Electromed, Inc. 10-Q

Item 1. Financial Statements. Electromed, Inc. Condensed Balance Sheets September 30, 2022 June 30, 2022 (Unaudited) Assets Current Assets Cash and cash equivalents $ 5,998,000 $ 8,153,000 Accounts receivable (net of allowances for doubtful accounts of $ 45,000 ) 20,957,000 21,052,000 Contract assets 453,000 286,000 Inventories 3,673,000 3,178,000 Prepaid expenses and other current assets 2,015,000 1,870,000 Income taxes receivable 124,000 - Total current assets 33,220,000 34,539,000 Property and equipment, net 4,682,000 4,568,000 Finite-life intangible assets, net 600,000 599,000 Other assets 100,000 120,000 Deferred income taxes 1,532,000 1,538,000 Total assets $ 40,134,000 $ 41,364,000 Liabilities and Shareholders’ Equity Current Liabilities Accounts payable $ 1,265,000 $ 1,261,000 Accrued compensation 1,610,000 2,742,000 Income tax payable - 51,000 Warranty reserve 1,354,000 1,256,000 Other accrued liabilities 1,724,000 1,840,000 Total current liabilities 5,953,000 7,150,000 Other long-term liabilities 37,000 41,000 Total liabilities 5,990,000 7,191,000 Commitments and Contingencies Shareholders’ Equity Common stock, $ 0.01 par value per share, 13,000,000 shares authorized; 8,485,864 and 8,475,438 shares issued and outstanding, as of September 30, 2022 and June 30, 2022, respectively 85,000 85,000 Additional paid-in capital 18,343,000 18,308,000 Retained earnings 15,716,000 15,780,000 Total shareholders’ equity 34,144,000 34,173,000 Total liabilities and shareholders’ equity $ 40,134,000 $ 41,364,000 See Notes to Condensed Financial Statements (Unaudited). 1 Electromed, Inc. Condensed Statements of Operations (Unaudited) Three Months Ended September 30, 2022 2021 Net revenues $ 10,658,000 $ 10,001,000 Cost of revenues 2,327,000 2,300,000 Gross profit 8,331,000 7,701,000 Operating expenses Selling, general and administrative 7,989,000 6,787,000 Research and development 298,000 376,000 Total operating expenses 8,287,000 7,163,000 Operating income 44,000 538,000 Interest income, net 4,000 9,000 Net income before income taxes 48,000 547,000 Income tax (benefit) expense ( 33,000 ) 108,000 Net income $ 81,000 $ 439,000 Income per share: Basic $ 0.01 $ 0.05 Diluted $ 0.01 $ 0.05 Weighted-average common shares outstanding: Basic 8,445,893 8,559,219 Diluted 8,689,377 8,884,493 See Notes to Condensed Financial Statements (Unaudited). 2 Electromed, Inc. Condensed Statements of Cash Flows (Unaudited) Three Months Ended September 30, 2022 2021 Cash Flows From Operating Activities Net income $ 81,000 $ 439,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 134,000 106,000 Amortization of finite-life intangible assets 20,000 52,000 Share-based compensation expense 95,000 249,000 Deferred income taxes 6,000 32,000 Changes in operating assets and liabilities: Accounts receivable 95,000 ( 1,331,000 ) Contract assets ( 167,000 ) 74,000 Inventories ( 500,000 ) 91,000 Prepaid expenses and other assets ( 125,000 ) ( 186,000 ) Income tax payable, net ( 175,000 ) ( 498,000 ) Accounts payable and accrued liabilities ( 26,000 ) ( 455,000 ) Accrued compensation ( 1,132,000 ) 851,000 Net cash used in operating activities ( 1,694,000 ) ( 576,000 ) Cash Flows From Investing Activities Expenditures for property and equipment ( 241,000 ) ( 225,000 ) Expenditures for finite-life intangible assets ( 15,000 ) ( 45,000 ) Net cash used in investing activities ( 256,000 ) ( 270,000 ) Cash Flows From Financing Activities Issuance of common stock upon exercise of options - 1,000 Taxes paid on net share settlement of stock option exercises ( 60,000 ) ( 64,000 ) Repurchase of common stock ( 145,000 ) - Net cash used in financing activities ( 205,000 ) ( 63,000 ) Net decrease in cash ( 2,155,000 ) ( 909,000 ) Cash Beginning of period 8,153,000 11,889,000 End of period $ 5,998,000 $ 10,980,000 Supplemental Disclosures of Cash Flow Information Cash paid for income taxes $ 135,000 $ 574,000 Supplemental Disclosures of Noncash Investing and Financing Activities Property and equipment acquisitions in accounts payable $ 46,000 $ 2,000 Intangible asset acquisitions in accounts payable $ 9,000 $ 7,000 Lease assets obtained in exchange for new operating lease liabilities $ - $ 53,000 Demonstration equipment returned to inventory $ 5,000 $ 1,000 See Notes to Condensed Financial Statements (Unaudited). 3 Electromed, Inc. Condensed Statements of Shareholders’ Equity (Unaudited) Total Common Stock Additional Paid- Retained 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 Total Common Stock Additional Paid- Retained Shareholders’ Shares Amount in Capital Earnings Equity Balance at June 30, 2022 8,475,438 $ 85,000 $ 18,308,000 $ 15,780,000 $ 34,173,000 Net income – – – 81,000 81,000 Issuance of restricted stock 27,400 – – – – Forfeiture of restricted stock ( 14,166 ) – – – – Issuance of common stock upon exercise of options 11,760 – – – – Taxes paid on stock options exercised on a net basis – – ( 60,000 ) – ( 60,000 ) Share-based compensation expense – – 95,000 – 95,000 Repurchase of common stock ( 14,568 ) – – ( 145,000 ) ( 145,000 ) Balance at September 30, 2022 8,485,864 $ 85,000 $ 18,343,000 $ 15,716,000 $ 34,144,000 See Notes to Condensed Financial Statements (Unaudited). 4 Electromed, Inc. Notes to Condensed Financial Statements (Unaudited) Note 1. Interim Financial Reporting Nature of business: Electromed, Inc. (the “Company”) develops, manufactures and markets innovative airway clearance products that apply High Frequency Chest Wall Oscillation (“HFCWO”) therapy in pulmonary care for patients of all ages. The Company markets its products in the U.S. to the 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 $ 81,000 and $ 112,000 for the three months ended September 30, 2022 and 2021, respectively. Since its inception, the Company has operated in a single industry segment: developing, manufacturing and marketing medical equipment. Impacts of COVID-19 on the Company’s business: The 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. Basis of presentation: The accompanying unaudited Condensed Financial Statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial statements and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. In the opinion of management, the accompanying unaudited Condensed Financial Statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation of the Company’s financial position and results of operations as required by Regulation S-X. Interim results of operations are not necessarily indicative of the results that may be achieved for the full year. The financial statements and related notes do not include all information and footnotes required by U.S. GAAP for annual reports. This interim report should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022 (“fiscal 2022”). 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 212,023 and 110,752 for the three months ended September 30, 2022 and 2021, respectively. Recently Issued Accounting Standards In June 2016, the Financial Accounting Board issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments -- Credit Losses: Measurement of Credit Losses on Financial Instruments, which was subsequently amended by ASU 2018-19, ASU 2019-04, 2019-05, 2019-10, 2019-11, and 2020-02. The standard introduces new accounting guidance for credit losses on financial instruments within its scope, including trade receivables. This new guidance adds an impairment model that is based on expected losses rather than incurred losses. It is effective for interim and annual reporting periods beginning after December 15, 2022, with early adoption permitted. The adoption of the standard is not expected to have an impact on the Company’s consolidated results of operations and financial condition. 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 September 30, 2022 2021 Home care $ 9,632,000 $ 9,284,000 Institutional 391,000 449,000 Home care distributor 554,000 156,000 International 81,000 112,000 Total $ 10,658,000 $ 10,001,000 In the following table, net home care revenue is disaggregated by payer type: Three Months Ended September 30, 2022 2021 Commercial $ 3,879,000 $ 3,784,000 Medicare 5,382,000 5,176,000 Medicaid 154,000 174,000 Other 217,000 150,000 Total $ 9,632,000 $ 9,284,000 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: 6 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. 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 within 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. 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. 8 Contract balances. The following table provides information about contract assets from contracts with customers: Schedule of contract assets Three Months Ended September 30, 2022 Fiscal Year Ended June 30, 2022 Increase (decrease) Increase (decrease) Contract assets, beginning $ 286,000 $ 393,000 Reclassification of contract assets to accounts receivable ( 305,000 ) ( 833,000 ) Contract assets recognized 471,000 784,000 Increase (decrease) as a result of changes in the estimate of amounts to be realized from payers, excluding amounts transferred to receivables during the period 1,000 ( 58,000 ) Contract assets, ending $ 453,000 $ 286,000 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 September 30, 2022 June 30, 2022 Parts inventory $ 2,968,000 $ 2,672,000 Work in process 361,000 100,000 Finished goods 317,000 469,000 Estimated inventory to be returned 251,000 228,000 Less: Reserve for obsolescence ( 224,000 ) ( 291,000 ) Total $ 3,673,000 $ 3,178,000 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. Changes in the Company’s warranty reserve were as follows: Schedule of changes in warranty liability Three Months Ended September 30, 2022 Fiscal Year Ended June 30, 2022 Warranty reserve, beginning $ 1,256,000 $ 940,000 Accrual for products sold 172,000 494,000 Expenditures and costs incurred for warranty claims ( 74,000 ) ( 178,000 ) Warranty reserve, ending $ 1,354,000 $ 1,256,000 9 Note 5. Income Taxes Income tax benefit was estimated at $ 33,000 , and the effective tax rate was ( 68.8 %) for the three months ended September 30, 2022. Estimated income tax expense for the three months ended September 30, 2022 includes a discrete current tax benefit of $ 44,000 related to the exercise of stock options. Income tax expense was estimated at $ 108,000 , and the effective tax rate was 19.7 % for the three months ended September 30, 2021. Estimated income tax expense for the three months ended September 30, 2021 included a discrete current tax benefit of $ 20,000 related to the exercise of stock options. The Company is subject to U.S. federal and state income tax in multiple jurisdictions. With limited exceptions, years prior to the Company’s fiscal year ended June 30, 2019 are no longer open to U.S. federal, state or local examinations by taxing authorities. The Company is not under any current income tax examinations by any federal, state or local taxing authority. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. Note 6. Financing Arrangements The Company has a credit facility that provides for a $ 2,500,000 revolving line of credit. There was no outstanding principal balance on the line of credit as of September 30, 2022 or June 30, 2022. Interest on borrowings under the line of credit, if any, accrues at the prime rate ( 6.25 % at September 30, 2022) 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, 2023 , if not renewed before such date. At September 30, 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. Common Stock Authorized shares: The Company’s Articles of Incorporation, as amended, have established 15,000,000 authorized shares of capital stock consisting of 13,000,000 shares of common stock, par value $ 0.01 per share, and 2,000,000 shares of undesignated stock. On May 26, 2021, the Company’s Board of Directors (the “Board”) approved a stock repurchase authorization. Under the authorization, the Company was originally able to repurchase up to $ 3.0 million of shares of common stock through May 26, 2022. On May 26, 2022, the Board removed the date limitation. As of September 30, 2022, a total of 239,195 shares have been repurchased and retired under this authorization for a total cost of $ 2,717,000 , or $ 11.36 per share. Repurchased shares have been retired and constitute authorized but unissued shares. Note 8. Share-Based Compensation The Company’s share-based compensation plans are described in Note 8 to the financial statements included in the Company’s Annual Report on Form 10-K for fiscal 2022. Share-based compensation expense was $ 95,000 and $ 249,000 for the three months ended September 30, 2022 and 2021, respectively. This expense is included in selling, general and administrative expense in the Condensed Statements of Operations. Stock Options Stock option transactions during the three months ended September 30, 2022 are summarized as follows: Number of Shares Weighted-Average Exercise Price per Share Outstanding at June 30, 2022 502,084 $ 5.82 Granted 101,500 $ 9.90 Exercised ( 20,000 ) $ 1.75 Cancelled or Forfeited ( 7,799 ) $ 11.95 Outstanding at September 30, 2022 575,785 $ 6.60 10 The following assumptions were used to estimate the fair value of stock options granted: Three Months Ended September 30, 2022 Fiscal Year Ended June 30, 2022 Risk-free interest rate 2.88 % 0.89 - 2.52 % Expected term (years) 6 6 Expected volatility 55 % 55 - 64 % The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price. At September 30, 2022, the weighted average remaining contractual term for all outstanding stock options was 6.0 years and the aggregate intrinsic value of the options was $ 2,345,567 . Outstanding at September 30, 2022 were 575,785 stock options issued to employees, of which 413,222 were vested and exercisable and had an aggregate intrinsic value of $ 2,309,189 . As of September 30, 2022, $ 643,858 of total unrecognized compensation expense related to stock options is expected to be recognized over a weighted-average period of approximately 2.5 years. Restricted Stock During the three months ended September 30, 2022, the Company issued restricted stock awards to employees totaling 27,400 shares of common stock, with a vesting term of three years and a weighted average fair value of $ 9.90 per share. There were 42,918 shares of unvested restricted stock with a weighted average fair value of $ 10.75 per share outstanding as of September 30, 2022. As of September 30, 2022, $ 304,373 of total unrecognized compensation expense related to restricted stock awards is expected to be recognized over a weighted-average period of approximately 2.4 years. Note 9. 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. Prior to the hearing on the motion to dismiss, the parties agreed in principle to settle the case. The parties have executed a settlement agreement and submitted a motion to settle the class action in the near future. If the court does not grant the motion for settlement, the Company will continue to vigorously defend the lawsuit. At this time, the Company is unable to determine the ultimate outcome or potential exposure to loss, if any.