on economies
and markets more generally;
|
|
|
●
|
the competitive nature of our market;
|
|
|
●
|
changes to Medicare, Medicaid, or private insurance reimbursement policies;
|
|
|
●
|
supply chain disruptions that limit our ability to produce and deliver our products to patients;
|
|
|
●
|
changes to state and federal health care laws;
|
|
|
●
|
changes affecting the medical device industry;
|
|
|
●
|
our ability to develop new sales channels for our products such as the home care distributor channel;
|
|
|
●
|
our need to maintain regulatory compliance and to gain future regulatory approvals and clearances;
|
|
|
●
|
new drug or pharmaceutical discoveries;
|
|
|
●
|
general economic and business conditions;
|
|
|
●
|
our ability to renew our line of credit or obtain additional credit as necessary;
|
|
|
●
|
our ability to protect and expand our intellectual property portfolio;
|
|
|
●
|
the risks associated with expansion into international markets;
|
|
|
●
|
the risks associated with cyberattacks, data breaches, computer viruses and other similar security threats; and
|
|
|
●
|
the risks associated with our planned sales force expansion.
|
This list of factors is
not exhaustive, however, and these or other factors, many of which are outside of our control, could have a material adverse effect
on us and our results of operations. Therefore, you should consider these risk factors with caution and form your own critical
and independent conclusions about the likely effect of these risk factors on our future performance. Forward-looking statements
speak only as of the date on which the statements are made, and we undertake no obligation, and expressly disclaim any such obligation,
to update any forward-looking statement for any reason other than as required by law, even if new information becomes available
or other events occur in the future. You should carefully review the disclosures and the risk factors described in this and other
documents we file from time to time with the Securities and Exchange Commission (the “SEC”), including our Annual Report
on Form 10-K for fiscal 2021. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified
in their entirety by the cautionary statements set forth herein.