Electromed(ELMD) - 2021 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION This section details the company's unaudited condensed financial statements, management's analysis, market risk, and internal controls Item 1. Financial Statements This section presents the unaudited condensed financial statements, including the balance sheets, statements of operations, cash flows, and shareholders' equity, along with detailed notes It provides a snapshot of the company's financial position, performance, and cash movements for the periods ended March 31, 2021, and June 30, 2020 Condensed Balance Sheets This section presents the company's assets, liabilities, and shareholders' equity as of March 31, 2021, and June 30, 2020 | Metric | March 31, 2021 (Unaudited) | June 30, 2020 | | :------------------------- | :------------------------- | :------------ | | Total Assets | $37,170,563 | $33,244,563 | | Total Liabilities | $4,297,952 | $2,995,248 | | Total Shareholders' Equity | $32,872,611 | $30,249,315 | - Cash increased from $10.48 million at June 30, 2020, to $12.50 million at March 31, 2021, and accounts receivable (net) increased from $12.94 million to $16.24 million[10] Condensed Statements of Operations This section details the company's revenues, gross profit, operating income, and net income for the specified periods | Metric (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Nine Months Ended March 31, 2021 | Nine Months Ended March 31, 2020 | | :-------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Net Revenues | $8,787 | $8,744 | $26,287 | $25,593 | | Gross Profit | $6,701 | $6,594 | $20,374 | $19,611 | | Operating Income | $243 | $913 | $2,489 | $3,829 | | Net Income | $224 | $653 | $1,962 | $2,853 | | Basic EPS | $0.03 | $0.08 | $0.23 | $0.34 | | Diluted EPS | $0.03 | $0.07 | $0.22 | $0.33 | - Operating expenses for the three months ended March 31, 2021, increased by 13.7% year-over-year, and for the nine months, increased by 13.3% year-over-year, driven by higher selling, general and administrative, and research and development costs[12] Condensed Statements of Cash Flows This section outlines the cash flows from operating, investing, and financing activities for the nine months ended March 31, 2021, and 2020 | Metric (in thousands) | Nine Months Ended March 31, 2021 | Nine Months Ended March 31, 2020 | | :------------------------------------ | :------------------------------- | :------------------------------- | | Net Cash Provided by Operating Activities | $2,325 | $2,912 | | Net Cash Used in Investing Activities | $(208) | $(850) | | Net Cash (Used in) Provided by Financing Activities | $(95) | $63 | | Net Increase in Cash | $2,022 | $2,125 | | Cash, End of Period | $12,501 | $9,933 | - The increase in accounts receivable by $3.30 million was a significant offset to operating cash flows, primarily due to the 13-month payment cycle for the Medicare portion of the home care business[105] Condensed Statements of Shareholders' Equity This section details changes in shareholders' equity, including retained earnings and additional paid-in capital | Metric | June 30, 2020 | March 31, 2021 | | :------------------------- | :------------ | :------------- | | Total Shareholders' Equity | $30,249,315 | $32,872,611 | | Retained Earnings | $13,683,503 | $15,645,963 | | Additional Paid-in Capital | $16,480,134 | $17,140,274 | - Net income contributed $223,771 for the three months ended March 31, 2021, and $1,962,460 for the nine months ended March 31, 2021, to retained earnings[17] Notes to Condensed Financial Statements This section provides detailed explanations and disclosures supporting the condensed financial statements Note 1. Interim Financial Reporting This note describes the company's business, product offerings, and the impact of the COVID-19 pandemic - The Company develops, manufactures, and markets innovative airway clearance products applying High Frequency Chest Wall Oscillation (HFCWO) therapy, operating in a single industry segment[21][67][69] - International sales were approximately $297,000 for the nine months ended March 31, 2021, a decrease from $455,000 in the prior year[21] - The COVID-19 pandemic's impact on the Company's business remains uncertain, affecting operational and financial performance due to reduced patient consultations and institutional orders[23][73][75] Note 2. Revenues This note provides a breakdown of net revenues by market and payer type, along with contract asset details Net Revenues by Market (in thousands) | Market | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Nine Months Ended March 31, 2021 | Nine Months Ended March 31, 2020 | | :---------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Home Care | $8,163 | $7,834 | $24,529 | $22,995 | | Institutional | $443 | $609 | $1,029 | $1,727 | | Home Care Distributor | $105 | $164 | $432 | $416 | | International | $76 | $137 | $297 | $455 | | Total Net Revenues | $8,787 | $8,744 | $26,287 | $25,593 | Net Home Care Revenue by Payer Type (in thousands) | Payer Type | Nine Months Ended March 31, 2021 | Nine Months Ended March 31, 2020 | | :--------- | :------------------------------- | :------------------------------- | | Commercial | $9,211 | $9,475 | | Medicare | $14,224 | $11,282 | | Medicaid | $669 | $1,432 | | Other | $424 | $806 | | Total | $24,529 | $22,995 | - Contract assets decreased from $902,619 at June 30, 2020, to $557,531 at March 31, 2021, primarily due to reclassification to accounts receivable[51] Note 3. Inventories This note details the components of inventory, including parts, work in process, finished goods, and obsolescence reserves Inventory Components | Component | March 31, 2021 | June 30, 2020 | | :------------------------- | :------------- | :------------ | | Parts inventory | $1,754,396 | $2,270,766 | | Work in process | $62,033 | $126,726 | | Finished goods | $609,805 | $826,740 | | Estimated inventory to be returned | $129,778 | $150,388 | | Less: Reserve for obsolescence | $(300,000) | $(290,000) | | Total | $2,256,012 | $3,084,620| Note 4. Finite-life Intangible Assets This note outlines the activity and balances of finite-life intangible assets, including additions and amortization Finite-life Intangible Assets Activity | Metric | Nine Months Ended March 31, 2021 | Fiscal Year Ended June 30, 2020 | | :--------------------- | :------------------------------- | :------------------------------ | | Balance, beginning | $598,389 | $581,413 | | Additions | $102,826 | $138,739 | | Amortization expense | $(98,785) | $(121,763) | | Balance, ending | $602,430 | $598,389 | Note 5. Warranty Liability This note presents the changes in the warranty reserve, including accruals and expenditures for claims Warranty Liability Changes | Metric | Nine Months Ended March 31, 2021 | Fiscal Year Ended June 30, 2020 | | :-------------------------------------- | :------------------------------- | :------------------------------ | | Warranty reserve, beginning | $740,000 | $810,000 | | Accrual for products sold | $127,500 | $79,000 | | Expenditures and costs incurred for warranty claims | $(127,500) | $(149,000) | | Warranty reserve, ending | $740,000 | $740,000 | Note 6. Income Taxes This note details the income tax expense and effective tax rates for the specified periods Income Tax Expense and Effective Tax Rate | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Nine Months Ended March 31, 2021 | Nine Months Ended March 31, 2020 | | :---------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Income Tax Expense | $29,000 | $294,000 | $555,000 | $1,087,000 | | Effective Tax Rate | 11.5% | 31.0% | 22.0% | 27.6% | - The effective tax rate for the three months ended March 31, 2021, decreased by 14.6% due to a $37,000 discrete tax benefit from lower federal and state tax estimates[57] Note 7. Financing Arrangements This note describes the company's revolving line of credit and associated covenants - The Company renewed its $2.5 million revolving line of credit on December 18, 2020, with no outstanding principal balance as of March 31, 2021[59] - The credit facility is secured by substantially all tangible and intangible assets and includes covenants such as a minimum tangible net worth of not less than $10,125,000[60] Note 8. Share-Based Compensation This note provides details on stock option transactions and share-based compensation expense Stock Option Transactions (Nine Months Ended March 31, 2021) | Metric | Number of Shares | Weighted Average Exercise Price per Share | | :---------------------- | :--------------- | :---------------------------------------- | | Outstanding at June 30, 2020 | 590,780 | $4.34 | | Granted | 61,017 | $14.14 | | Exercised | (71,150) | $5.09 | | Cancelled or Forfeited | (109,198) | $6.24 | | Outstanding at March 31, 2021 | 471,449 | $5.05 | - Share-based compensation expense increased to approximately $756,000 for the nine months ended March 31, 2021, from $677,000 in the prior year[62] - As of March 31, 2021, there were 71,255 shares of unvested restricted stock with a weighted average fair value of $10.80 per share[64] Note 9. Commitments and Contingencies This note addresses the company's involvement in legal claims and potential litigation - The Company is occasionally involved in claims and disputes in the ordinary course of business but is not aware of any undisclosed actual or threatened litigation that would have a material adverse effect on its financial condition or results of operations[65][125] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of Electromed's business, critical accounting policies, and a detailed analysis of its financial performance and condition for the periods presented It highlights the impacts of the COVID-19 pandemic, revenue trends across different markets, changes in operating expenses, and the company's liquidity and capital resources Overview This section introduces Electromed's core business, products, and reimbursement landscape - Electromed, Inc. develops and provides innovative airway clearance products, including the SmartVest® Airway Clearance System, utilizing High Frequency Chest Wall Oscillation (HFCWO) technologies for patients of all ages[67][69] - The SmartVest System is often eligible for reimbursement from major private insurance providers, HMOs, state Medicaid systems, and the federal Medicare system, which is an important consideration for patients[70] Critical Accounting Policies and Estimates This section identifies key accounting policies requiring significant management judgment and estimation - Critical accounting policies requiring significant judgment include revenue recognition and the estimation of variable consideration, allowance for doubtful accounts, inventory obsolescence, share-based compensation, and warranty liability[72] Impacts of COVID-19 on Our Business and Operations This section discusses the pandemic's effects on the company's operations, patient access, and revenue trends - The COVID-19 pandemic has negatively impacted business, leading to restricted access to healthcare facilities, reduced patient consultations, and postponed institutional orders, affecting operating results and cash flows[75] - Home care referrals and approvals increased significantly in March 2021, benefiting from increased patient visits, greater sales team access, and the CMS waiver for respiratory-related products[75][81] - Institutional revenue has been negatively impacted since the onset of the COVID-19 pandemic due to hospitals and long-term care facilities adjusting operating protocols and procurement management[76] Results of Operations This section analyzes the company's financial performance, including revenue, gross profit, and operating expenses - Net income decreased by 65.8% for the three months and 31.1% for the nine months ended March 31, 2021, primarily due to increased strategic investments in SG&A and R&D, partially offset by stronger home care revenue and higher gross margin percentage[104] - Gross profit percentage increased to 76.3% (three months) and 77.5% (nine months) due to a higher mix of home care revenue and a favorable mix of Medicare within the home care channel[90] Net Revenues This section analyzes revenue trends across home care, institutional, distributor, and international markets Net Revenues (in thousands) | Market | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Nine Months Ended March 31, 2021 | Nine Months Ended March 31, 2020 | | :---------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Home care | $8,163 | $7,834 | $24,529 | $22,995 | | Institutional | $443 | $609 | $1,029 | $1,727 | | Home care distributor | $105 | $164 | $432 | $416 | | International | $76 | $137 | $297 | $455 | | Total | $8,787 | $8,744 | $26,287 | $25,593 | - Home care revenue increased by 4.2% for the three months and 6.7% for the nine months ended March 31, 2021, driven by increased referrals and approvals, a hybrid selling model, and the CMS waiver[85] - Institutional revenue decreased by 27.3% for the three months and 40.4% for the nine months ended March 31, 2021, primarily due to the continued impact of COVID-19 on hospital purchasing activity[87] Gross profit This section examines the gross profit and gross margin percentage, highlighting factors influencing changes Gross Profit (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Nine Months Ended March 31, 2021 | Nine Months Ended March 31, 2020 | | :----------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Gross Profit | $6,701 | $6,594 | $20,374 | $19,611 | | % of Revenue | 76.3% | 75.4% | 77.5% | 76.6% | - The increase in gross profit percentage was primarily due to a higher mix of home care revenue and a favorable mix of Medicare within the home care channel[90] Operating expenses This section details changes in selling, general and administrative, and research and development expenses Operating Expenses (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Nine Months Ended March 31, 2021 | Nine Months Ended March 31, 2020 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Selling, General and Administrative | $6,051 | $5,288 | $16,490 | $15,148 | | Research and Development | $407 | $392 | $1,396 | $634 | | Total Operating Expenses | $6,458 | $5,680 | $17,886 | $15,783 | - Selling, general and administrative (SG&A) expenses increased by 14.4% (three months) and 8.9% (nine months) due to a higher average number of sales and marketing personnel, increased temporary resources for systems infrastructure investments, and a direct-to-consumer marketing campaign[93][94][96] - Research and development (R&D) expenses increased by 3.8% (three months) and 120.2% (nine months), primarily due to next-generation platform development activities[98] Interest income, net This section discusses the company's net interest income and the factors contributing to its changes Net Interest Income (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Nine Months Ended March 31, 2021 | Nine Months Ended March 31, 2020 | | :----------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Interest Income, Net | $10 | $34 | $29 | $111 | - The decrease in net interest income was primarily due to lower rates earned on cash deposits[99] Income tax expense This section analyzes the income tax expense and effective tax rates, including discrete tax benefits Income Tax Expense and Effective Tax Rate | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Nine Months Ended March 31, 2021 | Nine Months Ended March 31, 2020 | | :---------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Income Tax Expense | $29,000 | $294,000 | $555,000 | $1,087,000 | | Effective Tax Rate | 11.5% | 31.0% | 22.0% | 27.6% | - Estimated income tax expense for the nine months ended March 31, 2021, included a $37,000 discrete tax benefit from lower federal and state taxes and a $32,000 discrete tax benefit related to stock option exercises, decreasing the effective tax rates[101] Net income This section reviews the company's net income and the primary drivers of its changes Net Income (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Nine Months Ended March 31, 2021 | Nine Months Ended March 31, 2020 | | :--------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Net Income | $224 | $653 | $1,962 | $2,853 | - The decrease in net income was driven by increased strategic investments in selling, general and administrative (SG&A) and research and development (R&D), partially offset by stronger home care revenue performance and a higher gross margin percentage[104] Liquidity and Capital Resources This section assesses the company's cash flows, working capital, and ability to meet its financial obligations - The Company believes its working capital of approximately $28.05 million and available borrowings under its existing credit facility will provide adequate liquidity during fiscal 2021[108] - The $2.5 million revolving line of credit was renewed on December 18, 2020, with no outstanding principal balance as of March 31, 2021[109] Cash Flows from Operating Activities This section details the sources and uses of cash from the company's primary business operations Net Cash Provided by Operating Activities (in thousands) | Metric | Nine Months Ended March 31, 2021 | | :-------------------------------------- | :------------------------------- | | Net income | $1,962 | | Increase in accounts payable and accrued liabilities | $1,219 | | Decrease in contract assets | $345 | | Decrease in inventory | $839 | | Increase in accounts receivable | $(3,296) | | Net cash provided by operating activities | $2,325 | - The increase in accounts receivable was primarily due to an increase in the Medicare portion of the home care business, which has a 13-month payment cycle[105] Cash Flows from Investing Activities This section outlines cash flows related to the acquisition and disposal of long-term assets Cash Used in Investing Activities (in thousands) | Metric | Nine Months Ended March 31, 2021 | | :-------------------------------------- | :------------------------------- | | Expenditures for property and equipment | $(105) | | Expenditures for finite-life intangible assets | $(103) | | Net cash used in investing activities | $(208) | Cash Flows from Financing Activities This section describes cash flows from debt and equity transactions Cash Flows from Financing Activities (in thousands) | Metric | Nine Months Ended March 31, 2021 | | :-------------------------------------- | :------------------------------- | | Issuance of common stock upon exercise of options | $46 | | Taxes paid on net share settlement of stock option exercises | $(141) | | Net cash (used in) provided by financing activities | $(95) | Adequacy of Capital Resources This section evaluates the sufficiency of the company's working capital and credit facilities for future operations - The Company's working capital of approximately $28.05 million and available borrowings under its credit facility are deemed adequate for fiscal 2021[108] - The credit facility contains financial and nonfinancial covenants, including a minimum tangible net worth of not less than $10,125,000 and restrictions on incurring additional indebtedness or paying dividends[110] Off-Balance Sheet Arrangements This section discloses any off-balance sheet arrangements impacting the company's financial position - As of March 31, 2021, the Company had no off-balance sheet arrangements[114] Cautionary Note Regarding Forward-Looking Statements This section warns about inherent risks and uncertainties associated with forward-looking statements in the report - The report contains forward-looking statements subject to risks and uncertainties, including the duration and severity of the COVID-19 pandemic, competitive market, changes to Medicare, Medicaid, or private insurance reimbursement policies, and state and federal health care laws[115][116] - Other risk factors include the Company's ability to develop new sales channels, maintain regulatory compliance, protect and expand its intellectual property portfolio, and risks associated with international market expansion and planned sales force expansion[116][118] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Electromed, Inc. is not required to provide disclosures regarding quantitative and qualitative market risk - The Company is exempt from providing market risk disclosures as it is a smaller reporting company[120] Item 4. Controls and Procedures The principal executive and financial officers concluded that the Company's disclosure controls and procedures were effective as of March 31, 2021, ensuring timely and accurate reporting There were no material changes to internal control over financial reporting during the quarter - The principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures were effective as of March 31, 2021[122] - There were no material changes in the Company's internal control over financial reporting during the quarter ended March 31, 2021[123] PART II – OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, safety disclosures, and other miscellaneous information Item 1. Legal Proceedings The Company is occasionally involved in legal actions in the ordinary course of business but is not aware of any undisclosed litigation that would materially adversely affect its financial condition or results of operations - The Company is not aware of any undisclosed actual or threatened litigation that would have a material adverse effect on its financial condition or results of operations[125] Item 1A. Risk Factors As a smaller reporting company, Electromed, Inc. is not required to provide disclosures regarding risk factors in this section - The Company is exempt from providing risk factor disclosures as it is a smaller reporting company[126] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report for the period - No unregistered sales of equity securities or use of proceeds were reported[128] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities to report for the period - No defaults upon senior securities were reported[131] Item 4. Mine Safety Disclosures There were no mine safety disclosures to report for the period - No mine safety disclosures were reported[133] Item 5. Other Information There was no other information to report for the period - No other information was reported[135] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate organizational documents, certifications under the Sarbanes-Oxley Act, and XBRL financial statements - Exhibits include Composite Articles of Incorporation, Amended and Restated Bylaws, Certifications Pursuant to Section 302 and 906 of the Sarbanes-Oxley Act, and XBRL financial statements[137]