What changed in this filing

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Item 1. Financial Statements

2021-02-09 compared with 2020-11-10 · 430 added, 381 removed, 442 unchanged (65% of the section changed)

Balance Sheets

September 30, 2020

Financial Statements.

Electromed, Inc.

Condensed Balance Sheets

December 31, 2020

June 30, 2020

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Total liabilities and shareholders’

Notes to Condensed Financial Statements (Unaudited).

Statements of Operations (Unaudited)

Three Months Ended September 30,

See Notes to Condensed Financial Statements (Unaudited).

Electromed, Inc.

Condensed Statements of Operations (Unaudited)

Three Months Ended

Six Months Ended

Cost of revenues

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Weighted-average common shares outstanding:

Notes to Condensed Financial Statements (Unaudited).

Statements of Cash Flows (Unaudited)

Three Months Ended September 30,

See Notes to Condensed Financial Statements (Unaudited).

Electromed, Inc.

Condensed Statements of Cash Flows

Six Months Ended December 31,

Cash Flows From Operating Activities

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Share-based compensation expense

Deferred income taxes Changes in operating assets

and liabilities:

Loss on disposal of property and equipment Changes

in operating assets and liabilities:

Deferred income taxes

Loss on disposal of property and equipment

Changes in operating assets and liabilities:

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Issuance of common stock upon exercise of options

Taxes paid on stock options exercised, net

Taxes paid on net share settlement of stock option exercises

Net cash provided by (used in) financing activities

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End of period

Notes to Condensed Financial Statements (Unaudited).

See Notes to Condensed Financial Statements (Unaudited).

Electromed, Inc.

Statements of Shareholders’

Condensed Statements of Shareholders’

Equity (Unaudited)

Additional Paid-

Paid-in Capital

Shareholders’

Balance at June 30, 2019

Issuance of restricted stock

Issuance of common stock upon exercise of options

Share-based compensation expense

Balance at September 30, 2019

Additional Paid-

at June 30, 2019

of restricted stock

of common stock upon exercise

compensation expense

at September 30, 2019

of restricted stock

of common stock upon exercise

compensation expense

at December 31, 2019

Paid-in Capital

Shareholders’

Balance at June 30, 2020

Issuance (forfeiture) of restricted stock

Issuance of common stock upon exercise of options

Taxes paid on stock option exercised on a net basis

Share-based compensation expense

Issuance of restricted

stock, net of forfeitures

Issuance of common

stock upon exercise of options

Taxes paid on net share

settlement of stock option exercises

Share-based compensation

Balance at September 30, 2020

Notes to Condensed Financial Statements (Unaudited).

Issuance of restricted

Issuance of common

stock upon exercise of options

Taxes paid on net share

settlement of stock option exercises

Share-based compensation

Balance at December 31, 2020

See Notes to Condensed Financial

Statements (Unaudited).

Electromed, Inc.

Notes to Condensed Financial Statements

Interim Financial Reporting

of presentation:

Basis of presentation:

Electromed, Inc.

(the “Company”) develops, manufactures and markets innovative airway clearance

products that apply High Frequency Chest Wall Oscillation (“HFCWO”) therapy in pulmonary care for patients of all

(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 $84,000 and $66,000 for the three months ended September 30, 2020 and 2019, respectively.

Since its inception,

the Company has operated in a single industry segment:

developing, manufacturing and marketing medical equipment.

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

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 $221,000 and $319,000 for the six months ended December 31, 2020

and 2019, respectively.

Since its inception, the Company has operated in a single industry segment:

developing, manufacturing and

marketing medical equipment.

The accompanying unaudited Condensed Financial Statements of

the Company have been prepared in accordance with U.S.

generally accepted accounting principles (“U.S.

GAAP”) for interim

financial statements and pursuant to the rules and regulations of the U.S.

Securities and Exchange Commission.

In the opinion of management, the accompanying unaudited Condensed Financial Statements

reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation of the Company’s financial

position and results of operations as required by Regulation S-X.

Interim results of operations are not necessarily indicative

of the results that may be achieved for the full year.

The financial statements and related notes do not include all information

and footnotes required by U.S.

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

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, 2020 (“fiscal 2020”).

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

impact of the COVID-19 pandemic on the Company’s business remains uncertain and its effects on its operational and financial

performance will depend in large part on future developments, which cannot be reasonably estimated at this time.

Such future developments

include, but are not limited to, the duration, scope and severity of the COVID-19 pandemic in geographic areas 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 rapidly evolving situation, the Company is unable to predict with confidence the likely impact

of the COVID-19 pandemic on its future operations.

For a more detailed discussion see “Management’s Discussion and

Analysis of Financial Condition and Results of Operations”

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, 2020 (“fiscal 2020”).

Potential impacts of COVID-19 on the Company’s business:

The impact of the COVID-19 pandemic on the Company’s business

remains uncertain and its effects on its operational and financial performance will depend in large part on future developments,

which cannot be reasonably estimated at this time.

Such future developments include, but are not limited to, the duration, scope

and severity of the COVID-19 pandemic in geographic areas the Company operates or in which its patients live, actions taken to

contain or mitigate its impact, the impact on governmental healthcare programs and budgets, the development and distribution of

treatments or vaccines, and the resumption of widespread economic activity.

Due to the inherent uncertainty of the unprecedented

and rapidly evolving situation, the Company is unable to predict with confidence the likely impact of the COVID-19 pandemic on

its future operations.

For a more detailed discussion see “Management’s Discussion and Analysis of Financial Condition

and Results of Operations”

in Part I, Item 2 of this Quarterly Report on Form 10-Q.

summary of the Company’s significant accounting policies follows:

of estimates.

Management uses estimates and assumptions in preparing the Condensed Financial Statements in accordance with

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.

A summary of the Company’s significant accounting policies

Use of estimates.

Management uses estimates and assumptions

in preparing the unaudited Condensed Financial Statements in accordance with U.S.

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.

Company believes the critical accounting policies that require the most significant assumptions and judgments in the preparation

of its Condensed Financial Statements include revenue recognition and the related estimation of variable consideration, allowance

for doubtful accounts, inventory obsolescence, share-based compensation and its warranty liability.

income per common share.

Net income is presented on a per share basis for both basic and diluted common shares.

income per common share is computed using the weighted average number of common shares outstanding during the period, excluding

any restricted stock awards which have not vested.

The diluted net income per common share calculation includes outstanding restricted

stock grants and assumes that all stock options were exercised and converted into common stock at the beginning of the period,

unless their effect would be anti-dilutive.

Common stock equivalents excluded from the calculation of diluted earnings per share

because their impact was anti-dilutive was 48,500 and 446,350 for the three months ended September 30, 2020 and 2019, respectively.

The Company believes the critical accounting policies

that require the most significant assumptions and judgments in the preparation of its unaudited Condensed Financial Statements

include revenue recognition and the related estimation of variable consideration, allowance for doubtful accounts, inventory obsolescence,

share-based compensation and its warranty liability.

Net income per common share.

Net income is presented

on a per share basis for both basic and diluted common shares.

Basic net income per common share is computed using the weighted

average number of common shares outstanding during the period, excluding any restricted stock awards which have not vested.

diluted net income per common share calculation includes outstanding restricted stock grants and assumes that all stock options

were exercised and converted into common stock at the beginning of the period, unless their effect would be anti-dilutive.

stock equivalents excluded from the calculation of diluted earnings per share because their impact was anti-dilutive was 46,800

and 136,000 for the three months ended December 31, 2020 and 2019, respectively, and were 46,800 and 316,000 for the six months

ended December 31, 2020 and 2019, respectively.

is measured based on consideration specified in the contract with a customer, adjusted for any applicable estimates of variable

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Airway Clearance System (“SmartVest System”) after control has transferred to a customer are accounted

for as a fulfillment cost and are included in cost of revenues.

for as a fulfillment cost and are included in cost of revenues in the Condensed Statements of Operations.

timing of revenue recognition, billings and cash collections results in accounts receivable on the Condensed Balance Sheets as

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Disaggregation

Revenue disaggregated by market is approximately the following:

the three months ended September 30,

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

Three Months Ended December 31,

Six Months Ended December 31,

Institutional

Home Care Distributor

Care Distributor

International

care revenue disaggregated by payer type is approximately the following:

the three months ended September 30,

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

Three Months Ended December 31,

Six Months Ended December 31,

in the Company’s home care, home care distributor, and international markets are recognized at a point in time when control

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historical collection patterns, to estimate variable consideration for portfolios of contracts.

The Company’s estimates of

variable consideration consist of amounts it may receive from insurance providers in excess of its initial revenue estimate due

to patients meeting deductibles or coinsurance during the payment duration, changes to a patient’s insurance status, changes

in an insurance allowable, claims in appeals with Medicare and amounts received directly from patients for their allowable or

The Company’s estimates

of variable consideration consist of amounts it may receive from insurance providers in excess of its initial revenue estimate

due to patients meeting deductibles or coinsurance during the payment duration, changes to a patient’s insurance status,

changes in an insurance allowable, claims in appeals with Medicare and amounts received directly from patients for their allowable

or coinsurance.

The Company believes it has representative historical information to estimate the amount of variable consideration

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treated as operating leases and revenue is recognized ratably over the applicable rental

Lease revenue recognized during the three months ended September 30, 2020 and

2019 were approximately zero and $3,000, respectively.

Lease revenue recognized during the six months ended December 31, 2020 and 2019

was zero and approximately $4,000, respectively.

International

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shipment or delivery.

Consequently, the Company applies the practical expedient provided by ASC 340 and expense sales incentives

These costs are included in selling, general and administrative expenses in the Company’s statements of operations.

Consequently, the Company applies the practical expedient provided by ASC 340 and expenses sales incentives

These costs are included in selling, general and administrative expenses in the Condensed Statements of Operations.

The following table provides information about accounts receivable and contracts assets from contracts with customers:

included in “Accounts receivable, net of allowance for doubtful accounts”

Contract assets

included in "Accounts receivable, net of allowance for doubtful accounts"

changes in contract assets during the period are as follows:

September 30, 2020

June 30, 2020

Months Ended December 31, 2020

Year Ended June 30, 2020

Increase (decrease)

assets, beginning

Reclassification of

contract assets to accounts receivable

Contract assets recognized

Reclassification

of contract assets to accounts receivable

assets recognized

as a result of changes in the estimate of amounts to be realized from payers, excluding amounts transferred to receivables

during the period

Contract assets,

components of inventory were approximately as follows:

Parts inventory

Work in process

Finished goods

Estimated inventory

to be returned

assets, ending

components of inventory were as follows:

inventory to be returned

Reserve for obsolescence

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Accumulated amortization was approximately $1,183,000 and $1,119,000 at

September 30, 2020 and June 30, 2020, respectively.

activity and balances of finite-life intangible assets were approximately as follows:

Balance, ending

December 31, 2020 and June 30, 2020, respectively.

activity and balances of finite-life intangible assets were as follows:

Months Ended December 31, 2020

Year Ended June 30, 2020

Warranty Liability

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in the Company’s warranty liability were approximately as follows:

Months Ended December 31, 2020

Year Ended June 30, 2020

warranty reserve

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and costs incurred for warranty claims

Ending warranty

warranty reserve

a quarterly basis, the Company estimates its effective tax rate for the full fiscal year and records a quarterly income tax provision

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each applicable tax jurisdiction.

Income tax expense was estimated at approximately $137,000 and the effective tax rate was 20.4%

for the three months ended September 30, 2020.

Estimated income tax expense for the three months ended September 30, 2020 includes

a discrete current tax benefit of approximately $39,000 related to the excess tax benefit of non-qualified stock options exercised.

Income tax expense was estimated at approximately $374,000, and the effective tax rate was 26.9% for the three months ended September

Income tax expense was estimated at approximately $389,000 and $526,000 and the effective tax

rate was 24.4% and 23.2% for the three and six months ended December 31, 2020, respectively.

Estimated income tax expense for

the three and six months ended December 31, 2020 includes a discrete current tax (expense) benefit of approximately $(7,000) and

$32,000, respectively, related to the excess tax (expense) benefit of non-qualified stock options exercised.

Income tax expense

was estimated at approximately $419,000 and $793,000 and the effective tax rate was 26.1% and 26.5% for the three and six months

ended December 31, 2019, respectively.

Financing Arrangements

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There was no outstanding principal balance on the line of credit

as of September 30, 2020 or June 30, 2020.

as of December 31, 2020 or June 30, 2020.

Interest on borrowings under the line of credit, if any, accrues at the prime rate (3.25%

(3.25% at September 30, 2020) less 1.00% and is payable monthly.

The amount eligible for borrowing on the line of credit is limited

to the lesser of $2,500,000 or 57.00% of eligible accounts receivable and the line of credit expires on December 18, 2020, if

At September 30, 2020, the maximum $2,500,000 was eligible for borrowing.

at December 31, 2020) less 1.00% and is payable monthly.

The amount eligible for borrowing on the line of credit is limited to

the lesser of $2,500,000 or 57.00% of eligible accounts receivable and the line of credit expires on December 18, 2021, if not

At December 31, 2020, the maximum $2,500,000 was eligible for borrowing.

Payment obligations under the line of credit,

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Share-Based Compensation

Company’s share-based compensation plans are described in Note 8 of our annual report on Form 10-K for the year ended June

Share-based compensation expense was approximately $191,000 and $210,000 for the three months ended September 30, 2020

and 2019, respectively.

This expense is included in selling, general and administrative expense.

As of September 30, 2020, approximately

$1,267,000 of total unrecognized compensation expense related to non-vested equity awards was expected to be recognized over a

weighted-average period of approximately 0.9 years.

option transactions during the three months ended September 30, 2020 are summarized as follows:

Average Exercise Price per Share

Company’s share-based compensation plans are described in Note 8 of our annual report on Form 10-K for fiscal 2020.

compensation expense was approximately $430,000 and $444,000 for the six months ended December 31, 2020 and 2019, respectively.

This expense is included in selling, general and administrative expense in the Condensed Statements of Operations.

As of December

31, 2020, approximately $1,192,000 of total unrecognized compensation expense related to non-vested equity awards was expected

to be recognized over a weighted-average period of approximately 0.8 years.

option transactions during the six months ended December 31, 2020 are summarized as follows:

Number of Shares

Weighted Average Exercise Price per Share

Outstanding at June 30, 2020

Outstanding at

September 30, 2020

Cancelled or Forfeited

Outstanding at December 31, 2020

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

Months Ended September 30, 2020

Months Ended September 30, 2019

interest rate

Six Months Ended December 31, 2020

Year Ended June 30, 2020

Risk-free interest rate

0.31% - 0.39 %

Expected term (years)

Expected volatility

283.05% - 334.15 %

intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price.

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intrinsic value was approximately $2,489,000.

Outstanding at September 30, 2020 were 541,598 stock options issued to employees,

Outstanding at December 31, 2020 were 472,898 stock options issued to employees,

of which 341,104 were exercisable and had an aggregate intrinsic value of approximately $2,112,000.

the three months ended September 30, 2020, the Company issued restricted stock awards to employees totaling 30,756 shares of common

stock, with a vesting term of two to three years and a weighted average fair value of $14.68 per share.

There were 53,255 shares

of unvested restricted stock with a weighted average fair value per share of $11.06 as of September 30, 2020.

the six months ended December 31, 2020, the Company issued restricted stock awards to employees totaling 30,756 shares of common

stock, with a vesting term of two to three years and a weighted average fair value of $14.68 per share and to directors totaling

18,000 shares of common stock, with a vesting term of six months and a weighted average fair value of $9.94 per share.

71,255 shares of unvested restricted stock with a weighted average fair value of $10.80 per share as of December 31, 2020.

Commitments and Contingencies

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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, related notes thereto included in Part I, Item 8 and Part II, Item 7 of our Annual

10-Q, and our audited financial statements and related notes thereto included in Part I, Item 8 and Part II, Item 7 of our Annual

Report on Form 10-K for the fiscal year ended June 30, 2020 (“fiscal 2020”).

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The SmartVest SQL has been sold in the

domestic home care market since our fiscal quarter ended March 31, 2014.

In the fourth quarter of our fiscal year ended June 30,

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 Connect™

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.

we have marketed the SmartVest System and its predecessor products to patients suffering from cystic fibrosis, bronchiectasis

and repeated episodes of pneumonia.

Additionally, we offer our products to a patient population that includes neuromuscular disorders

such as cerebral palsy, muscular dystrophies, amyotrophic lateral sclerosis (“ALS”), the combination of emphysema

and chronic bronchitis commonly known as chronic obstructive pulmonary disease (“COPD”), and patients with post-surgical

complications or who are ventilator dependent or have other conditions involving excess secretion and impaired mucus transport.

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 Connect™

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, amyotrophic lateral sclerosis (“ALS”),

the combination of emphysema and chronic bronchitis commonly known as chronic obstructive pulmonary disease (“COPD”),

and patients with post-surgical complications or who are ventilator dependent or have other conditions involving excess secretion

and impaired mucus transport.

SmartVest System is often eligible for reimbursement from major private insurance providers, health maintenance organizations

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We believe that these and other responses by healthcare systems

have had a negative impact on our operating results and cash flows during the first quarter of our fiscal year ending June 30,

2021 (“fiscal 2021”), although to a lesser extent as compared to the fourth quarter of fiscal 2020.

first quarter of fiscal 2021, as state and local government restrictions began to ease in jurisdictions in which we operate, we

observed increased patient face-to-face re-engagement with clinicians and an increased number of clinics allowing face-to-face

access by our sales team.

Our sales team continues 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.

have had a negative impact on our operating results and cash flows during the second quarter of our fiscal year ending June 30,

2021 (“fiscal 2021”), although to a lesser extent as compared to the prior two fiscal quarters.

During the first

half of fiscal 2021, as state and local government restrictions began to ease in jurisdictions in which we operate, we observed

increased patient face-to-face re-engagement with clinicians and an increased number of clinics allowing face-to-face access by

our sales team.

Our sales team continues 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.

estimate that institutional revenue has been negatively impacted since the onset of the COVID-19 pandemic as hospitals and long-term

care facilities have adjusted their operating protocols and procurement management.

believe that the impact of the COVID-19 pandemic on our home care and institutional business will likely continue to decrease

during the remainder of fiscal 2021 and subsequent periods;

however, if COVID-19 rates increase and federal, state and local restrictions

believe that the impact of the COVID-19 pandemic on our home care and institutional business will likely continue during the remainder

of fiscal 2021.

We have experienced improvement in our home care referrals for the three months ended December 31, 2020 as compared

to the three months ended September 30, 2020;

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, then such measures could have a material

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have also taken measures to ensure the safety of our employees and to comply with applicable governmental orders.

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 and have therefore continued to operate during the government restrictions put in

place in response to the pandemic.

our business to be essential under applicable governmental orders due primarily 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.

response to the COVID-19 pandemic and the U.S.

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Face-to-face and in-person requirements for respiratory devices are being waived during such

The CMS waiver has been recently extended in conjunction with the extension of the public health emergency for an

additional 90-day period beginning on October 23, 2020.

Results of Operations

Net revenues for the three months ended

September 30, 2020 and 2019 are summarized in the table below (dollar amounts in thousands).

Three Months Ended September 30,

Increase (Decrease)

The CMS waiver was recently extended in conjunction with the extension of the public health emergency for an additional

90-day period beginning on January 21, 2021.

of Operations

revenues for the three and six months ended December 31, 2020 and 2019 are summarized in the table below (dollar amounts in thousands).

Months Ended December 31,

Institutional

Home care distributor

care distributor

International

Home care revenue.

Home care revenue

for the three months ended September 30, 2020 was approximately $7,464,000, representing a decrease of approximately $27,000, or

care revenue.

Home care revenue for the three months ended December 31, 2020 was approximately $8,903,000,

representing an increase of approximately $1,234,000, or 16.1%, compared to the same period in fiscal 2020.

months ended December 31, 2020, home care revenue was approximately $16,366,000, representing an increase of approximately $1,205,000, or

7.9%, compared to the same period in fiscal 2020.

The decrease was primarily due to a lower average allowable, partially offset

by an increase in referrals as compared to the prior year period.

Home care revenue growth continued to be impacted by healthcare

facilities and clinics restricting access to sales representatives, reduced patient consultations and treatments, and patient safety

concerns with face-to-face visits.

Home care revenue for the three months ended September 30, 2020 increased approximately $1,136,000,

or 17.9%, compared to home care revenue for the three months ended June 30, 2020.

The increase was driven primarily by state and

local government restrictions beginning to ease, increasing patient face-to-face re-engagement with clinicians and an increasing

number of clinics allowing face-to-face access by our sales team.

The home care business has also continued to benefit from the

CMS waiver, which has increased the number of referrals and the approval percentage for non-covered diagnosis and accelerated the

approval timeline for covered diagnosis.

Institutional revenue.

The revenue increase compared to the prior year periods was primarily due to

an increase in referrals and approvals.

The increase in referrals compared to the prior year was due to the sales team

adapting to a hybrid virtual and face-to-face selling model implemented to combat clinic access limitations due to the

COVID-19 pandemic, benefits of the CMS waiver on the non-commercial Medicare portion of our home care revenue, and an increase

in direct sales representatives.

Home care revenue for the three months ended December 31, 2020 increased approximately $1,439,000, or 19.3%, compared to the

period ended September 30, 2020.

The increase in revenue was also due to an increase in referrals and approvals.

The increase in

referrals compared to the prior quarter was primarily due to the success of our hybrid model, supplemented by increased patient

face-to-face re-engagement with physicians, improved access to clinics for our sales staff, temporary pent up demand for SmartVest

and an increase in direct sales reps.

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 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 April 2021.

Institutional

revenue for the three months ended September 30, 2020 was approximately $278,000, representing a decrease of approximately $347,000,

Institutional revenue for the three months ended December 31, 2020 was approximately $309,000, representing a

decrease of approximately $185,000, or 37.4%, compared to the same period in fiscal 2020.

For the six months ended December 31,

2020, institutional revenue was approximately $587,000, a decrease of approximately $531,000, or 47.5%, compared to the same period

in fiscal 2020.

The decrease in the current year periods was primarily due to the continued impact of COVID-19 on hospital purchasing

care distributor revenue .

Home care distributor revenue for the three months ended December 31, 2020 was approximately

$149,000, representing an increase of approximately $18,000, or 13.7%, compared to the same period in fiscal 2020.

months ended December 31, 2020, home care distributor revenue was approximately $327,000, an increase of approximately $76,000,

or 30.3%, compared to the same period in fiscal 2020.

The decrease in the current year period was primarily due to a decrease in

the volume of devices and disposable wraps sold due to continued impact of COVID-19 on hospital purchasing activity.

Institutional

revenue increased approximately $5,000, or 1.9%, compared to the three months ended June 30, 2020.

The increase was due primarily

to higher disposable wrap volumes, offset by lower capital sales.

Institutional includes sales to group purchasing organization

(“GPO”) members, medical equipment rental companies that rent to long-term care facilities and other institutions.

Home care distributor revenue.

care distributor revenue for the three months ended September 30, 2020 was approximately $178,000, representing an increase of

approximately $58,000, or 48.3%, compared to the same period in fiscal 2020.

We began selling to home medical equipment distributors

during fiscal 2020, who in turn sell our SmartVest System in the U.S.

We began selling to home medical equipment distributors during the three

months ended September 30, 2019, who in turn sell our SmartVest System in the U.S.

home care market.

International revenue.

International

revenue for the three months ended September 30, 2020 was approximately $84,000, representing an increase of approximately $18,000,

or 27.3%, compared to the same period in fiscal 2020.

International sales are affected by the timing of distributor purchases that

can cause significant fluctuations in reported revenue on a quarterly basis.

Gross profit decreased to approximately

$6,148,000, or 76.8% of net revenues, for the three months ended September 30, 2020, from approximately $6,342,000, or 76.4% of

net revenues, in the same period in fiscal 2020.

The decrease in gross profit dollars for the three months ended September 30,

2020 was primarily related to lower institutional revenue.

The increase in gross profit as a percentage of net revenue was driven

by a higher mix of home care revenue.

Operating expenses

Selling, general and administrative

Selling, general and administrative (“SG&A”) expenses were approximately $5,004,000 for the

three months ended September 30, 2020, representing an increase of approximately $109,000, or 2.2%, compared to the same period

in the prior year.

Payroll and compensation-related expenses

were approximately $3,299,000 for the three months ended September 30, 2020, representing an increase of approximately $161,000,

or 5.1%, compared to the same period in the prior year.

The increase in the current year period was primarily due to a higher average

number of employees in sales and marketing roles.

Travel, meals and entertainment expenses

were approximately $364,000 for the three months ended September 30, 2020, representing a decrease of approximately $221,000, or

37.8%, compared to the same period in the prior year.

The decrease in the current year period was primarily due to travel reductions

in connection with COVID-19.

Direct Marketing costs were approximately

$142,000 for the three months ended September 30, 2020, representing an increase of $95,000, or 198.7%, compared to the same period

in the prior year.

The increase in the current year period was primarily due to a direct-to-consumer marketing campaign that began

Professional fees for the three months

ended September 30, 2020 were approximately $454,000, an increase of approximately $42,000, or 10.1%, compared to the same period

in the prior year.

The increase in the current year period was primarily due to a new human resources platform that we implemented

in December 2019.

Professional fees are primarily for services related to legal costs, shareowner services and reporting requirements,

information technology (“IT”) technical support and consulting fees.

Research and development expenses.

and development (“R&D”) expenses were approximately $481,000 for the three months ended September 30, 2020, representing

an increase of approximately $382,000 compared to the same period in the prior year.

R&D expenses for the three months ended

September 30, 2020 were 6.0% of revenue compared to 1.2% of revenue for the same period in the prior year.

The increase in the

current year period was primarily due to next generation platform development activities.

Interest income, net

interest income for the three months ended September 30, 2020 was approximately $9,000 compared to approximately $40,000 in the

comparable prior year period.

The decrease in the current year period was primarily driven by lower rates earned on our cash deposits.

Income tax expense

Income tax expense was estimated at approximately

$137,000 and $374,000 and the effective tax rate was 20.4% and 26.9% for the three months ended September 30, 2020 and 2019, respectively.

The estimated income tax expense for the three months ended September 30, 2020 includes a discrete tax benefit of $39,000 related

to stock options exercised by current and former employees.

Net income for the three months ended September

30, 2020 was approximately $535,000 compared to $1,015,000 for the same period in the prior year.

The decrease in the current year

period was primarily due to increased R&D expense associated with our next generation platform development, lower institutional

revenue and higher average headcount in sales and marketing.

Liquidity and Capital Resources

Cash Flows and Sources of Liquidity

Cash Flows from Operating Activities

For the three months ended September 30,

2020, net cash provided by operating activities was approximately $822,000.

Cash flows provided by operating activities consisted

of net income of approximately $535,000, an increase in accounts payable and accrued liabilities of $501,000, non-cash expenses

of $410,000, a decrease in contract assets of $103,000, a decrease in income tax receivable of $44,000 and a decrease in inventory

These cash flows from operating activities were partially offset by an increase in accounts receivable of $684,000

and an increase in prepaid expenses and other assets of $114,000.

Cash Flows from Investing Activities

For the three months ended September 30,

2020, cash used in investing activities was approximately $82,000.

Cash used in investing activities consisted of approximately

$16,000 in expenditures for property and equipment and $66,000 in payments for patent costs.

Cash Flows from Financing Activities

For the three months ended September 30,

2020, cash used in financing activities was approximately $76,000, which consisted of taxes paid on stock options exercised on

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.

on our current operational performance, we believe our working capital of approximately $25,809,000 and available borrowings under

our existing credit facility will provide adequate liquidity during 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 September 30, 2020) less 1.00% and is payable monthly.

There was no outstanding principal balance on the

line of credit as of September 30, 2020 or June 30, 2020.

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

At September 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

If we are unable to repay such indebtedness, the lender could foreclose on these assets.

For the three months ended September 30,

2020 and 2019, we spent approximately $16,000 and $405,000, 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

Off-Balance Sheet Arrangements

As of September 30, 2020, we had no off-balance

International revenue for the three months ended December 31, 2020 was approximately $135,000, representing

a decrease of approximately $118,000, or 46.6%, compared to the same period in fiscal 2020.

For the six months ended December

31, 2020, international revenue was approximately $220,000, a decrease of approximately $99,000, or 31.0%, compared to the same

period in fiscal 2020.

International sales are affected by the timing of distributor purchases that can cause significant fluctuations

in reported revenue on a quarterly basis.

profit increased to approximately $7,525,000, or 79.2% of net revenues, for the three months ended December 31, 2020, from approximately

$6,676,000, or 78.1% of net revenues, in the same period in fiscal 2020.

Gross profit increased to approximately $13,673,000,

or 78.1% of net revenues, for the six months ended December 31, 2020, from approximately $13,018,000, or 77.3% of net revenues,

in the same period in fiscal 2020.

The increase in gross profit percentage compared to the prior year periods was primarily due

to a higher mix of home care revenue and a favorable mix of Medicare within the home care channel.

general and administrative expenses.

Selling, general and administrative (“SG&A”) expenses were approximately

$5,435,000 and $10,439,000 for the three and six months ended December 31, 2020, respectively, representing increases of approximately

$470,000 and $579,000, or 9.5% and 5.9%, respectively, compared to the same periods in the prior year.

and compensation-related expenses were approximately $3,432,000 and $6,732,000 for the three and six months ended December 31,

2020, respectively, representing increases of approximately $396,000 and $557,000, or 13.0% and 9.0%, respectively, compared to

the same periods in the prior year.

The increase in the current year periods was primarily due to higher incentive payments on

stronger home care revenue, a higher average number of sales and marketing personnel, and increased temporary resources to assist

with systems infrastructure investments.

meals and entertainment expenses were approximately $466,000 and $830,000 for the three and six months ended December 31, 2020,

respectively, representing decreases of approximately $91,000 and $312,000, or 16.3% and 27.3%, respectively, compared to the

same periods in the prior year.

The decrease in the current year periods was primarily due to travel reductions in connection

with COVID-19.

discretionary marketing expenses were approximately $317,000 and $506,000 for the three and six months ended December 31, 2020,

respectively, representing an increase of approximately $188,000 and $261,000, or 145.7% and 106.5%, respectively, compared to

the same periods in the prior year.

The increase in the current year periods was primarily due to a direct-to-consumer marketing

campaign that began in May 2020.

fees were approximately $533,000 and $987,000 for the three and six months ended December 31, 2020, respectively, representing

an increase of approximately $47,000 and $90,000, or 9.7% and 10.0%, respectively, compared to the same periods in the prior year.

The increase in the current year periods was primarily due to annual fees associated with a new human resources platform.

fees are primarily for services related to legal costs, shareowner services and reporting requirements, information technology technical support and consulting fees.

and development expenses.

Research and development (“R&D”) expenses were approximately $507,000 and $989,000

for the three and six months ended December 31, 2020, respectively, representing increases of approximately $364,000 and $747,000,

or 254.5% and 308.7%, respectively, compared to the same periods in the prior year.

The increase in the current year periods was

primarily due to next generation platform development activities.

R&D expenses were approximately 5.3% and 5.7% of revenue

for the three and six months ended December 31, 2020, respectively, and we expect R&D investment to remain in a similar range

for the duration of fiscal 2021.

interest income for the three and six months ended December 31, 2020 was approximately $10,000 and $19,000, respectively, compared

to approximately $37,000 and $77,000, respectively, in the comparable prior year periods.

The decrease in the current year periods was primarily due to lower

rates earned on our cash deposits.

tax expense was estimated at approximately $389,000 and $419,000 and the effective tax rate was 24.4% and 26.1% for the three

months ended December 31, 2020 and 2019, respectively.

Income tax expense was estimated at approximately $526,000 and $793,000

and the effective tax rate was 23.2% and 26.5% for the six months ended December 31, 2020 and 2019, respectively.

Estimated income

tax expense for the three and six months ended December 31, 2020 includes a discrete current tax (expense) benefit of approximately

$(7,000) and $32,000, respectively, related to the excess tax (expense) benefit of non-qualified stock options exercised.

income for the three and six months ended December 31, 2020 was approximately $1,203,000 and $1,739,000, respectively, compared

to $1,185,000 and $2,200,000 for the same periods in the prior year.

For the three months ended December 31, 2020, the increase

was driven by stronger home care revenue, offset by increased strategic investments in SG&A and R&D.

For the six months

ended December 31, 2020, the decrease was primarily due to increased strategic investments in both R&D and SG&A, partially

offset by stronger home care revenue performance.

and Capital Resources

Flows and Sources of Liquidity

Flows from Operating Activities

the six months ended December 31, 2020, net cash provided by operating activities was approximately $1,491,000.

Cash flows provided

by operating activities consisted of net income of approximately $1,739,000, an increase in accounts payable and accrued liabilities

of $494,000, non-cash expenses of $822,000, a decrease in contract assets of $206,000, a decrease in income tax receivable of

$186,000, a decrease in inventory of $490,000 and a decrease in prepaid expenses and other assets of $8,000.

These cash flows

from operating activities were partially offset by an increase in accounts receivable of $2,454,000.

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.

Flows from Investing Activities

the six months ended December 31, 2020, cash used in investing activities was approximately $144,000.

Cash used in investing activities

consisted of approximately $54,000 in expenditures for property and equipment and approximately $90,000 in payments for patent

Flows from Financing Activities

the six months ended December 31, 2020, cash used in financing activities was approximately $84,000, which consisted of approximately

$46,000 of cash provided from stock option exercises offset by approximately $130,000 of taxes paid on net share settlements of

stock option exercises.

of Capital Resources

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 $27,410,000

and available borrowings under our existing credit facility will provide adequate liquidity during fiscal 2021.

December 18, 2020, 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 December 31, 2020) less 1.00% and is payable monthly.

There was no outstanding

principal balance on the line of credit as of December 31, 2020 or June 30, 2020.

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, 2021, if not renewed.

At December 31, 2020, the maximum $2,500,000 was available under the line of credit.

obligations under the line of credit are secured by a security interest in substantially all of our tangible and intangible assets.

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.

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

the six months ended December 31, 2020 and 2019, we spent approximately $54,000 and $670,000, 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.

Sheet Arrangements

Cautionary Note Regarding Forward-Looking

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

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;

of December 31, 2020, we had no off-balance sheet arrangements.

Note Regarding Forward-Looking Statements

contained in this Quarterly Report on Form 10-Q that are not statements of historical fact should be considered forward-looking

statements within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section

21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Forward-looking statements include, but

are not limited to, statements regarding:

the expected impact of the COVID-19 pandemic on our business;

our business strategy,

including our intended level of investment in R&D and marketing activities;

our expectations with respect to earnings, gross

margins and sales growth, industry relationships, marketing strategies and international sales;

estimated sizes of markets into

which our products are or may be sold;

our business strengths and competitive advantages;

to grow additional sales distribution channels;

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

our intellectual property plans and practices;

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;

about our manufacturing processes;

our beliefs about our manufacturing

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;

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;

to our products and services;

expected excise tax exemption for the SmartVest System;

impact of the COVID-19 pandemic on our business;

and our anticipated revenues, expenses, capital requirements and liquidity.

such as “anticipate,”

and our anticipated revenues, expenses,

capital requirements and liquidity.

Words such as “anticipate,”

“believe,”

14 unchanged sentences

“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

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.

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:

● the duration, extent and severity of the COVID-19 pandemic, including its effects on our business,

operations and employees as well as its impact on our customers and distribution channels and on economies and markets more generally;

● the competitive nature of our market;

● changes to Medicare, Medicaid, or private insurance reimbursement policies;

● changes to state and federal health care laws;

● changes affecting the medical device industry;

● our ability to develop new sales channels for our products such as the home care distributor channel;

● our need to maintain regulatory compliance and to gain future regulatory approvals and clearances;

● new drug or pharmaceutical discoveries;

● general economic and business conditions;

● our ability to renew our line of credit or obtain additional credit as necessary;

● our ability to protect and expand our intellectual property portfolio;

● the risks associated with expansion into international markets.

This list of factors is not exhaustive,

however, and these or other factors, many of which are outside of our control, could have a material adverse effect on us and our

results of operations.

Therefore, you should consider these risk factors with caution and form your own critical and independent

conclusions about the likely effect of these risk factors on our future performance.

Forward-looking statements speak only as of

the date on which the statements are made, and we undertake no obligation, and expressly disclaim any such obligation, to update

any forward-looking statement for any reason other than as required by law, even if new information becomes available or other

events occur in the future.

You should carefully review the disclosures and the risk factors described in this and other documents

we file from time to time with the Securities and Exchange Commission (the “SEC”), including our Annual Report on Form

10-K and subsequent reports we file with the SEC.

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.

that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited

to, the following:

duration, extent and severity of the COVID-19 pandemic, including its effects on our

business, operations and employees as well as its impact on our customers and distribution

channels and on economies and markets more generally;

competitive nature of our market;

to Medicare, Medicaid, or private insurance reimbursement policies;

to state and federal health care laws;

affecting the medical device industry;

ability to develop new sales channels for our products such as the home care distributor

need to maintain regulatory compliance and to gain future regulatory approvals and clearances;

drug or pharmaceutical discoveries;

economic and business conditions;

ability to renew our line of credit or obtain additional credit as necessary;

ability to protect and expand our intellectual property portfolio;

risks associated with expansion into international markets.

list of factors is not exhaustive, however, and these or other factors, many of which are outside of our control, could have a

material adverse effect on us and our results of operations.

Therefore, you should consider these risk factors with caution and

form your own critical and independent conclusions about the likely effect of these risk factors on our future performance.

Forward-looking

statements speak only as of the date on which the statements are made, and we undertake no obligation, and expressly disclaim

any such obligation, to update any forward-looking statement for any reason other than as required by law, even if new information

becomes available or other events occur in the future.

You should carefully review the disclosures and the risk factors described

in this and other documents we file from time to time with the Securities and Exchange Commission (the “SEC”), including

our Annual Report on Form 10-K for fiscal 2020.

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.

Quantitative and Qualitative Disclosures About Market Risk.

As a smaller reporting company, we are

not required to provide disclosure pursuant to this Item.

and Qualitative Disclosures About Market Risk.

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

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements