What changed in this filing

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Item 1. Financial Statements

2024-02-13 compared with 2023-11-07 · 369 added, 424 removed, 133 unchanged (86% of the section changed)

Financial Statements.

Electromed, Inc.

Condensed Balance Sheets

September 30, 2023

December 31, 2023

June 30, 2023

20 unchanged sentences

Shareholders’ Equity

Common stock, $ 0.01 par value per share, 13,000,000 shares authorized;

8,579,050 and 8,555,238 shares issued and outstanding, as of September 30, 2023 and June 30, 2023, respectively

Common stock, $ 0.01 par value per share, 13,000,000 shares

8,602,677 and 8,555,238 shares issued and outstanding, as of December 31, 2023 and June 30, 2023,

Additional paid-in capital

3 unchanged sentences

See Notes to Condensed Financial Statements (Unaudited).

Electromed, Inc.

Condensed Statements of Operations

September 30,

Cost of revenues

6 unchanged sentences

Net income before income taxes

Income tax expense (benefit)

Income tax expense

Income per share:

Weighted-average common shares outstanding:

See Notes to Condensed Financial Statements (Unaudited).

Notes to Condensed Financial Statements (Unaudited).

Electromed, Inc.

Condensed Statements of Cash

Flows (Unaudited)

Three Months Ended September 30,

Six Months Ended December 31,

Cash Flows From Operating Activities

Adjustments to reconcile net income to net cash used in operating activities:

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Amortization of finite-life intangible assets

7 unchanged sentences

Accounts payable and accrued liabilities

Accrued compensation

( 1,171,000 )

( 1,132,000 )

Net cash used in operating activities

( 1,694,000 )

Accrued compensation

Net cash provided by (used in) operating activities

Cash Flows From Investing Activities

7 unchanged sentences

Net cash provided by (used in) financing activities

Net decrease in cash

Net increase (decrease) in cash

( 1,244,000 )

8 unchanged sentences

Demonstration equipment returned to inventory

See Notes to Condensed Financial Statements (Unaudited).

Notes to Condensed Financial Statements (Unaudited).

Electromed, Inc.

Condensed Statements of Shareholders’

Equity (Unaudited)

Additional Paid-

Shareholders’

7 unchanged sentences

Balance at September 30, 2022

Issuance of restricted stock

Issuance of common stock upon exercise of options

Share-based compensation expense

Repurchase of common stock

Balance at December 31, 2022

Additional Paid-

Shareholders’

1 unchanged sentence

Issuance of restricted stock

Forfeiture 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

Repurchase of common stock

Balance at September 30, 2023

See Notes to Condensed Financial Statements (Unaudited).

Notes to Condensed

Financial Statements

Issuance of restricted stock

Issuance of common stock upon exercise of options

Share-based compensation expense

Balance at December 31, 2023

to Condensed Financial Statements

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

to the home health care and hospital markets for use by patients in personal residences, hospitals and clinics.

also sells internationally through distributors.

International sales were $ 91,000 and $ 81,000

for the three months ended September 30, 2023 and 2022, respectively.

Since its inception, the Company has operated in a single

industry segment:

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

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

markets its products in the U.S.

to the home health care and hospital markets.

The Company also sells internationally through

distributors.

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

developing, manufacturing, and marketing medical equipment.

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.

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

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

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, 2023 (“fiscal 2023”).

A summary of the Company’s significant accounting

policies and estimates follows:

Use of estimates.

Management uses estimates

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

Those estimates and assumptions

affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues

and expenses.

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, 2023 (“fiscal

summary of the Company’s significant accounting policies and estimates follows:

of estimates .

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

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.

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

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

403,944 and 212,023 for the three months ended September 30, 2023 and 2022, 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.

The company adopted the

standard effective July 1, 2023.

The Company’s adoption of the standard did not have a material impact on the financial statements.

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

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:

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.

income per common share .

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

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

any restricted stock awards which have not vested.

The diluted net income per common share calculation includes outstanding restricted

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

unless their effect would be anti-dilutive.

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

because their impact was anti-dilutive were 405,974 and 200,499 for the three months ended December 31, 2023, and 2022, respectively,

and were 404,973 and 206,261 for the six months ended December 31, 2023 and 2022, respectively.

Issued Accounting Standards

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.

The company adopted the standard effective July 1, 2023.

The Company’s adoption of the

standard did not have a material impact on the financial statements.

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 .

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.

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.

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

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

Schedule of disaggregated revenue

Three Months Ended September 30,

Months Ended December 31,

Homecare distributor

International

In the following table, net homecare revenue is

disaggregated by payer type:

Three Months Ended September 30,

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

Months Ended December 31,

Medicare Supplemental

Revenues are recognized at a point in time when

control passes to the customer upon product shipment or delivery.

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:

Homecare market .

In the Company’s

homecare 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 homecare market, the Company regards the SmartVest System to be a single performance obligation.

The Company makes available to its homecare

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 homecare market consist of a single performance obligation:

are recognized at a point in time when control passes to the customer upon product shipment or delivery.

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:

In the Company’s homecare 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 homecare market, the Company regards the SmartVest

System to be a single performance obligation.

Company makes available to its homecare 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 homecare market

consist of a single performance obligation:

the SmartVest System.

Homecare 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 homecare

agreements as transferring control to the patient upon shipment or delivery, despite possible payment cancellation under government

or commercial programs where the payer is controlling the payment over specified time periods.

For homecare 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 homecare market are generally set by the terms of the contracts negotiated with insurance companies or by government

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.

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.

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.

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.

Homecare distributors.

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 the right to a higher discount on purchases more than 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.

Hospital market.

The Company’s

hospital sales are made to hospitals and home health care centers, pulmonary rehabilitation centers and other clinics.

these hospitals are negotiated with the individual hospital or with group purchasing organizations, with payments received directly

from the hospital.

No insurance reimbursement is involved.

Generators are either sold or leased to the hospitals and associated

hoses and wraps (used in hospital settings rather than vests) are sold separately.

Accordingly, each product is distinct and considered

a separate performance obligation in sales to hospital customers.

The agreements with hospitals 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

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

Accounts receivable.

patients generally will rely on third-party payers, including commercial payers and governmental payers such as Medicare, Medicaid

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.

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 homecare agreements as transferring control to the patient upon shipment or delivery, despite possible

payment cancellation under government or commercial programs where the payer is controlling the payment over specified time periods.

For homecare 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.

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 because 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

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.

Company’s contractually stated transaction prices in the homecare 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.

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.

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.

each type of variable consideration discussed above, there are many 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.

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.

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

The distributor’s purchases accumulate to give the distributor the right to a higher discount on purchases more

than 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.

The Company’s hospital sales are made to hospitals and other clinics.

Sales to these hospitals are negotiated

with the individual hospital or with group purchasing organizations, with payments received directly from the hospital.

reimbursement is involved.

Generators are either sold or leased to the hospitals and associated hoses and wraps (used in hospital

settings rather than vests) are sold separately.

Accordingly, each product is distinct and considered a separate performance obligation

in sales to hospital customers.

The agreements with hospitals fall into two main types, distinguished by differences in the timing

of transfer of control and timing of payments:

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.

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 later.

Revenue for the consumable wraps is recognized when control transfers to the customer.

International

Sales to international markets are made directly to several 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.

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.

The Company’s accounts receivable balance is comprised of amounts due from individuals, hospitals and distributors.

due from individuals are typically remitted to the Company by third-party reimbursement agencies such as Medicare, Medicaid and

private insurance companies.

Balances due from individuals are typically remitted to the Company by third-party reimbursement agencies such as Medicare, Medicaid

and private insurance companies.

Accounts receivables are carried at amounts estimated to be received from patients under reimbursement

5 unchanged sentences

Receivables are written off when deemed uncollectible.

Contract assets.

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 information about contract assets from contracts with customers:

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.

The following table provides information about contract assets from contracts with customers:

Schedule of contract asset

Three Months Ended September 30, 2023

Fiscal Year Ended

June 30, 2023

Six Months Ended December 31, 2023

Fiscal Year Ended June 30, 2023

Increase (decrease)

4 unchanged sentences

Contract assets recognized

Increase (decrease) because of changes in the estimate of amounts to be realized from payers, excluding amounts transferred to receivables during the period

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

Contract assets, ending

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

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

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

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

The components of inventory were as follows:

September 30, 2023

components of inventory were as follows:

December 31, 2023

June 30, 2023

5 unchanged sentences

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 hospital 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:

Three Months Ended

September 30, 2023

Fiscal Year Ended

June 30, 2023

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 hospital 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.

in the Company’s warranty reserve were as follows:

Six Months Ended December 31, 2023

Fiscal Year Ended June 30, 2023

Warranty reserve, beginning

2 unchanged sentences

Warranty reserve, ending

Income tax expense was estimated at $ 64,000 ,

and the effective tax rate was 29.3 % for the three months ended September 30, 2023.

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 included a discrete current tax benefit of $ 44,000 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, 2020

are no longer open to U.S.

tax expense was estimated at $ 685,000 and $ 749,000 , and the effective tax rate was 28.8 % and 28.9 % for the three and six months

ended December 31, 2023, respectively.

Estimated income tax expense for the three and six months ended December 31, 2023, includes

a discrete current tax benefit of $ 1,000 and $ 1,000 , respectively, related to the exercise of stock options.

tax expense was estimated at $ 304,000 and $ 271,000 , and the effective tax rate was 23.7 % and 20.4 % for the three and six months

ended December 31, 2022, respectively.

Estimated income tax expense for the three and six months ended December 31, 2022, includes

a discrete current tax expense of $ 1,000 and discrete current tax benefit of $ 43,000 , respectively, related to the exercise of

stock options.

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, 2020, 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.

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.

Financing Arrangements

The Company has a credit facility that provides

for a $ 2,500,000 revolving line of credit through December 18, 2023 if not renewed before such date.

There was no outstanding principal

balance on the line of credit as of September 30, 2023 or June 30, 2023.

Interest on borrowings under the line of credit, if any,

accrues at the prime rate ( 8.50 % at September 30, 2023) 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.

On September 30, 2023, 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.

Authorized shares:

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

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, 2023, a total of 239,995 shares have been repurchased and retired

under this authorization for a total cost of $ 2,725,000 , or $ 11.36 per share.

Repurchased shares have been retired and constitute

authorized but unissued shares.

There were no share repurchases for the three months ended September 30, 2023.

Company has a credit facility that provides for a $ 2,500,000 revolving line of credit through December 18, 2025 , if not renewed

before such date.

There was no outstanding principal balance on the line of credit as of December 31, 2023, or June 30, 2023.

Interest on borrowings under the line of credit, if any, accrues at the prime rate ( 8.50 % on December 31, 2023) 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.

On December 31, 2023, 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 the tangible and intangible assets of the

documents governing the line of credit contain certain financial and non-financial 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.

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.

May 26, 2021, the Company’s Board of Directors (the “Board”) approved a stock repurchase authorization.

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 December 31, 2023, a total of 239,995 shares

have been repurchased and retired under this authorization for a total cost of $ 2,725,000 , or $ 11.36 per share.

shares have been retired and constitute authorized but unissued shares.

There were no share repurchases for the three and six

months ended December 31, 2023.

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

Share-based compensation expense was $ 371,000 and $ 95,000 for the three months ended September 30, 2023 and 2022, 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, 2023 are summarized as follows:

Schedule of stock option transactions

Number of Shares

Weighted-Average Exercise Price per

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 2023.

Share-based compensation expenses were $ 791,000 and $ 316,000 for the six months ended

December 31, 2023, and 2022, respectively.

This expense is included in selling, general and administrative expense in the Condensed

Statements of Operations.

option transactions during the six months ended December 31, 2023, are summarized as follows:

Weighted-Average

Exercise Price per Share

Outstanding at June 30, 2023

Cancelled or Forfeited

Outstanding at September 30, 2023

The following assumptions were

used to estimate the fair value of stock options granted:

Schedule of assumptions were

used to estimate the fair value of stock options granted

Three Months Ended September 30, 2023

Fiscal Year Ended June 30, 2023

Risk-free interest rate

4.07 - 4.43 %

2.88 - 4.23 %

Expected term (years)

Expected volatility

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, 2023, the weighted average remaining

contractual term for all outstanding stock options was 6.9 years and the aggregate intrinsic value of the options was $ 1,740,000 .

Outstanding on September 30, 2023 were 697,552 stock options issued to employees, of which 375,673 were vested and exercisable

and had an aggregate intrinsic value of $ 1,717,000 .

As of September 30, 2023, $ 1,444,000 of total unrecognized compensation expense

related to stock options is expected to be recognized over a weighted-average period of approximately 3.25 years.

Restricted Stock

During the three months ended September 30, 2023,

the Company issued restricted stock awards to employees totaling 20,878 shares of common stock, with a vesting term of three years

and a weighted average fair value of $ 10.72 per share.

There were 39,111 shares of unvested restricted stock with a weighted average

grant date fair value of $ 10.49 per share outstanding as of September 30, 2023.

As of September 30, 2023, $ 257,000 of total unrecognized

compensation expense related to restricted stock awards is expected to be recognized over a weighted-average period of approximately

Performance-Based Restricted Stock Units

We have granted 175,000 performance-based restricted

stock units (“PSUs”) to our CEO in connection with his appointment as CEO on July 1, 2023.

The PSUs are to be earned

based on the extent to which performance goals tied to Total Shareholder Return (“TSR”) are achieved.

The performance-based

restricted stock units will be eligible to vest and settle into shares of common stock on a 1-for-1 basis with respect to one-half

of the shares upon achieving a total shareholder return of 50% and the remaining shares upon a total shareholder return of 100%,

in each case within four years of the date of grant.

The grant date fair value of the awards was determined using a Monte Carlo

valuation model with an expected term of four years.

Stock based compensation expense recognized for

PSUs was $ 73,000 and $ 0 for the three months ended September 30, 2023 and 2022, respectively.

The weighted average grant date fair

value per unit was $ 6.58 and as of September 30, 2023 there are 175,000 PSUs outstanding.

On September 30, 2023, there was approximately

$ 1,079,000 of total unrecognized compensation expense related to outstanding PSUs that is expected to be recognized over a period

of 3.75 years.

Outstanding at December 31, 2023

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

December 31, 2023

June 30, 2023

interest rate

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

31 2023, the weighted average remaining contractual term for all outstanding stock options was 6.7 years and the aggregate intrinsic

value of the options was $ 1,983,000 .

Outstanding on December 31, 2023, were 699,356 stock options issued to employees, of which

371,402 were vested and exercisable and had an aggregate intrinsic value of $ 1,879,000 .

As of December 31, 2023, $ 1,199,000 of

total unrecognized compensation expense related to stock options is expected to be recognized over a weighted-average period of

approximately 3.0 years.

the six months ended December 31, 2023, the Company issued restricted stock awards to employees totaling 20,878 shares of common

stock, with a weighted average vesting term of 3.0 years and a weighted average fair value of $ 10.72 per share, and to directors

totaling 21,000 shares of common stock, with a vesting term of six months and a weighted average fair value of $ 10.44 per share.

There were 55,111 shares of unvested restricted stock with a weighted average fair value of $ 10.51 per share outstanding as of

December 31, 2023.

As of December 31, 2023, $ 385,000 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.

Performance-Based

Restricted Stock Units

Company granted 175,000 performance-based restricted stock units (“PSUs”) to our CEO in connection with his appointment

as CEO on July 1, 2023.

The PSUs are to be earned based on the extent to which performance goals tied to Total Shareholder Return

(“TSR”) are achieved.

The performance-based restricted stock units will be eligible to vest and settle into shares

of common stock on a 1-for-1 basis with respect to one-half of the shares upon achieving a total shareholder return of 50% and

the remaining shares upon a total shareholder return of 100%, in each case within four years of the date of grant.

The grant date

fair value of the awards was determined using a Monte Carlo valuation model with an expected term of four years.

based compensation expense recognized for PSUs was $ 145,000 and $ 0 for the six months ended December 31, 2023, and 2022, respectively.

The weighted average grant date fair value per unit was $ 6.58 and as of December 31, 2023, there are 175,000 PSUs outstanding.

On December 31, 2023, there was approximately $ 1,006,000 of total unrecognized compensation expense related to outstanding PSUs

that is expected to be recognized over a period of 3.50 years.

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

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.

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.

During January 2023, the settlement was preliminarily approved.

hearing for final approval took place on June 5, 2023.

Following the final approval hearing, the court issued a judgment on July

10, 2023 granting a motion for final approval of the settlement.

Payment was made to the settlement fund during the first quarter

of fiscal 2024 for the settlement amount of $ 825,000 which was covered by insurance, resulting in a reduction in other current

assets and other accrued liabilities.

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.

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

What changed 10-Q

Item 1. Financial Statements