Item 1A. Risk Factors.
As
a smaller reporting company, we are not required to provide disclosure pursuant to this item.
Item 1B. Unresolved Staff Comments.
As
a smaller reporting company, we are not required to provide disclosure pursuant to this item.
11
Item 2. Properties.
We
own our principal headquarters and manufacturing facilities, consisting of approximately 37,000 square feet, which are located
on an approximately 2.3-acre parcel in New Prague, Minnesota. We believe that our facilities are satisfactory for our long-term
growth plans.
Item 3. Legal Proceedings.
We
may be party to legal actions, proceedings, or claims in the ordinary course of business. We are not aware of any actual or threatened
litigation that would have a material adverse effect on our financial condition or results of operations.
Item 4. Mine Safety Disclosures.
None.
PART
II
Market
Information
Our
common stock is listed on the NYSE American under the symbol “ELMD”.
As
of August 21, 2020, there were 65 registered holders of our common stock.
Dividends
We
have never paid cash dividends on any of our common stock. We currently intend to retain any earnings for use in operations and
do not anticipate paying cash dividends in the foreseeable future. The agreement governing our credit facility restricts our ability
to pay dividends.
Recent
Sales of Unregistered Equity Securities
None.
Purchases
of Equity Securities by the Company and Affiliated Purchasers
None.
Item 6. Selected Financial Data.
As
a smaller reporting company, we are not required to provide disclosure pursuant to this item.
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with our
financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K. The forward-looking statements
include statements that reflect management’s good faith beliefs, plans, objectives, goals, expectations, anticipations and
intentions with respect to our future development plans, capital resources and requirements, results of operations, and future
business performance. Our actual results could differ materially from those anticipated in the forward-looking statements included
in this discussion as a result of certain factors, including, but not limited to, those discussed in the section entitled “Information
Regarding Forward-Looking Statements” immediately preceding Part I of this Annual Report on Form 10-K.
12
Overview
Electromed
develops and provides innovative airway clearance products applying HFCWO technologies in pulmonary care for patients of all ages.
We
manufacture, market and sell products that provide HFCWO, including the SmartVest System and related products, to patients with
compromised pulmonary function. The SmartVest SQL is smaller, quieter and lighter than our previous product (the SV2100), with
enhanced programmability and ease of use. 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.” The SmartVest SQL has been sold in the
domestic home care market since 2014. In 2017, we launched the SmartVest SQL with SmartVest ConnectTM wireless technology.
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 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 for HFCWO devices if the patient has cystic fibrosis, bronchiectasis (including chronic bronchitis or chronic obstructive
pulmonary disease 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.
We
employ a direct-to-patient and provider model, through which we obtain patient referrals from clinicians, manage insurance claims
on behalf of our patients and their clinicians, deliver our solutions to patients and train them on proper use in their homes.
This model allows us to directly approach patients and clinicians, whereby we disintermediate the traditional durable medical
equipment channel and capture both the manufacturer and distributor margins.
Our
key growth strategies for the fiscal 2021 include:
● enhance patient and provider support to provide best-in-class customer care;
● continue to develop innovative device features that appeal to patients; and
● grow institutional market share to support home care growth.
Critical
Accounting Policies and Estimates
During
the preparation of our financial statements, we are required to make estimates, assumptions and judgments that affect reported
amounts. Those estimates and assumptions affect our reported amounts of assets and liabilities, our disclosure of contingent assets
and liabilities, and our reported revenues and expenses. We update these estimates, assumptions and judgments as appropriate,
which in most cases is at least quarterly. We use our technical accounting knowledge, cumulative business experience, judgment
and other factors in the selection and application of our accounting policies. While we believe the estimates, assumptions and
judgments we use in preparing our financial statements are appropriate, they are subject to factors and uncertainties regarding
their outcome and therefore, actual results may materially differ from these estimates. The following is a summary of our primary
critical accounting policies and estimates. See also Note 1 to the Financial Statements, included in Part II, Item 8, of this
Annual Report on Form 10-K.
COVID-19
Pandemic and CARES Act Funding
In
March 2020, the World Health Organization designated COVID-19 as a global pandemic. The impact of the COVID-19 pandemic on our
business remains uncertain and its effects on our operational and financial performance will depend in part on future developments,
which cannot be reasonably estimated at this time. Such future developments include, but are not limited to, the duration, scope
and severity of the COVID-19 pandemic in geographic areas in which we operate or in which our patients live, actions taken to
contain or mitigate its impact, the impact on governmental healthcare programs and budgets, the development of treatments or vaccines,
and the resumption of widespread economic activity. Due to the inherent uncertainty of the unprecedented and evolving situation,
we are unable to predict with confidence the likely impact of the COVID-19 pandemic on our future operations.
13
The
COVID-19 pandemic has created significant volatility, uncertainty and economic disruption and has negatively impacted business
in our industry starting in March 2020. In particular, certain healthcare facilities and clinics restricted access to their clinicians,
reducing patient consultations and treatments, or closed temporarily due to the COVID-19 pandemic, which reduced homecare referrals
and resulted in institutional orders being postponed. We believe that these and other responses by healthcare systems have had
a negative impact on our operating results and cash flows during the fourth quarter of fiscal 2020. As we exited the fourth quarter
of fiscal 2020, home care referral levels returned to near prior year levels as government restrictions began to ease and patients
began re-engaging with our clinicians. Institutional revenue has been negatively impacted as hospitals and long-term care facilities
have adjusted their operating protocols and procurement management since the onset of the COVID-19 pandemic. We expect the impact
on our business will continue to lessen during fiscal 2021 and continue to do so in subsequent periods; however, if COVID-19 rates
increase and federal, state and local restrictions on commerce, stay-at-home orders or other restrictions on businesses are reinstated,
such measures could have a material adverse effect on our business.
We
believe that the COVID-19 pandemic’s adverse impact on our operating results, cash flows and financial condition will be
primarily driven by: the severity and duration of the pandemic; its impact on the U.S. healthcare system and economy; and the
timing, scope and effectiveness of U.S. governmental responses to the COVID-19 pandemic.
While
we have not yet experienced adverse impacts on our supply chain, it is possible the COVID-19 pandemic could have an adverse impact
on our supply chain in the future, including impacts associated with preventive and precautionary measures that other businesses
and the governments are taking. A reduction or interruption in any of our manufacturing processes could have a material adverse
effect on our business.
In
response to the negative impacts of the COVID-19 pandemic on our business, in April 2020 we initiated cost-containment measures,
which included reducing discretionary and variable spend, such as travel, and the use of contractors, consultants, temporary help
and employee furloughs in our manufacturing and general and administrative functions due to lower near-term demand for our products.
Employee furloughs continued through the end of July 2020, at which time we returned to full employment in both our manufacturing
and general and administrative functions.
We
have also taken measures to ensure the safety of our employees and to comply with applicable governmental orders. We consider
our business to be essential under applicable orders due primarily to our role in manufacturing and supplying needed medical devices
to patients with respiratory related issues.
In
response to the COVID-19 pandemic and the U.S. federal government’s declaration of a public health emergency, the CMS implemented
a number of temporary rule changes and waivers to allow prescribers to best treat patients during the period of the public health
emergency. These waivers are retroactively effective to 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 during such period, which is currently scheduled to expire in October 2020.
On
April 10, 2020, we received a stimulus payment in the amount of approximately $913,000 under the Provider Relief Fund established
pursuant to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which is intended to offset losses
in revenue and expenses Medicare fee-for-service providers incurred due to the impacts of the COVID-19 pandemic. We are a Medicare
fee-for-service provider, and incurred revenue losses subsequent to receipt of the funds in excess of the amount of the stimulus
payment, and recognized the full amount as income during fiscal 2020.
Revenue
Recognition and Allowance for Doubtful Accounts
We
measure revenue 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 noncash consideration, consideration paid or payable
to 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.
14
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,” or other applicable guidance are met.
We
include shipping and handling fees in net revenues. Shipping and handling costs associated with the shipment of SmartVest Systems
after control has transferred to a customer are accounted for as a fulfillment cost and are included in cost of revenues.
Accounts
receivable are also net of an allowance for doubtful accounts, which are accounts from which payment is not expected to be received.
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. Recoveries of
receivables previously written off are recorded when received.
We
request that customers return previously sold units that are no longer in use to us in order to limit the possibility that such
units would be resold by unauthorized parties or used by individuals without a prescription. The customer is under no obligation
to return the product; however, we do reclaim the majority of previously sold units upon the discontinuance of patient usage.
We are certified to recondition and resell returned SmartVest units. Returned units are typically reconditioned and resold and
continue to be used for demonstration equipment and warranty replacement parts.
Valuation
of Long-Lived and Intangible Assets
Long-lived
assets, primarily property and equipment and finite-life intangible assets, are evaluated for impairment whenever events or changes
in circumstances indicate the carrying value of an asset may not be recoverable. In evaluating recoverability, the following factors,
among others, are considered: a significant change in the circumstances used to determine the amortization period, an adverse
change in legal factors or in the business climate, a transition to a new product or service strategy, a significant change in
customer base, and a realization of failed marketing efforts. The recoverability of an asset or asset group is measured by a comparison
of the unamortized balance of the asset or asset group to future undiscounted cash flows. If we believe the unamortized balance
is unrecoverable, we would recognize an impairment charge necessary to reduce the unamortized balance to the estimated fair value
of the asset group. The amount of such impairment would be charged to operations at the time of determination.
Property
and equipment are stated at cost less accumulated depreciation. We use the straight-line method for depreciating property and
equipment over their estimated useful lives, which range from 3 to 39 years. Our finite-life intangibles consist of patents and
trademarks and their carrying costs include the original cost of obtaining the patents, periodic renewal fees, and other costs
associated with maintaining and defending patent and trademark rights. Patents and trademarks are amortized over their estimated
useful lives, generally 15 and 12 years, respectively, using the straight-line method.
Allowance
for Excess and Slow-Moving Inventory
An
allowance for potentially slow-moving or excess inventories is made based on our analysis of inventory levels on hand and comparing
it to expected future production requirements, sales forecasts and current estimated market values.
Warranty
Reserve
We
provide a warranty on the SmartVest System that covers the cost of replacement parts and labor, or a new SmartVest System in the
event we determine a full replacement is necessary. For home care SmartVest Systems initially purchased and currently located
in the U.S. and Canada, we provide a lifetime warranty to the individual patient for whom the SmartVest System is prescribed.
For sales to institutions within the U.S., and for all international sales, except Canadian home care, we provide a three-year
warranty. We estimate, based upon a review of historical warranty claim experience, the costs that may be incurred under our warranty
policies and record a liability in the amount of such estimate at the time a product is sold. The warranty cost is based on future
product performance and durability and is estimated largely based on historical experience. We estimate the average useful life
of our products is approximately five years. Factors that affect our warranty liability include the number of units sold, historical
and anticipated rates of warranty claims, the product’s useful life, and cost per claim. At our discretion, based upon the
cost to either repair or replace a product, we have occasionally replaced such products covered under warranty with a new or refurbished
model. We periodically assess the adequacy of our recorded warranty liability and make adjustments to the accrual as claims data
and historical experience warrant.
15
Share-Based
Compensation
Share-based
payment awards consist of options issued to employees. Expense for options is estimated using the Black-Scholes pricing model
at the date of grant. The portion of the award that is ultimately expected to vest is recognized on a straight-line basis over
the requisite service or vesting period of the award and adjusted upon completion of the vesting period. In determining the fair
value of our share-based payment awards, we make various assumptions using the Black-Scholes pricing model, including expected
risk-free interest rate, stock price volatility, life and forfeitures. See Note 8 to the Financial Statements included in Part
II, Item 8, of this Annual Report on Form 10-K for a description of these assumptions.
Results
of Operations
Fiscal
Year Ended June 30, 2020 Compared to Fiscal Year Ended June 30, 2019
Revenues
Revenue
for the twelve-month periods are summarized in the table below (dollar amounts in thousands).
Twelve Months Ended June 30,
Home Care Distributor Revenue 430 — 430 —
Home
Care Revenue. Our home care revenue increased by 1.3%, or approximately $374,000, for fiscal 2020, compared to fiscal 2019.
Home care revenue increased year-over-year predominantly due to a greater percentage of approved referrals and a higher average
allowable based on payer mix, which was partially offset by a lower level of referrals as compared to the prior year. The decline
in fiscal 2020 referrals was due to a significant decrease in referrals that occurred during the three months ended June 30, 2020
driven by the COVID-19 pandemic. As we exited fiscal 2020, referrals began to come back to pre-COVID-19 levels. Home care referrals
benefited from a temporary rule changes and waivers to allow prescribers to best treat patients during the period of the public
health emergency. These waivers are retroactively effective to 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 during such period, which is currently scheduled to expire
in October 2020.
Institutional
Revenue. Institutional revenue increased by 24.7%, or approximately $396,000, in fiscal 2020 compared to fiscal 2019. Institutional
revenue includes sales to group purchasing organization (“GPO”) members, rental companies and other institutions.
The increases in institutional revenue was primarily due to a higher selling price per device and an increase in the number of
devices sold as compared to the prior year. Since the onset of the COVID-19 pandemic, institutional revenue has been negatively
impacted as hospitals and long-term care facilities have adjusted their operating protocols and procurement management.
16
Home
Care Distributor Revenue. Home care distributor revenue was approximately $430,000 for fiscal 2020. We began selling to home
medical equipment distributors during fiscal 2020, who in turn sell our SmartVest System in the U.S. home care market.
International
Revenue. International revenue was approximately $718,000 in fiscal 2020 compared to $747,000 in fiscal 2019. International
revenue growth is not a focus for us, and our corporate resources are only focused on supporting and maintaining our current distributors.
Gross
Profit
Gross
profit increased to approximately $25,200,000 during fiscal 2020, or 77.6% of net revenues, from approximately $23,848,000, or
76.2% of net revenues, during fiscal 2019. The increase in gross profit was primarily related to increases in domestic home care,
institutional revenue and home care distributor revenue. The increase in gross profit as a percentage of net revenue was driven
by a higher average allowable due to payer mix compared to the prior fiscal year.
We
believe as we continue to grow revenue we will be able to leverage manufacturing costs, although there can be fluctuations on
a short-term basis related to average reimbursement based on the mix of referrals during any given period. Factors such as diagnoses
that are not assured of reimbursement, insurance programs with lower allowable reimbursement amounts (for example, state Medicaid
programs), and whether an individual patient meets prerequisite medical criteria for reimbursement, may have an effect on average
reimbursement received on a short-term basis.
Operating
Expenses
Selling,
General and Administrative Expenses. Selling, general and administrative (“SG&A”) expenses for fiscal 2020
were approximately $19,945,000, compared to approximately $20,435,000 for the prior year, a decrease of approximately $490,000,
or 2.4%.
SG&A
payroll and compensation-related expenses decreased by approximately $687,000, or 5.2%, to approximately $12,461,000. The decrease
was due to eliminating certain sales roles during the latter part of fiscal 2019, a lower number of administrative roles and lower
share-based compensation expense.
Professional
and legal fees increased by approximately $487,000 to approximately $2,002,000 in fiscal 2020, compared to approximately $1,524,000
in fiscal 2019. These fees are primarily for services related to legal costs, shareowner services and reporting requirements,
information technology (“IT”) technical support, and consulting fees for enhancing our market development strategy.
The increase in professional fees were primarily in legal, consulting and shareowner services.
Recruiting
fees were approximately $430,000 in fiscal 2020, representing an increase of approximately $174,000, or 68.0%, as compared to
the prior year. The increase in recruiting fees was due primarily to hiring a greater number of employees in sales and administrative
roles as compared to the prior year.
Travel,
meals and entertainment expenses were approximately $1,944,000 for fiscal 2020 compared to $2,341,000 in the prior year, a decrease
of approximately $397,000, or 17.0%. The decrease was due primarily to eliminating certain sales roles during fiscal 2019 and
a lower level of travel due to the COVID-19 pandemic during the three months ended June 30, 2020.
Depreciation
and amortization expense was approximately $397,000 for fiscal 2020 compared to $537,000 in the prior year, a decrease of approximately
$140,000, or 26.1%. The decrease was due primarily to our decision to terminate the lease of a property used for office space
on June 30, 2019, which required us to accelerate the amortization of the leasehold improvement assets associated with the property
in the amount of approximately $151,000 during the prior fiscal year.
Research
and Development Expenses. R&D expenses were approximately $1,050,000 and $583,000, or 3.2% and 1.9% of net revenues, for
fiscal 2020 and 2019, respectively. As a percentage of sales, we expect spending on R&D expenses to increase slightly during
the fiscal year ended June 30, 2021 as compared with fiscal 2020 with engineering resources focusing on next generation product
enhancements. Certain expenses related to our innovation investments are not always captured in R&D expenses. These expenses
may be included in cost of revenue as in the case of depreciation of tooling, or for SG&A, in the case of professional fees
or higher labor expense, as we improve our internal processes or enhance our customer service.
17
Government
Stimulus Income. In fiscal 2020, we recorded $913,000 of government stimulus income related to general distribution funds
received from the Provider Relief Fund established by the CARES Act for Medicare fee-for-service providers due to lost revenues
resulting from the COVID-19 pandemic.
Interest
Income, net
Net
interest income was approximately $121,000 during fiscal 2020 compared to net interest income of $91,000 during the prior fiscal
year. Increases in net interest income was primarily driven by the payoff of our term loan of approximately $1,103,000 on December
18, 2018.
Income
Tax Expense
During
fiscal 2020, we recorded a current income tax expense of $1,078,000. Estimated income tax expense during fiscal 2020 includes
a current tax expense of $1,204,000 and a deferred benefit of $126,000. Estimated income tax expense for fiscal 2020 includes
a discrete current tax benefit of approximately $358,000 related to the excess tax benefit of non-qualified stock options exercised.
In
fiscal 2019, we recorded a current income tax expense of $940,000. Estimated income tax expense during fiscal 2019 includes a
current tax expense of $1,205,000 and a deferred benefit of $265,000. Estimated income tax expense for fiscal 2019 includes a
discrete deferred tax expense of approximately $157,000 related to unexercised fully vested stock options that expired and a discrete
current tax benefit of approximately $14,000 related to the excess tax benefit of non-qualified stock options exercised.
The
effective tax rates were 20.6% and 32.3% for fiscal 2020 and 2019, respectively. The effective tax rates differ from the statutory
federal rate due to the effect of state income taxes, R&D tax credits, the domestic production activities deduction and other
permanent items that are non-deductible for tax purposes relative to the amount of taxable income.
Net
Income
Net
income for fiscal 2020 was approximately $4,161,000, compared to net income of approximately $1,980,000 in fiscal 2019. The year-over-year
increase in net income was driven primarily by an increase in gross profit on higher revenue, government stimulus income related
to the COVID-19 pandemic and lower payroll and compensation expenses, which was partially offset by an increase in investments
in R&D and higher professional fees. Fiscal 2020 net income also benefited by a discrete current tax benefit of approximately
$358,000 related to the excess tax benefit of non-qualified stock options exercised.
Liquidity
and Capital Resources
Cash
Flows and Sources of Liquidity
Cash
Flows from Operating Activities
For
fiscal 2020, our net cash provided by operating activities was approximately $4,196,000. Cash flows from operating activities
consisted of net income of approximately $4,161,000, non-cash expenses of approximately $1,517,000, a decrease in contract assets
of $93,000 and a decrease in prepaid expenses and other assets of $78,000. These cash flows from operating activities were partially
offset by an increase in inventory of $449,000, a decrease in accounts payable and other current liabilities of approximately
$472,000, a decrease in income taxes payable of $289,000, an increase in income taxes receivable of $262,000 and an increase in
accounts receivable of $181,000.
18
Cash
Flows from Investing Activities
For
fiscal 2020, cash used in investing activities was approximately $977,000. Cash used in investing activities primarily consisted
of approximately $844,000 in expenditures for property and equipment and $133,000 in payments for patent and trademark costs.
Cash
Flows from Financing Activities
For
fiscal 2020, cash used in financing activities was approximately $548,000, consisting of $628,000 for taxes paid on behalf of
employees for stock options that were exercised on a net basis, which was partially offset by $80,000 of proceeds received from
stock options exercised.
Adequacy
of Capital Resources
Our
primary working capital requirements relate to adding employees to our sales force and support functions, continuing R&D efforts,
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 $25,036,000
and available borrowings under our existing credit facility will provide adequate liquidity for fiscal 2021.
Effective
December 18, 2019, we renewed our credit facility, which provides us with a revolving line of credit. Interest on borrowings on
the line of credit accrues at the prime rate (3.25% at June 30, 2020) less 1.00% and is payable monthly. There was no outstanding
principal balance on the line of credit as of June 30, 2020 or June 30, 2019. 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, 2020, if not renewed. At June 30, 2020, 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.
During
fiscal 2020 and 2019, we spent approximately $844,000 and $1,331,000, 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.
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements.
New
Accounting Pronouncements
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-02, “Leases (Topic 842)” (“ASU 2016-02”). This standard requires the recognition of all lease transactions
on the balance sheet as a lease liability and a right-of-use asset (as defined in ASU 2016-02). ASU 2016-02 to Topic 842 –
Leases (“ASC 842”) became effective on July 1, 2019 and was applied retrospectively to all periods presented. We applied
the practical expedient to calculate the present value of the fixed payments without having to perform an allocation to lease
and non-lease components.
19
Impact
on Previously Reported Results:
The
following table presents a recast of selected unaudited statement of operations line items after giving effect to the adoption
of ASC 842:
For the twelve months ended June 30, 2019
As Previously Reported Effect of Adoption As Adjusted
Operating expenses
Income per share:
The
following table presents a recast of selected unaudited balance sheet line items after giving effect to the adoption of ASC 842:
As Previously Reported Effect of Adoption As Adjusted
Assets
Liabilities and Shareholder’s Equity
Current maturities of other long-term liabilities — 30,320 30,320
The
following table presents a recast of selected unaudited statement of cash flow line items after giving effect to the adoption
of ASC 842:
For the Twelve months ended June 30, 2019
As Previously Reported Effect of Adoption As Adjusted
Cash Flow from Operating Activities
Changes in operating assets and liabilities:
20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
As
a smaller reporting company, we are not required to provide disclosure pursuant to this item.
21
Item 8. Financial Statements and Supplementary Data.
Index
to Financial Statements
Report of Independent Registered Public Accounting Firm F-2
Balance Sheets F-3
Statements of Operations F-4
Statements of Shareholders’ Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
F-1
Report
of Independent Registered Public Accounting Firm
To
the Shareholders and the Board of Directors of Electromed, Inc.
Opinion
on the Financial Statements
We
have audited the accompanying balance sheets of Electromed, Inc. (the Company) as of June 30, 2020 and 2019, the related statements
of operations, shareholders’ equity and cash flows for the years then ended, and the related notes to the financial statements
(collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the
financial position of the Company as of June 30, 2020 and 2019, and the results of its operations and its cash flows for the years
then ended, in conformity with accounting principles generally accepted in the United States of America.
Change
in Accounting Principle
As
discussed in Note 1 to the financial statements, the Company has changed the manner in which it accounts for leases in fiscal
year 2020, due to the adoption of Accounting Standards Codification Topic 842, Leases.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance
with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
/s/
RSM US LLP
We
have served as the Company’s auditor since 2010.
Duluth,
Minnesota
August
25, 2020
F-2
Electromed,
Inc.
Balance
Sheets
June 30, 2020 and 2019
Assets
Current Assets
Income tax receivable 262,155 —
Liabilities and Shareholders’ Equity
Current Liabilities
Current maturities of other long-term liabilities $ 72,328 $ 30,320
Commitments and Contingencies
Shareholders’ Equity
See
Notes to Financial Statements.
F-3
Electromed,
Inc.
Statements
of Operations
Years Ended June 30, 2020 and 2019
Years Ended June 30,
Operating expenses (income)
Government stimulus income (913,108 ) —
Income per share:
Weighted-average common shares outstanding:
See
Notes to Financial Statements.
F-4
Electromed,
Inc.
Statements of Shareholders’ Equity
Years Ended June 30, 2020 and 2019
Shares Amount
Taxes paid on stock option exercised on a net basis — — (628,399 ) — (628,399 )
See
Notes to Financial Statements.
F-5
Electromed, Inc.
Statements of Cash Flows
Years Ended June 30, 2020 and 2019
Years Ended June 30,
Cash Flows From Operating Activities
Amortization of finite-life intangible assets 121,762 120,640
Amortization of debt issuance costs — 1,958
Loss on disposal of property and equipment 2,622 11,186
Loss on disposal of intangible assets — 4,840
Changes in operating assets and liabilities:
Income tax receivable (262,155 ) —
Accounts payable and accrued liabilities (472,589 ) (200,899 )
Cash Flows From Investing Activities
Proceeds of sales of equipment — 1,750
Expenditures for finite-life intangible assets (132,970 ) (57,790 )
Cash Flows From Financing Activities
Issuance of common stock upon exercise of options 80,369 251,849
Taxes paid on stock options exercised on a net basis (628,399 ) —
Cash
Supplemental Disclosures of Cash Flow Information
Supplemental Disclosures of Noncash Investing and Financing Activities
Property and equipment acquisitions in accounts payable $ 1,278 $ 29,405
Intangible asset acquisitions in accounts payable $ 5,768 $ —
See
Notes to Financial Statements.
F-6
Electromed,
Inc.
Notes to Financial Statements
Note 1. Nature of Business and Summary of Significant Accounting Policies
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 both directly and through distributors. International sales were
approximately $718,000 and $747,000 for the fiscal years ended June 30, 2020 (“fiscal 2020”) and 2019 (“fiscal
2019”), respectively. Since its inception, the Company has operated in a single industry segment: developing, manufacturing
and marketing medical equipment.
A
summary of the Company’s significant accounting policies follows:
Use
of estimates: Management uses estimates and assumptions in preparing the financial statements in accordance with U.S. generally
accepted accounting principles (“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 financial statements include revenue recognition and the related estimation
of variable consideration, allowance for doubtful accounts, the potential impairment of intangible and long-lived assets, inventory
obsolescence, share-based compensation and the warranty reserve.
COVID-19
Pandemic and CARES Act Funding
In
March 2020, the World Health Organization designated COVID-19 as a global pandemic. The impact of the COVID-19 pandemic on the
Company’s business remains uncertain and its effects on operational and financial performance will depend in part on future
developments, which cannot be reasonably estimated at this time. Such future developments include, but are not limited to, the
duration, scope and severity of the COVID-19 pandemic in geographic areas in which the Company operates or in which its patients
live, actions taken to contain or mitigate its impact, the impact on governmental healthcare programs and budgets, the development
of treatments or vaccines, and the resumption of widespread economic activity. Due to the inherent uncertainty of the unprecedented
and evolving situation, the Company is unable to predict with confidence the likely impact of the COVID-19 pandemic on its future
operations.
The
COVID-19 pandemic has created significant volatility, uncertainty and economic disruption and has negatively impacted business
in the Company’s industry starting in March 2020. In particular, certain healthcare facilities and clinics restricted access
to their clinicians, reducing patient consultations and treatments, or closed temporarily due to the COVID-19 pandemic, which
reduced homecare referrals and resulted in institutional orders being postponed. The Company believes that these and other responses
by healthcare systems had a negative impact on the Company’s operating results and cash flows during the fourth quarter
of fiscal 2020.
In
response to the negative impacts of the COVID-19 pandemic on the Company’s business, in April 2020 the Company initiated
cost-containment measures, which included reducing discretionary and variable spend, such as travel, and the use of contractors,
consultants, temporary help and employee furloughs in its manufacturing and general and administrative functions due to lower
near-term demand for its products.
The
Company has also taken measures to ensure the safety of its employees and to comply with applicable governmental orders. The Company