| Item 1. | Financial Statements. |
Electromed, Inc.
Condensed Balance Sheets
| | |
March 31, 2023 | | |
June 30, 2022 | |
| | |
(Unaudited) | | |
| |
| Assets | |
| | | |
| | |
| Current Assets | |
| | | |
| | |
| Cash and cash equivalents | |
$ | 6,776,000 | | |
$ | 8,153,000 | |
| Accounts receivable (net of allowances for doubtful accounts of $45,000) | |
| 22,345,000 | | |
| 21,052,000 | |
| Contract assets | |
| 570,000 | | |
| 286,000 | |
| Inventories | |
| 3,451,000 | | |
| 3,178,000 | |
| Prepaid expenses and other current assets | |
| 1,808,000 | | |
| 1,870,000 | |
| Income tax receivable | |
| 219,000 | | |
| - | |
| Total current assets | |
| 35,169,000 | | |
| 34,539,000 | |
| Property and equipment, net | |
| 5,502,000 | | |
| 4,568,000 | |
| Finite-life intangible assets, net | |
| 604,000 | | |
| 599,000 | |
| Other assets | |
| 60,000 | | |
| 120,000 | |
| Deferred income taxes | |
| 1,506,000 | | |
| 1,538,000 | |
| Total assets | |
$ | 42,841,000 | | |
$ | 41,364,000 | |
| | |
| | | |
| | |
| Liabilities and Shareholders' Equity | |
| | | |
| | |
| Current Liabilities | |
| | | |
| | |
| Accounts payable | |
$ | 1,289,000 | | |
$ | 1,261,000 | |
| Accrued compensation | |
| 2,082,000 | | |
| 2,742,000 | |
| Income tax payable | |
| - | | |
| 51,000 | |
| Warranty reserve | |
| 1,333,000 | | |
| 1,256,000 | |
| Other accrued liabilities | |
| 1,713,000 | | |
| 1,840,000 | |
| Total current liabilities | |
| 6,417,000 | | |
| 7,150,000 | |
| Other long-term liabilities | |
| 30,000 | | |
| 41,000 | |
| Total liabilities | |
| 6,447,000 | | |
| 7,191,000 | |
| | |
| | | |
| | |
| Commitments and Contingencies | |
| | | |
| | |
| | |
| | | |
| | |
| Shareholders' Equity | |
| | | |
| | |
| Common stock, $0.01 par value per share,
13,000,000 shares authorized; 8,556,600 and 8,475,438 shares issued and outstanding, as of March 31, 2023 and June 30, 2022,
respectively | |
| 86,000 | | |
| 85,000 | |
| Additional paid-in capital | |
| 18,548,000 | | |
| 18,308,000 | |
| Retained earnings | |
| 17,760,000 | | |
| 15,780,000 | |
| Total shareholders' equity | |
| 36,394,000 | | |
| 34,173,000 | |
| Total liabilities and shareholders' equity | |
$ | 42,841,000 | | |
$ | 41,364,000 | |
|
See Notes to Condensed Financial Statements (Unaudited).
|
Electromed, Inc.
Condensed Statements of Operations
(Unaudited)
| | |
|
|
|
|
|
| | |
|
|
|
|
|
| |
| | |
Three Months
Ended | | |
Nine Months
Ended | |
| | |
March
31, | | |
March
31, | |
| | |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| Net revenues | |
$ | 12,068,000 | | |
$ | 10,141,000 | | |
$ | 34,455,000 | | |
$ | 30,390,000 | |
| Cost of revenues | |
| 3,012,000 | | |
| 2,398,000 | | |
| 8,386,000 | | |
| 7,066,000 | |
| Gross
profit | |
| 9,056,000 | | |
| 7,743,000 | | |
| 26,069,000 | | |
| 23,324,000 | |
| | |
| | | |
| | | |
| | | |
| | |
| Operating expenses | |
| | | |
| | | |
| | | |
| | |
| Selling, general and administrative | |
| 7,694,000 | | |
| 6,544,000 | | |
| 22,937,000 | | |
| 19,806,000 | |
| Research
and development | |
| 166,000 | | |
| 336,000 | | |
| 618,000 | | |
| 1,041,000 | |
| Total
operating expenses | |
| 7,860,000 | | |
| 6,880,000 | | |
| 23,555,000 | | |
| 20,847,000 | |
| Operating
income | |
| 1,196,000 | | |
| 863,000 | | |
| 2,514,000 | | |
| 2,477,000 | |
| Interest
income, net | |
| 26,000 | | |
| 6,000 | | |
| 37,000 | | |
| 21,000 | |
| | |
| | | |
| | | |
| | | |
| | |
| Income
tax expense | |
| 147,000 | | |
| 224,000 | | |
| 418,000 | | |
| 576,000 | |
| | |
| | | |
| | | |
| | | |
| | |
| Net
income | |
$ | 1,075,000 | | |
$ | 645,000 | | |
$ | 2,133,000 | | |
$ | 1,922,000 | |
| | |
| | | |
| | | |
| | | |
| | |
| Income per share: | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | |
| Basic | |
$ | 0.13 | | |
$ | 0.08 | | |
$ | 0.25 | | |
$ | 0.23 | |
| | |
| | | |
| | | |
| | | |
| | |
| Diluted | |
$ | 0.12 | | |
$ | 0.07 | | |
$ | 0.25 | | |
$ | 0.22 | |
| | |
| | | |
| | | |
| | | |
| | |
| Weighted-average common shares outstanding: | |
| | | |
| | | |
| | | |
| | |
| Basic | |
| 8,461,531 | | |
| 8,454,504 | | |
| 8,449,623 | | |
| 8,485,856 | |
| | |
| | | |
| | | |
| | | |
| | |
| Diluted | |
| 8,710,106 | | |
| 8,744,535 | | |
| 8,694,407 | | |
| 8,762,963 | |
See Notes to Condensed Financial Statements (Unaudited).
Electromed, Inc.
Condensed Statements of Cash
Flows (Unaudited)
| | |
|
|
|
|
|
| |
| | |
Nine
Months Ended March 31, | |
| | |
2023 | | |
2022 | |
| Cash Flows From Operating Activities | |
| | | |
| | |
| Net income | |
$ | 2,133,000 | | |
$ | 1,922,000 | |
| Adjustments to reconcile net income to net
cash provided by operating activities: | |
| | | |
| | |
| Depreciation | |
| 370,000 | | |
| 368,000 | |
| Amortization of finite-life intangible assets | |
| 52,000 | | |
| 105,000 | |
| Share-based compensation expense | |
| 506,000 | | |
| 703,000 | |
| Deferred income taxes | |
| 32,000 | | |
| 15,000 | |
| Changes in operating assets and liabilities: | |
| | | |
| | |
| Accounts receivable | |
| (1,293,000 | ) | |
| (2,582,000 | ) |
| Contract assets | |
| (284,000 | ) | |
| 98,000 | |
| Inventories | |
| (264,000 | ) | |
| 9,000 | |
| Prepaid expenses and other assets | |
| 105,000 | | |
| (519,000 | ) |
| Income tax receivable, net | |
| (270,000 | ) | |
| (443,000 | ) |
| Accounts payable and accrued liabilities | |
| (111,000 | ) | |
| 550,000 | |
| Accrued compensation | |
| (660,000 | ) | |
| (173,000 | ) |
| Net
cash provided by operating activities | |
| 316,000 | | |
| 53,000 | |
| | |
| | | |
| | |
| | |
| | | |
| | |
| Cash Flows From Investing Activities | |
| | | |
| | |
| Expenditures for property and equipment | |
| (1,221,000 | ) | |
| (980,000 | ) |
| Expenditures for finite-life
intangible assets | |
| (54,000 | ) | |
| (86,000 | ) |
| Net
cash used in investing activities | |
| (1,275,000 | ) | |
| (1,066,000 | ) |
| | |
| | | |
| | |
| Cash Flows From Financing Activities | |
| | | |
| | |
| Issuance of common stock upon exercise of
options | |
| 40,000 | | |
| - | |
| Taxes paid on net share settlement of stock
option exercises | |
| (305,000 | ) | |
| (70,000 | ) |
| Repurchase of common
stock | |
| (153,000 | ) | |
| (962,000 | ) |
| Net
cash used in financing activities | |
| (418,000 | ) | |
| (1,032,000 | ) |
| Net decrease in cash | |
| (1,377,000 | ) | |
| (2,045,000 | ) |
| Cash and cash equivalents | |
| | | |
| | |
| Beginning of period | |
| 8,153,000 | | |
| 11,889,000 | |
| End of period | |
$ | 6,776,000 | | |
$ | 9,844,000 | |
| | |
| | | |
| | |
| Supplemental Disclosures of Cash Flow Information | |
| | | |
| | |
| Cash paid for income taxes | |
$ | 655,000 | | |
$ | 1,003,000 | |
| | |
| | | |
| | |
| Supplemental Disclosures of Noncash Investing and Financing Activities | |
| | | |
| | |
| Property and equipment acquisitions in accounts
payable | |
$ | 136,000 | | |
$ | 85,000 | |
| Intangible asset acquisitions in accounts
payable | |
$ | 6,000 | | |
$ | 9,000 | |
| Lease assets obtained in exchange for new
operating lease liabilities | |
$ | - | | |
$ | 107,000 | |
| Demonstration equipment returned to inventory | |
$ | 9,000 | | |
$ | 17,000 | |
See Notes to Condensed Financial Statements (Unaudited).
Electromed, Inc.
Condensed Statements of Shareholders’
Equity (Unaudited)
| | |
| | |
| | |
| | |
| | |
Total | |
| | |
Common Stock | | |
Additional Paid- | | |
Retained | | |
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 | | |
| – | | |
| – | | |
| – | |
| Taxes paid on stock options exercised on a net basis | |
| – | | |
| – | | |
| (64,000 | ) | |
| – | | |
| (64,000 | ) |
| Share-based compensation expense | |
| – | | |
| – | | |
| 191,000 | | |
| – | | |
| 191,000 | |
| 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 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net income | |
| – | | |
| – | | |
| – | | |
| 645,000 | | |
| 645,000 | |
| Share-based compensation expense | |
| – | | |
| – | | |
| 326,000 | | |
| – | | |
| 326,000 | |
| Repurchase of common stock | |
| (24,551 | ) | |
| – | | |
| – | | |
| (299,000 | ) | |
| (299,000 | ) |
| Balance at March 31, 2022 | |
| 8,508,788 | | |
$ | 85,000 | | |
$ | 18,042,000 | | |
$ | 15,883,000 | | |
$ | 34,010,000 | |
| | |
| | |
| | |
| | |
| | |
Total | |
| | |
Common Stock | | |
Additional Paid- | | |
Retained | | |
Shareholders’ | |
| | |
Shares | | |
Amount | | |
in Capital | | |
Earnings | | |
Equity | |
| Balance at June 30, 2022 | |
| 8,475,438 | | |
$ | 85,000 | | |
$ | 18,308,000 | | |
$ | 15,780,000 | | |
$ | 34,173,000 | |
| Net income | |
| – | | |
| – | | |
| – | | |
| 81,000 | | |
| 81,000 | |
| Issuance of restricted stock | |
| 27,400 | | |
| – | | |
| – | | |
| – | | |
| – | |
| Forfeiture of restricted stock | |
| (14,166 | ) | |
| – | | |
| – | | |
| – | | |
| – | |
| Issuance of common stock upon exercise of options | |
| 11,760 | | |
| – | | |
| – | | |
| – | | |
| – | |
| Taxes paid on stock options exercised on a net basis | |
| – | | |
| – | | |
| (60,000 | ) | |
| – | | |
| (60,000 | ) |
| Share-based compensation expense | |
| – | | |
| – | | |
| 95,000 | | |
| – | | |
| 95,000 | |
| Repurchase of common stock | |
| (14,568 | ) | |
| – | | |
| – | | |
| (145,000 | ) | |
| (145,000 | ) |
| Balance at September 30, 2022 | |
| 8,485,864 | | |
| 85,000 | | |
| 18,343,000 | | |
| 15,716,000 | | |
| 34,144,000 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net income | |
| – | | |
| – | | |
| – | | |
| 977,000 | | |
| 977,000 | |
| Issuance of restricted stock | |
| 26,000 | | |
| – | | |
| – | | |
| – | | |
| – | |
| Issuance of common stock upon exercise of options | |
| 3,100 | | |
| – | | |
| 16,000 | | |
| – | | |
| 16,000 | |
| Share-based compensation expense | |
| – | | |
| – | | |
| 221,000 | | |
| – | | |
| 221,000 | |
| Repurchase of common stock | |
| (800 | ) | |
| – | | |
| – | | |
| (8,000 | ) | |
| (8,000 | ) |
| Balance at December 31, 2022 | |
| 8,514,164 | | |
$ | 85,000 | | |
$ | 18,580,000 | | |
$ | 16,685,000 | | |
$ | 35,350,000 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net income | |
| – | | |
| – | | |
| – | | |
| 1,075,000 | | |
| 1,075,000 | |
| Issuance of common stock upon exercise of options | |
| 42,436 | | |
| 1,000 | | |
| 23,000 | | |
| – | | |
| 24,000 | |
| Taxes paid on stock options exercised on a net basis | |
| – | | |
| – | | |
| (245,000 | ) | |
| – | | |
| (245,000 | ) |
| Share-based compensation expense | |
| – | | |
| – | | |
| 190,000 | | |
| – | | |
| 190,000 | |
| Balance at March 31, 2023 | |
| 8,556,600 | | |
$ | 86,000 | | |
$ | 18,548,000 | | |
$ | 17,760,000 | | |
$ | 36,394,000 | |
See Notes to Condensed Financial Statements (Unaudited).
Electromed, Inc.
Notes to Condensed
Financial Statements
(Unaudited)
Note 1. Interim Financial Reporting
Nature of business: 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, primarily through distributors.
International sales were $309,000 and $432,000
for the nine months ended March 31, 2023 and 2022, respectively. Since its inception, the Company has operated in a single industry
segment: developing, manufacturing and marketing medical equipment.
Impacts of COVID-19 on the Company’s
business:
The potential impact of the COVID-19 pandemic
and its effects on our operational and financial performance will depend in large part on future developments, which cannot be
reasonably estimated at this time. 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.
Basis of presentation: 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, 2022 (“fiscal 2022”).
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, inventory valuation, share-based compensation
and warranty reserve.
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
179,992 and 102,435 for the three months ended March 31, 2023 and 2022, respectively, and were 200,140 and 112,427 for the nine
months ended March 31, 2023 and 2022, respectively.
Recently Issued Accounting Standards
In June 2016, the Financial Accounting Board issued
Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments -- Credit Losses: Measurement of Credit
Losses on Financial Instruments”, which was subsequently amended by ASU 2018-19, ASU 2019-04, 2019-05, 2019-10, 2019-11,
and 2020-02. The standard introduces new accounting guidance for credit losses on financial instruments within its scope, including
trade receivables. This new guidance adds an impairment model that is based on expected losses rather than incurred losses. It
is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2022, with early adoption permitted.
The adoption of the standard is not expected to have a significant impact on the Company’s consolidated results of operations
and financial condition.
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 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:
| | |
Three Months Ended March 31, | | |
Nine Months Ended March 31, | |
| | |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| Home care | |
$ | 10,971,000 | | |
$ | 9,033,000 | | |
$ | 31,335,000 | | |
$ | 27,721,000 | |
| Institutional | |
| 440,000 | | |
| 392,000 | | |
| 1,420,000 | | |
| 1,174,000 | |
| Home care distributor | |
| 501,000 | | |
| 520,000 | | |
| 1,391,000 | | |
| 1,063,000 | |
| International | |
| 156,000 | | |
| 196,000 | | |
| 309,000 | | |
| 432,000 | |
| Total | |
$ | 12,068,000 | | |
$ | 10,141,000 | | |
$ | 34,455,000 | | |
$ | 30,390,000 | |
In the following table, net home care revenue is
disaggregated by payer type:
| | | |
Three
Months Ended March 31, | | |
Nine
Months Ended March 31, | |
| | | |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| Commercial | | |
$ | 4,787,000 | | |
$ | 3,358,000 | | |
$ | 12,706,000 | | |
$ | 10,738,000 | |
| Medicare | | |
| 5,822,000 | | |
| 5,027,000 | | |
| 17,434,000 | | |
| 15,603,000 | |
| Medicaid | | |
| 128,000 | | |
| 373,000 | | |
| 618,000 | | |
| 790,000 | |
| Other | | |
| 234,000 | | |
| 275,000 | | |
| 577,000 | | |
| 590,000 | |
| Total | | |
$ | 10,971,000 | | |
$ | 9,033,000 | | |
$ | 31,335,000 | | |
$ | 27,721,000 | |
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 revenue recognized at a point in time upon shipment
or delivery as well as revenue 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 two 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 within thirty 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 consumable 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 consumable wraps is recognized when
control transfers to the customer. |
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.
The Company’s accounts receivable balance is comprised of amounts due from individuals, institutions and distributors.
Balances due from individuals are typically remitted to the Company by third-party reimbursement agencies such as Medicare, Medicaid
and private insurance companies. Accounts receivable are carried at amounts estimated to be received from patients under reimbursement
arrangements with third-party payers. Accounts receivable are also net of an allowance for doubtful accounts. Management determines
the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s
financial condition and credit history. Receivables are written off when deemed uncollectible.
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.
Contract balances. The following table
provides information about contract assets from contracts with customers:
| | |
Nine
Months Ended
March 31, 2023 | | |
Fiscal
Year Ended
June 30, 2022 | |
| | |
Increase
(decrease) | | |
Increase
(decrease) | |
| Contract assets, beginning | |
$ | 286,000 | | |
$ | 393,000 | |
| Reclassification of contract assets to accounts receivable | |
| (1,107,000 | ) | |
| (833,000 | ) |
| Contract assets recognized | |
| 1,372,000 | | |
| 784,000 | |
| Increase (decrease) as a result of changes
in the estimate of amounts to be realized from payers, excluding amounts transferred to receivables during the period | |
| 19,000 | | |
| (58,000 | ) |
| Contract assets, ending | |
$ | 570,000 | | |
$ | 286,000 | |
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.
Note 3. Inventories
The components of inventory were as follows:
| | |
March
31, 2023 | | |
June
30, 2022 | |
| Parts inventory | |
$ | 2,908,000 | | |
$ | 2,672,000 | |
| Work in process | |
| 213,000 | | |
| 100,000 | |
| Finished goods | |
| 280,000 | | |
| 469,000 | |
| Estimated inventory to be returned | |
| 263,000 | | |
| 228,000 | |
| Less: Reserve for obsolescence | |
| (213,000 | ) | |
| (291,000 | ) |
| Total | |
$ | 3,451,000 | | |
$ | 3,178,000 | |
Note 4. Warranty Reserve
The Company provides a lifetime warranty on
its products to the prescribed patient for sales within the U.S. and a three-year warranty for all institutional sales and sales
to individuals outside the U.S. 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 reserve 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 reserve and adjusts the amounts as necessary.
Changes in the Company’s warranty
reserve were as follows:
| | |
Nine
Months Ended
March 31, 2023 | | |
Fiscal
Year Ended
June 30, 2022 | |
| Warranty reserve, beginning | |
$ | 1,256,000 | | |
$ | 940,000 | |
| Accrual for products sold | |
| 290,000 | | |
| 494,000 | |
| Expenditures and costs
incurred for warranty claims | |
| (213,000 | ) | |
| (178,000 | ) |
| Warranty reserve, ending | |
$ | 1,333,000 | | |
$ | 1,256,000 | |
Note 5. Income Taxes
Income tax expense was estimated at $147,000
and $418,000, and the effective tax rate was 12.0% and 16.4% for the three and nine months ended March 31, 2023, respectively.
Estimated income tax expense for the three and nine months ended March 31, 2023 includes a discrete current tax benefit of $176,000
and $219,000, respectively, related to the exercise of stock options.
Income tax expense was estimated at $224,000
and $576,000, and the effective tax rate was 25.8% and 23.1% for the three and nine months ended March 31, 2022, respectively.
Estimated income tax expense for the three and nine months ended March 31, 2022 includes a discrete current tax benefit of $22,000
and $43,000, respectively, related to the exercise of stock options and other items.
The Company is subject to U.S. federal and state
income tax in multiple jurisdictions. With limited exceptions, years prior to the Company’s fiscal year ended June 30, 2019
are no longer open to U.S. federal, state or local examinations by taxing authorities. The Company is not under any current income
tax examinations by any federal, state or local taxing authority. If any issues addressed in the Company’s tax audits are
resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision
for income taxes in the period such resolution occurs.
Note 6. Financing Arrangements
The Company has a credit facility that provides
for a $2,500,000 revolving line of credit. There was no outstanding principal balance on the line of credit as of March 31, 2023
or June 30, 2022. Interest on borrowings under the line of credit, if any, accrues at the prime rate (8.00% at March 31, 2023)
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 before such date.
At March 31, 2023, 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. Common Stock
Authorized
shares: The Company’s Articles of Incorporation, as amended, have established 15,000,000 authorized shares
of capital stock consisting of 13,000,000 shares of common stock, par value $0.01 per share, and 2,000,000 shares
of undesignated stock.
On
May 26, 2021, the Company’s Board of Directors (the “Board”) approved a stock repurchase authorization. Under
the authorization, the Company was originally able to repurchase up to $3.0 million of shares of common stock through
May 26, 2022. On May 26, 2022, the Board removed the date limitation. As of March 31, 2023, a total of 239,995 shares
have been repurchased and retired under this authorization for a total cost of $2,725,000, or $11.36 per share. Repurchased
shares have been retired and constitute authorized but unissued shares.
Note 8. 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
2022. Share-based compensation expense was $506,000 and $703,000 for the nine months ended March 31, 2023 and 2022, respectively.
This expense is included in selling, general and administrative expense in the Condensed Statements of Operations.
Stock Options
Stock option transactions during
the nine months ended March 31, 2023 are summarized as follows:
| | |
Number
of Shares | | |
Weighted-Average
Exercise Price per Share | |
| Outstanding at June 30, 2022 | |
| 502,084 | | |
$ | 5.82 | |
| Granted | |
| 104,325 | | |
$ | 9.93 | |
| Exercised | |
| (90,351 | ) | |
$ | 1.82 | |
| Cancelled or Forfeited | |
| (47,930 | ) | |
$ | 11.19 | |
| Outstanding at March 31, 2023 | |
| 468,128 | | |
$ | 6.96 | |
The following assumptions were
used to estimate the fair value of stock options granted:
| | |
Nine Months Ended
March 31, 2023 | | |
Fiscal Year Ended
June 30, 2022 | |
| Risk-free interest rate | |
| 2.88 - 4.23% | | |
0.89 - 2.52% | |
| Expected term (years) | |
| 6 | | |
6 | |
| Expected volatility | |
| 53% - 54% | | |
55 - 64% | |
The intrinsic value of an option is the amount
by which the fair value of the underlying stock exceeds its exercise price. At March 31 2023, the weighted average remaining contractual
term for all outstanding stock options was 5.9 years and the aggregate intrinsic value of the options was $1,802,672. Outstanding
at March 31, 2023 were 468,128 stock options issued to employees, of which 339,342 were vested and exercisable and had an aggregate
intrinsic value of $1,762,445. As of March 31, 2023, $328,218 of total unrecognized compensation expense related to stock options
is expected to be recognized over a weighted-average period of approximately 2.0 years.
Restricted Stock
During the nine months ended March 31, 2023,
the Company issued restricted stock awards to employees totaling 32,400 shares of common stock, with a weighted average vesting
term of 2.7 years and a weighted average fair value of $9.92 per share, and to directors totaling 21,000 shares of common stock,
with a vesting term of six months and a weighted average fair value of $9.86 per share. There were 57,818 shares of unvested restricted
stock with a weighted average fair value of $10.32 per share outstanding as of March 31, 2023. As of March 31, 2023, $244,063 of
total unrecognized compensation expense related to restricted stock awards is expected to be recognized over a weighted-average
period of approximately 1.3 years.
Note 9. 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. Prior to the hearing on the motion to dismiss, the parties agreed in principle to settle the case. The
parties have executed a settlement agreement and submitted a motion to settle the class action in the near future. During January
2023, the settlement was preliminarily approved. The hearing for final approval is scheduled for June 5, 2023. If the court does
not grant the approval for settlement, the Company will continue to vigorously defend the lawsuit. At this time, the Company is
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, 2022 (“fiscal 2022”).
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 Clearway®
Airway Clearance System (“Clearway”), previous generations SmartVest SQL® and SV2100, and related products, to patients
with compromised pulmonary function. The SmartVest Clearway, which received 510(k) clearance from the U.S. Food and Drug Administration
in December 2022, offers a state-of-the-art patient experience with a simple touch screen user interface, remote monitoring of data, and
is the lightest HFCWO generator on the market. Clearway also includes SmartVest Connect™ wireless technology, which allows data
connection between physicians and patients to track therapy performance and collaborate in treatment decisions.
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.”
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 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 2022.
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 and are based upon our historical experience, known trends in our
industry, terms of existing contracts, other information from outside sources, as appropriate and other factors. Therefore, management
discusses the development, selection and disclosures with the audit committee. Among other factors, these judgements 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 estimates, 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, inventory valuation, share-based
compensation and warranty reserve.
Impacts of COVID-19
on Our Business and Operations
In March 2020, the World
Health Organization designated COVID-19 as a global pandemic, and the U.S. Department of Health and Human Services designated COVID-19
as a public health emergency (“PHE”). In response to the COVID-19 pandemic and the U.S. federal government’s
declaration of a PHE, the Centers for Medicare & Medicaid Services (“CMS”) implemented a number of temporary rule
changes and waivers to allow prescribers to best treat patients during the period of the PHE. These waivers became effective on
March 1, 2020. 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.
On January 30, 2023, the
Biden administration announced that the COVID-19 national and PHE declarations will end on May 11, 2023 (the “PHE End Date”).
Without further action from the U.S. federal government, we expect the CMS waiver will terminate no later than the PHE End Date
and we may experience a one-time delay in some percentage of our Medicare net revenue as we expect our average Medicare patient
referral to approval timeframe will extend to pre-COVID-19 timeframes and referrals with diagnoses not covered pre-COVID-19 may
be cancelled or need to be submitted to CMS for an appeal. We are executing our plans to attempt to mitigate the potential effects
on our future net revenue resulting from the likely termination of the CMS waiver by hiring additional employees to increase capacity
and minimize the average timeframe to convert a Medicare patient referral to approval and re-educating clinicians on Medicare requirements
for reimbursement of HFCWO.
Impacts of Certain Macro-Economic
Conditions and the Supply Chain on Our Business and Operations
We observed increased lead
times for certain components in our supply chain and increased material costs and shipping rates during the second half of fiscal
2022 and into the nine months ended March 31, 2023. The changes to our supply chain lead times resulted in a temporary interruption
that impacted product availability for certain customers beginning in September 2022 and continuing through March 2023. We anticipate
that these increased lead times and temporary interruption of supply have the potential to continue through the fourth quarter
of our fiscal year ending June 30, 2023 (“fiscal 2023”). If we are unable to procure components to meet our demand
or if we extend delivery lead-times to our customers, there may be an adverse impact to our revenue and, longer term, the potential
of market share losses. We are taking actions to expedite components and to identify and qualify alternate suppliers for certain
components to minimize any impact to our revenue and customer deliveries.
We expect that material costs and shipping
rates will remain elevated during the fourth quarter of fiscal 2023 and the first half of our fiscal year ending June 30, 2024 relating
to supply chain availability and inflationary trends in electronic components and may extend to other components. In certain instances,
we have purchased key electronic materials in advance to ensure adequate future supply and mitigate the risk of potential supply chain
disruptions. It is possible that these macro-economic conditions could have a greater adverse impact on our supply chain in the future,
including impacts associated with preventative and precautionary measures taken by other businesses and applicable governments. A reduction
or further interruption in any of our manufacturing processes could have a material adverse effect on our business. Any significant increases
to our raw material or shipping costs could reduce our gross margins.
Results of Operations
Net Revenues
Net revenues for the
three and nine months ended March 31, 2023 and 2022 are summarized in the table below.
| |
|
Three Months Ended
March 31, | |
| | |
| | |
Nine
Months Ended March
31, | | |
| | |
| |
| | |
2023 | | |
2022 | | |
Increase (Decrease) | | |
2023 | | |
2022 | | |
Increase (Decrease) | |
| Home care | |
$ | 10,971,000 | | |
$ | 9,033,000 | | |
$ | 1,938,000 | | |
| 21.5 | % | |
$ | 31,335,000 | | |
$ | 27,721,000 | | |
$ | 3,614,000 | | |
| 13.0 | % |
| Institutional | |
| 440,000 | | |
| 392,000 | | |
| 48,000 | | |
| 12.2 | % | |
| 1,420,000 | | |
| 1,174,000 | | |
| 246,000 | | |
| 21.0 | % |
| Home care distributor | |
| 501,000 | | |
| 520,000 | | |
| (19,000 | ) | |
| (3.7 | %) | |
| 1,391,000 | | |
| 1,063,000 | | |
| 328,000 | | |
| 30.9 | % |
| International | |
| 156,000 | | |
| 196,000 | | |
| (40,000 | ) | |
| (20.4 | %) | |
| 309,000 | | |
| 432,000 | | |
| (123,000 | ) | |
| (28.5 | %) |
| Total | |
$ | 12,068,000 | | |
$ | 10,141,000 | | |
$ | 1,927,000 | | |
| 19.0 | % | |
$ | 34,455,000 | | |
$ | 30,390,000 | | |
$ | 4,065,000 | | |
| 13.4 | % |
Home care revenue.
Home care revenue increased by $1,938,000, or 21.5%, for the three months ended March 31, 2023 compared to the same period in the prior year. For the nine months ended March 31, 2023, home care revenue was $31,335,000, representing an increase of $3,614,000, or 13.0%, compared to the same period in the prior year. The increase was primarily due to an increase in referrals and approvals. The increase in referrals was due to an increase in direct sales representatives as well as positive market momentum from the introduction of our newest generation SmartVest Clearway during the quarter and was partially offset by a temporary interruption in supply chain and associated operations in the nine months ended March 31, 2023.
The CMS waiver continues to benefit the non-commercial Medicare portion of our home care revenue by increasing the number of referrals and the approval percentage for non-covered diagnoses. We believe that our ongoing sales team execution, along with the continued return to pre-COVID-19 levels of patient face-to-face engagement with physicians and clinic access for our sales team and the recent introduction of our newest generation SmartVest Clearway, has the potential to mitigate much of the impact of the potential CMS waiver expiration. If we are unsuccessful in mitigating the impact of the CMS waiver expiration, we may experience a decrease in our historical year over year growth rate.
Home care distributor
revenue. Home care distributor revenue decreased by $19,000, or 3.7%, for the three months ended March 31, 2023
compared to the same period in the prior year. For the nine months ended March 31, 2023, home care distributor revenue was $1,391,000,
an increase of $328,000, or 30.9%, compared to the same period in the prior year. Home care distributor sales are affected by the
timing of distributor purchases that can cause significant fluctuations in reported revenue on a quarterly basis. The year-to-date
revenue increase was due to increased demand from one of our primary home care distribution partners.
Institutional revenue.
Institutional revenue was $440,000, an increase of $48,000, or 12.2%, for the three months ended March 31, 2023 compared
to the same period in the prior year. For the nine months ended March 31, 2023, institutional revenue was $1,420,000, an increase
of $246,000, or 21.0%, compared to the same period in the prior year. The increase in the current year periods was primarily due
to increased consumable sales to institutional customers.
International revenue.
International revenue was $156,000, a decrease of $40,000, or 20.4%, for the three months ended March 31, 2023 compared to
the same period in the prior year. For the nine months ended March 31, 2023, international revenue was $309,000, a decrease of
$123,000, or 28.5%, compared to the same period in the prior year. International sales are affected by the timing of distributor
purchases that can cause significant fluctuations in reported revenue on a quarterly basis.
Gross profit
Gross profit increased to $9,056,000, or 75.0% of net revenues, for the three months ended March 31, 2023, from $7,743,000, or 76.4% of net revenues, in the same period in the prior year. Gross profit increased to $26,069,000, or 75.7% of net revenues, for the nine months ended March 31, 2023, from $23,324,000, or 76.7% of net revenues, in the same period in the prior year. The decrease in gross profit as a percentage of net revenues compared to the same period in the prior year was primarily due to increased material costs and component broker fees incurred to accelerate the ramp of supply for the Clearway product.
Operating expenses
Selling, general and
administrative expenses. Selling, general and administrative (“SG&A”) expenses were $7,694,000 and $22,937,000
for the three and nine months ended March 31, 2023, respectively, representing increases of $1,150,000 and $3,131,000, or 17.6%
and 15.8%, respectively, compared to the same periods in the prior year.
Payroll and compensation-related
expenses were $5,037,000 and $14,920,000 for the three and nine months ended March 31, 2023, respectively, representing increases
of $739,000 and $2,030,000, or 17.2% and 15.7%, respectively, compared to the same periods in the prior year. The increase in the
current year periods was primarily due to salaries and incentive compensation related to the higher average number of sales, sales
support, marketing, and reimbursement personnel to process higher patient referrals. We have also continued to provide regular
merit-based increases for our employees and are regularly benchmarking our compensation ranges for new and existing employees to
ensure we can hire and retain the talent needed to drive growth in our business. Field sales employees totaled 57 as of March 31,
2023, 48 of which were direct sales representatives, compared to 51 field sales employees and 42 direct sales representatives as
of March 31, 2022.
Travel, meals and entertainment
expenses were $658,000 and $2,290,000 for the three and nine months ended March 31, 2023, respectively, representing increases
of $20,000 and $390,000, or 3.1% and 20.5%, respectively, compared to the same periods in the prior year. The increase in the current
year periods was due to a higher average number of direct sales representatives as well as increases in airfare, lodging and inflationary
expenses for our annual sales meeting in August 2022.
Total discretionary marketing
expenses were $212,000 and $581,000 for the three and nine months ended March 31, 2023, respectively, representing decreases of
$29,000 and $24,000, or 12.0% and 4.0%, respectively, compared to the same periods in the prior year.
Professional fees were
$1,388,000 and $3,850,000 for the three and nine months ended March 31, 2023, respectively, representing increases of $382,000
and $646,000, or 38.0% and 20.2%, respectively, compared to the same periods in the prior year. Professional fees are primarily
for services related to legal costs, shareowner services and reporting requirements, information technology technical support and
consulting fees. The increase in the three months ended March 31, 2023 was primarily due to higher legal and consulting costs related
to the termination of the PHE and recruiting costs for multiple senior leadership positions, including a new Chief Executive Officer.
The additional increase in the nine months ended March 31, 2023 was primarily due to nonrecurring legal compliance fees of approximately
$400,000 for a reimbursement-related project offset by a reduction in expenses related to shareholder activism incurred during
the prior year, which concluded with a cooperation agreement that became effective in September 2021.
Research and development
expenses. Research and development (“R&D”) expenses were $166,000 and $618,000 for the three and nine months
ended March 31, 2023, respectively, representing decreases of $170,000 and $423,000, or 50.6% and 40.6%, respectively, compared
to the same periods in the prior year. The decreases in R&D expenses to 1.4% and 1.8% of revenue for the three and nine months
ended March 31, 2023, respectively were due to the completion of the Clearway product development process, resulting in the full
launch to the U.S. home care market in March 2023.
Interest income, net
Net interest income for the three and nine months ended March 31, 2023 was $26,000 and $37,000, respectively, compared to $6,000 and $21,000, respectively, for the same periods in the prior year. These increases were due to a higher yield in our interest-bearing cash accounts.
Income tax expense
Income tax expense was estimated
at $147,000 and $418,000, and the effective tax rate was 14.7% and 16.4%, for the three and nine months ended March 31, 2023, respectively.
Estimated income tax expense for the three and nine months ended March 31, 2023 includes a discrete tax benefit of $176,000 and
$219,000, respectively, related to the exercise of stock options.
Income tax expense was estimated
at $224,000 and $576,000, and the effective tax rate was 25.8% and 23.1%, for the three and nine months ended March 31, 2022, respectively.
Estimated income tax expense for the three and nine months ended March 31, 2022 includes a discrete tax benefit of $22,000 and
$43,000, respectively, related to the exercise of stock options and other items.
Net income
Net income for the three and nine
months ended March 31, 2023 was $1,075,000 and $2,133,000, respectively, compared to $645,000 and $1,922,000 for the same periods in
the prior year. The increases in net income were driven primarily by revenue growth and a decrease in R&Dexpenses but partially
offset by increased SG&A expenses related to our sales and reimbursement investments to drive revenue growth as well as
increased material costs and broker fees incurred to ramp up supply for the Clearway product.
Liquidity and Capital Resources
Cash Flows and Sources of Liquidity
Cash Flows from Operating Activities
For the nine months ended
March 31, 2023, net cash provided by operating activities was $316,000. Cash flows provided by operating activities consisted of
net income of $2,133,000, non-cash expenses of $960,000, and a decrease in prepaid expenses and other assets of $105,000. These
cash flows from operating activities were offset by an increase in accounts receivable of $1,293,000, a decrease in accrued compensation
of $660,000, an increase in income tax receivable of $270,000, an increase in inventory of $264,000, an increase in contract assets
of $284,000, and a decrease in accounts payable and other accrued liabilities of $111,000.
Cash Flows from Investing Activities
For the nine months
ended March 31, 2023, cash used in investing activities was $1,275,000. Cash used in investing activities consisted of $1,221,000
primarily related to our enterprise resource planning infrastructure investments and $54,000 in expenditures for intangible asset
costs.
Cash Flows from Financing Activities
For the nine months ended
March 31, 2023, cash used in financing activities was $418,000. Cash used in financing activities consisted primarily of $305,000
for taxes paid on net share settlement of stock option exercises and $153,000 used for our share repurchase program partially offset
by cash received for stock option exercises.
Adequacy of Capital Resources
Our primary working capital
requirements relate to adding employees to our sales force and support functions, continuing infrastructure investments, 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 $28,752,000 and available borrowings
under our existing credit facility will provide adequate liquidity during fiscal 2023.
Our credit facility provides
us with a revolving line of credit. Interest on borrowings on the line of credit accrues at the prime rate (8.0% at March 31, 2023)
less 1.00% and is payable monthly. There was no outstanding principal balance on the line of credit as of March 31, 2023 or June
30, 2022. 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. As of March 31, 2023, 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 nine months ended March
31, 2023 and 2022, we spent $1,221,000 and $980,000, respectively, on property and equipment. We currently expect to finance planned
equipment purchases with cash flows from operations or borrowings under our credit facility. We may need to incur additional debt
if we have an unforeseen need for additional capital equipment or if our operating performance does not generate adequate cash
flows.
While the impact of macro-economic
factors such as inflation are difficult to predict, we believe our cash, cash equivalents and cash flows from operations will be
sufficient to meet our working capital, capital expenditure, operational cash requirements for fiscal 2023 and the foreseeable
future. We will continue to evaluate our projected expenditures relative to our available cash and evaluate financing alternatives
in order to satisfy our working capital and other cash requirements.
Information 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,” “goal,” “target,” “should,” “will,” “would,”
and similar expressions, including the negative of these terms, are intended to identify forward-looking statements but are not
the exclusive means of identifying such statements. Although we believe these forward-looking statements are reasonable, they involve
risks and uncertainties that may cause actual results to differ materially from those projected by such statements. Such statements
involve known and unknown risks, uncertainties and other factors that may cause our actual results or our industry’s actual
results, levels of activity, performance or achievements to be materially different from the information expressed or implied by
the forward-looking statements.
Factors that could cause
actual results to differ from those discussed in the forward-looking statements include, but are not limited to, the following:
| ● | ability to obtain reimbursement from Medicare, Medicaid, or private insurance
payers for our products including the potential adverse impact of an expiration of the CMS waiver for certain respiratory diseases; |
| ● | component or raw material shortages, changes to lead times or significant
price increases; |
| ● | business disruption from the anticipated implementation of a new enterprise
resource planning software system; |
| ● | adverse changes to state and federal health care regulations; |
| ● | our ability to maintain regulatory compliance and to gain future regulatory
approvals and clearances; |
| ● | entry of new competitors including new drug or pharmaceutical discoveries; |
| ● | adverse economic and business conditions or intense competition; |
| ● | the risks associated with our planned
sales force expansion; |
| ● | wage and component price inflation; |
| ● | technical problems with our research and products; |
| ● | 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 risks associated with cyberattacks, data breaches, computer viruses
and other similar security threats; |
| ● | changes affecting the medical device industry; |
| ● | our ability to develop new sales channels
for our products such as the home care distributor channel; |
| ● | adverse international health care regulation impacting current international
business; |
| ● | our ability to renew our line of credit
or obtain additional credit as necessary; and |
| ● | our ability to protect and expand our intellectual property portfolio. |
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 2022. 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.