Electromed, Inc. 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2022 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission File No.: 001-34839 Electromed, Inc. (Exact Name of Registrant as Specified in its Charter) Minnesota 41-1732920 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 500 Sixth Avenue NW New Prague , Minnesota 56071 (Address of principal executive offices) (Zip Code) ( 952 ) 758-9299 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.01 par value ELMD NYSE American LLC (Title of each class) (Trading Symbol(s)) (Name of each exchange on which registered) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☑ Smaller reporting company ☑ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑ There were 8,513,035 shares of Electromed, Inc. common stock, par value $0.01 per share, outstanding as of the close of business on May 6, 2022. Electromed, Inc. Index to Quarterly Report on Form 10-Q Page PART I – FINANCIAL INFORMATION Item 1. Financial Statements 1 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 Item 4. Controls and Procedures 19 PART II – OTHER INFORMATION Item 1. Legal Proceedings 19 Item 1A. Risk Factors 19 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20 Item 3. Defaults Upon Senior Securities 20 Item 4. Mine Safety Disclosures 20 Item 5. Other Information 20 Item 6. Exhibits 20 i PART I – FINANCIAL INFORMATION Item 1. Financial Statements. Electromed, Inc. Condensed Balance Sheets March 31, 2022 June 30, 2021 (Unaudited) Assets Current Assets Cash and cash equivalents $ 9,844,000 $ 11,889,000 Accounts receivable (net of allowances for doubtful accounts of $ 45,000 ) 19,614,000 17,032,000 Contract assets 295,000 393,000 Inventories 2,089,000 2,114,000 Prepaid expenses and other current assets 991,000 276,000 Income tax receivable 155,000 - Total current assets 32,988,000 31,704,000 Property and equipment, net 4,309,000 3,605,000 Finite-life intangible assets, net 611,000 663,000 Other assets 77,000 88,000 Deferred income taxes 1,034,000 1,049,000 Total assets $ 39,019,000 $ 37,109,000 Liabilities and Shareholders’ Equity Current Liabilities Accounts payable 1,163,000 685,000 Accrued compensation 2,301,000 2,474,000 Income tax payable - 288,000 Warranty reserve 938,000 940,000 Other accrued liabilities 564,000 252,000 Total current liabilities 4,966,000 4,639,000 Other long-term liabilities 43,000 54,000 Total liabilities 5,009,000 4,693,000 Commitments and Contingencies Shareholders’ Equity Common stock, $ 0.01 par value per share, 13,000,000 shares authorized; 8,508,788 and 8,533,209 shares issued and outstanding, respectively 85,000 85,000 Additional paid-in capital 18,042,000 17,409,000 Retained earnings 15,883,000 14,922,000 Total shareholders’ equity 34,010,000 32,416,000 Total liabilities and shareholders’ equity $ 39,019,000 $ 37,109,000 See Notes to Condensed Financial Statements (Unaudited). 1 Electromed, Inc. Condensed Statements of Operations (Unaudited) Three Months Ended March 31, Nine Months Ended March 31, 2022 2021 2022 2021 Net revenues $ 10,141,000 $ 8,787,000 $ 30,390,000 $ 26,287,000 Cost of revenues 2,398,000 2,086,000 7,066,000 5,913,000 Gross profit 7,743,000 6,701,000 23,324,000 20,374,000 Operating expenses Selling, general and administrative 6,544,000 6,051,000 19,806,000 16,490,000 Research and development 336,000 407,000 1,041,000 1,396,000 Total operating expenses 6,880,000 6,458,000 20,847,000 17,886,000 Operating income 863,000 243,000 2,477,000 2,488,000 Interest income, net 6,000 10,000 21,000 29,000 Net income before income taxes 869,000 253,000 2,498,000 2,517,000 Income tax expense 224,000 29,000 576,000 555,000 Net income $ 645,000 $ 224,000 $ 1,922,000 $ 1,962,000 Income per share: Basic $ 0.08 $ 0.03 $ 0.23 $ 0.23 Diluted $ 0.07 $ 0.03 $ 0.22 $ 0.22 Weighted-average common shares outstanding: Basic 8,454,504 8,576,523 8,485,856 8,565,839 Diluted 8,744,535 8,907,045 8,762,963 8,921,494 See Notes to Condensed Financial Statements (Unaudited). 2 Electromed, Inc. Condensed Statements of Cash Flows (Unaudited) Nine Months Ended March 31, 2022 2021 Cash Flows From Operating Activities Net income $ 1,922,000 $ 1,962,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 368,000 359,000 Amortization of finite-life intangible assets 105,000 99,000 Share-based compensation expense 703,000 756,000 Deferred income taxes 15,000 102,000 Changes in operating assets and liabilities: Accounts receivable ( 2,582,000 ) ( 3,296,000 ) Contract assets 98,000 345,000 Inventories 9,000 839,000 Prepaid expenses and other current assets ( 519,000 ) ( 69,000 ) Income tax receivable ( 443,000 ) 8,000 Accounts payable and accrued liabilities 550,000 350,000 Accrued compensation ( 173,000 ) 869,000 Net cash provided by operating activities 53,000 2,324,000 Cash Flows From Investing Activities Investment in property and equipment ( 980,000 ) ( 105,000 ) Investment in finite-life intangible assets ( 86,000 ) ( 103,000 ) Net cash used in investing activities ( 1,066,000 ) ( 208,000 ) 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 ( 70,000 ) ( 141,000 ) Repurchase of common stock ( 962,000 ) - Net cash used in financing activities ( 1,032,000 ) ( 95,000 ) Net (decrease) increase in cash ( 2,045,000 ) 2,021,000 Cash And Cash Equivalents Beginning of period 11,889,000 10,479,000 End of period $ 9,844,000 $ 12,500,000 See Notes to Condensed Financial Statements (Unaudited). 3 Electromed, Inc. Condensed Statements of Shareholders’ Equity (Unaudited) Common Stock Additional Paid- Retained Total Shareholders’ Shares Amount in Capital Earnings Equity Balance at June 30, 2020 8,567,834 $ 86,000 $ 16,480,000 $ 13,684,000 $ 30,250,000 Net income - - - 535,000 535,000 Issuance of restricted stock 19,090 - - - - Issuance of common stock upon exercise of options 19,256 - - - - Taxes paid on stock options exercised on a net basis - - ( 120,000 ) - ( 120,000 ) Share-based compensation expense - - 191,000 - 191,000 Balance at September 30, 2020 8,606,180 86,000 16,551,000 14,219,000 30,856,000 Net income - - - 1,204,000 1,204,000 Issuance of restricted stock 18,000 - - - - Issuance of common stock upon exercise of options 10,865 - 46,000 - 46,000 Taxes paid on stock options exercised on a net basis - - ( 10,000 ) - ( 10,000 ) Share-based compensation expense - - 239,000 - 239,000 Balance at December 31, 2020 8,635,045 86,000 16,826,000 15,423,000 32,335,000 Net income - - - 224,000 224,000 Issuance of restricted stock - - - - - Issuance of common stock upon exercise of options 2,375 - - - - Taxes paid on stock options exercised on a net basis - - ( 11,000 ) - ( 11,000 ) Share-based compensation expense - - 326,000 - 326,000 Balance at March 31, 2021 8,637,420 $ 86,000 $ 17,141,000 $ 15,647,000 $ 32,874,000 Common Stock Additional Paid- Retained Total Shareholders’ Shares Amount in Capital Earnings Equity Balance at June 30, 2021 8,533,209 $ 85,000 $ 17,409,000 $ 14,922,000 $ 32,416,000 Net income - - - 439,000 439,000 Issuance of restricted stock 25,900 - - - - Issuance of common stock upon exercise of options 10,530 1,000 - - 1,000 Taxes paid on stock options exercised on a net basis - - ( 64,000 ) - ( 64,000 ) Share-based compensation expense - - 249,000 - 249,000 Balance at September 30, 2021 8,569,639 86,000 17,594,000 15,361,000 33,041,000 Net income - - - 838,000 838,000 Issuance of restricted stock 18,000 - - - - Issuance of common stock upon exercise of options 1,387 - - - - Taxes paid on stock options exercised on a net basis - - ( 6,000 ) - ( 6,000 ) Share-based compensation expense - - 277,000 - 277,000 Repurchase of common stock ( 55,687 ) ( 1,000 ) - ( 662,000 ) ( 663,000 ) Balance at December 31, 2021 8,533,339 $ 85,000 $ 17,865,000 $ 15,537,000 $ 33,487,000 Net income - - - 645,000 645,000 Issuance of restricted stock - - - - - Issuance of common stock upon exercise of options - - - - - Taxes paid on stock options exercised on a net basis - - - - - Share-based compensation expense - - 177,000 - 177,000 Repurchase of common stock ( 24,551 ) - - ( 299,000 ) ( 299,000 ) Balance at March 31, 2022 8,508,788 $ 85,000 $ 18,042,000 $ 15,883,000 $ 34,010,000 See Notes to Condensed Financial Statements (Unaudited). 4 Electromed, Inc. Notes to Condensed Financial Statements (Unaudited) Note 1. Interim Financial Reporting 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 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 $ 432,000 and $ 297,000 for the nine months ended March 31, 2022 and 2021, 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. 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, 2021 (“fiscal 2021”). 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 our 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 where 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. A summary of the Company’s significant accounting policies follows: Use of estimates . Management uses estimates and assumptions in preparing the unaudited Condensed Financial Statements in accordance with U.S. GAAP. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were used. The Company believes the critical accounting policies that require the most significant assumptions and judgments in the preparation of its unaudited Condensed Financial Statements include revenue recognition and the related estimation of variable consideration, inventory valuation, share-based compensation and warranty reserve. Net income per common share . Net income is presented on a per share basis for both basic and diluted common shares. Basic net income per common share is computed using the weighted average number of common shares outstanding during the period, excluding any restricted stock awards which have not vested. The diluted net income per common share calculation includes outstanding restricted stock grants and assumes that all stock options were exercised and converted into common stock at the beginning of the period unless their effect would be anti-dilutive. Common stock equivalents excluded from the calculation of diluted earnings per share because their impact was anti-dilutive were 102,435 and 52,017 for the three months ended March 31, 2022 and 2021, respectively, and were 112,427 and 52,017 for the nine months ended March 31, 2022 and 2021, respectively. 5 Note 2. Revenues Revenue is measured based on consideration specified in the contract with a customer, adjusted for any applicable estimates of variable consideration and other factors affecting the transaction price, including consideration paid or payable from customers and significant financing components. Revenue from all customers is recognized when a performance obligation is satisfied by transferring control of a distinct good or service to a customer, as further described below under Performance obligations and transaction price . Individual promised goods and services in a contract are considered a performance obligation and accounted for separately if the individual good or service is distinct (i.e., the customer can benefit from the good or service on its own or with other resources that are readily available to the customer and the good or service is separately identifiable from other promises in the arrangement). If an arrangement includes multiple performance obligations, the consideration is allocated between the performance obligations in proportion to their estimated standalone selling price, unless discounts or variable consideration is attributable to one or more but not all the performance obligations. Costs related to products delivered are recognized in the period incurred, unless criteria for capitalization of costs under Accounting Standards Codification (“ASC”) 340-40, “Other Assets and Deferred Costs” (“ASC 340”), or other applicable guidance are met. The Company includes shipping and handling fees in net revenues. Shipping and handling costs associated with the shipment of the Company’s SmartVest® Airway Clearance System (“SmartVest System”) after control has transferred to a customer are accounted for as a fulfillment cost and are included in cost of revenues in the Condensed Statements of Operations. The timing of revenue recognition, billings and cash collections results in accounts receivable on the Condensed Balance Sheets as further described below under Accounts receivable and Contract assets . Disaggregation of revenues. In the following table, net revenues are disaggregated by market: Schedule of disaggregated revenue Three Months Ended March 31, Nine Months Ended March 31, 2022 2021 2022 2021 Home care $ 9,033,000 $ 8,163,000 $ 27,721,000 $ 24,529,000 Institutional 392,000 443,000 1,174,000 1,029,000 Home care distributor 520,000 105,000 1,063,000 432,000 International 196,000 76,000 432,000 297,000 Total $ 10,141,000 $ 8,787,000 $ 30,390,000 $ 26,287,000 In the following table, net home care revenue is disaggregated by payer type: Three Months Ended March 31, Nine Months Ended March 31, 2022 2021 2022 2021 Commercial $ 3,358,000 $ 3,111,000 $ 10,738,000 $ 9,212,000 Medicare 5,027,000 4,622,000 15,603,000 14,224,000 Medicaid 373,000 316,000 790,000 669,000 Other 275,000 114,000 590,000 424,000 Total $ 9,033,000 $ 8,163,000 $ 27,721,000 $ 24,529,000 Revenues in the Company’s home care, home care distributor, and international markets are recognized at a point-in-time when control passes to the customer upon product shipment or delivery. Revenues in the Company’s institutional market include revenue recognized at a point-in-time upon shipment or delivery as well as revenue recognized over time under operating leases. Performance obligations and transaction price. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account under ASC 606, “Revenue From Contracts With Customers” (“ASC 606”). A contract’s transaction price is allocated to each distinct performance obligation in proportion to the standalone selling price for each and recognized as revenue when, or as, the performance obligation is satisfied. The Company’s performance obligations and the timing or method of revenue recognition in each of the Company’s markets are discussed below: Home care market . In the Company’s home care market, its customers are patients who use the SmartVest System. The various models of the SmartVest System are comprised of three main components - a generator, a vest and a connecting hose - that are sold together as an integrated unit. Accordingly, in contracts within the home care market, the Company regards the SmartVest System to be a single performance obligation. 6 The Company makes available to its home care patients limited post-sale services that are not material in the context of the contracts, either individually or taken together, and therefore does not consider them to be performance obligations. The costs associated with the services are accrued and expensed when the related revenues are recognized. As such, transactions in the home care market consist of a single performance obligation: the SmartVest System. Home care patients generally will rely on third-party payers, including commercial payers and governmental payers such as Medicare, Medicaid and the U.S. Department of Veterans Affairs to cover and reimburse all or part of the cost of the SmartVest System. The third-party payers’ reimbursement programs fall into three types, distinguished by the differences in the timing of payments from the payer, consisting of either (i) outright sale, in which payment is received from the payer based on standard terms, (ii) capped installment sale, under which the SmartVest System is sold for a series of payments that are capped not to exceed a prescribed or negotiated amount over a period of time or (iii) installment sale, under which the SmartVest System is paid for over a period of several months as long as the patient continues to use the SmartVest System. Regardless of the type of transaction, provided criteria for an enforceable contract are met, it is the Company’s long- standing business practice to regard all home care agreements as transferring control to the patient upon shipment or delivery, in spite of possible payment cancellation under government or commercial programs where the payer is controlling the payment over specified time periods. For home care sales that feature installment payments, the ultimate amount of consideration received from Medicare, Medicaid or commercial payers can be significantly less than expected if the contract is terminated due to changes in the patient’s status, including insurance coverage, hospitalization, death or otherwise becoming unable to use the SmartVest System. However, once delivered to a patient who needs the SmartVest System, the patient is under no obligation to return the SmartVest System should payments be terminated as a result of the described contingencies. As a result, the Company’s product sales qualify for point-in-time revenue recognition. Control transfers to the patient, and revenue is recognized, upon shipment of the SmartVest System. At this point, physical possession and the significant risks and rewards of ownership are transferred to the patient and either a current or future right to payment is triggered, as further discussed under Accounts receivable and Contract assets below. The Company’s contractually stated transaction prices in the home care market are generally set by the terms of the contracts negotiated with insurance companies or by government programs. The transaction price for the Company’s products may be further impacted by variable consideration. ASC 606 requires the Company to adjust the transaction price at contract inception and throughout the contract duration for the estimated value of payments to be received from insurance payers based on historical experience and other available information, subject to the constraint on estimates of variable consideration. Transactions requiring estimates of variable consideration primarily include (i) capped installment payments, which are subject to the third-party payer’s termination due to changes in insurance coverage, death or the patient’s discontinued use of the SmartVest System, (ii) contracts under appeal and (iii) patient responsibility amounts for deductibles, coinsurance, copays and other similar payments. Although estimates may be made on a contract-by-contract basis, whenever possible, the Company uses all available information, including historical collection patterns, to estimate variable consideration for portfolios of contracts. The Company’s estimates of variable consideration consist of amounts it may receive from insurance providers in excess of its initial revenue estimate due to patients meeting deductibles or coinsurance during the payment duration, changes to a patient’s insurance status, changes in an insurance allowable, claims in appeals with Medicare and amounts received directly from patients for their allowable or coinsurance. The Company believes it has representative historical information to estimate the amount of variable consideration in relevant portfolios considering the significant experience it has with each portfolio and the similarity of patient accounts within a portfolio. The analysis includes steps to ensure that revenue recognized on a portfolio basis does not result in a material difference when compared with an individual contract approach. The Company also leverages its historical experience and all available relevant information for each portfolio of contracts to minimize the risk its estimates used to arrive at the transaction price will result in a significant reversal in the amount of cumulative revenue recognized when the uncertainty associated with the variable consideration is subsequently resolved. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. For example, for contracts in which the Company believes the criteria for reimbursement under government or commercial payer contracts have been met but for which coverage is unconfirmed or payments are under appeal, the Company has significant observable evidence of relatively consistent claims recovery experience over the prior three to five years. The Company believes the low volatility in historical claims approval rates for populations of patients whose demographics are similar to those of current patients provides reliable predictive value in arriving at estimates of variable consideration in such contracts. Similarly, historical payment trends for recovery of claims subject to payer installments and payments from patients have remained relatively consistent over the past five years. No significant changes in patient demographics or other relevant factors have occurred that would limit the predictive value of such payment trends in estimating variable consideration for current contracts. As a result, the Company believes its estimates of variable consideration are generally not subject to the risk of significant revenue reversal. 7 For each type of variable consideration discussed above, there are a large number of contracts with similar characteristics with a wide range of possible transaction prices. For that reason, the Company uses the probability-weighted expected value method provided under ASC 606 to estimate variable consideration. The Company often receives payment from third-party payers for SmartVest System sales over a period of time that may exceed one year. Despite these extended payment terms, no significant financing component is deemed to exist because the purpose of such terms is not to provide financing to the patient, the payer or the Company. Rather, the extended payment terms are mandated by the government or commercial insurance programs; the fundamental purpose of which is to avoid paying the full purchase price of equipment that may potentially be used by the patient for only a short period of time. Home care distributors. Sales to distributors, who sell direct to patients, are made at fixed contract prices and may include tiered pricing structures or volume-based rebates which offer more favorable pricing once certain volumes are achieved per the negotiated contract. The distributor’s purchases accumulate to give the distributor a right to a higher discount on purchases in excess of the specified level within the contract period. As a result, to the extent the Company expects the distributor to exceed the specified volume of purchases in the annual period, it recognizes revenue at a blended rate based on estimated total annual volume and sales revenue. This effectively defers a portion of the transaction price on initial purchases below the specified volumes for recognition when the higher discount is earned on purchases in excess of specified volumes. Transfer of control of the products occurs upon shipment or delivery to the distributor, as applicable. Institutional market. The Company’s institutional sales are made to hospitals and home health care centers, pulmonary rehabilitation centers and other clinics. Sales to these institutions are negotiated with the individual institution or with group purchasing organizations, with payments received directly from the institution. No insurance reimbursement is involved. Generators are either sold or leased to the institutions and associated hoses and wraps (used in institutional settings rather than vests) are sold separately. Accordingly, each product is distinct and considered a separate performance obligation in sales to institutional customers. The agreements with institutions fall into two main types, distinguished by differences in the timing of transfer of control and timing of payments: ● Outright sale – Under these transactions, the Company sells its products for a prescribed or negotiated price. Transfer of control of the product, and associated revenue recognition, occurs at the time of shipment and payment is made within normal credit terms, usually thirty days. ● Wrap usage agreements – Under these transactions, the Company provides a generator device at no cost to the hospital in return for a fixed annual commitment to purchase consumable wraps. These agreements are cancellable upon at least sixty days prior written notice by either party. If cancelled, the generator is returned to the Company, where it can be refurbished and used again at a later date. Revenue for the consumable wraps is recognized when control transfers to the customer. International market. Sales to international markets are made directly to a number of independent distributors at fixed contract prices that are not subject to further adjustments for variable consideration. Transfer of control of the products occurs upon shipment or delivery to the distributor, as applicable. Product warranty. The Company offers warranties on its products. These warranties are assurance-type warranties not sold on a standalone basis or are otherwise considered immaterial in the context of the contract, and therefore are not considered distinct performance obligations under ASC 606. The Company estimates the costs that may be incurred under its warranties and records a liability in the amount of such costs at the time the product is sold. Accounts receivable. The Company’s accounts receivable balance is comprised of amounts due from individuals, institutions and distributors. Balances due from individuals are typically remitted to the Company by third-party reimbursement agencies such as Medicare, Medicaid and private insurance companies. Accounts receivable are carried at amounts estimated to be received from patients under reimbursement arrangements with third-party payers. Accounts receivable are also net of an allowance for doubtful accounts. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition and credit history. Receivables are written off when deemed uncollectible. 8 Contract assets. Contract assets include amounts recognized as revenue that are estimates of variable consideration for Medicare appeals where the final determination of the insurance coverage amount is dependent on future approval of an appeal, or when the consideration due to the Company is dependent on a future event such as the patient meeting a deductible prior to the Company’s claim being processed by the payer. Contract assets are classified as current as amounts will turn into accounts receivable and be collected during the Company’s normal business operating cycle. Contract assets are reclassified to accounts receivable when the right to receive payment is unconditional. Contract balances. The following table provides significant changes in contract assets from contracts with customers: Schedule of contract assets Nine Months Ended March 31, 2022 Fiscal Year Ended June 30, 2021 Increase (decrease) Increase (decrease) Contract assets, beginning $ 393,000 $ 903,000 Reclassification of contract assets to accounts receivable ( 169,000 ) ( 1,551,000 ) Contract assets recognized 151,000 1,060,000 Decrease as a result of changes in the estimate of amounts to be realized from payers, excluding amounts transferred to receivables during the period ( 80,000 ) ( 19,000 ) Contract assets, ending $ 295,000 $ 393,000 Incremental costs to obtain a contract. Sales incentives paid to sales representatives are eligible for capitalization as they are incremental costs that would not have been incurred without entering into a specific sales arrangement and are recoverable through the expected margin on the transaction. However, the recovery period is less than one year as the performance obligation is satisfied upon shipment or delivery. Consequently, the Company applies the practical expedient provided by ASC 340 and expenses sales incentives as incurred. These costs are included in selling, general and administrative expenses in the Condensed Statements of Operations. Note 3. Inventories The components of inventory were as follows: Schedule of components of inventories March 31, 2022 June 30, 2021 Parts inventory $ 1,735,000 $ 1,779,000 Work in process 102,000 23,000 Finished goods 334,000 445,000 Estimated inventory to be returned 205,000 167,000 Less: Reserve for obsolescence ( 287,000 ) ( 300,000 ) Total $ 2,089,000 $ 2,114,000 Note 4. Warranty Reserve The Company provides a lifetime warranty on its products to the prescribed patient for sales within the U.S. and a three-year warranty for all institutional sales and sales to individuals outside the U.S. The Company estimates the costs that may be incurred under its warranty and records a liability in the amount of such costs at the time the product is shipped. Factors that affect the Company’s warranty reserve include the number of units shipped, historical and anticipated rates of warranty claims, the product’s useful life and cost per claim. The Company periodically assesses the adequacy of its recorded warranty reserve and adjusts the amounts as necessary. 9 Changes in the Company’s warranty reserve were as follows: Schedule of changes in warranty liability Nine Months Ended March 31, 2022 Fiscal Year Ended June 30, 2021 Warranty reserve, beginning $ 940,000 $ 740,000 Accrual for products sold 122,000 354,000 Expenditures and costs incurred for warranty claims ( 124,000 ) ( 154,000 ) Warranty reserve, ending $ 938,000 $ 940,000 Note 5. Income Taxes Income tax expense was estimated at $ 224,000 and $ 576,000 and the effective tax rate was 25.8 % and 23.1 % for the three and nine months ended March 31, 2022, respectively. Estimated income tax expense for the three and nine months ended March 31, 2022 includes a discrete tax benefit of $ 22,000 and $ 43,000 , respectively, related to the exercise of stock options and other items. Income tax expense was estimated at $ 29,000 and $ 555,000 and the effective tax rate was 11.5 % and 22.0 % for the three and nine months ended March 31, 2021, respectively. Estimated income tax expense for the three months ended March 31, 2021 included a discrete tax benefit of $37,000 as a result of lower federal and state taxes than what was originally estimated in the Company’s tax provision for its fiscal year ended June 30, 2020. Estimated income tax expense for the nine months ended March 31, 2021 included such $ 37,000 discrete tax benefit as well as a $ 32,000 discrete tax benefit related to the exercise of stock options. The net impact of these discrete events decreased the estimated effective tax rates by 2.7 % during the nine months ended March 31, 2021. The Company is subject to U.S. federal and state income tax in multiple jurisdictions. With limited exceptions, years prior to the Company’s fiscal year ended 2019 are no longer open to U.S. federal, state or local examinations by taxing authorities. The Company is currently under examination by the Internal Revenue Service (the “IRS”) for the fiscal year ended June 30, 2020. To date, the IRS is continuing its examination process and no formal assessments have been issued. The Company is not under any current income tax examinations by any other state or local taxing authority. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. Note 6. Financing Arrangements The Company has a credit facility that provides for a revolving line of credit. Effective December 17, 2021 , the Company renewed its $ 2,500,000 revolving line of credit. There was no outstanding principal balance on the line of credit as of March 31, 2022, or June 30, 2021. Interest on borrowings under the line of credit, if any, accrues at the prime rate ( 3.50 % at March 31, 2022) less 1.0 % and is payable monthly. The amount eligible for borrowing on the line of credit is limited to the lesser of $ 2,500,000 or 57.0 % of eligible accounts receivable and the line of credit expires on December 18, 2023 , if not renewed before such date. At March 31, 2022, the maximum $ 2,500,000 was eligible for borrowing. Payment obligations under the line of credit, if any, are secured by a security interest in substantially all of the tangible and intangible assets of the Company. The documents governing the line of credit contain certain financial and nonfinancial covenants that include a minimum tangible net worth covenant of not less than $ 10,125,000 and restrictions on the Company’s ability to incur certain additional indebtedness or pay dividends. Note 7. Share-Based Compensation The Company’s share-based compensation plans are described in Note 8 to the financial statements included in the Company’s Annual Report on Form 10-K for fiscal 2021. Share-based compensation expense was $ 703,000 and $ 756,000 for the nine months ended March 31, 2022 and 2021, respectively. This expense is included in selling, general and administrative expense in the Condensed Statements of Operations. 10 Stock Options Stock option transactions during the nine months ended March 31, 2022 are summarized as follows: Number of Shares Weighted Average Exercise Price per Share Outstanding at June 30, 2021 468,049 $ 4.98 Granted 81,326 $ 11.52 Exercised ( 28,667 ) $ 5.45 Cancelled or Forfeited ( 15,866 ) $ 11.30 Outstanding at March 31, 2022 504,842 $ 5.81 The following assumptions were used to estimate the fair value of stock options granted: Nine Months Ended March 31, 2022 Fiscal Year Ended June 30, 2021 Risk-free interest rate 0.89 - 1.93 % 0.31 - 0.59 % Expected term (years) 6 6 Expected volatility 56 - 64 % 283 - 335 % The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price. At March 31, 2022, the weighted average remaining contractual term for all outstanding stock options was 5.6 years and the aggregate intrinsic value of the options was $ 3,437,000 . Outstanding at March 31, 2022 were 504,842 stock options issued to employees, of which 380,881 were vested and exercisable and had an aggregate intrinsic value of $ 3,195,500 . As of March 31, 2022, $ 364,900 of total unrecognized compensation expense related to stock options is expected to be recognized over a weighted-average period of approximately 2.2 years. Restricted Stock During the nine months ended March 31, 2022, the Company issued restricted stock awards to employees totaling 25,900 shares of common stock, with a vesting term of three years and a weighted average fair value of $ 11.35 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 $ 12.09 per share. As of March 31, 2022, there were 69,403 shares of unvested restricted stock with a weighted average fair value of $ 11.87 per share outstanding . As of March 31, 2022, $ 364,000 of total unrecognized compensation expense related to restricted stock awards is expected to be recognized over a weighted-average period of approximately 1.4 years. Note 8. Commitments and Contingencies The Company is occasionally involved in claims and disputes arising in the ordinary course of business. The Company insures certain business risks where possible to mitigate the financial impact of individual claims and establishes reserves for an estimate of any probable cost of settlement or other disposition. On September 8, 2021, a state court putative class action lawsuit was filed in Minnesota against the Company asserting injury resulting from the previously announced data breach that impacted the Company’s customer protected health information and employee personal information and seeking compensatory damages, equitable relief and attorneys’ fees and costs. On October 6, 2021, the proceeding was removed to the District of Minnesota. The Company believes the plaintiff was not injured as a result of the data privacy incident, and, as a result, the claims are without merit. Accordingly, on November 11, 2021, the Company moved to dismiss the complaint in its entirety, and the hearing on such motion is currently set for May 2022. The Company expects to continue to vigorously defend the lawsuit; however, it is currently unable to determine the ultimate outcome or potential exposure to loss, if any. 11 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited Condensed Financial Statements and related notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and our audited financial statements and related notes thereto included in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2021 (“fiscal 2021”). Overview Electromed, Inc. (“we,” “our,” “us,” “Electromed” or the “Company”) develops and provides innovative airway clearance products applying High Frequency Chest Wall Oscillation (“HFCWO”) technologies in pulmonary care for patients of all ages. We manufacture, market and sell products that provide HFCWO, including the SmartVest® Airway Clearance System (“SmartVest System”) that includes our newest generation SmartVest 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 and ease of use. Our products are sold in both the home health care market and the institutional market for use by patients in hospitals, which we refer to as “institutional sales.” The SmartVest SQL has been sold in the domestic home care market since 2014. In 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. The SmartVest System is often eligible for reimbursement from major private insurance providers, health maintenance organizations (“HMOs”), state Medicaid systems and the federal Medicare system, which we believe is an important consideration for patients considering an HFCWO course of therapy. For domestic sales, the SmartVest System may be reimbursed under the Medicare-assigned billing code (E0483) for HFCWO devices if the patient has cystic fibrosis, bronchiectasis (including chronic bronchitis or COPD that has resulted in a diagnosis of bronchiectasis) or any one of certain enumerated neuromuscular diseases, and can demonstrate that another less expensive physical or mechanical treatment did not adequately mobilize retained secretions. Private payers consider a variety of sources, including Medicare, as guidelines in setting their coverage policies and payment amounts. Critical Accounting Estimates For a description of our critical accounting policies, estimates and assumptions used in the preparation of our financial statements, including the unaudited Condensed Financial Statements in this Quarterly Report on Form 10-Q, see Note 1 to our unaudited Condensed Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and Part II, Item 7, and Note 1 to our audited financial statements included in Part II, Item 8, of our Annual Report on Form 10-K for fiscal 2021. Some of our accounting policies require us to exercise significant judgment in selecting the appropriate assumptions for calculating financial statements. Such judgments are subject to an inherent degree of uncertainty. 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. We believe the critical accounting policies that require the most significant assumptions and judgments in the preparation of our financial statements, including the unaudited Condensed Financial Statements contained in this Quarterly Report on Form 10-Q, include: revenue recognition and the estimation of variable consideration, inventory valuation, share-based compensation and warranty reserve. 12 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. During the third quarter of our fiscal year ending June 30, 2022 (“fiscal 2022”), we continued to experience a reduction in the number of clinics allowing face-to-face access by our sales team as the number of infections relating to the Omicron variant 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 the prior year period. During March 2022, we observed an improvement in clinic access and patient flow compared to earlier in the quarter, which we believe is likely a result of Omicron-related case reductions throughout most of the United States, resulting in 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 likely continue during the remainder of fiscal 2022. Our home care revenue for the three months ended March 31, 2022 has increased as compared to the three months ended March 31,2021; 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 raw material and shipping costs during the third quarter of fiscal 2022, but we have not experienced any disruptions that materially impacted product availability for our customers. We anticipate that raw material costs will increase in future quarters primarily relating to 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 Centers for Medicare & Medicaid Services (“CMS”) implemented a number of temporary rule changes and waivers to allow prescribers to best treat patients during the period of the 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 April 16, 2022. In September 2021, President Joe Biden signed an executive order directing executive departments and agencies to include a clause in all covered federal contracts to comply with guidance issued by the Safer Federal Workforce Task Force, which requires, among other things, covered federal contractor employees, including employees working remotely related to federal contracts, to be fully vaccinated, unless the employee is entitled to an accommodation. As a federal contractor to the U.S. Department of Veterans Affairs Federal Supply Schedule (“Veterans Administration”), we are subject to this regulation. In fiscal 2021, $557,000, or 1.6% of our total revenues, were attributable to the Veterans Administration, and we intend to leverage that business as a future growth opportunity; approximately 19 million U.S. veterans were served by the Veterans Administration healthcare system in calendar year 2020. During the three-month period ended December 31, 2021, we conducted a review process to ensure that we fully comply with the Safer Federal Workforce Task Force regulations. Through a concerted effort to increase vaccination rates among our workforce, we were able to achieve compliance with such regulations with minimal disruption. 13 On December 7, 2021, President Biden’s executive order was enjoined nationwide, and the federal government is appealing that decision. Due to the injunction, the federal government announced on December 9, 2021 that it is taking no action to enforce the clause implementing the requirements of the executive order at this time. Although it is unclear whether the executive order will be upheld, we are well positioned to achieve compliance with the Safer Federal Workforce Task Force regulations if the executive order becomes enforceable in the future. Results of Operations Net Revenues Net revenues for the three and nine months ended March 31, 2022 and 2021 are summarized in the table below. Three Months Ended March 31, Nine Months Ended March 31, 2022 2021 Increase (Decrease) 2022 2021 Increase Home care $ 9,033,000 $ 8,163,000 $ 870,000 10.7 % $ 27,721,000 $ 24,529,000 $ 3,192,000 13.0 % Institutional 392,000 443,000 (51,000 ) (11.5 %) 1,174,000 1,029,000 145,000 14.1 % Home care distributor 520,000 105,000 415,000 395.2 % 1,063,000 432,000 631,000 146.1 % International 196,000 76,000 120,000 157.9 % 432,000 297,000 135,000 45.5 % Total $ 10,141,000 $ 8,787,000 $ 1,354,000 15.4 % $ 30,390,000 $ 26,287,000 $ 4,103,000 15.6 % Home care revenue . Home care revenue for the three months ended March 31, 2022 was $9,033,000, representing an increase of $870,000, or 10.7%, compared to the same period in fiscal 2021. For the nine months ended March 31, 2022, home care revenue was $27,721,000, representing an increase of $3,192,000, or 13.0%, compared to the same period in fiscal 2021. The revenue increase compared to the prior year periods was primarily due to increases in referrals and approvals. The increase in referrals was primarily due to increased sales representative productivity driven by increased clinic access and patient flow, our sales team adapting to a hybrid virtual and face-to-face selling 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 set to expire in July 2022. Institutional revenue. Institutional revenue for the three months ended March 31, 2022 was $392,000, representing a decrease of $51,000, or 11.5%, compared to the same period in fiscal 2021. For the nine months ended March 31, 2022, institutional revenue was $1,174,000, an increase of $145,000, or 14.1%, compared to the same period in fiscal 2021. For the three months ended March 31, 2022, the revenue decline was driven by lower capital purchases. Consumable volume growth during the period increased by 16.5% compared to the prior year period, reflecting increased consumable wrap usage in hospitals. The revenue increase for the nine months ended March 31, 2022 was due to increased capital purchases and stronger consumable volumes compared to the corresponding prior year periods, as hospitals resumed utilization of HFCWO protocols after reducing utilization early in the COVID-19 pandemic. Home care distributor revenue . Home care distributor revenue for the three months ended March 31, 2022 was $520,000, representing an increase of $415,000, or 395.2%, compared to the same period in fiscal 2021. For the nine months ended March 31, 2022, home care distributor revenue was $1,063,000, an increase of $631,000, or 146.1%, compared to the same period in fiscal 2021. The revenue increase in the current year periods 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. 14 International revenue . International revenue for the three months ended March 31, 2022 was $196,000, representing an increase of $120,000, or 157.9%, compared to the same period in fiscal 2021. For the nine months ended March 31, 2022, international revenue was $432,000, an increase of $135,000, or 45.5%, compared to the same period in fiscal 2021. 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 $7,743,000, or 76.4% of net revenues, for the three months ended March 31, 2022, from $6,701,000, or 76.3% of net revenues, in the same period in fiscal 2021. Gross profit increased to $23,324,000, or 76.7% of net revenues, for the nine months ended March 31, 2022, from $20,374,000, or 77.5% of net revenues, in the same period in fiscal 2021. For the nine months ended March 31, 2022, the decrease in gross profit as a percentage of net revenues compared to the prior year period was primarily due to higher raw material and shipping costs, partially offset by a Medicare allowable rate increase that took effect in January 2022, increased operational efficiencies and operating leverage on higher revenue. Operating expenses Selling, general and administrative expenses. Selling, general and administrative (“SG&A”) expenses were $6,544,000 and $19,806,000 for the three and nine months ended March 31, 2022, respectively, representing increases of $493,000 and $3,316,000, or 8.1% and 20.1%, respectively, compared to the same periods in the prior year. Payroll and compensation-related expenses were $3,990,000 and $12,013,000 for the three and nine months ended March 31, 2022, respectively, representing increases of $152,000 and $1,444,000, or 4.0% and 13.7%, respectively, compared to the same periods in the prior year. The increase in the current year periods 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 51, of which 42 were direct sales, as of March 31, 2022, compared to 48 as of March 31, 2021, of which 39 were direct sales. Travel, meals and entertainment expenses were $580,000 and $1,810,000 for the three and nine months ended March 31, 2022, respectively, representing increases of $140,000 and $540,000, or 31.8% and 42.5%, respectively, compared to the same periods in the prior year. The increase in the three months ended March 31, 2022 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 periods and an increase in regional sales meetings that were cancelled in the prior year due to COVID-19. For the nine months ended March 31, 2022, we also held an in-person national sales meeting in August 2021 whereas the national sales meeting was held virtually the prior fiscal year due to COVID-19. Total discretionary marketing expenses were $241,000 and $605,000 for the three and nine months ended March 31, 2022, respectively, representing decreases of $107,000 and $248,000, or 30.7% and 29.1%, respectively, compared to the same periods in the prior year. The decrease in the current year periods was primarily due to a shift to more cost-effective direct-to-consumer marketing investments. Professional fees were $719,000 and $2,454,000 for the three and nine months ended March 31, 2022, respectively, representing increases of $19,000 and $768,000, or 2.7% and 45.6%, respectively, compared to the same periods in the prior year. Professional fees include services related to legal costs, shareowner services and reporting requirements, information technology technical support and consulting fees. For the nine months ended March 31, 2022, the increase in professional fees 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, and we did not incur any shareholder activism costs during the three months ended March 31, 2022. 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/SmartVest therapy. 15 Recruiting fees were $207,000 and $569,000 for the three and nine months ended March 31, 2022, respectively, representing increases of $124,000 and $358,000, or 149.4% and 169.7%, respectively, compared to the same periods in the prior year. The increase in recruiting fees is primarily due to increased recruiting for senior leadership and direct sales representative positions. Insurance expenses were $337,000 and $972,000 for the three and nine months ended March 31, 2022, respectively, representing increases of $50,000 and $145,000, or 17.4% and 17.5%, respectively, compared to the same periods in the prior year. The increase in insurance expenses primarily relate to higher health insurance, director and officer insurance costs and cyber insurance costs. Research and development expenses. Research and development (“R&D”) expenses were $336,000 and $1,041,000 for the three and nine months ended March 31, 2022, respectively, representing decreases of $71,000 and $355,000, or 17.4% and 25.4%, respectively, compared to the same periods in the prior year. The decrease in the current-year periods was primarily due to reduced professional services costs associated with our next generation platform development. R&D expenses were 3.3% and 3.4% of revenue for the three and nine months ended March 31, 2022, respectively. Interest income, net Net interest income for the three and nine months ended March 31, 2022 was $6,000 and $21,000, respectively, compared to $10,000 and $29,000, 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 and lower cash deposits in the bank compared to prior fiscal periods. Income tax expense Income tax expense was estimated at $224,000 and $576,000 and the effective tax rate was 25.8% and 23.1% for the three and nine months ended March 31, 2022, respectively. Estimated income tax expense for the three and nine months ended March 31, 2022 each include a discrete tax benefit of $22,000 and $43,000, respectively, related to the exercise of stock options and other items. Income tax expense was estimated at $29,000 and $555,000 and the effective tax rate was 11.5% and 22.0% for the three and nine months ended March 31, 2021, respectively. Estimated income tax expense for the three months ended March 31, 2021 included a discrete tax benefit of $37,000 as a result of lower federal and state taxes than what was originally estimated in our fiscal year ended June 30, 2020 tax provision. Estimated income tax expense for the nine months ended March 31, 2021 included that $37,000 discrete tax benefit as well as a $32,000 discrete tax benefit related to the exercise of stock options. The net impact of these discrete events decreased the estimated effective tax rates by 2.7% during the nine months ended March 31, 2021. Net income Net income for the three and nine months ended March 31, 2022 was $645,000 and $1,922,000, respectively, compared to $224,000 and $1,962,000 for the same periods in the prior year. The increase in net income for the three months ended March 31, 2022 was driven by home care and distributor revenue growth, partially offset by increased strategic investments in SG&A and higher product costs. The decrease in net income for the nine months ended March 31, 2022 was 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. 16 Liquidity and Capital Resources Cash Flows and Sources of Liquidity Cash Flows from Operating Activities For the nine months ended March 31, 2022, net cash provided by operating activities was $53,000. Cash flows provided by operating activities consisted of net income of $1,922,000, non-cash expenses of $1,191,000, a decrease in inventory of $9,000, a decrease in contract assets of $98,000 and an increase in accounts payable and accrued liabilities of $550,000. These cash flows from operating activities were offset by an increase in accounts receivable of $2,582,000, an increase in prepaid expenses and other assets of $519,000, an increase in income tax receivable of $443,000 and a decrease in accrued compensation of $173,000. The increase in accounts receivable was primarily due to continued growth 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 for the nine months ended March 31, 2022, including tax payments on higher-than-expected fiscal 2021 net income, a one-time payout of accrued vacation balances as part of an enhancement to our paid time off policy, and increased prepayments to secure adequate supply of key raw material components. Our cash receipt collection remains strong, with the three months ended March 31, 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. Cash Flows from Investing Activities For the nine months ended March 31, 2022, cash used in investing activities was $1,066,000. Cash used in investing activities consisted of $980,000 in expenditures for property and equipment and $86,000 in expenditures for patent costs. The investment in property and equipment primarily relates to our system infrastructure investments in an ERP system, customer relationship management system and revenue cycle management system, as well as tooling equipment for our next generation product. Cash Flows from Financing Activities For the nine months ended March 31, 2022, cash used in financing activities was $1,032,000, which consisted of $962,000 used to repurchase shares of common stock, and $70,000 of 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 R&D efforts, IT infrastructure projects, and supporting general corporate needs, including financing equipment purchases and other capital expenditures incurred in the ordinary course of business. Based on our current operational performance, we believe our working capital of $28,022,000 and available borrowings under our existing credit facility will provide adequate liquidity during fiscal 2022. 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 (3.5% at March 31, 2022) less 1.0% and is payable monthly. There was no outstanding principal balance on the line of credit as of March 31, 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 57.00% of eligible accounts receivable, and the line of credit expires on December 18, 2023, if not renewed before such date. At March 31, 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. 17 For the nine months ended March 31, 2022 and 2021, we spent $980,000 and $105,000, respectively, on property and equipment. We currently expect to finance planned equipment purchases with available working capital, 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. Cautionary Note Regarding Forward-Looking Statements Statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact should be considered forward-looking statements within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward- looking statements include, but are not limited to, statements regarding: the expected impact of the COVID-19 pandemic on our business; our business strategy, including our intended level of investment in R&D and marketing activities; our expectations with respect to earnings, gross margins and sales growth, industry relationships, marketing strategies and international sales; estimated sizes of markets into which our products are or may be sold; our business strengths and competitive advantages; our ability to grow additional sales distribution channels; our intent to retain any earnings for use in operations rather than paying dividends; our expectation that our products will continue to qualify for reimbursement and payment under government and private insurance programs; our intellectual property plans and practices; the expected impact of applicable regulations on our business; our beliefs about our manufacturing processes; our expectations and beliefs with respect to our employees and our relationships with them; our belief that our current facilities are adequate to support our growth plans; our expectations with respect to ongoing compliance with the terms of our credit facility; our expectations regarding the ongoing availability of credit and our ability to renew our line of credit; enhancements to our products and services; expected excise tax exemption for the SmartVest System; and our anticipated revenues, expenses, capital requirements and liquidity. Words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “project,” “should,” “will,” “would,” and similar expressions, including the negative of these terms, are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Although we believe these forward-looking statements are reasonable, they involve risks and uncertainties that may cause actual results to differ materially from those projected by such statements. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results or our industry’s actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by the forward-looking statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, the following: ● 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; ● supply chain disruptions that limit our ability to produce and deliver our products to patients; ● 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; ● the risks associated with cyberattacks, data breaches, computer viruses and other similar security threats; and ● the risks associated with our planned sales force expansion. 18 This list of factors is not exhaustive, however, and these or other factors, many of which are outside of our control, could have a material adverse effect on us and our results of operations. Therefore, you should consider these risk factors with caution and form your own critical and independent conclusions about the likely effect of these risk factors on our future performance. Forward-looking statements speak only as of the date on which the statements are made, and we undertake no obligation, and expressly disclaim any such obligation, to update any forward-looking statement for any reason other than as required by law, even if new information becomes available or other events occur in the future. You should carefully review the disclosures and the risk factors described in this and other documents we file from time to time with the Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K for fiscal 2021. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth herein. Item 3. Quantitative and Qualitative Disclosures About Market Risk. As a smaller reporting company, we are not required to provide disclosure pursuant to this Item. Item 4. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act, as of the end of the period subject to this Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the date of such evaluation to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Changes to Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II – OTHER INFORMATION Item 1. Legal Proceedings. The disclosure regarding legal proceedings set forth in Note 8 to our unaudited Condensed Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference. Occasionally, we may be party to legal actions, proceedings, or claims in the ordinary course of business, including claims based on assertions of patent and trademark infringement. Corresponding costs are accrued when it is probable that loss will be incurred, and the amount can be precisely or reasonably estimated. We are not aware of any undisclosed actual or threatened litigation that would have a material adverse effect on our financial condition or results of operations. Item 1A. Risk Factors. As a smaller reporting company, we are not required to provide disclosure pursuant to this Item. 19 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. On May 26, 2021, our Board of Directors authorized the repurchase of up to $3.0 million of outstanding shares of our common stock through May 26, 2022. 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 three months ended March 31, 2022: Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs January 1 to January 31, 2022 - $ - - $ 1,258,000 February 1 to February 28, 2022 14,321 $ 12.30 14,321 $ 1,037,000 March 1 to March 31, 2022 10,230 $ 12.10 10,230 $ 913,000 Total 24,551 $ 12.21 24,511 Item 3. Defaults Upon Senior Securities. None. Item 4. Mine Safety Disclosures. None. Item 5. Other Information. None. Item 6. Exhibits. Exhibit Number Description Method of Filing 3.1 Composite Articles of Incorporation, as amended through November 8, 2010 (incorporated by reference to Exhibit 3.1 to Annual Report on Form 10-K for the fiscal year ended June 30, 2015) Incorporated by Reference 3.2 Amended and Restated Bylaws, effective September 29, 2020 (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed September 29, 2020) Incorporated by Reference 10.1 Employment Agreement with Christopher G. Holland, dated February 16, 2022 Filed Electronically 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Filed Electronically 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Filed Electronically 32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Furnished Electronically 32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Furnished Electronically 101 Financial statements from the Quarterly Report on Form 10-Q for the period ended March 31, 2022, formatted in inline XBRL: (i) Condensed Balance Sheets, (ii) Condensed Statements of Operations, (iii) Condensed Statements of Cash Flows, (iv) Condensed Statements of Shareholders’ Equity, and (v) Notes to Condensed Financial Statements Filed Electronically 104 Cover Page Interactive Data File (embedded within the inline XBRL Document) Filed Electronically 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ELECTROMED, INC. Date: May 10, 2022 /s/ Kathleen S. Skarvan Kathleen S. Skarvan, President and Chief Executive Officer (duly authorized officer) Date: May 10, 2022 /s/ Michael J. MacCourt Michael J. MacCourt, Chief Financial Officer (principal financial officer and principal accounting officer)