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.
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. All of the Company’s revenues, profits, and assets are associated
with this facility. We believe that our facilities are satisfactory for our long-term growth plans.
Item 3. Legal Proceedings.
The
disclosure regarding legal proceedings set forth in Note 11 to our Financial Statements in Part II, Item 8 of this Annual Report
on Form 10-K is incorporated herein by reference. Occasionally, we may be party to legal actions, proceedings, or claims in the
ordinary course of business, including claims based on the assertions of patent and trademark infringement. Corresponding costs
are accrued when it is probable that loss will be incurred, and the amount can be precisely or reasonably estimated. We are not
aware of any undisclosed actual or threatened litigation that would have a material adverse effect on our financial condition
or results of operations.
Item 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 23, 2022, there were 59 registered holders of our common stock.
Dividends
We
have never paid cash dividends on any of our shares of common stock. We currently intend to retain any earnings for use in operations
and do not anticipate paying cash dividends to our shareholders in the foreseeable future. The agreement governing our credit
facility restricts our ability to pay dividends.
13
Recent
Sales of Unregistered Equity Securities
None.
Purchases
of Equity Securities by the Company and Affiliated Purchasers
On May 26, 2021,
our Board of Directors approved a stock repurchase authorization. Under the authorization, we were originally able to repurchase up to $3.0 million of
outstanding shares of our common stock through May 26, 2022. On May 26, 2022, our Board of Directors removed the date limitation. The shares of our
common stock may be repurchased on the open market or in privately negotiated transactions subject to applicable securities laws and regulations. The
following table sets forth information concerning purchases of shares of our common stock for the three months ended June 30, 2022:
Item 6. [Reserved].
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.
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 that includes our newest generation SmartVest
SQL® and previous generation SV2100 and related products, to patients with compromised pulmonary function. The SmartVest SQL
is smaller, quieter and lighter than our previous product with enhanced programmability, 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 2015, we launched the SmartVest
SQL into institutional and certain international markets. In June 2017, we announced the launch of the SmartVest SQL with SmartVest
ConnectTM wireless technology, which allows data connection between physicians and patients to track therapy performance
and collaborate in treatment decisions. SmartVest Connect is currently available to pediatric and cystic fibrosis patients and
was made available to certain targeted adult pulmonary clinics starting in November 2017. Since 2000, we have marketed the SmartVest
System and its predecessor products to patients suffering from cystic fibrosis, bronchiectasis and repeated episodes of pneumonia.
Additionally, we offer our products to a patient population that includes neuromuscular disorders such as cerebral palsy, muscular
dystrophies, ALS, the combination of emphysema and chronic bronchitis commonly known as COPD, and patients with post-surgical
complications or who are ventilator dependent or have other conditions involving excess secretion and impaired mucus transport.
14
The
SmartVest System is often eligible for reimbursement from major private insurance providers, health maintenance organizations
(“HMOs”), state Medicaid systems, and the federal Medicare system, which we believe is an important consideration
for patients considering an HFCWO course of therapy. For domestic sales, the SmartVest System may be reimbursed under the Medicare-assigned
billing code (E0483) for HFCWO devices if the patient has cystic fibrosis, bronchiectasis (including chronic bronchitis or COPD
that has resulted in a diagnosis of bronchiectasis), or any one of certain enumerated neuromuscular diseases, and can demonstrate
that another less expensive physical or mechanical treatment did not adequately mobilize retained secretions. Private payers consider
a variety of sources, including Medicare, as guidelines in setting their coverage policies and payment amounts.
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. We have engaged a limited number of regional durable
medical equipment distributors focused on respiratory therapies as an alternate sales channel. Revenue through this channel was
4% of our total revenues in fiscal 2022.
Our
key growth strategies for fiscal 2023 are to: accelerate our revenue growth by taking market share and expanding the addressable population for the largest and fastest growing
segments of the market: adult pulmonology/bronchiectasis. Actions to support accelerating our growth include the following:
● Provide best-in-class customer care and support;
● Introduce our innovative next generation device that appeals to patients.
Critical
Accounting Estimates
During
the preparation of our financial statements, we are required to make estimates, assumptions and judgment 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 judgment as appropriate.
Some of our accounting policies and estimates require us to exercise significant judgment in selecting the appropriate assumptions
for calculating financial statements. Such judgments are subject to an inherent degree of uncertainty. Among other factors, these
judgments are based upon our historical experience, known trends in our industry, terms of existing contracts and other information
from outside sources, as appropriate. 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.
Impacts
of COVID-19 on Our Business and Operations
In
March 2020, the World Health Organization designated COVID-19 as a global pandemic, and the U.S. Department of Health and Human
Services designated COVID-19 as a public health emergency. 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 and distribution 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.
15
During
fiscal 2022, we experienced a reduction in the number of clinics allowing face-to-face access by our sales team although
not to the extent experienced in fiscal 2021 as the number of infections relating to the Omicron variant and related
subvariants of COVID-19 increased throughout most regions of the United States, and hospitals implemented additional
safety protocols. Our sales team continued to utilize a hybrid sales process of virtual and face-to-face clinician
interaction with strict adherence to specific clinic and healthcare system safety protocols, which we believe
allowed them to drive stronger referral growth compared to fiscal 2021. During the second half of fiscal 2022,
we observed an improvement in clinic access and patient flow compared to earlier in the fiscal year, which we
believe is likely a result of Omicron-related case reductions throughout most of the United States, contributing
to a record high number of monthly referrals for our company.
We
believe that the impact of the COVID-19 pandemic on our home care and institutional business will continue during at least the
beginning of fiscal 2023. Our home care revenue for fiscal 2022 has increased as compared to fiscal 2021; however, if COVID-19
infection rates increase and federal, state and local restrictions on commerce, stay-at-home orders or other restrictions on businesses
are reinstated, we believe that such measures could have a material adverse effect on our business.
We
observed increased changes to our supply chain timelines and increased material and shipping costs during the second half of fiscal
2022, but we did not experience any disruptions that materially impacted product availability for our customers. We anticipate
that increased material and shipping costs will continue during fiscal 2023 relating to supply chain availability and inflationary
trends in electronic components but may extend to other components as well. In certain instances, we have purchased key electronic
materials in advance to ensure adequate future supply and mitigate the risk of supply chain disruption. It is possible that the
COVID-19 pandemic could have a greater adverse impact on our supply chain in the future, including impacts associated with preventative
and precautionary measures taken by other businesses and applicable governments. A reduction or interruption in any of our manufacturing
processes could have a material adverse effect on our business. Any significant increases to our raw material or shipping costs
could reduce our gross margins.
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 governmental orders, primarily due to our role in manufacturing and supplying needed
medical devices to patients with respiratory-related issues and have therefore continued to operate during the government restrictions
put in place in response to the pandemic.
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 became effective on March 1, 2020. Clinical indications and documentation typically required will not
be enforced for respiratory-related products including the SmartVest System (solely with respect to Medicare patients). The minimum
documentation now requires a valid order and documentation of a respiratory-related diagnosis. Face-to-face and in-person requirements
for respiratory devices are being waived while the waiver is in place. The CMS waiver was recently extended in conjunction with
the extension of the federal public health emergency for an additional 90-day period beginning July 15, 2022.
We
did not receive any direct financial assistance from any government program during fiscal 2021 or fiscal 2022 in connection with
COVID-19 relief measures.
Revenue
Recognition
Revenue
is measured based on consideration specified in the contract with a customer, adjusted for any applicable estimates of variable
consideration and other factors affecting the transaction price, including consideration paid or payable 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.
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 the requirements under other applicable accounting guidance are met.
16
The
Company includes shipping and handling fees in net revenues. Shipping and handling costs associated with the shipment of the Company’s
SmartVest System after control has transferred to a customer are accounted for as a fulfillment cost and are included in cost
of revenues.
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 System units. Returned units are typically reconditioned and resold
and continue to be used for demonstration equipment and warranty replacement parts.
Inventory
Valuation
Inventories
are stated at the lower of cost (first-in, first-out method) or net realizable value. Work in process and finished goods are carried
at standard cost, which approximates actual cost, and includes materials, labor and allocated overhead. The reserve for obsolescence
is determined by analyzing the inventory on hand and comparing it to expected future sales. Estimated inventory to be returned
is based on how many devices that have shipped that are expected to be returned prior to completion of the insurance reimbursement
process.
Warranty
Reserve
The
Company provides a lifetime warranty on its products to the prescribed patient for sales within the U.S. and a three-year warranty
for all institutional sales and sales to individuals outside the U.S. The Company estimates the costs that may be incurred under
its warranty and records a liability in the amount of such costs at the time the product is shipped. Factors that affect the Company’s
warranty reserve include the number of units shipped, historical and anticipated rates of warranty claims, the product’s
useful life and cost per claim. The Company periodically assesses the adequacy of its recorded warranty reserve and adjusts the
amounts as necessary.
Share-Based
Compensation
Share-based
payment awards consist of options to purchase shares of our common stock issued to employees. Expense for share-based payment
awards consist of options to purchase shares of our common stock issued to employees for services. Expense for options is estimated
using the Black-Scholes pricing model at the date of grant and expense for restricted stock is determined by the closing price
on the day the grant is made. Expense is recognized on a straight-line basis over the requisite service or vesting period of the
award, or at the time services are provided for non-employee awards. In determining the fair value of options, we make various
assumptions using the Black-Scholes pricing model, including expected risk-free interest rate, stock price volatility, and life.
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.
17
Results
of Operations
Fiscal
Year Ended June 30, 2022 Compared to Fiscal Year Ended June 30, 2021
Revenues
Revenue
for the fiscal years ended June 30, 2022 and 2021 are summarized in the table below (dollar amounts in thousands).
Fiscal Years Ended June 30,
Home
Care Revenue. Home care revenue increased by $5,018,000, or 15.2%, in fiscal 2022 compared to fiscal 2021. The revenue increase
compared to fiscal 2021 was primarily due to increases in referrals and approvals. The increase in referrals was primarily due
to an increase in direct sales representatives, increased sales representative productivity driven by increased clinic access
and patient flow, our sales team refining their selling process and clinic targeting methodology, and benefits of the CMS waiver
on the non-commercial Medicare portion of our home care revenue. Additionally, we also benefitted from a Medicare allowable rate
increase that took effect on January 1, 2022. Annual Medicare rate increases for our device are linked closely to changes in the
Urban Consumer Price Index.
The
CMS waiver benefited the non-commercial Medicare portion of our home care revenue by increasing the number of referrals and the
approval percentage for previously non-covered diagnoses. We believe that our ongoing sales team execution, along with the expected
return to pre-COVID-19 levels of patient face-to-face engagement with physicians and clinic access for our sales team, has the
potential to mitigate the impact of a CMS waiver expiration, which is currently effective until October 2022.
Institutional
Revenue. Institutional revenue increased by $111,000, or 7.2%, in fiscal 2022 compared to fiscal 2021. Institutional revenue
includes sales to group purchasing organizations, rental companies and other institutions. The revenue increase was due to increased
capital purchases and stronger consumable volumes compared to fiscal 2021, as hospitals resumed utilization of HFCWO protocols
after reducing utilization early in the COVID-19 pandemic.
Home
Care Distributor Revenue. Home care distributor revenue increased by $911,000, or 161.8%, in fiscal 2022 compared to fiscal
2021. The revenue increase in fiscal 2022 was due to increased demand from one of our primary home care distribution partners.
We began selling to a limited number of home medical equipment distributors during our fiscal year ended June 30, 2020, who in
turn sell our SmartVest System in the U.S. home care market.
International
Revenue. International revenue decreased by $137,000, or 20.8%, in fiscal 2022 compared to fiscal 2021. International revenue
growth is not currently a primary focus for us, and our corporate resources are focused on supporting and maintaining our current
distributors. International sales are affected by the timing of international distributor purchases that can cause significant
fluctuations in reported revenue on a quarterly basis.
Gross
Profit
Gross
profit increased to $31,442,000 in fiscal 2022, or 75.5% of net revenues, from $27,305,000, or 76.4% of net revenues,
in fiscal 2021. The increase in gross profit was primarily related to increases in domestic home care revenue
including the Medicare allowable rate increase that took effect in January 2022. The decrease in gross profit
as a percentage of net revenue was driven by higher raw material and shipping costs as well as patient
training related expenses due to increase in face-to-face trainings.
18
We
believe as we continue to grow revenue, we will be able to leverage manufacturing costs, although there may be fluctuations on
a short-term basis related to increased material and shipping costs as well as 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), whether an individual patient meets prerequisite medical criteria
for reimbursement, and continuation of the Medicare waiver currently in place may have an effect on average reimbursement received
on a short-term basis. We have a goal of improving our gross margin percentage over time due to lower product costs associated
with our next generation product, supplier optimization, and gaining operating leverage on higher volumes.
Operating
Expenses
Selling,
General and Administrative Expenses. Selling, general and administrative (“SG&A”) expenses were $27,114,000 in fiscal 2022, representing an increase of $4,671,000 or 20.8% from $22,443,000 in fiscal 2021.
SG&A
payroll and compensation-related expenses increased by $2,206,000, or 15.3%, to $16,640,000 in fiscal 2022, compared to $14,434,000
in fiscal 2021. The increase in the current year was primarily due to a higher average number of sales, sales support and marketing
personnel, increased reimbursement personnel to process higher patient referrals, increased temporary resources to assist with
systems infrastructure investments and increased incentive payments on higher home care revenue. We have also continued to provide
regular merit-based increases for our employees and are regularly benchmarking our compensation ranges for new and existing employees
to ensure we can hire and retain the talent needed to drive growth in our business. Field sales employees totaled 52, of which
43 were direct sales, as of June 30, 2022, compared to 46 as of June 30, 2021, of which 37 were direct sales.
Professional
and legal fees increased by $875,000, or 36.0%, to $3,308,000 in fiscal 2022, compared to $2,433,000 in fiscal 2021. Professional
fees include services related to legal costs, shareowner services and reporting requirements, information technology technical
support and consulting fees. The increase in the current year was primarily due to a shareholder activism matter, increased investment
in our system infrastructure and increased clinical study costs. Our shareholder activism matter concluded with a cooperation
agreement in September 2021. We continue to make key investments in systems infrastructure including implementing a new enterprise
resource planning (“ERP”) system, enhancing our customer relationship management system and further optimizing of
the revenue cycle management system that was implemented in June 2021. We expect these system infrastructure investments will
result in more efficient and scalable operational processes and provide enhanced analytics to drive business performance. We also
expect to continue investing in our on-going clinical studies in order to continue building the body of evidence around positive
outcomes from bronchiectasis patients using HFCWO and SmartVest therapy.
Total
discretionary marketing expenses decreased by $238,000, or 22.4% to $824,000 in fiscal 2022, compared to $1,062,000 in fiscal
2021. The decrease in the current year was primarily due to a shift to more cost-effective direct-to-consumer marketing investments.
Travel,
meals and entertainment expenses increased $734,000, or 41.2%, to $2,514,000 for fiscal 2022 compared to $1,780,000 in fiscal
2021. The increase in the current year period was primarily due to our sales team resuming closer-to-normal levels of travel compared
to the COVID-19 driven travel restrictions in the prior year and an increase in regional sales meetings that were cancelled in
the prior year due to COVID-19. The Company also held an in-person national sales meeting in August 2021 whereas the national
sales meeting was held virtually in fiscal 2021 due to COVID-19.
Recruiting
fees increased by $362,000 or 134.6% to $631,000 for fiscal 2022 compared to $269,000 in fiscal 2021. The increase in recruiting
fees is primarily due to increased recruiting for senior leadership and direct sales representative positions.
Insurance
expenses increased by $229,000 or 20.6% to $1,339,000 for fiscal 2022 compared to $1,110,000 in fiscal 2021. The increase in the
current year is primarily due to higher health insurance, director and officer insurance costs and cyber insurance costs.
19
Research
and Development Expenses
R&D
expenses decreased by $366,000, or 21.3%, to $1,356,000 in fiscal 2022 compared to $1,722,000 in fiscal 2021. The decrease in
the current year was primarily due to reduced professional consulting costs associated with our next generation platform development
activities. R&D expenses were 3.3% of revenue in fiscal 2022 compared to 4.8% of revenue in fiscal 2021. We expect R&D
spending to be between 2.0% and 3.0% of revenue during fiscal 2023, as we look to finalize our development and product testing
work in preparation for an anticipated fiscal year 2023 next generation product launch.
Interest
Income, net
Net
interest income was approximately $25,000 in fiscal 2022 compared to net interest income of $39,000 in fiscal 2021. The decrease
in the current year was primarily due to lower rates earned on our cash deposits and lower cash deposits in the bank compared
to prior fiscal periods.
Income
Tax Expense
Income
tax expense in fiscal 2022 was 692,000, which includes a current tax expense of $1,181,000 and a deferred benefit of $489,000.
Estimated income tax expenses include a discrete current tax benefit of approximately $37,000 related to exercised fully vested
stock options and a discrete current benefit of approximately $21,000 related to the excess tax benefit of non-qualified stock
options that were exercised during the period.
Income
tax expense in fiscal 2021 was $805,000, which included a current tax expense of $1,099,000 and a deferred benefit of $294,000.
Estimated income tax expense included a discrete deferred tax expense of approximately $81,000 related to unexercised fully vested
stock options that expired and a discrete current tax benefit of approximately $33,000 related to the excess tax benefit of non-qualified
stock options that were exercised during the period.
The
effective tax rates were 23.1% and 25.4% for fiscal 2022 and 2021, respectively. The effective tax rates differ from the statutory
federal rate due to the effect of state income taxes, R&D tax credits, and other permanent items that are non-deductible for
tax purposes relative to the amount of taxable income.
Net
Income
Net income
for fiscal 2022 was $2,305,000, compared to net income of $2,362,000 in fiscal 2021. The decrease in current year net income
was primarily due to increased strategic investments in SG&A, shareholder activism costs and higher product costs
partially offset by stronger home care and distributor revenue growth.
Liquidity
and Capital Resources
Cash
Flows and Sources of Liquidity
Cash
Flows from Operating Activities
Net
cash used in operating activities in fiscal 2022 was $686,000. Cash flows from operating activities consisted of net income of $2,305,000,
non-cash expenses of approximately $1,115,000, a $2,170,000 increase in accounts payable and accrued liabilities and a decrease in
contract assets of $107,000. These cash flows from operating activities were offset by a $4,020,000 increase in accounts receivable,
an increase in inventory of $1,072,000, and a $1,322,000 increase in prepaid expenses. The increase in accounts receivable was
primarily due to an increase in the Medicare portion of our home care business, which has a 13-month payment cycle. Three
distinct items have negatively impacted our operating cash flow in fiscal 2022, including tax payments on higher-than-expected
fiscal 2021 net income, increased payments to secure adequate supply of key raw material components, and a one-time payout of
accrued vacation balances as part of an enhancement to our paid time off policy. Our cash receipt collection remains strong,
with the three months ended June 30, 2022 period having the highest cash receipt collections in our company's history,
building upon the prior record that was set in the previous quarter.
20
Cash
Flows from Investing Activities
Net
cash used in investing activities in fiscal 2022 was approximately $1,525,000. Cash used in investing activities consisted of
approximately $1,425,000 in expenditures for property and equipment, approximately $943,000 for software and $482,000 for
equipment, and $100,000 in payments for patent and trademark costs.
Cash
Flows from Financing Activities
Net
cash used in financing activities in fiscal 2022 was approximately $1,525,000, consisting of $1,448,000 used for our share repurchase
program and $77,000 for taxes paid on net share settlements of stock option exercises.
Adequacy
of Capital Resources
Our
primary working capital requirements relate to adding employees to our sales force and support functions, continuing infrastructure
investments, and supporting general corporate needs, including financing equipment purchases and other capital expenditures incurred
in the ordinary course of business. Based on our current operational performance, we believe our working capital of approximately
$27,389,000 and available borrowings under our existing credit facility will provide adequate liquidity for fiscal 2023.
Effective
December 17, 2021, 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 (4.75% as of June 30, 2022) less 1.0% and is payable monthly. There was no outstanding
principal balance on the line of credit as of June 30, 2022 or June 30, 2021. 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, 2023, if not renewed. As of June 30, 2022, 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 2022 and 2021, we spent approximately $1,425,000 and $287,000, respectively, on property and equipment. We currently expect
to finance planned equipment purchases with cash flows from operations or borrowings under our credit facility. We may need to
incur additional debt if we have an unforeseen need for additional capital equipment or if our operating performance does not
generate adequate cash flows.
While
the impact of the COVID-19 pandemic and other factors such as inflation are difficult to predict, we believe our cash, cash equivalents
and cash flows from operations will be sufficient to meet our working capital, capital expenditure, operational cash requirements for
fiscal 2023.
Accounting
Standards Recently Issued But Not Yet Adopted by the Company
See
Note 1 of the Notes to our Financial Statements in this Annual Report on Form 10-K for information on new accounting standards
adopted in fiscal 2022 or pending adoption.
21
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.
22
Item 8. Financial Statements and Supplementary Data.
Index
to Financial Statements
Report of Independent Registered Public Accounting Firm F-2
Balance Sheets F-4
Statements of Operations F-5
Statements of Shareholders’ Equity F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-8
F-1
Report
of Independent Registered Public Accounting Firm
Shareholders
and Board of Directors
Electromed,
Inc.
Opinion
on the Financial Statements
We
have audited the accompanying balance sheets of Electromed, Inc. (the Company) as of June 30, 2022 and 2021, the related
statements of operations, shareholders’ equity and cash flows for the years then ended, and the related notes to 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, 2022 and 2021, 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.
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.
Critical
Audit Matter
The
critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was
communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material
to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of
the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not,
by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts
or disclosures to which it relates.
Measurement
of Customer Revenue Net of Adjustments
As discussed in Note 2 to the financial statements, revenues are recognized at a point in time when control passes to the customer upon product shipment or delivery. Net patient revenues (patient revenue less estimated adjustments) are recognized at the estimated net realizable amounts from third-party payers and customers in exchange for the product. The Company has agreements with third-party payers that provide for payments at amounts different from its established rates. Each quarter, the Company estimates its adjustments for each sale based on the terms of third-party payer contracts and historical collections experience, then applies an estimate for an adjustment reserve percentage to the gross accounts receivable balances.
We identified the measurement of the adjustment reserve related to customer revenue as a critical audit matter due to the audit effort, degree of auditor judgment, and subjectivity involved in evaluating the audit evidence related to management's estimate.
F-2
Our audit procedures related to the Company's measurement of the adjustment reserve included the following, among others.
/s/
RSM US LLP
We
have served as the Company’s auditor since 2010.
Rochester,
Minnesota
August 23,
2022
F-3
Electromed,
Inc.
Balance
Sheets
June 30, 2022 and 2021
Assets
Current Assets
Liabilities and Shareholders’ Equity
Current Liabilities
Commitments and Contingencies
Shareholders’ Equity
See
Notes to Financial Statements.
F-4
Electromed,
Inc.
Statements
of Operations
Years Ended June 30, 2022 and 2021
Years Ended June 30,
Operating expenses
Income per share:
Weighted-average common shares outstanding:
See
Notes to Financial Statements.
F-5
Electromed,
Inc.
Statements of Shareholders’ Equity
Years Ended June 30, 2022 and 2021
Common Stock Additional Retained Total Shareholders’
Shares Amount Paid-in Capital Earnings Equity
Issuance of restricted stock 37,090 — — — —
Taxes paid on stock option exercised on a net basis — — (141,000 ) — (141,000 )
Issuance of common stock upon exercise of options 13,245 — — — —
Taxes paid on stock option exercised on a net basis — — (77,000 ) — (77,000 )
See
Notes to Financial Statements.
F-6
Electromed, Inc.
Statements of Cash Flows
Years Ended June 30, 2022 and 2021
Years Ended June 30,
Cash Flows from Operating Activities
Amortization of finite-life intangible assets 125,000 133,000
Changes in operating assets and liabilities:
Net cash (used in) provided by operating activities (686,000 ) 3,077,000
Cash Flows from Investing Activities
Expenditures for finite-life intangible assets (100,000 ) (161,000 )
Cash Flows from Financing Activities
Issuance of common stock upon exercise of options — 46,000
Taxes paid on stock options exercised on a net basis (77,000 ) (141,000 )
Cash and cash equivalents
Supplemental Disclosures of Cash Flow Information
Supplemental Disclosures of Noncash Investing and Financing Activities
Property and equipment acquisitions in accounts payable $ 44,000 $ 10,000
Intangible asset acquisitions in accounts payable $ 3,000 $ 42,000
See
Notes to Financial Statements.
F-7
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
$521,000 and $658,000 for the fiscal years ended June 30, 2022 (“fiscal 2022”) and June 30, 2021 (“fiscal 2021”),
respectively. Since its inception, the Company has operated in a single industry segment: developing, manufacturing and marketing
medical equipment.
Impacts
of COVID-19 on the Company’s business
The
Company did not receive any direct financial assistance from any government program during fiscal 2021 or fiscal 2022 in connection
with COVID-19 relief measures.
In
response to the COVID-19 pandemic and the U.S. federal government’s declaration of a public health emergency, the Centers
for Medicare and Medicaid Services (“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 were made retroactively effective to March
1, 2020 and were in place for the duration of fiscal 2021 and fiscal 2022. Clinical indications and documentation typically required
were not enforced for respiratory related products including the Company’s SmartVest® Airway Clearance System (“SmartVest
System”) (solely with respect to direct Medicare covered patients) applicable for the Company’s home care prescriptions.
The minimum documentation now requires a valid order and documentation of a respiratory related diagnosis. Face-to-face and in-person
requirements for respiratory devices are being waived while the waiver is in place. The CMS waiver was recently extended in conjunction
with the extension of the federal public health emergency for an additional 90-day period beginning July 15, 2022. A temporary
suspension of a 2% tax on Medicare payments was also initiated in May 2020 and was extended through December 2021.
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 deployment 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.
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, inventory valuation, share-based compensation and warranty reserve.
Revenue
recognition: Revenue is measured based on consideration specified in the contract with a customer, adjusted for any applicable
estimates of variable consideration and other factors affecting the transaction price, including 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. See Note 2 for information on revenue.
F-8
Shipping
and handling expense: Shipping and handling charges incurred by the Company are included in cost of revenues and were $982,000
and $530,000 for fiscal 2022 and 2021, respectively.
Cash
and cash equivalents: Cash and cash equivalents consist of cash in bank deposits and money market funds with original maturities
of three months or less at the time of purchase. The Company has not experienced any losses in these accounts.
Accounts
receivable: The Company’s accounts receivable balance is comprised of amounts due from individuals, institutions and