SEC Form 10-Q filed by Electromed Inc.

 

 

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 September 30, 2024

  

	☐	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 8,458,005 shares of Electromed, Inc. common stock, par value $0.01 per share, outstanding as of the close of business on November 7, 2024.

 

 

 

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.	16
Item 4. Controls and Procedures	16
PART II – OTHER INFORMATION
Item 1. Legal Proceedings	16
Item 1A. Risk Factors.	16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	16
Item 3. Defaults Upon Senior Securities	17
Item 4. Mine Safety Disclosures	17
Item 5. Other Information	17
Item 6. Exhibits	18

 

 

PART I – FINANCIAL INFORMATION

 

Item 1.

Financial Statements.

 

Electromed, Inc.

Condensed Balance Sheets

 

		September 30, 2024				June 30, 2024
		(Unaudited)
Assets
Current Assets
Cash and cash equivalents		$	13,864,000			$	16,080,000
Accounts receivable (net of allowances for credit losses of $45,000)			22,366,000				23,333,000
Contract assets			754,000				719,000
Inventories			3,434,000				3,712,000
Prepaid expenses and other current assets			592,000				329,000
Total current assets			41,010,000				44,173,000
Property and equipment, net			5,003,000				5,165,000
Finite-life intangible assets, net			660,000				657,000
Other assets			90,000				87,000
Deferred income taxes			2,152,000				2,152,000
Total assets		$	48,915,000			$	52,234,000
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable		$	1,784,000			$	1,010,000
Accrued compensation			2,150,000				3,893,000
Income tax payable			188,000				277,000
Warranty reserve			1,641,000				1,567,000
Other accrued liabilities			1,656,000				930,000
Total current liabilities			7,419,000				7,677,000
Other long-term liabilities			8,000				12,000
Total liabilities			7,427,000				7,689,000
Shareholders’ Equity
Common stock, $0.01 par value per share, 13,000,000 shares authorized; 8,457,071 and 8,637,883 shares issued and outstanding, as of September 30, 2024 and June 30, 2024, respectively			85,000				87,000
Additional paid-in capital			20,816,000				20,790,000
Retained earnings			20,587,000				23,668,000
Total shareholders’ equity			41,488,000				44,545,000
Total liabilities and shareholders’ equity		$	48,915,000			$	52,234,000

 

See Notes to Condensed Financial Statements (Unaudited).

 

 

Electromed, Inc.

Condensed Statements of Operations (Unaudited)

 

		Three Months Ended September 30,
		2024				2023
Net revenues		$	14,668,000			$	12,324,000
Cost of revenues			3,177,000				2,826,000
Gross profit			11,491,000				9,498,000
Operating expenses
Selling, general and administrative			9,387,000				9,150,000
Research and development			166,000				206,000
Total operating expenses			9,553,000				9,356,000
Operating income			1,938,000				142,000
Interest income, net			195,000				77,000
Net income before income taxes			2,133,000				219,000
Income tax expense			659,000				64,000
Net income		$	1,474,000			$	155,000
Income per share:
Basic		$	0.17			$	0.02
Diluted		$	0.16			$	0.02
Weighted-average common shares outstanding:
Basic			8,564,489				8,537,388
Diluted			8,980,714				8,782,824

 

See Notes to Condensed Financial Statements (Unaudited).

 

 

Electromed, Inc.

Condensed Statements of Cash Flows (Unaudited)

 

		Three Months Ended September 30,
		2024				2023
Cash Flows From Operating Activities
Net income		$	1,474,000			$	155,000
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Depreciation			202,000				202,000
Amortization of finite-life intangible assets			18,000				12,000
Share-based compensation expense			697,000				371,000
Changes in operating assets and liabilities:
Accounts receivable			967,000				675,000
Contract assets			(35,000	)			(57,000	)
Inventories			278,000				(240,000	)
Prepaid expenses and other assets			(266,000	)			901,000
Income tax payable, net			(89,000	)			(226,000	)
Accounts payable and accrued liabilities			806,000				(863,000	)
Accrued compensation			(1,743,000	)			(1,174,000	)
Net cash provided by (used for) operating activities			2,309,000				(244,000	)
Cash Flows From Investing Activities
Expenditures for property and equipment			(37,000	)			(109,000	)
Expenditures for finite-life intangible assets			(21,000	)			(24,000	)
Net cash used for investing activities			(58,000	)			(133,000	)
Cash Flows From Financing Activities
Issuance of common stock upon exercise of options			84,000				29,000
Taxes paid on net share settlement of stock awards			(15,000	)			-
Repurchase of common stock			(4,536,000	)			-
Net cash (used for) provided by financing activities			(4,467,000	)			29,000
Net decrease in cash			(2,216,000	)			(348,000	)
Cash and cash equivalents
Beginning of period			16,080,000				7,372,000
End of period		$	13,864,000			$	7,024,000
Supplemental Disclosures of Cash Flow Information
Cash paid for income taxes		$	752,000			$	251,000
Supplemental Disclosures of Noncash Investing and Financing Activities
Property and equipment acquisitions in accounts payable		$	7,000			$	34,000
Demonstration equipment returned to inventory		$	-			$	19,000
Taxes owed on net share settlement of stock awards in accrued liabilities		$	740,000			$	-
Issuance of common stock upon the vesting of performance-based stock units		$	1,000			$	-

 

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, 2023			8,555,238			$	86,000			$	18,788,000			$	18,793,000			$	37,667,000
Net income			–				–				–				155,000				155,000
Exercise of common stock options, vesting of performance stock units and issuance of  restricted stock, net of cancellations and tax withholdings			23,812				–				29,000				–				29,000
Share-based compensation expense			–				–				371,000				–				371,000
Balance at September 30, 2023			8,579,050			$	86,000			$	19,188,000			$	18,948,000			$	38,222,000

 

		Common Stock								Additional Paid-				Retained				Total Shareholders’
		Shares				Amount				in Capital				Earnings				Equity
Balance at June 30, 2024			8,637,883			$	87,000			$	20,790,000			$	23,668,000			$	44,545,000
Net income			–				–				–				1,474,000				1,474,000
Exercise of common stock options, vesting of performance stock units and issuance of restricted stock, net of cancellations and tax withholdings			81,944				1,000				(671,000	)			–				(670,000	)
Share-based compensation expense			–				–				697,000				–				697,000
Repurchase of common stock			(262,756	)			(3,000	)			–				(4,555,000	)			(4,558,000	)
Balance at September 30, 2024			8,457,071			$	85,000			$	20,816,000			$	20,587,000			$	41,488,000

 

 

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 homecare and hospital markets. The Company also sells internationally through distributors.

 

Since its inception, the Company has operated in a single industry segment: developing, manufacturing, and marketing medical equipment.

 

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, 2024 (“fiscal 2024”).

 

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

 

Our significant accounting policies are detailed in Note 1. Nature of Business and Summary of Significant Accounting Policies of the Annual Report on Form 10-K for the year ended June 30, 2024. There have been no significant changes to these policies that have had a material impact on the Unaudited Condensed Financial Statements and the accompanying disclosure notes for the three months ended September 30, 2024.

 

Recently Issued Accounting Standards

 

ASU 2023-07 - Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures

 

The standard introduces increased disclosure requirements primarily related to significant segment expenses, along with disclosure of key criteria and metrics utilized by the Chief Operating Decision Maker (“CODM”). It is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of adoption and additional disclosure requirements.

 

ASU 2023-09 - Income Taxes (Topic 740): Improvements to Income Tax Disclosures

 

The standard introduces increased transparency about income tax information through the requirement of increased disclosures around specific categories in the rate reconciliation and requiring additional information on reconciling items. It is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of adoption and additional disclosure requirements.

 

 

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. When a contract with a customer has been established, revenue is recognized when a performance obligation is satisfied by transferring control of a distinct good or service to a customer, typically upon shipment or delivery.

 

Disaggregation of revenues.

 

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

Schedule of disaggregated revenue

		Three Months Ended September 30,
		2024				2023
Homecare		$	13,211,000			$	11,153,000
Hospital			690,000				507,000
Homecare distributor			587,000				573,000
Other			180,000				91,000
Total		$	14,668,000			$	12,324,000

 

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

 

		Three Months Ended September 30,
		2024				2023
Commercial		$	6,851,000			$	5,765,000
Medicare			4,767,000				3,948,000
Medicare Supplemental			1,111,000				983,000
Medicaid			242,000				293,000
Other			240,000				164,000
Total		$	13,211,000			$	11,153,000

 

Contract balances. The following tables provide information about accounts receivable and contract assets from contracts with customers:

Schedule of contract asset

		September 30, 2024				June 30, 2024
Receivables, included in “Accounts receivable, net of allowance for credit losses”		$	22,366,000			$	23,333,000
Contract Assets		$	754,000			$	719,000

 

Total Accounts receivable, net of allowances for credit losses, as of June 30, 2023 were $24,130,000.

 

		Three Months Ended September 30, 2024				Fiscal Year Ended June 30, 2024
		Increase (decrease)				Increase (decrease)
Contract assets, beginning		$	719,000			$	487,000
Reclassification of contract assets to accounts receivable			(638,000	)			(2,325,000	)
Contract assets recognized			689,000				2,840,000
Increase (decrease) because of changes in the estimate of amounts to be realized from payers, excluding amounts transferred to receivables during the period			(16,000	)			(283,000	)
Contract assets, ending		$	754,000			$	719,000

 

 

Note 3. Selected Balance Sheet Information

 

Inventory consists of the following:

Schedule of components of inventories

		September 30, 2024				June 30, 2024
Parts inventory		$	1,978,000			$	2,556,000
Work in process			390,000				454,000
Finished goods			939,000				834,000
Estimated inventory to be returned			358,000				265,000
Less: Reserve for obsolescence			(231,000	)			(397,000	)
Total		$	3,434,000			$	3,712,000

 

Other accrued liabilities consist of the following:

 Schedule of components of other accrued liabilities

		September 30, 2024				June 30, 2024
Accrued insurance recoupments		$	494,000			$	467,000
Accrued tax withholding upon performance stock unit vesting			766,000				-
Other accrued expenses			396,000				463,000
Total		$	1,656,000			$	930,000

 

 

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 one to five-year warranty for all homecare distributor, hospital and other sales. 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:

 

		Three Months Ended September 30, 2024				Fiscal Year Ended June 30, 2024
Warranty reserve, beginning		$	1,567,000			$	1,378,000
Accrual for products sold			170,000				559,000
Expenditures and costs incurred for warranty claims			(96,000	)			(370,000	)
Warranty reserve, ending		$	1,641,000			$	1,567,000

 

 

Note 5. Income Taxes

 

Income tax expense was estimated at $659,000, and the effective tax rate was 30.9% for the three months ended September 30, 2024, which includes a discrete current tax benefit of $4,000 primarily related to the vesting of restricted stock awards.

 

Income tax expense was estimated at $64,000, and the effective tax rate was 29.3% for the three months ended September 30, 2023.

 

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, 2021, 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 through December 18, 2025, if not renewed before such date. There was no outstanding principal balance on the line of credit as of September 30, 2024 or June 30, 2024. Interest on borrowings under the line of credit, if any, accrues at the prime rate (8.0% on September 30, 2024) 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 57.0% of eligible accounts receivable. On September 30, 2024, 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 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 September 11, 2024, the Company’s Board of Directors (the “Board”) approved a stock repurchase authorization. Under the authorization, the Company can repurchase up to $5.0 million of shares of common stock. The repurchase authorization has no expiration date. As of September 30, 2024, a total of 262,756 shares have been repurchased and retired under this authorization for a total cost of $4,536,000, or $17.26 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 2024. Share-based compensation expense was $697,000 and $371,000 for the three months ended September 30, 2024, and 2023, respectively. This expense is included in selling, general and administrative expense, cost of goods sold, and research and development in the Condensed Statements of Operations.

 

8

 

 

Stock Options

 

Stock option transactions during the three months ended September 30, 2024, are summarized as follows:

 

		Number of Shares				Weighted-Average Exercise Price per Share
Outstanding on June 30, 2024			635,073			$	8.49
Granted			59,900			$	17.22
Exercised			(9,419	)		$	11.46
Cancelled or Forfeited			(6,698	)		$	10.74
Outstanding on September 30, 2024			678,856			$	9.20

 

The following assumptions were used to estimate the fair value of stock options granted:

 

		Three Months Ended September 30, 2024			Fiscal Year Ended June 30, 2024
Risk-free interest rate		3.69%			3.85-4.64%
Expected term (years)		6			6
Expected volatility		53%			51-52%

 

The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price. On September 30, 2024, the weighted average remaining contractual term for all outstanding stock options was 6.45 years and the aggregate intrinsic value of the options was $8,331,000. Outstanding on September 30, 2024, were 678,856 stock options issued to employees, of which 414,855 were vested and exercisable and had an aggregate intrinsic value of $5,862,000. As of September 30, 2024, $1,057,000 of total unrecognized compensation expense related to stock options is expected to be recognized over a weighted-average period of approximately 2.65 years.

 

Restricted Stock

 

During the three months ended September 30, 2024, the Company issued restricted stock awards to employees totaling 21,400 shares of common stock, with a weighted-average vesting term of three years and a weighted average fair value of $17.25 per share. There were 42,667 shares of unvested restricted stock with a weighted average grant date fair value of $13.91 per share outstanding as of September 30, 2024. As of September 30, 2024, $453,000 of total unrecognized compensation expense related to restricted stock awards is expected to be recognized over a weighted-average period of approximately 2.66 years.

 

During the three months ended September 30, 2024, the Company issued restricted stock units to employees totaling 63,700, with a weighted-average vesting term of three years and a weighted average fair value of $17.25 per unit. There were 61,300 units of unvested restricted stock with a weighted average grant date fair value of $17.25 per share outstanding as of September 30, 2024. As of September 30, 2024, $1,008,000 of total unrecognized compensation expense related to restricted stock units is expected to be recognized over a weighted-average period of approximately 2.92 years.

 

Performance-Based Restricted Stock Units

 

The Company granted 175,000 performance-based restricted stock units (“PSUs”) to our CEO in connection with his appointment as CEO on July 1, 2023. The PSUs are to be earned based on the extent to which performance goals tied to Total Shareholder Return (“TSR”) are achieved. The performance-based restricted stock units will be eligible to vest and settle into shares of common stock on a 1-for-1 basis with respect to one-half of the shares upon achieving a total shareholder return of 50% and the remaining shares upon a total shareholder return of 100%, in each case within four years of the date of grant. The grant date fair value of the awards was determined using a Monte Carlo valuation model with an expected term of four years. As of September 30, 2024, the first TSR target was achieved, resulting in the vesting of 87,500 shares of common stock to our CEO. Unrecognized stock-based compensation expense of $395,000 associated with the first TSR target, which was set to be recognized in future periods, was recognized in the three months ended September 30, 2024.

 

 9

 

 

Stock based compensation expense recognized for PSUs was $468,000 and $73,000 for the three months ended September 30, 2024, and 2023, respectively. The weighted average grant date fair value per unit was $6.58 and as of September 30, 2024, 87,500 PSUs remained outstanding. On September 30, 2024, approximately $395,000 of unrecognized compensation expense related to outstanding PSUs remained, which is scheduled to be recognized over a period of 2.75 years or upon attainment of total shareholder return of 100%.

 

Note 9. Commitments and Contingencies

 

The Company is occasionally involved in claims and disputes arising in the ordinary course of business. The Company ensures 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.

 

Note 10. Segment Reporting

 

Our President and Chief Executive Officer is our chief operating decision maker (“CODM”). The CODM reviews financial information, including long-lived assets, presented on a consolidated basis, accompanied by information about revenue by market, for purposes of allocating resources and evaluating financial performance. We have a single active product and engage in the single business activity of selling and supporting that single product. There are no segment managers who are held accountable for operations, operating results or plans for levels or components below the consolidated level. Accordingly, we have determined that we have a single reportable and operating segment structure. We and our CODM evaluate performance based on revenue from our single product in the markets in which the Company operates. Revenue by market is described above in Note 2.

 

Note 11. Earnings Per Common Share (“EPS”)

 

The computations of the basic and diluted EPS amounts were as follows:

 

		Three Months Ended September 30,
		2024				2023
Net Income		$	1,474,000			$	155,000
Weighted-average common shares outstanding:
Basic			8,564,489				8,537,388
Effect of dilutive common stock equivalents			416,225				245,436
Diluted			8,980,714				8,782,824
Earnings per common share:
Basic		$	0.17			$	0.02
Diluted		$	0.16			$	0.02

 

Common stock equivalents excluded from the calculation of diluted earnings per share because their impact was anti-dilutive were 44,026 and 403,944 for the three months ended September 30, 2024, and 2023, respectively.

 

 

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, 2024 (“fiscal 2024”).

 

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.

 

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 generation SmartVest SQL®, and related garments and accessories to patients with compromised pulmonary function. The SmartVest Clearway, which received 510(k) clearance from the U.S. Food and Drug Administration in November 2022, provides patients with proven quality of life outcomes while offering a state-of-the-art patient experience with a simple touch screen user interface, small generator footprint and comfortable, lightweight vests.

 

Our products are sold in both the homecare market and the hospital market for inpatient use, which we refer to as “hospital sales.” Since 2000, we have marketed the SmartVest System and its predecessor products to patients suffering from bronchiectasis, cystic fibrosis, and other chronic pulmonary conditions which require external chest manipulation to enhance mucus transport. Additionally, we offer our products to a patient population that includes neuromuscular disorders such as cerebral palsy, muscular dystrophies, amyotrophic lateral sclerosis (“ALS”), patients with post-surgical complications or who are ventilator dependent and patients who 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 myopathies 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 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 and Note 2 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 2024.

 

There were no material changes in our critical accounting estimates and assumptions since the filing of our Annual Report on Form 10-K for fiscal 2024.

 

 

Results of Operations

 

Net Revenues

 

Net revenues for the three months ended September 30, 2024, and 2023 are summarized in the table below.

 

	Three Months Ended September 30,						Increase
	2024			2023
Homecare Revenue		13,211,000			11,153,000			2,058,000		18.5	%
Hospital Revenue		690,000			507,000			183,000		36.1	%
Homecare Distributor Revenue	587,000			573,000			14,000			2.4	%
Other Revenue	180,000			91,000			89,000			97.8	%
Total Revenue		14,668,000			12,324,000			2,344,000		19.0	%

 

Homecare revenue. Homecare revenue increased by $2,058,000, or 18.5%, for the three months ended September 30, 2024, compared to the same period in fiscal 2024. The increase in revenue was due to an increase in referrals driven by an increase in direct sales representatives, higher net revenues per approval, and efficiencies within our reimbursement department.

 

Hospital revenue. Hospital revenue increased by $183,000, or 36.1%, for the three months ended September 30, 2024, compared to the same period in fiscal 2024. This increase was primarily due to an increase in capital and disposable demand.

 

Homecare distributor revenue. Homecare distributor revenue increased by $14,000 or 2.4%, for the three months ended September 30, 2024, compared to the same period in fiscal 2024. The change in Homecare distributor sales was primarily a result of the timing of distributor purchases that can cause fluctuations in reported revenue on a quarterly basis.

 

Other revenue. Other revenue increased by $89,000, or 97.8%, for the three months ended September 30, 2024, compared to the same period in fiscal 2024. The increase in other revenue was primarily due to the timing of international distributor purchases and purchases by customers that do not fall within the other markets described above, which can cause fluctuations in reported revenue on a quarterly basis.

 

Though we have not identified a material impact to our net revenues for the three months ended September 30, 2024, we continue to monitor the potential impact of natural disasters such as hurricanes, which may have an impact on providers and their patients getting access to our product.

 

Gross profit

 

Gross profit increased to $11,491,000, or 78.3% of net revenues, for the three months ended September 30, 2024, from $9,498,000, or 77.1% of net revenues, in the same period in fiscal 2024. The increase in gross profit dollars for the three months ended September 30, 2024, was primarily due to increased revenue volume and a higher average net revenue per device. The gross margin rate increased year over year driven by a higher average net revenue per device.

 

Operating expenses

 

Selling, general and administrative expenses. Selling, general and administrative (“SG&A”) expenses were $9,387,000 for the three months ended September 30, 2024, representing an increase of $237,000 or 2.6%, compared to the same period in the prior year.

 

SG&A payroll and compensation-related expenses including health insurance benefits and other compensation increased by $691,000, or 12.0%, to $6,457,000 for the three months ended September 30, 2024, compared to the same period in the prior year. The increase in the current period was primarily due to increases in share-based compensation associated with the vesting of performance-based equity awards, 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 including share-based compensation 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 60 as of September 30, 2024, 53 of which were direct sales representatives, compared to 59 field sales employees and 51 direct sales representatives as of September 30, 2023.

 

 

Travel, meals and entertainment expenses increased $47,000, or 5.1%, to $964,000 for the three months ended September 30, 2024, compared to the same period in the prior year. The increase in the current year was primarily due to a higher average number of direct sales representatives and higher travel costs.

 

Total discretionary marketing expenses decreased $263,000, or 49.9%, to $264,000 for the three months ended September 30, 2024, compared to the same period in the prior year. The decrease was primarily due a one-time investment in market research in the prior year that did not recur in the three months ended September 30, 2024.

 

Professional fees decreased $171,000, or 13.0%, to $1,140,000 for the three months ended September 30, 2024, compared to the same period 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 decrease was primarily due to clinical fees in the prior year related to the finalization of a clinical study that did not recur in the three months ended September 30, 2024.

 

Research and development expenses. Research and development (“R&D”) expenses decreased $40,000, or 19.4%, to $166,000 for the three months ended September 30, 2024, compared to the same period in the prior year. The decrease was primarily due to reduced costs associated with our SmartVest Clearway platform development in the prior year which has now been launched into the Homecare and Hospital markets.

 

Operating income

 

Operating income increased by $1,796,000, to $1,938,000 for the three months ended September 30, 2024, compared to the same period in the prior year. The increase is primarily due to an increase in revenue and gross profit and growth in selling, general and administrative expense growth tracking below revenue growth.

 

Interest income, net

 

Net interest income increased $118,000, to $195,000 for the three months ended September 30, 2024, compared to the same period in the prior year. The increase is due to increased savings rates on higher cash balances.

 

Income tax expense

 

Income tax expense was estimated at $659,000 for the three months ended September 30, 2024, compared to an estimated income tax expense of $64,000 for the three months ended September 30, 2023. The effective tax rates were 30.9% and 29.3% for the three months ended September 30, 2024, and 2023, respectively. The income tax expense for the three months ended September 30, 2024, included a discrete tax benefit of $4,000 primarily related to the vesting of restricted stock awards.

 

Net income

 

Net income for the three months ended September 30, 2024, was $1,474,000 compared to $155,000 for the same period in the prior year. The increase in net income was primarily due to increased revenue and gross profit.

 

Liquidity and Capital Resources

 

Cash Flows and Sources of Liquidity

 

Cash Flows from Operating Activities

 

For the three months ended September 30, 2024, net cash provided by operating activities was $2,309,000. Cash flows provided by operating activities consisted of net income of $1,474,000, non-cash expenses of $917,000, a decrease in accounts receivable of $967,000, a decrease in inventory of $278,000, and an increase in accounts payable and accrued liabilities of $806,000. These cash flows from operating activities were offset by a decrease in accrued compensation of $1,743,000, an increase in prepaid expenses and other assets of $266,000, a decrease in income tax payable of $89,000, and an increase in contract assets of $35,000. The decrease in accrued compensation was primarily due to the payment of previously accrued annual incentives.

 

 

Cash Flows from Investing Activities

 

For the three months ended September 30, 2024, cash used in investing activities was $58,000. Cash used in investing activities consisted of $37,000 of expenditures for property and equipment and $21,000 in expenditures for intangible asset costs.

 

Cash Flows from Financing Activities

 

For the three months ended September 30, 2024, cash used by financing activities was $4,467,000, consisting of $4,536,000 used to repurchase common stock and $15,000 used to pay taxes for equity issued on a net basis. These amounts were partially offset by cash received from the issuance of common stock upon the exercise of options of $84,000.

 

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 approximately $33,591,000 and available borrowings under our existing credit facility will provide sufficient liquidity to meet our anticipated working capital and other liquidity needs for the next twelve months from the date of this report.

 

We maintain a credit facility that was last amended in December 2023, which provides us with a revolving line of credit. Interest on borrowings on the line of credit accrues at the prime rate (8.0% as of September 30, 2024) less 1.0% and is payable monthly. There was no outstanding principal balance on the line of credit as of September 30, 2024, or June 30, 2024. The amount eligible for borrowing on the line of credit is limited to the lesser of $2,500,000 or 57.0% of eligible accounts receivable, and the line of credit expires on December 18, 2025, if not renewed. As of September 30, 2024, 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 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 three months ended September 30, 2024, and 2023, we spent approximately $37,000 and $109,000, respectively, on property and equipment. We currently expect to finance planned equipment purchases with cash flows from operations. 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 macroeconomic 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 2025 and the foreseeable future. We will continue to evaluate our projected expenditures relative to our available cash and evaluate financing alternatives 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: 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;

•

component or raw material shortages, changes to lead times or significant price increases;

•

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;

•

wage and component price inflation;

•

technical problems with our research and products;

•

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 homecare 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 any 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 2024. 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 September 30, 2024, 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.

 

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. We are not party to any material pending legal proceedings.

 

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 September 11, 2024, our Board of Directors (the “Board”) approved and announced the repurchase of up to $5.0 million of outstanding shares of our common stock. 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 current repurchase authorization does not expire and the approximate dollar value of shares that may yet be purchased under the plan as of September 30, 2024, was approximately $464,000. The following table sets forth information concerning repurchases of shares of our common stock for the three months ended September 30, 2024:

 

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
July 1 – July 31, 2024				-			$	-				-			$	-
August 1 – August 31, 2024				-			$	-				-			$	-
September 1 – September 30, 2024				262,756			$	17.26				262,756			$	464,000
Total				262,756								262,756

 

 

Item 3.

Defaults Upon Senior Securities.

 

None.

 

Item 4.

Mine Safety Disclosures.

 

None.

 

Item 5.

Other Information.

 

During the three months ended September 30, 2024, no director or officer of the Company adopted, modified or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

 

 

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		Form of Non-Qualified Stock Option Agreement under the 2023 Equity Incentive Plan*	Filed Electronically
10.2		Form of Restricted Stock Agreement (Employees) under the 2023 Equity Incentive Plan*	Filed Electronically
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 September 30, 2024, 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, (v) Notes to Condensed Financial Statements, and (vi) the information set forth in Part II, Item 5	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:	November 12, 2024	/s/ James L. Cunniff
		James L. Cunniff, President and Chief Executive Officer (duly authorized officer)
Date:	November 12, 2024	/s/ Bradley M. Nagel
		Bradley M. Nagel, Chief Financial Officer
		(principal financial officer and principal accounting officer)