UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


(Mark One)
☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2022
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission File No.: 001-34839

Electromed, Inc.

(Exact Name of Registrant as Specified in its Charter)

	Minnesota		41-1732920
	(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

	500 Sixth Avenue NW New Prague, Minnesota		56071
	(Address of principal executive offices)		(Zip Code)

(952) 758-9299

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $0.01 par value		ELMD		NYSE American LLC
(Title of each class)		(Trading Symbol(s))		(Name of each exchange on which registered)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☑

Smaller reporting company ☑

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

There were 8,513,035 shares of Electromed, Inc. common stock, par value $0.01 per share, outstanding as of the close of business on May 6, 2022.

Electromed, Inc.

Index to Quarterly Report on Form 10-Q

	Page
PART I – FINANCIAL INFORMATION

Item 1. Financial Statements	1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3. Quantitative and Qualitative Disclosures About Market Risk	19
Item 4. Controls and Procedures	19

PART II – OTHER INFORMATION

Item 1. Legal Proceedings	19
Item 1A. Risk Factors	19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3. Defaults Upon Senior Securities	20
Item 4. Mine Safety Disclosures	20
Item 5. Other Information	20
Item 6. Exhibits	20

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements.

Electromed, Inc.

Condensed Balance Sheets


	March 31, 2022		June 30, 2021
	(Unaudited)
Assets
Current Assets
Cash and cash equivalents	$	9,844,000	$	11,889,000
Accounts receivable (net of allowances for doubtful accounts of $45,000)		19,614,000		17,032,000
Contract assets		295,000		393,000
Inventories		2,089,000		2,114,000
Prepaid expenses and other current assets		991,000		276,000
Income tax receivable		155,000		-
Total current assets		32,988,000		31,704,000
Property and equipment, net		4,309,000		3,605,000
Finite-life intangible assets, net		611,000		663,000
Other assets		77,000		88,000
Deferred income taxes		1,034,000		1,049,000
Total assets	$	39,019,000	$	37,109,000
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable		1,163,000		685,000
Accrued compensation		2,301,000		2,474,000
Income tax payable		-		288,000
Warranty reserve		938,000		940,000
Other accrued liabilities		564,000		252,000
Total current liabilities		4,966,000		4,639,000
Other long-term liabilities		43,000		54,000
Total liabilities		5,009,000		4,693,000

Commitments and Contingencies

Shareholders’ Equity
Common stock, $0.01 par value per share, 13,000,000 shares authorized; 8,508,788 and 8,533,209 shares issued and outstanding, respectively		85,000		85,000
Additional paid-in capital		18,042,000		17,409,000
Retained earnings		15,883,000		14,922,000
Total shareholders’ equity		34,010,000		32,416,000
Total liabilities and shareholders’ equity	$	39,019,000	$	37,109,000

See Notes to Condensed Financial Statements (Unaudited).

Electromed, Inc.

Condensed Statements of Operations (Unaudited)


	Three Months Ended March 31,				Nine Months Ended March 31,
	2022		2021		2022		2021
Net revenues	$	10,141,000	$	8,787,000	$	30,390,000	$	26,287,000
Cost of revenues		2,398,000		2,086,000		7,066,000		5,913,000
Gross profit		7,743,000		6,701,000		23,324,000		20,374,000

Operating expenses
Selling, general and administrative		6,544,000		6,051,000		19,806,000		16,490,000
Research and development		336,000		407,000		1,041,000		1,396,000
Total operating expenses		6,880,000		6,458,000		20,847,000		17,886,000
Operating income		863,000		243,000		2,477,000		2,488,000
Interest income, net		6,000		10,000		21,000		29,000
Net income before income taxes		869,000		253,000		2,498,000		2,517,000

Income tax expense		224,000		29,000		576,000		555,000

Net income	$	645,000	$	224,000	$	1,922,000	$	1,962,000

Income per share:

Basic	$	0.08	$	0.03	$	0.23	$	0.23

Diluted	$	0.07	$	0.03	$	0.22	$	0.22

Weighted-average common shares outstanding:
Basic		8,454,504		8,576,523		8,485,856		8,565,839
Diluted		8,744,535		8,907,045		8,762,963		8,921,494

See Notes to Condensed Financial Statements (Unaudited).

Electromed, Inc.

Condensed Statements of Cash Flows (Unaudited)


	Nine Months Ended March 31,
	2022			2021
Cash Flows From Operating Activities
Net income	$	1,922,000		$	1,962,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		368,000			359,000
Amortization of finite-life intangible assets		105,000			99,000
Share-based compensation expense		703,000			756,000
Deferred income taxes		15,000			102,000
Changes in operating assets and liabilities:
Accounts receivable		(2,582,000	)		(3,296,000	)
Contract assets		98,000			345,000
Inventories		9,000			839,000
Prepaid expenses and other current assets		(519,000	)		(69,000	)
Income tax receivable		(443,000	)		8,000
Accounts payable and accrued liabilities		550,000			350,000
Accrued compensation		(173,000	)		869,000
Net cash provided by operating activities		53,000			2,324,000

Cash Flows From Investing Activities
Investment in property and equipment		(980,000	)		(105,000	)
Investment in finite-life intangible assets		(86,000	)		(103,000	)
Net cash used in investing activities		(1,066,000	)		(208,000	)

Cash Flows From Financing Activities
Issuance of common stock upon exercise of options		-			46,000
Taxes paid on stock options exercised on a net basis		(70,000	)		(141,000	)
Repurchase of common stock		(962,000	)		-
Net cash used in financing activities		(1,032,000	)		(95,000	)
Net (decrease) increase in cash		(2,045,000	)		2,021,000

Cash And Cash Equivalents
Beginning of period		11,889,000			10,479,000
End of period	$	9,844,000		$	12,500,000

See Notes to Condensed Financial Statements (Unaudited).

Electromed, Inc.

Condensed Statements of Shareholders’ Equity (Unaudited)


	Common Stock				Additional Paid-			Retained		Total Shareholders’
	Shares		Amount		in Capital			Earnings		Equity
Balance at June 30, 2020		8,567,834	$	86,000	$	16,480,000		$	13,684,000	$	30,250,000

Net income		-		-		-			535,000		535,000
Issuance of restricted stock		19,090		-		-			-		-

Issuance of common stock upon exercise of options		19,256		-		-			-		-
Taxes paid on stock options exercised on a net basis		-		-		(120,000	)		-		(120,000	)
Share-based compensation expense		-		-		191,000			-		191,000
Balance at September 30, 2020		8,606,180		86,000		16,551,000			14,219,000		30,856,000

Net income		-		-		-			1,204,000		1,204,000
Issuance of restricted stock		18,000		-		-			-		-

Issuance of common stock upon exercise of options		10,865		-		46,000			-		46,000
Taxes paid on stock options exercised on a net basis		-		-		(10,000	)		-		(10,000)
Share-based compensation expense		-		-		239,000			-		239,000
Balance at December 31, 2020		8,635,045		86,000		16,826,000			15,423,000		32,335,000

Net income		-		-		-			224,000		224,000
Issuance of restricted stock		-		-		-			-		-

Issuance of common stock upon exercise of options		2,375		-		-			-		-
Taxes paid on stock options exercised on a net basis		-		-		(11,000	)		-		(11,000	)
Share-based compensation expense		-		-		326,000			-		326,000
Balance at March 31, 2021		8,637,420	$	86,000	$	17,141,000		$	15,647,000	$	32,874,000


	Common Stock						Additional Paid-			Retained			Total Shareholders’
	Shares			Amount			in Capital			Earnings			Equity
Balance at June 30, 2021		8,533,209		$	85,000		$	17,409,000		$	14,922,000		$	32,416,000

Net income		-			-			-			439,000			439,000
Issuance of restricted stock		25,900			-			-			-			-
Issuance of common stock upon exercise of options		10,530			1,000			-			-			1,000
Taxes paid on stock options exercised on a net basis		-			-			(64,000	)		-			(64,000	)
Share-based compensation expense		-			-			249,000			-			249,000
Balance at September 30, 2021		8,569,639			86,000			17,594,000			15,361,000			33,041,000

Net income		-			-			-			838,000			838,000
Issuance of restricted stock		18,000			-			-			-			-

Issuance of common stock upon exercise of options		1,387			-			-			-			-
Taxes paid on stock options exercised on a net basis		-			-			(6,000	)		-			(6,000	)
Share-based compensation expense		-			-			277,000			-			277,000
Repurchase of common stock		(55,687	)		(1,000	)		-			(662,000	)		(663,000	)
Balance at December 31, 2021		8,533,339		$	85,000		$	17,865,000		$	15,537,000		$	33,487,000

Net income		-			-			-			645,000			645,000
Issuance of restricted stock		-			-			-			-			-

Issuance of common stock upon exercise of options		-			-			-			-			-
Taxes paid on stock options exercised on a net basis		-			-			-			-			-
Share-based compensation expense		-			-			177,000			-			177,000
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

See Notes to Condensed Financial Statements (Unaudited).

Electromed, Inc.

Notes to Condensed Financial Statements

(Unaudited)

Note 1. Interim Financial Reporting

Basis of presentation: Electromed, Inc. (the “Company”) develops, manufactures and markets innovative airway clearance products that apply High Frequency Chest Wall Oscillation (“HFCWO”) therapy in pulmonary care for patients of all ages. The Company markets its products in the U.S. to the home health care and institutional markets for use by patients in personal residences, hospitals and clinics. The Company also sells internationally both directly and through distributors. International sales were $432,000 and $297,000 for the nine months ended March 31, 2022 and 2021, respectively. Since its inception, the Company has operated in a single industry segment: developing, manufacturing and marketing medical equipment.

The accompanying unaudited Condensed Financial Statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial statements and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. In the opinion of management, the accompanying unaudited Condensed Financial Statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation of the Company’s financial position and results of operations as required by Regulation S-X. Interim results of operations are not necessarily indicative of the results that may be achieved for the full year. The financial statements and related notes do not include all information and footnotes required by U.S. GAAP for annual reports. This interim report should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2021 (“fiscal 2021”).

Impacts of COVID-19 on the Company’s business:

The impact of the COVID-19 pandemic on the Company’s business remains uncertain, and its effects on our operational and financial performance will depend in large part on future developments, which cannot be reasonably estimated at this time. Such future developments include, but are not limited to, the duration, scope and severity of the COVID-19 pandemic in geographic areas where the Company operates or in which its patients live, actions taken to contain or mitigate its impact, the impact on governmental healthcare programs and budgets, the development and distribution of treatments or vaccines, and the resumption of widespread economic activity. Due to the inherent uncertainty of the unprecedented and rapidly evolving situation, the Company is unable to predict with confidence the likely impact of the COVID-19 pandemic on its future operations. For a more detailed discussion, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Quarterly Report on Form 10-Q.

A summary of the Company’s significant accounting policies follows:

Use of estimates. Management uses estimates and assumptions in preparing the unaudited Condensed Financial Statements in accordance with U.S. GAAP. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were used. The Company believes the critical accounting policies that require the most significant assumptions and judgments in the preparation of its unaudited Condensed Financial Statements include revenue recognition and the related estimation of variable consideration, 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 102,435 and 52,017 for the three months ended March 31, 2022 and 2021, respectively, and were 112,427 and 52,017 for the nine months ended March 31, 2022 and 2021, respectively.

Note 2. Revenues

Revenue is measured based on consideration specified in the contract with a customer, adjusted for any applicable estimates of variable consideration and other factors affecting the transaction price, including consideration paid or payable from customers and significant financing components. Revenue from all customers is recognized when a performance obligation is satisfied by transferring control of a distinct good or service to a customer, as further described below under Performance obligations and transaction price.

Individual promised goods and services in a contract are considered a performance obligation and accounted for separately if the individual good or service is distinct (i.e., the customer can benefit from the good or service on its own or with other resources that are readily available to the customer and the good or service is separately identifiable from other promises in the arrangement). If an arrangement includes multiple performance obligations, the consideration is allocated between the performance obligations in proportion to their estimated standalone selling price, unless discounts or variable consideration is attributable to one or more but not all the performance obligations. Costs related to products delivered are recognized in the period incurred, unless criteria for capitalization of costs under Accounting Standards Codification (“ASC”) 340-40, “Other Assets and Deferred Costs” (“ASC 340”), or other applicable guidance are met.

The Company includes shipping and handling fees in net revenues. Shipping and handling costs associated with the shipment of the Company’s SmartVest® Airway Clearance System (“SmartVest System”) after control has transferred to a customer are accounted for as a fulfillment cost and are included in cost of revenues in the Condensed Statements of Operations.

The timing of revenue recognition, billings and cash collections results in accounts receivable on the Condensed Balance Sheets as further described below under Accounts receivable and Contract assets.

Disaggregation of revenues. In the following table, net revenues are disaggregated by market:

Schedule of disaggregated revenue

	Three Months Ended March 31,				Nine Months Ended March 31,
	2022		2021		2022		2021
Home care	$	9,033,000	$	8,163,000	$	27,721,000	$	24,529,000
Institutional		392,000		443,000		1,174,000		1,029,000
Home care distributor		520,000		105,000		1,063,000		432,000
International		196,000		76,000		432,000		297,000
Total	$	10,141,000	$	8,787,000	$	30,390,000	$	26,287,000

In the following table, net home care revenue is disaggregated by payer type:

	Three Months Ended March 31,				Nine Months Ended March 31,
	2022		2021		2022		2021
Commercial	$	3,358,000	$	3,111,000	$	10,738,000	$	9,212,000
Medicare		5,027,000		4,622,000		15,603,000		14,224,000
Medicaid		373,000		316,000		790,000		669,000
Other		275,000		114,000		590,000		424,000
Total	$	9,033,000	$	8,163,000	$	27,721,000	$	24,529,000

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 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 significant changes in c

SEC Form 10-Q filed by Electromed Inc.