Electromed, Inc. 10-Q

Item 1. Financial Statements. Electromed, Inc. Condensed Balance Sheets September 30, 2024 June 30, 2024 (Unaudited) Assets Current Assets Cash and cash equivalents $ 13,864,000 $ 16,080,000 Accounts receivable (net of allowances for credit losses of $ 45,000 ) 22,366,000 23,333,000 Contract assets 754,000 719,000 Inventories 3,434,000 3,712,000 Prepaid expenses and other current assets 592,000 329,000 Total current assets 41,010,000 44,173,000 Property and equipment, net 5,003,000 5,165,000 Finite-life intangible assets, net 660,000 657,000 Other assets 90,000 87,000 Deferred income taxes 2,152,000 2,152,000 Total assets $ 48,915,000 $ 52,234,000 Liabilities and Shareholders’ Equity Current Liabilities Accounts payable $ 1,784,000 $ 1,010,000 Accrued compensation 2,150,000 3,893,000 Income tax payable 188,000 277,000 Warranty reserve 1,641,000 1,567,000 Other accrued liabilities 1,656,000 930,000 Total current liabilities 7,419,000 7,677,000 Other long-term liabilities 8,000 12,000 Total liabilities 7,427,000 7,689,000 Shareholders’ Equity Common stock, $ 0.01 par value per share, 13,000,000 shares authorized; 8,457,071 and 8,637,883 shares issued and outstanding, as of September 30, 2024 and June 30, 2024, respectively 85,000 87,000 Additional paid-in capital 20,816,000 20,790,000 Retained earnings 20,587,000 23,668,000 Total shareholders’ equity 41,488,000 44,545,000 Total liabilities and shareholders’ equity $ 48,915,000 $ 52,234,000 See Notes to Condensed Financial Statements (Unaudited). 1 Electromed, Inc. Condensed Statements of Operations (Unaudited) Three Months Ended September 30, 2024 2023 Net revenues $ 14,668,000 $ 12,324,000 Cost of revenues 3,177,000 2,826,000 Gross profit 11,491,000 9,498,000 Operating expenses Selling, general and administrative 9,387,000 9,150,000 Research and development 166,000 206,000 Total operating expenses 9,553,000 9,356,000 Operating income 1,938,000 142,000 Interest income, net 195,000 77,000 Net income before income taxes 2,133,000 219,000 Income tax expense 659,000 64,000 Net income $ 1,474,000 $ 155,000 Income per share: Basic $ 0.17 $ 0.02 Diluted $ 0.16 $ 0.02 Weighted-average common shares outstanding: Basic 8,564,489 8,537,388 Diluted 8,980,714 8,782,824 See Notes to Condensed Financial Statements (Unaudited). 2 Electromed, Inc. Condensed Statements of Cash Flows (Unaudited) Three Months Ended September 30, 2024 2023 Cash Flows From Operating Activities Net income $ 1,474,000 $ 155,000 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation 202,000 202,000 Amortization of finite-life intangible assets 18,000 12,000 Share-based compensation expense 697,000 371,000 Changes in operating assets and liabilities: Accounts receivable 967,000 675,000 Contract assets ( 35,000 ) ( 57,000 ) Inventories 278,000 ( 240,000 ) Prepaid expenses and other assets ( 266,000 ) 901,000 Income tax payable, net ( 89,000 ) ( 226,000 ) Accounts payable and accrued liabilities 806,000 ( 863,000 ) Accrued compensation ( 1,743,000 ) ( 1,174,000 ) Net cash provided by (used for) operating activities 2,309,000 ( 244,000 ) Cash Flows From Investing Activities Expenditures for property and equipment ( 37,000 ) ( 109,000 ) Expenditures for finite-life intangible assets ( 21,000 ) ( 24,000 ) Net cash used for investing activities ( 58,000 ) ( 133,000 ) Cash Flows From Financing Activities Issuance of common stock upon exercise of options 84,000 29,000 Taxes paid on net share settlement of stock awards ( 15,000 ) - Repurchase of common stock ( 4,536,000 ) - Net cash (used for) provided by financing activities ( 4,467,000 ) 29,000 Net decrease in cash ( 2,216,000 ) ( 348,000 ) Cash and cash equivalents Beginning of period 16,080,000 7,372,000 End of period $ 13,864,000 $ 7,024,000 Supplemental Disclosures of Cash Flow Information Cash paid for income taxes $ 752,000 $ 251,000 Supplemental Disclosures of Noncash Investing and Financing Activities Property and equipment acquisitions in accounts payable $ 7,000 $ 34,000 Demonstration equipment returned to inventory $ - $ 19,000 Taxes owed on net share settlement of stock awards in accrued liabilities $ 740,000 $ - Issuance of common stock upon the vesting of performance-based stock units $ 1,000 $ - See Notes to Condensed Financial Statements (Unaudited). 3 Electromed, Inc. Condensed Statements of Shareholders’ Equity (Unaudited) Common Stock Additional Paid- Retained Total Shareholders’ Shares Amount in Capital Earnings Equity Balance at June 30, 2023 8,555,238 $ 86,000 $ 18,788,000 $ 18,793,000 $ 37,667,000 Net income – – – 155,000 155,000 Exercise of common stock options, vesting of performance stock units and issuance of restricted stock, net of cancellations and tax withholdings 23,812 – 29,000 – 29,000 Share-based compensation expense – – 371,000 – 371,000 Balance at September 30, 2023 8,579,050 $ 86,000 $ 19,188,000 $ 18,948,000 $ 38,222,000 Common Stock Additional Paid- Retained Total Shareholders’ Shares Amount in Capital Earnings Equity Balance at June 30, 2024 8,637,883 $ 87,000 $ 20,790,000 $ 23,668,000 $ 44,545,000 Net income – – – 1,474,000 1,474,000 Exercise of common stock options, vesting of performance stock units and issuance of restricted stock, net of cancellations and tax withholdings 81,944 1,000 ( 671,000 ) – ( 670,000 ) Share-based compensation expense – – 697,000 – 697,000 Repurchase of common stock ( 262,756 ) ( 3,000 ) – ( 4,555,000 ) ( 4,558,000 ) Balance at September 30, 2024 8,457,071 $ 85,000 $ 20,816,000 $ 20,587,000 $ 41,488,000 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 homecare and hospital markets. The Company also sells internationally through distributors. Since 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. 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, 2024 (“fiscal 2024”). A summary of the Company’s significant accounting policies and estimates follows: Our significant accounting policies are detailed in Note 1. Nature of Business and Summary of Significant Accounting Policies of the Annual Report on Form 10-K for the year ended June 30, 2024. There have been no significant changes to these policies that have had a material impact on the Unaudited Condensed Financial Statements and the accompanying disclosure notes for the three months ended September 30, 2024. Recently Issued Accounting Standards ASU 2023-07 - Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures The standard introduces increased disclosure requirements primarily related to significant segment expenses, along with disclosure of key criteria and metrics utilized by the Chief Operating Decision Maker (“CODM”). It is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of adoption and additional disclosure requirements. ASU 2023-09 - Income Taxes (Topic 740): Improvements to Income Tax Disclosures The standard introduces increased transparency about income tax information through the requirement of increased disclosures around specific categories in the rate reconciliation and requiring additional information on reconciling items. It is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of adoption and additional disclosure requirements. 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. When a contract with a customer has been established, revenue is recognized when a performance obligation is satisfied by transferring control of a distinct good or service to a customer, typically upon shipment or delivery. Disaggregation of revenues. In the following table, net revenues are disaggregated by market: Schedule of disaggregated revenue Three Months Ended September 30, 2024 2023 Homecare $ 13,211,000 $ 11,153,000 Hospital 690,000 507,000 Homecare distributor 587,000 573,000 Other 180,000 91,000 Total $ 14,668,000 $ 12,324,000 In the following table, net homecare revenue is disaggregated by payer type: Three Months Ended September 30, 2024 2023 Commercial $ 6,851,000 $ 5,765,000 Medicare 4,767,000 3,948,000 Medicare Supplemental 1,111,000 983,000 Medicaid 242,000 293,000 Other 240,000 164,000 Total $ 13,211,000 $ 11,153,000 Contract balances. The following tables provide information about accounts receivable and contract assets from contracts with customers: Schedule of contract asset September 30, 2024 June 30, 2024 Receivables, included in “Accounts receivable, net of allowance for credit losses” $ 22,366,000 $ 23,333,000 Contract Assets $ 754,000 $ 719,000 Total Accounts receivable, net of allowances for credit losses, as of June 30, 2023 were $24,130,000. Three Months Ended September 30, 2024 Fiscal Year Ended June 30, 2024 Increase (decrease) Increase (decrease) Contract assets, beginning $ 719,000 $ 487,000 Reclassification of contract assets to accounts receivable ( 638,000 ) ( 2,325,000 ) Contract assets recognized 689,000 2,840,000 Increase (decrease) because of changes in the estimate of amounts to be realized from payers, excluding amounts transferred to receivables during the period ( 16,000 ) ( 283,000 ) Contract assets, ending $ 754,000 $ 719,000 6 Note 3. Selected Balance Sheet Information Inventory consists of the following: Schedule of components of inventories September 30, 2024 June 30, 2024 Parts inventory $ 1,978,000 $ 2,556,000 Work in process 390,000 454,000 Finished goods 939,000 834,000 Estimated inventory to be returned 358,000 265,000 Less: Reserve for obsolescence ( 231,000 ) ( 397,000 ) Total $ 3,434,000 $ 3,712,000 Other accrued liabilities consist of the following: Schedule of components of other accrued liabilities September 30, 2024 June 30, 2024 Accrued insurance recoupments $ 494,000 $ 467,000 Accrued tax withholding upon performance stock unit vesting 766,000 - Other accrued expenses 396,000 463,000 Total $ 1,656,000 $ 930,000 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 one to five-year warranty for all homecare distributor, hospital and other sales. 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, 2024 Fiscal Year Ended June 30, 2024 Warranty reserve, beginning $ 1,567,000 $ 1,378,000 Accrual for products sold 170,000 559,000 Expenditures and costs incurred for warranty claims ( 96,000 ) ( 370,000 ) Warranty reserve, ending $ 1,641,000 $ 1,567,000 7 Note 5. Income Taxes Income tax expense was estimated at $ 659,000 , and the effective tax rate was 30.9 % for the three months ended September 30, 2024, which includes a discrete current tax benefit of $ 4,000 primarily related to the vesting of restricted stock awards. Income tax expense was estimated at $ 64,000 , and the effective tax rate was 29.3 % for the three months ended September 30, 2023. 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, 2021, 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 through December 18, 2025, if not renewed before such date. There was no outstanding principal balance on the line of credit as of September 30, 2024 or June 30, 2024. Interest on borrowings under the line of credit, if any, accrues at the prime rate ( 8.0 % on September 30, 2024) 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 57.0 % of eligible accounts receivable. On September 30, 2024, 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 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 September 11, 2024, the Company’s Board of Directors (the “Board”) approved a stock repurchase authorization. Under the authorization, the Company can repurchase up to $ 5.0 million of shares of common stock. The repurchase authorization has no expiration date. As of September 30, 2024, a total of 262,756 shares have been repurchased and retired under this authorization for a total cost of $ 4,536,000 , or $ 17.26 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 2024. Share-based compensation expense was $ 697,000 and $ 371,000 for the three months ended September 30, 2024, and 2023, respectively. This expense is included in selling, general and administrative expense, cost of goods sold, and research and development in the Condensed Statements of Operations. 8 Stock Options Stock option transactions during the three months ended September 30, 2024, are summarized as follows: Number of Shares Weighted-Average Exercise Price per Share Outstanding on June 30, 2024 635,073 $ 8.49 Granted 59,900 $ 17.22 Exercised ( 9,419 ) $ 11.46 Cancelled or Forfeited ( 6,698 ) $ 10.74 Outstanding on September 30, 2024 678,856 $ 9.20 The following assumptions were used to estimate the fair value of stock options granted: Three Months Ended September 30, 2024 Fiscal Year Ended June 30, 2024 Risk-free interest rate 3.69 % 3.85 - 4.64 % Expected term (years) 6 6 Expected volatility 53 % 51 - 52 % The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price. On September 30, 2024, the weighted average remaining contractual term for all outstanding stock options was 6.45 years and the aggregate intrinsic value of the options was $ 8,331,000 . Outstanding on September 30, 2024, were 678,856 stock options issued to employees, of which 414,855 were vested and exercisable and had an aggregate intrinsic value of $ 5,862,000 . As of September 30, 2024, $ 1,057,000 of total unrecognized compensation expense related to stock options is expected to be recognized over a weighted-average period of approximately 2.65 years. Restricted Stock During the three months ended September 30, 2024, the Company issued restricted stock awards to employees totaling 21,400 shares of common stock, with a weighted-average vesting term of three years and a weighted average fair value of $ 17.25 per share. There were 42,667 shares of unvested restricted stock with a weighted average grant date fair value of $ 13.91 per share outstanding as of September 30, 2024. As of September 30, 2024, $ 453,000 of total unrecognized compensation expense related to restricted stock awards is expected to be recognized over a weighted-average period of approximately 2.66 years. During the three months ended September 30, 2024, the Company issued restricted stock units to employees totaling 63,700 , with a weighted-average vesting term of three years and a weighted average fair value of $ 17.25 per unit. There were 61,300 units of unvested restricted stock with a weighted average grant date fair value of $ 17.25 per share outstanding as of September 30, 2024. As of September 30, 2024, $ 1,008,000 of total unrecognized compensation expense related to restricted stock units is expected to be recognized over a weighted-average period of approximately 2.92 years. Performance-Based Restricted Stock Units The 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. As of September 30, 2024, the first TSR target was achieved, resulting in the vesting of 87,500 shares of common stock to our CEO. Unrecognized stock-based compensation expense of $395,000 associated with the first TSR target, which was set to be recognized in future periods, was recognized in the three months ended September 30, 2024. 9 Stock based compensation expense recognized for PSUs was $ 468,000 and $ 73,000 for the three months ended September 30, 2024, and 2023, respectively. The weighted average grant date fair value per unit was $ 6.58 and as of September 30, 2024, 87,500 PSUs remained outstanding. On September 30, 2024, approximately $ 395,000 of unrecognized compensation expense related to outstanding PSUs remained, which is scheduled to be recognized over a period of 2.75 years or upon attainment of total shareholder return of 100%. Note 9. Commitments and Contingencies The Company is occasionally involved in claims and disputes arising in the ordinary course of business. The Company ensures 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. Note 10. Segment Reporting Our President and Chief Executive Officer is our chief operating decision maker (“CODM”). The CODM reviews financial information, including long-lived assets, presented on a consolidated basis, accompanied by information about revenue by market, for purposes of allocating resources and evaluating financial performance. We have a single active product and engage in the single business activity of selling and supporting that single product. There are no segment managers who are held accountable for operations, operating results or plans for levels or components below the consolidated level. Accordingly, we have determined that we have a single reportable and operating segment structure. We and our CODM evaluate performance based on revenue from our single product in the markets in which the Company operates. Revenue by market is described above in Note 2. Note 11. Earnings Per Common Share (“EPS”) The computations of the basic and diluted EPS amounts were as follows: Three Months Ended September 30, 2024 2023 Net Income $ 1,474,000 $ 155,000 Weighted-average common shares outstanding: Basic 8,564,489 8,537,388 Effect of dilutive common stock equivalents 416,225 245,436 Diluted 8,980,714 8,782,824 Earnings per common share: Basic $ 0.17 $ 0.02 Diluted $ 0.16 $ 0.02 Common stock equivalents excluded from the calculation of diluted earnings per share because their impact was anti-dilutive were 44,026 and 403,944 for the three months ended September 30, 2024, and 2023, respectively. 10