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, 2023
☐	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 8,561,100 shares of Electromed, Inc. common stock, par value $0.01 per share, outstanding as of the close of business on May 5, 2023.

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		11
Item 3. Quantitative and Qualitative Disclosures About Market Risk		17
Item 4. Controls and Procedures		18

PART II – OTHER INFORMATION

Item 1. Legal Proceedings		18
Item 1A. Risk Factors		18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		18
Item 3. Defaults Upon Senior Securities		18
Item 4. Mine Safety Disclosures		18
Item 5. Other Information		19
Item 6. Exhibits		19

PART I – FINANCIAL INFORMATION

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
Net income before income taxes		1,222,000		869,000		2,551,000		2,498,000

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.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

As a smaller reporting company, we are not required to provide disclosure pursuant to this Item.

Item 4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of the end of the period subject to this Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the date of such evaluation to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.

Changes to Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings.

The disclosure regarding legal proceedings set forth in Note 9 to our unaudited Condensed Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference. Occasionally, we may be party to legal actions, proceedings, or claims in the ordinary course of business, including claims based on assertions of patent and trademark infringement. Corresponding costs are accrued when it is probable that loss will be incurred and the amount can be precisely or reasonably estimated. We are not aware of any undisclosed actual or threatened litigation that would have a material adverse effect on our financial condition or results of operations.

Item 1A. Risk Factors.

As a smaller reporting company, we are not required to provide disclosure pursuant to this Item.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

On May 26, 2021, our Board of Directors (the “Board”) approved a stock repurchase authorization. Under the authorization, we were originally able to repurchase up to $3.0 million of outstanding shares of our common stock through May 26, 2022. On May 26, 2022, the Board removed the date limitation. The shares of our common stock may be repurchased under the authorization on the open market or in privately negotiated transactions subject to applicable securities laws and regulations. The following table sets forth information concerning purchases of shares of our common stock for three months ended March 31, 2023:

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
January 1 – January 31, 2023		-	$	-		-	$	275,000
February 1 – February 28, 2023		-		-		-	$	275,000
March 1 – March 31, 2023		-		-		-	$	275,000
Total		-	$	-		-

Item 3.

Defaults Upon Senior Securities.

None.

Item 4.

Mine Safety Disclosures.

None.

Item 5.

Other Information.

None.

Item 6.

Exhibits.

Exhibit Number	Description	Method of Filing
3.1	Composite Articles of Incorporation, as amended through November 8, 2010 (incorporated by reference to Exhibit 3.1 to Annual Report on Form 10-K for the fiscal year ended June 30, 2015)	Incorporated by Reference

3.2	Amended and Restated Bylaws, effective September 29, 2020 (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed September 29, 2020)	Incorporated by Reference

10.1	Letter Agreement with Kathleen S. Skarvan, dated February 14, 2023 (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed February 14, 2023)*	Incorporated by Reference

31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed Electronically

31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed Electronically

32.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Furnished Electronically

32.2	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Furnished Electronically

101	Financial statements from the Quarterly Report on Form 10-Q for the period ended March 31, 2023, formatted in inline XBRL: (i) Condensed Balance Sheets, (ii) Condensed Statements of Operations, (iii) Condensed Statements of Cash Flows, (iv) Condensed Statements of Shareholders’ Equity, and (v) Notes to Condensed Financial Statements	Filed Electronically

104	Cover Page Interactive Data File (embedded within the inline XBRL Document)	Filed Electronically

* Management compensatory contract or arrangement

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		ELECTROMED, INC.

Date: May 9, 2023		/s/ Kathleen S. Skarvan
		Kathleen S. Skarvan, President and Chief Executive Officer (duly authorized officer)

Date: May 9, 2023		/s/ Bradley M. Nagel
		Bradley M. Nagel, Chief Financial Officer (principal financial officer and principal accounting officer)

SEC Form 10-Q filed by Electromed Inc.